-----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, LLmDYXRYdOFi9fcI5Td9wuCVAAFDevCz3U2PcB+/F2BxelBgm3wIWZ313+VvmVQM YvEkdCZ7Lu13JAoVHwqgjw== 0001012870-99-001617.txt : 19990518 0001012870-99-001617.hdr.sgml : 19990518 ACCESSION NUMBER: 0001012870-99-001617 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 000-25393 FILM NUMBER: 99626345 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-Q 1 FORM 10-Q FOR QUARTERLY PERIOD ENDED APRIL 2 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 April 2, 1999 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) 3050 Hansen Way, Palo Alto, California 94304-1000 (Former Address) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 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 [_] No [X] The number of shares of the Registrant's common stock outstanding as of May 7, 1999 was 30,422,792 shares of $0.01 par value common stock. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS Part I. Financial Information.......................................... 1 Item 1. Financial Statements........................................... 1 Combined Statements of Operations.............................. 1 Combined Balance Sheets........................................ 2 Combined Condensed Statements of Cash Flows.................... 3 Notes to the Combined Financial Statements..................... 4 Management's Discussion and Analysis of Financial Condition and Item 2. Results of Operations.......................................... 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 19 Part II. Other Information.............................................. 20 Item 5. Other Information.............................................. 20 Item 6. Exhibits and Reports on Form 8-K............................... 20
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for these types of statements. These forward- looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the "Company") to differ materially from management's current expectations. Those risks and uncertainties include, without limitation: new product development and commercialization; demand and acceptance for the Company's products; competitive products and pricing; economic conditions in the Company's product and geographic markets, including Asia markets; foreign currency fluctuations; market investment in capital equipment; the ability to realize anticipated cost-savings from the recently- initiated reorganization and restructuring; increasing operating margins on higher sales; costs of investigating and remediating environmentally- contaminated sites; successful implementation by the Company and certain third parties of corrective action to address the impact of the Year 2000; the risks detailed in the Company's registration statement on Form 10/A filed with the Securities and Exchange Commission; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company assumes and undertakes no obligation to update or revise any forward- looking statement, whether as a result of new information, future events or otherwise. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Varian, Inc. and Subsidiary Companies Combined Statements of Operations (In thousands, except per share amounts) (Unaudited)
Quarter Ended Six Months Ended --------------------------- --------------------------- April 2, 1999 April 3, 1998 April 2, 1999 April 3, 1998 ------------- ------------- ------------- ------------- Sales $ 148,936 $ 140,965 $ 282,232 $ 281,913 --------- --------- --------- --------- Operating Costs and Expenses Cost of sales 101,712 85,228 182,378 171,660 Research and development 9,277 7,775 16,440 15,005 Marketing 34,180 28,068 64,276 55,340 General and administrative 10,760 9,246 18,462 19,630 Restructuring charges 10,974 -- 10,974 -- --------- --------- --------- --------- Total Operating Expenses 166,903 130,317 292,530 261,635 --------- --------- --------- --------- Operating Earnings (Loss) Before Taxes (17,967) 10,648 (10,298) 20,278 Income tax (benefit) expense (7,993) 4,248 (4,580) 8,117 --------- --------- --------- --------- Net Earnings (Loss) $ (9,974) $ 6,400 $ (5,718) $ 12,161 ========= ========= ========= ========= Pro Forma Net Earnings (Loss) Per Share: Basic $ (0.33) $ 0.21 $ (0.19) $ 0.40 ========= ========= ========= ========= Diluted $ (0.33) $ 0.21 $ (0.19) $ 0.40 ========= ========= ========= ========= Shares Used in Pro Forma Per Share Computations: Basic 30,423 30,423 30,423 30,423 ========= ========= ========= ========= Diluted 30,423 30,587 30,423 30,587 ========= ========= ========= =========
See accompanying Notes to the Combined Financial Statements. 1 Varian, Inc. and Subsidiary Companies Combined Balance Sheets (In thousands, except share and par value amounts)
April 2, October 2, 1999 1998 ----------- ---------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 12,093 $ -- Accounts receivable 142,974 143,836 Inventories 67,482 71,575 Other current assets 31,834 26,260 --------- --------- Total Current Assets 254,383 241,671 Property, plant and equipment 194,087 219,385 Accumulated depreciation and amortization (108,073) (124,666) --------- --------- Net Property, Plant and Equipment 86,014 94,719 Other Assets 66,425 67,709 --------- --------- Total Assets $ 406,822 $ 404,099 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable $ 11,428 $ -- Accounts payable--trade 28,347 34,320 Accrued expenses 111,243 102,470 Product warranty 7,907 7,608 Advance payments from customers 8,234 5,180 --------- --------- Total Current Liabilities 167,159 149,578 Long-Term Accrued Expenses 7,929 6,862 Deferred Taxes 4,460 4,192 Notes Payable 52,517 -- --------- --------- Total Liabilities 232,065 160,632 --------- --------- Contingencies (Note 7) 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--30,422,792 shares at April 2, 1999 and none historical 304 -- Capital in excess of par value 174,453 -- Divisional equity -- 243,467 --------- --------- Total Stockholders' Equity 174,757 243,467 --------- --------- Total Liabilities and Stockholders' Equity $ 406,822 $ 404,099 ========= =========
See accompanying Notes to the Combined Financial Statements. 2 Varian, Inc. and Subsidiary Companies Combined Condensed Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended --------------------------- April 2, 1999 April 3, 1998 ------------- ------------- Net Cash Provided by Operating Activities $ 8,584 $ 19,407 -------- -------- Investing Activities Purchase of property, plant and equipment (10,546) (9,710) -------- -------- Net Cash Used in Investing Activities (10,546) (9,710) -------- -------- Financing Activities Net transfers from (to) Varian Associates, Inc. 14,792 (10,139) -------- -------- Net Cash Provided by (Used in) Financing Activities 14,792 (10,139) -------- -------- Effects of Exchange Rate Changes on Cash (737) 442 -------- -------- Net increase (decrease) in cash and cash equivalents 12,093 -- Cash and cash equivalents at beginning of period -- -- -------- -------- Cash and Cash Equivalents at End of Period $ 12,093 $ -- ======== ======== Non-Cash Investing and Financing Activities: Debt assumed/transferred from Varian Associates, Inc. $ 77,100 ======== Transfer of property, plant and equipment $ 9,900 ========
See accompanying Notes to the Combined Financial Statements. 3 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS (Unaudited) Note 1. Interim Combined Financial Statements These interim combined financial statements of Varian, Inc. and its subsidiary companies (collectively, the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year ended October 2, 1998 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim combined financial statements should be read in conjunction with the financial statements and the notes thereto included in the registration statement on the Company's Form 10/A filed with the Securities and Exchange Commission. In the opinion of the Company's management, the interim combined financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the second quarter and six months ended April 2, 1999 are not necessarily indicative of the results to be expected for a full year or for any other periods. Note 2. Basis of Presentation Until April 2, 1999, the Company's business was operated as part of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business ("IB") to the Company, then on April 2, 1999 distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI and VSEA (the "Distribution Agreement"). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS and VSEA after the Distribution, the Company, VMS and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement and a Transition Services Agreement (collectively, the "Distribution Related Agreements"). The interim combined financial statements generally reflect the results of operations, financial position and cash flows of IB, which was transferred to the Company in connection with the Distribution. Accordingly, the interim combined financial statements have been carved out from the interim financial statements of VAI using the historical results of operations and historical bases of the assets and liabilities of IB. The statements include the accounts of IB after elimination of inter-business balances and transactions. The interim combined financial statements include, among other things, allocations of certain VAI corporate assets (including pension assets), liabilities (including profit sharing and pension benefits), and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury and other corporate overhead) to IB. These amounts have been allocated to IB on the basis that is considered by management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by IB. Typical measures and activity indicators used for allocation purposes include headcount, sales revenue and payroll expense. The Company's management believes that the methods used to allocate these amounts are reasonable. However, these allocations are not necessarily indicative of the amounts that would have been or that will be recorded by the Company on a stand-alone basis. The interim combined financial statements do not reflect any changes that may occur in the financing and operations of the Company as a result of the Distribution. The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 1999 will comprise the 52-week period ending October 1, 1999, and fiscal year 1998 comprises the 53-week 4 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued) (Unaudited) period ended October 2, 1998. The fiscal quarters ended April 2, 1999 and April 3, 1998 each comprise 13 weeks. For purposes of interim reporting, the six-month period ended April 2, 1999 comprises 26 weeks, and the six-month period ended April 3, 1998 comprises 27 weeks. Note 3. Balance Sheet Detail Inventories
April 2, October 2, 1999 1998 -------- ---------- (Dollars in millions) Raw materials and parts............................... $35.9 $32.1 Work in process....................................... 5.6 6.7 Finished goods........................................ 26.0 32.8 ----- ----- Total inventories................................... $67.5 $71.6 ===== =====
Inventories are valued at the lower of cost or market (net realizable value) using the last-in, first-out (LIFO) cost for the U.S. inventories. All other inventories are valued principally at average cost. If the first-in, first-out (FIFO) method had been used for those operations valuing inventories on a LIFO basis, inventories would have been higher than reported by $14.2 million at April 2, 1999 and $13.7 million at October 2, 1998. Other Assets
April 2, October 2, 1999 1998 -------- ---------- (Dollars in millions) Net goodwill........................................... $60.2 $59.6 Other.................................................. 6.2 8.1 ----- ----- Total other assets................................... $66.4 $67.7 ===== =====
Accrued Expenses
April 2, October 2, 1999 1998 -------- ---------- (Dollars in millions) Payroll and employee benefits.......................... $ 29.8 $ 33.1 Foreign income taxes payable........................... 6.5 19.2 Deferred income........................................ 16.2 14.7 Group and risk insurance............................... 7.2 7.7 Net amount due to VMS/VSEA............................. 13.2 -- Restructuring.......................................... 7.1 -- Other.................................................. 31.2 27.8 ------ ------ $111.2 $102.5 ====== ======
Note 4. Forward Exchange Contracts IB has entered and the Company will enter into forward exchange contracts to mitigate the balance sheet exposures to fluctuations in foreign currency exchange rates. When these foreign exchange contracts hedge operational exposure, the effects of movements in currency exchange rates on these instruments are recognized in income when the related revenue and expenses are recognized. When foreign exchange contracts hedge 5 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued) (Unaudited) balance sheet exposure, such effects are recognized in income when the exchange rate changes. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the underlying items being hedged, these instruments do not subject IB or the Company to risk that would otherwise result from changes in currency exchange rates. Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Any deferred gains or losses are included in accrued expenses in the balance sheet. If a hedging instrument is sold or terminated prior to maturity, gains and losses continue to be deferred until the hedged item is recognized in income. If a hedging instrument ceases to qualify as a hedge, any subsequent gains and losses are recognized currently in income. There were no significant forward exchange contracts outstanding as of April 2, 1999. Note 5. Pro Forma Net Earnings (Loss) Per Share IB's pro forma basic earnings (loss) per share is calculated based on net earnings (loss) and the weighted-average number of shares outstanding during the reported period. For purposes of the pro forma calculation, the weighted- average number of shares outstanding during the reporting period was assumed to be the number of shares of common stock outstanding as of the Distribution on April 2, 1999. Pro forma diluted earnings (loss) per share includes additional dilution from potential common stock shares such as common stock issuable pursuant to the exercise of outstanding stock options. For purposes of the pro forma diluted earnings (loss) per share calculation, the additional shares issuable upon exercise of stock options were determined using the treasury stock method based on the number of replacement stock options issued as of the Distribution on April 2, 1999. All options to purchase common stock were excluded from the computation of diluted loss per share for the quarter and six-month period ended April 2, 1999 because their effect was anti-dilutive. For the quarter and six-month period ended April 3, 1998, options to purchase 3,030,355 potential common stock shares with exercise prices in excess of the market value on April 2, 1999 of such common stock were excluded from the computation. Note 6. Debt and Credit Facilities The Distribution Agreement provided for the division among the Company, VSEA and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the Company was to assume 50% of VAI's term loans and receive an amount of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, adjustments may be required within 180 days following the Distribution. In addition, certain other pre-Distribution transactions may require 6 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued) (Unaudited) adjustment within 90 days following the Distribution under the provisions of the Distribution Agreement. As a result of these adjustments, the Company may be required to make cash payments to VMS or may be entitled to receive cash payments from VMS. The amount of any such adjustments cannot be estimated. As part of the Distribution, a total of $63.9 million in debt was assumed by or transferred to the Company, which debt consisted of $58.5 million in term loans and $5.4 million in notes payable. As of April 2, 1999, interest rates on the term loans ranged from 6.70% to 7.49%, and the weighted average interest rate on the term loans was 7.02%. As of April 2, 1999, interest rates on the notes payable ranged from 1.50% to 4.00%, and the weighted average interest rate on the notes payable was 2.95%. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. As of April 2, 1999, the Company entered into $40.0 million in uncommitted credit facilities for working capital purposes. As of April 2, 1999, none of these credit facilities were utilized and no amount was outstanding. Following April 2, 1999, the Company entered into additional uncommitted credit facilities for $15.0 million for working capital purposes. All of these credit facilities contain certain conditions and events of default customary for such facilities. Future principal payments on notes payable and long-term debt outstanding on April 2, 1999 will be $8.4 million, $6.0 million, $6.0 million, $6.0 million, $2.5 million, $2.5 million and $32.5 million during the six months ended October 1, 1999, the fiscal years ended 2000, 2001, 2002, 2003, 2004, and thereafter, respectively. Note 7. Contingencies Environmental Matters In the Distribution Agreement, the Company agreed to indemnify VMS and VSEA for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized for such costs), as further described below. VAI 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 or disposal. VAI is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former VAI facilities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of April 2,1999, it was nonetheless estimated that the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $21.0 million to $48.3 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of April 2, 1999. 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 therefore VAI accrued $21.0 million in estimated environmental costs as of April 2, 1999. The amount accrued was not discounted to present value. 7 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued) (Unaudited) 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 April 2, 1999, it was estimated that the future exposure for environmental related investigation and remediation costs for these sites and facilities ranged in the aggregate from $39.2 million to $73.0 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of April 2, 1999. 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 futures costs were reliably determinable. Together, these amounts totaled $50.6 million at April 2, 1999. Accordingly, VAI accrued $21.9 million as of April 2, 1999, which represents the best estimate of the future costs discounted at 4%, net of inflation. This accrual is in addition to the $21.0 million described in the preceding paragraph. Since the Company is obligated to reimburse VMS for one-third of the foregoing environmental-related costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs or expenses) that are paid after April 2, 1999, IB recorded $7.7 million as its portion of these estimated future costs and expenses as of April 2, 1999. The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. The Company believes that most of these cost ranges will narrow as investigation and remediation activities progress. The Company'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 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 statements. Legal Proceedings In the Distribution Agreement, the Company agreed to reimburse VMS for one- third of certain costs and expenses (adjusted for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former or corporate operations of VAI. These shared liabilities will generally be managed by VMS, and expenses and losses (adjusted for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) will generally be borne one-third each by the Company, VMS and VSEA. Also, from time to time, the Company is involved in a number of legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the above legal matters is not determinable, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. Note 8. Stockholders' Equity On April 2, 1999, stockholders of record of VAI on March 24, 1999 received in the Distribution one share of the Company's common stock for each share of VAI common stock held on April 2, 1999. Immediately following the Distribution, the Company had 30,422,792 shares of common stock outstanding. 8 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued) (Unaudited) Each stockholder also received one Right for each share of common stock distributed, entitling the stockholder to purchase one one-thousandth of a share of Participating Preferred Stock, par value $0.01 per share, for $75.00, subject to adjustment. The Participating Preferred Stock is designed so that each one one-thousandth of share has economic and voting terms similar to those of one share of common stock. The Company will begin accumulating retained earnings on April 3, 1999, the date after the Distribution. In connection with the Distribution, certain holders of options to purchase shares of VAI common stock received replacement options from the Company to purchase shares of the Company's common stock. The Company granted such replacement options to purchase 4,299,639 shares of the Company's common stock with an average exercise price of $11.16 per share. Such stock options vest over the same vesting periods as the original VAI stock options, typically three years. At issuance, options to purchase 3,459,508 shares with an average exercise price of $10.66 were immediately exercisable. Note 9. Restructuring Charges During the second quarter of fiscal year 1999, IB's management approved a program to consolidate field sales and service organizations in Europe, Australia and the United States so as to fall within the direct responsibility of management at IB's principal factories in those countries in order to reduce costs, simplify management structure and benefit from the infrastructure existing in those factories. This restructuring entailed consolidating certain sales, service and support operations. The consolidation resulted in exiting of a product line, closing or downsizing of sales offices and termination of approximately 100 personnel. The following table sets forth certain details associated with this restructuring during the second quarter of fiscal year 1999:
Cash Accrual at Restructuring Payments/Other April 2, Charges Reductions 1999 ------------- -------------- ---------- (Dollars in thousands) Lease payments and other facility expenses............................. $ 2,205 $ 240 $1,965 Severance and other related employee benefits............................. 7,171 1,988 5,183 Exited product line................... 1,598 1,598 -- ------- ------ ------ Total............................... $10,974 $3,826 $7,148 ======= ====== ======
Note 10. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement changes standards for the way that public business enterprises identify and report operating segments in annual and interim financial statements. This statement requires selected information about an enterprise's operating segments and related disclosure about products and services, geographic areas and major customers. The Company expects to report multiple segments when it adopts SFAS No. 131 at fiscal year-end 1999. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133 in the first quarter of fiscal year 2000 and is in the process of determining the impact that adoption will have on its consolidated financial statements. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Until April 2, 1999, the Company's business was operated as part of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business ("IB") to the Company, then on April 2, 1999 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. IB includes VAI's business units that design, manufacture, sell and service analytical and research instrumentation and vacuum technologies, and a business unit that provides contract electronics assembly. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI and VSEA (the "Distribution Agreement"). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS and VSEA after the Distribution, the Company, VMS and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement and a Transition Services Agreement (collectively, the "Distribution Related Agreements"). The interim combined financial statements generally reflect the results of operations, financial position and cash flows of IB, which was transferred to the Company in connection with the Distribution. Accordingly, the interim combined financial statements have been carved out from the interim financial statements of VAI using the historical results of operations and historical bases of the assets and liabilities of IB. The statements include the accounts of IB after elimination of inter-business balances and transactions. The interim combined financial statements include, among other things, allocations of certain VAI corporate assets (including pension assets), liabilities (including profit-sharing and pension benefits) and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury and other corporate overhead) to IB using the allocation methodology described in Note 2 of the Notes to the Company's interim combined financial statements. The Company's management believes that the methods used to allocate these amounts are reasonable. The interim combined financial statements do not reflect any changes that may occur in the financing and operations of the Company as a result of the Distribution. This discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the interim combined financial statements of the Company and the notes thereto, as well as the Instruments Business of Varian Associates, Inc. Combined Financial Statements and notes thereto and the information contained under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's registration statement on Form 10/A filed with the Securities and Exchange Commission. The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 1999 comprises the 52-week period ending October 1, 1999, and fiscal year 1998 comprises the 53-week period ended October 2, 1998. The fiscal quarters ended April 2, 1999 and April 3, 1998 each comprise 13 weeks. For purposes of interim reporting, the six-month period ended April 2, 1999 comprises 26 weeks, and the six-month period ended April 3, 1998 comprises 27 weeks. Results of Operations Second Quarter of Fiscal Year 1999 Compared to Second Quarter of Fiscal Year 1998 Sales. IB's sales were $148.9 million in the second quarter of fiscal year 1999, compared to sales of $141.0 million in the second quarter of fiscal year 1998. The primary reasons for this 5.7% increase in sales 10 were higher volume in the Analytical Instruments business (driven in large part by Chrompack International B.V. ("Chrompack"), which was acquired in the fourth quarter of fiscal year 1998), and an increase in sales by IB's Electronics Manufacturing (formerly Tempe Electronics Center) business. These increases were partially off-set by lower sales in the Vacuum Technologies (formerly Vacuum Products) business, which declined largely due to the continuing slow-down in capital spending, particularly in Asian markets, and continuing weakness in semiconductor equipment demand. NMR Systems (formerly NMR Instruments) also experienced lower sales due to the timing of shipments of NMR Systems products. Geographically, sales in North America of $80.1 million and Europe of $49.1 million in the second quarter of fiscal year 1999 represented increases of 2.0% and 29.0%, respectively, from the second quarter of fiscal year 1998, while sales in Asia of $14.0 million in the second quarter of fiscal year 1999 represented a decrease of 18.0% from the second quarter of fiscal year 1998. The increase in Europe resulted largely from the acquisition of Chrompack in the fourth quarter of fiscal year 1998, and the decrease in Asia resulted largely from weak economic conditions in that region. IB's orders during the second quarter of fiscal year 1999 were $154.2 million, compared to $138.5 million in the first quarter of fiscal year 1999 and $136.4 million in the second quarter of fiscal year 1998. All IB businesses contributed to the sequential orders growth, with only the Vacuum Technologies business showing a slight decline compared to the year-ago quarter (although it showed a 33% sequential increase). Gross Profit. IB's gross profit was $47.2 million (representing 31.7% of sales) in the second quarter of fiscal year 1999, compared to $55.7 million (representing 39.5% of sales) in the second quarter of fiscal year 1998. The decline in gross profit resulted primarily from actions taken as part of an overall reorganization of IB, which included actions to prepare IB to separate from VAI and become a stand-alone company, other organizational changes and a comprehensive product review, which resulted in a decision to accelerate transition from certain older to newer products necessitating the writedown of certain excess and obsolete inventories and the lowering of prices to accelerate the liquidation of older products. The impact on gross profit of these actions were in addition to the restructuring charges discussed below. The decline in gross profit was also the result of lower sales of Vacuum Technologies products. Research and Development. IB's research and development expenses were $9.3 million (representing 6.2% of sales) in the second quarter of fiscal year 1999, compared to research and development expenses of $7.8 million (representing 5.5% of sales) in the second quarter of fiscal year 1998. This increase related primarily to the research and development expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and accelerated development costs incurred to complete a new gas chromatograph product. Marketing. IB's marketing expenses were $34.2 million (representing 22.9% of sales) in the second quarter of fiscal year 1999, compared to $28.1 million (representing 19.9% of sales) in the second quarter of fiscal year 1998. Some of the increase was due to marketing expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998. Additionally, the increase in marketing expenses resulted from actions taken as part of the above-described reorganization, including costs to move people and equipment to new consolidated locations, writedown of field demonstration equipment following the accelerated transition to newer products, and other higher than normal costs related to the reorganization. These charges were in addition to the restructuring charges discussed below. General and Administrative. IB's general and administrative expenses were $10.8 million (representing 7.2% of sales) in the second quarter of fiscal year 1999, compared to $9.2 million (representing 6.5% of sales) in the second quarter of fiscal year 1998. The primary reason for this increase was the additional general and administrative costs of Chrompack, which was acquired in the fourth fiscal quarter of fiscal 1998. Restructuring Charges. During the second quarter of fiscal year 1999, IB's management approved a program to consolidate field sales and service organizations in Europe, Australia and the United States so as to fall within the direct responsibility of management at IB's principal factories in those countries in order to reduce 11 costs, simplify management structure and benefit from the infrastructure existing in those factories. This restructuring entailed consolidating certain sales, service and support operations. The consolidation resulted in exiting of a product line, closing or downsizing of sales offices and termination of approximately 100 personnel. The following table sets forth certain details associated with this restructuring in the second quarter of fiscal year 1999:
Cash Accrual at Restructuring Payments/Other April 2, Charges Reductions 1999 ------------- -------------- ---------- (Dollars in thousands) Lease payments and other facility expenses........................ $ 2,205 $ 240 $1,965 Severance and other related employee benefits............... 7,171 1,988 5,183 Exited product line.............. 1,598 1,598 -- ------- ------ ------ Total.......................... $10,974 $3,826 $7,148 ======= ====== ======
Taxes on Earnings. IB's effective income tax rate was 44.5% in the second quarter of fiscal year 1999, compared to 40.0% in the second quarter of fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate because the Company expects to realize a larger proportion of high-tax foreign country income during fiscal year 1999 than it did during fiscal year 1998. Net Loss. The net loss of $10.0 million ($0.33 pro forma net loss per share) in the second quarter of fiscal year 1999 was the result of IB's overall reorganization described above, which resulted in incremental costs primarily included in cost of sales, marketing and restructuring charges. Although some of these costs will continue at significantly reduced levels for several quarters, management believes that the Company will return to profitability during the third quarter of fiscal year 1999. First Half of Fiscal Year 1999 Compared to First Half of Fiscal Year 1998 Sales. IB's sales were $282 million in the first half of fiscal year 1999, the same as in the first half of fiscal year 1998. Sales by the Analytical Instruments and the Electronics Manufacturing businesses were higher during the six-month period relative to the year-ago period, in the case of the former due in part to Chrompack, which was acquired in the fourth quarter of fiscal year 1998. These increases were off-set by lower sales in the Vacuum Technology business, which declined largely due to the continuing slow-down in capital spending, particularly in Asian markets, and continuing weakness in semiconductor equipment demand. NMR Systems also experienced lower sales, due to the timing of shipments of NMR Systems products. Geographically, sales in North America of $149.3 million and Europe of $92.0 million in the first half of fiscal year 1999 represented a decline of 4.5% and an increase of 15.3%, respectively, as compared to the first half of fiscal year 1998, while sales in Asia of $29.0 million in the first half of fiscal year 1999 declined by 11.7% from the first half of fiscal year 1998, reflecting the general slow-down in Asian markets. The decline in North America was predominantly due to the slow-down in the semiconductor equipment industry. IB's orders in the first half of fiscal year 1999 were $292.7 million, compared to $270.3 million in the first half of fiscal year 1998. All IB businesses except the Vacuum Technologies business contributed to the orders growth. Gross Profit. IB's gross profit was $99.9 million (representing 35.4% of sales) in the first half of fiscal year 1999, compared to $110.3 million (representing 39.1% of sales) in the first half of fiscal year 1998. The decline in gross profit resulted primarily from actions taken as part of an overall reorganization of IB, which included actions to prepare IB to separate from VAI and become a stand-alone company, other organizational changes and a comprehensive product review, which resulted in a decision to accelerate transition from certain older to newer products necessitating the writedown of certain excess and obsolete inventories and the lowering 12 of prices to accelerate the liquidation of older products. The impact on gross profit of these actions were in addition to the restructuring charges discussed below. The decline in gross profit was also the result of lower sales of Vacuum Technologies products. Research and Development. IB's research and development expenses were $16.4 million (representing 5.8% of sales) in the first half of fiscal year 1999, compared to research and development expenses of $15.0 million (representing 5.3% of sales) in the first half of fiscal year 1998. The increase related primarily to the additional research and development expense of Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and accelerated development costs incurred to complete a new gas chromatograph product. Marketing. IB's marketing expenses were $64.3 million (representing 22.8% of sales) in the first half of fiscal year 1999, compared to $55.3 million (representing 19.6% of sales) in the first half of fiscal year 1998. Some of the increase was due to marketing expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998. Additionally, the increase in marketing expenses resulting from actions taken as part of the above-described reorganization, including costs to move people and equipment to new consolidated locations, writedown of field demonstration equipment following the accelerated transition to newer products, and other higher than normal costs related to the reorganization. These charges were in addition to the restructuring charges discussed below. General and Administrative. IB's general and administrative expenses were $18.5 million (representing 6.5% of sales) in the first half of fiscal year 1999, compared to $19.6 million (representing 7.0% of sales) in the first half of fiscal year 1998. The primary reason for this decrease was due to lower profit-sharing and management incentive compensation costs in the first half of fiscal year 1999, the additional general and administrative costs of Chrompack, which was acquired in the fourth quarter of fiscal year 1998. Restructuring Charges. During the second quarter of fiscal year 1999, IB's management approved a program to consolidate field sales and service organizations in Europe, Australia and the United States so as to fall within the direct responsibility of management at IB's principal factories in those countries in order to reduce costs, simplify management structure and benefit from the infrastructure existing in those factories. This restructuring entailed consolidating certain sales, service and support operations. The consolidation resulted in exiting of a product line, closing or downsizing of sales offices and termination of approximately 100 personnel. The following table sets forth certain details associated with this restructuring during the second quarter of fiscal year 1999:
Cash Accrual at Restructuring Payments/Other April 2, Charges Reductions 1999 ------------- -------------- ---------- (Dollars in thousands) Lease payments and other facility expenses........................ $ 2,205 $ 240 $1,965 Severance and other related employee benefits............... 7,171 1,988 5,183 Exited product line ............. 1,598 1,598 -- ------- ------ ------ Total.......................... $10,974 $3,826 $7,148 ======= ====== ======
Taxes on Earnings. IB's effective income tax rate was 44.5% in the first half of fiscal year 1999, compared to 40.0% in the first half of fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate because the Company expects to realize a larger proportion of high-tax foreign country income during fiscal year 1999 than it did during fiscal year 1998. Net Loss. The net loss of $5.7 million ($0.19 pro forma net loss per share) in the first half of fiscal year 1999 was the result of IB's overall reorganization described above, which resulted in incremental costs primarily included in cost of sales, marketing and restructuring charges. Liquidity and Capital Resources VAI Cash and Debt Allocations. The Distribution Agreement provided for the division among the Company, VSEA and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the 13 Company was to assume 50% of VAI's term loans and receive an amount of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, adjustments may be required within 180 days following the Distribution. In addition, certain other pre- Distribution transactions may require adjustment within 90 days following the Distribution under the provisions of the Distribution Agreement. As a result of these adjustments, the Company may be required to make cash payments to VMS or may be entitled to receive cash payments from VMS. The amount of any such adjustments cannot be estimated. Debt and Credit Facilities. IB's debt was historically incurred or managed by VAI. In connection with the Distribution, a portion of VAI's debt was assumed by the Company as of April 2, 1999. In addition, the Company entered into new debt arrangements as of and after April 2, 1999. As part of the Distribution, a total of $63.9 million in debt was assumed by or transferred to the Company, which debt consisted of $58.5 million in term loans and $5.4 million in notes payable. As of April 2, 1999, interest rates on the term loans ranged from 6.70% to 7.49%, and the weighted average interest rate on the term loans was 7.02%. As of April 2, 1999, interest rates on the notes payable ranged from 1.50% to 4.00%, and the weighted average interest rate on the notes payable was 2.95%. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. As of April 2, 1999, the Company entered into $40.0 million in uncommitted credit facilities for working capital purposes. As of April 2, 1999, none of these credit facilities were utilized and no amount was outstanding. Following April 2, 1999, the Company entered into additional uncommitted credit facilities for $15.0 million for working capital purposes. All of these credit facilities contain certain conditions and events of default customary for such facilities. Future principal payments on notes payable and long-term debt outstanding on April 2, 1999 will be $8.4 million, $6.0 million, $6.0 million, $6.0 million, $2.5 million, $2.5 million and $32.5 million during the six months ended October 1, 1999, the fiscal years ended 2000, 2001, 2002, 2003, 2004, and thereafter, respectively. Cash and Cash Equivalents. Pursuant to the Distribution Agreement as described above, the Company received a cash contribution from VAI in the amount of $12.1 million as of April 2, 1999. IB generated $8.6 million of cash from operations in the first half of fiscal year 1999, which compares to $19.4 million in the first half of fiscal year 1998. The primary reason for this decrease in cash generated was the lower earnings which reflect increased spending from the reorganization activities. IB used $10.5 million of cash for investing activities in the first half of fiscal year 1999, which compares to $9.7 million in the first half of fiscal year 1998. The primary reason for this increase was capital equipment expenditures by Chrompack. The cash flow impact of certain actions relating to the above-described overall reorganization of IB will occur for several more quarters after April 2, 1999. Management believes that the cash flow impact will be approximately $4.8 million in the remainder of fiscal year 1999 and $2.4 million in fiscal year 2000. The Company currently has no plans to materially modify or expand its facilities or to make other material capital expenditures. 14 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 Company's liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the Company's borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the current fiscal year and fiscal year 2000. Environmental Matters The Company's operations are subject to various foreign, federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. This includes discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require manufacturers to dispose of their products at the end of their useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of such operations. In addition, under the Distribution Agreement, the Company agreed to indemnify VMS and VSEA for one-third of environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized for such costs), as further described below. VAI 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 or disposal. VAI is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former VAI facilities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of April 2,1999, it was nonetheless estimated that the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $21.0 million to $48.3 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of April 2, 1999. 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 therefore VAI accrued $21.0 million in estimated environmental costs as of April 2, 1999. The amount accrued was not discounted to present value. 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 April 2, 1999, it was estimated that the future exposure for environmental related investigation and remediation costs for these sites and facilities ranged in the aggregate from $39.2 million to $73.0 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of April 2, 1999. 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 futures costs were reliably determinable. Together, these amounts totaled $50.6 million at April 2, 1999. Accordingly, VAI accrued $21.9 million as of April 2, 1999, which represents the best estimate of the future costs discounted at 4%, net of inflation. This accrual is in addition to the $21.0 million described in the preceding paragraph. 15 Since the Company is obligated to reimburse VMS for one-third of the foregoing environmental-related costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs or expenses) that are paid after April 2, 1999, IB recorded $7.7 million as its portion of these estimated future costs for environmental liabilities of VAI as of April 2, 1999. The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. Management believes that most of these cost ranges will narrow as investigation and remediation activities progress. 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 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, 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 statements. Year 2000 General. The "Year 2000" problem refers to computer programs and other equipment with embedded microprocessors ("non-IT systems") which use only the last two digits to refer to a year, and which therefore might not properly recognize a year that begins with "20" instead of the familiar "19." As a result, those computer programs and non-IT systems might be unable to operate or process accurately certain date-sensitive data before or after January 1, 2000. Because the Company relies heavily on computer programs and non-IT systems, and relies on third parties which themselves rely on computer programs and non-IT systems, the Year 2000 problem, if not addressed, could adversely effect the Company's business, results of operations and financial condition. State of Readiness. VAI and IB previously initiated a comprehensive assessment of potential Year 2000 problems with respect to (1) IB's internal systems, (2) IB's products, and (3) significant third parties with which the IB does business. The Company is continuing that assessment for its businesses, although under the terms of the Transition Services Agreement among VMS, VSEA and the Company, VMS is taking certain actions and otherwise assisting the Company with respect to certain Year 2000 implications with internal systems. IB has substantially completed its assessment of potential Year 2000 problems in internal systems, which systems have been categorized as follows, in order of importance: (a) enterprise information systems; (b) enterprise networking and telecommunications; (c) factory-specific information systems; (d) non-IT systems; (e) computers and packaged software; and (f) facilities systems. With respect to enterprise information systems, VAI initiated in 1994 replacement of its existing systems with a single company-wide system supplied by SAP America, Inc., which system is designed and tested by SAP for Year 2000 capability. Installation of the SAP enterprise information system has been staged to replace first those existing systems that are not Year 2000 capable. Installation of the SAP system is approximately 70% complete, with 90% completion expected by July 1999 and full completion expected by the end of 1999; upgrade of networking and telecommunications systems is complete; upgrade of factory-specific information systems is approximately 90% complete, with 95% completion expected by July 1999 and 100% completion expected by December 1999; and upgrade of non-IT systems, computers and packaged software, and facilities systems are approximately 95% complete, with 100% completion expected by July 1999. The Company has initiated an assessment of potential Year 2000 problems in its current and previously-sold products. With respect to current products, that assessment and corrective actions are complete, and the Company believes that all of its current products are Year 2000 capable; however, that conclusion is based in 16 part on Year 2000 assurances or warranties from suppliers of computer programs and non-IT systems which are integrated into or sold with the Company's current products. With respect to previously-sold products, the Company does not intend to assess Year 2000 preparedness of every product it has ever sold, but rather is focusing its assessments on products that will be under written warranties or are still relatively early in their useful life, are more likely to be dependent on non-IT systems that are not Year 2000 capable, and/or cannot be easily upgraded with readily available externally-utilized computers and packaged software. These assessments are expected to be substantially completed by July 1999. Where the Company identifies previously-sold products that are not Year 2000 capable, the Company intends in some cases to develop and offer to sell upgrades or retrofits, identify corrective measures which the customer could itself undertake or identify for the customer other suppliers of upgrades or retrofits. There may be instances where the Company will be required to repair and/or upgrade such products at its own expense. Schedules for completing those corrective actions vary considerably among the Company's businesses and products, but are generally expected to be substantially completed by July 1999. The Company is still assessing potential Year 2000 problems of third parties with which the Company has material relationships, which will be primarily suppliers of products or services. These assessments will identify and prioritize critical suppliers, review those suppliers' written assurances on their own assessments and correction of Year 2000 problems and develop appropriate contingency plans for those suppliers which might not be adequately prepared for Year 2000 problems. These assessments are expected to be substantially completed by August 1999. Costs. The Company estimates that IB had incurred approximately $1,021,000 as of April 2, 1999 to assess and correct Year 2000 problems. Although difficult to assess, based on its assessment to date, the Company estimates that it will incur approximately $350,000 in additional costs to assess and correct Year 2000 problems, which costs are expected to be incurred throughout fiscal year 1999 and the first half of fiscal year 2000. All of these costs have been and will continue to be expensed as incurred. This estimate of future costs has not been reduced by expected recoveries from certain third parties, which are subject to indemnity, reimbursement or warranty obligations for Year 2000 problems. In addition, the Company expects that certain costs will be offset by revenues generated by the sale of upgrades and retrofits and other customer support services relating to Year 2000 problems. However, there can be no assurance that the Company's actual costs to assess and correct Year 2000 problems will not be higher than the foregoing estimate. Risks. Failure by the Company or its key suppliers to accurately assess and correct Year 2000 problems would likely result in interruption of certain of the Company's normal business operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. If the Company does not adequately identify and correct Year 2000 problems in its information systems, it could experience an interruption in its operations, including manufacturing, order processing, receivables collection, cash management and accounting, such that there would be delays in product shipments, lost data and a consequential impact on revenues, expenditures, cashflow and financial reporting. If the Company does not adequately Risks. Failure by the Company or its key suppliers to accurately assess and correct Year 2000 problems would likely result in interruption of certain of the Company's normal business operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. If the Company does not adequately identify and correct Year 2000 problems in its information systems, it could experience an interruption in its operations, including manufacturing, order processing, receivables collection, cash management and accounting, such that there would be delays in product shipments, lost data and a consequential impact on revenues, expenditures, cashflow and financial reporting. If the Company does not adequately identify and correct Year 2000 problems in its non-IT systems, it could experience an interruption in its manufacturing and related operations, such that there would be delays in product shipments and a consequential impact on revenues. If the Company does not adequately identify and correct Year 2000 problems in previously-sold products, it could experience warranty or product liability claims by users of products which do not function correctly. If the Company does not adequately identify and correct Year 2000 problems of the significant third parties with which it does business, it could experience an interruption in the supply of key components or services from those parties, such that there would be delays in product shipments or services and a consequential 17 impact on revenues. The most difficult risks to assess and prepare for relate to basic infrastructure services (such as electricity, water, gas, telecommunications, transportation, distribution and banking) provided by third parties. Management believes that the assessments and corrective actions described above have been or will be accomplished within the cost and time estimates stated. Although it is not expected that the Company will be 100% Year 2000 compliant by the end of 1999, management does not currently believe that any Year 2000 non-compliance in the Company's information systems would have a material adverse effect on the Company's business, results of operations or financial condition. However, given the inherent complexity and implications of the Year 2000 problem, there can be no assurance that actual costs will not be higher than currently anticipated or that corrective actions will not take longer than currently anticipated to complete. Risk factors which might result in higher costs or delays include the ability to identify and correct in a timely fashion Year 2000 problems; regulatory or legal obligations to correct Year 2000 problems in previously-sold products; ability to retain and hire qualified personnel to perform assessments and corrective actions; the willingness and ability of critical suppliers to assess and correct their own Year 2000 problems, including the products they supply to the Company; and the additional complexity which will likely be caused by undertaking during fiscal year 1999 and fiscal year 2000 the separation (as a result of the Distribution) of enterprise information systems which the Company currently shares with VMS and VSEA. Because of uncertainties as to the extent of Year 2000 problems with the Company's previously-sold products and the extent of any legal obligation for the Company to correct Year 2000 problems in those products, the Company cannot yet assess risks to the Company with respect to those products. Because its assessments are not yet complete, the Company also cannot yet conclude that the failure of critical suppliers to assess and correct Year 2000 problems is not reasonably likely to have a material adverse effect on the Company's results of operations, and indeed the failure of certain suppliers to provide essential infrastructure services will likely have a material adverse effect on the Company's business, results of operations and financial condition. Contingency Plans. With respect to the Company's enterprise information systems, the Company has a contingency plan if the SAP system is not fully installed before December 31, 1999. That plan primarily involves installation where necessary of a Year 2000 capable upgrade of existing information systems pending complete installation of the SAP system. That upgrade is currently in acceptance testing, and, if functional, will be held for contingency purposes. With respect to products and significant third parties, the Company intends, as part of its on-going assessment of potential Year 2000 problems, to develop contingency plans for the more critical problems that might not be corrected December 31, 1999. It is currently anticipated that the focus of these contingency plans will be the possible interruption of supply of key components or services from third parties. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement changes standards for the way that public business enterprises identify and report operating segments in annual and interim financial statements. This statement requires selected information about an enterprise's operating segments and related disclosure about products and services, geographic areas and major customers. The Company expects to report multiple segments when it adopts SFAS No. 131 at fiscal year-end 1999. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133 in the first quarter of fiscal year 2000 and is in the process of determining the impact that adoption will have on its combined financial statements. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Exchange Risk With global operations and activities, the Company faces exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as the Company's business practices evolve and could have a material adverse impact on the Company's financial results. Historically, IB's primary exposures have related to non-U.S. dollar denominated sales and purchases throughout Europe and Asia. The Euro was adopted as a common currency for members of the European Monetary Union on January 1, 1999. The Company is evaluating, among other issues, the impact of the Euro conversion on its foreign currency exposure. Based on its evaluation to date, the Company does not expect the Euro conversion to create any change in its currency exposure due to the Company's existing hedging practices. IB historically hedged its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. IB did not enter into forward exchange contracts for trading purposes. IB's forward exchange contracts generally ranged from one to three months in original maturity, and no forward exchange contract had an original maturity greater than one year. There were no significant forward exchange contracts outstanding as of April 2, 1999. Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio, notes payable and long-term debt obligations. The Company does not use derivative financial instruments in its investment portfolio, and the Company's investment portfolio only includes highly liquid instruments with an original maturity to the Company of three months or less. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures and acquisitions. The Company is subject to fluctuating interest rates that may impact, adversely or otherwise, its results of operations or cash flows for its variable rate notes payable and cash and cash equivalents. Fluctuations in interest rates may also impact, adversely or otherwise, the estimated fair value of the Company's fixed rate long-term obligations. The Company has no cash flow exposure due to rate changes for long-term debt obligations. The table below presents principal amounts and related weighted-average interest rates by year of maturity for the Company's cash and cash equivalents and debt obligations.
Six months Fiscal year ended Oct. 1, ---------------------------------------------- 1999 2000 2001 2002 2003 2004 Thereafter Total ------------- ---- ---- ---- ---- ---- ---------- ----- (Dollars in millions) Assets Cash and cash equivalents(1)....... $12.1 -- -- -- -- -- -- $12.1 Liabilities Notes payable......... $ 5.4 -- -- -- -- -- -- $ 5.4 Average interest rate............... 3.0% -- -- -- -- -- -- 3.0% Long-term debt (including current portion)............. $ 3.0 $6.0 $6.0 $6.0 $2.5 $2.5 $32.5 $58.5 Average interest rate............... 7.3% 7.3% 7.3% 7.3% 7.2% 7.2% 6.8% 7.0%
- -------- (1) Cash and cash equivalents primarily consist of non-interest bearing operating accounts located throughout the foreign subsidiaries. The estimated fair value of the Company's cash and cash equivalents approximates the principal amounts reflected above based on the short maturities of these financial instruments. The estimated fair value of the Company's debt obligations approximates the principal amounts reflected above based on rates currently available to the Company for debt with similar terms and remaining maturities. Although payments under certain of the Company's operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases. 19 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION Pursuant to the Company's By-Laws, and in accordance with Securities and Exchange Commission ("SEC") Rule 14a-5(e), (1) stockholder proposals submitted pursuant to the requirements of SEC Rule 14a-8 must be received by the Company's Secretary not later than September 17, 1999 at the Company's address set forth on the cover page of this Form 10-Q and must otherwise meet the requirements of SEC Rule 14a-8, and (2) stockholder proposal submitted outside the processes of SEC Rule 14a-8 must be received by the Company's Secretary not later than November 16, 1999 and not earlier than October 17, 1999 at the Company's address set forth on the cover page of this Form 10-Q and must otherwise meet the requirements set forth in the Company's By-Laws. In addition, in accordance with SEC Rule 14a-4(c)(1), stockholder proxies obtained by the Board of Directors of the Company in connection with the Company's 2000 Annual Meeting of Stockholders will confer on the proxy holders discretionary authority to vote on any matters presented at the meeting, unless notice of the matter is provided to the Company's Secretary not later than December 1, 1999 and the Company's address set forth on the cover page of this Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit No. Description ----------- ----------- 2.1 Amended and Restated Distribution Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of January 14, 1999.* 3.1 Restated Certificate of Incorporation of Varian, Inc. 3.2 Certificate of Designation and Terms of Participating Preferred Stock of Varian, Inc. 3.3 By-Laws of Varian, Inc. 10.1 Employee Benefits Allocation Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.2 Intellectual Property Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.3 Tax Sharing Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.4 Transition Services Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.5 Supplemental Retirement Plan of Varian, Inc. 10.6 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption Dated as of April 2, 1999.* 27.1 Financial Data Schedule.
- -------- * Certain exhibits and schedules omitted. (b) Reports on Form 8-K filed during the quarter ended April 2, 1999: None. 20 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 and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: May 17, 1999 21 INDEX TO EXHIBITS
Exhibit No. Description ----------- ----------- 2.1 Amended and Restated Distribution Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of January 14, 1999.* 3.1 Restated Certificate of Incorporation of Varian, Inc. 3.2 Certificate of Designation and Terms of Participating Preferred Stock of Varian, Inc. 3.3 By-Laws of Varian, Inc. 10.1 Employee Benefits Allocation Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.2 Intellectual Property Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.3 Tax Sharing Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.4 Transition Services Agreement dated as of April 2, 1999 among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.* 10.5 Supplemental Retirement Plan of Varian, Inc. 10.6 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption Dated as of April 2, 1999.* 27.1 Financial Data Schedule.
- -------- * Certain exhibits and schedules omitted. EX-2.1 2 DISTRIBUTION AGREEMENT AMONG VARIAN ASSOC EXHIBIT 2.1 - -------------------------------------------------------------------------------- AMENDED AND RESTATED DISTRIBUTION AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of January 14, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS........................................................................ 1 Section 1.01. General.................................................................... 1 Section 1.02. References; Interpretation................................................. 17 ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS................................... 17 Section 2.01. Corporate Reorganization Transactions; Dispositions........................ 17 Section 2.02. Conveyance of Assets....................................................... 18 Section 2.03. Transfer and Assignment of Certain Licenses and Permits.................... 18 Section 2.04. Transfer and Assignment of Certain Agreements.............................. 19 Section 2.05. Certain Financial and Other Arrangements................................... 19 Section 2.06. Assumption and Satisfaction of Liabilities................................. 21 Section 2.07. Stock Issuance; Dividends.................................................. 21 Section 2.08. Charters; By-laws; Rights Plans............................................ 22 Section 2.09. Directors, Officers and Employees.......................................... 22 Section 2.10. Other Transactions......................................................... 22 Section 2.11. Meeting; Proxy Statement; Other Filings.................................... 23 Section 2.12. State Securities Laws...................................................... 23 Section 2.13. Listing Application........................................................ 23 Section 2.14. Transfers Not Effected Before the Distributions; Transfers Deemed Effective as of the Effective Time......................................... 23 Section 2.15. Ancillary Agreements....................................................... 23 Section 2.16. Operations in Ordinary Course.............................................. 24 ARTICLE III THE DISTRIBUTIONS.................................................................. 24 Section 3.01. Record Date and Distribution Date.......................................... 24 Section 3.02. The Distributions.......................................................... 24 ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS.................................................... 24 Section 4.01. Conditions Precedent to the Distributions.................................. 24 Section 4.02. Waivers.................................................................... 26 ARTICLE V COVENANTS.......................................................................... 26 Section 5.01. Further Assurances; Consents............................................... 26 Section 5.02. Intellectual Property Matters.............................................. 26 Section 5.03. Employees; Employee Benefits............................................... 26 Section 5.04. Tax Matters................................................................ 26 Section 5.05. No Representations or Warranties........................................... 27 Section 5.06. Removal of Certain Guarantees; Releases from Liabilities................... 27 Section 5.07. Intercompany Agreements.................................................... 28 Section 5.08. Nondisclosure Agreements................................................... 28
-i- TABLE OF CONTENTS (continued)
Page Section 5.09. Receipts after the Distribution Date......................................... 28 Section 5.10. Post-Distribution Audit...................................................... 28 ARTICLE VI ACCESS TO INFORMATION; CONFIDENTIALITY............................................... 29 Section 6.01. Provision, Transfer and Delivery of Applicable Corporate Records............. 29 Section 6.02. Access to Books and Records.................................................. 29 Section 6.03. Confidentiality.............................................................. 30 Section 6.04. Witness Services............................................................. 30 Section 6.05. Reimbursement; Other Matters................................................. 30 Section 6.06. Retention of Records......................................................... 30 Section 6.07. Privileged Matters........................................................... 31 ARTICLE VII INDEMNIFICATION...................................................................... 31 Section 7.01. Survival of Agreements....................................................... 31 Section 7.02. Taxes........................................................................ 32 Section 7.03. Indemnification by HCS....................................................... 32 Section 7.04. Indemnification by SEB....................................................... 32 Section 7.05. Indemnification by IB........................................................ 32 Section 7.06. Limitations on Indemnification Obligations................................... 32 Section 7.07. Procedures for Indemnification............................................... 34 Section 7.08. Indemnification Payments..................................................... 36 Section 7.09. Certain Legal Proceedings.................................................... 36 Section 7.10. Survival of Indemnities...................................................... 36 Section 7.11. Contribution................................................................. 36 Section 7.12. Exclusive Mechanism; Waiver of Jury Trial.................................... 36 Section 7.13. Failure to Satisfy Indemnification Obligation................................ 36 Section 7.14. Treatment of Shared Assets................................................... 37 ARTICLE VIII INSURANCE............................................................................ 37 Section 8.01. Policies and Rights Included within Assets................................... 37 Section 8.02. Claims....................................................................... 38 Section 8.03. Administration; Other Matters................................................ 39 Section 8.04. Retrospectively Calculated Insurance Premiums................................ 40 Section 8.05. Allocation of Insurance Proceeds; Cooperation................................ 40 Section 8.06. Reimbursement of Expenses.................................................... 40 Section 8.07. Insurer Insolvency or Coverage Controversy................................... 41 Section 8.08. Agreement for Waiver of Conflict and Shared Defense.......................... 41 Section 8.09. Direct Responsibility for Claims; Additional Insurance; No Modifications..... 41
-ii- TABLE OF CONTENTS (continued)
Page ARTICLE IX DISPUTE RESOLUTION................................................................... 41 Section 9.01. Separation Committee......................................................... 41 Section 9.02. Binding Arbitration.......................................................... 42 Section 9.03. Disputes Regarding Closing Balance Sheets; Payments.......................... 43 Section 9.04. Post-Distribution Adjustment in Respect of Transaction Expenditures and Disposition Proceeds......................................................... 44 Section 9.05. Discretionary Restructuring Amounts.......................................... 45 Section 9.06. Specific Performance......................................................... 45 ARTICLE X MISCELLANEOUS........................................................................ 45 Section 10.01. Complete Agreement; Construction............................................. 45 Section 10.02. Ancillary Agreements......................................................... 45 Section 10.03. Counterparts................................................................. 45 Section 10.04. Responsibility for Expenses.................................................. 45 Section 10.05. Notices...................................................................... 45 Section 10.06. Waivers...................................................................... 47 Section 10.07. Amendments................................................................... 47 Section 10.08. Assignment................................................................... 47 Section 10.09. Successors and Assigns....................................................... 47 Section 10.10. Termination.................................................................. 47 Section 10.11. Third Party Beneficiaries.................................................... 48 Section 10.12. Exhibits and Schedules....................................................... 48 Section 10.13. Governing Law................................................................ 48 Section 10.14. Severability................................................................. 48 Section 10.15. Subsidiaries................................................................. 48 Section 10.16. Titles and Headings.......................................................... 48 Section 10.17. Consent to Jurisdiction...................................................... 48 Exhibit A Corporate Reorganization Transactions........................................................... A-1 Exhibit B Employee Benefits Allocation Agreement.......................................................... B-1 Exhibit C Intellectual Property Agreement................................................................. C-1 Exhibit D Tax Sharing Agreement........................................................................... D-1 Exhibit E Transition Services Agreement................................................................... E-1 Exhibit F HCS Pro Forma Balance Sheet..................................................................... F-1 Exhibit G IB Pro Forma Balance Sheet...................................................................... G-1 Exhibit H SEB Pro Forma Balance Sheet..................................................................... H-1 Exhibit I HCS Subsidiaries................................................................................ I-1
-iii- TABLE OF CONTENTS (continued)
Page Exhibit J IB Subsidiaries............................................................................... J-1 Exhibit K SEB Subsidiaries.............................................................................. K-1 Exhibit L Varian By-Laws................................................................................ L-1
-iv- AMENDED AND RESTATED DISTRIBUTION AGREEMENT THIS AMENDED and RESTATED DISTRIBUTION AGREEMENT effective as of the 14th day of January, 1999, among VARIAN ASSOCIATES, INC., a Delaware corporation ("Varian"), VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC., a Delaware corporation ("SEB"), and VARIAN, INC., a Delaware corporation ("IB"). R E C I T A L S WHEREAS, the Board of Directors of Varian has deemed it appropriate and desirable to: (a) separate and divide the existing businesses of Varian so that (i) the business of the manufacture, sale and service of ion implanters for semiconductor equipment fabrication facilities will be owned and conducted directly or indirectly by SEB, (ii) the business of the manufacture, sale and service of analytical and research instruments and high vacuum products and fabrication of circuit boards and electronic subassemblies will be owned and conducted directly or indirectly by IB, and (iii) the business of the manufacture, sale and service of integrated cancer-care systems, including medical linear accelerators and brachytherapy systems for treatment, simulators for therapy planning and verification, and ancillary equipment, software and networking systems and related data management, and of x-ray tubes for the diagnostic imaging industry and imaging subsystems, will be retained and conducted directly or indirectly by Varian, which will be renamed Varian Medical Systems, Inc. immediately following the Distributions (as hereinafter defined); and (b) distribute, after such separation and division, as a dividend to the holders of shares of common stock, par value $1.00 per share, of Varian (the "VAI Common Stock"), all of the then-outstanding shares of common stock, par value $.01 per share, of SEB (the "SEB Common Stock"), and all of the then- outstanding shares of common stock, par value $.01 per share, of IB (the "IB Common Stock"); and WHEREAS, each of Varian, SEB and IB has determined that it is necessary and desirable to set forth the principal corporate transactions required to effect such separation, division and Distributions and to set forth agreements that will govern certain other matters before and after the Distributions. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. General. As used in this Agreement, the following terms have ------- the following meanings: "AAA" has the meaning ascribed to such term in Section 9.02(b). --- "AAA Rules" has the meaning ascribed to such term in Section 9.02(c). --------- "Action" means any action, suit, arbitration, inquiry, proceeding or ------ investigation by or before any Governmental Authority or any arbitration tribunal. "Affiliate" means, when used with respect to a specified Person, another --------- Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. "After-tax Differential" means the positive or negative amount determined ---------------------- by adding the amounts of the Disposition Proceeds received after the Effective Time and the Tax Benefit and subtracting therefrom the amounts of the Transaction Expenditures paid after the Effective Time and the Tax Cost. 1 "Agent" means First Chicago Trust Company of New York, or such other trust ----- company or bank designated by Varian, who shall act as agent for the holders of VAI Common Stock in connection with the Distributions. "Agreement" means this Distribution Agreement among Varian, SEB and IB, --------- including all amendments hereto and all Schedules and Exhibits hereto. "Agreement Date" means the date set forth in the first paragraph of this -------------- Agreement. "Agreement Disputes" has the meaning ascribed to such term in Section ------------------ 9.01(a). "Aircraft Disposition" has the meaning ascribed to such term in Section -------------------- 2.01(b). "Ancillary Agreements" means, collectively, the Employee Benefits -------------------- Allocation Agreement, the Tax Sharing Agreement, the Transition Services Agreement and the Intellectual Property Agreement. "Arbitration Demand Notice" has the meaning ascribed to such term in ------------------------- Section 9.02(b). "Assets" means assets, properties and rights (including goodwill), wherever ------ located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including: (i) all accounting and other books, records and files whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other form; (ii) all apparatus, computers and other electronic data processing equipment, fixtures, machinery, equipment, capital and other spares, furniture, office equipment, automobiles, trucks, aircraft and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property; (iii) all inventories of materials, parts, raw materials, supplies, work- in-process, consigned goods, finished goods, packaging and all products and product samples; (iv) all interests in real property of whatever nature, including easements, leases and licenses, whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor, lessee, sublessee or otherwise; (v) all buildings and other improvements to real property; (vi) all interests in any capital stock or other equity interests of any Subsidiary or any other Person, all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person, all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person and all other investments in securities of any Person; (vii) all license agreements, leases of personal property, open purchase orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale of products, other sales or purchase agreements, distributions arrangements, and other contracts, agreements or commitments; (viii) all deposits, letters of credit and performance and surety bonds; (ix) all technical information, data, research and development information, engineering drawings, operating and maintenance manuals, and materials and analyses prepared by consultants and other third parties; (x) all Intellectual Property; 2 (xi) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, quality records and reports and other books, records, studies, surveys, reports, plans and documents; (xii) all prepaid expenses, trade accounts and other accounts and notes receivables; (xiii) all rights under contracts, agreements, warranties or guarantees, all claims or rights or judgments against any Person, all rights in connection with any bids or offers and all claims, choses in action, rights of recovery and rights of set-off or similar rights, whether accrued or contingent, and refunds and deposits; (xiv) all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution; (xv) all licenses, permits, approvals and authorizations which have been issued by any Governmental Authority; (xvi) and marketing materials and other printed or written materials; (xvii) employee contracts, including any rights thereunder to restrict an employee or former employee from competing in certain respects and personnel and medical files and records; (xviii) all computer programs and other software (in executable or source code format), including operating software, applications, networks software, firmware, middleware, design software, design tools, test and diagnostic software and systems configurations (and all documentation, schematics, drawings, designs, manuals, reports, records, instructions, studies, surveys, plans, books or other written materials (whether in hard copy or magnetic form) relating to or including the foregoing) but excluding product-related computer programs and other software; (xix) Cash and Cash Equivalents, bank accounts, lock boxes and other deposit arrangements; and (xx) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements. "Assignee" has the meaning ascribed to such term in Section 2.04(b). -------- "Auditors" has the meaning ascribed to such term in Section 5.10(a). -------- "Books and Records" means all books, records, manuals, agreements and other ----------------- materials (in any form or medium), including all mortgages, licenses, indentures, contracts, financial data, customer lists, marketing materials and studies, advertising materials, price lists, correspondence, distribution lists, supplier lists, production data, sales and promotional materials and records, purchasing materials and records, personnel records, manufacturing and quality control records and procedures, blue prints, research and development files, records, data and laboratory books, accounts records, sales order files, litigation files, computer files, microfiche, tape recordings and photographs. "Cash and Cash Equivalents" has the meaning ascribed to such term under ------------------------- GAAP. "Claims Administration" means the processing of claims made under the --------------------- Company Policies, including the reporting of losses, management and defense of claims (except to the extent settlement authority remains with another party as contemplated by Section 7.07) and providing for appropriate releases upon settlement of claims. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Commission" means the Securities and Exchange Commission. ---------- 3 "Company Policies" means all Policies, current or past, which are as of the ---------------- Effective Time, or at any time were, maintained by, on behalf of, or for the benefit or protection of Varian or any of its Subsidiaries or any of its predecessors which relate to any Shared Liability, the Instruments Business, the Health Care Systems Business or the Semiconductor Equipment Business, or current or past directors, officers, employees or agents of any of the foregoing. "Consent" means any approval, consent or waiver required to be obtained ------- from any Governmental Authority or other third party for the consummation of a specified transaction, including any option, right of first refusal or other similar right of a third party triggered by a specified transaction. "Consolidated Debt" means with respect to any Person (without duplication), ----------------- every obligation of such Person and its consolidated Subsidiaries (i) for money borrowed, (ii) evidenced by bonds, debentures, notes or other similar instruments, (iii) for reimbursement with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person or its consolidated Subsidiaries, (iv) for the deferred purchase price of property or services if, and to the extent that, such obligation would appear as a Liability upon a balance sheet of such Person or its consolidated Subsidiaries prepared in accordance with GAAP (but excluding trade accounts payable or accrued Liabilities arising in the ordinary course of business), excluding capital leases, and (v) to guarantee or otherwise be liable for, any obligation of the type referred to in clauses (i) through (iv) of another Person. "Conveyancing and Assumption Instruments" means, collectively, the various --------------------------------------- written agreements, instruments and other documents to be entered into to effect the Corporate Reorganization Transactions or otherwise to effect the transfer of Assets and the assumption of Liabilities in the manner contemplated by this Agreement and the Ancillary Agreements. "Corporate Reorganization Transactions" means, collectively, each of the ------------------------------------- distributions, transfers, conveyances, contributions, assignments and other transactions described and set forth on Exhibit A, and those described or contemplated by the Proxy Statement and the private ruling request submissions made to the Internal Revenue Service in connection therewith, which are intended to separate and divide the existing businesses of Varian so that, except as otherwise expressly provided on Exhibit A: (i) the Semiconductor Equipment Assets, Semiconductor Equipment Liabilities and Semiconductor Equipment Business shall be owned or held, directly or indirectly, by SEB; (ii) the Instruments Assets, Instruments Liabilities and Instruments Business shall be owned or held, directly or indirectly, by IB; and (iii) the businesses, Assets and Liabilities of Varian that remain after the transactions described in clauses (i) and (ii) above, after giving effect to the Distributions, including the Health Care Systems Assets, Health Care Systems Liabilities and Health Care Systems Business shall be owned or held, directly or indirectly, by HCS. "Cost" means (i) the salary, fringe benefits and overhead expense of ---- personnel (or an allocable portion thereof) plus (ii) out-of-pocket expenses. "DGCL" means the Delaware General Corporation Law, as amended. ---- "Dispositions" means, collectively, the Palo Alto Property Disposition and ------------ the Aircraft Disposition. "Disposition Proceeds" means the proceeds from the Palo Alto Property -------------------- Disposition (or any of its component parts) or the Aircraft Disposition, net of the expenses of such sale or other disposition. "Disputing Party" has the meaning ascribed to such term in Section 9.03(a). --------------- "Distribution Date" means the date determined by the Board of Directors of ----------------- Varian as of which the Distributions shall be effected. 4 "Distribution Proposals" means, collectively, Proposals One through Ten ---------------------- set forth in the Proxy Statement. "Distribution Record Date" means the time designated by the Board of ------------------------ Directors of Varian for the purpose of determining the holders of record of VAI Common Stock entitled to receive the Distributions. "Distributions" means, collectively, the SEB Distribution and the IB ------------- Distribution. "Effective Time" means 11:59 p.m. California time on the Distribution Date. -------------- "Employee Benefits Allocation Agreement" means the Employee Benefits -------------------------------------- Allocation Agreement among Varian, SEB and IB (including all exhibits and schedules thereto) substantially in the form of Exhibit B. "Environmental Laws" means any and all federal, state, local and foreign ------------------ statutes, Laws, regulations, ordinances, rules, principles of common law, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions (including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq.), whether now or hereafter in existence, relating to the environment, natural resources, human health or safety, endangered or threatened species of fish, wildlife and plants, or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including indoor or outdoor air, surface water, groundwater and surface or subsurface soils), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the investigation, cleanup or other remediation thereof. "Environmental Matters" means all matters relating in any way to (i) soil, --------------------- air and water and groundwater pollution or contamination, including any on-site or off-site pollution or contamination, (ii) damages to the natural environment or natural resources, (iii) Releases or discharges of waste, Hazardous Materials, or pollutants or contaminants, or (iv) recycling or disposal of Hazardous Materials or wastes (including garbage, refuse, slag, sludge and other discarded materials, whether solid, liquid, semisolid or gaseous and whether on- site or off-site). "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "GAAP" means United States generally accepted accounting principles and ---- practices, as in effect on the date of this Agreement, as promulgated by the Financial Accounting Standards Board and its predecessors. "Governmental Authority" means any government or any agency, bureau, board, ---------------------- commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "Group" means (i) with respect to HCS, the Health Care Systems Group, (ii) ----- with respect to SEB, the Semiconductor Equipment Group, and (iii) with respect to IB, the Instruments Group. "Hazardous Materials" means those elements, compounds and substances ------------------- identified in any of the Environmental Laws as "hazardous materials," "hazardous substances," or "hazardous waste," as well as any other elements, compounds or substances which are listed or identified as "pollutants," "contaminants," "hazardous," "toxic" (or other term of similar meaning) under any Environmental Law. The term "Hazardous Materials" expressly includes radioactive materials, petroleum products and asbestos. "HCS" means Varian, after giving effect to the Corporate Reorganization --- Transactions and the Distributions or as if the Corporate Reorganization Transactions and the Distributions had occurred, as the context requires. "HCS Adjusted Closing Balance Sheet" has the meaning ascribed to such term ---------------------------------- in Section 9.03(b). "HCS Closing Balance Sheet" has the meaning ascribed to such term in ------------------------- Section 5.10(a). 5 "HCS Common Stock" means VAI Common Stock after the Distributions. ---------------- "HCS Discretionary Restructuring Amount" means the total of the out-of- -------------------------------------- pocket costs of any discretionary restructuring of the Health Care Systems Group between October 2, 1998 and the Distribution Date, including but not limited to all amounts paid to employees (other than employees terminated for cause) for accrued personal paid leave and severance amounts, as well as any amounts paid in connection with the termination of leases and other contracts in connection with such discretionary restructuring. "HCS Dispute" has the meaning ascribed to such term in Section 9.03(a). ----------- "HCS Indemnitees" means HCS, the HCS Subsidiaries and each Affiliate --------------- thereof after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of any of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "HCS Pro Forma Balance Sheet" means the pro forma balance sheet of HCS at --------------------------- October 2, 1998, attached as Exhibit F and the accounting records supporting such balance sheet. "HCS Records" has the meaning ascribed to such term in Section 6.01(c). ----------- "HCS Subsidiaries" means the Subsidiaries of Varian listed on Exhibit I and ---------------- all other Subsidiaries of Varian other than IB, SEB, the IB Subsidiaries and the SEB Subsidiaries. "Health Care Systems Assets" means, collectively, all the Assets that are -------------------------- owned or held by HCS or any HCS Subsidiary as of the Effective Time (and those Assets to be transferred to HCS or a HCS Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the HCS Subsidiaries; (ii) all the Assets included on the HCS Pro Forma Balance Sheet that are owned or held by HCS or any HCS Subsidiary as of the Effective Time; (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the HCS Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the HCS Pro Forma Balance Sheet had they been acquired on or before the date of the HCS Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the HCS Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by HCS or any HCS Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of HCS and the HCS Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Health Care Systems Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Instruments Group or the Semiconductor Equipment Group. "Health Care Systems Business" means the business that, after giving effect ---------------------------- to the Corporate Reorganization Transactions and the Distributions, is conducted by HCS, the HCS Subsidiaries and/or any other member of the Health Care Systems Group. "Health Care Systems Group" means HCS, the HCS Subsidiaries and the Persons ------------------------- that become Subsidiaries of HCS after the consummation of the Corporate Reorganization Transactions and the Distributions. 6 "Health Care Systems Liabilities" means, collectively, all the Liabilities ------------------------------- of HCS, the HCS Subsidiaries and the other members of the Health Care Systems Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the HCS Pro Forma Balance Sheet that remain outstanding as of the Effective Time; (ii) all the Liabilities of Varian arising or assumed after the date of the HCS Pro Forma Balance Sheet and that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the HCS Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the HCS Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of HCS on the HCS Pro Forma Balance Sheet; (iii) all the Liabilities expressly assumed or retained by HCS, any HCS Subsidiary and any other member of the Health Care Systems Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (iv) the obligations of HCS, the HCS Subsidiaries and any other member of the Health Care Systems Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Health Care Systems Business or the Health Care Systems Assets before, on or after the Distribution Date, and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Health Care Systems Business or the Health Care Systems Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of HCS and any other member of the Health Care Systems Group to third parties (regarding of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, sold or distributed at any time on or before the Distribution Date by the Health Care Systems Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Health Care Systems Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (viii) all the Liabilities of the parties or their respective Subsidiaries (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Health Care Systems Business or ownership of the Health Care Systems Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of HCS, the HCS Subsidiaries or the other members of the Health Care Systems Group in the Registration Statements or the Proxy Statement), except as otherwise expressly provided herein. Notwithstanding the foregoing, the Health Care Systems Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a); or 7 (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Instruments Group or the Semiconductor Equipment Group. "IB" has the meaning ascribed to such term in the first paragraph of this -- Agreement. "IB Adjusted Closing Balance Sheet" has the meaning ascribed to such term --------------------------------- in Section 9.03(b). "IB Claim" has the meaning ascribed to such term in Section 8.01(b). -------- "IB Closing Balance Sheet" has the meaning ascribed to such term in Section ------------------------ 5.10(a). "IB Common Shares" means the shares of IB Common Stock owned by Varian ---------------- immediately before the Distributions. "IB Common Stock" has the meaning ascribed to such term in the recitals to --------------- this Agreement. "IB Discretionary Restructuring Amount" means the total of the out-of- ---------------------------------- pocket costs of any discretionary restructuring of the Instruments Group between October 2, 1998 and the Distribution Date, including but not limited to, all amounts paid to employees (other than employees terminated for cause) for accrued personal paid leave and severance amounts, as well as any amounts paid in connection with the termination of leases and other contracts in connection with such discretionary restructuring. "IB Distribution" means the distribution, on the Distribution Date, as a --------------- dividend by Varian to the Varian Holders of the IB Common Shares on the basis provided in Section 3.02. "IB Dispute" has the meaning ascribed to such term in Section 9.03(a). ---------- "IB Indemnitees" means IB, the IB Subsidiaries and each Affiliate thereof -------------- after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "IB Pro Forma Balance Sheet" means the pro forma balance sheet of IB at -------------------------- October 2, 1998, attached as Exhibit G and the accounting records supporting such balance sheet. "IB Records" has the meaning ascribed to such term in Section 6.01(b). ---------- "IB Notes Payable" means the Notes Payable assumed by IB pursuant to ---------------- Sections 2.05(c) and (d). "IB Subsidiaries" means the Subsidiaries listed on Exhibit J. --------------- "IB Term Loans" has the meaning ascribed to such term in Section ------------- 2.05(c)(i). "Income Tax" means (i) any Tax imposed by Subtitle A or F of the Code, (ii) ---------- any Tax imposed by any state of the United States or by any political subdivision of any such state which is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income, and (iii) any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession that is an income tax as defined in Treasury Regulation Section 1.901-2. "Indemnifiable Losses" means, with respect to any Person, any and all -------------------- losses, obligations, claims, damages, deficiencies, penalties, judgments, settlements, payments, fines, interest, costs and expenses (including reasonable attorneys', accountants', consultants' or other professionals' fees, investigation expenses and any and all other out-of-pocket expenses) or other Liabilities whatsoever that are assessed, imposed, awarded against or incurred by such Person excluding exemplary, special or punitive damages or lost profits except to the extent actually paid by an 8 Indemnitee in respect of a Third Party Claim or Action either (i) in investigating, preparing for, defending against any Actions, any potential or threatened Actions or any Third Party Claims or potential or threatened Third Party Claims or in settling any of the foregoing or in satisfaction of any judgment, fine or penalty rendered in or resulting from any of the foregoing or otherwise arising out of, relating to or resulting from any Actions, any potential or threatened Actions or any Third Party Claims or potential or threatened Third Party Claims for which such Person would be entitled to indemnification under Article VII hereof, or (ii) in respect of any other event, occurrence or matter for which such Person would be entitled to indemnification under Article VII hereof, in each case whether accrued before, on or after the date of this Agreement. "Indemnifying Party" has the meaning ascribed to such term in Section ------------------ 7.06(a). "Indemnitee" has the meaning ascribed to such term in Section 7.06(a). ---------- "Independent Auditors" has the meaning ascribed to such term in Section -------------------- 9.03(b). "Instruments Assets" means, collectively, all the Assets that are owned or ------------------ held by IB or any IB Subsidiary as of the Effective Time (and those Assets to be transferred to IB or an IB Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the IB Subsidiaries; (ii) all the Assets included on the IB Pro Forma Balance Sheet that are owned or held by IB or any IB Subsidiary as of the Effective Time; (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the IB Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the IB Pro Forma Balance Sheet had they been acquired on or before the date of the IB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the IB Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by IB or any IB Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of IB and the IB Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Instruments Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Semiconductor Equipment Group or the Health Care Systems Group. "Instruments Business" means the business that, after giving effect to the -------------------- Corporate Reorganization Transactions and the Distributions, is conducted by IB, the IB Subsidiaries and/or any other member of the Instruments Group. "Instruments Group" means IB, the IB Subsidiaries and the Persons that ----------------- become Subsidiaries of IB after the consummation of the Corporate Reorganization Transactions and the Distributions. "Instruments Liabilities" means, collectively, all the Liabilities of IB, ----------------------- the IB Subsidiaries and the other members of the Instruments Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the IB Pro Forma Balance Sheet that remain outstanding as of the Effective Time; 9 (ii) all the Liabilities of Varian arising or assumed after the date of the IB Pro Forma Balance Sheet and that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the IB Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the IB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of IB on the IB Pro Forma Balance Sheet; (iii) all the Liabilities expressly assumed or retained by IB, any IB Subsidiary and any other member of the Instruments Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions, the IB Term Loans and the IB Notes Payable; (iv) the obligations of IB, the IB Subsidiaries and any other member of the Instruments Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Instruments Business or the Instruments Assets before, on or after the Distribution Date, and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Instruments Business or the Instruments Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of IB and any other member of the Instruments Group to third parties (regarding of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, sold or distributed at any time on or before the Distribution Date by the Instruments Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Instruments Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (viii) all the Liabilities of the parties or their respective Subsidiaries (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Instruments Business or ownership of the Instruments Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of IB, the IB Subsidiaries or the other members of the Instruments Group in the Registration Statements or the Proxy Statement), except as otherwise expressly provided herein. Notwithstanding the foregoing, the Instruments Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a) or 1.01(c); (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Semiconductor Equipment Group or the Health Care Systems Group. "Insurance Administration" means, with respect to each Company Policy, the ------------------------ accounting for premiums, retrospectively calculated additional or return premiums or assessments, policy dividends or audited exposure, defense costs, indemnity payments, deductibles and retentions, as appropriate, under the terms and conditions of 10 each of the Company Policies; the reporting to excess insurance carriers of any losses or claims that may cause the per occurrence, per claim or aggregate limits of any Company Policy to be exceeded and the distribution of Insurance Proceeds as contemplated by this Agreement. "Insurance Proceeds" means, with respect to any insured party, those ------------------ monies, net of any applicable premium adjustment, retrospectively calculated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured, which are either: (i) received by an insured from an insurer; or (ii) paid by an insurer on behalf of an insured. "Insured Claims" means those Liabilities that, individually or in the -------------- aggregate, are covered within the terms and conditions of any of the Company Policies, whether or not subject to deductibles, co-insurance, uncollectability or retrospectively calculated premium adjustments. "Intellectual Property" means the intellectual property rights owned, --------------------- licensed to or otherwise held throughout the world by any person, including, without limitation, all of the rights, title and interests in the following: (i) all United States and foreign patents, patent applications (including any continuations, continuation-in-part and divisionals), patent applications under preparation, invention disclosures and invention disclosures under preparation; (ii) all United States and foreign registered and unregistered copyrights and mask works, including applications and applications under preparation therefor; (iii) all United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor; (iv) all trade secrets, know-how, ideas, concepts, discoveries, improvements, processes, procedures, methods, recipes, formulae, data and specifications; (v) all product-related computer programs and other software (in executable or source code format), including operating software, applications, networks software, firmware, middleware, design software, design tools, test and diagnostic software and systems configurations; and (vi) all documentation, schematics, drawings, designs, manuals, reports, records, instructions, studies, surveys, plans, books or other written materials (whether in hard copy or magnetic form) relating to or including any of the (i) through (v) above. "Intellectual Property Agreement" means the Intellectual Property Agreement ------------------------------- among Varian, SEB and IB (including all exhibits and schedules thereto), substantially in the form of Exhibit C. "Law" means all laws, statutes, ordinances, regulations, rules, orders and --- regulations of any Governmental Authority. "Liabilities" means any and all debts, liabilities, obligations, ----------- responsibilities, charges, claims, actions, injuries, losses, damages (whether compensatory, punitive or treble), fines, penalties and sanctions, absolute or contingent, matured or unmatured, liquidated or unliquidated, foreseen or unforeseen, joint, several or individual, asserted or unasserted, accrued or unaccrued, known or unknown, whenever arising, including those arising under or in connection with any Law (including any Environmental Law), Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator, and those arising under any contract, guarantee, commitment or undertaking, whether sought to be imposed by a Governmental Authority, private party or party to 11 this Agreement, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, or otherwise, and including any costs, expenses, interest, attorneys' fees, disbursements and expenses of counsel, experts' and consultants' fees and costs related thereto or to investigating, preparing for or defending or settling any of the foregoing. "Managing Party" has the meaning ascribed to such term in Section 7.07(c). -------------- "Meeting" means the Combined Annual and Special Meeting of holders of VAI ------- Common Stock to consider the Distribution Proposals and the other proposals included by the Board of Directors of Varian in the notice of the Meeting. "Meeting Date" means the date determined by the Board of Directors of ------------ Varian for the Meeting. "Meeting Record Date" means the time determined by the Board of Directors ------------------- of Varian for the purpose of determining the holders of record of VAI Common Stock entitled to vote at the Meeting. "Nasdaq" means The Nasdaq Stock Market. ------ "Net Debt" means the difference between (i) the sum of the Notes Payable -------- and VAI Term Loans assumed or retained by a party as of the date of determination and (ii) the amount of Cash and Cash Equivalents of such party as of the date of determination. "Net Worth" has the meaning ascribed to such term under GAAP, as calculated --------- in accordance with this Agreement, but without giving effect to any Liabilities or expenditures related to the discretionary restructuring of a business between the date hereof and the Effective Time, including reductions in force, facilities' closures, product line abandonment and revaluing impaired assets. "Nondisclosure Agreements" means all of the nondisclosure or ------------------------ confidentiality agreements entered into by Varian and its Subsidiaries from time to time before the Distribution Date. "Notes Payable" has the meaning ascribed to such term in Varian's audited ------------- consolidated financial statements for the fiscal year ended October 2, 1998. "Notice" has the meaning ascribed to such term in Section 10.05. ------ "NYSE" means the New York Stock Exchange, Inc. ---- "Palo Alto Property Disposition" has the meaning ascribed to such term in ------------------------------ Section 2.01(b). "Panel" has the meaning ascribed to such term in Section 9.02(c). ----- "Person" means any natural person, corporation, business trust, joint ------ venture, association, company, partnership, limited liability company or other entity or any Governmental Authority. "Policies" means insurance policies and insurance contracts of any kind -------- (other than life and benefits policies or contracts), including primary, excess and umbrella policies, commercial general liability policies, officers' liability, fiduciary liability, automobile, aircraft, property and casualty, workers' compensation and employee dishonesty insurance policies, bonds and self-insurance and captive insurance arrangements, together with the rights, benefits and privileges thereunder. "Privilege" has the meaning ascribed to such term in Section 6.07(a). --------- "Privileged Information" has the meaning ascribed to such term in Section ---------------------- 6.07(b). 12 "Proxy Statement" means the Proxy Statement sent to the holders of VAI --------------- Common Stock in connection with the Meeting, including any amendments or supplements thereto. "Registration Statements" means the Registration Statements on Form 10 to ----------------------- be filed by SEB and IB with the Commission pursuant to the requirements of the Exchange Act and the rules and regulations thereunder in order to register the SEB Common Stock and the IB Common Stock, respectively, under the Exchange Act, including any amendments thereto. "Release" means any spilling, leaking, pumping, pouring, emitting, ------- discharging, injecting, escaping, leaching, dumping or disposing into the environment of any Hazardous Material, including the abandonment or discarding of containers and other receptacles containing any Hazardous Materials and any passive migration of any Hazardous Material. "Remediation" means any investigation, remediation, prevention, containment ----------- or abatement of releases or threatened releases of materials into the workplace or the environment and the assessment and mitigation of risks and/or restoration of any harm arising therefrom and any related actions. "Representative" means, with respect to any Person, any of such Person's -------------- directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives. "SEB" has the meaning ascribed to such term in the first paragraph of this --- Agreement. "SEB Adjusted Closing Balance Sheet" has the meaning ascribed to such term ---------------------------------- in Section 9.03(b). "SEB Claim" has the meaning ascribed to such term in Section 8.01(c). --------- "SEB Closing Balance Sheet" has the meaning ascribed to such term in ------------------------- Section 5.10(a). "SEB Common Shares" means the shares of SEB Common Stock owned by Varian ----------------- immediately before the Distributions. "SEB Common Stock" has the meaning ascribed to such term in the recitals to ---------------- this Agreement. "SEB Dispute" has the meaning ascribed to such term in Section 9.03(a). ----------- "SEB Distribution" means the distribution, on the Distribution Date, as a ---------------- dividend by Varian to the Varian Holders of the SEB Common Shares on the basis provided in Section 3.02. "SEB Indemnitees" means SEB, the SEB Subsidiaries and each Affiliate --------------- thereof after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "SEB Pro Forma Balance Sheet" means the pro forma balance sheet of SEB at --------------------------- October 2, 1998, attached as Exhibit H and the accounting records supporting such balance sheet. "SEB Records" has the meaning ascribed to such term in Section 6.01(a). ----------- "SEB Subsidiaries" means the Subsidiaries listed on Exhibit K. ---------------- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Securities Liabilities" means any Liabilities whatsoever that are ---------------------- assessed, imposed, awarded against, incurred or accrued by a Person arising out of, relating to or resulting from, in whole or in part, any Action, any potential or threatened Action or any Third Party Claim (or any potential or threatened Third Party Claim) by any 13 Governmental Authority or any other Person that is based on any violations or alleged violations of the Securities Act, Exchange Act, any of the rules or regulations of the Commission promulgated under the Securities Act or Exchange Act, or any other securities or other similar Law, or on any alleged breach of duty by a Person in causing, permitting or failing to prevent any such violation or alleged violation. "Security Interest" means any mortgage, security interest, pledge, lien, ----------------- charge, claim, option, right to acquire, voting or other restriction, right-of- way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. "Semiconductor Equipment Assets" means, collectively, all the Assets that ------------------------------ are owned or held by SEB or any SEB Subsidiary as of the Effective Time (and those Assets to be transferred to SEB or a SEB Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the SEB Subsidiaries; (ii) all the Assets included on the SEB Pro Forma Balance Sheet that are owned or held by SEB or any SEB Subsidiary as of the Effective Time; (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the SEB Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the SEB Pro Forma Balance Sheet had they been acquired on or before the date of the SEB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the SEB Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by SEB or any SEB Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of SEB and the SEB Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Semiconductor Equipment Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Instruments Group or the Health Care Systems Group. "Semiconductor Equipment Business" means the business that, after giving -------------------------------- effect to the Corporate Reorganization Transactions and the Distributions, is conducted by SEB, the SEB Subsidiaries and/or any other member of the Semiconductor Equipment Group. "Semiconductor Equipment Group" means SEB, the SEB Subsidiaries and the ----------------------------- Persons that become Subsidiaries of SEB after the consummation of the Corporate Reorganization Transactions and the Distributions. "Semiconductor Equipment Liabilities" means, collectively, all of the ----------------------------------- Liabilities of SEB, the SEB Subsidiaries and the other members of the Semiconductor Equipment Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the SEB Pro Forma Balance Sheet that remain outstanding as of the Effective Time; (ii) all the Liabilities of Varian arising or assumed after the date of the SEB Pro Forma Balance Sheet that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the SEB Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the SEB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of SEB on the SEB Pro Forma Balance Sheet; 14 (iii) all the Liabilities expressly assumed or retained by SEB, any SEB Subsidiary and any other member of the Semiconductor Equipment Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (iv) the obligations of SEB, the SEB Subsidiaries and any other member of the Semiconductor Equipment Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Semiconductor Equipment Business or the Semiconductor Equipment Assets before, on or after the Distribution Date and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Semiconductor Equipment Business or the Semiconductor Equipment Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of SEB and any other member of the Semiconductor Equipment Group to third parties (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, sold or distributed at any time on or before the Distribution Date by the Semiconductor Equipment Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all the Liabilities of the parties or their respective Subsidiaries, (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Semiconductor Equipment Business or ownership of the Semiconductor Equipment Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of SEB, the SEB Subsidiaries or the other members of the Semiconductor Equipment Group in the Registration Statements and Proxy Statement), except as otherwise expressly provided herein; (viii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Semiconductor Equipment Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (ix) all Liabilities, including those expressly enumerated in clauses (i) through (viii), arising out of, related to, or resulting from the Thin Film Systems Business and the acquisition, ownership, use and disposition of the Assets related thereto. Notwithstanding the foregoing, the Semiconductor Equipment Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a) or 1.01(c); or (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Instruments Group or the Health Care Systems Group. "Separation Committee" has the meaning ascribed to such term in Section -------------------- 9.01(a). 15 "Shared Assets" means (i) the Assets listed on Schedule 1.02, (ii) any ------------- claim or right of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) arising out of, relating to or resulting from, the management or conduct before the Distributions of the business of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions), which Asset is not expressly included in the definitions of "Health Care Systems Assets," "Instruments Assets" or "Semiconductor Equipment Assets" and which claim or right, whenever arising, has accrued before the Distribution Date and (iii) any Asset received in respect of a Shared Liability, the amount of which exceeds the amount of the Shared Liability then due and owing. "Shared Liabilities" means (i) the Liabilities listed on Schedule 1.01(a), ------------------ (ii) any Liability (whether arising before, on or after the Distributions) of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) arising out of, relating to or resulting from, the management or conduct before the Distributions of the businesses of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) or their respective Assets, which Liability is not expressly included in the definitions of "Health Care Systems Liabilities," "Instruments Liabilities" or "Semiconductor Equipment Liabilities," including those Liabilities listed on Schedule 1.01(b), Securities Liabilities of Varian and its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and Distributions) and/or any of its and their respective directors, officers, employees, agents or representative at or before the Distributions (other than Securities Liabilities specifically assumed by HCS, SEB and IB in this Agreement) and Liabilities arising out of, relating to or resulting from any alleged breach of fiduciary duty by the Board of Directors of Varian or any member thereof at or before the Distributions, (iii) the Costs of personnel and third party service providers involved in Insurance Administration with respect to the Company Policies, and (iv) the cost of any Policies, letters of credit or surety bonds insuring against or otherwise covering the Liabilities included in clauses (i) and (ii) and the Costs of personnel and third party service providers involved in Insurance Administration or Claims Administration with respect to such Policies. "Subsidiary" means, with respect to any Person: ---------- (i) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of a contingency) is at the time, directly or indirectly, owned or controlled by such Person or by such Person and one or more of its Subsidiaries; or (ii) any non-corporate entity in which such Person or such Person and one or more Subsidiaries of such Person either (A) directly or indirectly, at the date of determination thereof, has at least majority ownership interest, or (B) at the date of determination is a general partner or an entity performing similar functions (e.g., manager of a limited liability company or a trustee of a trust). "Tax" or "Taxes" means any income, gross income, gross receipts, profits, --- ----- capital stock, franchise, withholding, payroll, social security, workers' compensation, unemployment, registration, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated, or other similar tax (including any fee, assessment or other charge in the nature of or in lieu of any tax) imposed by any Governmental Authority, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing. "Tax Benefit" means the product determined by multiplying the sum of all ----------- Transaction Expenditures (whether paid before, on or after the Effective Time) that are deductible for U.S. federal income tax purposes by 38%. "Tax Cost" means the sum of the products determined by multiplying the -------- gains on the Dispositions (whether recognized before, on or after the Effective Time) for U.S. federal income tax purposes by 38%. "Tax Sharing Agreement" means the Tax Sharing Agreement among Varian, IB --------------------- and SEB (including all exhibits or schedules thereto) substantially in the form of Exhibit D. 16 "Thin Film Systems Business" means the business of the development, -------------------------- manufacture, sale and service of products for physical vapor disposition and chemical vapor disposition of thin films sold to Novellus Systems, Inc. effective June 13, 1997. "Third Party Claim" has the meaning ascribed to such term in Section ----------------- 7.07(a). "Transaction Expenditures" means all cash costs, expenses or other ------------------------ expenditures incurred before or after the date hereof in connection with the preparation, execution and delivery of this Agreement and the Ancillary Agreements and the effectuation of the Corporate Reorganization Transactions and the Distributions, including the items listed on Schedule 1.03, but excluding (i) taxes, (ii) the costs associated with the termination of personnel employed other than in the United States, (iii) Liabilities and expenditures related to the discretionary restructuring of a business, and (iv) Shared Liabilities. "Transition Services Agreement" means the Transition Services Agreement ----------------------------- among SEB, IB and Varian (including all exhibits or schedules thereto), substantially in the form of Exhibit E. "VAI Common Stock" has the meaning ascribed to such term in the recitals to ---------------- this Agreement. "VAI Term Loans" means the indebtedness outstanding under the Senior Notes -------------- of Varian issued and outstanding under the Master Shelf Agreement dated as of May 11, 1992 and the Note Purchase and Private Master Shelf Agreement dated as of October 18, 1996. "Varian" has the meaning ascribed to such term in the first paragraph of ------ this Agreement. "Varian Holders" means the holders of record of VAI Common Stock as of the -------------- Distribution Record Date. Section 1.02. References; Interpretation. References in this Agreement to -------------------------- any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS Section 2.01. Corporate Reorganization Transactions; Dispositions. --------------------------------------------------- (a) Corporate Reorganization. On or before the Distribution Date (but in ------------------------ all events before the Distributions), each of Varian, IB and SEB shall, and shall cause each of their respective Subsidiaries to, as applicable, take such action or actions as is necessary or appropriate to cause, effect and consummate the Corporate Reorganization Transactions in accordance with the terms and provisions set forth in Exhibit A. Notwithstanding the foregoing, each of Varian, IB and SEB agrees that before the Distributions, one or more of the Corporate Reorganization Transactions may be amended, modified, supplemented or eliminated by Varian in any manner determined by Varian in its sole discretion to be necessary or appropriate, including to qualify any of such transactions for tax-free treatment under the Code; provided, however, that no Corporate -------- ------- Reorganization Transaction may be amended, modified, supplemented or eliminated after the Varian stockholders approve the Distributions, unless it would not be materially adverse to the Varian stockholders. 17 (b) Dispositions. ------------ (i) Varian shall use commercially reasonable efforts to sell Varian's leasehold interest in and buildings and fixtures for four of its buildings in the Stanford Research Park (the Ginzton Research Center at 3075 Hansen Way and the three buildings at 3030-3050 Hansen Way, Palo Alto) before the Distribution Date (the "Palo Alto Property Disposition"). (ii) Varian shall use commercially reasonable efforts to sell its Gulf Stream III aircraft, model year 1980 before the Distribution Date (the "Aircraft Disposition"). Section 2.02. Conveyance of Assets. Except as otherwise expressly provided -------------------- in this Agreement or the Ancillary Agreements, on or before the Distribution Date, (a) Health Care Systems Transfers. Varian shall, on behalf of itself and ----------------------------- the HCS Subsidiaries, transfer or cause to be transferred to IB or an IB Subsidiary all of Varian's and the HCS Subsidiaries' right, title and interest in the Instruments Assets. Varian shall, on behalf of itself and the HCS Subsidiaries, transfer or cause to be transferred to SEB or a SEB Subsidiary all of Varian's and the HCS Subsidiaries' right, title and interest in the Semiconductor Equipment Assets. (b) Instruments Transfers. IB shall, on behalf of itself and the IB --------------------- Subsidiaries, transfer or cause to be transferred to Varian or a HCS Subsidiary all of IB's and the IB Subsidiaries' right, title and interest in the Health Care Systems Assets. IB shall, on behalf of itself and the IB Subsidiaries, transfer or cause to be transferred to SEB or a SEB Subsidiary, all of IB's and the IB Subsidiaries' right, title and interest in the Semiconductor Equipment Assets. (c) Semiconductor Equipment Transfers. SEB shall, on behalf of itself and --------------------------------- the SEB Subsidiaries, transfer or cause to be transferred to Varian or a HCS Subsidiary all of SEB's and the SEB Subsidiaries' right, title and interest in the Health Care Systems Assets. SEB shall, on behalf of itself and the SEB Subsidiaries, transfer or cause to be transferred to IB or an IB Subsidiary all of SEB's and the SEB Subsidiaries' right, title and interest in the Instruments Assets. (d) IT Capital Equipment. Notwithstanding the foregoing, each of Varian, -------------------- IB and SEB shall transfer or cause to be transferred to HCS, IB and SEB as tenants in common each of its and its respective Subsidiaries' right, title and interest in the Assets identified in the schedules to the Transition Services Agreement as the "IT Capital Equipment" subject to all Liabilities associated therewith. (e) Designation of Owner. Each of Varian, IB and SEB may designate the -------------------- member of its Group to which each Asset is to be transferred. Section 2.03. Transfer and Assignment of Certain Licenses and Permits. ------------------------------------------------------- Without limiting the generality of Section 2.02 and except as otherwise expressly provided in this Agreement or the Ancillary Agreements, on or before the Distribution Date: (a) Semiconductor Equipment Licenses. Each of Varian and IB shall (and, if -------------------------------- applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Semiconductor Equipment Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Health Care Systems Group or the Instruments Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Semiconductor Equipment Business and are not otherwise required by the Health Care Systems Business or the Instruments Business, respectively. (b) Instruments Licenses. Each of Varian and SEB shall (and, if -------------------- applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Instruments Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Health Care Systems 18 Group or the Semiconductor Equipment Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Instruments Business and are not otherwise required by the Health Care Systems Business or the Semiconductor Equipment Business, respectively. (c) Health Care Systems Licenses. Each of SEB and IB shall (and, if ---------------------------- applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Health Care Systems Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Semiconductor Equipment Group or the Instruments Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Health Care Systems Business and are not otherwise required by the Semiconductor Equipment Group or the Instruments Group, respectively. Section 2.04. Transfer and Assignment of Certain Agreements. --------------------------------------------- (a) Transfers. Without limiting the generality of Section 2.02 and except --------- as otherwise expressly provided in this Agreement or the Ancillary Agreements, on or before the Distribution Date, and subject to the limitations set forth in this Section 2.04: (i) Each of SEB and IB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to), assign, transfer and convey to the appropriate member of the Health Care Systems Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Health Care Systems Business or any member of the Health Care Systems Group. (ii) Each of Varian and IB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to) assign, transfer and convey to the appropriate member of the Semiconductor Equipment Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Semiconductor Equipment Business or any member of the Semiconductor Equipment Group. (iii) Each of Varian and SEB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to) assign, transfer and convey to the appropriate member of the Instruments Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Instruments Business or any member of the Instruments Group. (b) Obligations of Assignees. The assignee of any agreement assigned, in ------------------------ whole or in part, under this Agreement (an "Assignee") shall assume and agree to pay, perform and fully discharge all obligations of the assignor under such agreement (whether such obligations arose or were incurred before, on or after the Distribution Date and irrespective of whether such obligations have been asserted as of the Distribution Date) or, in the case of a partial assignment, such Assignee's portion of such obligations. (c) No Assignment of Certain Agreements. Notwithstanding anything in this ----------------------------------- Agreement to the contrary, this Agreement shall not constitute an agreement to assign any agreement, in whole or in part, or any rights thereunder if the agreement to assign or attempt to assign, without the consent of a third party, would constitute a breach thereof or in any way adversely affect the rights of the Assignee thereof. Until such consent is obtained or if an attempted assignment thereof would be ineffective or would adversely affect the rights of any party so that the Assignee would not, in fact, receive all such rights, the provisions of Section 2.14 shall apply to such agreement. Section 2.05. Certain Financial and Other Arrangements. ---------------------------------------- (a) Settlement of Intercompany Accounts. All intercompany receivables, ----------------------------------- payables and loans (other than receivables, payables and loans otherwise expressly provided for in this Agreement or an Ancillary Agreement), including in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, (i) between any member of the Semiconductor Equipment Group, on the one hand, and any member of the Health Care Systems Group, on the other hand, (ii) between any member of the Health Care Systems Group, on the one 19 hand, and any member of the Instruments Group, on the other hand, and (iii) between any member of the Instruments Group, on the one hand, and any member of the Semiconductor Equipment Group, on the other hand, shall, as of the Effective Time, be settled, capitalized or converted into ordinary trade accounts in accordance with the Corporate Reorganization Transactions and, if applicable, shall be paid or settled in the ordinary course of business in a manner consistent with payment or settlement of similar accounts arising from transactions with third parties. (b) SEB Capital Contribution; Consolidated Debt. ------------------------------------------- (i) Capital Contributions. In addition to any other obligations under --------------------- this Agreement, on or before the Distribution Date, Varian shall contribute to SEB an amount of Cash and Cash Equivalents such that after giving effect to the Corporate Reorganization Transactions (A) the aggregate Cash and Cash Equivalents of the members of the Semiconductor Equipment Group as of the Effective Time would equal at least $100,000,000 and (B) SEB would have a consolidated Net Worth as of the Effective Time of at least $150,000,000. Such contribution shall be based on Varian's good faith estimate of the Cash and Cash Equivalents of the Semiconductor Equipment Group and the consolidated Net Worth of SEB as of the Effective Time and shall be subject to adjustment as provided in Section 9.03(c)(i). (ii) Consolidated Debt. Varian shall not cause or permit the transfer ----------------- to or retention by any member of the Semiconductor Equipment Group of Notes Payable or other Consolidated Debt if, as a result thereof, the Consolidated Debt of SEB as of the Effective Time would exceed $5,000,000. If after giving effect to the Corporate Reorganization Transactions, the Consolidated Debt of SEB would exceed such amount, Varian shall take such actions as shall be necessary, which may include but shall not be limited to, payment, partial payment or provision for payment in the form of the contribution of additional Cash and Cash Equivalents of one or more Liabilities comprising such Consolidated Debt to reduce the amount thereof to no more than $5,000,000. The Consolidated Debt caused or permitted to be transferred or retained shall be based on Varian's good faith estimate of the Notes Payable and other Consolidated Debt of the Semiconductor Equipment Group as of the Effective Time and shall be subject to adjustment as provided in Section 9.03(c)(i). (c) IB Capital Contribution; Term Loans; Notes Payable. -------------------------------------------------- (i) Term Loans. As of the Effective Time, IB shall assume as an ---------- Instruments Liability 50% of the VAI Term Loans outstanding as of the Effective Time (the "IB Term Loans"). (ii) Notes Payable; IB Capital Contribution. As of the Effective Time, -------------------------------------- the Instruments Group shall assume or retain as an Instruments Liability an amount of the Notes Payable and shall retain or have contributed to it as of the Effective Time an aggregate amount of Cash and Cash Equivalents such that the Net Debt of IB as of the Effective Time would be equal to 50% of the combined Net Debt of HCS and IB as of the Effective Time, after giving effect to the Corporate Reorganization Transactions and the provisions of Section 2.05(b) but before giving effect to the provisions of Section 2.05(d). Notwithstanding the foregoing, if the assumptions, contributions and retentions contemplated by the immediately preceding sentence (after giving effect to the Corporate Reorganization Transactions and the provisions of Section 2.05(b) but before giving effect to the provisions of Section 2.05(d)) would cause the consolidated Net Worth of HCS as of the Effective Time (A) to exceed 50% of the combined consolidated Net Worths of HCS and IB as of the Effective Time or (B) to be less than 40% of the combined consolidated Net Worths of HCS and IB as of the Effective Time, then, in the case of (A) the amount of Notes Payable to be assumed or retained by the Instruments Group shall be decreased (and/or the Cash and Cash Equivalents contributed to IB by Varian increased) such that the consolidated Net Worth of HCS as of the Effective Time would equal 50% of the combined consolidated Net Worths of HCS and IB as of the Effective Time and, in the case of (B) the amount of Notes Payable to be assumed or retained by the Instrument Group shall be increased (and/or the Cash and Cash Equivalents contributed to IB by Varian decreased) such that the consolidated Net Worth of HCS as of the Effective Time would equal 40% of the combined consolidated Net Worths of HCS and IB as of the Effective Time. For purposes of this Section 2.05(c)(ii), the consolidated Net Worth of HCS shall be determined without giving effect to any Transaction Expenditures or Dispositions (including associated tax benefit and tax cost) that have been accrued, paid or 20 received by HCS as of the Effective Time. The amounts of Notes Payable, Cash and Cash Equivalents and Net Worth used to determine the assumptions, contributions and retentions provided in this Section 2.05(c)(ii) shall be based on Varian's good faith estimates and shall be subject to adjustment as provided in Section 9.03(c)(ii). (d) Additional Allocations. In addition to the Notes Payable to be assumed ---------------------- or retained by the Instruments Group and/or the capital contributions to be made to IB by Varian contemplated by paragraph (c) above, if the After-tax Differential is a positive number, then the amount of Notes Payable to be assumed or retained by the Instruments Group shall be decreased (and/or the Cash and Cash Equivalents contributed to IB by Varian increased) by an amount equal to 50% of the After-tax Differential. If, instead, the After-tax Differential is a negative number, then the amount of Notes Payable to be assumed or retained by the Instruments Group shall be increased (and/or the Cash and Cash Equivalents contributed to IB by Varian decreased) by an amount equal to 50% of the absolute After-tax Differential (i.e., irrespective of its negative sign). The components of the After-tax Differential which are not determined as of the Effective Time shall be based on Varian's good faith estimates immediately before the Effective Time and shall be subject to adjustment as provided in Section 9.04. (e) Discretionary Restructuring Amounts. In addition to the transfers and ----------------------------------- retentions of Cash and Cash Equivalents and Debt contemplated by Sections 2.05(c) and (d), if the estimated HCS Discretionary Restructuring Amount exceeds the estimated IB Discretionary Restructuring Amount as of the Effective Time, the amounts of Notes Payable to be assumed or retained by the Instruments Group shall be decreased (and/or the Cash and Cash Equivalents contributed to IB by Varian increased) by an amount equal to 50% of such excess (after giving effect to any tax benefits) and if the estimated IB Discretionary Restructuring Amount exceeds the estimated HCS Discretionary Restructuring Amount as of the Effective Time, the amounts of Notes Payable to be assumed or retained by the Instruments Group shall be increased (and/or the Cash and Cash Equivalents contributed to IB by Varian decreased) by an amount equal to 50% of such excess (after giving effect to any tax benefits). Any such tax benefit shall be determined using a federal income tax rate of 38%. (f) Renegotiation and Allocation. Varian shall use its reasonable efforts ---------------------------- to obtain, before the Distribution Date, all required consents, waivers or amendments or other actions by the lenders under the VAI Term Loans and the Notes Payable to permit the transfers, assumptions and retentions contemplated by Sections 2.05(b), (c) and (d). Notwithstanding the foregoing, Notes Payable shall first be transferred to or retained by the member of the Group to which any related Asset is transferred, or by which any related Asset is retained, and shall only be allocated to another Group to the extent otherwise required by this Section 2.05. Section 2.06. Assumption and Satisfaction of Liabilities. Except as ------------------------------------------ otherwise expressly provided in this Agreement or any Ancillary Agreement, from and after the Effective Time, (a) Health Care Systems Liabilities. HCS shall, and shall cause the other ------------------------------- members of the Health Care Systems Group to, assume, pay, perform and discharge all Health Care Systems Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions; (b) Semiconductor Equipment Liabilities. SEB shall, and shall cause the ----------------------------------- other members of the Semiconductor Equipment Group to, assume, pay, perform and discharge all Semiconductor Equipment Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions; and (c) Instruments Liabilities. IB shall, and shall cause the other members ----------------------- of the Instruments Group to, assume, pay, perform and discharge all Instruments Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions. Section 2.07. Stock Issuance; Dividends. On or before the Distribution ------------------------- Date (but in all events before the Distributions), 21 (a) IB Common Stock. IB shall take all necessary actions so that on the --------------- Distribution Date, the number of shares of IB Common Stock outstanding and held by Varian is equal to the number of shares of VAI Common Stock outstanding on the Distribution Record Date. (b) SEB Common Stock. SEB shall take all necessary actions so that on the ---------------- Distribution Date, the number of shares of SEB Common Stock outstanding and held by Varian is equal to the number of shares of VAI Common Stock outstanding on the Distribution Record Date. Section 2.08. Charters; By-laws; Rights Plans. On or before the ------------------------------- Distribution Date (but in all events before the Distributions): (a) SEB Governance Matters. Each of Varian and SEB shall take all ---------------------- necessary actions so that as of the Effective Time the Certificate of Incorporation and By-laws of SEB will be substantially in the forms filed as exhibits to SEB's Registration Statement at the time it becomes effective and a Rights Agreement in substantially the form filed as an exhibit to SEB's Registration Statement at the time it becomes effective shall have been executed and delivered. (b) IB Governance Matters. Each of Varian and IB shall take all necessary --------------------- actions so that as of the Effective Time the Certificate of Incorporation and By-laws of IB will be substantially in the forms filed as exhibits to IB's Registration Statement at the time it becomes effective and a Rights Agreement in substantially the form filed as an exhibit to IB's Registration Statement at the time it becomes effective shall have been executed and delivered. (c) HCS Governance Matters. Varian shall take all necessary actions so ---------------------- that immediately after the Effective Time the Amended and Restated Certificate of Incorporation of Varian will include the amendments approved at the Meeting by the holders of VAI Common Stock and the By-laws of Varian will be in substantially the form of Exhibit L. Section 2.09. Directors, Officers and Employees. --------------------------------- (a) Election of Directors of IB and SEB. On or before the Distribution ----------------------------------- Date: (i) Each of Varian and SEB shall take all necessary actions so that as of the Effective Time the directors of SEB will be as set forth in the Proxy Statement. (ii) Each of Varian and IB shall take all necessary actions so that as of the Effective Time the directors of IB will be as set forth in the Proxy Statement. (b) Election of Officers. On or before the Distribution Date, each of -------------------- Varian, SEB and IB, as applicable, shall take all necessary actions so that as of the Effective Time the officers of Varian, SEB and IB, respectively, will be as set forth in the Proxy Statement. (c) Resignations. Subject to the provisions of Sections 2.09(a) and ------------ 2.09(b), each of Varian, SEB and IB, shall take all necessary action to cause their respective directors and employees, and those of the members of their respective Groups, to resign, as of the Effective Time, from all boards of directors or similar governing bodies of each member of the other Groups on which they serve, and from all positions as officers or employees of any member of such other Groups, except as otherwise set forth in the Proxy Statement or mutually agreed to in writing on or before the Distribution Date by Varian, on the one hand, and, as applicable, SEB and/or IB, on the other hand. Section 2.10. Other Transactions. On or before the Distributions, each of ------------------ Varian, IB and SEB shall have consummated those other transactions in connection with the Corporate Reorganization Transactions and the Distributions that are contemplated by the Proxy Statement and the ruling request submission by Varian to the Internal Revenue Service and not specifically referred to in Sections 2.01 through 2.09, subject, however, to the limitation set forth in Section 2.01. 22 Section 2.11. Meeting; Proxy Statement; Other Filings. --------------------------------------- (a) Meeting. The Board of Directors of Varian shall establish the Meeting ------- Record Date and the Meeting Date and shall take all necessary or appropriate actions with respect to the Meeting. At the Meeting there shall be submitted to the Varian stockholders for their vote the Distribution Proposals and such other proposals as are included in the notice of the Meeting. (b) Proxy Statement; Registration Statements; NYSE Notice. Varian, SEB and ----------------------------------------------------- IB shall prepare the Proxy Statement and the Registration Statements. Varian shall file the Proxy Statement with the Commission and shall mail the Proxy Statement to the holders of VAI Common Stock as of the Meeting Record Date. Each of SEB and IB shall file their respective Registration Statements with the Commission. Varian shall, to the extent possible, give the NYSE not less than ten days advance notice of the Distribution Record Date in compliance with Rule 10b-17 under the Exchange Act. Each of Varian, SEB and IB shall use reasonable commercial efforts to cause the Registration Statements to become effective under the Exchange Act on or before the Distribution Date. (c) Other Filings. Varian, SEB and IB shall cooperate in preparing, filing ------------- with the Commission under the Securities Act and causing to become effective any registration statements or amendments thereto that are appropriate to reflect the establishment of or amendments to any employee benefit plan contemplated by the Employee Benefits Allocation Agreement, the Proxy Statement or otherwise as necessary to reflect the transactions contemplated by this Agreement. Section 2.12. State Securities Laws. Before the Distribution Date, each of --------------------- Varian, SEB and IB shall take all necessary or appropriate actions under the securities or blue sky Laws of states or other political subdivisions of the United States in order to effect the Distributions. Section 2.13. Listing Application. Before the Distribution Date, IB and SEB ------------------- shall prepare and file with a national securities exchange or Nasdaq listing applications and related documents and shall take all other necessary or appropriate actions in order to cause a national securities exchange to list, or Nasdaq to approve for quotation on its National Market, on or before the Distribution Date the SEB Common Shares and the IB Common Shares. Section 2.14. Transfers Not Effected Before the Distributions; Transfers ---------------------------------------------------------- Deemed Effective as of the Effective Time. If any transfers contemplated by this - ----------------------------------------- Article II are not consummated at or before the Effective Time, the parties shall (and shall cause their respective Affiliates and members of their respective Groups to) cooperate to effect such transfers as promptly as practicable after the Effective Time. Nothing herein shall be deemed to require the transfer of any Assets or the assumption of any Liabilities which by their terms or operation of Law cannot be transferred or assumed; provided, however, -------- ------- that the parties shall (and shall cause their respective Affiliates and members of their respective Groups to) cooperate to seek to obtain any necessary Consents for the transfer of all Assets and Liabilities contemplated to be transferred pursuant to this Article II. Where any transfer of Assets or Liabilities has not been consummated at or before the Effective Time, from and after the Effective Time the party retaining such Asset or Liability (or, as applicable, such other member or members of such party's Group) shall hold such Asset in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto) or retain such Liability for the account of the party by whom such Liability is to be assumed, as the case may be, and take such other action as may be reasonably requested by the party to whom such Asset is to be transferred, or by whom such Liability is to be assumed, as the case may be, in order to place such party, to the extent reasonably possible, in the same position as it would have been had such Asset or Liability been transferred or assumed as contemplated by this Agreement. As, when and if any such Asset or Liability becomes transferable or assumable, such transfer or assumption shall be effected as promptly as practicable. As of the Effective Time, each party (or, if applicable, such other member or members of such party's Group) shall be deemed to have acquired (or, as applicable, retained) complete and sole beneficial ownership over all Assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all the Liabilities, and all duties, obligations and responsibilities incident thereto, which such party (or any member of such party's Group) is entitled to acquire or required to assume under this Agreement. Section 2.15. Ancillary Agreements. On or before the Distribution Date, -------------------- each of Varian, SEB and IB shall enter into, and/or where applicable shall cause such other members of their respective Groups to enter into, (a) 23 the Ancillary Agreements, (b) the Conveyancing and Assumption Instruments, and (c) any other agreements in respect of the Distributions as are reasonably necessary or appropriate in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. Section 2.16. Operations in Ordinary Course. Except as otherwise expressly ----------------------------- provided in this Agreement, between the Agreement Date and the Effective Time, each of Varian, SEB and IB shall, and shall cause its Subsidiaries to, conduct its business in a manner substantially consistent with current and past operating practices and in the ordinary course, including with respect to the payment and administration of accounts payable and the collection and administration of accounts receivable, the purchase of capital assets and equipment and the management of inventories. ARTICLE III THE DISTRIBUTIONS Section 3.01. Record Date and Distribution Date. Subject to the --------------------------------- satisfaction or, if applicable, waiver of the conditions set forth in Section 4.01, the Board of Directors of Varian shall establish the Distribution Record Date and the Distribution Date and any appropriate procedures in connection with the Distributions. Section 3.02. The Distributions. ----------------- (a) On or before the Distribution Date, Varian shall: (i) deliver to the Agent the certificates representing the IB Common Shares and the SEB Common Shares, in each case, endorsed by Varian in blank, for the benefit of the Varian Holders; and (ii) instruct the Agent to distribute, on or as soon as practicable after the Distribution Date, to the Varian Holders, (A) one share of IB Common Stock for each share of VAI Common Stock; and (B) one share of SEB Common Stock for each share of VAI Common Stock. (b) Duties and Responsibilities of SEB and IB. All shares of SEB Common ----------------------------------------- Stock issued in the SEB Distribution shall be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive (or similar) rights. All shares of IB Common Stock issued in the IB Distribution shall be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive (or similar) rights. As soon as practicable after the Distribution Date, certificates for shares of IB Common Stock and SEB Common Stock shall be mailed by the Agent to the Varian Holders, unless the Agent uses a book entry system of stock record keeping, in which event no certificates for shares of IB Common Stock or SEB Common Stock will be used unless a stockholder so requests. If certificates are used, each of SEB and IB shall provide, or cause to be provided, to the Agent sufficient certificates representing SEB Common Stock and IB Common Stock, respectively, in such denominations as the Agent may request in order to effect the Distributions. (c) Unclaimed Stock or Cash. Any shares of SEB Common Stock, shares of IB ----------------------- Common Stock or any dividends or distributions, if any, with respect to SEB Common Stock or IB Common Stock that remain unclaimed 180 days after the Distribution Date shall be returned to HCS and the Persons entitled thereto shall look only to HCS for such shares of SEB Common Stock, shares of IB Common Stock, and any dividends or distributions, subject in each case to applicable escheat or other abandoned property Laws. ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS Section 4.01. Conditions Precedent to the Distributions. The obligations of ----------------------------------------- the parties to consummate the Distributions are subject to the satisfaction or waiver as determined by Varian in its sole discretion (except as provided in Section 4.02 below), of each of the following conditions: 24 (a) Declaration of Distributions and Establishment of Distribution Date. ------------------------------------------------------------------- The Board of Directors of Varian shall have, in its sole discretion and subject to and in accordance with the applicable rules of the NYSE and provisions of the DGCL, declared the Distributions and established the Distribution Record Date, the Distribution Date, the date on which shares of SEB Common Stock and IB Common Stock, and any cash in lieu of fractional shares shall be mailed to the Varian Holders and all appropriate procedures in connection with the Distributions to the extent not provided in this Agreement. (b) Tax Sharing Agreement. Varian, SEB and IB shall have executed and --------------------- delivered the Tax Sharing Agreement and such agreement shall be in full force and effect. (c) Employee Benefits Allocation Agreement. Varian, SEB and IB shall have -------------------------------------- executed and delivered the Employee Benefits Allocation Agreement and such agreement shall be in full force and effect. (d) Transition Services Agreement. Varian, SEB and IB shall have executed ----------------------------- and delivered the Transition Services Agreement and such agreement shall be in full force and effect. (e) Intellectual Property Agreement. Varian, SEB and IB shall have ------------------------------- executed and delivered the Intellectual Property Agreement and such agreement shall be in full force and effect. (f) Effective Date of Registration Statements. The Registration Statements ----------------------------------------- shall have been declared effective by order of the Commission and no stop order shall have been entered, and no proceeding for that purpose shall have been initiated or threatened by the Commission with respect thereto. (g) Listing. The SEB Common Stock and the IB Common Stock shall have been ------- approved for listing on a national securities exchange or quotation on the Nasdaq National Market, on or before consummation of the Distributions. (h) Tax Ruling. Varian shall have received rulings from the Internal ---------- Revenue Service in form and substance satisfactory to the Board of Directors of Varian, which rulings shall be in full force and effect as of the Distribution Date. (i) Pre-Distribution Transactions. Each of the transactions and other ----------------------------- matters contemplated by Article II (including each of the distributions, transfers, conveyances, contributions, assignments or other transactions included in, or otherwise necessary to consummate, the Corporate Reorganization Transactions) shall have been consummated in all material respects. (j) Covenants. The covenants contained in Article V of this Agreement that --------- are required to be performed on or before the Distribution Date shall have been fully performed. (k) No Prohibitions. No temporary, preliminary or permanent injunction or --------------- other order, decree or ruling issued by a Governmental Authority and no statute, rule, regulation or executive order promulgated or enacted by any Governmental Authority shall be in effect materially restricting, preventing or prohibiting the consummation of the Distributions. (l) Consents. Each of Varian, SEB and IB and the other members of their -------- respective Groups shall have obtained all Consents the failure of which to obtain would, in the determination of the Board of Directors of Varian, have a material adverse effect on HCS, SEB or IB. (m) Stockholder Approval. The Distribution Proposals (other than Proposal -------------------- Four) shall have been approved by the requisite vote of the holders of VAI Common Stock in accordance with the DGCL and the provisions of Varian's Restated Certificate of Incorporation. (n) Fairness Opinion. Warburg Dillon Read LLC shall have delivered its ---------------- written opinion to the Board of Directors of Varian dated as of the date the Distributions are declared confirming that the Distributions are fair, from a financial point of view, to the Varian Holders, and such opinion shall not have been withdrawn or rescinded. 25 Section 4.02. Waivers. After the Varian stockholders approve the ------- Distribution Proposals, the conditions set forth in Section 4.01 may only be waived if the Board of Directors of Varian determines such waiver would not be materially adverse to the Varian stockholders. Further, the Board of Directors may only waive the condition set forth in Section 4.01(h) with respect to receipt of Internal Revenue Service tax rulings if it has received an opinion of counsel substantially to the effect that, for federal income tax purposes, no gain or loss will be recognized by any holder of VAI Common Stock as a result of the Distributions and no gain or loss will be recognized by the Company upon the Distributions, which opinion shall not have been withdrawn or rescinded as of the Effective Time. ARTICLE V COVENANTS Section 5.01. Further Assurances; Consents. In addition to the actions ---------------------------- otherwise expressly provided in this Agreement, each party shall use its commercially reasonable efforts to (a) execute and deliver, or cause to be executed and delivered, such instruments and documents and take, or cause to be taken, such further or other actions as any other party may reasonably request to effectuate the purposes of this Agreement and carry out the terms hereof, and (b) take or cause to be taken all actions, and to do, or cause to be done, all things reasonably necessary or appropriate under applicable Laws, agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including (notwithstanding Section 5.05(c)) using its commercially reasonable efforts to obtain any Consents, to enter into amendatory agreements and to make any filings and applications necessary or appropriate in order to consummate the transactions contemplated by this Agreement; provided, however, -------- ------- that no party shall be obligated to pay any consideration therefor (except for filing fees and other similar charges) to any third party from whom such Consents or amendments are requested or to take any action or omit to take any action if the taking or omission would be unreasonable burdensome to the party or its Group or the Group's business. Section 5.02. Intellectual Property Matters. ----------------------------- (a) Intellectual Property Agreement Controls. Each party acknowledges ---------------------------------------- that, after the Distribution Date, it shall have no interest in nor any right to use or display the name or any Intellectual Property of another party in any way, except to the extent expressly provided in this Agreement or in any Ancillary Agreement and except for any use which is otherwise permissible as "fair use" under applicable Law. Each party further understands and agrees that the rights, obligations and responsibilities of the parties with respect to the Intellectual Property that is subject to the Intellectual Property Agreement shall be governed by the Intellectual Property Agreement to the extent therein provided. (b) No Representation of Affiliation. After the Distribution Date, no -------------------------------- party shall represent or permit to be represented to any third party that it or any member of its Group has a business affiliation with any other party or any member of such other party's Group, except as expressly permitted by an Ancillary Agreement. Section 5.03. Employees; Employee Benefits. ---------------------------- (a) Treatment of Employees. As of the Effective Time, except as expressly ---------------------- provided in the Employee Benefits Allocation Agreement, (i) those Persons employed in the Health Care Systems Business shall remain or become employees of the applicable member of the Health Care Systems Group, (ii) those Persons employed in the Instruments Business shall become employees of the applicable member of the Instruments Group, and (iii) those Persons employed in the Semiconductor Equipment Business shall become employees of the applicable member of the Semiconductor Equipment Group. (b) Employee Benefits Allocation Agreement Controls. Each party further ----------------------------------------------- understands and agrees that the rights, obligations and responsibilities of the parties with respect to employees and employee benefit matters shall be governed by the Employee Benefits Allocation Agreement to the extent therein provided. Section 5.04. Tax Matters. Each party intends that (a) the contributions of ----------- Assets to IB and SEB each be treated as a reorganization within the meaning of section 368(a)(1)(D) of the Code with respect to which no gain 26 or loss is recognized by any of the parties, and (b) the Distributions be treated as tax-free distributions under section 355 of the Code and each such party shall use its best efforts to cause the Distributions to so qualify. Each party further understands and agrees that the rights, obligations and responsibilities of the parties with respect to Tax matters will be governed by the Tax Sharing Agreement to the extent therein provided. Section 5.05. No Representations or Warranties. -------------------------------- (a) General. Each party understands and agrees that, except as otherwise ------- expressly provided in any Ancillary Agreement or paragraph (c) below, no party is, in this Agreement or in any other agreement or document contemplated by this Agreement (including the Conveyancing and Assumption Instruments) or otherwise, making any representation or warranty whatsoever, including representing or warranting in any way as to the Assets, businesses or Liabilities retained, transferred or assumed as contemplated by this Agreement, as to the value or freedom from Security Interests, or any other matter concerning any Assets or Liabilities of such party, or as to the absence of any defenses or right of set- off or freedom from counterclaim with respect to any claim or other Asset, including any account receivable or any Liability of any party, or as to the legal sufficiency of any assignment, document or instrument delivered under this Agreement to convey title to any Asset or any other thing of value upon the execution, delivery and filing thereof. (b) Disclaimer of Merchantability or Fitness of Assets. Each party further -------------------------------------------------- understands and agrees that there are no warranties, express or implied, as to the merchantability or fitness of any of the Assets either transferred to or retained by the parties, and that, notwithstanding anything to the contrary expressly provided in the applicable Conveyancing and Assumption Instrument, all Assets either transferred or retained by the parties shall be "as is, where is" and that, subject to Section 5.01, the party to which any such Assets are transferred, or which retains any such Assets, shall bear the economic and legal risks that any conveyances of such Assets shall prove to be insufficient to vest in the transferee good and marketable title, free and clear of any Security Interest. (c) No Representations or Warranties Regarding Consents. Each party --------------------------------------------------- understands and agrees that, except as otherwise expressly provided in the applicable Conveyancing and Assumption Instruments, no party is representing or warranting in any way that the obtaining of any Consents, the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable Laws. Each party further understands and agrees that the party to which any Assets are transferred pursuant to this Agreement shall bear the economic and legal risk that any necessary Consents are not obtained, that any necessary amendatory agreements are not executed and delivered or that the provisions of any applicable agreements or requirements of applicable Laws are not satisfied. Section 5.06. Removal of Certain Guarantees; Releases from Liabilities. -------------------------------------------------------- (a) Removal of Varian as Guarantor of Semiconductor Equipment Liabilities --------------------------------------------------------------------- and Instruments Liabilities. Except as otherwise expressly provided in an - --------------------------- Ancillary Agreement, each party shall use its commercially reasonable efforts to have, on or before the Distribution Date, or as soon as practicable thereafter, (i) Varian and any other member of the Health Care Systems Group removed as a guarantor of, or obligor under or for, any Semiconductor Equipment Liability or Instruments Liability, (ii) SEB and any other member of the Semiconductor Equipment Group removed as a guarantor of, or obligor under or for, any Health Care Systems Liability or Instruments Liability, and (iii) IB and any other member of the Instruments Group removed as a guarantor of, or obligor under or for, any Health Care Systems Liability or Semiconductor Equipment Liability. (b) Indemnification for Guaranties. If (i) a party is unable to obtain, or ------------------------------ to cause to be obtained, any removal described in paragraph (a) above, or (ii) Liabilities arise from and after the Effective Time but before a guarantor or obligor with reference to any such Liability is removed pursuant to Section 5.06(a), then such guarantor or obligor shall be indemnified for all Liabilities incurred by it in its capacity as guarantor or obligor by (A) HCS with respect to any Health Care Systems Liabilities, (B) SEB with respect to any Semiconductor Equipment Liabilities, and (C) IB with respect to any Instruments Liabilities. Without limiting the foregoing, each party shall, or shall cause a member of its Group to, reimburse any such guarantor or obligor as soon as practicable (but in no event later than 30 days) following receipt of notice of a payment made pursuant to this Section 5.06(b) in respect of the party's Liabilities. 27 (c) Additional Obligations. In the event that at any time before or after ---------------------- the Distribution Date, a party identifies any letters of credit, interest rate or foreign exchange contracts or other contracts (excluding guarantees) that relate primarily to one business but for which a member of another Group has contingent, secondary, joint, several or other Liability of any nature whatsoever, the party the business of which is primarily liable shall, at its expense, take such actions and enter into such agreements and arrangements as the other party may reasonably request to effect such party's (or the member of each party's Group) release or substitution. (d) Other Releases. Each party shall use commercially reasonable efforts to -------------- obtain, or cause to be obtained, any Consent, substitution or amendment required to novate or assign all obligations under agreements, leases, licenses and other obligation or Liabilities of any nature whatsoever transferred under this Agreement, or to obtain in writing the unconditional release of the assignor so that in each such case, IB shall be solely responsible for the Instruments Liabilities, HCS shall be solely responsible for the Health Care Systems Liabilities and SEB shall be solely responsible for the Semiconductor Equipment Liabilities; provided, however, that no party shall be obligated to pay any -------- ------- consideration therefor (except for filing fees or other similar charges) to any third party from whom such Consents, substitutions, amendments or releases are requested. Whether or not any such Consent, substitution, amendment or release is obtained, nothing in this Section 5.06(d) shall in any way limit the obligations of the parties under Article VII. Section 5.07. Intercompany Agreements. As of the Effective Time, each party ----------------------- shall (and shall cause each other member of its Group to) terminate each agreement between it and any member of any other Groups (other than this Agreement, the Ancillary Agreements, the Conveyancing and Assumption Instruments and any agreements that do not take effect until the Effective Time); provided, -------- however, that such termination shall not affect any of the rights and/or - ------- obligations of the parties to such agreements that accrued or were incurred before the Effective Time (subject to the terms of Section 2.05(a)). Section 5.08. Nondisclosure Agreements. Each of SEB and IB agrees to be ------------------------ bound by and subject to the terms and provisions of each of the Nondisclosure Agreements for the same period of time and to the same extent as Varian (or the applicable Subsidiary of Varian that is a party to such Nondisclosure Agreement). Varian shall not, amend, supplement, terminate or waive any provisions of the Nondisclosure Agreements (a) that relate to the Instruments Business without the prior written consent of IB, or (b) that relate to the Semiconductor Equipment Business without the prior written consent of SEB. Section 5.09. Receipts after the Distribution Date. From and after the ------------------------------------ Distribution Date each party shall (or shall cause the applicable member of its Group to) promptly transfer to the appropriate other party, or the appropriate member of such other party's Group, any property it receives that is an Asset of such other party or a member of the other party's Group. Without limiting the foregoing, funds received by a member of one Group upon payment of accounts receivable that belong to a member of another Group shall be transferred to the other Group as soon as practicable (but in no event later than 30 business days) after receipt of such funds. Section 5.10. Post-Distribution Audit. ----------------------- (a) Preparation of Closing Balance Sheets. As soon as practicable after the ------------------------------------- Effective Time, Varian shall cause PricewaterhouseCoopers LLP (or another comparable independent accounting firm selected by Varian (the "Auditors")) to: (i) conduct an audit of IB and the IB Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for IB and the IB Subsidiaries as of the Effective Time (the "IB Closing Balance Sheet"); (ii) conduct an audit of HCS and the HCS Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for HCS and the HCS Subsidiaries as of the Effective Time (the "HCS Closing Balance Sheet"); 28 (iii) conduct an audit of SEB and the SEB Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for SEB and the SEB Subsidiaries, as of the Effective Time (the "SEB Closing Balance Sheet"); and to deliver such Closing Balance Sheets within 90 days after the Distribution Date. (b) Audit Requirements. Each of the IB Closing Balance Sheet, the HCS ------------------ Closing Balance Sheet and the SEB Closing Balance Sheet shall be prepared on the basis of an audit conducted by the Auditors in accordance with GAAP consistently applied and without giving effect to any change in accounting principles required on account of the consummation of the Distributions, except that, to the extent that any definition contained herein contemplates inclusion or exclusion of an item that would not be included or excluded under GAAP, the Auditors shall compute such item in accordance with such definition. During the course of the preparation of the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet by the Auditors, and during any period in which there is a dispute regarding either the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet, each of HCS, IB and SEB, as the case may be, shall cooperate with the Auditors and the other parties and shall have access to all pertinent accounting and each other's records. Each party also shall use its reasonable efforts to cause the work papers of the Auditors in respect of its business to be made available to each of the other parties. ARTICLE VI ACCESS TO INFORMATION; CONFIDENTIALITY Section 6.01. Provision, Transfer and Delivery of Applicable Corporate -------------------------------------------------------- Records. Except as expressly provided in any Ancillary Agreement, - ------- (a) Provision, Transfer and Delivery of SEB Records. Each of HCS and IB ----------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at SEB's expense) to SEB the Books and Records in its possession that relate primarily to the Semiconductor Equipment Assets, the Semiconductor Equipment Liabilities or the Semiconductor Equipment Business or are necessary to operate the Semiconductor Equipment Business (collectively, the "SEB Records"), except to the extent such items are already in the possession of any member of the Semiconductor Equipment Group. (b) Provision, Transfer and Delivery of IB Records. Each of HCS and SEB ---------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at IB's expense) to IB the Books and Records in its possession that relate primarily to the Instruments Assets, the Instruments Liabilities or the Instruments Business or are necessary to operate the Instruments Business (collectively, the "IB Records"), except to the extent such items are already in the possession of any member of the Instruments Group. (c) Provision, Transfer and Delivery of HCS Records. Each of SEB and IB ----------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at HCS's expense) to HCS the Books and Records in its possession that relate primarily to the Health Care Systems Assets, the Health Care Systems Liabilities or the Health Care Systems Business or are necessary to operate the Health Care Systems Business (collectively, the "HCS Records"), except to the extent such items are already in the possession of any member of the Health Care Systems Group. Section 6.02. Access to Books and Records. Unless otherwise contemplated by --------------------------- Section 6.06, from and after the Distribution Date, each of HCS, SEB and IB shall (and shall cause each other member of its Group to) afford to each other party and its authorized Representatives reasonable access and duplicating rights during normal business hours, subject to appropriate restrictions for classified, privileged or confidential information, to the personnel, properties, Books and Records and other data and information of such party and each other member of such party's Group created before the Distributions insofar as such access is reasonably required by the requesting party for the conduct of the requesting party's business (but not for competitive purposes). 29 Section 6.03. Confidentiality. --------------- (a) General Restriction on Disclosure. From and after the Distribution --------------------------------- Date, none of HCS, SEB and IB shall (or permit any other member of its Group to) use without the prior written consent of the applicable party and shall (and shall cause each other member of its Group to) hold, and shall cause its Representatives to (and those of any other member of its Group to) hold, in strict confidence, all information concerning each other party and the other members of each other party's Group in its possession, custody or control to the extent such information either: (i) relates to the period up to the Distribution Date; (ii) relates to any Ancillary Agreement; or (iii) is obtained in the course of performing services for the other party pursuant to any Ancillary Agreement, and shall not (and shall cause each other member of its Group not to) otherwise release or disclose such information to any other Person, except its Representatives (who shall be bound by this Section 6.03), without the prior written consent of the applicable party or parties, unless compelled by judicial or administrative process or, in the opinion of such party's counsel, required by Law and such party has used commercially reasonable efforts to consult with the applicable party or parties before such disclosure. (b) Exceptions to Confidential Treatment. Notwithstanding paragraph (a), no ------------------------------------ party shall be prohibited from using or permitting the use of, or required to hold in confidence and not release or disclose, any information to the extent that (i) such information has been or is in the public domain through no fault of such party, (ii) such information was used or held for use in such party's business before the Distribution Date, (iii) such information is, after the Distribution Date, lawfully acquired from other sources by such party, (iv) this Agreement, any Ancillary Agreement or any other agreement entered into pursuant to this Agreement permits the use or disclosure of such information by such party, or (v) such information is necessary for such party to investigate, evaluate, defend or prosecute any claim or Action involving any other party to this Agreement. Section 6.04. Witness Services. From and after the Distribution Date, each ---------------- of HCS, SEB and IB shall use its commercially reasonable efforts to make available to each other party, upon reasonable written request, the officers, directors, employees and agents of each member of its Group for consultation and/or as witnesses to the extent that (a) such Persons may reasonably be useful or required in connection with the prosecution or defense of any Action or the investigation of any claim which involves the interests of the requesting party or any member of its Group; and (b) there is no conflict in the Action or claim between the requesting party or any member of its respective Group and the party to which a request is made pursuant to this Section or any member of such party's Group. The employing party agrees that such consultant or witness shall be made available to the requesting party to the same extent that the employing party would have made such consultant or witness available if the Distributions had not occurred. Section 6.05. Reimbursement; Other Matters. Except as otherwise ----------------------------- contemplated by this Agreement (including circumstances in which indemnification is sought pursuant to Article VII) or by any Ancillary Agreement, a party providing Books and Records or access to information or consulting or witness services to any other party (or such party's Representatives) under this Article VI shall be entitled to receive from such other party, upon the presentation of invoices therefor reimbursement for all Costs (including the Costs of employees providing consulting and witness services in connection with litigation and Costs of employees providing information), as may be reasonably incurred in providing such Books and Records or access to information, consulting or witness services. Section 6.06. Retention of Records. Except when a longer period is required -------------------- by Law or is expressly provided for in this Agreement, any Ancillary Agreement or the retention policy of Varian as of the date of this Agreement, each party shall (and shall cause the members of its Group to) retain, for a period of at least seven years after the Distribution Date, all material information (including all material Books and Records) relating to such 30 Group and its operations before the Distribution Date. Notwithstanding the foregoing, when retention of information is no longer required by Law or expressly provided for in another Section of this Agreement or any Ancillary Agreement, any party may offer in writing to deliver to the other parties all or a portion of such information that relates to members of the offering party's Group and, if such offer is accepted in writing within 90 days after receipt thereof, the offering party shall promptly deliver such information (or copies thereof) to each accepting party (at the expense of the accepting party). If such offer is not so accepted, the offered information may be destroyed or otherwise disposed of by the offering party at any time after expiration of such 90-day period. Section 6.07. Privileged Matters. ------------------ (a) Privileged Information. Each party shall (and shall cause the members ---------------------- of its Group to) use its reasonable efforts to maintain, preserve, protect and assert all privileges against disclosure (including the attorney-client privilege, the attorney work product privilege and the self-evaluation privilege) that apply to any Books and Records or other information of any member of any other Group relating to any period before the Distribution Date ("Privilege" or "Privileges"). Each party shall use its reasonable efforts not to waive (or permit any member of its Group to waive) any such Privilege that could be asserted under applicable Law without the prior written consent of the other party or parties having the right to assert or waive such Privilege pursuant to this Section. HCS shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of any and all Privileges which relate primarily to the Health Care Systems Business or to Health Care Systems Liabilities; SEB shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of all Privileges which relate primarily to the Semiconductor Equipment Business or to Semiconductor Equipment Liabilities; and IB shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of all Privileges which relate primarily to the Instruments Business or to Instruments Liabilities. (b) Compelled Disclosure. To the extent that a party is compelled by -------------------- judicial or administrative process to disclose any information under circumstances in which any Privilege would be available ("Privileged Information"), such party agrees to assert such Privilege in good faith before making such disclosure. Each party shall consult with each applicable party upon receipt by a party or any member of its Group of any subpoena, discovery or other request that calls for production or disclosure of Privileged Information, or if a party or any member of its Group obtains knowledge that any current or former employee of such party or any member of its Group has received any subpoena, discovery or other request which calls for the production or disclosure of Privileged Information, including regarding whether any Privilege is available. Each party shall cooperate with each applicable party and its counsel participating in any hearing or other proceeding in respect of such disclosure and assertion of Privilege. Nothing in this Section requires any party to subject itself to sanctions in connection with any compelled disclosure. Notwithstanding the foregoing, each party shall be permitted to disclose Privileged Information in any proceeding in which such party is in an adversarial position to any other party to this Agreement. (c) No Waiver. The parties understand and agree that the transfer of any --------- Books and Records or other information between any members of the Health Care Systems Group, the Semiconductor Equipment Group or the Instruments Group shall be made in reliance on the agreements of Varian, SEB and IB, as set forth in Section 6.03 and this Section, to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. The Books and Records being transferred pursuant to Section 6.01, the access to information being granted pursuant to Section 6.02, the agreement to provide witnesses and individuals pursuant to Section 6.04 and the transfer of Privileged Information to any party pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to each party in, or the obligations imposed upon each party by, this Section. ARTICLE VII INDEMNIFICATION Section 7.01. Survival of Agreements. All covenants and agreements of the ---------------------- parties contained in this Agreement and all covenants and agreements of the parties contained in the Ancillary Agreements shall survive the Distribution Date except as expressly provided herein and therein, and shall not be merged into any deeds or other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. 31 Section 7.02. Taxes. This Article VII shall not be applicable to any ----- Indemnifiable Losses related to (a) Taxes, which shall be governed by the Tax Sharing Agreement, or (b) which are otherwise expressly provided for in the Ancillary Agreements. Section 7.03. Indemnification by HCS. Except as expressly provided in this ---------------------- Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) HCS shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the SEB Indemnitees and the IB Indemnitees from and against any and all Indemnifiable Losses of the SEB Indemnitees and the IB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Health Care Systems Liabilities or (ii) the breach by HCS or Varian of any provision of this Agreement, or any Ancillary Agreement and (b) HCS shall bear the cost of and indemnify, defend and hold harmless the SEB Indemnitees and the IB Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, ------------------ that, except as otherwise provided in this Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Health Care Systems Business and the Instruments Business or the Health Care Systems Business and the Semiconductor Equipment Business, HCS shall bear the cost of and indemnify, defend and hold harmless IB and SEB, respectively, from one-half of the Indemnifiable Losses, as incurred. Section 7.04. Indemnification by SEB. Except as expressly provided in this ---------------------- Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) SEB shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the HCS Indemnitees and the IB Indemnitees from and against any and all Indemnifiable Losses of the HCS Indemnitees and the IB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Semiconductor Equipment Liabilities, or (ii) the breach by SEB of any provision of this Agreement or any Ancillary Agreement, and (b) SEB shall bear the cost of and indemnify, defend and hold harmless the HCS Indemnitees and the IB Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, ------------------ that, except as otherwise provided in this Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Semiconductor Equipment Business and the Instruments Business or the Semiconductor Equipment Business and the Health Care Systems Business, SEB shall bear the cost of and indemnify, defend and hold harmless IB and HCS, respectively, from one-half of the Indemnifiable Losses as incurred. Section 7.05. Indemnification by IB. Except as expressly provided in this --------------------- Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) IB shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the HCS Indemnitees and the SEB Indemnitees from and against any and all Indemnifiable Losses of the HCS Indemnitees and the SEB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Instruments Liabilities or (ii) the breach by IB of any provision of this Agreement or any Ancillary Agreement, and (b) IB shall bear the cost of and indemnify, defend and hold harmless the HCS Indemnitees and the SEB Indemnitees from one-third of the Indemnifiable Losses as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, that, except as ------------------ otherwise provided in this Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Instruments Business and the Health Care Systems Business or the Instruments Business and the Semiconductor Equipment Business, IB shall bear the cost of and indemnify, defend and hold harmless HCS and SEB, respectively, from one-half of the Indemnifiable Losses, as incurred. Section 7.06. Limitations on Indemnification Obligations. ------------------------------------------ (a) Reductions for Insurance Proceeds and Other Recoveries. The amount that ------------------------------------------------------ any party (an "Indemnifying Party") is or may be required to pay to any other Person (an "Indemnitee") pursuant to Section 7.03, 7.04 or 7.05, as applicable, shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related Indemnifiable Loss. The existence of a claim by an Indemnitee for monies from an insurer or against a third party in respect of any Indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather the Indemnifying Party shall make payment in full of the amount determined to be due and owing by it against an assignment by the 32 Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for Insurance Proceeds or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the parties that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated. If an Indemnitee has received the payment required by this Agreement from an Indemnifying Party in respect of any Indemnifiable Loss and later receives Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnitee shall hold such Insurance Proceeds or other amounts in trust for the benefit of the Indemnifying Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as promptly as practicable after receipt, a sum equal to the amount of such Insurance Proceeds or other amounts received, up to the aggregate amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such Indemnifiable Loss (or, if there is more than one Indemnifying Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share (based on payments received from the Indemnifying Parties) of such Insurance Proceeds). (b) Adjustments for Taxes. The amount of any Indemnifiable Loss shall be --------------------- appropriately adjusted so that the amount of such Indemnifiable Loss is (i) increased by the amount of all Income Taxes payable with respect to any payments received from the Indemnifying Party or Indemnifying Parties, and (ii) reduced by the amount of all Income Tax benefits from the incurrence or payment of any such Indemnifiable Loss by the Indemnitee, as determined pursuant to the next paragraph. In computing the amount of Income Taxes payable or Income Tax benefit, (i) in the absence of any change in treatment under the Code or applicable Tax Law, payments with respect to contingent Liabilities attributable to periods before the Distribution Date shall be treated for income tax purposes by the Indemnitee and the Indemnifying Parties (and if Varian is neither the Indemnitee nor the Indemnifying Party, by Varian) as distributions or capital contributions, as appropriate, occurring immediately before the Distributions on the Distribution Date, (ii) it shall be assumed that the highest marginal Tax rates in effect are applicable to the Indemnitee, and (iii) such determination shall be made without regard to whether any actual increase or decrease in Tax is realized by the Indemnitee. If, notwithstanding the manner in which indemnity payments are reported, there is an adjustment to the Tax Liability of a party as a result of its receipt of an indemnity payment pursuant to this Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof, shall equal the amount of the payment which the Indemnitee would otherwise be entitled to receive pursuant to this Agreement. (c) Foreign Currency Adjustments. In the event that any indemnification ---------------------------- payment required to be made hereunder shall be denominated in a currency other than U.S. Dollars, the amount of such payment shall be translated into U.S. Dollars using the foreign exchange rate for such currency determined as follows: (i) with respect to any Indemnifiable Loss arising from the payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the foreign exchange rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed; (ii) with respect to any Indemnifiable Loss covered by insurance, the foreign exchange rate for such currency shall be the foreign exchange rate employed by the insurer in settling such Indemnifiable Losses with the Indemnifying Party; and (iii) with respect to any Indemnifiable Loss not covered by either clause (i) or (ii) above, the foreign exchange rate for such currency shall be determined as of the date that notice of the claim with respect to such Indemnifiable Loss is given to the Indemnitee. 33 Section 7.07. Procedures for Indemnification. Except as expressly provided ------------------------------ in any Ancillary Agreement: (a) Notice of Third Party Claims (Other than Shared Liabilities). If a ----------------------------------------------------------- claim or demand is made against an Indemnitee by any Person who is not a party to this Agreement or a Subsidiary thereof (a "Third Party Claim") for which an Indemnifying Party may be liable under this Agreement other than with respect to a Shared Liability, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 30 business days) after receipt by such Indemnitee of written notice of the Third Party Claim; provided, however, that no delay by the -------- ------- Indemnitee in giving such notice shall affect the Indemnitee's right to indemnification hereunder except to the extent the Indemnifying Party is actually prejudiced by such delay (except that the Indemnifying Party shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within ten business days) after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. (b) Legal Defense of Third Party Claims. If a Third Party Claim is made ----------------------------------- against an Indemnitee, the Indemnifying Party shall be entitled to participate in the defense thereof and, if it so chooses and acknowledges in writing its obligation to indemnify the Indemnitee for the Third Party Claim, to assume the defense thereof with counsel selected by the Indemnifying Party. Should the Indemnifying Party assume the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnitee for legal or other expenses subsequently incurred by the Indemnitee in connection with the defense of such Third Party Claim. The Indemnifying Party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnifying Party has failed to assume the defense of the Third Party Claim (other than the period during which the Indemnitee failed to give notice of the Third Party Claim). If the Indemnifying Party elects to assume the defense of any Third Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party in the defense or prosecution thereof. (c) Third Party Claims (Shared Liabilities). If a Third Party Claim in -------------------------------------- respect of a Shared Liability is made against an Indemnitee, such Indemnitee shall notify the Indemnifying Parties in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 30 business days) after receipt by such Indemnitee of written notice of the Third Party Claim; provided, however, that no delay by the Indemnitee in giving such notice shall affect the Indemnitee's right to indemnification hereunder except to the extent an Indemnifying Party is actually prejudiced by such delay (except that the Indemnifying Party or Parties shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party or Parties, promptly (and in any event within ten business days) after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. The party designated on Schedule 1.01(a) or (b) to have management responsibility for the related Shared Liability (the "Managing Party") shall have management and administrative responsibility for the Third Party Claim (unless no party is so designated, in which case the Managing Party shall be as agreed among the affected parties). Such management and administrative responsibility shall entail the defense of such Third Party Claim, negotiation with claimants and potential claimants (subject to the limitations in the following paragraph) and other reasonably related activities. Unless the Managing Party is an Indemnifying Party that does not acknowledge in writing its obligations to indemnify the Indemnitee for the Third Party Claim to the extent contemplated by this Agreement, the Managing Party may assume the defense thereof with counsel selected by such Managing Party. If the Managing Party assumes the defense of the Third Party Claim, the legal or other expenses in respect of such Third Party Claim incurred by or on behalf of any Person other than such Managing Party shall not be Indemnifiable Losses for purposes of this Agreement, except for the reasonable fees and expenses of counsel employed by the Indemnitee for any period during which the Managing Party has failed to assume the defense of the Third Party Claim (other than the period during which the Indemnitee failed to give notice of the Third Party Claim). Each Indemnitee and each Indemnifying Party shall cooperate with any Managing Party and each other in the defense or prosecution of such Third Party Claim. All costs and expenses (including attorneys' fees and all out-of-pocket expenses, together with the Costs of the Managing Party (if the Managing Party assumes the defense of the Third Party Claim)) incurred in connection with a Third Party Claim in respect of a Shared Liability shall be included as a part of the Indemnifiable Losses. 34 (d) Notwithstanding Sections 7.07(b) and 7.07(c): (i) an Indemnifying Party (or the Managing Party, as applicable) shall not be entitled to assume the defense of any Third Party Claim (and shall be liable to the Indemnitee for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim to the extent contemplated by this Agreement) if the Third Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnitee which the Indemnitee reasonably determines, after conferring with its counsel, cannot be separated from any related claim for money damages and is materially prejudicial to the Indemnitee's business; provided, however, that if such equitable relief or other relief -------- ------- portion of the Third Party Claim can be so separated from that for money damages, the Indemnifying Party (or the Managing Party, as applicable) shall be entitled, but not required, to assume the defense of the portion relating to money damages; (ii) an Indemnifying Party (or the Managing Party, as applicable) shall not be entitled to assume the defense of any Third Party Claim (and shall be liable to the Indemnitee for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim to the extent contemplated by this Agreement) if, in the Indemnitee's reasonable judgment, a conflict of interest between such Indemnitee and any Indemnifying Party exists, in respect of such Third Party Claim; and (iii) if at any time after assuming the defense of a Third Party Claim an Indemnifying Party (or the Managing Party, as applicable) shall fail to assume or withdraws from the defense of such Third Party Claim, the Indemnitee may resume the defense thereof and the Indemnifying Party (or Indemnifying Parties as applicable) shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnitee in such defense. (e) Settlement of Third Party Claims. -------------------------------- (i) No Indemnitee (or the Managing Party, as applicable) shall admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim or consent to the entry of any judgment without each Indemnifying Party's prior written consent; provided, however, that the -------- ------- Indemnitee shall have the right to settle, compromise or discharge such Third Party Claim or consent to the entry of any judgment without the prior written consent of the Indemnifying Party or Indemnifying Parties if (A) the Indemnitee releases each Indemnifying Party from its indemnification obligation hereunder with respect to such Third Party Claim and such settlement, compromise or discharge would not otherwise materially adversely affect the Indemnifying Party or Indemnifying Parties, or (B) the Indemnifying Party (or the Managing Party, as applicable) has failed to assume the defense of the Third Party Claim within 90 days after the receipt of notice thereof. (ii) No Indemnifying Party (or Managing Party, as applicable) shall settle, compromise or discharge any Third Party Claim or consent to any judgment without each Indemnitee's prior written consent unless (A) an unconditional term of such settlement, compromise or discharge thereof is delivery by the claimant or the plaintiff to the Indemnitee of a written release of all Liability in respect of such Third Party Claims, (B) the Indemnifying Party pays the full amount of the Liability in connection with such Third Party Claim, and (C) such settlement, compromise or discharge would not otherwise materially adversely affect the Indemnitee. (f) Other Claims. Any claim for an Indemnifiable Loss which does not ------------ result from a Third Party Claim shall be asserted by the Indemnitee by written notice and in reasonable detail to the applicable Indemnifying Party. The Indemnifying Party shall have 90 days from the date that it receives written notice during which to notify the Indemnitee in writing of its good faith objections, if any, to the Indemnitee's notice of claims for indemnification describing in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying Party does not deliver a written notice of objection within such 90-day period, the Indemnifying Party shall be deemed not have any objections to such notice or such claim. If the Indemnifying Party does deliver such written notice of objection within such 90-day period, the Indemnifying Party and the Indemnitee shall attempt in good faith to resolve any such dispute within 90 days of receipt by the Indemnitee of such written notice of objection. If the Indemnifying 35 Party and the Indemnitee are unable to resolve any such dispute within such 90- day period, such dispute shall be submitted to the Separation Committee in accordance with the procedures set forth in Article IX. Section 7.08. Indemnification Payments. Indemnification required by this ------------------------ Article VII shall be made by quarterly payments of the amount thereof (other than individual amounts of $100,000 or more, which shall be paid within ten business days) during the course of the investigation or defense; provided, -------- however, that if the applicable Indemnitee is a Subsidiary of a party that is - ------- organized under a jurisdiction not in the United States, the payments shall, in lieu thereof, be made to HCS, IB or SEB, as applicable. Section 7.09. Certain Legal Proceedings. ------------------------- (a) IB Third Party Claims. On the Distribution Date, IB shall assume (or --------------------- shall cause one of its Subsidiaries to assume) (i) the prosecution of all claims which are Instruments Assets and are pending on the Distribution Date, and (ii) control of the defense against all Third Party Claims which are Instruments Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(a). (b) SEB Third Party Claims. On the Distribution Date, SEB shall assume (or ---------------------- shall cause one of its Subsidiaries to assume) (i) the prosecution of all claims which are Semiconductor Equipment Assets and are pending on the Distribution Date and (ii) control of the defense against all Third Party Claims which are Semiconductor Equipment Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(b). (c) HCS Third Party Claims. HCS (or its Subsidiaries) shall retain (i) the ---------------------- prosecution of all claims which are Health Care Systems Assets and are pending on the Distribution Date, and (ii) control of the defense against all Third Party Claims which are Health Care Systems Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(c). (d) Shared Assets/Shared Liabilities. The Managing Party shall assume or -------------------------------- retain the (i) prosecution of all claims that are Shared Assets and are pending on the Distribution Date and (ii) control of the defense against all Third Party Claims which are Shared Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(d). Section 7.10. Survival of Indemnities. The obligations of HCS, SEB and IB ----------------------- under this Article VII shall survive the sale or other transfer by any of them of any Assets or businesses or the assignment by any of them of any Liabilities with respect to any Indemnifiable Loss of any Indemnitee related to such Assets, businesses or Liabilities. Section 7.11. Contribution. To the extent that indemnification provided for ------------ under Section 7.03, 7.04 or 7.05 is unavailable to hold harmless an Indemnitee in respect of any Indemnifiable Loss, then the Indemnifying Party under such Section, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such Indemnifiable Loss in such proportion as is appropriate to reflect the relative fault (to be determined through the procedures provided for in Article IX) of the Indemnifying Party on the one hand and of the Indemnitee on the other hand in connection with the action, inaction, statements or omissions that resulted in such Indemnifiable Loss as well as any other relevant equitable considerations. Section 7.12. Exclusive Mechanism; Waiver of Jury Trial. Each of IB, SEB ----------------------------------------- and HCS, on behalf of itself and each member of its Group, agrees that the procedures set forth in this Article VII, together with Article IX, shall be the sole and exclusive mechanism for the resolution of any dispute, controversy or claim relating to any of the matters set forth in Sections 7.03, 7.04 and 7.05. Each of IB, SEB and HCS, on behalf of itself and each member of its Group, irrevocably waives any right to any trial by jury with respect to any dispute, controversy or claim arising out of, relating to or resulting from this Agreement or any Ancillary Agreement. Section 7.13. Failure to Satisfy Indemnification Obligation. In the event --------------------------------------------- that (a) it is finally determined that an Indemnifying Party is liable to an Indemnitee hereunder in respect of an Indemnifiable Loss, and (b) a court of competent jurisdiction prohibits such Indemnifying Party from satisfying all or a part of its obligations to the 36 Indemnitee hereunder (for indemnification or contribution) in respect of such Indemnifiable Loss, then the amount of the Indemnifiable Loss that is not satisfied shall be treated as a Shared Liability of the parties to this Agreement other than the Indemnifying Party, with each such other party bearing one-half of such amount. Section 7.14. Treatment of Shared Assets. -------------------------- (a) Prosecution of Claims. The Managing Party in respect of a Shared --------------------- Asset, or such other party as the parties hereto shall agree (or, if they cannot agree, HCS) shall have sole and exclusive authority to commence, prosecute, settle, manage, control, conduct, waive, forego, release, discharge, forgive and otherwise determine all matters whatsoever with respect to any Shared Asset. (b) Disposition of Benefit. Any benefit that may be received from a Shared ---------------------- Asset shall be shared, one-third each, among HCS, IB and SEB, except to the extent that the benefit relates to a Shared Asset received in respect of a Shared Liability, the indemnification obligations for which are borne by only two of the parties pursuant to Sections 7.03, 7.04 or 7.05, in which event such benefit shall be shared, one-half each, by the parties bearing the indemnification obligation. (c) Shared Asset Payments. The amount of any benefit from a Shared Asset --------------------- shall be payable by the party receiving the benefit (net of the Costs incurred in collecting such benefit, if the party is not otherwise indemnified with respect to such Costs under other provisions of this Article VII) to the other parties quarterly (other than individual amounts of $100,000 or more, which shall be paid within ten business days) as such benefits are received. (d) Adjustment for Taxes. The amount of benefits determined pursuant to -------------------- this Section 7.14 shall be appropriately adjusted to take into account Income Taxes in a manner consistent with Section 7.06(b). ARTICLE VIII INSURANCE Section 8.01. Policies and Rights Included within Assets. ------------------------------------------ (a) New and Existing Insurance. As of the Effective Time, each of the -------------------------- Groups shall be responsible for arranging separate Policies with respect to Actions and Liabilities arising after the Effective Time with respect to such Group and its business. As of the Effective Time, all prepaid and unused premiums, and all refunds received thereafter with respect to each Company Policy that inured to the benefit of more than one Group before the Effective Time, except as provided in Section 8.04, shall be distributed or retained one- third each to HCS, IB and SEB (or one-half each to the affected parties if only two parties were insured under the applicable Company Policy). To the extent any party receives any such refund, the party receiving the refund shall promptly transfer to the other parties the portion of such refund to which each such other party is entitled. (b) IB's Insurance. Without limiting the generality of the definition of -------------- the Instruments Assets set forth in Section 1.01 or the effect of Section 2.02, the Instruments Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto for Actions or Liabilities arising before the Effective Time, including rights of indemnity and the right to be defended by or at the expense of the insurer, with respect to all Actions or Liabilities incurred or claimed to have been incurred before the Distribution Date by any party in connection with the Instruments Assets or the conduct of the Instruments Business or, to the extent any claim is made against IB or any IB Subsidiary, the conduct of the Health Care Systems Business or the Semiconductor Equipment Business (a "IB Claim"); provided, however, that nothing in this paragraph (b) shall be deemed -------- ------- to constitute (or to reflect) an assignment of such Company Policies, or any of them, to IB. Except for Insurance Proceeds paid to or on behalf of any member of the Health Care Systems Group or the Semiconductor Equipment Group at the direction of IB in satisfaction of a claim that would otherwise be subject to indemnification by IB under Article VII, IB shall be entitled to receive from Varian any Insurance Proceeds with respect to any IB Claims under the Company Policies, including reimbursement for Instruments Liabilities. 37 (c) SEB's Insurance. Without limiting the generality of the definition of --------------- the Semiconductor Equipment Assets set forth in Section 1.01 or the effect of Section 2.02, the Semiconductor Equipment Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto for Actions or Liabilities arising before the Effective Time, including rights of indemnity and the right to be defended by or at the expense of the insurer, with respect to all Actions or Liabilities incurred or claimed to have been incurred before the Distribution Date by any party in connection with the Semiconductor Equipment Assets or the conduct of the Semiconductor Equipment Business or, to the extent any claim is made against SEB or any SEB Subsidiary, the conduct of the Instruments Business or the Health Care Systems Business, (an "SEB Claim"); provided, however, that nothing in this paragraph (c) shall be deemed to constitute (or to reflect) an assignment of such Company Policies, or any of them, to SEB. Except for Insurance Proceeds paid to or on behalf of any member of the Instruments Group or the Health Care Systems Group at the direction of SEB in satisfaction of a claim that would otherwise be subject to indemnification by SEB under Article VII, SEB shall be entitled to receive from Varian any Insurance Proceeds with respect to any SEB Claims under the Company Policies, including reimbursement for Semiconductor Equipment Liabilities. (d) HCS's Insurance. Without limiting the generality of the definition of --------------- the Health Care Systems Assets set forth in Section 1.01, the Health Care Systems Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto including rights of indemnity and the right to be defended by or at the expense of the insurer, other than the rights that are included in the Instruments Assets or the Semiconductor Equipment Assets. Section 8.02. Claims. ------ (a) Assignment of Rights to the Instruments Group. --------------------------------------------- (i) The parties agree that as of the Effective Time, Varian shall be deemed (A) to have assigned to the Instruments Group, all the other Groups' rights, if any, as an insured party or an additional named insured party including rights of indemnity and the right to be defended by or at the expense of the insurer, under all of the Company Policies with respect to such IB Claims as are pending on the Distribution Date, and (B) to the extent necessary to provide the Instruments Group all the benefit of such insurance with respect to IB Claims, to designate IB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, -------- however, that nothing in this Section 8.02(a) shall be deemed to constitute ------- or reflect the assignment of any of the Company Policies to the Instruments Group. If, after the Distribution Date, the Instruments Group shall be entitled to payment or reimbursement with respect to an IB Claim or any Person shall assert an IB Claim, then HCS shall at the time such IB Claim arises or is asserted be deemed (A) to assign, without need of further documentation, to the Instruments Group all of the Health Care Systems Group's rights, if any, as an insured party or an additional named insured party, including right of indemnity and the right to be defended by or at the expense of the insurer, under the applicable Company Policy with respect to such IB Claim and (B) to the extent necessary to provide the Instruments Group with the benefit of such insurance with respect to IB Claims, to designate IB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this -------- ------- Section 8.02(a) shall be deemed to constitute or reflect the assignment of any of the Company Policies to the Instruments Group. In the event an insurer refuses to honor such agency or to pay such Insurance Proceeds to the Instruments Group, HCS shall use all reasonable efforts to collect such Insurance Proceeds and forward them to IB. (ii) In the event of payment of an IB Claim by the Instruments Group after the Distribution Date, IB, or the applicable member of the Instruments Group shall be subrogated to and stand in the place of HCS or the applicable member of any other Group as to any rights, events or circumstances in respect of which IB or the applicable member of the Instruments Group may have any right or claim under this Agreement or otherwise against any such insurer relating to such IB Claim. The parties shall cooperate with the Instruments Group in a reasonable manner in prosecuting any subrogated right or claim. 38 (b) Assignment of Rights to the Semiconductor Equipment Group. --------------------------------------------------------- (i) The parties agree that as of the Effective Time, Varian shall be deemed (A) to have assigned to the Semiconductor Equipment Group, all the other Groups' rights, if any, as an insured party or an additional named insured party including rights of indemnity and the right to be defended by or at the expense of the insurer, under all of the Company Policies with respect to such SEB Claims as are pending on the Distribution Date, and (B) to the extent necessary to provide the Semiconductor Equipment Group all the benefit of such insurance with respect to SEB Claims, to designate SEB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this Section 8.02(b) shall be deemed to -------- ------- constitute or reflect the assignment of any of the Company Policies to the Semiconductor Equipment Group. If, after the Distribution Date, the Semiconductor Equipment Group shall be entitled to payment or reimbursement with respect to a SEB Claim or any Person shall assert a SEB Claim, then HCS shall at the time such SEB Claim arises or is asserted be deemed (A) to assign, without need of further documentation, to the Semiconductor Equipment Group all of the Health Care Systems Group's rights, if any, as an insured party or an additional named insured party, including right of indemnity and the right to be defended by or at the expense of the insurer, under the applicable Company Policy with respect to such SEB Claim and (B) to the extent necessary to provide the Semiconductor Equipment Group with the benefit of such insurance with respect to SEB Claims, to designate SEB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this Section 8.02(b) shall be deemed to -------- ------- constitute or reflect the assignment of any of the Company Policies to the Semiconductor Equipment Group. In the event an insurer refuses to honor such agency or to pay such Insurance Proceeds to the Semiconductor Equipment Group, HCS shall use all reasonable efforts to collect such Insurance Proceeds and forward them to SEB. (ii) In the event of payment of a SEB Claim by the Semiconductor Equipment Group after the Distribution Date, SEB, or the applicable member of the Semiconductor Equipment Group shall be subrogated to and stand in the place of HCS or the applicable member of any other Group as to any rights, events or circumstances in respect of which SEB or the applicable member of the Semiconductor Equipment Group may have any right or claim under this Agreement or otherwise against any such insurer relating to such SEB Claim. The parties shall cooperate with the Semiconductor Equipment Group in a reasonable manner in prosecuting any subrogated right or claim. Section 8.03. Administration; Other Matters. Consistent with the provisions ------------------------------ of Article VII, after the Distribution Date, (a) HCS's Responsibilities. HCS shall be responsible for (i) Insurance ---------------------- Administration of the Company Policies, and (ii) Claims Administration with respect to any Health Care Systems Liabilities, any Health Care Systems Assets or any claims as to which the Health Care Systems Group has retained rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. It is understood that the retention of the Company Policies by HCS is in no way intended to limit, inhibit or preclude any right to insurance coverage for any Insured Claim or any other rights under the Company Policies. (b) IB's Responsibilities. IB shall be responsible for Claims --------------------- Administration with respect to any Instruments Liabilities, Instruments Assets or any claims as to which the Instruments Group has rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. (c) SEB's Responsibilities. SEB shall be responsible for Claims ---------------------- Administration with respect to any Semiconductor Equipment Liabilities, Semiconductor Equipment Assets or any claims as to which the Semiconductor Equipment Group has rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. (d) The Managing Party's Responsibilities. The Managing Party shall be ------------------------------------- responsible for Claims Administration with respect to Insured Claims for Shared Liabilities. 39 (e) Notice. In the event that HCS, SEB or IB makes an Insured Claim under ------ a Company Policy, such party shall deliver notice to the other parties of such Insured Claim and shall keep the other parties periodically updated as to the status of such Insured Claim. Section 8.04. Retrospectively Calculated Insurance Premiums. Each party --------------------------------------------- shall pay or receive its share of retrospectively calculated additional or return premiums or assessments, policy dividends or audited exposures after the Distribution Date for coverage under the Company Policies with respect to their respective Liabilities which are Insured Claims under the Company Policies. Such shares shall be determined consistent with losses incurred or audited exposure with respect to the Assets or businesses of the parties for that specific line of insurance coverage, as determined in an independent underwriting analysis. Each party shall have the right, but not the obligation, to pay any additional premiums under the Company Policies with respect to the other parties' Liabilities which are Insured Claims under the Company Policies to the extent that one or more other parties does not pay such premium, in which event the non-paying party or parties shall promptly reimburse the payor for any premiums paid by the payor with respect to such non-paying party's Liabilities. Section 8.05. Allocation of Insurance Proceeds; Cooperation. --------------------------------------------- (a) Allocation of Insurance Proceeds. Except as otherwise provided in -------------------------------- Section 8.01, Insurance Proceeds received with respect to claims, costs and expenses under the Company Policies shall be paid to HCS with respect to Health Care Systems Liabilities that are Insured Claims, to IB with respect to Instruments Liabilities that are Insured Claims and to SEB with respect to Semiconductor Equipment Liabilities that are Insured Claims. Payment of the allocable portions of indemnity costs of Insurance Proceeds resulting from the Company Policies shall be made to the appropriate party upon receipt from the insurer. Insurance Proceeds received with respect to Shared Liabilities shall be paid to the party or other Person bearing the Liability that represents the Insured Claim. (b) Maximization of Coverage. Each party agrees to use commercially ------------------------ reasonable efforts to maximize available coverage under the Company Policies for all Insured Claims whether or not such party is the expected beneficiary of Insurance Proceeds under such Company Policies in respect of such Insured Claims. As part of such efforts to maximize insurance coverage, each party agrees to take all commercially reasonable actions to recover such amounts as are or might be due from all other responsible parties in respect of an Insured Claim, including Insured Claims as to which coverage limits under the Company Policies would be or would have been exceeded as a result of such Insured Claim and whether or not such party is expected to benefit directly from such effort and to engage in reasonable settlement negotiations and consider reasonable offers of settlement or compromise with respect to any Liabilities that represent Insured Claims. Each party further agrees to name each other party to this Agreement as an additional insured (up to a maximum of $10,000,000) under each liability Policy maintained by such Party during the three-year period commencing on the Distribution Date for claims under Article VII of this Agreement. (c) Multiple Claims. Where Health Care Systems Liabilities and/or --------------- Instruments Liabilities and/or Semiconductor Equipment Liabilities, as applicable, are covered under the same Company Policies for periods before the Distribution Date, or covering claims made after the Distribution Date with respect to an event or an occurrence before the Distribution Date, then the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, as applicable, may claim coverage for Insured Claims under such Company Policies to the extent of liability or other coverage of such Company Policies. Each party may receive Insurance Proceeds in respect of its Insured Claims as and when payable under the terms of the applicable Company Policies without regard to whether the Insured Claim covers Health Care Systems Liabilities, Instruments Liabilities or Semiconductor Equipment Liabilities; provided, -------- however, that before receiving payment under a Company Policy, the party making - ------- the claim shall be required to have retained a portion of the Liability underlying such Insured Claim equal to the amount of the self insurance retention or deductible. In the event that the aggregate limits on any Company Policy is exceeded by the aggregate of paid Insured Claims, no Group shall be entitled to reimbursement from another Group. Section 8.06. Reimbursement of Expenses. Each of IB or SEB shall reimburse ------------------------- the applicable insurer (or any applicable third-party administrator) to the extent required under any Company Policy (or service agreement) for any services performed after the Distribution Date with respect to any and all IB Claims or SEB Claims, respectively, which are paid, settled, adjusted, defended and/or otherwise handled by such insurer or third- 40 party administrator under the terms and conditions of such Company Policy (or any service agreement with any such third-party administrator). Section 8.07. Insurer Insolvency or Coverage Controversy. None of IB, HCS ------------------------------------------ and SEB shall be liable to one another for claims not reimbursed by insurers for any reason, including co-insurance provisions, deductibles, adequacy of limits, self-insurance retentions, bankruptcy or insolvency of any insurer, any coverage disputes, any failure to timely claim or any defect in such claim or its processing or exhaustion of Company Policy aggregates. Section 8.08. Agreement for Waiver of Conflict and Shared Defense. In the --------------------------------------------------- event that Insured Claims of more than one of the parties exist relating to the same occurrence, the applicable parties shall jointly defend and waive any conflict of interest necessary to the conduct of the joint defense. Nothing in this Section 8.08 shall be construed to limit or otherwise alter in any way the obligations of the parties to this Agreement, including those created by this Agreement, by operation of Law or otherwise. Section 8.09. Direct Responsibility for Claims; Additional Insurance; No ---------------------------------------------------------- Modifications. - ------------- (a) Notification to Insurers. Varian agrees to use commercially reasonable ------------------------ efforts to notify all known liability insurers under the Company Policies of the Distributions and to seek an endorsement by such insurers that the coverage provided by such Company Policies will apply to the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, as organized and existing on the Distribution Date, with the same force and effect and subject to the same terms, conditions and exclusions as if the separation of Varian and the Distributions had not occurred (it being understood that Varian shall be under no obligation to pay any amounts or otherwise incur any Liabilities in connection therewith). In the event such endorsement is refused, Varian agrees to use commercially reasonable efforts to place the Instruments Group and the Semiconductor Equipment Group in the same position as each would have been had such endorsement been agreed upon by such insurers (it being understood that Varian shall be under no obligation to pay any amounts or otherwise incur any Liabilities in connection therewith). Each of HCS, IB and SEB shall have the right to use commercially reasonable efforts to negotiate agreements with any and all insurers or third party administrators for the assumption of direct responsibility for any and all Liabilities related to it under any Company Policies, and Varian shall provide commercially reasonable assistance in this effort. (b) Post-Distribution Date Actions. After the Distribution Date, none of ------------------------------ HCS, IB or SEB or any member of their respective Groups shall, without the prior written consent of the other parties, provide any insurer with a release, or amend, modify or waive any rights under any Policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights to coverage of any member of the other Groups thereunder; provided, however, that, except as expressly provided in this Agreement, the - -------- ------- foregoing shall not (i) preclude any member of any Group from presenting any claim or, subject to Section 8.05, from exhausting any Policy limit, (ii) require any member of any Group to pay any premium or other amount or to incur any Liability, or (iii) require any member of any Group to renew, extend or continue any Policy in force. Each of HCS, IB and SEB shall share such information as is reasonably necessary in order to permit the others to manage and conduct its insurance matters in an orderly fashion. (c) Additional Insurance. Nothing in this Agreement shall be deemed to -------------------- restrict any member of the Instruments Group or the Semiconductor Equipment Group from acquiring, at its own expense, any other insurance policy in respect of any Liabilities or covering any period to the extent such insurance policy does not contravene or abrogate any rights of any member of the other Groups under any of the Company Policies or increase (or potentially increase) premiums thereunder, whether prospectively or retroactively. ARTICLE IX DISPUTE RESOLUTION Section 9.01. Separation Committee. -------------------- (a) Composition and Responsibility of Committee. As of the Effective Time, ------------------------------------------- HCS, IB and SEB shall form a committee (the "Separation Committee") comprised of one representative designated from time-to-time by 41 the chief executive officer of each of the parties. Except as otherwise expressly provided in this Agreement, until the tenth anniversary of the Effective Time, the Separation Committee shall be responsible for resolving any and all controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement or any Ancillary Agreement (or any amendment hereto or thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non- performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement or any of the Ancillary Agreements, including any dispute as to (i) whether any Action or other Liability is an Instruments Liability, a Health Care Systems Liability, a Semiconductor Equipment Liability or a Shared Liability, (ii) whether any Asset is a Instruments Asset, a Health Care Systems Asset, a Semiconductor Equipment Asset or a Shared Asset, (iii) the interpretation of any provision of this Agreement or any Ancillary Agreement, and (iv) such other matters as are contemplated by this Agreement or any Ancillary Agreement to be resolved by the Separation Committee (collectively, "Agreement Disputes"). (b) Resolution Procedures. In the event of an Agreement Dispute, each of --------------------- the parties shall have the right to refer such Agreement Dispute in writing to the Separation Committee (or, if the Agreement Dispute involves only two of the parties, to the representatives of the affected parties that are members thereof) for resolution. The Separation Committee (or such members) shall seek to render a unanimous written decision with respect to any Agreement Dispute within 60 days after receipt of the referral. The decision of the Separation Committee (or such members) with respect to any Agreement Dispute shall be binding on the affected parties, the members of their respective Groups and their respective successors and assigns. In the event that the Separation Committee (or such members) is unable to reach a unanimous written decision as to any Agreement Dispute within 60 days after receipt of the referral, any of the affected parties shall have the right to submit such Agreement Dispute to arbitration in accordance with the procedures described in Section 9.02. The parties shall each bear their own expenses and costs in connection with the procedures described in this Section 9.01. Section 9.02. Binding Arbitration. ------------------- (a) Submission of Agreement Disputes. Until 60 days after the tenth -------------------------------- anniversary of the Effective Time, the resolution of any and all such Agreement Disputes not resolved in accordance with Section 9.01 shall be exclusively governed, settled and resolved in accordance with the mandatory binding arbitration provided for in this Section 9.02. (b) Commencement of Arbitration. Any affected party may commence --------------------------- arbitration proceedings by delivering a written notice to the other party or parties, describing in reasonable detail the Agreement Dispute to the other(s), and expressly requesting arbitration (an "Arbitration Demand Notice") and by filing with the American Arbitration Association ("AAA") a claim. Any such arbitration shall be final, conclusive and binding on the parties, the members of their respective Groups and their respective successors and assigns. (c) Selection of Panel. The arbitration shall be conducted in Palo Alto, ------------------ California by three arbitrators acting by majority vote (the "Panel"). The parties involved in the arbitration shall jointly select the three arbitrators from a list provided by AAA. If the parties are unable to agree as to the Panel within 30 days after delivery of the Arbitration Demand Notice, the arbitrators shall be appointed by the AAA pursuant to the commercial arbitration rules of the American Arbitration Association, as amended from time to time (the "AAA Rules"). If an arbitrator so selected or appointed becomes unable to serve, his or her successor shall be similarly selected or appointed. Notwithstanding the foregoing, if the affected parties agree, the Panel may consist of one arbitrator jointly selected by the affected parties. The Panel shall be the sole judge of the existence and extent of its jurisdiction. (d) Arbitration Procedures. The arbitration shall be conducted under the ---------------------- AAA Rules. (e) Conduct of Hearing. All hearings shall be conducted on an expedited ------------------ schedule and all proceedings shall be confidential. Any affected party may at its expense make a stenographic record thereof, which shall then be shared with the other affected parties which so request a copy (which parties shall then share equally in the expense) and which shall be given to the Panel as the official record of the proceedings. Hearings with respect to an Agreement Dispute shall begin not later than 120 days after selection or appointment of the Panel and shall not be more than 30 days in length. The Panel shall be required to issue a final award within 30 days of the conclusion of the hearings. The award shall be in writing and shall specify the factual and legal basis for the award. The Panel 42 shall apportion all costs and expenses of arbitration, including the Panel's fees and expenses, fees and expenses of experts and reasonable attorneys' fees, among the affected parties as the Panel deems fair and reasonable. The parties agree that money damages may be inadequate and that any party shall be entitled to seek, and that the Panel shall be empowered to enter, equitable and injunctive relief, including preliminary and temporary injunctive relief, in addition to any other appropriate relief or remedy. The parties consent to the jurisdiction of the Panel to award such relief and to the binding nature of any such relief award by the Panel. Any arbitration award shall be binding and enforceable against the affected parties and each member of their respective Groups and judgment may be entered thereon in any court of competent jurisdiction. (f) Limitation on Damages. In no event may the Panel award exemplary, --------------------- special or punitive damages or lost profits, except to the extent that exemplary, special or punitive damages or lost profits are actually paid by a party or a member of a party's Group to a third party. Section 9.03. Disputes Regarding Closing Balance Sheets; Payments. --------------------------------------------------- Notwithstanding Sections 9.01 and 9.02, the following shall govern disputes with respect to the IB Closing Balance Sheet, the HCS Closing Balance Sheet and SEB Closing Balance Sheet. (a) Disputes Regarding Closing Balance Sheets. Unless (i) in the case of ----------------------------------------- the IB Closing Balance Sheet, IB delivers written notice to HCS and SEB on or before the 60th day after its receipt of the IB Closing Balance Sheet that it disputes the value of any item set forth on the IB Closing Balance Sheet (a "IB Dispute"), or (ii) in the case of the SEB Closing Balance Sheet, SEB delivers written notice to HCS and IB on or before the 60th day after its receipt of the SEB Closing Balance Sheet that it disputes the value of any item set forth on the SEB Closing Balance Sheet (a "SEB Dispute"), or (iii) in the case of the HCS Closing Balance Sheet, HCS delivers a written notice to IB and SEB on or before the 60th day after its receipt of the HCS Balance Sheet that it disputes the value of any item set forth on the HCS Closing Balance Sheet (a "HCS Dispute"), then the parties shall be deemed to have accepted and agreed to the IB Closing Balance Sheet, the HCS Closing Balance Sheet or the SEB Closing Balance Sheet, as applicable, in the form in which it was delivered to it by the Auditors. If such a notice of a dispute is given by a party (the "Disputing Party") within such 60-day period, then the parties shall, within 30 days after the giving of any such notice, attempt to resolve the IB Dispute, HCS Dispute or SEB Dispute, as the case may be, and agree in writing upon the final content of the affected Closing Balance Sheet. Notwithstanding the foregoing, the values assigned to each Asset and Liability on the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet will be conclusively presumed to be correct, and no party shall have the right to dispute the value of any item if the values assigned to such Assets and Liabilities are the same as the values recorded on Varian's balance sheet immediately prior to the Effective Time. (b) If the parties are unable to resolve any IB Dispute, HCS Dispute or SEB Dispute, as the case may be, within such 30-day period, then a mutually acceptable independent accounting firm (the "Independent Auditors") shall be employed as arbitrator hereunder to settle such IB Dispute, HCS Dispute and/or SEB Dispute, as the case may be, as soon as practicable. In resolving such IB Dispute, HCS Dispute or SEB Dispute, the Independent Auditors shall (i) be granted access to all documents and facilities necessary to perform its function as arbitrator; (ii) permit each party and its representatives to make written and oral presentations to the Independent Auditors; (iii) resolve such IB Dispute, HCS Dispute and/or SEB Dispute by following relevant internal accounting methods and policies consistently applied, to the extent such methods and policies are not inconsistent with GAAP or any term of this Agreement; (iv) make a final decision regarding such IB Dispute, HCS Dispute and/or SEB Dispute within such period of time mutually agreed upon by the relevant parties and specified at the time of appointment of the Independent Auditors; and (v) issue a written statement explaining the basis for its final decision. The determination of the Independent Auditors with respect to any IB Dispute, HCS Dispute and/or SEB Dispute, as the case may be, shall be final and binding on the applicable parties. Each affected party shall pay its proportionate share of the fees and expenses of the Independent Auditors for such services. HCS and the Disputing Party (or Disputing Parties) each agree to execute, if requested by the Independent Auditors, a reasonable engagement letter. The term "IB Adjusted Closing Balance Sheet" as used herein shall mean the definitive IB Closing Balance Sheet agreed to by the parties or, as the case may be, the definitive IB Closing Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this Section 9.03 (in addition to the matters theretofore agreed to by IB and HCS). The term "HCS Adjusted Closing Balance Sheet" as used herein shall mean the definitive HCS Balance Sheet agreed to by the parties or, as the case may be, the definitive HCS Closing Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this 43 Section 9.03 (in addition to the matters theretofore agreed to by HCS and the Disputing Party or Disputing Parties). The term "SEB Adjusted Closing Balance Sheet" as used herein shall mean the definitive SEB Closing Balance Sheet agreed to by the parties or, as the case may be, the definitive SEB Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this Section 9.03 (in addition to the matters theretofore agreed to by SEB and HCS). (c) Post-Distribution Adjustments, Cash Payments and Other Actions. -------------------------------------------------------------- (i) If the SEB Adjusted Closing Balance Sheet indicates that the targets for the minimum Cash and Cash Equivalents provided in Section 2.05(b)(i)(A) or minimum consolidated Net Worth provided in Section 2.05(b)(i)(B) or the maximum Consolidated Debt of SEB provided in Section 2.05(b)(ii) were not met as of the Effective Time, then each of HCS and IB shall pay to SEB, in cash, an amount equal to 50% of the amount that would have been sufficient to cause SEB to meet such targets, or to reimburse SEB for any Consolidated Debt in excess of $5,000,000, as of the Effective Time, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. If the SEB Adjusted Closing Balance Sheet indicates that the target for the minimum Cash and Cash Equivalents provided in Section 2.05(b)(i)(A) has been exceeded but the target for minimum consolidated Net Worth provided in Section 2.05(b)(i)(B) has been satisfied, then SEB shall pay to each of HCS and IB, in cash, an amount equal to 50% of the amount by which (A) the Cash and Cash Equivalents of SEB set forth on the SEB Adjusted Closing Balance Sheet exceed (B) the sum of (y) $100,000,000 and (z) the amount, if any, that would be required to reimburse SEB for any Consolidated Debt in excess of $5,000,000, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. If the consolidated Net Worth set forth on the SEB Adjusting Closing Balance Sheet exceeds $225,000,000, then SEB shall pay to each of HCS and IB, in cash, an amount equal to 50% of the amount by which the such consolidated Net Worth exceeds $225,000,000, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. (ii) If the HCS Adjusted Closing Balance Sheet indicates that the consolidated Net Worth of HCS set forth on the HCS Adjusted Closing Balance Sheet is less than 40% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet, then IB shall pay to HCS an amount in cash that would have been sufficient to cause the consolidated Net Worth of HCS to have equaled 40% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet as of the Effective Time, within ten days after the later of the date the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet is determined and provided to the parties. If the HCS Adjusted Closing Balance Sheet indicates that the consolidated Net Worth of HCS set forth on the HCS Adjusted Closing Balance Sheet is more than 50% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet, then HCS shall pay to IB an amount in cash that would have been sufficient to cause the consolidated Net Worth of HCS to have equaled 50% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet as of the Effective Time, within ten days after the later of the date the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet is determined and provided to the parties. For purposes of this Section 9.03(c)(ii), the consolidated Net Worth of HCS shall be determined without giving effect to any Transaction Expenditures or Dispositions (including associated tax benefit and tax cost) that have been accrued, paid or received by HCS as of the Effective Time or any of the transactions effected pursuant to Section 2.05(d), but shall include any adjustments required by Section 9.03(c)(i). Section 9.04. Post-Distribution Adjustment in Respect of Transaction ------------------------------------------------------ Expenditures and Disposition Proceeds. On the date that is 180 days after the - ------------------------------------- Distribution Date (or, if such date is not a business day, the immediately following business day), HCS and IB shall recompute the After-tax Differential (including HCS's and IB's good faith estimates of the components thereof that are not yet determinable as of such 180th day). If the positive or negative difference between the After-tax Differential determined as of such date and the After-tax Differential determined pursuant to the provisions of Section 2.05(d) is more than $1,000,000, then IB shall pay HCS, or HCS shall pay IB (as applicable to put the parties in the positions they would have been if the After-tax 44 Differential computed pursuant to the provisions of Section 2.05(d) was equal to the recomputed After-tax Differential) 50% of the amount of such difference. Section 9.05. Discretionary Restructuring Amounts. On the date that is 90 ----------------------------------- days after the Distribution Date (or, if such date is not a business day, the immediately following business day) HCS and IB shall recompute the HCS Discretionary Restructuring Amount and the IB Discretionary Restructuring Amount and IB shall pay HCS or HCS shall pay IB (as applicable) such amounts as shall be necessary to put such entities in the positions they would have been if the HCS Discretionary Restructuring Amount and the IB Discretionary Restructuring Amount computed pursuant to the provisions of Section 2.05(c) were equal to the recomputed amounts. Section 9.06. Specific Performance. Each party acknowledges that there is -------------------- no adequate remedy at Law for the failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages. Accordingly, each party agrees that the agreement contained in Section 9.02 with respect to arbitration of Agreement Disputes and in Section 9.03 with respect to resolution of Disputes by the Independent Auditors may be specifically enforced without the requirement of posting a bond or other security. ARTICLE X MISCELLANEOUS Section 10.01. Complete Agreement; Construction. This Agreement and the -------------------------------- Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and any Schedule or Exhibit, the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there is a conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement, the Ancillary Agreement shall prevail, except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX, which shall prevail over any inconsistent provisions of any Ancillary Agreement other than the Tax Sharing Agreement. Section 10.02. Ancillary Agreements. This Agreement is not intended to -------------------- address, and should not be interpreted to address, the matters expressly covered by the Ancillary Agreements. Section 10.03. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 10.04. Responsibility for Expenses. --------------------------- (a) Transaction Expenditures. Except as otherwise expressly provided in ------------------------ this Agreement, any Ancillary Agreement or any instrument or agreement contemplated thereby, and subject to the provisions of this Agreement with respect to the After-tax Differential, all Transaction Expenditures shall be charged to and paid by Varian. (b) Expenses Incurred or Accrued after the Distribution Date. Except as -------------------------------------------------------- otherwise set forth in this Agreement or any Ancillary Agreement, each party shall bear its own costs and expenses incurred in connection with the transactions contemplated by this Agreement. Section 10.05. Notices. All notices, consents, requests, waivers, claims ------- or other communications (each a "Notice") required or permitted under this Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: 45 If to Varian before the Distributions, at: 3050 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer Telecopy: (650) 424-5754 with a copy to: 3050 Hansen Way Palo Alto, California 94304 Attn: General Counsel Telecopy: (650) 858-2018 If to HCS before the Distributions, at: 3100 Hansen Way Palo Alto, California 94304 Attn: Elisha W. Finney Telecopy: (650) 424-5358 with a copy to: 3050 Hansen Way Palo Alto, California 94304 Attn: Joseph B. Phair Telecopy: (650) 858-2018 If to SEB before the Distributions, at: 35 Dory Road Gloucester, Massachusetts 01930 Attn: Ernest L. Godshalk III Telecopy: (978) 281-3152 If to IB before the Distributions, at: 3050 Hansen Way Palo Alto, California 94304 Attn: Wayne P. Somrak Telecopy: (650) 424-5754 with a copy to: 3100 Hansen Way Palo Alto, California 94304 Attn: A.W. Homan Telecopy: (650) 424-5998 If to HCS after the Distributions, at: 3100 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer With a copy to: 3100 Hansen Way Palo Alto, California 94304 Attn: General Counsel 46 If to SEB after the Distributions, at: 35 Dory Road Gloucester, Massachusetts 01930 Attention: Chief Financial Officer Telecopy: (978) 281-3152 With a copy to: 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) 281-3152 If to IB after the Distributions, at: 3120 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer with a copy to: 3120 Hansen Way Palo Alto, California 94304 Attn: General Counsel or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. Section 10.06. Waivers. The failure of any party to require strict ------- performance by any other party of any provision in or rights or remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. Section 10.07. Amendments. This Agreement may be amended or supplemented, ---------- or its provisions waived only by an agreement in writing signed by each of the parties; provided, however, that (i) after the Varian stockholders approve the -------- ------- Distributions no such amendment, supplement or waiver may be effected unless it would not be materially adverse to the Varian stockholders, and (ii) Article VII may not be amended after the Distributions in respect of third party beneficiaries thereof without the consent of such Persons. Section 10.08. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above or Section 7.10, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 10.09. Successors and Assigns. Subject to Section 10.08, this ---------------------- Agreement shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 10.10. Termination. This Agreement may be terminated and the ----------- Distributions may be abandoned at any time before the Distributions by Varian in its sole discretion without the approval of SEB or IB or 47 the Varian stockholders. In the event of such termination, no party shall have any Liability of any kind to any other party. After the Distributions, this Agreement may not be terminated except by an agreement in writing signed by each of the parties; provided, however, that Article VII may not be terminated after -------- ------- the Distributions in respect of the third party beneficiaries thereof without the consent of such Persons. Section 10.11. Third Party Beneficiaries. Except as expressly contemplated ------------------------- by Article VII (relating to Indemnitees), this Agreement is solely for the benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and permitted assigns, and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Section 10.12. Exhibits and Schedules. The Exhibits and Schedules attached ---------------------- to this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Section 10.13. Governing Law. This Agreement, the Ancillary Agreements and ------------- any other agreements entered into in connection with the transactions contemplated hereby (except for the Conveyancing and Assumption Instruments, which shall be governed by local Law) shall be governed by, and construed and enforced in accordance with, the Laws of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of Agreement Disputes. Section 10.14. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Section 10.15. Subsidiaries. Each party shall cause to be performed, and ------------ hereby guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. Section 10.16. Titles and Headings. Titles and headings to sections herein ------------------- are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement or of any Ancillary Agreement. Section 10.17. Consent to Jurisdiction. Without limiting any of the ----------------------- provisions of Article IX, each party hereby submits to the exclusive jurisdiction of the Chancery Court of the State of Delaware and the Federal courts of the United States of America located in Delaware in respect of the transactions contemplated by this Agreement, and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the transactions contemplated by this Agreement, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in such courts or that the Agreement may not be enforced in or by such courts or that its property is exempt or immune from execution, that the suit, action or proceeding is brought in an inconvenient forum, or that the venue of the suit, action or proceeding is improper. 48 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN ASSOCIATES, INC. By /s/ Richard M. Levy ------------------------------------------ Name: Richard M. Levy Title: Executive Vice President VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By /s/ Richard A. Aurelio ------------------------------------------ Name: Richard A. Aurelio Title: President and Chief Executive Officer VARIAN, INC. By /s/ Allen J. Lauer ------------------------------------------ Name: Allen J. Lauer Title: President and Chief Executive Officer 49 EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATED VARIAN, INC Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF VARIAN, INC. A Delaware Corporation ARTICLE I NAME The name of the corporation is Varian, Inc. (the "Corporation"). ARTICLE II REGISTERED OFFICE AND AGENT The address of the registered office of the Corporation in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III PURPOSES The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV CAPITAL STOCK The Corporation shall be authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares of both classes of stock which the Corporation has authority to issue is one hundred million (100,000,000) shares, consisting of: ninety nine million (99,000,000) shares of Common Stock, $0.01 par value per share, and one million (1,000,000) shares of Preferred Stock, $0.01 par value per share. The Board of Directors of the Corporation (the "Board of Directors") is authorized, subject to limitations prescribed by applicable law and the provisions of this Article IV, to provide for the issuance of the shares of Preferred Stock from time to time in one or more series, each of which series shall have such distinctive designation or title as shall be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series of Preferred Stock shall have such voting powers, shall consist of such number of shares, shall be issued for such consideration and shall otherwise have such powers, designations, preferences and relative, participating, optional or other rights, if any, and such qualifications, limitations or restrictions, if any, as shall be stated in such resolution or resolutions providing for the issue of such series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with applicable law. The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as may be provided in this Certificate of Incorporation or in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV that shall be in effect under the General Corporation Law of the State of Delaware (a "Preferred Stock Designation"), the holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. Pursuant to authority granted by this Article IV, the Board of Directors adopted a resolution creating a series of Preferred Stock, $0.01 par value per share, and stated the designation and number of shares, and fixed the powers, designations, preferences and relative, participating, optional or other rights, if any, of the shares of such series and the qualifications, limitations or restrictions thereof, if any, as set forth in a Certificate of Designation of Participating Preferred Stock of Varian, Inc. ARTICLE V ELECTION OF DIRECTORS Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the then authorized number of directors of the Corporation, but in no event shall the number of directors be fewer than three. The directors, other than those who may be elected solely by the holders of any series of Preferred Stock (unless the relevant Preferred Stock Designation shall so provide), shall be divided into three classes, as nearly equal in number as possible, designated "Class I," "Class II" and "Class III." Directors of each class shall serve for a term ending on the third annual meeting of stockholders following the annual meeting at which such class was elected, except that the term of office of the initial Class I 2 director shall expire on the date of the annual meeting in 2000, the term of office of the initial Class II directors shall expire on the date of the annual meeting in 2001 and the term of office of the initial Class III directors shall expire on the date of the annual meeting in 2002. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless such director shall die, resign, retire or be disqualified or removed. At all elections of directors, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed. If for any reason the number of directors in the various classes shall not be as nearly equal as possible, the Board of Directors may redesignate any director into a different class in order that the balance of directors in such classes shall be as nearly equal as possible. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies in the Board of Directors resulting from one or more directors' death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class, at a meeting called for that purpose. Elections of directors of the Corporation need not be by written ballot except and to the extent the by-laws of the Corporation (the "By-Laws") so provide. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least 66?% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article V. For purposes of this Certificate of Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. 3 ARTICLE VI POWERS OF THE BOARD OF DIRECTORS In furtherance and not in limitation of the powers conferred by applicable law, the Board of Directors shall have the power to (1) adopt, amend or repeal By-Laws, subject to the power of the stockholders of the Corporation under the General Corporation Law of the State of Delaware to adopt, amend or repeal any By-Law; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock required by applicable law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 66?% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required for stockholders to adopt, amend or repeal any provision of the By-Laws; and (2) from time to time determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least 66?% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with clause (1) of the preceding sentence. The Corporation may in its By-Laws confer powers upon its Board of Directors in addition to the powers and authorities expressly conferred upon it by applicable law. ARTICLE VII LIABILITY OF DIRECTORS To the fullest extent permitted by the General Corporation Law of the State of Delaware, as it exists on the date hereof or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director of the Corporation. Without limiting the effect of the preceding sentence, if the General Corporation Law of the State of Delaware is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. 4 ARTICLE VIII INDEMNIFICATION Each person who is or was a director or officer of the Corporation, or each such person who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, limited liability company, partnership, joint venture, trust or other enterprise (including the heirs, executor, administrators or estate of such person), including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) and any other applicable laws as presently or hereafter in effect. The Corporation may, by action of the Board of Directors, provide indemnification to employees and agents of the Corporation, and to any such persons serving as directors, officers, employees or agents of another corporation, limited liability company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, at the request of the Corporation, with the same scope and effect as the foregoing indemnification of directors and officers. The Corporation shall be required to indemnify any person seeking indemnification in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person's right to indemnification pursuant to the rights granted by this Certificate of Incorporation or otherwise by the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater than or different from that provided in this Article VIII. ARTICLE IX ACTION BY STOCKHOLDERS Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of at least 66?% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article IX. ARTICLE X AMENDMENTS Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all 5 rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article X; provided, however, that any amendment or repeal of Article VII or Article VIII of this Certificate of Incorporation shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal; and provided further that no Preferred Stock Designation shall be amended after the issuance of any shares of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law. 6 EX-3.2 4 CERTIFICATE OF DESIGNATION AND TERMS Exhibit 3.2 FORM OF CERTIFICATE OF DESIGNATION AND TERMS OF PARTICIPATING PREFERRED STOCK OF VARIAN, INC. ------------------------------------------------ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ---------------------------------------- We, the undersigned, Allen J. Lauer and Arthur W. Homan, the President and Secretary, respectively, of Varian, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: Pursuant to authority granted by Article IV of the Restated Certificate of Incorporation, as amended, of the Corporation and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation has adopted the following resolutions fixing the designation and certain terms, powers, preferences and other rights of a new series of the Corporation's Preferred Stock, par value $0.01 per share, and certain qualifications, limitations and restrictions thereon: RESOLVED, that there is hereby established a series of Preferred Stock, par value $0.01 per share, of the Corporation, and the designation and certain terms, powers, preferences and other rights of the shares of such series, and certain qualifications, limitations and restrictions thereon, are hereby fixed as follows: (i) The distinctive serial designation of this series shall be "Participating Preferred Stock" (hereinafter called "this Series"). Each share of this Series shall be identical in all respects with the other shares of this Series except as to the dates from and after which dividends thereon shall be cumulative. (ii) The number of shares in this Series shall initially be 50,000, which number may from time to time be increased or decreased (but not below the number then outstanding) by the Board of Directors. Shares of this Series purchased by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series. Shares of this Series may be issued in fractional shares, which fractional shares shall entitle the holder, in proportion to such holder's fractional share, to all rights of a holder of a whole share of this Series. (iii) The holders of full or fractional shares of this Series shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds legally available therefor, dividends, (A) on each date that dividends or other distributions (other than dividends or distributions payable in Common Stock of the Corporation) are payable on or in respect of Common Stock comprising part of the Reference Package (as defined below), in an amount per whole share of this Series equal to the aggregate amount of dividends or other distributions (other than dividends or distributions payable in Common Stock of the Corporation) that would be payable on such date to a holder of the Reference Package (as hereinafter defined) and (B) on the last day of March, June, September and December in each year, in an amount per whole share of this Series equal to the excess (if any) of $2.50 over the aggregate dividends paid per whole share of this Series during the three month period ending on such last day. Each such dividend shall be paid to the holders of record of shares of this Series on the date, not exceeding sixty days preceding such dividend or distribution payment date, fixed for the purpose by the Board of Directors in advance of payment of each particular dividend or distribution. Dividends on each full and each fractional share of this Series shall be cumulative from the date such full or fractional share is originally issued; provided that any such full or fractional share originally issued after a dividend record date and on or prior to the dividend payment date to which such record date relates shall not be entitled to receive the dividend payable on such dividend payment date or any amount in respect of the period from such original issuance to such dividend payment date. The term "Reference Package" shall initially mean 1,000 shares of Common Stock, $0.01 par value per share ("Common Stock"), of the Corporation. In the event the Corporation shall at any time after 5:00 p.m., California time, on April 2, 1999 (A) declare or pay a dividend on any Common Stock payable in Common Stock, (B) subdivide any Common Stock or (C) combine any Common Stock into a smaller number of shares, then and in each such case the Reference Package after such event shall be the Common Stock that a holder of the Reference Package immediately prior to such event would hold thereafter as a result thereof. Holders of shares of this Series shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided on this Series. So long as any shares of this series are outstanding, no dividends (other than a dividend in Common Stock or in any other stock ranking junior to this Series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock ranking junior to this Series as to dividends or upon liquidation, nor shall any Common Stock nor any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to this Series as to dividends 2 and upon liquidation), unless, in each case, the full cumulative dividends (including the dividend to be due upon payment of such dividend, distribution, redemption, purchase or other acquisition) on all outstanding shares of this Series shall have been, or shall contemporaneously be, paid. (iv) In the event of any merger, consolidation, reclassification or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of this Series shall at the same time be similarly exchanged or changed in an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, that a holder of the Reference Package would be entitled to receive as a result of such transaction. (v) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of full and fractional shares of this Series shall be entitled, before any distribution or payment is made on any date to the holders of the Common Stock or any other stock of the Corporation ranking junior to this Series upon liquidation, to be paid in full an amount per whole share of this Series equal to the greater of (A) $100 or (B) the aggregate amount distributed or to be distributed prior to such date in connection with such liquidation, dissolution or winding up to a holder of the Reference Package (such greater amount being hereinafter referred to as the "Liquidation Preference"), together with accrued dividends to such distribution or payment date, whether or not earned or declared. If such payment shall have been made in full to all holders of shares of this Series, the holders of shares of this Series as such shall have no right or claim to any of the remaining assets of the Corporation. In the event the assets of the Corporation available for distribution to the holders of shares of this Series upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to the first paragraph of this Section (v), no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the shares of this Series upon such liquidation, dissolution or winding up unless proportionate distributive amounts shall be paid on account of the shares of this Series, ratably in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation, dissolution or winding up. Upon the liquidation, dissolution or winding up of the Corporation, the holders of shares of this Series then outstanding shall be entitled to be paid out of assets of the Corporation available for distribution to its Stockholders all amounts to which such holders are entitled pursuant to the first paragraph of this Section (v) before any payment 3 shall be made to the holders of Common Stock or any other stock of the Corporation ranking junior upon liquidation to this Series. For the purposes of this Section (v), the consolidation or merger of, or binding share exchange by, the Corporation with any other corporation shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation. (vi) The shares of this Series shall not be redeemable. (vii) In addition to any other vote or consent of Stockholders required by law or by the Restated Certificate of Incorporation, as amended, of the Corporation, each whole share of this Series shall, on any matter, vote as a class with any other capital stock comprising part of the Reference Package and voting on such matter and shall have the number of votes thereon that a holder of the Reference Package would have. IN WITNESS WHEREOF, the undersigned have signed and attested this certificate on the 29th day of March, 1999. /s/ Allen J. Lauer ---------------------- Allen J. Lauer President Attest: /s/ Arthur W. Homan - ---------------------- Arthur W. Homan Secretary 4 EX-3.3 5 BY LAWS OF VARIAN INC EXHIBIT 3.3 BY-LAWS OF VARIAN, INC. A Delaware Corporation As adopted on February 18, 1999, to be effective on March 30, 1999 TABLE OF CONTENTS
Page ARTICLE I OFFICES.................................................................................. 1 Section 1. Registered Office................................................................... 1 Section 2. General Office and Other Offices.................................................... 1 ARTICLE II STOCKHOLDERS' MEETINGS................................................................... 1 Section 3. Annual Meeting...................................................................... 1 Section 4. Business to be Conducted at Annual Meeting.......................................... 1 Section 5. Special Meetings.................................................................... 2 Section 6. Place of Meetings................................................................... 2 Section 7. Notice of Meetings.................................................................. 3 Section 8. Nominations of Directors............................................................ 3 Section 9. List of Stockholders................................................................ 4 Section 10. Quorum.............................................................................. 4 Section 11. Voting and Required Vote............................................................ 5 Section 12. Proxies............................................................................. 5 Section 13. Inspectors of Election; Polls....................................................... 5 Section 14. Organization........................................................................ 5 Section 15. No Stockholder Action by Written Consent............................................ 5 ARTICLE III BOARD OF DIRECTORS....................................................................... 6 Section 16. General Powers, Number, Term of Office.............................................. 6 Section 17. Vacancies........................................................................... 6 Section 18. Chairman of the Board............................................................... 6 Section 19. Regular Meetings.................................................................... 7 Section 20. Special Meetings.................................................................... 7 Section 21. Notices............................................................................. 7 Section 22. Conference Telephone Meetings....................................................... 7 Section 23. Quorum.............................................................................. 7 Section 24. Organization........................................................................ 8 Section 25. Resignations........................................................................ 8 Section 26. Removal............................................................................. 8 Section 27. Action Without a Meeting............................................................ 8 Section 28. Location of Books................................................................... 8
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PAGE Section 29. Dividends........................................................................... 8 Section 30. Compensation of Directors........................................................... 8 Section 31. Additional Powers................................................................... 9 ARTICLE IV COMMITTEES OF DIRECTORS.................................................................. 9 Section 32. Designation, Power, Alternate Members............................................... 9 Section 33. Quorum, Manner of Acting............................................................ 9 Section 34. Minutes............................................................................. 9 ARTICLE V ADVISORY DIRECTORS....................................................................... 10 Section 35. Advisory Directors.................................................................. 10 ARTICLE VI OFFICERS................................................................................. 10 Section 36. Designation......................................................................... 10 Section 37. Election and Term................................................................... 10 Section 38. Removal............................................................................. 10 Section 39. Resignations........................................................................ 10 Section 40. Vacancies........................................................................... 10 Section 41. Chief Executive Officer............................................................. 10 Section 42. President........................................................................... 11 Section 43. Vice Presidents..................................................................... 11 Section 44. Secretary........................................................................... 11 Section 45. Assistant Secretaries............................................................... 11 Section 46. Chief Financial Officer............................................................. 11 Section 47. Treasurer........................................................................... 11 Section 48. Assistant Treasurers................................................................ 12 Section 49. Controller.......................................................................... 12 Section 50. Assistant Controllers............................................................... 12 ARTICLE VII CONTRACTS, INSTRUMENTS AND PROXIES....................................................... 12 Section 51. Contracts and Other Instruments..................................................... 12 Section 52. Proxies............................................................................. 12 ARTICLE VIII CAPITAL STOCK............................................................................ 13 Section 53. Stock Certificates; Book-Entry Accounts............................................. 13 Section 54. Record Ownership.................................................................... 13
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Page Section 55. Record Dates........................................................................ 13 Section 56. Transfer of Stock................................................................... 13 Section 57. Lost, Stolen or Destroyed Certificates.............................................. 13 Section 58. Terms of Preferred Stock............................................................ 14 ARTICLE IX INDEMNIFICATION.......................................................................... 14 Section 59. Right of Indemnification Generally.................................................. 14 Section 60. Written Request; Determination of Entitlement....................................... 15 Section 61. Recovery of Unpaid Claim............................................................ 15 Section 62. Exclusivity; Subsequent Modification................................................ 15 Section 63. Insurance........................................................................... 15 Section 64. Other Indemnification Rights........................................................ 16 Section 65. Illegality; Unenforceability........................................................ 16 Section 66. Form and Delivery of Communications................................................. 16 ARTICLE X MISCELLANEOUS............................................................................ 16 Section 67. Corporate Seal...................................................................... 16 Section 68. Fiscal Year......................................................................... 16 Section 69. Auditors............................................................................ 16 Section 70. Waiver of Notice.................................................................... 17 ARTICLE XI AMENDMENT TO BY-LAWS..................................................................... 17 Section 71. Amendments.......................................................................... 17
-iii- BY-LAWS OF VARIAN, INC. A Delaware Corporation As adopted on February 18, 1999, to be effective on March 30, 1999 ARTICLE I OFFICES Section 1. Registered Office. The name of the registered agent of ----------------- Varian, Inc. (the "Corporation") is The Corporation Trust Company and the registered office of the Corporation shall be located in the City of Wilmington, County of New Castle, State of Delaware. Section 2. General Office and Other Offices. The Corporation shall have -------------------------------- its General Offices in the City of Palo Alto, State of California (the "General Offices"), and may also have offices at such other places in or outside the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS Section 3. Annual Meeting. An annual meeting of stockholders shall be -------------- held on such day and at such time as may be designated by the Board of Directors for the purpose of electing directors and for the transaction of such other business as properly may come before such meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders. Section 4. Business to be Conducted at Annual Meeting. ------------------------------------------ (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Corporation's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such meeting's anniversary date, notice by the stockholder must be received not earlier than the 90/th/ day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60/th/ day prior to such date of mailing of proxy materials or the 10/th/ day following the day on which public announcement of the date of the annual meeting is first made. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business. For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law. The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, and any such proposal so included shall be deemed timely given for purposes of this By-Law. Section 5. Special Meetings. Special meetings of stockholders for any ---------------- proper purpose or purposes, unless otherwise provided by the General Corporation Law of the State of Delaware or in any Certificate of Designation designating any series of Preferred Stock pursuant to Article IV of the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") that shall be in effect under the General Corporation Law of the State of Delaware (a "Preferred Stock Designation"), may be called by the Chairman of the Board, the Chief Executive Officer or the President, or in the absence of each of them, by the Secretary at the written request of a majority of the directors. Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of the meeting. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders. Section 6. Place of Meetings. All meetings of stockholders shall be ----------------- held at such place as may be determined by resolution of the Board of Directors. 2 Section 7. Notice of Meetings. Except as otherwise required by ------------------ applicable law, notice of each meeting of the stockholders, whether annual or special, shall, at least 10 days but not more than 60 days before the date of the meeting, be given to each stockholder of record entitled to vote at the meeting by mailing such notice in the U.S. mail, postage prepaid, addressed to such stockholder at such stockholder's address as the same appears on the records of the Corporation. Such notice shall state the place, date and hour of the meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof. Section 8. Nominations of Directors. ------------------------ (a) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this By-Law. (b) Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 90/th/ day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60/th/ day prior to such date of mailing of proxy materials or the 10/th/ day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special meeting at which directors are to be elected, not earlier than the 90/th/ day prior to such special meeting and not later than the close of business on the later of the 60/th/ day prior to such special meeting or the 10/th/ day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made. In the case of a special meeting of stockholders at which directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Corporation's notice of meeting as being up for election at such meeting. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Corporation's books, of such stockholder and the class and number of shares of the Corporation's stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and number of shares of the Corporation's stock which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary that information required to be 3 set forth in a stockholder's notice of nomination that pertains to the nominee. Notwithstanding anything in this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the General Offices not later than the close of business on the 10/th/ day following the day on which such public announcement is first made by the Corporation. (c) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Section 9. List of Stockholders. -------------------- (a) The Secretary of the Corporation shall prepare, at least 10 days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (b) The stock ledger of the Corporation shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any meeting of stockholders, or (ii) to exercise the rights in accordance with applicable law to examine the stock ledger, the list required by this By-Law or the books and records of the Corporation. Section 10. Quorum. The holders of a majority of the stock issued and ------ outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by applicable law, by the Certificate of Incorporation or by these By-Laws. The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum. Whether or not a quorum is present, either the Chairman of the meeting or a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting. If the adjournment is for more than 30 days, or if after the 4 adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 11. Voting and Required Vote. Subject to the provisions of the ------------------------ Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder. Subject to the provisions of the Certificate of Incorporation and applicable law, directors shall be chosen by the vote of a plurality of the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. Elections of directors shall be by written ballot. Section 12. Proxies. Each stockholder entitled to vote at a meeting of ------- stockholders may authorize another person or persons to act for such stockholder by proxy, provided the instrument authorizing such proxy to act shall have been executed in writing in the manner prescribed by applicable law. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 13. Inspectors of Election; Polls. Before each meeting of ----------------------------- stockholders, the Chairman of the Board or another officer of the Corporation designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act. If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the chairman of the meeting. Each inspector shall have such duties as are provided by applicable law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting. Section 14. Organization. The Chairman of the Board of Directors, or in ------------ the Chairman's absence, (i) the Chief Executive Officer, (ii) the Vice Chairman of the Board of Directors, (iii) the President, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meetings of the stockholders, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting. The order of business and the procedure at any meeting of stockholders shall be determined by the chairman of the meeting. Section 15. No Stockholder Action by Written Consent. Any action ---------------------------------------- required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. 5 ARTICLE III BOARD OF DIRECTORS Section 16. General Powers, Number, Term of Office. The business of the -------------------------------------- Corporation shall be managed under the direction of its Board of Directors. Subject to the rights of the holders of any series of preferred stock, $0.01 par value per share, of the Corporation ("Preferred Stock") to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by resolution of a majority of the then authorized number of directors of the Corporation (the number of then authorized directors of the Corporation is referred to herein as the "Whole Board"), but in no event shall the number of directors be fewer than three. The directors, other than those who may be elected solely by the holders of any series of Preferred Stock (unless the relevant Preferred Stock Designation shall so provide), shall be divided into three classes, as nearly equal in number as possible, designated "Class I," "Class II" and "Class III." Directors of each class shall serve for a term ending on the third annual meeting of stockholders following the annual meeting at which such class was elected, except that the term of office of the initial Class I director shall expire on the date of the annual meeting in 2000, the term of office of the initial Class II directors shall expire on the date of the annual meeting in 2001 and the term of office of the initial Class III directors shall expire on the date of the annual meeting in 2002. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless such director shall die, resign, retire or be disqualified or removed. At all elections of directors, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed. If for any reason the number of directors in the various classes shall not be as nearly equal as possible, the Board of Directors may redesignate any director into a different class in order that the balance of directors in such classes shall be as nearly equal as possible. Section 17. Vacancies. Subject to the rights of the holders of any --------- series of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. Chairman of the Board. The Chairman of the Board of --------------------- Directors shall be chosen from among the directors. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under applicable law. The Chairman shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Corporation. The Chairman, alone or with the Chief Executive Officer, the President, and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time. The 6 Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws or the Board of Directors. The Board of Directors may also choose a Vice Chairman of the Board of Directors from among the directors, which Vice Chairman if chosen shall perform such duties as may be assigned by these By-Laws, the Board of Directors or the Chairman of the Board. Section 19. Regular Meetings. Following the annual meeting of ---------------- stockholders, the first meeting of each newly elected Board of Directors may be held, without notice, on the same day and at the same place as such stockholders' meeting. The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each director, as provided in Section 21 below, who was not present at the meeting at which such action was taken. Section 20. Special Meetings. Special meetings of the Board of Directors ---------------- shall be held whenever called by the Chairman of the Board of Directors, the Vice Chairman of the Board, the Chief Executive Officer or the President, or in the absence of each of them, by the Secretary at the written request of a majority of the directors. Section 21. Notices. Notice of any special meeting of the Board of ------- Directors shall be addressed to each director at such director's residence or business address and shall be sent to such director by mail, electronic mail, telecopier, telegram or telex or telephoned or delivered to such director personally. If such notice is sent by mail, it shall be sent not later than three days before the day on which the meeting is to be held. If such notice is sent by electronic mail, telecopier, telegram or telex, it shall be sent not later than 24 hours before the time at which the meeting is to be held. If such notice is delivered personally, it shall be received not later than 24 hours before the time at which the meeting is to be held. If such notice is telephoned, it shall be to such telephone number or numbers of which the director from time to time shall advise the Secretary for receiving such notice. If given by telephone call, notice shall be deemed given to a director when a message stating the time, place and purpose of the meeting is left with a person answering the telephone at any such number with a request that the director be so informed, or if no such telephone number is answered, then when at least two attempts have been made to reach each telephone number designated by the director for receiving telephonic notice, with an interval of not less than one hour. A certification shall be prepared and filed with the minutes stating the date, time and results of telephonic notice given to any director not present at a meeting with respect to which his waiver of notice of meeting is not filed with the minutes. In all cases, such notice shall state the time, place and purpose or purposes of the meeting. Section 22. Conference Telephone Meetings. Members of the Board of ----------------------------- Directors or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 23. Quorum. One-half of the total number of directors ------ constituting the Whole Board, but not less than two, shall constitute a quorum for the transaction of business at any 7 meeting of the Board of Directors, but if less than such required number of directors for a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Except as otherwise specifically provided by applicable law, the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 24. Organization. At each meeting of the Board of Directors, the ------------ Chairman of the Board or, in the Chairman's absence, (i) the Chief Executive Officer, if a member of the Board of Directors, (ii) the Vice Chairman of the Board, (iii) the President, if a member of the Board of Directors, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 25. Resignations. Any Director may resign at any time by giving ------------ written notice to the Chairman of the Board, the Chief Executive Officer, the President or the Secretary of the Corporation. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 26. Removal. Subject to the rights of the holders of any series ------- of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. For purposes of these By-Laws, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. Section 27. Action Without a Meeting. Unless otherwise restricted by the ------------------------ Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 28. Location of Books. Except as otherwise provided by ----------------- resolution of the Board of Directors and subject to applicable law, the books of the Corporation may be kept at the General Offices and at such other places as may be necessary or convenient for the business of the Corporation. Section 29. Dividends. Subject to the provisions of the Certificate of --------- Incorporation and applicable law, dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. Section 30. Compensation of Directors. Directors shall receive such ------------------------- compensation and benefits as may be determined by resolution of the Board of Directors for their services as members of the Board of Directors and committees. Directors shall also be reimbursed for their 8 expenses of attending Board of Directors and committee meetings. Nothing contained herein shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Section 31. Additional Powers. In addition to the powers and authorities ----------------- by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. ARTICLE IV COMMITTEES OF DIRECTORS Section 32. Designation, Power, Alternate Members. The Board of Directors ------------------------------------- may, by resolution or resolutions passed by a majority of the Whole Board, designate an Executive Committee and one or more additional committees, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in said resolution or resolutions and subject to any limitations provided by applicable law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If at a meeting of any committee one or more of the members thereof is absent or disqualified, and if either the Board of Directors has not so designated any alternate member or members, or the number of absent or disqualified members exceeds the number of alternate members who are present at such meeting, then the member or members of such committee (including alternates) present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified member. The term of office of the members of each committee shall be as fixed from time to time by the Board of Directors; provided, however, that any committee member who ceases to be a member of the Board of Directors shall automatically cease to be a committee member. Section 33. Quorum, Manner of Acting. At any meeting of a committee, the ------------------------ presence of one-half of its members then in office shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By- Laws or by resolution of the Board of Directors, make rules for the conduct of its business. Section 34. Minutes. The committees shall keep minutes of their ------- proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. 9 ARTICLE V ADVISORY DIRECTORS Section 35. Advisory Directors. The Board of Directors may, by resolution ------------------ adopted by a majority of the Whole Board, appoint such Advisory Directors as the Board of Directors may from time to time determine. The Advisory Directors shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board of Directors. ARTICLE VI OFFICERS Section 36. Designation. The officers of the Corporation shall be the Chief ----------- Executive Officer, a President, a Secretary, a Chief Financial Officer, a Treasurer and a Controller. The Board of Directors may also elect one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers as it shall deem necessary. Any number of offices may be held by the same person. Section 37. Election and Term. At its first meeting after each annual ----------------- meeting of stockholders, the Board of Directors shall elect the officers of the Corporation and at any time thereafter the Board of Directors may elect additional officers of the Corporation, and each such officer shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation or removal. Alternatively, at the last regular meeting of the Board of Directors prior to an annual meeting of stockholders, the Board of Directors may elect the officers of the Corporation, contingent upon the election of the persons nominated to be directors by the Board of Directors; and each such officer so elected shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation or removal. Section 38. Removal. Any officer shall be subject to removal or suspension ------- at any time, for or without cause, by the affirmative vote of a majority of the Whole Board. Section 39. Resignations. Any officer may resign at any time by giving ------------ written notice to the Chairman of the Board, the President or to the Secretary. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 40. Vacancies. A vacancy in any office because of death, --------- resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors. Section 41. Chief Executive Officer. The Chief Executive Officer shall have ----------------------- the general and active management and supervision of the business of the Corporation. The Chief Executive Officer, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are 10 carried into effect. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer's absence. Section 42. President. The President shall perform such duties as may be --------- assigned to the President by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. Section 43. Vice Presidents. Each Executive Vice President, Senior Vice --------------- President, Group Vice President and each other Vice President shall perform the duties and functions and exercise the powers assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. Section 44. Secretary. The Secretary shall attend all meetings of the Board --------- of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Corporation. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. Section 45. Assistant Secretaries. The Assistant Secretaries shall, during --------------------- the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by these By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Section 46. Chief Financial Officer. The Chief Financial Officer shall have ----------------------- overall responsibility for causing (1) the funds and securities of the Corporation to be deposited in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; (2) the disbursement of funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; (3) the investment of funds of the Corporation when authorized by the Board of Directors or a committee thereof; and (4) to be kept full and accurate account of receipts and disbursements in books of the Corporation. The Chief Financial Officer shall render to the Board of Directors, the Chief Executive Officer, or the President, whenever requested, an account of all transactions as Chief Financial Officer and shall also perform all duties incident to the office of Chief Financial Officer and such other duties as may be assigned to the Chief Financial Officer by these By-Laws, the Board of Directors, the Chief Executive Officer, or the President. Section 47. Treasurer. The Treasurer shall have the custody of the funds and --------- securities of the Corporation and shall deposit them in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse 11 funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Corporation when authorized by the Board of Directors or a committee thereof. The Treasurer shall render to the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer. Section 48. Assistant Treasurers. The Assistant Treasurers shall, during the -------------------- absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Section 49. Controller. The Controller shall serve as the principal ---------- accounting officer of the Corporation and shall keep full and accurate account of receipts and disbursements in books of the Corporation and render to the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer, whenever requested, an account of all transactions as Controller and of the financial condition of the Corporation. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. Section 50. Assistant Controllers. The Assistant Controllers shall, during --------------------- the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Controller. ARTICLE VII CONTRACTS, INSTRUMENTS AND PROXIES Section 51. Contracts and Other Instruments. Except as otherwise required by ------------------------------- applicable law, the Certificate of Incorporation or these By-Laws, any contracts or other instruments may be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile. Such authority may be general or confined to specific instances as the Board of Directors or such officer or officers may determine. Section 52. Proxies. Except as otherwise provided by resolution of the Board ------- of Directors, any officer of the Corporation shall each have full power and authority, in behalf of the Corporation, to exercise any and all rights of the Corporation with respect to any meeting of stockholders of any corporation in which the Corporation holds stock, including the execution 12 and delivery of proxies therefor, and to consent in writing to action by such corporation without a meeting. ARTICLE VIII CAPITAL STOCK Section 53. Stock Certificates; Book-Entry Accounts. The interest of each --------------------------------------- stockholder of the Corporation shall be evidenced by (a) certificates signed by, or in the name of the Corporation by, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer or the Treasurer, and by the Secretary or any Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation, or (b) registration in book-entry accounts without certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. Any of or all the signatures on a stock certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 54. Record Ownership. The Corporation shall be entitled to treat the ---------------- person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Corporation shall have notice thereof, except as otherwise provided by applicable law. Section 55. Record Dates. In order that the Corporation may determine the ------------ stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. Section 56. Transfer of Stock. Transfers of shares of stock of the ----------------- Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by the registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon, or by appropriate book-entry procedures. Section 57. Lost, Stolen or Destroyed Certificates. The Board of Directors -------------------------------------- may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of 13 Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 58. Terms of Preferred Stock. The provisions of these By-Laws, ------------------------ including those pertaining to voting rights, election of directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation, any Preferred Stock Designation and in any resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of directors which shall constitute the Whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional directors as and to the extent specifically provided by the provisions of such Preferred Stock. ARTICLE IX INDEMNIFICATION Section 59. Right of Indemnification Generally. ---------------------------------- (a) Directors, Officers, Employees and Agents. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, limited liability company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), and any other applicable laws as presently or hereafter in effect, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that except as provided in Section 60 below, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. (b) Contract Right. The right to indemnification conferred in this Article IX shall be a contract right. 14 Section 60. Written Request; Determination of Entitlement. To obtain --------------------------------------------- indemnification under this Article IX, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made, at the option of the person seeking indemnification, by the directors as set forth in the General Corporation Law of the State of Delaware or by independent legal counsel selected by such person with the consent of the Corporation (which consent shall not unreasonably be withheld). Section 61. Recovery of Unpaid Claim. If a claim under Section 59 above is ------------------------ not paid in full by the Corporation within 60 days after a written claim pursuant to Section 60 above has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than actions brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 62. Exclusivity; Subsequent Modification. The right to ------------------------------------ indemnification conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or directors or otherwise. No repeal or modification of this Article IX shall in any way diminish or adversely affect the rights hereunder of any director, officer, employee or agent in respect of any occurrence or matter arising prior to any such repeal or modification. Section 63. Insurance. The Corporation may maintain insurance, at its --------- expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, limited liability company, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware or otherwise. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director, officer, employee or agent shall be covered 15 by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. Section 64. Other Indemnification Rights. The Corporation may, to the extent ---------------------------- authorized from time to time by the Board of Directors, grant additional rights to indemnification, including rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the Corporation to the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment). Section 65. Illegality; Unenforceability. If any provision or provisions of ---------------------------- this Article IX shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Article IX (including, without limitation, each portion of any Section or subsection of this Article IX containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Article IX (including, without limitation, each such portion of any Section or subsection of this Article IX containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall be construed so as give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 66. Form and Delivery of Communications. Any notice, request or ----------------------------------- other communication required or permitted to be given to the Corporation under this Article IX shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation. ARTICLE X MISCELLANEOUS Section 67. Corporate Seal. The seal of the Corporation shall be circular in -------------- form, containing the words "Varian, Inc." and the word "Delaware" on the circumference surrounding the word "Seal." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 68. Fiscal Year. The fiscal year of the Corporation is the 51- to ----------- 53-week period that ends on the Friday nearest September 30. Section 69. Auditors. The Board of Directors shall select certified public -------- accountants to audit the books of account and other appropriate corporate records of the Corporation annually and at such other times as the Board of Directors shall determine by resolution. 16 Section 70. Waiver of Notice. Whenever notice is required to be given ---------------- pursuant to applicable law, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these By-Laws. ARTICLE XI AMENDMENT TO BY-LAWS Section 71. Amendments. These By-Laws may be amended or repealed, or new By- ---------- Laws may be adopted, at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than 24 hours prior to the meeting; provided, however, that in the case of amendment, repeal or adoption by stockholders, notwithstanding any other provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock required by applicable law, the Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 66?% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required for the stockholders to adopt, amend or repeal any provision of these By-Laws. 17 EX-10.1 6 EMPLOYEE BENEFITS ALLOCATION AGREEMENT EXHIBIT 10.1 - -------------------------------------------------------------------------------- EMPLOYEE BENEFITS ALLOCATION AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of April 2, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS...................................................................................... 1 Section 1.01. Definitions...................................................................... 1 ARTICLE II GENERAL EMPLOYMENT MATTERS....................................................................... 2 Section 2.01. General Obligations.............................................................. 2 Section 2.02. Initial Compensation of Active Employees......................................... 2 Section 2.03. No Additional Employment Rights Created.......................................... 2 Section 2.04. Corporate and Transition Employees............................................... 2 Section 2.05. Retiree Payments................................................................. 3 ARTICLE III UNITED STATES RETIREMENT AND PROFIT-SHARING PLAN BENEFITS........................................ 3 Section 3.01. Varian Associates, Inc. Retirement and Profit-Sharing Program.................... 3 Section 3.02. Establishment of Varian Semiconductor Equipment Associates, Inc. Defined Contribution Plan................................................................ 3 Section 3.03. Establishment of Varian, Inc. Defined Contribution Plan.......................... 3 Section 3.04. Reimbursement and Indemnification................................................ 4 ARTICLE IV EMPLOYEE BENEFITS MATTERS OUTSIDE THE UNITED STATES.............................................. 4 Section 4.01. Employee Benefits Matters Outside the United States.............................. 4 ARTICLE V EXECUTIVE COMPENSATION........................................................................... 5 Section 5.01. Supplemental Retirement Plan..................................................... 5 Section 5.02. Management Incentive Plan........................................................ 5 Section 5.03. Long-Term Incentives............................................................. 5 Section 5.04. Deferred Cash Compensation....................................................... 5 Section 5.05. Restricted Stock Program......................................................... 5 Section 5.06. Options.......................................................................... 5 Section 5.07. Restricted Stock................................................................. 7 ARTICLE VI WELFARE BENEFITS................................................................................. 7 Section 6.01. Welfare Plans.................................................................... 7 Section 6.02. Allocation and Discharge of Welfare Plan Liabilities............................. 7 ARTICLE VII GENERAL.......................................................................................... 7 Section 7.01. Post-Distribution Administration of Plans........................................ 7 Section 7.02. Costs and Expenses............................................................... 7 Section 7.03. Sharing of Participant Information............................................... 8 ARTICLE VIII INDEMNIFICATION.................................................................................. 8 Section 8.01. Rights and Obligations........................................................... 8 ARTICLE IX DISPUTE RESOLUTION............................................................................... 8 Section 9.01. Distribution Agreement to Control................................................ 8
-i- TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE X MISCELLANEOUS..................................................................................... 8 Section 10.01. Complete Agreement; Construction.................................................... 8 Section 10.02. Other Agreements.................................................................... 8 Section 10.03. Counterparts........................................................................ 8 Section 10.04. Survival of Agreements.............................................................. 8 Section 10.05. Expenses............................................................................ 8 Section 10.06. Notices............................................................................. 9 Section 10.07. Waivers............................................................................. 10 Section 10.08. Amendments.......................................................................... 10 Section 10.09. Assignment.......................................................................... 10 Section 10.10. Successors and Assigns.............................................................. 10 Section 10.11. Termination......................................................................... 10 Section 10.12. No Third Party Beneficiaries........................................................ 10 Section 10.13. Titles and Headings; Interpretation................................................. 10 Section 10.14. Governing Law....................................................................... 10 Section 10.15. Severability........................................................................ 10
-ii- EMPLOYEE BENEFITS ALLOCATION AGREEMENT THIS EMPLOYEE BENEFITS ALLOCATION AGREEMENT is made and entered into as of this 2nd day of April, 1999 by and among Varian Associates, Inc., a Delaware corporation ("Varian" or "HCS"), Varian Semiconductor Equipment Associates, Inc., a Delaware corporation ("SEB"), and Varian, Inc., a Delaware corporation ("IB"). WHEREAS, pursuant to the terms of that certain Amended and Restated Distribution Agreement by and among Varian, SEB and IB and dated as of January 14, 1999 (the "Distribution Agreement"), the parties have entered into this Agreement regarding certain employment, compensation and benefit matters occasioned by the Distributions. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement and the Distribution Agreement, each of the parties hereto, on behalf of itself and each other member of its Group, hereby agrees as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. The following terms, when capitalized herein, ----------- shall have the meanings set forth below in this Article I. All other capitalized terms which are used but are not otherwise defined herein shall have the meanings ascribed to them in the Distribution Agreement. "Active Employees" means, with respect to each Group, all employees ---------------- actively engaged in and primarily dedicated to the performance of services to, for or on behalf of any member of such Group as of the Effective Time, including any employee who is not actively performing services because of (a) PPL, (b) leave of absence, or (c) disability, and the dependents of such persons (and, as applicable, the alternate payees of such persons). "Active Employees" includes, with respect to a Group, non-employee directors of Varian Associates, Inc. providing services as a director to any member of the Group as of the Effective Time. "Corporate Employees" means (a) the Non-Designated United States ------------------- Former Employees and (b) the United States Active Employees who have been or will be separated from employment in connection with the Distribution and are listed on Schedule 1. "Former Employees" means all former employees and former non-employee ---------------- directors of Varian and/or its Subsidiaries as of the Effective Time (including, but not limited to, such employees who, as of the Effective Time, are (a) on disability, (b) in RIF status, (c) on salary continuation, or (d) within termination notice periods, and the dependents and, as applicable, the alternate payees, of those persons, and including retirees but excluding the Retirees). "Former Health Care Systems Employees" means Former Employees who, if ------------------------------------ they were actively engaged in and primarily dedicated to the performance of services to, for or on behalf of Varian or any of its Subsidiaries at the Effective Time, would be Active Employees of the Health Care Systems Group, determined on a basis consistent with the determination of the Active Employees of such Group. "Former Instruments Employees" means Former Employees who, if they ---------------------------- were actively engaged in and primarily dedicated to the performance of services to, for or on behalf of Varian or any of its Subsidiaries at the Effective Time, would be Active Employees of the Instruments Group, determined on a basis consistent with the determination of the Active Employees of such Group. "Former Semiconductor Equipment Employees" means Former Employees who, ---------------------------------------- if they were actively engaged in and primarily dedicated to the performance of services to, for or on behalf of Varian or 1 any of its Subsidiaries at the Effective Time, would be Active Employees of the Semiconductor Equipment Group, determined on a basis consistent with the determination of the Active Employees of such Group, including without limitation persons who were employees of the Thin Film Systems business at the time of or prior to its disposition. "Non-Designated Foreign Employees" means (a) non-United States Former -------------------------------- Employees who are not Former Health Care System Employees, Former Instruments Employees or Former Semiconductor Equipment Employees and (b) non-United States Active Employees who are not primarily dedicated to a single Group and who will be terminated in connection with the Distribution. "Non-Designated United States Former Employees" means United States --------------------------------------------- Former Employees who are not Former Health Care System Employees, Former Instruments Employees or Former Semiconductor Equipment Employees. "Retirees" means J. Tracy O'Rourke, Robert A. Lemos, Joseph B. Phair, -------- Wayne P. Somrak, Ernest M. Felago, Derrel B. De Passe and James Hennessy, and the dependents and, as applicable, the alternate payees of such persons. "Transition Employees" means the Active Employees listed on Schedule -------------------- 2, but only during the period they are providing transition services. "Varian Welfare Plans" means, collectively, the Varian Business Travel -------------------- Accident Plan, the Varian Dental Plan, the Varian Dependent Care Assistance Plan, Varian Dependent Life Insurance, the Varian Disability Plan, the Varian HMO Plans, Varian Life and AD&D Insurance, the Varian Major Medical Plan, the Varian Out-of-Area Medical Plans, the Varian Personal Paid Leave Plan, the Varian Retiree Medical Plans and the Varian Vision Plan. ARTICLE II GENERAL EMPLOYMENT MATTERS Section 2.01. General Obligations. Except as specifically provided herein, ------------------- from and after the Distribution Date, each of HCS, SEB and IB shall, as applicable, cause each of the other members of its respective Group to (a) continue the employment of all of the Active Employees of its respective Group, subject, however to the terms of Section 2.03 below and (b) except as otherwise specifically provided herein, assume, pay, perform and discharge any and all labor, employment, compensation and benefit Liabilities with respect to all Active Employees of its respective Group. Except as otherwise specifically provided herein, (i) all labor, employment, compensation and benefit Liabilities with respect to Retirees, Corporate Employees and Transition Employees shall constitute Shared Liabilities, (ii) all labor, employment, compensation and benefits Liabilities with respect to Former Employees (other than Corporate Employees and Non-Designated Foreign Employees) shall constitute Liabilities of the respective Group, and (iii) all labor, employment, compensation and benefit Liabilities with respect to Non-Designated Foreign Employees shall constitute Liabilities of the entity that employed them at the time of their termination. Section 2.02. Initial Compensation of Active Employees. The initial base ---------------------------------------- salary or wage level of each Active Employee of each Group shall be no less than the base salary or wage level of such Active Employee immediately prior to the Distribution Date. Section 2.03. No Additional Employment Rights Created. Nothing in this --------------------------------------- Agreement shall give any Active Employee of any Group any right to continued employment by any member of that Group or any other Group beyond the Distribution Date, which is in addition to or supplemental to any such right he or she may have arising under contract or otherwise. Section 2.04. Corporate and Transition Employees. Costs associated with the ---------------------------------- termination or severance of Corporate Employees (but only those Corporate Employees listed on Schedule 1) and Transition Employees, 2 including the cost of any claim, suit or dispute relating to such severance or termination, shall constitute Transaction Expenditures. Section 2.05. Retiree Payments. All payments made to the Retirees pursuant ---------------- to their severance agreements shall constitute Transaction Expenditures. ARTICLE III UNITED STATES RETIREMENT AND PROFIT-SHARING PLAN BENEFITS Section 3.01. Varian Associates, Inc. Retirement and Profit-Sharing ----------------------------------------------------- Program. The active participation in the Varian Associates, Inc. Retirement and - ------- Profit-Sharing Program (the "Varian Profit-Sharing Plan") by persons other than the Active Employees of the Health Care Systems Group will cease, effective as of the Distribution Date. In addition, as of the Distribution Date, all members of the Semiconductor Equipment Group and all members of the Instruments Group will cease to be participating employers in the Varian Profit Sharing Plan and the members of the Health Care Systems Group will become the only participating employers in the Varian Profit-Sharing Plan. All payments to or on behalf of Active Employees and Former Employees under the Varian Profit-Sharing Plan with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 3.02. Establishment of Varian Semiconductor Equipment Associates, ----------------------------------------------------------- Inc.Defined Contribution Plan. - ----------------------------- (a) Varian Semiconductor Equipment Associates, Inc. DC Plan. SEB -------------------------------------------------------- will establish or make available, effective as of the Distribution Date, a defined contribution plan for the benefit of the United States Active Employees of the Semiconductor Equipment Group (the "SEB DC Plan"). (b) Transfer of Account Balances to Varian Semiconductor Associates, --------------------------------------------------------------- Inc. DC Plan. As promptly as practicable after the Distribution Date (but ------------ in no event later than December 31 of the second calendar year after the Distribution Date), HCS shall cause the trustee of the Varian Profit- Sharing Plan to transfer to the trustee of the SEB DC Plan, as a direct rollover, the account balance of those Active Employees of the Semiconductor Equipment Group who elect direct rollovers and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. In addition, at two times to be mutually agreed by the parties (but in no event later than 12 months following the Distribution Date), HCS shall cause the trustee of the Varian Profit-Sharing Plan to transfer to the trustee of the SEB DC Plan, as a direct rollover, the current balance of those Active Employees of the Semiconductor Equipment Group who elect to participate in such batch rollover and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. The trustee of the SEB DC Plan shall accept such rollovers in accordance with its standard procedures, except that the trustee shall accept the direct rollovers described in the preceding sentence on an in kind basis. Section 3.03. Establishment of Varian, Inc. Defined Contribution Plan. ------------------------------------------------------- (a) Varian, Inc. DC Plan. IB will establish or make available, -------------------- effective as of the Distribution Date, a defined contribution plan for the benefit of the United States Active Employees of the Instruments Group (the "IB DC Plan"). (b) Transfer of Account Balances to Varian, Inc. DC Plan. As promptly ---------------------------------------------------- as practicable after the Distribution Date (but in no event later than December 31 of the second calendar year after the Distribution Date), HCS shall cause the trustee of the Varian Profit-Sharing Plan to transfer to the trustee of the IB DC Plan as a direct rollover, the account balance of those Active Employees of the Instruments Group who elect direct rollovers and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. In addition, at two times to be mutually agreed by the parties (but in no event later than 12 months following the Distribution Date), HCS shall cause the trustee of the Varian Profit- Sharing Plan to transfer to the trustee of the IB DC Plan, as a direct rollover, the current balance of those Active Employees of the Instruments Group who elect to participate in such batch rollover and with 3 respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. The trustee of the IB DC Plan shall accept such rollovers in accordance with its standard procedures, except that the trustee of the IB DC Plan shall accept the direct rollovers described in the preceding sentence on an in kind basis. Section 3.04. Reimbursement and Indemnification. IB and SEB, respectively, --------------------------------- shall assume all direct and indirect administrative costs associated with the Varian Profit-Sharing Plan with respect to Active Employees of the Instruments Group and the Semiconductor Equipment Group, respectively, which would otherwise be borne by HCS, and such costs shall constitute Instruments Liabilities and Semiconductor Equipment Liabilities, respectively. All direct and indirect administrative costs associated with the Varian Profit-Sharing Plan with respect to Former Employees of each Group shall constitute Liabilities of that Group. All direct and indirect administrative costs associated with the Varian Profit Sharing Plan with respect to Retirees, Corporate Employees and Transition Employees shall constitute Shared Liabilities. ARTICLE IV EMPLOYEE BENEFITS MATTERS OUTSIDE THE UNITED STATES Section 4.01. Employee Benefits Matters Outside the United States. --------------------------------------------------- (a) Assets and Liabilities. With respect to the business and ---------------------- operations of each Group in jurisdictions outside the United States, each of the parties hereto shall (and, as applicable, shall cause each other member of its Group over which it has direct or indirect legal or effective control to) assume, or retain, as the case may be, any and all employee benefits Liabilities and attendant plans and their assets related to the Active Employees of its Group. (b) Later-Transferred Businesses. To the extent that one or more of ---------------------------- the Corporate Reorganization Transactions has not been consummated at or before the Distribution Date, the party then retaining the Assets and Liabilities of, or ownership of the Subsidiary or business intended to be conveyed, directly or indirectly, to another party in connection with such Corporate Reorganization Transaction (a "Later-Transferred Business") shall, and shall cause each of the other members of its respective Group to continue the employment of the Active Employees of the Later-Transferred Business (subject to Section 2.03) and pay, perform and discharge any and all labor, employment, compensation and benefit Liabilities with respect to such Active Employees, in each case, at the expense of the party to whom the Later-Transferred Business is to be conveyed under the Distribution Agreement, until the Corporate Reorganization Transaction is effected. The party retaining the Later-Transferred Business shall take such actions as may be reasonably requested by the party to whom the Later-Transferred Business is to be conveyed. (c) Underfunded Defined Benefit Pensions. If any non-United States ------------------------------------ defined benefit pension plan or program is determined to be underfunded using generally accepted actuarial principles, each Group shall pay its proportionate share of (i) the Liabilities and (ii) its share of any Shared Liabilities with respect to such underfunding, which proportionate share shall be calculated on the basis of an actuarial determination (using generally accepted actuarial principles) taking into account all current or former employees of that Group participating in the plan or program at the time of such determination. 4 ARTICLE V EXECUTIVE COMPENSATION Section 5.01. Supplemental Retirement Plan. At or promptly after the ---------------------------- Distribution Date, Varian Associates, Inc. will distribute the account balances existing as of the Distribution Date of all current and former participants in the Supplemental Retirement Plan of Varian Associates, Inc. (the "SRP"). Such distributions shall constitute Transaction Expenditures. As of the Distribution Date, only Active Employees of the Health Care Systems Group will be eligible to accrue benefits under the SRP. Section 5.02. Management Incentive Plan. None of the Active Employees of ------------------------- the Semiconductor Equipment Group or the Instruments Group will accrue any benefits under the Varian Associates, Inc. Management Incentive Plan (the "MIP") from and after the Distribution Date. All payments made under the MIP to United States employees with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 5.03. Long-Term Incentives. None of the Active Employees of the -------------------- Semiconductor Equipment Group or the Instruments Group will accrue any benefits under the "long-term incentive" feature ("LTI") of the Varian Associates, Inc. Omnibus Stock Plan from and after the Distribution Date. All payments made under the LTI to United States employees with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 5.04. Deferred Cash Compensation. At or promptly after the -------------------------- Distribution Date, all deferred cash compensation with respect to pre- Distribution service of current and former employees and non-employee directors will be distributed. Such distributions shall constitute Transaction Expenditures. Section 5.05. Restricted Stock Program. None of the Active Employees of ------------------------ the Semiconductor Equipment Group or the Instruments Group will receive grants of restricted stock under the "restricted stock program" of the Varian Associates, Inc. Omnibus Stock Plan from and after the Distribution Date. Section 5.06. Options. SEB and IB have established, respectively, the ------- Varian Semiconductor Equipment Associates, Inc. Omnibus Stock Plan (the "SEB Stock Plan") and the Varian, Inc. Omnibus Stock Plan (the "IB Stock Plan"). For purposes of this Section 5.06, if the markets upon which VAI Common Stock, HCS Common Stock, IB Common Stock or SEB Common Stock are open for trading on the Distribution Date but no trade is made, the average of the last high bid and the last low ask price reported on the Distribution Date shall govern with respect to the Common Stock so affected. If such markets are not open for trading on the Distribution Date, then the closing prices of the VAI Common Stock, the HCS Common Stock, the IB Common Stock and the SEB Common Stock on the trading day immediately preceding the Distribution Date shall govern (unless there is no trade on such date, in which case the average of the last high bid and the last low ask price reported on such date shall govern with respect to the Common Stock so affected). (a) Active Employees of HCS. Effective as of the Distribution Date, ----------------------- all outstanding options in respect of VAI Common Stock ("Current Options") held immediately prior to the Effective Time by Active Employees of the Health Care Systems Group (other than non-employee directors of Varian Associates, Inc.) will be adjusted as follows to reflect the Distributions ("Adjusted Options"): The option exercise price for Adjusted Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of HCS Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of HCS Common Stock subject to an Adjusted Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of HCS Common Stock on the Distribution Date. Adjusted Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. 5 (b) Active Employees of IB. Effective as of the Distribution Date, ---------------------- Current Options held immediately prior to the Effective Time by Active Employees of the Instruments Group (other than non-employee directors of Varian Associates, Inc.) who so elect prior to the Distribution Date will be replaced with substitute options in respect of IB Common Stock ("Spinoff IB Options"). The option exercise price for Spinoff IB Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of IB Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of IB Common Stock subject to a Spinoff IB Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of IB Common Stock on the Distribution Date. Active Employees of IB who do not elect to receive Spinoff IB Options will receive Adjusted Options, which will terminate pursuant to their terms. Spinoff IB Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (c) Active Employees of SEB. Effective as of the Distribution Date, ----------------------- Current Options held immediately prior to the Effective Time by Active Employees of the Semiconductor Group (other than non-employee directors of Varian Associates, Inc.) who so elect prior to the Distribution Date will be replaced with substitute options in respect of SEB Common Stock ("Spinoff SEB Options" and, together with Spinoff IB Options, "Spinoff Options"). The option exercise price for Spinoff SEB Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of SEB Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of SEB Common Stock subject to a Spinoff SEB Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of SEB Common Stock on the Distribution Date. Active Employees of SEB who do not elect to receive Spinoff SEB Options will receive Adjusted Options, which will terminate pursuant to their terms. Spinoff SEB Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (d) Retirees. Effective as of the Distribution Date, Current Options held -------- immediately prior to the Effective Time by Retirees will be replaced with options in respect of each of HCS Common Stock, IB Common Stock and SEB Common Stock ("Converted Options"). The option exercise price and number of shares subject to Converted Options will be calculated by subjecting 1/3 of the shares subject to the relevant Current Option to each of the calculations described above for Adjusted Options, Spinoff IB Options and Spinoff SEB Options. Current Options held by Retirees will be fully vested as of the Effective Time . (e) Non-Employee Directors. Effective as of the Distribution Date, ---------------------- Current Options held by non-employee directors of Varian Associates, Inc. who so elect prior to the Distribution Date will be exchanged for Converted Options. Non-employee directors of Varian Associates, Inc. who do not elect to receive Converted Options will receive Adjusted Options. Converted Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (f) Former Employees. Effective as of the Distribution Date, Current ---------------- Options held immediately prior to the Effective Time by Former Employees not terminated in connection with the Distributions will be replaced with Adjusted Options. (g) Employees Terminated in Connection with the Distributions. Effective --------------------------------------------------------- as of the Distribution Date, Current Options held by Former Employees whose employment is terminated on or before the Distribution Date in connection with the Distributions (as determined by the employer) and who so elect will be replaced with Converted Options. Options held by Active Employees whose employment terminates after the Distribution Date but in connection with the Distributions (as determined by the employer) and who so elect will be replaced with options in respect of each of HCS, IB and SEB. The 6 number and exercise price of such options shall be calculated consistent with the principles governing Converted Options, using the respective prices as of the Distribution Date. Current Options and Adjusted Options held by employees whose employment was or is terminated in connection with the Distributions and who elect a conversion pursuant to this Section 5.06(g) will be fully vested as of the Effective Time or, if later, the employee's final work day. Current Options and Adjusted Options held by employees whose employment was or is terminated in connection with the Distributions but who do not elect a conversion pursuant to this Section 5.06(g) will terminate according to their terms without any accelerated vesting of Current Options or Adjusted Options not vested as of the Distribution Date or the employee's last work day, as applicable. (h) Transition Employees Transferred Subsequent to the Distributions. ---------------------------------------------------------------- Transition Employees transferred from employment with HCS, IB or SEB to employment with another of HCS, IB or SEB following the Distribution who so elect will have their Adjusted Options or Spinoff Options replaced with options in the entity to which they are transferred. The number and exercise price of such options shall be calculated consistent with the principles governing Spinoff Options, using the respective prices as of the Distribution Date. (i) Survivors of Former Employees. Effective as of the Distribution Date, ----------------------------- persons who hold Current Options granted to Former Employees who are deceased as of the Effective Time will receive Converted Options, if the holder so elects. Holders who do not so elect will receive Adjusted Options. Section 5.07. Restricted Stock. All unvested Restricted Stock held by ---------------- employees and non-employee directors of the Health Care Systems Group, the Semiconductor Equipment Group and the Instruments Group shall be fully vested immediately prior to the Distributions. ARTICLE VI WELFARE BENEFITS Section 6.01. Welfare Plans. As of the Effective Time, HCS shall serve ------------- as the sole sponsor of the Varian Welfare Plans from and after the Distribution Date. Section 6.02. Allocation and Discharge of Welfare Plan Liabilities. As ---------------------------------------------------- of the Effective Time, all Liabilities under the Varian Welfare Plans (including administrative expenses) with respect to Active Employees of the Semiconductor Equipment Group and Former Semiconductor Equipment Employees shall be assumed by the Semiconductor Equipment Group and shall constitute Semiconductor Equipment Liabilities. As of the Effective Time, all Liabilities (including administrative expenses) under the Varian Welfare Plans with respect to Active Employees of the Instruments Group and Former Instruments Employees shall be assumed by the Instruments Group and shall constitute Instruments Liabilities. As of the Effective Time, all Varian Welfare Plan Liabilities (including administrative expenses) with respect to Active Employees of the Health Care Systems Group and Former Health Care Systems Employees shall constitute Health Care Systems Liabilities. As of the Effective Time, all Varian Welfare Plan Liabilities with respect to (a) Retirees, (b) Corporate Employees and (c) Transition Employees shall constitute Shared Liabilities. ARTICLE VII GENERAL Section 7.01. Post-Distribution Administration of Plans. The parties ----------------------------------------- hereto will administer all plans consistently herewith, and to the extent necessary will amend their respective employee benefit plans accordingly. Section 7.02. Costs and Expenses. Each party shall bear all costs and ------------------ expenses, including but not limited to legal and actuarial fees, incurred from and after the Distribution Date in the design, drafting and implementation of any and all plans and compensation structures which it establishes or creates and the amendment of its existing plans or compensation structures. 7 Section 7.03. Sharing of Participant Information. From and after the ---------------------------------- Distribution Date, HCS, IB and SEB shall share, and shall cause each member of their respective Groups to share, with each other and with their respective agents and vendors all participant information necessary and appropriate for the efficient and accurate administration of each party's respective employee benefit plans and performance of their respective obligations under this Agreement. HCS, IB and SEB shall, subject to all applicable laws concerning confidentiality, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of another party, to the extent necessary and appropriate for such administration and performance. ARTICLE VIII INDEMNIFICATION Section 8.01. Rights and Obligations. Article VII of the Distribution ---------------------- Agreement shall govern the rights and obligations of HCS, IB, SEB and the members of their respective Groups with respect to indemnification for any and all Indemnifiable Losses related to the subject matter of this Agreement. The term "Third Party Claim" in that Article shall be read to include all claims or demands made by any Person who is not a party to this Agreement or a Subsidiary of the party concerning the subject matter of this Agreement. ARTICLE IX DISPUTE RESOLUTION Section 9.01. Distribution Agreement to Control. Any and all --------------------------------- controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in, Article IX of the Distribution Agreement. ARTICLE X MISCELLANEOUS Section 10.01. Complete Agreement; Construction. This Agreement, and the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. Section 10.02. Other Agreements. This Agreement is not intended to ---------------- address, and should not be interpreted to address, the matters expressly covered by the Distribution Agreement and/or the other Ancillary Agreements. Section 10.03. Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 10.04. Survival of Agreements. All covenants and agreements of ---------------------- the parties contained in this Agreement shall survive the Distribution Date except as expressly provided herein and shall not be merged into any other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. Section 10.05. Expenses. Except as otherwise expressly provided in this -------- Agreement or the Distribution Agreement, all costs and expenses incurred or accrued on or before the Distribution Date (whether or not paid on or 8 before the Distribution Date) in connection with the preparation, execution, delivery and implementation of this Agreement and the consummation of the transactions contemplated hereby shall be charged to and paid by Varian. Section 10.06. Notices. All Notices required or permitted under this ------- Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy (978) 281-3152 with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) 281-3152 or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. 9 Section 10.07. Waivers. The failure of any party to require strict ------- performance by any other party of any provision of this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof. Section 10.08. Amendments. This Agreement may be amended or supplemented, or its provisions waived, only by an agreement in writing signed by each of the parties. Section 10.09. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 10.10. Successors and Assigns. This Agreement shall be binding ---------------------- upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 10.11. Termination. This Agreement may be terminated at any time ----------- before the Distributions by Varian in its sole discretion without the approval of SEB or IB or the Varian stockholders. In the event of such termination, no party shall have any Liability of any kind to any other party. After the Distributions, this Agreement may not be terminated except by an agreement in writing signed by each of the parties. Section 10.12. No Third Party Beneficiaries. This Agreement is solely ---------------------------- for the benefit of the parties and the members of their respective Groups and Affiliates and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. Section 10.13. Titles and Headings; Interpretation. Titles and headings ----------------------------------- to sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, and Schedules shall be deemed references to Articles and Sections of, and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. Section 10.14. Governing Law. This Agreement shall be governed by, and ------------- construed and enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder, to the extent not preempted by the Employee Retirement Income Security Act of 1974. Section 10.15. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, of the application of such provision to Persons or circumstances other than those as to which it has held invalid," void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner adverse to any party. 10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By: /s/ Joseph B. Phair ------------------- Name: Joseph B. Phair Title: Secretary VARIAN ASSOCIATES, INC. By: /s/ Robert A. Lemos ------------------- Name: Robert A. Lemos Title: Vice President Finance and Chief Financial Officer VARIAN, INC. By: /s/ Arthur W. Homan ------------------- Name: Arthur W. Homan Title: Secretary 11 EX-10.2 7 INTELLECTUAL PROPERTY AGREEMENT DATED APRIL 2 1999 EXHIBIT 10.2 - -------------------------------------------------------------------------------- INTELLECTUAL PROPERTY AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of April 2, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS................................................................................ 1 Section 1.01. General................................................................................ 1 ARTICLE II OWNERSHIP OF INTELLECTUAL PROPERTY......................................................... 2 Section 2.01. General Principles of Allocation and Recognition....................................... 2 Section 2.02. Distribution of Rights................................................................. 3 Section 2.03. Rights Arising in Future............................................................... 4 Section 2.04. No Warranties.......................................................................... 4 Section 2.05. Recognition of Non-Party Rights........................................................ 4 Section 2.06. Effectuating Transfer of Rights........................................................ 5 Section 2.07. Limitations and Obligations in Jointly Owned Intellectual Property..................... 5 ARTICLE III CROSS LICENSING OF RIGHTS.................................................................. 5 Section 3.01. Grants by Varian....................................................................... 5 Section 3.02. Grants by IB........................................................................... 6 Section 3.03. Grants by SEB.......................................................................... 6 Section 3.04. Limitations of Rights.................................................................. 6 Section 3.05. Restrictions on Sublicensing........................................................... 6 ARTICLE IV TRADEMARKS OF VARIAN ASSOCIATES, INC....................................................... 6 Section 4.01. Grant of Licenses...................................................................... 6 Section 4.02. Protection of Licensed Property........................................................ 7 Section 4.03. Costs and Administration............................................................... 7 Section 4.04. Extending the Rights in the Marks...................................................... 7 Section 4.05. Reducing the Rights in the Marks....................................................... 7 Section 4.06. Non-use or Abandonment of the Marks.................................................... 7 Section 4.07. Limitations on Concurrent Use.......................................................... 8 Section 4.08. Notice and Publicity................................................................... 8 Section 4.09. Domain Name and Internet Hyperlinks.................................................... 8 Section 4.10. Duty to Avoid Confusion................................................................ 8 Section 4.11. Consent to Registration................................................................ 8 Section 4.12. Limitations on Sublicensing............................................................ 9 Section 4.13. Transition Period...................................................................... 9 ARTICLE V COVENANTS.................................................................................. 9 Section 5.01. Further Assurances..................................................................... 9 Section 5.02. Cooperation............................................................................ 9 Section 5.03. Intellectual Property Records.......................................................... 9 ARTICLE VI INDEMNIFICATION............................................................................ 9 Section 6.01. Rights and Obligations................................................................. 9
-i- TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE VII DISPUTE RESOLUTION........................................................................ 10 Section 7.01. Distribution Agreement to Control..................................................... 10 ARTICLE VIII MISCELLANEOUS............................................................................. 10 Section 8.01. Complete Agreement; Construction...................................................... 10 Section 8.02. Other Agreements...................................................................... 10 Section 8.03. Counterparts.......................................................................... 10 Section 8.04. Survival of Agreements................................................................ 10 Section 8.05. Expenses.............................................................................. 10 Section 8.06. Notices............................................................................... 10 Section 8.07. Waivers............................................................................... 11 Section 8.08. Amendments............................................................................ 11 Section 8.09. Assignment............................................................................ 12 Section 8.10. Successors and Assigns................................................................ 12 Section 8.11. Third Party Beneficiaries............................................................. 12 Section 8.12. Schedules............................................................................. 12 Section 8.13. Titles and Headings; Interpretation................................................... 12 Section 8.14. Governing Law......................................................................... 12 Section 8.15. Severability.......................................................................... 12 Section 8.16. Subsidiaries.......................................................................... 12 Exhibit A.......................................................................................................A-1
-ii- INTELLECTUAL PROPERTY AGREEMENT THIS INTELLECTUAL PROPERTY AGREEMENT (this "Agreement") is made and entered into as of this 2nd day of April, 1999, between and among VARIAN ASSOCIATES, INC., a Delaware corporation ("Varian"), VARIAN, INC., a Delaware corporation ("IB"), and VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC., a Delaware corporation ("SEB"). RECITALS WHEREAS, Varian, directly and through its Subsidiaries and Affiliates, currently owns various intellectual property rights used in connection with a number of businesses, which businesses are described in the Amended and Restated Distribution Agreement dated as of January 14, 1999, among Varian, IB and SEB (the "Distribution Agreement"); and WHEREAS, the parties have determined that this Agreement is appropriate in order to effectuate the purposes of the Distribution Agreement as described therein, and in order to promote a clear understanding of their respective intellectual property rights after the Distributions (as defined in the Distribution Agreement) contemplated thereby; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein and therein, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. General. Except for the defined terms set forth below, the ------- capitalized terms used in this Agreement have the meanings ascribed to them in Article I, Section 1.01 of the Distribution Agreement, except that for purposes of this Agreement the terms "HCS," "IB" and "SEB" shall include the other members of the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, respectively, unless the context otherwise requires. "Fields" means certain combinations of, or collectively, the product ------ markets of the Health Care Systems Business, the Instruments Business and the Semiconductor Equipment Business, as defined herein below. "Field of Health Care Systems" means the product markets to which the ---------------------------- Health Care Systems Business directs its marketing, sales, engineering, research and development efforts, to the extent described in paragraph 1 of Exhibit A. "Field of Instruments" means the product markets to which the Instruments -------------------- Business directs its marketing, sales, engineering, research and development efforts, to the extent described in paragraph 2 of Exhibit A. "Field of Semiconductor Equipment" means the product markets to which the -------------------------------- Semiconductor Equipment Business directs its marketing, sales, engineering, research and development efforts, to the extent described in paragraph 3 of Exhibit A. "HCS Intellectual Property" shall have the meaning set forth in Section ------------------------- 2.01(a). "IB Intellectual Property" shall have the meaning set forth in Section ------------------------ 2.01(b). "Infringement" means any unauthorized use or conduct in violation or ------------ derogation of the rights in question. "Intellectual Property" means the intellectual property rights owned, --------------------- licensed to or otherwise held by Varian, and its Subsidiaries and Affiliates, throughout the world, as of the Distribution Date, including, without limitation, all of the rights, title and interests in the following: (i) all United States and foreign patents, patent applications (including any continuations, continuation-in-part and divisionals), patent applications under preparation, invention disclosures and invention disclosures under preparation; (ii) all United States and foreign registered and unregistered copyrights and mask works, including applications and applications under preparation therefor; (iii) all United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor; (iv) all trade secrets, know-how, ideas, concepts, discoveries, improvements, processes, procedures, methods, recipes, formulae, data and specifications; (v) all product-related computer programs and other software (in executable or source code format), including operating software, applications, network software, firmware, middleware, design software, design tools, test and diagnostic software, systems configurations; and (vi) all documentation, schematics, drawings, designs, manuals, reports, records, instructions, studies, surveys, plans, books or other written materials (whether in hard copy or magnetic form) relating to or including any of the (i) through (v) above. "Residual Intellectual Property" shall have the meaning set forth in ------------------------------ Section 2.01(d). "SEB Intellectual Property" shall have the meaning set forth in Section ------------------------- 2.01(c). "Specified Intellectual Property" shall have the meaning set forth in ------------------------------- Section 2.01(e). ARTICLE II OWNERSHIP OF INTELLECTUAL PROPERTY Section 2.01. General Principles of Allocation and Recognition. ------------------------------------------------ (a) Without limiting any obligation or Liability of Varian under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, Varian (or another member of the Health Care Systems Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Health Care Systems Business or primarily in connection with the Health Care Systems Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Health Care Systems Business or in connection with the Health Care Systems Assets; (iii) was developed exclusively or primarily for the conduct of the Health Care Systems Business or in connection with the Health Care Systems Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Health Care Systems Business or in connection with the Health Care Systems Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Health Care Systems Business or in connection with the Health Care Systems Assets; and/or (vi) as of the Effective Time, is allocated to HCS by mutual agreement of the parties (collectively "HCS Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (b) or paragraph (c) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. 2 (b) Without limiting any obligation or Liability of IB under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, IB (or another member of the Instruments Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Instruments Business or primarily in connection with the Instruments Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Instruments Business or in connection with the Instruments Assets; (iii) was developed exclusively or primarily for the conduct of the Instruments Business or in connection with the Instruments Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Instruments Business or in connection with the Instruments Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Instruments Business or in connection with the Instruments Assets; and/or (vi) as of the Effective Time, is allocated to IB by mutual agreement of the parties (collectively "IB Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (a) or in paragraph (c) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. (c) Without limiting any obligation or Liability of SEB under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, SEB (or another member of the Semiconductor Equipment Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Semiconductor Equipment Business or primarily in connection with the Semiconductor Equipment Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (iii) was developed exclusively or primarily for the conduct of the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; and/or (vi) as of the Effective Time, is allocated to SEB by mutual agreement of the parties (collectively "SEB Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (a) or in paragraph (b) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. (d) Subject to the provisions of Section 2.01(a), (b) and (c) above, any Intellectual Property that: (i) did not originate primarily with the conduct of the business or primarily in connection with the Assets of any Group; (ii) was not obtained by, exclusively or primarily for the conduct of, any Group or in connection with the Assets of any Group; (iii) was not developed exclusively or primarily for the conduct of the business or in connection with the Assets of any Group; (iv) did not arise from funding by, exclusively or primarily for the benefit of any Group or in connection with the Assets of any Group; (v) is not used or held for use exclusively or primarily for the conduct of the business or in connection with the Assets of any Group as of the Effective Time; (vi) was not sold or transferred to a third party without the retention of any rights; and (vii) has not been allocated to one of the parties under this Agreement (the Intellectual Property satisfying each of the foregoing clauses (i)-(vii) hereinafter, collectively, "Residual Intellectual Property"), shall be jointly owned by the parties. (e) Notwithstanding the provisions in Section 2.01(a), (b), (c) and (d) above, effective as of the Effective Time, the parties acknowledge that joint ownership in the rights, title and/or interest in certain Intellectual Property specified in or pursuant to this Agreement may be held by two or more parties ("Specified Intellectual Property"). The Specified Intellectual Property may not be licensed, assigned or otherwise transferred by a first party having joint ownership rights therein to any competitor of a second party also having joint ownership rights therein without the prior written consent of such second party. Section 2.02. Distribution of Rights. ---------------------- (a) Varian hereby irrevocably transfers and assigns, effective as of the Effective Time, to IB the ownership of all rights, title and/or interest in the IB Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(a). In addition, Varian hereby irrevocably transfers and 3 assigns to IB, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(d), subject to the provisions of Section 2.07 below. (b) Varian hereby irrevocably transfers and assigns, effective as of the Effective Time, to SEB the ownership of all rights, title and/or interest in the SEB Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(b). In addition, Varian hereby irrevocably transfers and assigns to SEB, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(d), subject to the provisions of Section 2.07 below. (c) Varian hereby irrevocably retains, effective as of the Effective Time, the ownership of all rights, title and/or interest in the HCS Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(c), and subject to the provisions of Article IV below, in the "Varian" and "VA logo" trademarks. In addition, Varian hereby retains, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(d), subject to the provisions of Section 2.07 below. (d) Varian hereby irrevocably transfers and assigns to IB and SEB, and retains for itself, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Residual Intellectual Property, subject to the provisions of Section 2.07 below. By mutual written agreement at any time, the parties may re-designate any Residual Intellectual Property as being either HCS, IB or SEB Intellectual Property or as Specified Intellectual Property. Any party renouncing its undivided joint ownership rights in any Residual Intellectual Property in favor of another party or parties, through such written agreement shall have continuing license rights thereto pursuant to Article III. (e) Without limiting any obligation or Liability of any party under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Effective Time, all rights, title and/or interest in all Intellectual Property identified on Schedules 2.02(a) through (d) shall be owned solely or jointly by or vested in the party indicated therein. In the event that any party believes that certain Intellectual Property has been improperly designated to be either HCS Intellectual Property, IB Intellectual Property, SEB Intellectual Property, Residual Intellectual Property or Specified Intellectual Property, such party may seek the agreement of the other parties to a re-designation of such Intellectual Property or have the issue resolved pursuant to Article VII. (f) In the event of any inconsistency between Schedules 2.02 (a), (b), (c) and/or (d) and Section 2.01, the definitions set forth in Section 2.01 shall prevail. Section 2.03. Rights Arising in Future. Subject to the provisions of ------------------------ Article III below, after the Effective Time: (a) any and all intellectual property created by or on behalf of a party, including common-law rights related thereto, shall belong solely and exclusively to such party; and (b) any and all subsequent ownership, possession and use by each party of the Intellectual Property that it will own subsequent to the Distributions under the terms of this Agreement (excluding any possession or use pursuant to license granted by another party), including common-law rights related thereto, shall inure solely to such party's sole and exclusive benefit. Section 2.04. No Warranties. No party to this Agreement, the Distribution ------------- Agreement, or any other agreement contemplated herein or otherwise (notwithstanding anything to the contrary expressly provided in any Conveyancing and Assumption Instrument), is making any representation or warranty whatsoever regarding the Intellectual Property transferred, distributed or licensed under this Agreement, including, as to title, value or legal sufficiency thereof. Any and all Intellectual Property and related Assets transferred or retained by the parties, as the case may be, shall be "AS IS, WHERE IS". Section 2.05. Recognition of Non-Party Rights. The recognition among the ------------------------------- parties of the transfers of rights in the Intellectual Property under Sections 2.01 through 2.03 of this Agreement is subject to all pre-existing rights, obligations and restrictions of Persons that are not parties to this Agreement as of the 4 Effective Time. The provisions of Section 2.14 of the Distribution Agreement shall govern the rights and obligations of the parties with regard to obtaining any necessary Consents and taking other actions relating to such transfers of rights. Section 2.06. Effectuating Transfer of Rights. The parties shall execute ------------------------------- all such documents, and to take all such actions before, at and after the Effective Time, as may be necessary to achieve, perfect or confirm the respective ownership of rights in the Intellectual Property, as contemplated in this Article II. Section 2.07. Limitations and Obligations in Jointly Owned Intellectual --------------------------------------------------------- Property. - -------- (a) Each party shall have the unlimited right to use the Residual Intellectual Property and/or Specified Intellectual Property, as applicable, except to make, have made or sell competing products in the Fields of the other parties, as set forth in Article I above. (b) The parties shall share equally in all costs and fees, if any, associated with obtaining, perfecting and/or maintaining the Residual Intellectual Property and the Specified Intellectual Property, to the extent that each party has an ownership interest therein. The parties shall designate a party, by mutual agreement, to have administrative responsibility for tracking, coordinating and submitting payment of such costs and fees ("Designated Party"). The Designated Party that is responsible for a particular cost or fee shall deliver, at least forty-five (45) days before such cost or fee becomes due, an invoice to the other party or parties ("Invoiced Party") requesting submission of its or their share(s) of such cost or fee. The Invoiced Party shall have thirty (30) days from the date of the receipt to pay such invoice. If an Invoiced Party, at any time, does not pay in full the invoiced amount in a timely manner, the Designated Party shall send a written notice, by facsimile transmission or overnight mail, to such Invoiced Party requesting payment of such invoice within fifteen (15) business days. The failure by the Invoiced Party to make such payment shall constitute abandonment of all rights in the Residual Intellectual Property or Specified Intellectual Property relating to such payment and shall result in such rights shall be reapportioned equally between the remaining parties. If a Designated Party decides to abandon its rights in certain Residual Intellectual Property or Specified Intellectual Property for which it has administrative responsibility, such Designated Party shall provide the other parties with written notice of its decision at least sixty (60) days prior to the due date of any cost or fee, and the remaining parties shall confer to determine and thereafter designate the new Designated Party. The effect of such abandonment shall be to remove the restriction set forth in Section 2.07(a) above and to permit the other party, or parties, retaining rights in the Residual Intellectual Property or Specified Intellectual Property to enforce those rights against the abandoning party. (c) Each party shall be responsible for policing its rights in the Residual Intellectual Property and Specified Intellectual Property, as applicable, against Infringement in its respective Field, as set forth in Article I above. ARTICLE III CROSS LICENSING OF RIGHTS Section 3.01. Grants by Varian. ---------------- (a) Varian hereby grants to IB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the HCS Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Health Care Systems Business) to make, have made, use and sell products only in the Field of Instruments, subject to the provisions of this Article III. (b) Varian hereby grants to SEB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the HCS Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and 5 other marks, including applications and applications under preparation therefor, used primarily in the Health Care Systems Business) to make, have made, use and sell products only in the Field of Semiconductor Equipment, subject to the provisions of this Article III. Section 3.02. Grants by IB. ------------ (a) IB hereby grants to Varian a limited, non-exclusive, perpetual, royalty-free, worldwide license under the IB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Instruments Business) to make, have made, use and sell products only in the Field of Health Care Systems, subject to the provisions of this Article III. (b) IB hereby grants to SEB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the IB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Instruments Business) to make, have made, use and sell products only in the Field of Semiconductor Equipment, subject to the provisions of this Article III. Section 3.03. Grants by SEB. ------------- (a) SEB hereby grants to Varian a limited, non-exclusive, perpetual, royalty-free, worldwide license under the SEB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Semiconductor Equipment Business) to make, have made, use and sell products only in the Field of Health Care Systems, subject to the provisions of this Article III. (b) SEB hereby grants to IB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the SEB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Semiconductor Equipment Business) to make, have made, use and sell products only in the Field of Instruments, subject to the provisions of this Article III. Section 3.04. Limitations of Rights. Nothing in the foregoing grants of --------------------- license shall be construed as providing a grantee party the right to make, have made, use or sell any product that competes, directly or indirectly, with the products of a grantor party. Section 3.05. Restrictions on Sublicensing. The parties shall have no ---------------------------- right to sublicense to any third party the rights granted by another party pursuant to this Article III without the prior written consent of the grantor party, which consent shall not be unreasonably withheld. ARTICLE IV TRADEMARKS OF VARIAN ASSOCIATES, INC. Section 4.01. Grant of Licenses. ----------------- (a) Varian hereby grants to IB a limited, exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the "Varian" and "VA logo" trademarks in the Field of Instruments, subject to the provisions of this Article IV. 6 (b) Varian hereby grants to SEB a limited, exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the "Varian" and "VA logo" trademarks in the Field of Semiconductor Equipment, subject to the provisions of this Article IV. (c) Varian hereby retains a limited, exclusive, perpetual, [irrevocable,] royalty-free, worldwide right to use the name "Varian" and the "VA logo" trademarks in the Field of Health Care Systems, subject to the provisions of this Article IV. (d) After the Effective Time, each of Varian, IB and SEB shall possess the right to use the "Varian" name or "VA logo" standing alone or by itself for use on products, advertising or marketing purposes, etc., subject to the provisions of this Article IV. Section 4.02. Protection of Licensed Property. After the Effective Time, ------------------------------- each of Varian, IB and SEB shall use the "Varian" and "VA logo" trademarks (hereinafter the "Marks") in a manner that protects the goodwill and other rights associated therewith, that associates the Marks with high quality products, that avoids disparagement, dilution or otherwise adversely affects the validity of the Marks, and that is in accordance with the policies and guidelines established for the protection of that party's other trademarks. Each party shall be responsible for policing and preventing Infringement by third parties of the Marks in their respective Fields. Any party's failure to use the Marks in accordance with the foregoing or material failure to prevent Infringement by third parties shall be grounds for revocation of the rights granted in this Article IV, pursuant to the provisions of Article VII below. Section 4.03. Costs and Administration. The parties shall share equally in ------------------------ all costs and fees associated with maintaining the Marks, and Varian shall have the administrative responsibility for tracking, coordinating and submitting payments therefor. Varian shall deliver, at least forty-five (45) days before such costs or fees become due, an invoice to the other parties ("Invoiced Party") requesting submission of each party's share of such costs or fees. The Invoiced Party shall have thirty (30) days from the date of receipt to pay such invoice. If, at any time, an Invoiced Party does not pay, in full, the invoiced amount in a timely manner, Varian shall send a written notice, by facsimile transmission or overnight mail, to such Invoiced Party requesting payment of such invoiced amount within fifteen (15) business days. The failure by the Invoiced Party to make such payment shall constitute abandonment of all rights in the Marks. If Varian decides to abandon its rights in the Marks, Varian shall provide the other parties with written notice of its decision at least sixty (60) days prior to the due date that any cost or fee, and the remaining parties shall confer and determine which of IB or SEB shall be given the administrative responsibility for the Marks. The effect of such abandonment shall be to require the immediate cessation of all use of the Marks by the abandoning party. Section 4.04. Extending the Rights in the Marks. In the event that a party --------------------------------- desires to extend the rights in the Marks by registrations in additional countries or additional classes, or to add new goods to existing classes, such party shall, in writing, request that Varian seek such registrations. Varian shall comply with such request by engaging trademark counsel within thirty (30) days thereof, and such requesting party agrees to pay all costs and fees associated with such applications for registrations. Upon completion of the registrations, the maintenance costs and fees shall be governed by the provisions of Section 4.03 above. Section 4.05. Reducing the Rights in the Marks. The scope of rights in the -------------------------------- Marks may not be reduced, e.g., by abandoning registrations in certain countries or classes, without the mutual written consent of each party, which consent shall not be unreasonably withheld. Section 4.06. Non-use or Abandonment of the Marks. In the event that ----------------------------------- Varian, IB and/or SEB choose, for any reason, not to use any of the Marks for a period greater than one (1) year, such non-use shall constitute abandonment of such Marks and shall serve as the basis for revoking the rights granted therein by this Article IV. (a) If either IB or SEB abandons the Marks through non-use thereof, Varian shall provide the abandoning party with no less than thirty (30) days written notice of its intent to revoke such 7 party's rights to use such Marks. The noticed party may prevent such revocation by providing proof of its use within the past year or by resuming its use of any of the Marks within such thirty (30) day period, provided its use is on a continuous basis thereafter for not less than six (6) months. If, for any reason, Varian fails to provide such written revocation notice, either IB or SEB, as appropriate, may request, in writing, that Varian deliver such notice within fifteen (15) business days of receipt of such request. If Varian does not comply with such written request, either IB or SEB, as appropriate, shall have the right to provide such written revocation notice as the authorized agent of Varian. (b) If Varian abandons the Marks through non-use thereof, either IB or SEB may provide Varian with written notice requiring that Varian execute an assignment of the ownership rights in the Marks to either IB or SEB, as appropriate, within forty-five (45) days of receiving such notice. A copy of such notice shall be provided to the party not initiating the procedure set forth in this paragraph. Varian may prevent its loss of ownership rights in and rights to use the Marks by providing proof of its use of the Marks within the past year or by resuming its use of any of the Marks within thirty (30) days after receipt of such notice, provided its use is on a continuous basis thereafter for not less than six (6) months. If Varian refuses to execute such assignment of ownership, the ownership rights in the Marks shall automatically pass to either IB or SEB, as appropriate, as the party sending such notice. Section 4.07. Limitations on Concurrent Use. The parties shall not use the ----------------------------- Marks in the Fields of the other parties. Otherwise, the provisions in this Article IV shall in no way restrict the rights of the parties to sell any product or service or enter into any business identical or similar to any product or service sold, or business conducted by, the other parties before the Distribution Date, provided the Marks are not used, in any way, to describe or identify such product, service, or business. Section 4.08. Notice and Publicity. After the Distribution Date, the -------------------- parties will give or cause to be given, in each distinct geographic area or line of business in which they intend to operate or to sell any product or service, such notice and publicity of their separation and distinct identities as the source of any such business, product or service as may be reasonable under the circumstances or required by the relevant local law, where the local law imposes such a duty so to notify and/or publicize. Section 4.09. Domain Name and Internet Hyperlinks. The parties will ----------------------------------- mutually agree on the ownership of Internet domain name "www.varian.com." In any event, each of the parties shall provide and maintain on the "home page" of its internet or website, for a period of two (2) years after the Distribution Date, a hyperlink to the principal internet or website of the other two parties. Furthermore, each of the parties will cooperate reasonably in the identification of appropriate addresses and/or domain names and in resolving technical issues necessary to establish, design and maintain such hyperlinks. Section 4.10. Duty to Avoid Confusion. The parties confirm their belief ----------------------- that the likelihood of confusion will not result from the parties' use of the Marks, as provided for in this Agreement, due to the differences in the goods and services associated therewith and the differences in the customers to whom the goods and services are primarily offered and sold. The parties further believe that any potential future confusion will be prevented under the provisions of this Agreement. Furthermore, in order to enable and permit each other to continue using and to register their respective trademarks and to ensure that there is no confusion among them in any relevant marketplace, the parties will use commercially reasonable efforts to avoid actual or potential confusion arising from their use, to advise any other affected party of any instance of actual or potential confusion that comes to a party's attention concerning use of their respective trademarks, to take all such actions as may be necessary or appropriate to remedy any actual or potential confusion caused by their actions, and to cooperate with each other in good faith to avoid and prevent actual or potential confusion. Section 4.11. Consent to Registration. Subject to the other provisions of ----------------------- this Article IV, each party consents to the other parties' use of a copy of this Agreement to evidence the other parties' express consent to registration of the party's trademarks, if necessary to obtain or maintain a registration of such trademark in the United States Patent and Trademark Office or any other pertinent governmental agency in any country or group of countries; and further will take any other necessary action that any other party may reasonably request to express or confirm such consent. 8 Section 4.12. Limitations on Sublicensing. No party may sublicense any --------------------------- rights in the Marks to any non-Affiliated third party without the express written consent of the other parties. Section 4.13. Transition Period. During the longest time period set ----------------- forth in the schedules to the Transition Services Agreement, after the Distribution Date, the parties shall have the right to continue to use existing supplies of product brochures, marketing literature, letterhead stationary and other pre-printed materials that include the Marks and the names "Varian Associates" or "Varian Associates, Inc." After such period, the parties may continue to use existing supplies of product brochures, marketing literature, letterhead stationary and other pre-printed materials that include the Marks, provided such pre-printed materials do not cause misidentification as to the source thereof and/or confusion in the marketplace. ARTICLE V COVENANTS Section 5.01. Further Assurances. Without limiting the obligations of any ------------------ party under other Articles of this Agreement, each party shall use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, such instruments and documents and take, or cause to be taken, such further or other actions as any other party may reasonably request to effectuate the purposes of this Agreement and carry out the terms hereof. Section 5.02. Cooperation. Without limiting the obligations of any party ----------- under other Articles of this Agreement, each party shall reasonably cooperate with the other parties with respect to any filings with any Governmental Authority or any other actions reasonably necessary to perfect, maintain and enforce the rights to the Intellectual Property covered by this Agreement. Section 5.03. Intellectual Property Records. Without limiting the ----------------------------- oligation of any party under other Articles of this Agreement, each party shall provide each other party with access to Books and Records relating to Intellectual Property in its possession or control that were created before the Distributions, in accordance with and subject to Article VI of the Distribution Agreement. ARTICLE VI INDEMNIFICATION Section 6.01. Rights and Obligations. Article VII of the Distribution ---------------------- Agreement shall govern the rights and obligations of HCS, IB, SEB and the members of their respective Groups with respect to indemnification for any and all Indemnifiable Losses related to the Intellectual Property. The term "Health Care System Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by HCS or the HCS Subsidiaries under this Agreement. The term "Instruments Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by IB or the IB Subsidiaries under this Agreement. The term "Semiconductor Equipment Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by SEB or the SEB Subsidiaries under this Agreement. The term "Third Party Claim" in that Article shall be read to include all claims or demands made by any Person that is not a party to this Agreement or a Subsidiary thereof concerning the Intellectual Property, including claims for Infringement accruing or arising before the Distribution Date. Furthermore, no party shall be entitled to any indemnification under this Agreement, the Distribution Agreement, or any other agreement contemplated herein, by virtue of having used, practiced or applied the grants of license as provided by the other parties in Article III. 9 ARTICLE VII DISPUTE RESOLUTION Section 7.01. Distribution Agreement to Control. Any and all --------------------------------- controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in Article IX of the Distribution Agreement. ARTICLE VIII MISCELLANEOUS Section 8.01. Complete Agreement; Construction. This Agreement and the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. Section 8.02. Other Agreements. This Agreement is not intended to address, ---------------- and should not be interpreted to address, the matters expressly covered by the Distribution Agreement and/or the other Ancillary Agreements. Section 8.03. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 8.04. Survival of Agreements. All covenants and agreements of the ---------------------- parties contained in this Agreement shall survive the Effective Time except as expressly provided herein and shall not be merged into any other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. Section 8.05. Expenses. Except as otherwise expressly provided in this -------- Agreement or the Distribution Agreement, all costs and expenses incurred or accrued on or before the Distribution Date (whether or not paid on or before the Distribution Date) in connection with the preparation, execution, delivery and implementation of this Agreement and the consummation of the transactions contemplated hereby shall be charged to and paid by Varian. Except as otherwise provided in this Agreement, each party shall bear its own costs and expenses related to the Intellectual Property, including the performance of any obligation arising under Articles III, IV and V of this Agreement. Section 8.06. Notices. All Notices required or permitted under this ------- Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: 10 If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy: (978) 281-3152 with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) 281-3152 or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. Section 8.07. Waivers. The failure of any party to require strict ------- performance by any other party of any provision in or rights and remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. Section 8.08. Amendments. After the execution of this Agreement by all ---------- parties, and solely to the extent that a change is desired by and restricted to any two parties without affecting the licenses and rights of the third party hereto, such two parties may separately amend in writing any provision of this Agreement which governs the licenses and rights exchanged between them without notifying the third party hereto. 11 Except as expressly provided herein, this Agreement may be amended or supplemented or its provisions waived only by an agreement in writing signed by each of the parties. Section 8.09. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 8.10. Successors and Assigns. Subject to Section 8.08, this ---------------------- Agreement shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 8.11. Third Party Beneficiaries. This Agreement is solely for the ------------------------- benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and assigns and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Section 8.12. Schedules. The Schedules shall be construed with and as an --------- integral part of this Agreement to the same extent as if they had been set forth verbatim herein. Section 8.13. Titles and Headings; Interpretation. Titles and headings to ----------------------------------- sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. Section 8.14. Governing Law. This Agreement shall be governed by, and ------------- construed and enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitration of Agreement Disputes. Section 8.15. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner adverse to any party. Section 8.16. Subsidiaries. Each of the parties shall cause to be ------------ performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that is contemplated to be a Subsidiary of such party on and after the Distribution Date. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN ASSOCIATES, INC. By: /s/ Robert A. Lemos -------------------------- Name Robert A. Lemos Title: Vice President Finance and Chief Financial Officer VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By: /s/ Joseph B. Phair -------------------------- Name: Joseph B. Phair Title: Secretary VARIAN, INC. By: /s/ Arthur W. Homan -------------------------- Name: Arthur W. Homan Title: Secretary 13 EXHIBIT A --------- 1. For the purposes of the definition "Field of Health Care Systems," the product markets of the Health Care Systems Business are defined as those products, equipment, processes and services used in: (a) human, animal and cellular diagnostic and therapeutic applications using fluxes of energetic particles, including protons, photons, and electrons, or using thermal or acoustic energy; or (b) irradiation and imaging of objects with fluxes of electrons or photons for industrial, commercial and research uses; including, without limitation, applications within radiation oncology, radiotherapy, medical oncology, X-ray tube technology, vascular therapy, and imaging technology other than imaging by magnetic resonance phenomena. For the purposes of the definition "Field of Health Care Systems," the product markets for the Health Care Systems Business shall not include: (i) products or equipment used in the formation or measurement of pressures that are very low in relation to ambient; and (ii) products or equipment used in imaging and selective analysis through techniques of magnetic resonance phenomena or optical spectroscopy. 2. For the purposes of the definition "Field of Instruments Business," the product markets of the Instruments Business are defined as those products, equipment, processes and services used in: (a) analytical studies of compositions of matter and magnetic fields; (b) imaging and selective analysis through techniques of magnetic resonance phenomena or optical spectroscopy; (c) design and fabrication of printed circuit boards and circuit assembly; or (d) formation and measurement of pressures that are very low in relation to ambient; including, without limitation, applications within analytical chemistry, chromatographic sciences, vacuum technology, electronics manufacturing, magnetic resonance imaging and medical diagnostics. 3. For the purposes of the definition "Field of Semiconductor Equipment," the product markets of the Semiconductor Equipment Business are defined as those products, equipment, processes and services used in: (a) processing and manufacturing semiconductors; or (b) modifying the properties of materials other than biological molecules using fluxes of ions; including, without limitation, applications in ion implantation. For the purposes of the definition "Field of Semiconductor Equipment," the product markets shall not include equipment or components used in the formation or measurement of pressures that are very low in relation to ambient. A-1 EX-10.3 8 TAX SHARING AGREEMENT DATED APRIL 2 1999 EXHIBIT 10.3 TAX SHARING AGREEMENT among VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. and VARIAN, INC. TABLE OF CONTENTS
PAGE SECTION 1. Definition of Terms................................................................... 1 SECTION 2. Allocation of Tax Liabilities......................................................... 7 SECTION 3. Proration of Taxes for Straddle Periods............................................... 10 SECTION 4. Tax Contests.......................................................................... 10 SECTION 5. Tax Payments and Intercompany Billings................................................ 14 SECTION 6. Preparation and Filing of Tax Returns................................................. 17 SECTION 7. Assistance and Cooperation............................................................ 18 SECTION 8. Tax Records........................................................................... 19 SECTION 9. Effective Date; Termination of Prior Intercompany Tax Allocation Agreements........... 19 SECTION 10. No Inconsistent Actions............................................................... 19 SECTION 11. Survival of Obligations............................................................... 20 SECTION 12. Employee Matters...................................................................... 20 SECTION 13. Treatment of Payments; Tax Gross Up................................................... 20 SECTION 14. Disagreements......................................................................... 21 SECTION 15. Late Payments......................................................................... 21 SECTION 16. Expenses.............................................................................. 21 SECTION 17. Nonqualified Stock Options............................................................ 21 SECTION 18. General Provisions.................................................................... 21
-i- TAX SHARING AGREEMENT This Agreement is entered into as of April 2, 1999 by and among Varian Associates, Inc., a Delaware corporation, to be renamed Varian Medical Systems, Inc. ("Varian" or "HCS"), Varian, Inc., a Delaware corporation ("IB"), and Varian Semiconductor Equipment Associates, Inc., a Delaware corporation ("SEB"). Capitalized terms used in this Agreement are defined in Section 1 below. Unless otherwise indicated, all "Section" references in this Agreement are to sections of this Agreement. RECITALS WHEREAS, as of the opening of business on the date hereof, Varian was the common parent of an affiliated group of corporations, which has elected to file consolidated Federal income tax returns; and WHEREAS, Varian has been engaged through various divisions in, among other things, the Health Care Systems Business, the Instruments Business and the Semiconductor Equipment Business; and WHEREAS, the Board of Directors of Varian has determined that the interests of its businesses would be best served by separating its business into three separate companies, one consisting of the Health Care Systems Business, one consisting of the Instruments Business, and one consisting of the Semiconductor Equipment Business; and WHEREAS, as set forth in the Amended and Restated Distribution Agreement dated as of January 14, 1999, and subject to the terms and conditions thereof, Varian wishes (a) to transfer and assign to IB substantially all of the assets of the Instruments Business, in exchange for (i) the assumption by IB of substantially all the liabilities and obligations relating to the Instruments Business, and (ii) the issuance to Varian by IB of shares of IB common stock, and (b) to transfer and assign to SEB substantially all of the assets of the Semiconductor Equipment Business, in exchange for (i) the assumption by SEB of substantially all the liabilities and obligations relating to the Semiconductor Equipment Business, and (ii) the issuance to Varian by SEB of shares of SEB common stock, in transactions intended to be reorganizations under Section 368(a)(l)(D) of the Code; and WHEREAS, pursuant to the Distribution Agreement, Varian will distribute all of the outstanding shares of common stock of IB and SEB to Varian stockholders, in transactions intended to qualify as tax-free distributions under Section 355 of the Code; and WHEREAS, as a result of the Distributions, IB and SEB, and their respective subsidiaries, will cease to be members of the affiliated group of which Varian is the common parent, effective as of the Distribution Date; and WHEREAS, as of the Distribution Date, Varian will be renamed Varian Medical Systems, Inc.; and WHEREAS, the Companies desire to provide for and agree upon the allocation between and among the parties of liabilities for Taxes arising prior to, as a result of, and subsequent to the transactions contemplated by the Distribution Agreement, and to provide for and agree upon other matters relating to Taxes; NOW THEREFORE, in consideration of the mutual agreements contained herein, the Companies hereby agree as follows: SECTION 1. Definition of Terms. For purposes of this Agreement (including ------------------- the recitals hereof), the following terms have the following meanings: "Accounting Cutoff Date" means, with respect to each of HCS, IB and SEB, any date as of the end of which there is a closing of the financial accounting records for such entity. "Adjustment" means the deemed increase or decrease in a Tax, determined on an issue-by-issue or transaction-by-transaction basis, as appropriate, and using the assumptions set forth in the next sentence, resulting from an adjustment made or proposed by a Tax Authority with respect to any amount reflected or required to be reflected on any Tax Return. For purposes of determining such deemed increase or decrease in a Tax, the following assumptions will be used: (a) in the case of any Income Tax, the highest marginal Tax rate, or, in the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Tax Period or any portion of the Tax Period to which the adjustment relates, shall apply; and (b) such determination shall be made without regard to whether any actual increase or decrease in such Tax will in fact be realized with respect to the Tax Return to which such adjustment relates. "Adjustment Request" means any formal or informal claim or request filed with any Tax Authority, or with any administrative agency or court, for the adjustment, refund, or credit of Taxes, including (a) any amended Tax return claiming adjustment to the Taxes as reported on the Tax Return or, if applicable, as previously adjusted, or (b) any claim for refund or credit of Taxes previously paid, except for any claim for refund or credit arising from a carryback of an item from a Post-Distribution Period. "Affiliate" means any entity that directly or indirectly is "controlled" by the person or entity in question. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract or otherwise. Except as otherwise provided herein, the term Affiliate shall refer to Affiliates of a person as determined immediately after the Distributions. "Agreement" means this Tax Sharing Agreement. "Business" means any one of the Health Care Systems Business, the Instruments Business, or the Semiconductor Equipment Business. "Carryback" means any net operating loss, net capital loss, excess tax credit, or other similar Tax item which may or must be carried from one Tax Period to another Tax Period under the Code or other applicable Tax Law. "Closing Balance Sheet" means the HCS Adjusted Closing Balance Sheet, the IB Adjusted Closing Balance Sheet, or the SEB Adjusted Closing Balance Sheet, as the case may be. "Code" means the United States Internal Revenue Code of 1986, as amended, or any successor law. "Companies" means HCS, IB, and SEB, collectively, and "Company" means any one of HCS, IB or SEB. "Consolidated or Combined Income Tax" means any Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated or Combined State Income Tax" means any State Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated Return" means any Tax Return with respect to any Consolidated or Combined Income Tax. "Consolidated Tax Liability" means, with respect to any Varian Federal Consolidated Return, the "tax liability of the group" as that term is used in Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest, additions to the tax, additional amounts, and penalties as provided in the Code), provided that such tax liability shall be treated as including any alternative minimum tax liability under Code Section 55. "Controlling Party" means HCS or any other member of the Health Care Systems Group, IB or 2 any other member of the Instruments Group or SEB or any other member of the Semiconductor Equipment Group, as the case may be, that filed or, if no such Tax Return has been filed, was required to file, a Tax Return that is the subject of any Tax Contest, or any successor and/or assign of any of the foregoing; provided, however, that in the case of any Consolidated Return, the person that actually filed such Consolidated Return (or any successor and/or assign of such person) will be the Controlling Party. For purposes of this Agreement, each of HCS, IB or SEB may act as the Controlling Party with respect to all matters for which one of their Affiliates is the Controlling Party (e.g., for purposes of providing notices and receiving payments hereunder). "Correlative Adjustment" means, in the case of an Adjustment, the net present value of any future increases or decreases in a Tax that would be realized, using the assumptions set forth in the next sentence, by any member of the Health Care Systems Group, the Instruments Group, or the Semiconductor Equipment Group, as the case may be, in one or more Tax Periods (or any portion of a Tax Period) but only if such increases or decreases are a direct result of such an Adjustment to that Tax. For purposes of determining the net present value of any such future increases or decreases in a Tax, the following assumptions will be used: (i) a discount rate equal to the sum of the Prime Rate as of the date of the recomputation of Tax or the Final Determination relating to such Adjustment plus 2.0%; (ii) in the case of any Income Tax, the highest marginal Tax rate, or, in the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Tax Period, or portion of the Tax Period, in which the Adjustment was made; (iii) the depreciation, amortization or credit rate or lives, if applicable, in effect for the Tax Period, or portion of the Tax Period, in which the Adjustment was made; and (iv) such determination shall be made without regard to whether any actual increases or decreases in such Tax will in fact be realized with respect to the future Tax Returns to which such Correlative Adjustment relates. "Disputed Adjustment" has the meaning set forth in Section 4.04(b). "Distribution Agreement" means the agreement, as amended from time to time, setting forth the transactions required to effect the transfer of the Transferred Businesses to IB and SEB and the distribution to the holders of Varian common shares of all of the common shares of SEB and IB, and to which a form of this Tax Sharing Agreement is attached as an exhibit. "Distribution Date" means the Distribution Date, as that term is defined in the Distribution Agreement. "Distributions" means the SEB Distribution and the IB Distribution, as such terms are defined in the Distribution Agreement. "Federal Income Tax" means any Tax imposed by Subtitle A or F of the Code. "Final Determination" means the final resolution of liability for any Tax for any Tax Period, including any related interest or penalties, by or as a result of: (i) a final and unappealable decision, judgment, decree or other order by any court of competent jurisdiction; (ii) a closing agreement or accepted offer in compromise under Code Section 7121 or 7122, or comparable agreement under the laws of other jurisdictions which resolves the entire Tax liability for any Tax Period; (iii) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered by the jurisdiction imposing the Tax; or (iv) any other final disposition, including by reason of the expiration of the applicable statute of limitations. "Foreign Income Tax" means any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession, which is an income tax as defined in Treasury Regulation Section 1.901-2. "Group" means the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group, as the context requires. "HCS Adjusted Closing Balance Sheet" means the HCS Adjusted Closing Balance Sheet as that term is defined in the Distribution Agreement. 3 "Health Care Systems Business" means the Health Care Systems Business, as that term is defined in the Distribution Agreement. "HCS" means Varian Medical Systems, Inc., a Delaware corporation, and any successor. "Health Care Systems Group" means HCS and its Affiliates, excluding any entity that is a member of the Semiconductor Equipment Group or the Instruments Group. "IB Adjusted Closing Balance Sheet" means the IB Adjusted Closing Balance Sheet as that term is defined in the Distribution Agreement. "IB Distribution" means the IB Distribution, as that term is defined in the Distribution Agreement. "Income Tax" means any Federal Income Tax, State Income Tax, or Foreign Income Tax. "Indemnified Party" has the meaning set forth in Section 5.06(d). "Indemnifying Party" has the meaning set forth in Section 5.06(d). "Independent Auditors" means the Independent Auditors as that term is defined in the Distribution Agreement. "Independent Third Party" means a nationally recognized law firm or any of the following "Big Five" accounting firms or their successors: Arthur Andersen LLP, Ernst & Young LLP, KPMG Peat Marwick, Deloitte & Touche LLP, and PricewaterhouseCoopers LLP. "Initial Determination" has the meaning set forth in Section 4.05(b)(i). "IB" means Varian, Inc., a Delaware corporation, and any successor. "Instruments Business" means the Instruments Business, as that term is defined in the Distribution Agreement. "Instruments Group" means IB and its Affiliates as determined immediately after the Distributions. "Interested Party" means HCS or any other member of the Health Care Systems Group, IB or any other member of the Instruments Group or SEB or any other member of the Semiconductor Equipment Group (including any successor and/or assign of any of each of the foregoing), as the case may be, to the extent (a) such Person is not the Controlling Party with respect to a Tax Contest; and (b) such Person (i) may be liable for, or required to make, any indemnity payment, reimbursement or other payment pursuant to the provisions of this Agreement with respect to such Tax Contest; or (ii) may be entitled to receive any indemnity payment, reimbursement or other payment pursuant to the provisions of this Agreement with respect to such Tax Contest; provided, however, that in no event shall a member of either the Health Care Systems Group, the Instruments Group or the Semiconductor Equipment Group, as the case may be, be an Interested Party in a Tax Contest in which another member of its Group is the Controlling Party with respect to the Tax Contest. "Interested Party Notice" has the meaning set forth in Section 4.04(b). "IRS" means the United States Internal Revenue Service. "Payment Date" means (i) with respect to any Varian Federal Consolidated Return, the due date for any required installment of estimated taxes determined under Code Section 6655, the due date (determined without regard to extensions) for filing the return determined under Code Section 6072, and the date the return is 4 filed, and (ii) with respect to any Tax Return for any Consolidated or Combined State Income Tax, the corresponding dates determined under the applicable Tax Law. "Post-Distribution Period" means any Tax Period beginning after the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period beginning the day after the Distribution Date. "Pre-Distribution Consolidated Tax Liability" means Consolidated Tax Liability with respect to all Tax Periods ending on or prior to the Distribution Date and in the case of the Tax Period which includes the Distribution Date, the Consolidated Tax Liability computed as if the Distribution Date were the last day of the Tax Period. "Pre-Distribution Period" means any Tax Period ending on or before the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period ending on the Distribution Date. "Prime Rate" means the base rate on corporate loans charged by Citibank, N.A., New York, New York from time to time, compounded daily on the basis of a year of 365 or 366 (as applicable) days and actual days elapsed. "Prior Intercompany Tax Allocation Agreements" means any written or oral agreement or any other arrangements relating to allocation of Taxes existing between or among members of the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group as of the Distribution Date (other than this Agreement and other than any such agreement or arrangement between or among persons who are members of a single Group). "Responsible Company" means, with respect to any Tax Return, the Company having responsibility for preparing and filing such Tax Return under this Agreement. "Restructuring Tax" means the Income Taxes described in Section 2.05(a) (relating to Tax resulting from any income or gain recognized as a result of the Transactions). "Ruling Request" means the letter filed by Varian with the Internal Revenue Service requesting a ruling from the Internal Revenue Service regarding certain tax consequences of the Transactions (including all attachments, exhibits, and other materials submitted with such ruling request letter) and any amendment or supplement to such ruling request letter. "SEB Adjusted Closing Balance Sheet" means the SEB Adjusted Closing Balance Sheet, as that term is defined in the Distribution Agreement. "SEB Distribution" means the SEB Distribution, as that term is defined in the Distribution Agreement. "SEB" means Varian Semiconductor Equipment Associates, Inc., a Delaware corporation, and any successor. "Semiconductor Equipment Business" means the Semiconductor Equipment Business, as that term is defined in the Distribution Agreement. "Semiconductor Equipment Group" means SEB and its Affiliates as determined immediately after the Distributions. "Separate Company Tax" means any Tax computed by reference to the assets and activities of a member or members of a single Group. "Separation Committee" means the Separation Committee, as that term is defined in the Distribution Agreement. 5 "Sharing Percentage" shall mean one-third for the Health Care Systems Group, one-third for the Instruments Group, and one-third for the Semiconductor Equipment Group. "Significant Obligation" means, in the case of an Interested Party, and with respect to any Tax Detriment, an obligation to make or right to receive any indemnity payment, reimbursement or other payment with respect to any such Tax Detriment (including the effect of a Correlative Adjustment relating thereto) pursuant to the terms of the Agreement that is greater than $1,000,000. "State Income Tax" means any Tax imposed by any State of the United States or by any political subdivision of any such State which is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income. "Straddle Period" means any Tax Period that begins on or before and ends after the Distribution Date. "Subsidiary" shall have the meaning provided in the Distribution Agreement. "Tainting Act" shall have the meaning provided in Section 10. "Tax" or "Taxes" means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, registration, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax) imposed by any governmental entity or political subdivision thereof, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing. "Tax Authority" means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision. "Tax Benefit" means, with respect to any Tax Period or portion of a Tax Period, and as computed separately with respect to each Tax, the net decrease in each such Tax equal to the sum of all Adjustments (including the effect of any Correlative Adjustment relating thereto) with respect to each such Tax for each such Tax Period or portion of a Tax Period. "Tax Contest" means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes of any of the Companies or their Affiliates (including any administrative or judicial review of any claim for refund). "Tax Detriment" means, with respect to any Tax Period or portion of a Tax Period, and as computed separately with respect to each Tax, the net increase in such Tax equal to the sum of all Adjustments (including the effect of any Correlative Adjustment relating thereto) with respect to each such Tax for each such Tax Period or portion of a Tax Period. "Tax Item" means, with respect to any Income Tax, any item of income, gain, loss, deduction, and credit. "Tax Law" means the law of any governmental entity or political subdivision thereof relating to any Tax. "Tax Period" means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law. 6 "Tax Records" means Tax Returns, Tax Return workpapers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority. "Tax Return" means any report of Taxes due, any claims for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, or document required to be filed under the Code or other Tax Law, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing. "Transaction Tax" means the Taxes described in Sections 2.05(a) (relating to Tax incurred as a result of the Transactions), including any Restructuring Tax. "Transactions" means the transactions contemplated by the Distribution Agreement (including the Corporate Restructuring Transactions and Distributions, as defined in the Distribution Agreement). "Transferred Instruments Business" means the Instruments Business transferred to IB pursuant to the Distribution Agreement. "Transferred Semiconductor Equipment Business" means the Semiconductor Equipment Business transferred to SEB pursuant to the Distribution Agreement. "Treasury Regulations" means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Period. "Ultimate Determination" has the meaning set forth in Section 4.05(b)(iii). "Varian Federal Consolidated Return" means any United States federal Tax Return for the affiliated group (as that term is defined in Code Section 1504) that includes Varian as the common parent and includes any member of the Instruments Group or the Semiconductor Equipment Group. SECTION 2. Allocation of Tax Liabilities. The provisions of this Section 2 ----------------------------- are intended to determine each Company's liability for Taxes with respect to Pre-Distribution Periods and Post-Distribution Periods. Once the liability has been determined under this Section 2, Section 5 determines the time when payment of the liability is to be made, and whether the payment is to be made to the Tax Authority directly or to another Company. 2.01. General Rule. ------------ (a) HCS Liability. Health Care Systems shall be liable for, and ------------- shall indemnify and hold harmless the Semiconductor Equipment Group and the Instruments Group from and against any liability for Taxes, which are HCS's responsibility or which are allocated to HCS under this Section 2. (b) IB Liability. IB shall be liable for, and shall indemnify and ------------ hold harmless the Semiconductor Equipment Group and the Health Care Systems Group from and against any liability for Taxes, which are Instrument's responsibility or are allocated to IB under this Section 2. (c) SEB Liability. SEB shall be liable for, and shall indemnify and ------------- hold harmless the Health Care Systems Group and the Instruments Group from and against any liability for Taxes, which are SEB's responsibility or are allocated to SEB under this Section 2. 2.02. Responsibilities for United States Federal Income Tax. Except as ----------------------------------------------------- otherwise provided in this Agreement: (a) HCS. HCS (i) shall be responsible for all Pre-Distribution --- Consolidated Tax Liability, and (ii) shall be entitled to all refunds with respect thereto; provided, that HCS shall be responsible for or shall be 7 entitled to HCS's Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. (b) IB. IB shall be responsible for or shall be entitled to -- Instrument's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Pre-Distribution Consolidated Tax Liability. (c) SEB. SEB shall be responsible for or shall be entitled to SEB's --- Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Pre-Distribution Consolidated Tax Liability. 2.03. Allocation of State Income Taxes. Except as otherwise provided in -------------------------------- this Agreement, State Income Taxes shall be allocated as follows: (a) Separate Company Taxes. In the case of any State Income Tax ---------------------- which is a Separate Company Tax that is apportioned under this Agreement to a Pre-Distribution Period, except as otherwise provided in this Agreement, HCS (i) shall be liable (A) to IB for such Tax imposed on any member of the Instruments Group, and (B) to SEB for such Tax imposed on any member of the Semiconductor Equipment Group, and (ii) shall be entitled to all refunds with respect thereto; provided, that HCS shall be responsible for or shall be entitled to HCS's Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. IB shall be responsible for or shall be entitled to Instrument's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Separate Company Tax that is apportioned under this Agreement to a Pre-Distribution Period. SEB shall be responsible for or shall be entitled to SEB's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Separate Company Tax that is apportioned under this Agreement to a Pre- Distribution Period and shall be entitled to SEB's Sharing Percentage of any Tax Benefit with respect thereto. (b) Consolidated or Combined State Income Taxes. ------------------------------------------- (i) Allocation of Tax Reported on Tax Returns Filed After the --------------------------------------------------------- Distribution Date. Except as otherwise provided in this Agreement, ----------------- any Consolidated or Combined State Income Tax that is apportioned under this Agreement to a Pre-Distribution Period shall be allocated to the Health Care Systems Group. (ii) Allocation of Combined or Consolidated State Income Tax ------------------------------------------------------- Adjustments. HCS, IB and SEB shall each be responsible for or shall ----------- be entitled to their respective Sharing Percentages of any Tax Benefit or Tax Detriment resulting from any Adjustment relating to Consolidated or Combined State Income Tax reported on any Tax Return (or as previously adjusted) that is apportioned under this Agreement to a Pre-Distribution Period. 2.04. Allocation of Foreign Income Taxes and Other Taxes. Except as -------------------------------------------------- provided in Sections 2.05 and 2.07, all Taxes (including without limitation any Foreign Income Taxes and any Taxes with respect to Post-Distribution Periods) other than those specifically allocated pursuant to Sections 2.02 through 2.04 shall be allocated based on the legal entity on which the legal incidence of the Tax is imposed; provided, however, that (x) the amounts of any such Taxes (other than Income Taxes) specifically related to the business and assets transferred by Varian to SEB in the Transactions (the "Transferred Semiconductor Equipment Businesses") and which are accrued on the SEB Adjusted Closing Balance Sheet shall be allocated to SEB and the amounts of any such Taxes specifically related to the business and assets transferred by Varian to IB in the Transactions (the "Transferred Instruments Business") and which are accrued on the IB Adjusted Closing Balance Sheet shall be allocated to IB, and (y) each of the Companies shall be entitled to or shall be responsible for its respective Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any such Taxes (other than customs duties described in the immediately succeeding clause (z)), and (z) any underpayments, Adjustments, overpayments, refunds or drawbacks of customs duties shall be allocated to the Company whose Business bore such duties, in accordance with Varian's historical practices for allocating duties and duty drawbacks among the Businesses. Subject to the proviso in the preceding sentence, as between the parties to this Agreement, HCS shall be liable for all Taxes imposed on any member of the Health Care Systems Group, SEB shall be liable for all Taxes 8 imposed on any member of the Semiconductor Equipment Group and IB shall be liable for all Taxes imposed on any member of the Instruments Group. The Companies believe that there is no Tax not specifically allocated pursuant to Sections 2.02 through 2.04 relating to Pre-Distribution Periods which is legally imposed on more than one legal entity or is not solely allocable to the Transferred Semiconductor Equipment Businesses or the Transferred Instruments Business (e.g., joint and several liability); however, if there is any such Tax, it shall be allocated in accordance with past practices as reasonably determined by the affected Companies, or in the absence of such practices, in accordance with any allocation method agreed upon by the affected Companies. 2.05. Transaction Taxes. ----------------- (a) HCS Liability. Except as otherwise provided in this Section ------------- 2.05 or Section 2.07, all Taxes resulting from the Transactions ("Transaction Tax"), including: (i) any sales and use, gross receipts, or other transfer Taxes, or any Foreign Income Taxes, imposed on the transfers occurring pursuant to the Transactions; (ii) any Tax resulting from any income or gain recognized under Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions of other applicable Tax Laws of the United States or any political subdivision thereof) as a result of the Transactions; and (iii) any Tax resulting from any income or gain recognized as a result of any of the Transactions contemplated by the Distribution Agreement failing to qualify for tax-free treatment under Code Sections 332, 351, 355, 361, or other provisions of the Code (as contemplated in the Ruling Request) or other applicable Tax Laws of the United States or any political subdivision thereof; shall be allocated based on the legal entity on which the legal incidence of the Tax is imposed; provided, however, that except as otherwise provided in this Agreement each of the Companies shall be entitled to or shall be responsible for its respective Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. For purposes of this Section 2.05(a), the legal incidence of any Income Tax shall be determined without regard for Treasury Regulation Section 1.1502-6 or corresponding provisions of other Tax Laws. (b) Indemnity for Inconsistent Acts. IB shall be liable for, and ------------------------------- shall indemnify and hold harmless the Health Care Systems Group and the Semiconductor Equipment Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of Instrument's representations or covenants under Section 10 or any Tainting Act by IB or its Affiliates. SEB shall be liable for, and shall indemnify and hold harmless the Health Care Systems Group and the Instruments Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of SEB's representations or covenants under Section 10 or any Tainting Act by SEB or its Affiliates. HCS shall be liable for and shall indemnify and hold harmless the Semiconductor Equipment Group and the Instruments Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of HCS's representations or covenants under Section 10 or any Tainting Act by HCS or its Affiliates. 2.06. Tax Detriments and Benefits. In the case of any Adjustment for any --------------------------- Pre-Period or with respect to any Transaction Tax, each Group's liability for, and/or right to receive, the amount of any resulting Tax Detriment or Tax Benefit, as the case may be, shall be determined on a jurisdiction-by- jurisdiction basis such that each Group bears its respective Sharing Percentage of such Tax Detriment or Tax Benefit; provided, however, that in the event that there is any Correlative Adjustment with respect to any such Tax Detriment or Tax Benefit, then the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group shall share such Tax Detriment or Tax Benefit in the following manner in order to ensure that the party or parties that will bear the burden or receive the benefit of the Correlative Adjustment in the future will share the Tax Detriment or Tax Benefit in proportion to each of their respective Sharing Percentages after giving effect to such Correlative Adjustment: 9 (i) first, the amount of any such Tax Detriment or Tax Benefit shall be increased or decreased, as appropriate, by the amount of the Correlative Adjustment, the net amount resulting from such increase or decrease being hereinafter referred to as the "Net Adjustment" for purposes of this Section 2.06; (ii) second, the Net Adjustment shall be allocated among the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group in proportion to their respective Sharing Percentages, taking into account the extent each party is liable for and/or has an obligation to make, or has the right to receive, as the case may be, any payment to any Tax Authority or any indemnity payment, reimbursement, or other payment with respect to such Tax Detriment or Tax Benefit under this Agreement; and (iii) finally, with respect to a party to which a Correlative Adjustment is attributable, that party's share of the Net Adjustment as allocated pursuant to paragraph (ii) of this Section 2.06 will be increased or decreased, as appropriate, by the amount, if any, of the Correlative Adjustment that is attributable to such party in order to determine the amount of such party's share of the Tax Detriment or Tax Benefit. 2.07. Unanticipated Tax Amounts. In the event that for any Group, (a) ------------------------- Taxes shown as due on the initial Tax Returns filed with respect to any Taxes (or, in the case of Taxes that do not require the filing of a Tax Return, the amounts paid with respect to such Tax), in each case relating to Tax Periods or portions of Tax Periods ending on or before the Distribution Date, exceed (b) the aggregate amounts accrued with respect thereto on the Closing Balance Sheet for that Group (such excess an "Unanticipated Tax Amount"), by more than $1,000,000, the Company heading such Group may propose a sharing of the Unanticipated Tax Amount among the three Companies. If the affected Companies do not agree on a resolution, such proposal shall be referred to the Separation Committee under the procedures set forth in Section 9.01 of the Distribution Agreement. If the Separation Committee is not able to resolve the dispute within 30 days, the matter shall be treated as a balance sheet dispute and submitted to the Independent Auditors under the provisions of Section 9.03(b) of the Distribution Agreement. SECTION 3. Proration of Taxes for Straddle Periods. --------------------------------------- 3.01. General Method of Proration. In the case of any Straddle Period, Tax --------------------------- Items shall be apportioned between Pre-Distribution Periods and Post- Distribution Periods in accordance with the principles of Treasury Regulation Section 1.1502-76(b) as reasonably interpreted and applied by the Companies. No election shall be made under Treasury Regulation Section 1.1502-76(b)(2)(ii) (relating to ratable allocation of a year's items). If the Distribution Date is not an Accounting Cutoff Date, the provisions of Treasury Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably allocate the items (other than extraordinary items) for the month which includes the Distribution Date. 3.02. Transaction Treated as Extraordinary Item. In determining the ----------------------------------------- apportionment of Tax Items between Pre-Distribution Periods and Post- Distribution Periods, any Tax Item relating to the Transactions shall be treated as an extraordinary item described in Treasury Regulation Section 1.1502- 76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and any Taxes related to such items shall be treated under Treasury Regulation Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall be allocated to Pre-Distribution Periods. SECTION 4. Tax Contests. ------------ 4.01. Notification Of Tax Contests. The Controlling Party shall promptly ---------------------------- notify all Interested Parties of (a) the commencement of any Tax Contest pursuant to which such Interested Parties may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this Agreement; and (b) as required and specified in Section 4.04 hereof, any Final Determination made with respect to any Tax Contest pursuant to which such Interested Parties may be required to make or entitled to receive any indemnity payment, reimbursement or other payment under this Agreement. The failure of a Controlling Party to promptly notify any Interested Party as specified in the preceding sentence shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the 10 Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. 4.02. Tax Contest Settlement Rights. The Controlling Party shall have the ----------------------------- sole right to contest, litigate, compromise and settle any Adjustment that is made or proposed in a Tax Contest without obtaining the prior consent of any Interested Party; provided, however, that, unless waived by the parties in writing, the Controlling Party shall, in connection with any proposed or assessed Adjustment in a Tax Contest for which an Interested Party may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this Agreement (a) keep all such Interested Parties informed in a timely manner of all actions taken or proposed to be taken by the Controlling Party; and (b) provide all such Interested Parties with copies of any correspondence or filings submitted to any Tax Authority or judicial authority, in each case in connection with any contest, litigation, compromise or settlement relating to any such Adjustment in a Tax Contest. The failure of a Controlling Party to take any action as specified in the preceding sentence with respect to an Interested Party shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. The Controlling Party may, in its sole discretion, take into account any suggestions made by an Interested Party with respect to any such contest, litigation, compromise or settlement of any Adjustment in a Tax Contest. All costs of any Tax Contest are to be borne by the Controlling Party; provided, however, that (x) all reasonable external costs incurred by the Controlling Party in connection with any Tax Contest with respect to a Pre- Distribution Period or with respect to any Restructuring Tax are to be shared equally by HCS, SEB, and IB on an after-tax basis in the same manner as Tax Detriments are shared under this Agreement, (y) any costs related to an Interested Party's attendance at any meeting with a Tax Authority or hearing or proceeding before any judicial authority pursuant to Section 4.03 hereof shall be borne by such Interested Party, and (z) the costs of any legal or other representatives retained by an Interested Party in connection with any Tax Contest that is subject to the provisions of this Agreement shall be borne by such Interested Party. 4.03. Tax Contest Participation. Unless waived by the parties in writing, ------------------------- the Controlling Party shall provide an Interested Party with written notice reasonably in advance of, and such Interested Party shall have the right to attend, any formally scheduled meetings with Tax Authorities or hearings or proceedings before any judicial authorities in connection with any contest, litigation, compromise or settlement of any proposed or assessed Adjustment that is the subject of any Tax Contest pursuant to which such Interested Party may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this Agreement. In addition, unless waived by the parties in writing, the Controlling Party shall provide each such Interested Party with draft copies of any correspondence or filings to be submitted to any Tax Authority or judicial authority with respect to such Adjustments for such Interested Party's review and comment. The Controlling Party shall provide such draft copies reasonably in advance of the date that they are to be submitted to the Tax Authority or judicial authority and the Interested Party shall provide its comments, if any, with respect thereto within in a reasonable time before such submission. The failure of a Controlling Party to provide any notice, correspondence or filing as specified in this Section 4.03 to an Interested Party shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. 4.04. Tax Contest Waiver. ------------------ (a) The Controlling Party shall promptly provide written notice, sent postage prepaid by United States mail, certified mail, return receipt requested, to all Interested Parties in a Tax Contest (i) that a Final Determination has been made with respect to such Tax Contest; and (ii) enumerating the amount of the Interested Party's share of each Tax Benefit or Tax Detriment reflected in such Final Determination of the Tax Contest for which such Interested Party may be required to make or entitled to receive or has made or been entitled to receive an indemnity payment, reimbursement or other payment under this Agreement. (b) Within ninety (90) days after an Interested Party receives the notice described in Section 4.04(a) hereof from the Controlling Party, such Interested Party shall execute a written statement giving notice to the Controlling Party (i) that the Interested Party agrees with each Tax Benefit or Tax Detriment (and its share thereof) 11 enumerated in the notice described in Section 4.04(a) hereof except with respect to those Tax Benefits or Tax Detriments (and/or its shares thereof) that, in the good faith judgment of the Interested Party, it disagrees with and has specifically enumerated its disagreement with, including the amount of such disagreement, in the statement (each such disagreed Tax Benefit or Tax Detriment (and/or share thereof) hereinafter referred to as a "Disputed Adjustment"); and (ii) that the Interested Party thereby waives it right to a determination by an Independent Third Party pursuant to the provisions of Section 4.05 hereof with respect to all Tax Benefits or Tax Detriments to which it agrees with its share (this statement hereinafter referred to as the "Interested Party Notice"). The failure of an Interested Party to provide the Interested Party Notice to the Controlling Party within the ninety (90) day period specified in the preceding sentence shall be deemed to indicate that such Interested Party agrees with its share of all Tax Benefits or Tax Detriments enumerated in the notice described in Section 4.04(a) hereof and that such Interested Party waives it right to a determination by an Independent Third Party with respect to all such Tax Benefits or Tax Detriments (and its shares thereof) pursuant to Section 4.05 hereof. (c) During the ninety (90) day period immediately following the Controlling Party's receipt of the Interested Party Notice described in Section 4.04(b) above, the Controlling Party and the Interested Party shall in good faith confer with each other to resolve any disagreement over each Disputed Adjustment that was specifically enumerated in such Interested Party Notice. At the end of the ninety (90) day period specified in the preceding sentence, unless otherwise extended in writing by the mutual consent of the parties, the Interested Party shall be deemed to agree with all Disputed Adjustments that were specifically enumerated in the Interested Party Notice and waive its right to a determination by an Independent Third Party pursuant to Section 4.05 hereof with respect to all such Disputed Adjustments unless, and to the extent, that at any time during such ninety (90) day (or extended) period, either the Controlling Party or the Interested Party has given the other party written notice that it is seeking a determination by an Independent Third Party pursuant to Section 4.05 hereof regarding the propriety of any such Disputed Adjustment. (d) Notwithstanding anything in this Agreement to the contrary, an Interested Party that does not have a Significant Obligation with respect to a Tax Detriment relating to a Final Determination has no right to a determination by an Independent Third Party under Section 4.05 hereof with respect to any Disputed Adjustment relating to such Final Determination, and any such Disputed Adjustment shall not be subject to the provisions of Section 14. 4.05. Tax Contest Dispute Resolution. ------------------------------ (a) In the event that either a Controlling Party or an Interested Party has given the other party written notice as required in Section 4.04(c) hereof that it is seeking a determination by an Independent Third Party pursuant to this Section 4.05 with respect to any Disputed Adjustment that was enumerated in an Interested Party Notice, then the parties shall, within thirty (30) days after a party has received such notice, jointly select an Independent Third Party to make such determination. In the event that the parties cannot jointly agree on an Independent Third Party to make such determination within such thirty (30) day period, then the Controlling Party and the Interested Party shall each immediately select an Independent Third Party and the Independent Third Parties so selected by the parties shall jointly select, within twenty (20) days of their selection, another Independent Third Party to make such determination. (b) In making its determination as to the propriety of any Disputed Adjustment, the Independent Third Party selected pursuant to Section 4.05(a) above shall assume that the Interested Party is not required or entitled under applicable law to be a member of any Consolidated Return. In addition, the Independent Third Party shall make its determination according to the following procedure: (i) The Independent Third Party shall first analyze each Disputed Adjustment for which a determination is sought pursuant to this Section 4.05 on a stand-alone basis to determine whether the actual outcome reached with respect to such Disputed Adjustment as reflected in the Final Determination of the Tax Contest was fair and appropriate taking into account the following exclusive criteria: (A) the facts relating to such Adjustment; (B) the applicable law, if any, with respect to such Adjustment; (C) the position of the applicable Tax Authority with respect to compromise, settlement or litigation of such Adjustment; (D) the strength of the factual and legal arguments made by the Controlling Party in reaching the outcome with respect to such Adjustment 12 as reflected in the Final Determination of the Tax Contest; and (E) the strength of the factual and legal arguments being made by the Interested Party for the alternative outcome being asserted by such Interested Party (including the availability of facts, information and documentation to support such alternative outcome). Based on this analysis, the Independent Third Party shall determine what is the fair and appropriate outcome (hereinafter referred to as the "Initial Determination") with respect to each such Disputed Adjustment. (ii) The Interested Party shall not be entitled to modification of its share of a Disputed Adjustment under this Section 4.05 if, as the case may be, either (A) the amount that would be paid by the Interested Party under the Initial Determination with respect to such Disputed Adjustment is 80% or more than the amount that would be paid by the Interested Party with respect to such Disputed Adjustment under the actual outcome reached with respect to such Disputed Adjustment; or (B) the amount that would be received by the Interested Party under the Initial Determination with respect to such Disputed Adjustment is 120% or less than the amount that the Interested Party would receive with respect to such Disputed Adjustment under the actual outcome reached with respected to such Disputed Adjustment. The Independent Third Party will provide notice to the Controlling Party and the Interested Party in the event the Interested Party is not entitled to modification of its share of the Disputed Adjustment pursuant to this paragraph (ii). (iii) If the modification of an Interested Party's share of a Disputed Adjustment under this Section 4.05 is not prohibited pursuant to paragraph (ii) above, then the Independent Third Party shall determine what is the fair and appropriate outcome (hereinafter referred to as the "Ultimate Determination") to the Interested Party with respect to such Disputed Adjustment in the context of the entire Tax Contest as it relates to the Interested Party. In making this determination, the Independent Third Party shall consider the Disputed Adjustment as if it were raised in an independent audit of the Interested Party by the appropriate Tax Authority and the Independent Third Party shall take into account and give appropriate weight in its sole discretion to the following exclusive criteria: (A) the strength of the legal and factual support for other potential, non-frivolous Adjustments with respect to matters that were actually raised and contested by the applicable Tax Authority in the Tax Contest for which the Interested Party could have been liable under this Agreement but which were eliminated or reduced as a result of the Controlling Party agreeing to the Disputed Adjustment as reflected in the Final Determination of the Tax Contest; (B) the effect of the actual outcome reached with respect to the Disputed Adjustment on other Tax Periods and on other positions taken or proposed to be taken in Returns filed or proposed to be filed by the Interested Party; (C) the realistic possibility of avoiding examination of potential, non-frivolous issues for which the Interested Party could be liable under this Agreement and that were contemporaneously identified in writings by the party or parties during the course of the Tax Contest but which had not been raised and contested by the applicable Tax Authority in the Tax Contest; and (D) the benefits to the Interested Party in reaching a Final Determination, and the strategy and rationale with respect to the Interested Party's Disputed Adjustment that the Controlling Party had for agreeing to such Disputed Adjustment in reaching the Final Determination, in each case that were contemporaneously identified in writings by the party or parties during the course of the Tax Contest. (iv) The Interested Party shall only be entitled to modification of its share of a Disputed Adjustment under this Section 4.05 if, as the case may be, either (A) the amount that would be paid by the Interested Party under the Ultimate Determination with respect to such Disputed Adjustment is less than 80% of the amount that would be paid by the Interested Party with respect to such Disputed Adjustment under the actual outcome reached with respect to such Disputed Adjustment; or (B) the amount that would be received by the Interested Party under the Ultimate Determination with respect to such Disputed Adjustment is more than 120% of the amount that the Interested Party would receive with respect to such Disputed Adjustment under the actual outcome reached with respected to such Disputed Adjustment. If an Interested Party is entitled to modification of its share of any Disputed Adjustment under the preceding sentence, the amount the Interested Party is entitled to receive, or is required to pay, as the case may be, with respect to such Disputed Adjustment shall be equal to the amount of the Ultimate Determination 13 of such Disputed Adjustment. The Independent Third Party will provide notice to the Controlling Party and the Interested Party stating whether the Interested Party is entitled to modification of its share of the Disputed Adjustment pursuant to this paragraph (iv) and, if the Interested Party is entitled to such modification, the amount as determined in the preceding sentence that the Interested Party is entitled to receive from, or required to pay to, the Controlling Party with respect to such Disputed Adjustment. (c) Any determination made or notice given by an Independent Third Party pursuant to this Section 4.05 shall be (i) in writing; (ii) made within ninety (90) days following the selection of the Independent Third Party as set forth in Section 4.05(a) of this Agreement unless such period is otherwise extended by the mutual consent of the parties; and (iii) final and binding upon the parties. The costs of any Independent Third Party retained pursuant to this Section 4.05 shall be shared equally by the parties. The Controlling Party and the Interested Party shall provide the Independent Third Party jointly selected pursuant to Section 4.05(a) hereof with such information or documentation as may be appropriate or necessary in order for such Independent Third Party to make the determination requested of it. Upon issuance of an Independent Third Party's notice under Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof, the Controlling Party or the Interested Party, as the case may be, shall pay as specified in Section 5 of this Agreement, the amount, if any, of the Disputed Adjustment to the appropriate party. SECTION 5. Tax Payments and Intercompany Billings. -------------------------------------- 5.01. Payment of Taxes With Respect to Varian Federal Consolidated ------------------------------------------------------------ Returns Filed After the Distribution Date. In the case of any Varian Federal - ----------------------------------------- Consolidated Return the due date for which (including extensions) is after the Distribution Date, HCS shall compute and pay the Tax required to be paid to the IRS (taking into account the requirements of Section 6.03, relating to consistent accounting practices) with respect to such Tax Return. 5.02. Payment of State Income Tax Relating to Pre-Distribution Periods ---------------------------------------------------------------- With Respect to Returns Filed After the Distribution Date. - --------------------------------------------------------- (a) Computation and Payment of Tax Due. At least ten business ---------------------------------- days prior to any Payment Date for any Tax Return with respect to any State Income Tax relating to a Pre-Distribution Period, the Responsible Company shall compute the amount of Tax required to be paid to the applicable Tax Authority (taking into account the requirements of Section 6.03, relating to consistent accounting practices) with respect to such Tax Return on such Payment Date and (i) If such Tax Return is with respect to a Consolidated or Combined State Income Tax, HCS will pay such amount to such Tax Authority on or before such Payment Date. (ii) If such Tax Return is with respect to a Separate Company Tax, the Responsible Company shall, if it is not the Company liable for the Tax reported on such Tax Return, notify the Company liable for such Tax in writing of the amount of Tax required to be paid on such Payment Date. The Company liable for such Tax will pay such amount to such Tax Authority on or before such Payment Date. 5.03. Payment of Other Taxes. Each Company shall pay, or shall cause to --------------------- be paid, to the applicable Tax Authority when due all Separate Company Taxes, Foreign Income Taxes, and Other Taxes owed by such Company or a member of such Company's Group. 5.04. Tax Payments for Account of Other Party. --------------------------------------- (a) If any Company (the "payor") is required to pay to a Tax Authority a Tax that another Company (the "identified party") is required to pay to such Tax Authority under this Agreement, the identified party shall reimburse the payor within 30 days of delivery by the payor to the identified party of an invoice for the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. The reimbursement shall include interest on the Tax payment computed at the 14 Prime Rate based on the number of days from the date of the payment to the Tax Authority to the date of reimbursement under this Section 5.04. (b) In the event that (x) it is finally determined that any Company (the "Responsible Party") is liable to another Company (the "Protected Party") hereunder in respect of any payment obligation under this Agreement (a "Protected Loss") and (y) a court of competent jurisdiction prohibits such Responsible Party from satisfying all or a part of its obligations to the Protected Party hereunder in respect of such Protected Loss, then the amount of the Protected Loss that is not satisfied shall be treated as a liability of the parties to this Agreement other than the Responsible Party, with the Sharing Percentage of the Group of which each such other party is a member equal to 50%. 5.05. Tax Refunds for Account of Other Party. If a member of one Group -------------------------------------- receives any Tax refund or credit against a Tax liability with respect to any Taxes for which a member of another Group is liable hereunder, the Company receiving such Tax refund or credit shall make a payment to the Company that is liable for such Taxes hereunder within 30 days following receipt of the Tax refund in an amount equal to the Tax refund, plus interest on such amount computed at the Prime Rate based on the number of days from the date that is five (5) days after the date of receipt of the Tax refund to the date of payment of such amount under this Section 5.05. 5.06. Payment of Taxes Related to Adjustments. --------------------------------------- (a) Adjustments Resulting in Underpayments. The Controlling -------------------------------------- Party shall pay to the appropriate Tax Authority when due any additional Tax required to be paid as a result of any Adjustment with respect to any Pre- Distribution Period. Each other Company shall pay to whichever of HCS, IB or SEB is or controls the Controlling Party its share of any Tax Detriment resulting from such Adjustment (that has not yet been paid pursuant to the terms of this Agreement) determined in accordance with Section 2.06 within 90 days from the later of (i) the date the amount of the Adjustment was paid or (ii) the date of receipt by the indemnifying party of a written notice and demand from the Controlling Party (or whichever of HCS, IB and SEB the Controlling Party is an Affiliate) for payment of the amount due, accompanied by evidence of payment and a statement detailing the Tax Detriment and describing in reasonable detail the particulars relating thereto. Each indemnifying party shall also pay to whichever of HCS, IB or SEB controls the Controlling Party interest on their respective shares of such Tax Detriment computed at the Prime Rate plus 2.0%, per annum, based on the number of days from the date interest ceased to run with respect to the relevant recomputation of Tax to the date of their respective payments under this Section 5.06(a); provided, however, that in no event shall more than 180 days interest accrue between the date interest ceases to run with respect to the relevant recomputation of tax and the date of receipt of the written notice and demand referred to in clause (ii) of the immediately preceding sentence. (b) Adjustments Resulting in Overpayments. Within 30 days of ------------------------------------- receipt of any Tax refund or adjustment to Tax liability resulting from any Adjustment relating to a Pre-Distribution Period, whichever of HCS, IB or SEB is or controls the person that received the related Tax Benefit shall pay to any party entitled to a share such Tax Benefit (that has not yet been paid pursuant to the terms of this Agreement) their respective shares thereof determined in accordance with Section 2.06. Any payments required under this Section 5.06(b) shall include interest computed at the Prime Rate plus 2.0%, per annum, based on the number of days from the date of the recomputation of Tax to the date of payment under this Section 5.06(b). (c) Recomputations of Tax. For purposes of this Agreement, an --------------------- Adjustment occurs, and the respective liabilities of the parties shall be recomputed: (i) in each instance when payments are to be made to, or refunds received from, the relevant Tax Authority, (ii) when no payment is to be made or refund is to be received due to offsetting adjustments, upon filing of an amended return, completion of an IRS audit and completion of an IRS appellate review or the equivalent steps with respect to State Income Taxes or Foreign Income Taxes; and (iii) to reflect the results of any Final Determination. (d) Procedures After Final Determination. If an Interested Party ------------------------------------ has any liability and/or obligation to make or has previously made, or the right to receive or has previously received, any indemnity payment, reimbursement or other payment with respect to a Tax Benefit or Tax Detriment under this Agreement for which it does not have a right to a determination by an Independent Third Party under Section 4.05 hereof, then the amount of any such Tax Benefit or Tax Detriment not previously paid shall be immediately due and payable upon 15 receipt by the Interested Party of a notice of Final Determination of a Tax Contest as required and specified in Section 4.04(a) hereof. If after (i) notice of a Final Determination of a Tax Contest as required and specified in Section 4.04(a) hereof has been given by a Controlling Party to an Interested Party; and (ii) the Interested Party receiving such notice has either: (A) failed to provide the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period set forth in Section 4.04(b); (B) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) agreeing to all Tax Benefits or Tax Detriments (and the Interested Party's share of all such amounts) and waiving the right to an Independent Third Party determination pursuant to Section 4.05 hereof with respect to all such Tax Benefits or Tax Detriments (and the Interested Party's share of such amounts); (C) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) agreeing with some, but not all, Tax Benefits or Tax Detriments (and the Interested Party's share of such agreed amounts) and waiving the right to an Independent Third Party Determination pursuant to Section 4.05 hereof with respect to all such agreed Tax Benefits or Tax Detriments (and the Interested Party's share of such amounts); or (D) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) specifically enumerating the Disputed Adjustments to which it does not agree and for which the notice specified in either Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof relating to any such Disputed Adjustment has been given by an Independent Third Party, then the amount of any Tax Detriment or Tax Benefit agreed to or deemed to be agreed to by the Interested Party, or for which an Independent Third Party notice has been given pursuant to either Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof, as set forth in each of clauses (A), (B), (C) or (D) above, shall be immediately due and payable. Any Person entitled to any indemnification, reimbursement or other payment under this Agreement with respect to the amount of any Tax Detriment or Tax Benefit that has become immediately due and payable under this Section 5.06(d) (the "Indemnified Party") shall notify in writing the Person against whom such indemnification, reimbursement or other payment is sought (the "Indemnifying Party") of its right to and the amount of such indemnification, reimbursement or other payment; provided, however, that the failure to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability and/or obligation which it may have to an Indemnified Party on account of the provisions contained in this Agreement except to the extent that the Indemnifying Party was prejudiced by such failure, and in no event shall such failure relieve the Indemnifying Party from any other liability or obligation which it may have to such Indemnified Party. The Indemnifying Party shall make such indemnity payment, reimbursement or other payment to the Indemnified Party within thirty (30) days of the receipt of the written notice specified in the preceding sentence; provided, however, that, in the case of any Final Determination of a Tax Contest involving a state, local or municipal Tax in which the Indemnifying Party is also the Controlling Party with respect to such Tax Contest and, as Controlling Party, is entitled to receive an overall net refund from the applicable state, local or municipal Tax Authority with respect to such state, local or municipal Tax, then the Indemnifying Party shall be required to make such indemnity payment, reimbursement or other payment to the Indemnified Party within thirty (30) days from the date the Indemnifying Party actually receives payment of or obtains the benefit of the net refund due from the applicable state, local or municipal Tax Authority. 5.07. Recoveries. Any amounts recovered from third parties (e.g., a tax ---------- advisor to one of the Companies or any Affiliate) with respect to any Tax Detriment shall be shared among the Companies in a manner consistent with the principles of this Agreement. For example, if some or all of an amount paid with respect to an Adjustment that is shared by the Companies in accordance with their Sharing Percentages is reimbursed by a tax 16 advisor, the Company that receives (or whose Affiliate receives) such reimbursement will make such payments to the other Companies as are necessary to cause the net after-tax cost of the Adjustment net of such reimbursement to be shared by the Companies in accordance with their Sharing Percentages (taking into account any Correlative Adjustment and the assumptions set forth in the definition of Adjustment). SECTION 6. Preparation and Filing of Tax Returns. ------------------------------------- 6.01. General. Except as otherwise provided in this Section 6, Tax ------- Returns shall be prepared and filed when due (including extensions) by the person obligated to file such Tax Returns under the Code or applicable Tax Law. The Companies shall provide, and shall cause their Affiliates to provide, assistance and cooperate with one another in accordance with Section 7 with respect to the preparation and filing of Tax Returns, including providing information required to be provided in Section 7. 6.02. Post-Distribution Period Tax Returns. Except as otherwise provided ------------------------------------ in this Section 6: (1) All Tax Returns related to the Health Care Systems Group for Post- Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by HCS; (2) All Tax Returns related to the Semiconductor Equipment Group for Post-Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by SEB; and (3) All Tax Returns related to the Instruments Group for Post- Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by IB. 6.03. Manner of Filing. All Tax Returns filed or caused to be filed by ---------------- HCS, IB or SEB and the Affiliates of each of them after the Distribution Date shall be prepared on a basis that is consistent with any IRS or other Tax ruling obtained by Varian in connection with the restructuring of Varian contemplated by the Distribution Agreement (in the absence of a controlling change in law or circumstances), and shall be filed on a timely basis by the party responsible for such filing under this Agreement. 6.04. Right to Review Tax Returns. --------------------------- (a) General. The Responsible Company with respect to any Tax ------- Return shall make such Tax Return and related workpapers available for review by the other Companies, if requested, to the extent (i) such Tax Return relates to Taxes for which the requesting party may be liable, (ii) such Tax Return relates to Taxes for which the requesting party may be liable in whole or in part for any additional Taxes owing as a result of adjustments to the amount of Taxes reported on such Tax Return, (iii) such Tax Return relates to Taxes for which the requesting party may have a claim for Tax Benefits under this Agreement, or (iv) the requesting party reasonably determines that it must inspect such Tax Return to confirm compliance with the terms of this Agreement. The Responsible Company shall use its reasonable best efforts to make such Tax Return available for review as required under this paragraph sufficiently in advance of the due date for filing such Tax Returns to provide the requesting party with a meaningful opportunity to analyze and comment on such Tax Returns and have such Tax Returns modified before filing, taking into account the person responsible for payment of the tax (if any) reported on such Tax Return and the materiality of the amount of Tax liability with respect to such Tax Return. The Companies shall attempt in good faith to resolve any issues arising out of the review of such Tax Returns. (b) Execution of Returns Prepared by Other Party. In the case of -------------------------------------------- any Tax Return which is required to be prepared and filed by one Company under this Agreement and which is required by law to be signed by another Company (or by its authorized representative), the Company which is legally required to sign such Tax Return shall not be required to sign such Tax Return under this Agreement if there is no reasonable basis for the tax treatment of any material items reported on the Tax Return. Any such Tax Return shall be supplied by the Company responsible for its preparation and filing to the Company responsible for its signing at least five days prior to the due date of such Tax Return (including applicable extensions) and such signing Company shall deliver an executed copy of such Tax Return to the filing Company at least two days prior to the due date of such Tax Return (including applicable extensions). 17 6.05. Claims for Refund, Carrybacks, and Self-Audit Adjustments. --------------------------------------------------------- (a) Carrybacks. Each of the Companies shall be permitted, ---------- without the consent of any other Company, to file claims for refund or credit or amended returns with respect to Tax Returns for which it is the Responsible Company to carry back Tax items from Post-Distribution Periods. (b) Consent Required for Adjustment Requests Related to --------------------------------------------------- Consolidated or Combined Income Taxes. Except as provided in paragraph (c) - ------------------------------------- below, each of the Companies hereby agrees that, unless each of the other Companies consents in writing, which consent shall not be unreasonably withheld, no Adjustment Request with respect to any Consolidated or Combined Income Tax for a Pre-Distribution Period shall be filed. Any Adjustment Request which the Companies consent to make under this Section 6.05 shall be prepared and filed by the Responsible Company under Sections 6.01 and 6.02 for the Tax Return to be adjusted. The Company requesting the Adjustment Request shall provide to the Responsible Company all information required for the preparation and filing of such Adjustment Request in such form and detail as reasonably requested by the Responsible Company, and shall bear all external costs incurred in connection with the preparation and filing of such Adjustment Request. (c) Exception for Adjustment Requests Related to Audit -------------------------------------------------- Adjustments. Each of the Companies shall be entitled, without the consent of any - ----------- other Company, to require HCS to file an Adjustment Request to take into account any net operating loss, net capital loss, deduction, credit, or other adjustment attributable to such Company or any member of its Group corresponding to any adjustment resulting from any audit by the IRS or other Tax Authority with respect to Consolidated or Combined Income Taxes for any Pre-Distribution Period. For example, if the Internal Revenue Service requires a Company to capitalize an item deducted for the taxable year 1996, such Company shall be entitled, without the consent of any other Company, to require HCS to file an Adjustment Request for the taxable year 1997 (and later years) to take into account any depreciation or amortization deductions in such years directly related to the item capitalized in 1996. In addition, each of the Companies shall be entitled to require any other Company, as appropriate, to file an Adjustment Request of the same sort with respect to Separate Company Taxes or Foreign Income Taxes for any Pre-Distribution Periods. The Company that requires another Company to file an Adjustment Request shall bear all external costs in connection with the preparation and filing of the Adjustment Request. (d) Other Adjustment Requests Permitted. Nothing in this Section ----------------------------------- 6.06 shall prevent any Company or its Affiliates from filing any Adjustment Request with respect to Income Taxes which are not Consolidated or Combined Income Taxes or with respect to any Taxes other than Income Taxes; provided, however, that without the written consent of the Company responsible for the relevant Tax (which consent shall not be unreasonably withheld) no Company shall file an amended Tax Return with respect to Taxes for which another Company is liable under this Agreement. Any refund or credit obtained as a result of any such Adjustment Request (or otherwise) shall be for the account of the person liable for the Tax under this Agreement. (e) Payment of Refunds. Any refunds or other Tax Benefits ------------------ received by any Company (or any of its Affiliates) as a result of any Adjustment Request which are for the account of another Company (or member of such other Company's Group) shall be paid by the Company receiving (or whose Affiliate received) such refund or Tax Benefit to such other Company in accordance with Section 5. SECTION 7. Assistance and Cooperation. -------------------------- 7.01. General. After the Distribution Date, each of the Companies shall ------- cooperate (and cause their respective Affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Companies and their Affiliates including (i) preparation and filing of Tax Returns, (ii) determining the liability for and amount of any Taxes due (including estimated Taxes) or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include making all information and documents in their possession relating to the other Companies and their Affiliates available to such other Companies as provided in Section 8. Each of the Companies shall also make available to each other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the Companies or their respective Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or 18 documents in connection with any administrative or judicial proceedings relating to Taxes. The Company requesting assistance shall reimburse the Company providing assistance for the reasonable costs thereof, including personnel costs. Any information or documents provided under this Section 7 shall be kept confidential by the Company receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. 7.02. Income Tax Return Information. Each Company will provide to each ----------------------------- other Company information and documents relating to their respective Groups required by the other Companies to prepare Tax Returns. The Responsible Company shall determine a reasonable compliance schedule for such purpose in accordance with VA's past practices. Any additional information or documents the Responsible Company requires to prepare such Tax Returns will be provided in accordance with past practices, if any, or as the Responsible Company reasonably requests and in sufficient time for the Responsible Company to file such Tax Returns timely. SECTION 8. Tax Records. ----------- 8.01. Retention of Tax Records. Except as provided in Section 8.02, each ------------------------ Company shall preserve and keep all of its Tax Records for Pre-Distribution Tax Periods until the later of (i) seven years after the Distribution Date or (ii) a Final Determination with respect to any Tax Contest for which such Tax Records may be relevant. Before disposing of any such Tax Records, a Company shall provide 90 days prior notice to each other Company. Such notice shall include a list of the records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Companies shall have the opportunity, at their cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records. If, prior to the end of such seven-year period, a Company reasonably determines that any Tax Records which it is required to preserve and keep under this Section 8 are no longer material in the administration of any matter under the Code or other applicable Tax Law, such Company may dispose of such records upon 90 days prior notice to each other Company. Such notice shall include a list of the records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Companies shall have the opportunity, at their cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records. 8.02. State Income Tax Returns. Tax Returns with respect to State Income ------------------------ Taxes and workpapers prepared in connection with preparing such Tax Returns shall be preserved and kept, in accordance with the guidelines of Section 8.01, by the Company responsible for preparing and filing the applicable Tax Return. 8.03. Access to Tax Records. The Companies and their respective --------------------- Affiliates shall make available to each other for inspection and copying during normal business hours upon reasonable notice all Tax Records in their possession to the extent reasonably required by the other Company in connection with the preparation of Tax Returns, audits, litigation, or the resolution of items under this Agreement. SECTION 9. Effective Date; Termination of Prior Intercompany Tax ----------------------------------------------------- Allocation Agreements. This Agreement shall be effective on the Distribution - --------------------- Date. Each of the Companies represents and warrants that there are no Prior Intercompany Tax Allocation Agreements in effect as of the Distribution Date. SECTION 10. No Inconsistent Actions. ----------------------- (a) Each of the Companies covenants and agrees that it will use its best efforts to cause the Distributions to qualify under Section 355 of the Code. Each of the Companies covenants and agrees that it will not take or permit any action, and it will cause its Affiliates to refrain from taking or permitting any action, which may be inconsistent with the Tax treatment of the Transactions as contemplated in the Ruling Request or any Tax ruling received with respect to Tax consequences related to the Transaction in a foreign jurisdiction (any such action is referred to in this Section 10 as a "Tainting Act"), unless (i) the Company or Affiliate thereof proposing such Tainting Act (the "Requesting Party") either (A) obtains a ruling with respect to the Tainting Act from the IRS or other applicable Tax Authority that is reasonably satisfactory to each other Company (the "Requested Parties") (except that the Requesting Party shall not submit any such ruling request if a Requested Party determines in good faith that filing such request might have a materially adverse effect upon such Requested Party), or (B) obtains an unqualified opinion of independent nationally recognized tax counsel acceptable to each Requested Party, on a basis of assumed facts and representations consistent with the facts at the time of such action, that such Tainting Act will 19 not affect the Tax treatment of the Transactions as contemplated in the Ruling Request, or (ii) each Requested Party consents in writing to such Tainting Act, which consent shall be granted or withheld in the sole and absolute discretion of each such Requested Party. A Tainting Act of a Company shall include a transaction involving that Company to which Section 355(e) of the Code is applicable, regardless of whether the Company could have prevented such transaction. Without limiting the foregoing: (i) No Inconsistent Plan or Intent. Each of the Companies ------------------------------ represents and warrants that neither it nor any of its Affiliates has any plan or intent to take any action which is inconsistent with any factual statements or representations in the Ruling Request. Regardless of any change in circumstances, each of the Companies covenants and agrees that it will not take or permit, and it will cause its Affiliates to refrain from taking or permitting, any such inconsistent action on or before the second anniversary of the Distribution Date other than as permitted in this Section 10. (ii) Amended or Supplemental Rulings. Each of the Companies ------------------------------- covenants and agrees that it will not file, and it will cause its Affiliates to refrain from filing, any amendment or supplement to the Ruling Request subsequent to the Distribution Date without the consent of the other Companies, which consent shall not be unreasonably withheld. (b) Notwithstanding anything to the contrary in this Agreement, each Company shall be solely liable for, and shall indemnify and hold harmless each other Company from any Restructuring Tax resulting from a Tainting Act by such first Company or its Affiliates, regardless of whether clause (i) or (ii) of Section 10(a) was satisfied with respect to such Tainting Act. SECTION 11. Survival of Obligations. The representations, warranties, ----------------------- covenants and agreements set forth in this Agreement shall be unconditional and absolute and shall remain in effect without limitation as to time. SECTION 12. Employee Matters. Each of the Companies shall utilize, or ---------------- cause its Affiliates to utilize, the standard procedure set forth in Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage reporting. SECTION 13. Treatment of Payments; Tax Gross Up. ----------------------------------- 13.01. Tax Treatment of Payments. In the absence of any change in tax ------------------------- treatment under the Code or other applicable Tax Law, any Tax indemnity, Tax Detriment, Tax Benefit or other payments made by a Company hereunder shall be reported for Tax purposes by the payor and the recipient (and, if HCS is neither the payor nor the recipient, by HCS) as distributions or capital contributions, as appropriate, occurring immediately before the Distributions on the Distribution Date, except to the extent the payment relates to a Tax allocated to the payor in accordance with Treasury Regulation Section 1.1502-33(d) (or under corresponding principles of other applicable Tax Laws). 13.02. Tax Gross Up. If notwithstanding the manner in which Tax ------------ indemnity, Tax Detriment or Tax Benefit payments were reported, there is an adjustment to the Tax liability of a Company as a result of its receipt of a payment pursuant to this Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof (but taking into account all correlative Tax benefits resulting from the payment of such Income Taxes), shall equal the amount of the payment which the Company receiving such payment would otherwise be entitled to receive pursuant to this Agreement. For purposes of determining such Income Taxes, it shall be assumed that the highest marginal Tax rates in effect are applicable. 13.03. Interest Under This Agreement. Anything herein to the contrary ----------------------------- notwithstanding, to the extent one Company ("indemnitor") makes a payment of interest to another Company ("indemnitee") under this Agreement with respect to the period from the date that the indemnitee made a payment of Tax to a Tax Authority to the date that the indemnitor reimbursed the indemnitee for such Tax payment, or with respect to the period from the date that the indemnitor received a Tax Benefit to the date indemnitor paid the Tax Benefit to the indemnitee, the interest payment shall be treated as interest expense to the indemnitor (deductible to the extent provided by law) and 20 as interest income by the indemnitee (includible in income to the extent provided by law). The amount of the payment shall not be adjusted under Section 13.02 to take into account any associated Tax benefit to the indemnitor or increase in Tax to the indemnitee. SECTION 14. Disagreements. Except to the extent of the specific dispute ------------- resolutions set forth in Sections 4.04 and 4.05 of this Agreement, any and all controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, nonperformance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in, Article IX of the Distribution Agreement. SECTION 15. Late Payments. Any amount owed by one party to another party ------------- under this Agreement which is not paid when due shall bear interest at the Prime Rate plus two percent, compounded semiannually, from the due date of the payment to the date paid. To the extent interest required to be paid under this Section 15 duplicates interest required to be paid under any other provision of this Agreement, interest shall be computed at the higher of the interest rate provided under this Section 15 or the interest rate provided under such other provision. SECTION 16. Expenses. Except as provided in Sections 4.02, 6.05, 7.01 or -------- 14, each party and its Affiliates shall bear their own expenses incurred in connection with preparation of Tax Returns, Tax Contests, and other matters related to Taxes under the provisions of this Agreement. SECTION 17. Nonqualified Stock Options. Each of the Companies shall -------------------------- report exercises of nonqualified stock options in a manner consistent with any ruling letter issued by the IRS with respect to the Distributions. The Companies shall cooperate fully (including development of any reasonably necessary procedures) to satisfy applicable reporting and withholding requirements and obtain allowable Tax deductions upon the exercise of such options. SECTION 18. General Provisions ------------------ 18.01. Complete Agreement; Construction. This Agreement, the Distribution -------------------------------- Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there is a conflict between the provisions of this Agreement and the provisions of the Distribution Agreement or any other Ancillary Agreement, this Agreement shall prevail. 18.02. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. 18.03. Notices. All notices, consents, requests, waivers, claims or other ------- communications (each a "Notice") required or permitted under this Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS, at: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer 21 With a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304 Attn: General Counsel If to SEB, at: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy: (978) 281-3152 With a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) 281-3152 If to IB, at: Varian, Inc. 3120 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer With a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94304 Attn: General Counsel or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. 18.04. Waivers. The failure of any party to require strict performance by ------- any other party of any provision in or rights or remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. 18.05. Amendments. This Agreement may be amended or supplemented, or its ---------- provisions waived only by an agreement in writing signed by each of the parties. 18.06. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. 22 18.07. Successors and Assigns. Subject to Section 18.06, this Agreement ---------------------- shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. 18.08. Third Party Beneficiaries. This Agreement is solely for the ------------------------- benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and permitted assigns, and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. 18.09. Governing Law. This Agreement, the other Ancillary Agreements and ------------- any other agreements entered into in connection with the transactions contemplated hereby shall be governed by, and construed and enforced in accordance with, the Laws of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of disputes governed by the Distribution Agreement. 18.10. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 18.11. Subsidiaries. Each party shall cause to be performed, and hereby ------------ guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. 18.12. Titles and Headings. Titles and headings to sections herein are ------------------- inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 18.13. Further Action. The parties shall execute and deliver all -------------- documents, provide all information, and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement, including the execution and delivery to the other parties and their Affiliates and representatives of such powers of attorney or other authorizing documentation as is reasonably necessary or appropriate in connection with Tax Contests (or portions thereof) under the control of such other parties in accordance with Section 4. 18.14. No Double Recovery; Subrogation. No provision of this Agreement ------------------------------- shall be construed to provide an indemnity or other recovery for any costs, damages, or other amounts for which the damaged party has been fully compensated under any other provision of this Agreement or under any other agreement or action at law or equity. Unless expressly required in this Agreement, a party shall not be required to exhaust all remedies available under other agreements or at law or equity before recovering under the remedies provided in this Agreement. Subject to any limitations provided in this Agreement (for example, the limitation on filing claims for refund in Section 6.05), the indemnifying party shall be subrogated to all rights of the indemnified party for recovery from any third party. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the respective officers as of the date set forth above. VARIAN ASSOCIATES, INC. By: /s/ Robert A. Lemos ---------------------------------------- Name: Robert A. Lemos Title: Vice President Finance and Chief Financial Officer 23 VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By: /s/ Joseph B. Phair ---------------------------------------- Name: Joseph B. Phair Title: Secretary VARIAN, INC. By: /s/ Arthur W. Homan ---------------------------------------- Name: Arthur W. Homan Title: Secretary 24 EX-10.4 9 TRANSITION SERVICES AGREEMENT DATED APRIL 2 1999 EXHIBIT 10.4 - -------------------------------------------------------------------------------- TRANSITION SERVICES AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of April 2, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE I SERVICES PROVIDED................................ 1 1.1 Transition Services.............................. 1 1.2 Personnel........................................ 1 1.3 Representatives.................................. 2 1.4 Level of Transition Services..................... 2 1.5 Corrective Efforts............................... 2 1.6 Force Majeure.................................... 2 1.7 Modification of Procedures....................... 3 1.8 No Obligation to Continue to Use Services........ 3 1.9 Provider Access.................................. 3 ARTICLE II COMPENSATION..................................... 3 2.1 Consideration.................................... 3 2.2 Invoices......................................... 3 2.3 Payment of Amounts Due........................... 4 2.4 Provider's Rights on Failure to Pay.............. 4 ARTICLE III CONFIDENTIALITY.................................. 4 3.1 Obligation....................................... 4 ARTICLE IV TERM AND TERMINATION............................. 4 4.1 Term............................................. 4 4.2 Extension........................................ 4 4.3 Termination...................................... 5 4.4 Termination of Obligations....................... 5 4.5 Survival of Certain Obligations.................. 5 ARTICLE V DISPUTE RESOLUTION............................... 5 5.1 Distribution Agreement to Control................ 5 ARTICLE VI INSURANCE; INDEMNIFICATION....................... 5 6.1 Insurance and Indemnity.......................... 5 6.2 Recipients' Indemnity for Services............... 6 6.3 Providers' Indemnity for Services................ 6 ARTICLE VII MISCELLANEOUS.................................... 6 7.1 Complete Agreement; Construction................. 6 7.2 Other Agreements................................. 6 7.3 Counterparts..................................... 6 7.4 Notices.......................................... 6 7.5 Waivers.......................................... 7 7.6 Amendments....................................... 7
-i- TABLE OF CONTENTS (continued)
Page 7.7 Assignment....................................... 7 7.8 Successors and Assigns........................... 8 7.9 Third Party Beneficiaries........................ 8 7.10 Schedules........................................ 8 7.11 Governing Law.................................... 8 7.12 Severability..................................... 8 7.13 Subsidiaries..................................... 8 7.14 Title and Headings............................... 8 7.15 Laws and Government Regulations.................. 8 7.16 Relationship of Parties.......................... 8 7.17 Definitions...................................... 8
-ii- TRANSITION SERVICES AGREEMENT THIS TRANSITION SERVICES AGREEMENT (this "Agreement") is made and entered into as of this 2nd day of April, 1999 between and among VARIAN ASSOCIATES, INC., a Delaware corporation ("HCS"), VARIAN, INC., a Delaware corporation ("IB"), and VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, Inc., a Delaware corporation ("SEB") (collectively, the "parties" or individually a "party"). WHEREAS, HCS, IB and SEB have entered into an Amended and Restated Distribution Agreement dated as of January 14, 1999 (the "Distribution Agreement") which, among other matters, contemplates that one or more parties thereto will provide, or cause one or more of its Subsidiaries to provide, to the other parties and their respective Subsidiaries, certain transitional, administrative and support services on the terms set forth in this Agreement. Each party when providing a service under this Agreement (together with any Subsidiaries or Affiliates providing services) is referred to as "Provider" and each party when receiving a service under this Agreement (together with any Subsidiaries or Affiliates receiving services) is referred to as "Recipient." NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree as follows: ARTICLE I SERVICES PROVIDED 1.1 Transition Services. ------------------- (a) Upon the terms and subject to the conditions of this Agreement, the relevant Provider shall provide to the relevant Recipient the services indicated on the Schedules hereto (each, a "Transition Service" and, collectively, the "Transition Services") during the time period for such Transition Service set forth in the applicable Schedule (each, a "Time Period"). (b) Subject to the other provisions of this Agreement, the Transition Services set forth on such Schedules may be amended from time to time, as the relevant parties shall agree in writing to add, omit or redefine any of the Transition Services, the time period for which such Transition Services are to be rendered and/or the compensation therefor. 1.2 Personnel. --------- (a) Each party in its capacity as Provider shall make a sufficient number of competent employees (and/or third party contractors to the extent that third party services are routinely utilized to provide similar services to other businesses of such Provider or are reasonably necessary for the efficient performance of any Transition Service) to render the Transition Services to be provided under this Agreement when required, for so long as Provider provides said services to itself. Except to the extent specific individuals are designated on a Schedule, a Provider of a Transition Service shall determine both the staffing required and the particular personnel assigned to perform the Transition Service, including but not limited to, clerical staff, technicians, professionals or others. The personnel assigned by a Provider under this Agreement to perform Transition Services for a Recipient shall not be deemed to be in the employ of the Recipient or entitled to receive any compensation or benefits therefrom. (b) Each Recipient shall not, without the Provider's prior written consent, solicit any employees of a Provider assigned by the Provider to the Recipient for the performance of such services while such employee is employed by Provider or within the six-month period after the date any employee ceases to provide Transition Services. 1.3 Representatives. --------------- (a) Each of HCS, IB and SEB shall designate a representative to act as its primary contact person for the provision of all Transition Services (each, a "Primary Coordinator"). The initial Primary Coordinators shall be designated in writing by notice to the others in accordance with paragraph (b) on or before the Distribution Date. The initial coordinators for each specific Transition Service shall be the individuals named in the Schedule relating to such Transition Service (each, a "Service Coordinator"). Each party may treat an act of another party's Primary Coordinator or Service Coordinator as authorized by such other party without inquiring behind such act or ascertaining whether such Primary Coordinator or Service Coordinator had actual authority so to act, provided, however, that neither the Primary Coordinator nor the Service Coordinator shall have authority to amend or modify the Agreement. All communications relating to the provision of the Transition Services shall be directed to the Primary Coordinators. (b) Each of the relevant Provider and the relevant Recipient of a Transition Service shall notify the other in writing of any change in its Primary Coordinator and/or its Service Coordinator for each Transition Service. Any such notice shall (i) set forth the name of the Primary Coordinator or Service Coordinator to be replaced and the name of the replacement, and (ii) certify that the replacement Primary Coordinator is authorized to act for such party in all matters relating to this Agreement or that the replacement Service Coordinator is authorized to act for such party in all matters relating to the relevant Transition Service, as applicable, as provided in Section 1.3 (a) above. 1.4 Level of Transition Services. (a) Each party, in its capacity as Provider, shall exercise the same degree of care when performing Transition Services as it exercises in performing the same or similar services for its own account, with priority equal to that provided to its own businesses. Nothing in this Agreement shall require any party in its capacity as Provider to favor the businesses of a Recipient over its own businesses. (b) No Provider shall be required to provide the Recipient of Transition Services with a quantity of Transition Services in excess of that provided by Provider as of the date of this Agreement and shall specifically not be required to provide extraordinary levels of Transition Services, special studies, training, or the like or the advantage of systems, equipment, facilities, training, or improvements procured, obtained or made after the Distribution Date by such Provider. (c) Transition Services provided by third parties shall be subject to the terms and conditions of this Agreement and any agreements between the Provider of such Transition Services and such third parties. 1.5 Corrective Efforts. Notwithstanding anything to the contrary ------------------ contained in this Agreement, if a Provider incorrectly performs any Transition Service, the Provider, at the Recipient's request, shall use commercially reasonable efforts to correct or re-perform the Transition Service at no additional cost to the Recipient, but shall have no other obligation to correct the subject Transition Service. In the event Recipient does not request such correction of the Transition Service or Provider does not correct the performance, any damages recoverable by Recipient shall be limited to the amount paid by Recipient to Provider for the item of Service in respect of which a claim is made. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR LOSS OF PROFITS OR OPPORTUNITIES, OR ANY EXEMPLARY OR PUNITIVE DAMAGES ARISING OUT OF ANY BREACH OF THIS AGREEMENT, REGARDLESS OF THE CIRCUMSTANCES FROM WHICH SUCH DAMAGES AROSE. 1.6 Force Majeure. Any failure or omission by a party in the performance ------------- of any obligation under this Agreement shall not be deemed a breach of this Agreement or create any liability, if the failure or omission arises from any cause or causes beyond the control of the party, including, but not limited to, the following, which for purposes of this Agreement shall be regarded as beyond the control of each of the parties hereto: acts of God, fire, storm, flood, earthquake, governmental regulation or direction, acts of the public enemy, war, rebellion, insurrection, riot, invasion, strike or lockout; provided, however, -------- ------- that the party shall resume the performance whenever such causes are removed. Notwithstanding the foregoing, if a party cannot perform under this Agreement 2 for a period of 45 days due to such cause or causes, the affected party may terminate this Agreement with the defaulting party by providing written notice thereto. 1.7 Modification of Procedures. Each party, in its capacity as Provider, -------------------------- may make changes from time to time in its standards and procedures for performing any of the Transition Services for which it is responsible; provided, -------- however, that, except as provided in Section 1.1(b) or required by Law, no party - ------- in its capacity as Provider shall implement any substantial changes affecting a Recipient of a Transition Service unless: (a) Provider has furnished Recipient notice (which shall be the same notice such Provider shall provide its own businesses) thereof; (b) Provider changes the procedures for its own businesses at the same time; and (c) Provider gives Recipient a reasonable period of time for Recipient (i) to adapt its operations to accommodate the changes or (ii) to reject the proposed changes. In the event Recipient fails to accept or reject a proposed change on or before a date specified in the notice of change, Recipient shall be deemed to have accepted the change. Subject to Section 1.8, in the event Recipient rejects a proposed change but does not terminate the provision of the Transition Service, Recipient shall pay any charges resulting from Provider's need to maintain different versions of the same systems, procedures, technologies, or services or resulting from requirements of third party vendors or suppliers. 1.8 No Obligation to Continue to Use Services. Except as provided in the ----------------------------------------- Schedules, no Recipient shall have any obligation to continue to use any of the Transition Services and a Recipient may delete any or all Transition Services from the Transition Services that a Provider is providing to the Recipient by giving the Provider written notice thereof in accordance with the notice provisions of this Agreement and the applicable Schedules. 1.9 Provider Access. Recipient shall provide the personnel of a Provider --------------- with access to its equipment, office space, plants, telecommunications and computer equipment and systems, and any other areas and equipment to the extent reasonably required for personnel of a Provider to perform any Transition Service. ARTICLE II COMPENSATION 2.1 Consideration. As consideration for the Transition Services, each ------------- party in its capacity as Recipient shall pay to each Provider the aggregate amount specified in the Schedules relating to the Transition Services provided by Provider to Recipient. 2.2 Invoices. Except as set forth in the Schedules, the monthly fixed -------- charges or fees for Transition Services set forth on the Schedules shall be paid on the first day of each month in which the Transition Services are to be performed. Except as set forth in the Schedules, any fees not payable as fixed amounts shall be invoiced monthly by the Provider to the Recipient no later than the 30th day of the calendar month next following the calendar month in which the Transition Services were performed. All invoices shall be sent by the Provider to the Recipient at the following address or to such other address as the Recipient shall have specified by notice in writing to the Provider of the Transition Services: To HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attention: Chief Financial Officer 3 To IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attention: Chief Financial Officer To SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attention: Chief Financial Officer Fax: (978) 281-3152 2.3 Payment of Amounts Due. Except as set forth in the Schedules, payment ---------------------- of all amounts due for Transition Services shall be made by check or electronic funds transmission in U.S. Dollars, without any offset or deduction of any nature whatsoever, within 30 days of the invoice date or as specified in the applicable Schedules. All payments shall be made in accordance with the terms of the applicable Schedules, the instructions set forth on or accompanying the invoice or as otherwise agreed to in writing between the relevant Provider and the relevant Recipient. Books and Records of a Provider pertaining to the services provided and all reimbursed costs shall be available for inspection and audit by the Recipient during normal business hours for three months following the delivery of the invoice for the period for which the Transition Services were provided. 2.4 Provider's Rights on Failure to Pay. Except as set forth in the ----------------------------------- Schedules, if any fixed fee or invoice is not paid when due, the Provider shall have the right, in its sole and absolute discretion, without any liability to the Recipient that has not paid such fixed fee or invoice or anyone claiming by or through the Recipient, to immediately cease providing any or all of the Transition Services provided by the Provider to the Recipient until such payment is received. ARTICLE III CONFIDENTIALITY 3.1 Obligation. ---------- (a) All information with respect to any Recipient obtained by a party in its capacity as Provider shall be held and used by Provider only in accordance with Section 6.03 of the Distribution Agreement. (b) All information with respect to any Provider obtained by a party in its capacity as Recipient shall be held and used by the Recipient only in accordance with Section 6.03 of the Distribution Agreement. ARTICLE IV TERM AND TERMINATION 4.1 Term. This Agreement shall become effective on the Distribution Date ---- and shall remain in force with respect to a party until the expiration of the longest Time Period specified in any Schedule affecting such party as either Provider or Recipient, including any extension thereof, unless all of the Transition Services to be performed or received by such party are deleted or this Agreement is earlier terminated with respect to such party, in each case, in accordance with the terms of this Agreement. 4.2 Extension. The Time Period for which a Transition Service shall be --------- provided may be extended by written agreement among the Recipient and the Provider of the Transition Service. 4 4.3 Termination. If any party (the "Defaulting Party") shall fail to ----------- perform or default in the performance of any of its obligations under this Agreement (other than a payment default subject to Section 2.4), the party entitled to the benefit of the performance (the "Non-Defaulting Party") may give written notice to the Defaulting Party specifying the nature of the failure or default and stating that the Non-Defaulting Party intends to terminate this Agreement with respect to the Defaulting Party if the failure or default is not cured within 30 days of the written notice. If any failure or default so specified is not cured within the 30-day period, the Non-Defaulting Party may elect immediately to terminate this Agreement with respect to the Defaulting Party; provided, however, that if the failure or default relates to a dispute -------- ------- contested in good faith by the Defaulting Party, the Non-Defaulting Party may not terminate this Agreement pending resolution of the dispute in accordance with Article V hereof. Such termination shall be effective upon giving a written notice of termination from the Non-Defaulting Party to the Defaulting Party and shall be without prejudice to any other remedy which may be available to the Non-Defaulting Party against the Defaulting Party. 4.4 Termination of Obligations. All obligations of each Provider to -------------------------- provide each Transition Service for which the Provider is responsible shall immediately cease upon the expiration of the Time Period (and any extension thereof in accordance with Section 4.2) for the Transition Service, and each Provider's obligations to provide all of the Transition Services for which the Provider is responsible shall immediately cease upon the termination of this Agreement with respect to the Provider and all relevant Recipients. Upon the cessation of a Provider's obligation to provide any Transition Service, the Recipient of the Transition Service shall immediately cease using, directly or indirectly, the Transition Service (including, without limitation, any and all software of Provider or third party software provided through Provider, telecommunications services or equipment, or computer systems or equipment). 4.5 Survival of Certain Obligations. Without prejudice to the survival of ------------------------------- the other agreements of the parties, the following obligations shall survive the termination of this Agreement: (a) the obligations of each party under Articles III, IV and VI; and (b) each Provider's right to receive the compensation for the Transition Services provided in Section 2.1 accruing prior to the effective date of termination. ARTICLE V DISPUTE RESOLUTION 5.1 Distribution Agreement to Control. Any and all controversies, disputes --------------------------------- or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non- performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in Article IX of the Distribution Agreement. ARTICLE VI INSURANCE; INDEMNIFICATION 6.1 Insurance and Indemnity. Each party shall comply with all applicable ----------------------- workers' compensation statutes either by obtaining a policy with the limits required by law or by qualifying legally to self insure. Each party shall, or shall cause its insurer to, waive the right of subrogation or recovery against any other party in connection with this Agreement for any work-related injury or disease. Each party shall carry employer's liability insurance with minimum limits of $1,000,000 per accident. Each party shall carry general liability insurance, with minimum limits of $1,000,000 per occurrence, to cover such party's indemnification obligations under this Agreement. Each party shall carry automobile liability insurance to cover claims arising out of the operation, maintenance or use of any motor vehicles owned, hired, rented or used by such party in connection with this Agreement. 5 A party in its capacity as Provider shall not be responsible to a Recipient for damage to the Recipient's real or personal property at Recipient's premises, or any other place, when Recipient's property is in the care, custody or control of Provider. All deductibles or self insured retentions, on policies of insurance required to be maintained under this Agreement, will be borne by the responsible parties as set forth in Sections 6.2 and 6.3 below. 6.2 Recipients' Indemnity for Services. Each party in its capacity as ---------------------------------- Recipient shall indemnify, defend and hold harmless each Provider, and the Provider's directors, officers, employees and agents, against any and all Liabilities incurred by any of them in connection with Transition Services provided under this Agreement except to the extent arising out of, relating to or resulting from Provider's gross negligence or intentional misconduct. 6.3 Providers' Indemnity for Services. Each party in its capacity as --------------------------------- Provider shall indemnify, defend and hold harmless each Recipient, and the Recipient's directors, officers, employees and agents, against all Liabilities incurred by any of them in connection with Transition Services provided under this Agreement to the extent arising out of, relating to or resulting from Provider's gross negligence or intentional misconduct; provided, however, that -------- ------- any Liabilities claimed by Recipient and the Recipient's directors, officers, employees and agents shall be limited to the amount of the charges paid to Provider for such item of Transition Service in respect of which a claim is made; and provided, further, that Provider will defend, indemnify and hold -------- ------- harmless each Recipient of Transition Services from such Provider, and such Recipient's directors, officers, employees and agents, against all Liabilities incurred by any of them in connection with the Provider's operation, maintenance or use of a motor vehicle in the course of providing Transition Services to the Recipient. ARTICLE VII MISCELLANEOUS 7.1 Complete Agreement; Construction. This Agreement, including the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and any Schedule hereto, the Schedule shall prevail. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. 7.2 Other Agreements. This Agreement is not intended to address, and ---------------- should not be interpreted to address, the matters expressly covered by the Distribution Agreement and the other Ancillary Agreements. 7.3 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same Agreement. 7.4 Notices. All Notices required or permitted under this Agreement ------- shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified U.S. mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer 6 with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy (978) 281-3152 with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) 281-3152 or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. 7.5 Waivers. The failure of any party to require strict performance by ------- any other party of any provision in or rights and remedies with respect to this Agreement will not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. 7.6 Amendments. After the execution of this Agreement by all parties, and ---------- solely to the extent that a change is desired by and restricted to any two parties without affecting the rights of the third party hereto, such two parties may separately amend in writing any provision of this Agreement which governs the rights exchanged between them without notifying the third party hereto. Except as expressly provided herein, this Agreement may be amended or supplemented or its provisions waived only by an agreement in writing signed by each of the parties. 7.7 Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction 7 or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. 7.8 Successors and Assigns. Subject to Section 7.7, this Agreement shall ---------------------- be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. 7.9 Third Party Beneficiaries. This Agreement is solely for the benefit ------------------------- of the parties and the members of their respective Groups and Affiliates and their respective successors and assigns and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. 7.10 Schedules. The Schedules shall be construed with and as an integral --------- part of this Agreement to the same extent as if they had been set forth verbatim herein. 7.11 Governing Law. This Agreement shall be governed by, and construed and ------------- enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of disputes. 7.12 Severability. If any provision of this Agreement or the application ------------ thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 7.13 Subsidiaries. Each of the parties shall cause to be performed, and ------------ hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that is contemplated to be a Subsidiary of such party on and after the Distribution Date. 7.14 Title and Headings. Titles and headings to sections herein are ------------------ inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 7.15 Laws and Government Regulations. Each party in its capacity as ------------------------------- Recipient shall be responsible for (a) compliance with all Laws affecting its businesses and (b) any use it may make of the Transition Services to assist it in complying with such Laws . While a party in its capacity as Provider shall not have any responsibility for the compliance by any Recipient with such Laws, Provider shall use reasonable commercial efforts to cause the Transition Services to be designed in such manner that the Transition Services shall be able to assist the Recipient in complying with applicable legal and regulatory responsibilities. 7.16 Relationship of Parties. Nothing in this Agreement shall be construed ----------------------- to create a partnership, agency or other relationship between the parties or to make any party liable for any debts or obligations incurred by another party. 7.17 Definitions. Capitalized terms used in this Agreement and not ----------- otherwise defined herein have the meanings ascribed to such terms in Article I, Section 1.01 of the Distribution Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Transition Services Agreement to be executed as of the day and year first above written. 8 VARIAN ASSOCIATES, INC. By: /s/ Robert A. Lemos -------------------------------------- Name: Robert A. Lemos Title: Vice President Finance and Chief Financial Officer VARIAN, INC. By: /s/ Arthur W. Homan -------------------------------------- Name: Arthur W. Homan Title: Secretary VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By: /s/ Joseph B. Phair -------------------------------------- Name: Joseph B. Phair Title: Secretary 9 EX-10.5 10 SUPPLEMENTAL RETIREMENT PLAN OF VARIAN INC. EXHIBIT 10.5 SUPPLEMENTAL RETIREMENT PLAN OF VARIAN, INC. SECTION 1 BACKGROUND, PURPOSE AND DURATION 1.1 Effective Date. The Plan is effective as of the date on which VAI -------------- distributes shares of the Company's common stock to the stockholders of VAI. 1.2 Purpose of the Plan. The purpose of the Plan is to provide deferred ------------------- compensation consisting of (a) elective deferrals and (b) allocations of Matching Contributions and Profit-Sharing Contributions that exceed the amounts that the Dollar Limitations permit to be allocated under the Retirement Plan, but that are otherwise calculated by reference to the Retirement Plan. SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 2.1 "Code" means the Internal Revenue Code of 1986, as amended. Reference ---- to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. 2.2 "Committee" means the Compensation Committee of the Company's Board --------- of Directors. 2.3 "Company" means Varian, Inc., a Delaware corporation, or any successor ------- thereto. 2.4 "Compensation Ceiling" means the limitation described in section -------------------- 401(a)(17) of the Code, adjusted as prescribed by the Code. The Compensation Ceiling for plan years beginning in 1999 is $160,000. 2.5 "Dollar Limitations" means (a) the Compensation Ceiling and (b) the ------------------ limitation on annual additions described in section 415(c)(1) of the Code, adjusted in each case as prescribed by the Code. 2.6 "Eligible Earnings" shall have the meaning given to such term in the ----------------- Retirement Plan, except that Eligible Earnings for purposes of this Plan shall not be subject to the Compensation Ceiling. 2.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 2.8 "Participant" means an individual who is eligible to participate in ----------- the Plan pursuant to Section 3 and for whose benefit an amount is credited to a Reserve Account Pursuant to Section 3. 2.9 "Plan" means the Supplemental Retirement Plan of Varian, Inc., as set ---- forth in this instrument and as hereafter amended from time to time. 2.10 "Plan Year" means the Retirement Plan's Plan Year. --------- 2.11 "Reserve Account" means the unfunded bookkeeping account described in --------------- Section 3.2. 2.12 "Retirement Plan" means the Varian, Inc. Retirement Plan, as amended --------------- from time to time. 2.13 "Unforeseeable Emergency" means a severe financial hardship to the ----------------------- Participant resulting from a sudden and unexpected illness or accident of the Eligible Participant or of a dependent of the Participant, from a loss of the Participant's property due to casualty or from other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Partici-pant. A hardship shall not constitute an Unforeseeable Emergen-cy under the Plan to the extent that it is or may be relieved: (a) Through reimbursement or compensation, by insurance or otherwise; (b) By liquidation of the Participant's assets, to the extent that the liquidation of such assets would not itself cause severe financial hardship; or (c) By discontinuing deferrals under this Plan or under any other plan of the Company as soon as permissible. An Unforeseeable Emergency under the Plan shall in no event include the need to send a child to college or the desire to purchase a home. 2.14 "VAI" means Varian Associates, Inc., a Delaware corporation. --- 2.15 "Valuation Date" means the last day of each calendar quarter. -------------- Any capitalized terms used in the Plan and not defined herein shall have the meaning provided in the Retirement Plan. 2 SECTION 3 ELIGIBILITY, PARTICIPATION, RESERVE ACCOUNTS AND CREDITS 3.1 Participation in the Plan shall be limited to: (a) Officers of the Company (not including any officer holding the office of only Assistant Secretary or Assistant Treasurer) who are active Retirement Plan participants; (b) Participants in the Retirement Plan whose Eligible Earnings under the Retirement Plan are limited by the Compensation Ceiling; and (c) Any other participant in the Retirement Plan who is designated by the Committee. At the beginning of a particular Plan Year, the Company, in its sole discretion, may determine that one or more individuals qualify as Participants for the Plan Year pursuant to Subsection (b) based upon such individual's current salary rate and target bonus compensation (to the extent includible in Eligible Earnings). Any such determination shall be valid for that Plan Year, regardless of whether the individual's Eligible Earnings at the end of the Plan Year actually exceed the Compensation Ceiling. 3.2 Reserve Account. The Company shall establish on its books a special --------------- unfunded Reserve Account for each Participant. As of each Valuation Date, the Company shall credit interest on the balance in each Reserve Account (not including any amounts credited under Sections 3.3, 3.4 and 3.5 below during the calendar quarter then ending). The interest credited to the Reserve Account shall be established from time to time by the Committee. 3.3 Matching Contributions. As of each Valuation Date in a Plan Year ---------------------- following the date when the Participant's contributions to the Retirement Plan reach the limitation in effect under Code section 402(g) (which limitation is $10,000 for 1999), the Company shall credit to a Participant's Reserve Account an amount determined as follows: (a) First, the hypothetical amount of the Participant's Matching Contribution since the preceding Valuation Date shall be calculated, based on the assumptions (i) that the Dollar Limitations do not apply and (ii) that the Participant's contributed to the Retirement Plan at a rate of 6% of Eligible Earnings; (b) Second, the amount calculated under Subsection (a) above shall be reduced (but not below zero) by the actual amount of the Participant's Matching Contribution since the preceding Valuation Date; and (c) The remainder (if any) shall be the amount credited to the Participant's Reserve Account under this Section 3.3. 3.4 Profit-Sharing Contributions. As of the Valuation Date coinciding with ---------------------------- or next following the date when the Company makes a Profit-Sharing Contribution under the Retirement 3 Plan, the Company shall credit to a Participant's Reserve Account an amount determined as follows: (a) First, the hypothetical amount of the Participant's share of the Profit-Sharing Contribution shall be calculated, based on the assumption that the Dollar Limitations do not apply; (b) Second, the amount calculated under Subsection (a) above shall be reduced (but not below zero) by the actual amount of the Participant's share of the Profit-Sharing Contribution; and (c) The remainder (if any) shall be the amount credited to the Participant's Reserve Account under this Section 3.4. 3.5 Elective Deferrals. An individual who is eligible to participate in ------------------ the Plan pursuant to Section 3.1 may elect to defer a portion of his Eligible Earnings with respect to a calendar year by filing a written deferral election with the Company during the Election Period. Any such election shall specify the percentage of Eligible Earnings to be deferred, which percentage shall be no higher than the maximum deferral percentage permitted under the Retirement Plan. A deferral election shall apply only to Eligible Earnings to be paid following the date when the Participant's Retirement Plan contributions exceed the limitation in effect under Section 402(g) of the Code ($10,000 for 1999). Deferral elections may be made and revoked any number of times during the Election Period, but any deferral election that has been submitted and has not been revoked at the end of the Election Period then becomes irrevocable. Normally, the Election Period is the month of December and the deferral election applies to the following calendar year. However, a special Election Period applies with respect to the calendar year when an individual first becomes eligible to participate in the Plan. In any such case, the Participant's Election Period is the 30-day period after the Company's written notice of eligibility is given, and such a Participant's deferral election applies to the remainder of the then-current calendar year following the close of the Election Period. There is also a special Election Period applicable to 1999, the calendar year in which this Plan was established. That Election Period is the 30-day period after the Company's written notice of eligibility is given to Participants, and any such Participant's deferral election applies to the remainder of 1999 following the close of the Election Period. Any other provision of the Plan notwithstanding, the Committee, at its sole discretion, may reduce the level of deferral elections or decline altogether to accept an individual's deferral election. SECTION 4 DISTRIBUTIONS 4.1 Right to Receive Payment. Any amount that may become payable under the ------------------------ Plan shall be paid solely from the general assets of the Company. Nothing in this Plan shall be construed to create a trust or to establish or evidence any Participant's claim of any right other than as an unsecured creditor with respect to any payment to which he or she may be entitled. 4 4.2 Timing of Payment---In General. Following the termination of a ------------------------------ Participant's employment with the Company and its subsidiaries, the Company shall pay to the Participant the balance credited to his or her Reserve Account. Payment shall be made in cash at such time(s) and in such form (including a lump sum or installments) as the Committee shall determine, in its sole discretion. If the Committee determines that payment is to be made in the form of installments, such installments shall be paid quarterly over a period not to exceed two years. 4.3 Accelerated In-Service Payment in Case of Emergency. In the event of --------------------------------------------------- a Participant's Unforeseeable Emergency, upon application by the Participant, the Committee may determine in its sole discretion that distribution of all or a portion of the Participant's Reserve Account shall be made on a date prior to the Participant's termination of employment. Distributions on account of an Unforeseeable Emergency shall be permitted only to the extent reasonably needed to satisfy the Participant's need. 4.4 In-Service Distribution With Penalty. Upon application by a ------------------------------------ Participant, the Committee may determine in its sole discretion that distribution of all or a portion of the Participant's Reserve Account shall be made prior to the Participant's termination of employment (even in the absence of an Unforseeable Emergency). All distributions under this Section 4.4 shall be reduced by a penalty equal to six percent of the amount otherwise distributable, which penalty shall be forfeited to the Company. A Participant who has received a distribution under this Section 4.4 shall thereafter be ineligible to make elective deferrals to the Plan. 4.5 Payment in the Event of Death. In the event of a Participant's death ----------------------------- before the entire Reserve Account has been distributed to him or her, the unpaid balance remaining in the Participant's Reserve Account shall be paid to his or her beneficiary or beneficiaries under the Retirement Plan, at such time(s) and in such form as the Committee shall determine in its sole discretion. SECTION 5 ADMINISTRATION 5.1 Committee is the Administrator. The Plan shall be administered by the ------------------------------ Committee. 5.2 Committee Authority. It shall be the duty of the Committee to ------------------- administer the Plan in accordance with the Plan's provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation including, but not limited to, the power to (a) determine which Retirement Plan participants shall be eligible to participate in this Plan, (b) determine the amounts to be credited to Reserve Accounts, (c) determine whether to grant applications for accelerated payments pursuant to Sections 4.3 and 4.4, (d) determine distributions to be made in the event of death pursuant to Section 4.5, (e) interpret the Plan, (f) adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and (g) interpret, amend or revoke any such rules. 5.3 Decisions Binding. All determinations and decisions made by the ----------------- Committee, the Board and any delegate of the Committee pursuant to the provisions of the Plan shall be final, 5 conclusive and binding on all persons, and shall be given the maximum deference permitted by law. 5.4 Delegation by the Committee. The Committee, in its sole discretion and --------------------------- on such terms and conditions as it may provide, may delegate all or part of its authority and powers under the Plan to one or more directors, officers or employees of the Company. SECTION 6 CLAIMS AND REVIEW PROCEDURES 6.1 Application for Benefits. Any application for benefits under the Plan ------------------------ shall be submitted to the Committee at the Company's principal office. Such application shall be in writing and on the prescribed form, if any, and shall be signed by the applicant. 6.2 Denial of Applications. In the event that any application for benefits ---------------------- is denied in whole or in part, the Committee shall notify the applicant in writing of the right to a review of the denial. Such written notice shall set forth, in a manner calculated to be understood by the applicant, specific reasons for the denial, specific references to the Plan provisions on which the denial was based, a description of any information or material necessary to perfect the application, an explanation of why such material is necessary, and an explanation of the Plan's review procedure. Such written notice shall be given to the applicant within 90 days after the Committee receives the application, unless special circumstances require an extension of time for processing the application. In no event shall such an extension exceed a period of 90 days from the end of the initial 90-day period. If such an extension is required, written notice thereof shall be furnished to the applicant before the end of the initial 90-day period. Such notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render a decision. If written notice is not given to the applicant within the period prescribed by this Section 6.2, the application shall be deemed to have been denied for purposes of Section 6.3 upon the expiration of such period. 6.3 Request for Review. Any person whose application for benefits is ------------------ denied in whole or in part (or such person's duly authorized representative) may appeal the denial by submitting to the Committee a request for a review of such application within 90 days after receiving written notice of denial. The Committee shall give the applicant or such representative an opportunity to review pertinent documents (except legally privileged materials) in preparing such request for review and to submit issues and comments in writing. The request for review shall be in writing and shall be addressed to the Committee at the Company's principal office. The request for review shall set forth all of the ground on which it is based, all facts in support of the request, and any other matters which the applicant deems pertinent. The Committee may require the applicant to submit such additional facts, documents, or other material as it may deem necessary or appropriate in making its review. 6.4 Decision on Review. The Committee shall act upon each request for ------------------ review within 60 days after receipt thereof, unless special circumstances require an extension of time for processing, but in no event shall the decision on review be rendered more that 120 days after the Committee receives the request for review. If such an extension is required, written notice 6 thereof shall be furnished to the applicant before the end of the initial 60-day period. The Committee shall give prompt, written notice of its decision to the applicant and to the Company. In the event that the Committee confirms the denial of the application for benefits in whole or in part, such notice shall set forth, in a manner calculated to be understood by the applicant, the specific reasons for such denial and specific references to the Plan provisions on which the decision is based. To the extent that the Committee overrules the denial of the application for benefits, such benefits shall be paid to the applicant. 6.5 Exhaustion of Administrative Remedies. No legal or equitable action ------------------------------------- for benefits under the Plan shall be brought unless and until the claimant (a) has submitted a written application for benefits in accordance with Section 6.1, (b) has been notified that the application is denied, (c) has filed a written request for a review of the application in accordance with Section 6.3, and (d) has been notified in writing that the Committee has affirmed the denial of the application; provided, however, that an action may be brought after the Committee has failed to act on the claim within the time prescribed in Section 6.2 and Section 6.4, respectively. SECTION 7 GENERAL PROVISIONS 7.1 Tax Withholding. The Company shall withhold all applicable taxes from --------------- any payment under this Plan, including any federal, state and local taxes (including the Participant's FICA obligation). 7.2 No Effect on Employment or Service. Nothing in the Plan shall ---------------------------------- interfere with or limit in any way the right of the Company to terminate any Participant's employment or service at any time, with or without cause. Employment with the Company and its affiliates is on an at-will basis only. The Company expressly reserves the right, which may be exercised at any time, to terminate any individual's employment with or without cause, and to treat him or her without regard to the effect that such treatment might have upon him or her as a Participant. 7.3 Participation. No individual shall have the right to be selected to ------------- participate in the Plan for any particular Plan Year. 7.4 Indemnification. To the extent permitted by ERISA, each person who is --------------- or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and (b) from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of 7 Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. 7.5 Successors. All obligations of the Company under the Plan shall be ---------- binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company. 7.6 Nontransferability of Awards. No portion of any Participant's Reserve ---------------------------- Account may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, and any act in violation of this Section shall be void. All rights with respect to a Participant's Reserve Account shall be available during his or her lifetime only to the Participant. SECTION 8 AMENDMENT, TERMINATION AND DURATION 8.1 Amendment, Suspension or Termination. The Company, in its sole ------------------------------------ discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. . The Company shall also have the authority to distribute all or a portion of any Participant's Reserve Account at any time, regardless of whether the Plan is then being terminated. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under the Plan. 8.2 Duration of the Plan. The Plan shall commence on the date specified -------------------- herein and, subject to Section 8.1 (regarding the Company's right to amend or terminate the Plan), shall remain in effect thereafter. SECTION 9 LEGAL CONSTRUCTION 9.1 Gender and Number. Except where otherwise indicated by the context, ----------------- any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 9.2 Severability. In the event any provision of the Plan shall be held ------------ illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 9.3 Requirements of Law. Benefits provided under the Plan shall be subject ------------------- to all applicable laws, rules and regulations, and to such approvals by any governmental agencies as may be required. 9.4 Governing Law. The Plan shall be construed in accordance with governed ------------- by ERISA and, to the extent not preempted by ERISA, by the laws of the State of California, but without regard to its conflict of law provisions. 8 9.5 Captions. Captions are provided herein for convenience only, and shall -------- not serve as a basis for interpretation or construction of the Plan. EXECUTION IN WITNESS WHEREOF, Varian, Inc. by its duly authorized officer, has executed the Plan on the date indicated below. VARIAN, INC. Dated: April 2, 1999 By: /s/ Robert R. Christofk II ___________________________ Name: Robert R. Christofk II Title: Vice President, Human Resources 9 EX-10.6 11 AMENDED AND RESTATED NOT OF REPURCHASE AND PRIVATE Exhibit 10.6 EXECUTION COPY - -------------------------------------------------------------------------------- VARIAN, INC. AMENDED AND RESTATED NOTE PURCHASE AND PRIVATE SHELF AGREEMENT AND ASSUMPTION $12,500,000 7.21% SERIES A SENIOR NOTES DUE JUNE 9, 2007 $25,000,000 6.70% SERIES B SENIOR NOTES DUE APRIL 30, 2014 $14,000,000 7.49% SERIES C SENIOR NOTES DUE JUNE 9, 2002 $7,000,000 6.90% SERIES D SENIOR NOTES DUE JUNE 9, 2002 AND $50,000,000 PRIVATE SHELF FACILITY DATED AS OF APRIL 2, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS (not part of agreement)
PAGE INTRODUCTION..................................................................................................... 1 1. AUTHORIZATION OF ISSUE OF NOTES......................................................................... 3 1A. Authorization of Issue of Series A Notes....................................................... 3 1B. Authorization of Issue of Series B Notes....................................................... 3 1C. Authorization of Issue of Series C Notes....................................................... 3 1D. Authorization of Issue of Series D Notes....................................................... 3 1E. Authorization of Issue of Shelf Notes.......................................................... 3 2. ASSUMPTION AND AMENDMENT AND RESTATEMENT OF EXISTING NOTES; PURCHASE AND SALE OF SHELF NOTES............ 4 2A(1). Assumption....................................................................... 4 2A(2). Amendment and Restatement of Existing 7.21% Notes and Issuance of Series A Notes.......................................................................... 4 2A(3). Amendment and Restatement of Existing 6.70% Notes and Issuance of Series B Notes.......................................................................... 5 2A(4). Amendment and Restatement of Existing 7.49% Notes and Issuance of Series C Notes.......................................................................... 5 2A(5). Amendment and Restatement of Existing 6.90% Notes and Issuance of Series D Notes.......................................................................... 6 2B. Purchase and Sale of Shelf Notes............................................................... 6 3. CONDITIONS OF CLOSING................................................................................... 10 3A. Conditions to Amendments and Restatements...................................................... 10
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PAGE 3B. Conditions to Purchase of Notes............................................................... 11 4. PREPAYMENTS............................................................................................ 12 4A. Required Prepayments of Series A Notes, Series B Notes, Series C Notes and Series D Notes......................................................................................... 13 4A(1). Required Prepayments of Series A Notes.......................................... 13 4A(2). Required Prepayments of Series B Notes.......................................... 13 4A(3). Required Prepayments of Series C Notes.......................................... 13 4A(4). Required Prepayments of Series D Notes.......................................... 13 4B. Required Prepayments of Shelf Notes........................................................... 13 4C. Optional Prepayment With Yield-Maintenance Amount............................................. 13 4D. Notice of Optional Prepayment................................................................. 14 4E. Application of Prepayments.................................................................... 14 4F. Retirement of Notes........................................................................... 14 5. AFFIRMATIVE COVENANTS.................................................................................. 14 5A. Financial Statements; Notice of Defaults...................................................... 14 5B. Information Required by Rule 144A............................................................. 16 5C. Inspection of Property........................................................................ 16 5D. Covenant to Secure Notes Equally.............................................................. 16 5E. Maintenance of Insurance...................................................................... 17 5F. Compliance with Laws.......................................................................... 17 6. NEGATIVE COVENANTS..................................................................................... 17 6A. Certain Financial Requirements................................................................ 17 6B. Dividend Limitation........................................................................... 17 6C. Lien, Funded Debt and Other Restrictions...................................................... 18
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PAGE 7. EVENTS OF DEFAULT...................................................................................... 21 7A. Acceleration.................................................................................. 21 7B. Rescission of Acceleration.................................................................... 24 7C. Notice of Acceleration or Rescission.......................................................... 24 7D. Other Remedies................................................................................ 24 8. REPRESENTATIONS, COVENANTS AND WARRANTIES.............................................................. 24 8A. Organization.................................................................................. 25 8B. Financial Statements.......................................................................... 25 8C. Actions Pending............................................................................... 25 8D. Outstanding Funded Debt....................................................................... 26 8E. Title to Properties........................................................................... 26 8F. Taxes......................................................................................... 26 8G. Conflicting Agreements and Other Matters...................................................... 26 8H. Offering of Notes............................................................................. 27 8I. Use of Proceeds............................................................................... 27 8J. ERISA......................................................................................... 27 8K. Governmental Consent.......................................................................... 28 8L. Environmental Compliance...................................................................... 28 8M. Disclosure.................................................................................... 28 8N. Hostile Tender Offers......................................................................... 28 8O. Year 2000 Compliance.......................................................................... 28 9. REPRESENTATIONS OF THE PURCHASERS...................................................................... 29 9A. Nature of Purchase............................................................................ 29 9B. Source of Funds............................................................................... 29 10. DEFINITIONS; ACCOUNTING MATTERS........................................................................ 30 10A. Yield-Maintenance Terms....................................................................... 30 10B. Other Terms................................................................................... 31
-iii- TABLE OF CONTENTS (CONTINUED)
PAGE 10C. Accounting Principles, Terms and Determinations............................................... 39 11. MISCELLANEOUS.......................................................................................... 39 11A. Note Payments................................................................................. 39 11B. Expenses...................................................................................... 39 11C. Consent to Amendments......................................................................... 40 11D(1). Form, Registration, Transfer and Exchange of Notes; Lost Notes.................. 41 11D(2). Prior Notice to Company Regarding Resale; Excluded Transferees.................. 41 11E. Persons Deemed Owners; Participations......................................................... 42 11F. Survival of Representations and Warranties; Entire Agreement.................................. 42 11G. Successors and Assigns........................................................................ 42 11H. Disclosure to Other Persons................................................................... 43 11I. Independence of Covenants..................................................................... 43 11J. Notices....................................................................................... 43 11K. Payments Due on Non-Business Days............................................................. 44 11L. Severability.................................................................................. 44 11M. Descriptive Headings.......................................................................... 44 11N. Satisfaction Requirement...................................................................... 44 11O. Governing Law................................................................................. 45 11P. Severalty of Obligations...................................................................... 45 11Q. Counterparts.................................................................................. 45 11R. Binding Agreement............................................................................. 45 11S. Amendment and Restatement of Existing Agreements; Release of the Company...................... 46
EXHIBITS AND SCHEDULES Purchaser Schedule for Series A Notes, Series B Notes, Series C Notes and Series D Notes Information Schedule Exhibit A-1 -- Form of Series A Note Exhibit A-2 -- Form of Series B Note Exhibit A-3 -- Form of Series C Note Exhibit A-4 -- Form of Series D Note Exhibit A-5 -- Form of Shelf Note -iv- TABLE OF CONTENTS (CONTINUED) PAGE Exhibit B -- Form of Request for Purchase Exhibit C -- Form of Confirmation of Acceptance Exhibit D -- Form of Solvency Certificate Exhibit E-1 -- Form of Opinion of Company Counsel, Series C Note Closing Exhibit E-2 -- Form of Opinion of Company Counsel, Shelf Note Closing Exhibit F-1 -- Form of Prudential Confidentiality Agreement Exhibit F-2 -- Form of Non-Prudential Confidentiality Agreement Exhibit G -- Investment Policy of Company Board of Directors Schedule 8G -- Agreements Restricting Debt -v- VARIAN, INC. 3120 Hansen Way Palo Alto, California 94304-1000 As of April 2, 1999 The Prudential Insurance Company of America ("PRUDENTIAL") Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (together with Prudential, the "PURCHASERS") c/o Prudential Capital Group Four Embarcadero Center Suite 2700 San Francisco, California 94111 Ladies and Gentlemen: The undersigned, Varian, Inc., a Delaware corporation (herein called the "COMPANY"), hereby agrees with you as set forth below. Reference is made to paragraph 10 hereof for definitions of capitalized terms used herein and not otherwise defined herein. INTRODUCTION. Varian Associates, Inc., a Delaware corporation, to be known as Varian Medical Systems, Inc., effective April 3, 1999 ("MEDICAL SYSTEMS"), and the holder of all of the outstanding shares of capital stock of the Company, and Prudential are parties to (i) the Master Shelf Agreement, dated as of May 11, 1992 (as heretofore amended, the "1992 NOTE AGREEMENT"), under which Medical Systems issued, and there are now outstanding and held by Prudential (a) Medical Systems' 7.49% Senior Notes due June 9, 2002, in the original aggregate principal amount of $40,000,000, of which $28,000,000 aggregate principal amount are now outstanding (the "EXISTING 7.49% NOTES"), and (b) Medical Systems' 6.90% Senior Notes due June 9, 2002, in the original aggregate principal amount of $20,000,000, of which $14,000,000 aggregate principal amount are now outstanding (the "EXISTING 6.90% NOTES"), and (ii) the Note Purchase and Private Shelf Agreement, dated as of October 18, 1996 (as heretofore amended, the "1996 NOTE AGREEMENT"), under which Medical Systems issued, and there are now outstanding and held by Prudential (a) Medical Systems' 7.21% Series A Senior Notes due June 9, 2007 in the aggregate principal amount of $25,000,000 (the "EXISTING 7.21% NOTES"), and (b) Medical Systems' 6.70% Series B Senior Notes due April 30, 2018 in the aggregate principal amount of $50,000,000 (the "EXISTING 6.70% NOTES"). Medical Systems has advised Prudential that it intends to distribute all of the shares of the Company to the shareholders of Medical Systems (the "SPIN OFF"). In connection with the Spin Off, Medical Systems will prepay $14,000,000 principal amount of the Existing 7.49% Notes and $7,000,000 principal amount of the Existing 6.90% Notes, and the Company and Medical Systems have requested that Prudential agree to, among other things, the following effective upon the consummation of the Spin Off: (1) to amend certain of the terms of $12,500,000 principal amount of the Existing 7.21% Notes as more specifically set forth in the Medical Systems Amended and Restated Note Agreement (such $12,500,000 principal amount of the Existing 7.21% Notes amended pursuant to the Medical Systems Amended and Restated Note Agreement being herein called the "MEDICAL SYSTEMS SERIES A NOTES"); (2) to shorten the maturity of the Existing 6.70% Notes to April 30, 2014 and to amend the interest rate on $25,000,000 principal amount of the Existing 6.70% Notes, as more specifically set forth in the Medical Systems Amended and Restated Note Agreement (such $25,000,000 principal amount of the Existing 6.70% Notes the interest rate on which is amended pursuant to the Medical Systems Amended and Restated Note Agreement being herein called the "MEDICAL SYSTEMS SERIES B NOTES"); (3) the assumption by the Company of Medical Systems' obligations under, and the release of Medical Systems from any obligation under, (A) the $14,000,000 principal amount of the Existing 7.49% Notes and the $7,000,000 principal amount of the Existing 6.90% Notes not prepaid by Medical Systems (the $14,000,000 principal amount of the Existing 7.49% Notes to be so assumed by the Company being herein called the "SERIES C NOTES" (which term shall include each Series C Note delivered pursuant to any provision of this Agreement and each promissory note of the Company delivered in substitution or exchange for any Series C Note pursuant to any such provision)) and the $7,000,000 principal amount of the Existing 6.90% Notes to be so assumed by the Company being herein called the "SERIES D NOTES" (which term shall include each Series D Note delivered pursuant to any provision of this Agreement and each promissory note of the Company delivered in substitution or exchange for any Series D Note pursuant to any such provision)), (B) the $12,500,000 principal amount of the Existing 7.21% Notes not constituting the Medical Systems Series A Notes (the $12,500,000 principal amount of the Existing 7.21% Notes to be so assumed by the Company being herein called the "SERIES A NOTES" (which term shall include each Series A Note delivered pursuant to any provision of this Agreement and each promissory note of the Company delivered in substitution or exchange for any Series A Note pursuant to any such provision)) and (C) the $25,000,000 principal amount of the Existing 6.70% Notes not constituting Medical Systems Series B Notes (the $25,000,000 principal amount of the Existing 6.70% Notes to be so assumed by the Company being herein called the "SERIES B NOTES" (which term shall include each Series B Note delivered pursuant to any promissory note of the Company delivered in substitution or exchange for any Series B Note pursuant to any such provision)); and (4) to amend and restate the 1992 Note Agreement and the 1996 Note Agreement, as they relate to the Series A Notes, the Series B Notes, the Series C Notes and the Series D Notes, in their entireties as set forth herein, including to provide for a new private shelf facility as set forth in paragraph 2B hereof, and to provide that the Series A Notes, the Series B Notes, the 2 Series C Notes, the Series D Notes and any Shelf Notes shall be subject to the terms of this Agreement. Subject to the terms and conditions hereof, Prudential is willing to agree to the foregoing. Accordingly, the Company and the Purchasers agree as follows: 1. AUTHORIZATION OF ISSUE OF NOTES. 1A. AUTHORIZATION OF ISSUE OF SERIES A NOTES. The Company will authorize the issue of the Series A Notes in the aggregate principal amount of $12,500,000, to be dated the date of issue thereof, to mature June 9, 2007, to bear interest (computed on the basis of a 360 day year -- 30 day month) on the unpaid balance thereof from the date thereof until the principal thereof shall have become due at the rate of 7.21% per annum, and on overdue principal, Yield- Maintenance Amount and interest at the rate and at the time specified therein, and to be substantially in the form of Exhibit A-1 attached hereto. 1B. AUTHORIZATION OF ISSUE OF SERIES B NOTES. The Company will authorize the issue of the Series B Notes in the aggregate principal amount of $25,000,000, to be dated the date of issue thereof, to mature April 30, 2014, to bear interest (computed on the basis of a 360 day year -- 30 day month) on the unpaid balance thereof from the date thereof until the principal thereof shall have become due at the rate of 6.70% per annum, and on overdue principal, Yield- Maintenance Amount and interest at the rate and at the time specified therein, and to be substantially in the form of Exhibit A-2 attached hereto. 1C. AUTHORIZATION OF ISSUE OF SERIES C NOTES. The Company will authorize the issue of the Series C Notes in the aggregate principal amount of $14,000,000, to be dated the date of issue thereof, to mature June 9, 2002 to bear interest (computed on the basis of a 360 day year -- 30 day month) on the unpaid balance thereof from the date thereof until the principal thereof shall have become due at the rate of 7.49 % per annum, and on overdue principal, Yield-Maintenance Amount and interest at the rate and at the time specified therein, and to be substantially in the form of Exhibit A-3 attached hereto. 1D. AUTHORIZATION OF ISSUE OF SERIES D NOTES. The Company will authorize the issue of the Series D Notes in the aggregate principal amount of $7,000,000, to be dated the date of issue thereof, to mature June 9, 2002, to bear interest (computed on the basis of a 360 day year -- 30 day month) on the unpaid balance thereof from the date thereof until the principal amount thereof shall have become due at the rate of 6.90% per annum, and on overdue principal, Yield-Maintenance Amount and interest at the rate and at the time specified therein, and to be substantially in the form of Exhibit A-4 attached hereto 1E. AUTHORIZATION OF ISSUE OF SHELF NOTES. The Company may authorize the issue of its additional senior promissory notes (the "SHELF NOTES") in the aggregate principal amount of $50,000,000, to be dated the date of issue thereof, to mature, in the case of each Shelf Note so issued, no more than fifteen years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than twelve years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of 3 each Shelf Note so issued, in the Confirmation of Acceptance with respect to such Shelf Note delivered pursuant to paragraph 2B(5), and to be substantially in the form of Exhibit A-5 attached hereto. The terms "SHELF NOTE" and "SHELF NOTES" as used herein shall include each Shelf Note delivered pursuant to any provision of this Agreement and each Shelf Note delivered in substitution or exchange for any such Shelf Note pursuant to any such provision. The terms "NOTE" and "NOTES" as used herein shall include each Series A Note, each Series B Note, each Series C Note, each Series D Note and each Shelf Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note's ultimate predecessor Note was issued), are herein called a "SERIES" of Notes. 2. ASSUMPTION AND AMENDMENT AND RESTATEMENT OF EXISTING NOTES; PURCHASE AND SALE OF SHELF NOTES. 2A(1). ASSUMPTION. Effective as of the Restatement Date, the Company hereby irrevocably, absolutely, unconditionally and expressly assumes (i) the due and punctual payment of all of the principal of, interest on, Yield- Maintenance Amount (if any) with respect to, and all other payments due under or relating to, (a) the $14,000,000 principal amount of the Existing 7.49% Notes and the $7,000,000 principal amount of the Existing 6.90% Notes not prepaid by Medical Systems as contemplated by the Medical Systems Amended and Restated Note Agreement, (b) the $12,500,000 principal amount of the Existing 7.21% Notes not constituting Medical Systems Series A Notes, and (c) the $25,000,000 principal amount of the Existing 6.70% Notes the maturity of which has been shortened to April 30, 2014 pursuant to the Medical Systems Amended and Restated Note Agreement but not constituting Medical Systems Series B Notes, (ii) as amended and restated in paragraphs 2A(2), 2A(3), 2A(4) and 2A(5), the due and punctual payment and performance of all covenants and provisions in the 1992 Note Agreement, the 1996 Note Agreement, the Existing 7.49% Notes, the Existing 6.90% Notes, the Existing 7.21% Notes, the Existing 6.70% Notes and all other instruments, agreements and undertakings which have been made by Medical Systems, in each case to the extent related to the indebtedness the payment of which is assumed by the Company pursuant to clause (i) of the paragraph 2A(1), and (iii) all other debts, liabilities and obligations of Medical Systems under any of the agreements, promissory notes, instruments or undertaking referred to in clause (ii) of this paragraph 2A(1), in each case to the extent related to the indebtedness the payment of which is assumed by the Company pursuant to clause (i) of this paragraph 2A(1). The Company covenants that its debts, liabilities and obligations assumed pursuant to this paragraph 2A(1) shall be those of a primary obligor and not a guarantor, surety or secondary obligor. 2A(2). AMENDMENT AND RESTATEMENT OF EXISTING 7.21% NOTES AND ISSUANCE OF SERIES A NOTES. Subject to the terms and conditions herein set forth, the Company and Prudential agree that, effective on the Restatement Date, the $12,500,000 principal amount of the Existing 7.21% Notes the payment of which is being assumed by the Company pursuant to paragraph 2A(1) will be amended and restated in their entirety to be a like principal amount of Series A Notes having the terms described in paragraph 1A hereof and to be in the form of 4 Exhibit A-1 hereto. On the Restatement Date, the Company will deliver to Prudential, in substitution and exchange for the Existing 7.21% Notes being so amended and restated, at the offices of Schiff Hardin & Waite, 6600 Sears Tower, Chicago, Illinois 60606, one or more Series A Notes registered in the name of Prudential, evidencing the aggregate principal amount of the Existing 7.21% Notes held by Prudential being so amended and restated, and in the denomination or denominations, specified in the Purchaser Schedule attached hereto. The Series A Notes (i) are given in exchange and substitution for, and not as payment of the indebtedness evidenced by, the $12,500,000 principal amount of the Existing 7.21% Notes being amended and restated pursuant to this paragraph 2A(2), (ii) merely re-evidence the indebtedness evidenced by such $12,500,000 principal amount of the Existing 7.21% Notes, and (iii) are not intended to constitute a novation or discharge of the indebtedness evidenced by such $12,500,000 principal amount of the Existing 7.21% Notes. Promptly after the Restatement Date Prudential agrees to mark such Existing 7.21% Notes "Replaced" and to return such Existing 7.21% Notes to Medical Systems. 2A(3). AMENDMENT AND RESTATEMENT OF EXISTING 6.70% NOTES AND ISSUANCE OF SERIES B NOTES. Subject to the terms and conditions herein set forth, the Company and Prudential agree that, effective on the Restatement Date, the $25,000,000 principal amount of the Existing 6.70% Notes the payment of which is being assumed by the Company pursuant to paragraph 2A(1) will be amended and restated in their entirety to be a like principal amount of Series B Notes having the terms described in paragraph 1B hereof and to be in the form of Exhibit A-2 hereto. On the Restatement Date, the Company will deliver to Prudential, in substitution and exchange for the Existing 6.70% Notes being so amended and restated, at the offices of Schiff Hardin & Waite, 6600 Sears Tower, Chicago, Illinois 60606, one or more Series B Notes registered in the name of Prudential, evidencing the aggregate principal amount of the Existing 6.70% Notes held by Prudential being so amended and restated, and in the denomination or denominations, specified in the Purchaser Schedule attached hereto. The Series B Notes (i) are given in exchange and substitution for, and not as payment of the indebtedness evidenced by, the $25,000,000 principal amount of the Existing 6.70% Notes being amended and restated pursuant to this paragraph 2A(3), (ii) merely re-evidence the indebtedness evidenced by such $25,000,000 principal amount of the Existing 6.70% Notes, and (iii) are not intended to constitute a novation or discharge of the indebtedness evidenced by such $25,000,000 principal amount of the Existing 6.70% Notes. Promptly after the Restatement Date Prudential agrees to mark such Existing 6.70% Notes "Replaced" and to return such Existing 6.70% Notes to Medical Systems. 2A(4). AMENDMENT AND RESTATEMENT OF EXISTING 7.49% NOTES AND ISSUANCE OF SERIES C NOTES. Subject to the terms and conditions herein set forth, the Company and Prudential agree that, effective on the Restatement Date, the $14,000,000 principal amount of the Existing 7.49% Notes the payment of which is being assumed by the Company pursuant to paragraph 2A(1) will be amended and restated in their entirety to be a like principal amount of Series C Notes having the terms described in paragraph 1C and to be in the form of Exhibit A-3 hereto. On the Restatement Date, the Company will deliver to Prudential, in substitution and exchange for the Existing 7.49% Notes being so amended and restated, at the offices of Schiff Hardin & Waite, 6600 Sears Tower, Chicago, Illinois 60606, one or more Series C Notes registered in the name of Prudential, evidencing the aggregate principal amount of the Existing 7.49% Notes held by Prudential being so amended and restated, and in the denomination or 5 denominations, specified in the Purchaser Schedule attached hereto. The Series C Notes (i) are given in exchange and substitution for, and not a payment of the indebtedness evidenced by, the $14,000,000 principal amount of the Existing 7.49% Notes being amended and restated pursuant to this paragraph 2A(4), (ii) merely re-evidence the indebtedness evidenced by such $14,000,000 principal amount of the Existing 7.49% Notes, and (iii) are not intended to constitute a novation or discharge of the indebtedness evidenced by such $14,000,000 principal amount of the Existing 7.49% Notes. Promptly after the Restatement Date, Prudential agrees to mark such Existing 7.49% Notes "Replaced" and to return such Existing 7.49% Notes to Medical Systems. 2A(5). AMENDMENT AND RESTATEMENT OF EXISTING 6.90% NOTES AND ISSUANCE OF SERIES D NOTES. Subject to the terms and conditions herein set forth, the Company and Prudential agree that, effective on the Restatement Date, the $7,000,000 principal amount of the Existing 6.90% Notes the payment of which is being assumed by the Company pursuant to paragraph 2A(1) will be amended and restated in their entirety to be a like principal amount of Series D Notes having the terms described in paragraph 1D and to be in the form of Exhibit A-4 hereto. On the Restatement Date, the Company will deliver to Prudential, in substitution and exchange for the Existing 6.90% Notes being so amended and restated, at the offices of Schiff Hardin & Waite, 6600 Sears Tower, Chicago, Illinois 60606, one or more Series D Notes registered in the name of Prudential, evidencing the aggregate principal amount of the Existing 6.90% Note held by Prudential being so amended and restated, and in the denomination or denominations, specified in the Purchaser Schedule attached hereto. The Series D Notes (i) are given in exchange and substitution for, and not as payment of the indebtedness evidenced by, the $7,000,000 principal amount of the Existing 6.90% Notes being amended and restated pursuant to this paragraph 2A(5), (ii) merely re-evidence the indebtedness evidenced by such $7,000,000 principal amount of the Existing 6.90% Notes, and (iii) are not intended to constitute a novation or discharge of the indebtedness evidenced by such $7,000,000 principal amount of the Existing 6.90% Notes. Promptly after the Restatement Date, Prudential agrees to mark such Existing 6.90% Notes "Replaced" and to return such Existing 6.90% Notes to Medical Systems. 2B. PURCHASE AND SALE OF SHELF NOTES. 2B(1). FACILITY. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Shelf Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Shelf Notes is herein called the "Facility". At any time, the aggregate principal amount of Shelf Notes stated in paragraph 1E, minus the ----- aggregate principal amount of Shelf Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted ----- Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, is herein called the "AVAILABLE FACILITY AMOUNT" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF SHELF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE SHELF NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF SHELF NOTES, AND THE FACILITY SHALL IN NO WAY BE 6 CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. 2B(2). ISSUANCE PERIOD. Shelf Notes may be issued and sold pursuant to this Agreement until the earlier of (i) the third anniversary of the date of this Agreement (or if such anniversary is not a Business Day, the Business Day next preceding such anniversary) and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, written notice stating that it elects to terminate the issuance and sale of Shelf Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day next preceding such thirtieth day). The period during which Shelf Notes may be issued and sold pursuant to this Agreement is herein called the "ISSUANCE PERIOD". 2B(3). REQUEST FOR PURCHASE. The Company may from time to time during the Issuance Period make requests for purchases of Shelf Notes (each such request being herein called a "REQUEST FOR PURCHASE"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Shelf Notes covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities, principal prepayment dates and amounts and interest payment periods (quarterly or semi-annual in arrears) of the Shelf Notes covered thereby, (iii) specify the use of proceeds of such Shelf Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Shelf Notes, which shall be a Business Day during the Issuance Period not less than 5 Business Days and not more than 30 Business Days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Shelf Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase (except to the extent caused by the transactions herein contemplated) and that there exists on the date of such Request for Purchase no Event of Default or Default, (vii) specify the Designated Spread for such Shelf Notes and (viii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2B(4). RATE QUOTES. Not later than two Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2B(3), Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the several principal amounts, maturities, principal prepayment schedules, and interest payment periods of Shelf Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Shelf Notes at which Prudential or a Prudential Affiliate would be willing to purchase such Shelf Notes at 100% of the principal amount thereof. 2B(5). ACCEPTANCE. Within 5 minutes after Prudential shall have provided any interest rate quotes pursuant to paragraph 2B(4) or such shorter period as Prudential may specify to the Company (such period herein called the "ACCEPTANCE WINDOW"), the Company may, subject to paragraph 2B(6), elect to accept such interest rate quotes as to not less than $5,000,000 aggregate principal amount of the Shelf Notes specified in the related Request for Purchase. 7 Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Shelf Notes (each such Shelf Note being herein called an "ACCEPTED NOTE") as to which such acceptance (herein called an "ACCEPTANCE") relates. The day the Company notifies an Acceptance with respect to any Accepted Notes is herein called the "ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2B(6) and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a "CONFIRMATION OF ACCEPTANCE"). If the Company should fail to execute and return to Prudential within three Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing. 2B(6). MARKET DISRUPTION. Notwithstanding the provisions of paragraph 2B(5), if Prudential shall have provided interest rate quotes pursuant to paragraph 2B(4) and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2B(5) the domestic market for U.S. Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the domestic market for U.S. Treasury securities or derivatives, then such interest rate quotes shall expire, and no purchase or sale of Shelf Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2B(6) are applicable with respect to such Acceptance. 2B(7). FACILITY CLOSINGS. Not later than 11:30 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of Prudential Capital Group, Four Embarcadero Center, Suite 2700, San Francisco, California 94111, the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this paragraph 2B(7), or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (i) such closing is to be 8 rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 30 Business Days after such scheduled Closing Day (the "RESCHEDULED CLOSING DAY")) and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2B(8)(iii) or (ii) such closing is to be canceled. In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Closing Day, notify the Company in writing that such closing is to be canceled. Notwithstanding anything to the contrary appearing in this Agreement, the Company may not elect to reschedule a closing with respect to any given Accepted Notes on more than one occasion, unless Prudential shall have otherwise consented in writing. 2B(8). FEES. 2B(8)(i). ISSUANCE FEE. The Company will pay to Prudential in immediately available funds a fee (herein called the "ISSUANCE FEE") on each Closing Day (other than any other Closing Day which occurs prior to the date which is three months after the Restatement Date) in an amount equal to 0.15% of the aggregate principal amount of Notes sold on such Closing Day. 2B(8)(ii). DELAYED DELIVERY FEE. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Closing Day for such Accepted Note, the Company will pay to Prudential (a) on the Cancellation Date or actual closing date of such purchase and sale and (b) if earlier, the next Business Day following 90 days after the Acceptance Day for such Accepted Note and on each Business Day following 90 days after the prior payment hereunder, a fee (herein called the "DELAYED DELIVERY FEE") calculated as follows: (BEY - MMY) X DTS/360 X PA where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note; "MMY" means Money Market Yield, i.e., the yield per annum on a commercial paper investment of the highest quality selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the original Closing Day with respect to such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2B(7). 9 2B(8)(iii). CANCELLATION FEE. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2B(5) or the penultimate sentence of paragraph 2B(7) that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being herein called the "CANCELLATION DATE"), the Company will pay to Prudential in immediately available funds an amount (the "CANCELLATION FEE") calculated as follows: PI X PA where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "PA" has the meaning ascribed to it in paragraph 2B(8)(iii). The foregoing bid and ask prices shall be as reported by Bridge Telerate Services (Telerate) (or, if such data for any reason ceases to be available through Bridge Telerate Services (Telerate), any publicly available source of similar market data). Each price shall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero. 3. CONDITIONS OF CLOSING. 3A. CONDITIONS TO AMENDMENTS AND RESTATEMENTS. The effectiveness of the amendment and restatement of the $12,500,000 principal amount of Existing 7.21% Notes pursuant to paragraph 2A(1) hereof, the amendment and restatement of the $25,000,000 principal amount of the Existing 6.70% Notes pursuant to paragraph 2A(2) hereof, the amendment and restatement of the $14,000,000 principal amount of the Existing 7.49% Notes pursuant to paragraph 2A(3) hereof, the amendment and restatement of the $7,000,000 principal amount of the 6.90% Notes pursuant to paragraph 2A(4) hereof, and the amendment and restatement of the 1992 Note Agreement and the 1996 Note Agreement pursuant to paragraph 11S hereof are subject to the satisfaction, on or before the Restatement Date, of (i) each of the conditions set forth in paragraph 3B hereof, and (ii) each of the following conditions: 3A(1). SPIN OFF. All agreements and instruments relating to the Spin Off shall be in form and substance reasonably satisfactory to Prudential and shall have been duly executed and delivered by the parties thereto, Prudential shall have received copies of all such agreements and instruments together with an Officer's Certificate certify that such agreements and instrument are correct and complete, and the Spin Off shall have been consummated in accordance with the terms of such agreements and instruments. 3A(2). MEDICAL SYSTEMS AMENDED AND RESTATED NOTE AGREEMENT. Prudential and Medical Systems shall have duly executed and delivered the Medical Systems Amended and Restated Note Agreement and the Medical Systems Amended and Restated Note 10 Agreement shall be in full force and effect. All conditions to the effectiveness of the amendment and restatement of the 1992 Note Agreement and the 1996 Note Agreement, as they relate to the Medical Systems Series A Notes and the Medical Systems Series B Notes, and the release of Medical Systems from obligations being assumed by the Company hereunder under the Medical Systems Amended and Restated Note Agreement shall have been satisfied. 3A(3). RESTATED NOTES. Prudential shall have received the Series A Notes, the Series B Notes, the Series C Notes and the Series D Notes, as contemplated by paragraphs 2A(2), 2A(3), 2A(4) and 2A(5) hereof, duly executed and delivered by the Company. 3A(4). SECURITIES VALUATION OFFICE QUESTIONNAIRE. The Company will have delivered to Prudential a copy of the Company's response to the Year 2000 Due Diligence Questionnaire supplied by the Securities Valuation Office of the National Association of Insurance Commissioners. 3A(5). SOLVENCY CERTIFICATE. Prudential shall have received an Officer's Certificate as to the solvency of the Company after giving effect to the Spin-Off, the assumption by the Company pursuant to paragraph 2A(1) hereof, the amendments and restatements pursuant to paragraphs 2A(2), 2A(3), 2A(4) and 2A(5), the issuance of the Notes and the consummation of the other transactions contemplated hereby in the form of Exhibit D attached hereto. 3B. CONDITIONS TO PURCHASE OF NOTES. The effectiveness of the amendments and restatements referred to in paragraph 3A and the obligation of any Purchaser to purchase and pay for any Notes is subject to the satisfaction (i) on or before the Restatement Date, of each of the conditions set forth in paragraph 3A, and (ii) on or before the Closing Day for such Notes, of the following additional conditions: 3B(1). CERTAIN DOCUMENTS. Such Purchaser shall have received the following, each dated the date of the Restatement Date or the applicable Closing Day, as applicable: (i) In the case of the purchase of any Note(s), the Note(s) to be purchased by such Purchaser. (ii) Certified copies of the resolutions of the Boards of Directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. (iii) Certificates of the Secretary or an Assistant Secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder. (iv) Certified copies of the Charter and By-laws of the Company. (v) A favorable opinion from the general counsel of the Company (or such other counsel designated by the Company and acceptable to the Purchaser(s)) satisfactory to such Purchaser and substantially in the form of Exhibit E-1 (in the case of the 11 effectiveness of such amendments and restatements) or E-2 (in the case of any Shelf Notes) attached hereto and as to such other matters as such Purchaser may reasonably request. The Company hereby directs each such counsel to deliver such opinion, agrees that the issuance and sale of any Notes will constitute a reconfirmation of such direction, and understands and agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such opinion. (vi) Good standing certificates for the Company from the Secretaries of State of Delaware and California dated as of a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request. (vii) In the case of Closing Days other than the Restatement Date, additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser at least two Business Days prior to the Closing Day. 3B(2). OPINION OF PURCHASER'S SPECIAL COUNSEL. Such Purchaser shall have received from James F. Evert, Assistant General Counsel of Prudential or such other counsel who is acting as special counsel for it in connection with this transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the matters herein contemplated as it may reasonably request. 3B(3). REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations and warranties of the Company contained in paragraph 8 hereof shall be true on and as of the Restatement Date or such Closing Day, as applicable, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the Restatement Date or such Closing Day, as applicable, no Event of Default or Default; and the Company shall have delivered to such Purchaser an Officer's Certificate, dated the Restatement Date or such Closing Day, as applicable, to both such effects. 3B(4). PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation T, U or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition. 3B(5). PAYMENT OF FEES. The Company shall have paid to Prudential any fees due it pursuant to or in connection with this Agreement, including any Issuance Fee due pursuant to paragraph 2B(8)(i) and any Delayed Delivery Fee due pursuant to paragraph 2B(8)(ii). 4. PREPAYMENTS. The Series A Notes, the Series B Notes, the Series C Notes, the Series D Notes and any Shelf Notes shall be subject to required prepayment as and to the extent provided in paragraphs 4A and 4B, respectively. The Series A Notes, the Series B Notes, 12 the Series C Notes, the Series D Notes and any Shelf Notes shall also be subject to prepayment under the circumstances set forth in paragraph 4C. 4A. REQUIRED PREPAYMENTS OF SERIES A NOTES, SERIES B NOTES, SERIES C NOTES AND SERIES D NOTES. 4A(1). REQUIRED PREPAYMENTS OF SERIES A NOTES. Until the Series A Notes shall be paid in full, the Company shall apply to the prepayment of the Series A Notes, without Yield Maintenance Amount, the sum of $1,250,000 on June 9 and December 9 in each year, commencing December 9, 2002 through and including December 9, 2006, and such principal amounts of the Series A Notes, together with interest accrued thereon to the payment dates, shall become due on such payment dates. The remaining unpaid principal amount of the Series A Notes, together with interest accrued thereon, shall become due on the maturity date of the Series A Notes. 4A(2). REQUIRED PREPAYMENTS OF SERIES B NOTES. Until the Series B Notes shall be paid in full, the Company shall apply to the prepayment of the Series B Notes, without Yield-Maintenance Amount, the sum of $6,250,000 on April 30, 2008, April 30, 2010 and April 30, 2012, and such principal amounts of the Series B Notes, together with interest accrued thereon to the payment dates, shall become due on such payment dates. The remaining unpaid principal amount of the Series B Notes, together with interest accrued thereon, shall become due on the maturity date of the Series B Notes. 4A(3). REQUIRED PREPAYMENTS OF SERIES C NOTES. Until the Series C Notes shall be paid in full, the Company shall apply to the prepayment of the Series C Notes, without Yield-Maintenance Amount, the sum of $2,000,000 on June 9 and December 9 in each year, commencing June 9, 1999 through and including December 9, 2001, and such principal amounts of the Series C Notes, together with interest accrued thereon to the payment dates, shall become due on such payment dates. The remaining unpaid principal amount of the Series C Notes, together with interest accrued thereon, shall become due on the maturity date of the Series C Notes. 4A(4). REQUIRED PREPAYMENTS OF SERIES D NOTES. Until the Series D Note shall be paid in full, the Company shall apply to the prepayment of the Series D Notes, without Yield-Maintenance Amount, the sum of $1,000,000 on June 9 and December 9 in each year, commencing, June 9, 1999 through and including December 9, 2001, and such principal amounts of the Series D Notes, together with interest accrued thereon to the payment dates, shall become due on such payment dates. The remaining unpaid principal balance of the Series D Notes, together with interest accrued thereon, shall become due on the maturity date of the Series D Notes. 4B. REQUIRED PREPAYMENTS OF SHELF NOTES. Each Series of Shelf Notes shall be subject to the required prepayments, if any, set forth in the Notes of such Series. 4C. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. The Notes of each Series shall be subject to prepayment, in whole at any time or from time to time in part (in integral multiples of $100,000 and in a minimum amount of $1,000,000), at the option of the 13 Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. Notwithstanding paragraphs 4A(1), 4A(2), 4A(3), 4A(4) and 4B, upon any partial prepayment of Notes of a Series pursuant to this paragraph 4C, the principal amount of each required prepayment of the Notes of such Series under paragraph 4A(1), 4A(2), 4A(3), 4A(4) or 4B, as the case may be, becoming due after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes of such Series is reduced as a result of such prepayment pursuant to this paragraph 4C. 4D. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give the holder of each Note of a Series to be prepaid pursuant to paragraph 4C irrevocable written notice of such prepayment not less than 5 Business Days prior to the prepayment date, specifying such prepayment date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of the Notes of such Series held by such holder to be prepaid on that date and that such prepayment is to be made pursuant to paragraph 4C. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date. The Company shall, on or before the day on which it gives written notice of any prepayment pursuant to paragraph 4C, give telephonic notice of the principal amount of the Notes to be prepaid and the prepayment date to each Significant Holder which shall have designated a recipient for such notices in the Purchaser Schedule attached hereto or in the applicable Confirmation of Acceptance or by notice in writing to the Company. 4E. APPLICATION OF PREPAYMENTS. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes of any Series pursuant to paragraph 4A, 4B or 4C, the amount to be prepaid shall be applied pro rata to all outstanding Notes of such Series according to the respective unpaid principal amounts thereof. 4F. RETIREMENT OF NOTES. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraph 4A, 4B or 4C or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes of any Series held by any holder. 5. AFFIRMATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows: 5A. FINANCIAL STATEMENTS; NOTICE OF DEFAULTS. The Company covenants that it will deliver to each Significant Holder in duplicate: (i) as soon as practicable and in any event within 45 days after the end of each of the first three quarterly periods in each fiscal year, consolidated statements of earnings, cash flows and shareholders' equity of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the 14 corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, however, that -------- ------- pursuant to clause (iii) below of copies of the Quarterly Report on Form 10-Q of the Company for such quarterly period filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (i); (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated statements of earnings, cash flows and shareholders' equity of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and satisfactory in form to the Required Holder(s) and containing an unqualified opinion by independent nationally recognized public accountants selected by the Company; provided, however, that -------- ------- delivery pursuant to clause (iii) below of copies of the Annual Report on Form 10-K of the Company for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (ii); (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its stockholders and copies of all registration statements (without exhibits and exclusive of any registration statement on From S-8 or any successor thereto) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (iv) promptly upon any amendment or other modification thereof which changes the types or amounts of investments or classes of investments permitted thereby, a copy of the Investment Policy reflecting such amendment or other modification; and (v) with reasonable promptness, such other financial data as such Significant Holder may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each Significant Holder an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraphs 6A, 6B, 6C(2) and 6C(3) and stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each Significant Holder a certificate of such accountants stating that, in making the audit necessary for their report on such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or Default which would not be disclosed in the course of such audit. 15 The Company also covenants that immediately after any Designated Officer obtains knowledge of an Event of Default or Default, it will deliver to each Significant Holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 5B. INFORMATION REQUIRED BY RULE 144A. The Company covenants that it will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to and in compliance with the reporting requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 5C. INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom (provided making copies or taking extracts of any such documents with the consent of the Company is not prohibited by any federal, state or local law) and to discuss the affairs, finances and accounts of any of such corporations with (x) the principal officers of the Company and (y) during the pendency of an Event of Default and so long as an officer of the Company is provided an opportunity to attend, its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request; provided, however, that (i) the foregoing provisions of this paragraph 5C shall - -------- ------- be subject to compliance with applicable security regulations of the United States Government, (ii) matters which the Company in good faith has determined are subject to the attorney/client privilege, information from third parties which the Company is required to maintain as confidential and confidential research and design information of the Company or of any Subsidiary shall not be subject to such inspection, examination, copying and discussion and (iii) disclosure of any other material non-public information of the Company or its Subsidiaries requested by such Person may be conditioned upon such Person's execution and delivery of a confidentiality agreement in the form of Exhibit F-1 (in the case of Prudential or any Prudential Affiliate) or in the form of Exhibit F-2 or such other form as is reasonably satisfactory to the Company and such Person (in the case of any other holder of Notes). 5D. COVENANT TO SECURE NOTES EQUALLY. The Company covenants that, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6C(1) (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will, if requested by the Required Holders, make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Funded Debt thereby secured so long as any such other Funded Debt shall be so secured. 16 5E. MAINTENANCE OF INSURANCE. The Company covenants that it will, and will cause its Subsidiaries to, maintain insurance in such amounts and against such hazards and liabilities as customarily is maintained by other companies operating similar businesses and, from time to time, upon the written request of any Significant Holder, will deliver an Officer's Certificate specifying the details of such insurance then in effect. 5F. COMPLIANCE WITH LAWS. The Company covenants that it will, and will cause each of the Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all applicable statutes, rules, regulations and orders of all federal, state, local and foreign governments, courts, agencies or regulatory bodies, including all Environmental Laws, except where noncompliance would not materially adversely affect the business, condition (financial or otherwise) or operations of the Company and the Subsidiaries taken as a whole. 6. NEGATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note or other amount due hereunder is outstanding and unpaid, the Company covenants as follows: 6A. CERTAIN FINANCIAL REQUIREMENTS. The Company covenants that it will not permit: (i) Consolidated Working Capital at any time to be less than $65,000,000; (ii) the ratio of (A) the sum of Consolidated Cash and Cash Equivalents plus Consolidated Receivables to (B) Consolidated Current Liabilities at any time to be less than 50%; or (iii) the ratio of (A) the sum of (1) Consolidated Net Earnings plus (2) Consolidated income taxes plus (3) Consolidated Interest Expense to (B) Consolidated Interest Expense for the five immediately preceding consecutive fiscal quarters at any time to be less than 300%. 6B. DIVIDEND LIMITATION. The Company covenants that it will not and will not permit any Subsidiary to (i) pay or declare any dividend on any class of its stock, or make any other distribution on account of any class of its stock, or (ii) redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock (all of the foregoing being herein called "RESTRICTED PAYMENTS") except any such Restricted Payment which, when added to all prior Restricted Payments made by the Company or any Subsidiary after October 2, 1998, does not exceed Consolidated Net Earnings Available for Restricted Payments. There shall not be included in Restricted Payments (i) dividends paid, or distributions made, in its own stock by the Company or a Subsidiary; (ii) exchanges of stock of one or more classes of the Company or a Subsidiary for its common stock or for its stock of the same class, except to the extent that cash or other value is involved in such exchange; (iii) the cost of stock of the Company repurchased by the Company in any year for the issuance of new stock to employees and directors under the employee stock plans and programs described in the Company's proxy statement dated February 12, 1999, and any successor or replacement programs, but not to exceed the proceeds received by the Company from the issuance of stock under such plans and programs during such year; or (iv) 17 dividends or distributions paid by a Subsidiary to the Company. The term "stock" as used in this paragraph 6B shall include warrants, rights or options to purchase stock. 6C. LIEN, FUNDED DEBT AND OTHER RESTRICTIONS. The Company covenants that it will not and will not permit any Subsidiary to: 6C(1). LIENS. Create, assume or suffer to exist at any time any Lien upon any of its property or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Note in accordance with the provisions of paragraph 5C), except (i) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with generally accepted accounting principles; (ii) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (iii) Liens on property or assets of a Subsidiary to secure obligations of such Subsidiary to the Company or another Subsidiary; and (iv) any Lien on property of the Company or any Subsidiary securing Funded Debt permitted by paragraph 6C(2), provided that Funded Debt secured -------- by all such Liens shall not at any time exceed 15% of Consolidated Tangible Net Worth; 6C(2). CONSOLIDATED FUNDED DEBT. Create, incur, assume or suffer to exist at any time any Funded Debt, except to the extent that (i) Consolidated Funded Debt is less than or equal to 55% of Consolidated Tangible Gross Worth, (ii) Consolidated Funded Debt secured by Liens is less than or equal to 15% of Consolidated Tangible Net Worth, and (iii) Funded Debt of Subsidiaries (including Guarantees of Funded Debt of the Company) to Persons other than the Company or another Subsidiary is less than or equal to 10% of Consolidated Tangible Net Worth; 6C(3). LOANS, ADVANCES, INVESTMENTS AND CONTINGENT LIABILITIES. Make or permit to remain outstanding any loan or advance to, or Guarantee, endorse or otherwise voluntarily be or become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (provided that for -------- purposes of this Agreement down payments and progress payments in the ordinary course of business shall not be considered as advances), except that the Company or any Subsidiary may: (i) make or permit to remain outstanding loans or advances to any Subsidiary, 18 (ii) own, purchase or acquire stock, obligations or securities of a Subsidiary, or of a corporation which immediately after such purchase or acquisition will be a Subsidiary, (iii) acquire and own stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Company or any Subsidiary, (iv) endorse negotiable instruments for collection in the ordinary course of business, (v) make or permit to remain outstanding (A) travel advances in the ordinary course of business to, and (B) loans and Guarantees pursuant to employee relocation and housing programs approved by the Company's Board of Directors to or on behalf of, officers and employees of the Company or any Subsidiary, (vi) guarantee obligations of other Persons, provided the Funded Debt represented by such Guarantees does not violate any provision of this Agreement, including paragraph 6C(2), (vii) make investments as permitted by the investment policy (the "INVESTMENT POLICY") adopted by the Board of Directors of the Company and which is attached hereto as Exhibit G, as amended from time to time, (viii) make Restricted Payments in compliance with paragraph 6B, and (ix) guarantee obligations of Medical Systems and Varian Semiconductor Equipment Associates, Inc. ("VSEA") consisting of "shared liabilities" as that term is defined in the Distribution Agreement dated as of January 14, 1999 by and among the Company, Medical Systems and VSEA, (x) make other loans, advances and investments, provided that the -------- aggregate dollar amount thereof shall not at any time exceed 20% of Consolidated Tangible Net Worth; 6C(4). SALE OF STOCK AND FUNDED DEBT OF SUBSIDIARIES. Sell, issue or otherwise dispose of any shares of stock (other than director's or shareholder's qualifying shares) or Funded Debt of any Subsidiary, except (i) to the Company or another Subsidiary, (ii) that all shares of stock and Funded Debt of any Subsidiary at the time owned by or owed to the Company and all Subsidiaries may be sold as an entirety for a consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Funded Debt so sold, provided that such sale shall be subject to and shall not violate paragraph - -------- 6C(5), and further provided that, at the time of such sale, such Subsidiary -------- shall not own, directly or indirectly, any shares of stock or Funded Debt of any other Subsidiary (unless all of the shares of stock and Funded Debt of such other Subsidiary owned, directly or indirectly, by the Company and all Subsidiaries are simultaneously being sold as permitted by this paragraph 6C(4)) and (iii) less than all shares of stock in a Subsidiary may be sold for a consideration of not less than fair value (as determined in good faith by the Board of 19 Directors of the Company) so long as the Company's remaining investment in such former Subsidiary is treated as an investment and can be held in compliance with paragraph 6C(3); 6C(5). MERGER AND SALE OF ASSETS. Enter into any transaction of merger or consolidation with any other corporation or sell, lease or transfer or otherwise dispose of all or a substantial part of its assets to any Person, except that (i) any Subsidiary wholly-owned by the Company may merge with the Company (provided that the Company shall be the continuing or surviving corporation) or with any one or more other Subsidiaries, (ii) any Subsidiary may sell, lease, transfer or otherwise dispose of (collectively, "TRANSFER") any of its assets to the Company or another Subsidiary, (iii) any Subsidiary may Transfer all or substantially all of its assets subject to the conditions specified in paragraphs 6C(4)(ii) and the remainder of this 6C(5) with respect to the sale of the stock of such Subsidiary, (iv) the Company may merge or consolidate with any other corporation provided that the Company shall be the continuing or surviving corporation -------- and that immediately after such merger or consolidation, there shall exist no Event of Default or Default under this Agreement, and (v) the Company or any Subsidiary may Transfer any of its assets provided that (x) the book value of all such assets Transferred, together with the book value of all shares of stock and Funded Debt of any Subsidiary Transferred pursuant to the provisions of paragraph 6C(4) and assets Transferred pursuant to clause (iii) of this paragraph 6C(5), in any fiscal year does not exceed 20% of Consolidated Tangible Net Worth as of the last day of the immediately preceding fiscal year, and (y) the assets, including any assets Transferred pursuant to clause (iii) of this paragraph 6C(5) and any Subsidiary Transferred pursuant to the provisions of paragraph 6C(4), Transferred in any fiscal year shall have contributed less than 10% of the average amount of Consolidated Net Earnings for the three fiscal years immediately preceding the fiscal year in which such determination takes place; provided, however, that notwithstanding any provision of paragraphs 6C(4) and - -------- ------- 6C(5) to the contrary, (A) the Company and its Subsidiaries shall not Transfer assets, on a cumulative basis from the date of this Agreement, either with a book value in excess of 40% of Consolidated Tangible Net Worth (measured as of the last day of the fiscal year immediately preceding the fiscal year in which such determination takes place) or that contributed Consolidated Net Earnings (calculated as set forth in clause (v) (y) above) in excess of 20% of Consolidated Net Earnings for the three fiscal years immediately preceding the fiscal year in which such determination takes place, and (B) the Company may discontinue the operation of, or sell, any division of its business or any Subsidiary if such division or Subsidiary is unprofitable and the Board of Directors of the Company in good faith has determined that the business of such division or Subsidiary should be so discontinued or otherwise abandoned; 20 6C(6). SALE OR DISCOUNT OF RECEIVABLES. Discount or sell with recourse, or sell for less than the face value thereof, any of its notes or accounts receivable, except that the Company or any Subsidiary may (i) sell ------ notes or accounts receivable with recourse provided that the aggregate face amount of such notes and accounts receivable sold in any fiscal year does not exceed 5% of Consolidated gross sales for the fiscal year then most recently ended, and (ii) discount notes or accounts receivable provided that the amount of such discount reflects only customary finance charges paid by the Company or such Subsidiary in the normal course of business; 6C(7). TRANSACTIONS WITH STOCKHOLDERS. Directly or indirectly, purchase, acquire or lease any property from, or Transfer any property to, or otherwise deal with, in the ordinary course of business or otherwise (i) any Affiliate or (ii) any Substantial Stockholder, except that (a) the Company may sell to, or purchase (within the limitations of paragraph 6B) from, any such person shares of the Company's stock, (b) such acts and transactions prohibited by this paragraph 6C(7) may be performed or engaged in if made upon terms not less favorable than if no such relationship described in clauses (i) and (ii) above existed, (c) the foregoing shall not apply to cash compensation, stock option and other stock-based incentive compensation, employee relocation and other employee benefit plans approved by the Company's Board of Directors, (d) the Company and its Subsidiaries may, in the ordinary course of business, directly or indirectly, purchase, acquire or lease property from, or Transfer property to, or otherwise deal with Affiliates provided that such transaction with any such Affiliate shall be not less favorable to the Company and its Subsidiaries than if such transactions were entered into with non-Affiliates and (e) the Company and Subsidiaries may engage in such transactions if approved by a majority of the outside, disinterested members of the Company's Board of Directors. 7. EVENTS OF DEFAULT. 7A. ACCELERATION. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of or Yield Maintenance Amount on any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than 10 days after the date due; or (iii) the Company or any Subsidiary defaults (whether as primary obligor, as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if 21 any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, provided that the aggregate amount of all obligations as to which -------- such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $5,000,000; or (iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or (v) the Company fails to perform or observe any agreement contained in paragraph 6; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any Designated Officer obtains actual knowledge thereof; or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or 22 (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets with a book value, or the divestiture of the stock of a Subsidiary whose assets have a book value, in excess of 20% of Consolidated Tangible Net Worth (measured at the end of the fiscal year immediately preceding the fiscal year in which such divestiture occurs) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed in excess of 10% of the average amount of Consolidated Net Earnings for the three completed fiscal years immediately preceding the fiscal year in which such divestiture occurs, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) one or more final judgments in an aggregate amount in excess of $5,000,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, any such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, any such judgment is not discharged; or (xiv) if (a) any Plan shall fail to satisfy any applicable minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (b) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (c) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $1,000,000, (d) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (e) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (f) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post- employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (a) through (f) above, either individually or together with any other such event or events, would reasonably be expected to have a material adverse effect on the financial condition of the Company and its Subsidiaries taken as a whole; then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, any holder of any Note may at its option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes held by such holder to be, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with 23 respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) with respect to any event constituting an Event of Default, the Required Holder(s) of the Notes of any Series may at its or their option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company. 7B. RESCISSION OF ACCELERATION. At any time after any or all of the Notes of any Series shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) of the Notes of such Series may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes of such Series, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes of such Series which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes of such Series or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding. 7D. OTHER REMEDIES. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows (all such representations, warranties and covenants being made both immediately before and after giving effect to the Spin Off and all references to "SUBSIDIARY" and "SUBSIDIARIES" in this paragraph 8 shall be deemed omitted if the Company has no Subsidiaries at the time the representations herein are made or repeated): 24 8A. ORGANIZATION. The Company is a corporation duly organized and existing in good standing under the laws of the State of Delaware, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted, and the Company is and each Subsidiary is duly qualified as a foreign corporation to do business and in good standing in every jurisdiction in which the nature of the respective business conducted by it makes such qualification necessary, excepting jurisdictions where failure to qualify would on a consolidated basis have no material effect on the Company. The issuance of any Notes pursuant to this Agreement is in compliance with the authorizing resolutions of the Board of Directors then in effect and will not result in the aggregate outstanding amount of Notes, debt obligations and other borrowings authorized by such resolutions, after giving effect to the issuance of, and application of the proceeds from, such Notes, to exceed the aggregate limitation contained in such authorizing resolutions. 8B. FINANCIAL STATEMENTS. The Company has furnished Prudential and each Purchaser of any Accepted Notes with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at the last day of each of the two fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidated statements of earnings, cash flows and shareholders' equity of the Company and its Subsidiaries for each such year, all reported on by PricewaterhouseCoopers LLP (or another nationally recognized independent accounting firm) and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 45 days prior to such date for which financial statements have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of earnings and cash flows for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company (provided that no such quarterly statements have been delivered for any quarterly period ended prior to the Spin-Off). Such financial statements (including any related schedules and/or notes) are complete (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of earnings, stockholders' equity and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. There has been no material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. ACTIONS PENDING. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, 25 arbitrator or administrative or governmental body which could reasonably be expected to result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8D. OUTSTANDING FUNDED DEBT. Neither the Company nor any of its Subsidiaries has outstanding any Funded Debt except as permitted by paragraph 6C(2). There exists no default under the provisions of any instrument evidencing such outstanding Funded Debt or of any agreement relating thereto. 8E. TITLE TO PROPERTIES. The Company has and each of its Subsidiaries has good and marketable title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, other than any immaterial assets with respect to which it will diligently attempt to obtain good and marketable title after the Spin Off, in both cases to the extent material to the Company's Consolidated business, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business and, to the extent disclosure thereof has been made in writing to Prudential, other properties and assets disposed of in compliance with the terms of this Agreement), subject to no Lien of any kind except Liens permitted by paragraph 6C(1). All leases necessary in any material respect for the conduct of the Consolidated business of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. 8F. TAXES. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which, to the best knowledge of the officers of the Company and its Subsidiaries, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due and the failure to either file such returns or pay such taxes or assessments could have a material adverse effect on the Company and its Subsidiaries, taken as a whole, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects the Company's Consolidated business, property or assets, condition (financial or otherwise) or operations. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes (including, without limitation, the consummation of the Spin Off and the assumption by the Company of certain of the obligations of Medical Systems as contemplated by paragraph 2A(1) hereof) will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any material award of any arbitrator or any material agreement (including any agreement with shareholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Funded Debt of the Company or such 26 Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Funded Debt of the Company of the type to be evidenced by the Notes, except in each case as set forth in the agreements listed in Schedule 8G attached hereto (as such Schedule 8G may have been ----------- modified from time to time subsequent to the Restatement Date by written supplements thereto delivered by the Company to Prudential). 8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than Institutional Investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 8I. USE OF PROCEEDS. None of the proceeds of the sale of any Notes will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as defined in Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System (herein called "MARGIN STOCK") or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock (other than retiring indebtedness incurred to acquire stock of the Company, which stock is retired promptly upon the Company's acquisition thereof) or for any other purpose which might constitute the purchase of such Notes a "purpose credit" within the meaning of such Regulation U, unless the Company shall have delivered to the Purchaser which is purchasing such Notes, on the Closing Day for such Notes, an opinion of counsel satisfactory to such Purchaser stating that the purchase of such Notes does not constitute a violation of such Regulation U. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan) that is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to 27 the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes. 8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Day for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. To the extent pertaining to the Securities Act and state Blue Sky laws, the representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9A hereof. 8L. ENVIRONMENTAL COMPLIANCE. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all Environmental Laws, except, in any such case, where failure to comply would not result in a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 8M. DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. To the knowledge of any Designated Officer, there is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole and which has not been set forth in this Agreement and the schedules hereto (or in any certificate or other document required to be delivered subsequent to the execution and delivery of this Agreement). 8N. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 8O. YEAR 2000 COMPLIANCE. The Company has and its Subsidiaries have conducted an analysis of, and developed or are developing a compliance program with respect to, the effect of Year 2000 upon the key software, tradeware, telecommunications, physical plant and automated processes of the Company and its Subsidiaries and have made appropriate inquiries of the key customers and suppliers of the Company and its Subsidiaries. The Company anticipates that such compliance program will be completed on a timely basis and that the impact of Year 2000 on the Company, its Subsidiaries and the key customers and suppliers of the Company and 28 its Subsidiaries will not be such as to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Subsidiaries taken as a whole. 9. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser represents as follows: 9A. NATURE OF PURCHASE. Such Purchaser is acquiring the Notes purchased by it hereunder for investment only, with neither an intention at the time of such purchase to sell or distribute such Notes nor with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all -------- times be and remain within its control. Such Purchaser acknowledges that the Notes being purchased by it have not been registered under the Securities Act, and cannot be transferred except in compliance with the Securities Act and applicable state securities laws. 9B. SOURCE OF FUNDS. At least one of the following statements is an accurate representation as to each source of funds (a "SOURCE") to be used by such Purchaser to pay the purchase price of the Notes to be purchased by it hereunder: (i) the Source is the "insurance company general account" of such Purchaser (as such term is defined under Section V of the United States Department of Labor's Prohibited Transaction Class Exemption ("PTCE") 95-60), and as of the date of the purchase of the Notes such Purchaser satisfies all of the applicable requirements for relief under Sections 1 and IV of PTCE 95-60; (ii) the Source is a separate account maintained by such Purchaser in which no employee benefit plan, other than employee benefit plans identified on a list which has been furnished by such Purchaser to the Company, participates to the extent of 10% or more; (iii) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part 1(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (a) the identity of such QPAM and (b) the names of all employee benefit plan whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (iii); (iv) the Source is a governmental plan; (v) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (v); or (vi) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. For the purpose of this paragraph 9B, the terms "separate account", "governmental plan", "party in interest" and "employee benefit plan" shall have the respective meanings specified in section 3 of ERISA. 29 10. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined in paragraphs 10A and 10B (or within the text of any other paragraph) shall have the respective meanings specified therein. 10A. YIELD-MAINTENANCE TERMS. "CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4C or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "DESIGNATED SPREAD" shall mean 0 in the case of each Series A Note, each Series B Note, each Series C Note and each Series D Note and 0 in the case of each Note of any other Series unless the Confirmation of Acceptance with respect to the Notes of such Series specifies a different Designated Spread in which case it shall mean, with respect to each Note of such Series, the Designated Spread so specified. "DISCOUNTED VALUE" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (as converted to reflect the periodic basis on which interest on such Note is payable, if payable other than on a semi-annual basis) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" shall mean, with respect to the Called Principal of any Note, the Designated Spread over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on Bridge Telerate Services (Telerate) (or such other display as may replace page 678 on Bridge Telerate Services (Telerate)) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H. 15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. "REMAINING AVERAGE LIFE" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date 30 with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4C or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 10B. OTHER TERMS. "ACCEPTANCE" shall have the meaning specified in paragraph 2B(5). "ACCEPTANCE DAY" shall have the meaning specified in paragraph 2B(5). "ACCEPTANCE WINDOW" shall have the meaning specified in paragraph 2B(5). "ACCEPTED NOTE" shall have the meaning specified in paragraph 2B(5). "AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person either (i) possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise or (ii) owns beneficially, directly or indirectly, 10% or more of the voting stock of such corporation. "AUTHORIZED OFFICER" shall mean (i) in the case of the Company, a Designated Officer, any other officer of the Company designated as an "Authorized Officer" of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by a Designated Officer and delivered to Prudential, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Information Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by 31 any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "AVAILABLE FACILITY AMOUNT" shall have the meaning specified in paragraph 2B(1). "BANKRUPTCY LAW" shall have the meaning specified in clause (viii) of paragraph 7A. "BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City or San Francisco are required or authorized to be closed and (iii) for purposes of paragraph 2B(3) hereof only, a day on which The Prudential Insurance Company of America is not open for business. "CANCELLATION DATE" shall have the meaning specified in paragraph 2B(8)(iv). "CANCELLATION FEE" shall have the meaning specified in paragraph 2B(8)(iii). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles. "CLOSING DAY" shall mean, with respect to any Accepted Note, the Business Day specified for the closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, provided that (i) if the Company -------- and the Purchaser which is obligated to purchase such Accepted Note agree on an earlier Business Day for such closing, the "Closing Day" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2B(7), the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2B(8)(iii), shall mean the Rescheduled Closing Day with respect to such Accepted Note. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in paragraph 2B(5). "CONSOLIDATED" when used in connection with an accounting term, including all defined terms herein, shall mean the combined account of the type defined by the accounting term for the Company and all Subsidiaries determined in accordance with generally accepted accounting principles. "CONSOLIDATED CASH AND CASH EQUIVALENTS" shall mean, with respect to the Company and its Subsidiaries (i) all amounts from time to time on deposit in demand deposit accounts, along with interest thereon, and all other amounts shown as part of "Cash and Cash Equivalents" on the Company's consolidated balance sheet in accordance with generally accepted accounting principles, (ii) all certificates of deposit at banks or other financial institutions, net of any penalty or fees for early withdrawal and (iii) marketable securities, as determined by generally accepted 32 accounting principles and that are within the parameters of the Investment Policy; provided, however, that "Consolidated Cash and Cash Equivalents" shall -------- ------- not include any of the foregoing to the extent that such amounts are on deposit for or otherwise subject to a claim or right of another Person superior or pari passu in right of priority to that of the Company or any Subsidiary, such as escrow or performance deposits. "CONSOLIDATED CURRENT ASSETS" shall mean, with respect to the Company and its Subsidiaries, the consolidated current assets thereof determined in accordance with generally accepted accounting principles. "CONSOLIDATED CURRENT LIABILITIES" shall mean, with respect to the Company and its Subsidiaries, the consolidated current liabilities thereof determined in accordance with generally accepted accounting principles. "CONSOLIDATED INTEREST EXPENSE" shall mean Consolidated gross interest expense, as determined by generally accepted accounting principles. "CONSOLIDATED NET EARNINGS" shall mean the consolidated gross revenues of the Company and its Subsidiaries less all operating and non-operating expenses of the Company and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to revenues), but not including in gross revenues any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition (other than in the ordinary course of business) of capital assets (i.e., assets other than current assets), any gains resulting from the write-up (other than in the ordinary course of business) of assets, any extraordinary gains, any equity of the Company and its Subsidiaries in the undistributed earnings of any corporation which is not a Subsidiary, any earnings of any other corporation acquired by the Company or any Subsidiary through purchase, merger, or consolidation or otherwise for any year prior to the year of acquisition, or any equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary and not including in expenses any extraordinary losses, or any equity of the Company and its Subsidiaries in the undistributed earnings of all such corporations, all determined in accordance with generally accepted accounting principles consistently applied. With respect to any determination of Consolidated Net Earnings hereunder for any period of determination which includes any period prior to the Spin-Off, Consolidated Net Earnings for such period of determination shall be calculated on a proforma basis as though the Spin-Off had been consummated immediately prior to the beginning of the period of determination. "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS" shall mean an amount equal to (i) $30,000,000 plus (ii) 65% (or minus 100% in case of a ----- deficit) of Consolidated Net Earnings for the period (taken as one accounting period) commencing on October 3, 1998 and terminating at the end of the last fiscal quarter immediately preceding the date of any proposed Restricted Payment. "CONSOLIDATED RECEIVABLES" shall mean the Company's consolidated accounts receivable, determined in accordance with generally accepted accounting principles. 33 "CONSOLIDATED TANGIBLE NET WORTH" shall mean the amount shown on the books of the Company and all Subsidiaries as total shareholders' equity (determined on a consolidated basis in accordance with generally accepted accounting principles consistently applied, less (without duplication) goodwill, trade names, trademarks, patents, organization expenses, unamortized debt discount expenses and other intangibles. "CONSOLIDATED TANGIBLE GROSS WORTH" shall mean the sum of (i) Consolidated Funded Debt, and (ii) Consolidated Tangible Net Worth. "CONSOLIDATED WORKING CAPITAL" shall mean the excess of Consolidated Current Assets over Consolidated Current Liabilities. "DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2B(8)(ii). "DEMAND" shall have the meaning specified in paragraph 11B. "DESIGNATED OFFICER" shall mean the Chairman of the Board of Directors, President, Chief Financial Officer, Treasurer, Assistant Treasurer and Controller of the Company. "ENVIRONMENTAL LAWS" shall mean all federal, state, local and foreign laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes, and any and all regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letters issued, entered, promulgated or approved thereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "EVENT OF DEFAULT" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such - -------- event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXCLUDED PERSONS" shall mean those Persons and their respective Affiliates set forth on the list provided by the Company to a holder of a Note pursuant to paragraph 11D(2). "Excluded Persons" shall not include, except if otherwise agreed to in writing by the Company and such holder, any Person of the type specified in clause (i) of the definition of Institutional Investors. 34 "EXISTING 6.70% NOTES" shall have the meaning specified in the Introduction. "EXISTING 6.90% NOTES" shall have the meaning specified in the Introduction. "EXISTING 7.21% NOTES" shall have the meaning specified in the Introduction. "EXISTING 7.49% NOTES" shall have the meaning specified in the Introduction. "FACILITY" shall have the meaning specified in paragraph 2B(1). "FUNDED DEBT" shall mean, without duplication, (i) any obligation payable more than one year from the date of the creation thereof (or which is renewable or extendable at the option of the obligor for a period of more than one year from the date of creation), (ii) all indebtedness having a maturity of less than one year, provided such indebtedness is incurred pursuant to revolving credit -------- arrangements or other financing commitments with a final, non-extendable maturity more than one year from the date of creation thereof, (iii) any obligation for borrowed money (and any notes payable, drafts accepted or advances representing extensions of credit (other than trade payables) whether or not representing obligations for borrowed money) payable on demand or within a period of one year from the date or creation thereof, (iv) seasonal credit facilities, (v) Capitalized Lease Obligations, (vi) obligations of third parties secured by a Lien on the property or other assets of the Company or any Subsidiary, (vii) obligations of partnerships and joint ventures of which the Company or any Subsidiary is a general partner or coventurer and which is not expressly non-recourse to the Company or such Subsidiaries, (viii) unfunded vested benefits under each Plan maintained for employees of the Company or any Subsidiary and covered by Title IV of ERISA, (ix) Guarantees by the Company or any Subsidiary of the foregoing (excluding letters of credit and other contingent liabilities for advance payments and performance bonds) and (x) modifications, renewals and extensions of the above. "GUARANTEE" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or service, regardless of the non-delivery or non- furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. 35 "HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as determined by Prudential) most closely matches the duration of such Accepted Note. "HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases for portfolio investment purposes of such shares, equity interests, securities or rights which, together with any such shares, equity, interests, securities or rights then held, represent less than 5% of the equity interests or beneficial ownership of such corporation or other entity, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "INCLUDING" shall mean, unless the context clearly requires otherwise, "including without limitation". "INSTITUTIONAL INVESTORS" shall mean (i) banks, finance companies, insurance companies, pension funds and other commercial lenders, (ii) "accredited investors," as such term is defined under Regulation D promulgated under the Securities Act and (iii) "qualified institutional buyers", as such term is defined in Rule 144A promulgated under the Securities Act. "INVESTMENT POLICY" shall have the meaning specified in paragraph 6C(3)(vii). "ISSUANCE FEE" shall have the meaning specified in paragraph 2B(8)(i). "ISSUANCE PERIOD" shall have the meaning specified in paragraph 2B(2). "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "MEDICAL SYSTEMS" shall have the meaning specified in the Introduction. "MEDICAL SYSTEMS AMENDED AND RESTATED NOTE AGREEMENT" shall mean the Amended and Restated Note Purchase and Private Shelf Agreement, dated as of April 2, 1999, among Medical Systems, Prudential, PRUCO Life Insurance Company, PRUCO Life Insurance Company of New Jersey and each Prudential Affiliate which becomes bound by the provisions thereof. "MEDICAL SYSTEMS SERIES A NOTES" shall have the meaning specified in the Introduction. "MEDICAL SYSTEMS SERIES B NOTES" shall have the meaning specified in the Introduction. 36 "MEDICAL SYSTEMS SERIES B NOTES" shall have the meaning specified in the Introduction. "MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001 (a)(3) of ERISA. "1992 NOTE AGREEMENT" shall have the meaning specified in the Introduction. "1996 NOTE AGREEMENT" shall have the meaning specified in the Introduction. "NOTES" shall have the meaning specified in paragraph 1E. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor replacement entity thereto under ERISA. "PERSON" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "PLAN" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "PRUDENTIAL" shall mean The Prudential Insurance Company of America. "PRUDENTIAL AFFILIATE" shall mean (i) any Person which, directly or indirectly, controls, is controlled by, or is under common control with, Prudential and (ii) any investment fund which is managed by Prudential or a Prudential Affiliate described in clause (i) of this definition. "PURCHASERS" shall mean Prudential with respect to the Series A Notes, the Series B Notes, the Series C Notes and the Series D Notes and, with respect to any Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "REQUEST FOR PURCHASE" shall have the meaning specified in paragraph 2B(3). "REQUIRED HOLDER(S)" shall mean the holder or holders of more than 50% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding. "RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph 2B(7). "RESTATEMENT DATE" shall mean the "Series C Closing Day", as defined in the Medical Systems Amended and Restated Note Agreement. 37 "RESTRICTED PAYMENTS" shall have the meaning specified to such term in paragraph 6B. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SERIES" shall have the meaning specified in paragraph 1E. "SERIES A NOTES" shall have the meaning specified in the Introduction. "SERIES B NOTES" shall have the meaning specified in the Introduction. "SERIES C NOTES" shall have the meaning specified in the Introduction. "SERIES D NOTES" shall have the meaning specified in the Introduction. "SHELF NOTES" shall have the meaning specified in paragraph 1E. "SIGNIFICANT HOLDER" shall mean (i) Prudential, so long as Prudential or any Prudential Affiliate shall hold (or be committed under this Agreement to purchase) any Note, or (ii) any other holder of at least 10% of the aggregate principal amount of the Notes of any Series from time to time outstanding. "SPIN OFF" shall have the meaning specified in the Introduction. "STRUCTURING FEE" shall have the meaning provided in paragraph 2B(8)(i). "SUBSIDIARY" shall mean any corporation, association or other business entity in which the Company or one or more of its Subsidiaries or the Company and one or more of its Subsidiaries owns at least 75% of the equity or voting interests of such entity (and such equity or voting interests so owned enable the Company and/or Subsidiaries to elect at least a majority of the directors, or persons performing similar functions, of such entity), and any partnership or joint venture if more than a 75% interest in the profits or capital thereof is owned by the Company or one or more of its Subsidiaries or the Company and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of the Company or one or more of its Subsidiaries). "SUBSTANTIAL STOCKHOLDER" shall mean (i) any Person owning beneficially, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, 5% or more of the outstanding voting stock of the Company, or (ii) any Person related by blood, adoption or marriage to any Person coming within clause (i) of this definition. "TRANSFER" shall have the meaning specified in paragraph 6C(5)(ii). "TRANSFEREE" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement. "VOTING STOCK" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of 38 directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). 10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with the most recent audited financial statements delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 8B. Any reference herein to any specific citation, section or form of law, statute, rule or regulation shall refer to such new, replacement or analogous citation, section or form should citation, section or form be modified, amended or replaced. 11. MISCELLANEOUS. 11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit to (i) the account or accounts of such Purchaser specified in the Purchaser Schedule attached hereto in the case of any Series A Note, Series B Note, Series C Note or Series D Note, (ii) the account or accounts of such Purchaser specified in the Confirmation of Acceptance with respect to such Note in the case of any Shelf Note or (iii) such other account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A. 11B. EXPENSES. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of all reasonable out-of-pocket expenses arising in connection with the following: (i) all document negotiation, drafting and duplication charges and the fees and expenses of any special counsel engaged by (A) Prudential and the Purchasers in connection with entering into this Agreement and (B) Prudential, any Purchaser or any Transferee in connection with any subsequent transaction contemplated by, proposed modification of, or proposed consent under, this Agreement, if such proposed transaction, modification or consent (1) is requested by the Company, whether or not such transaction occurs, such modification becomes effective or such consent is granted or (2) results from or relates to the occurrence of a Default or Event of Default, or in order to avert, waive, consent to or cure the same; provided, however, that in each such case the Company shall be responsible -------- ------- for the fees and expenses of only one firm of outside counsel for Prudential, the Purchasers and the 39 Transferees at any one time; and (ii) the costs and expenses, including attorneys' fees, incurred by Prudential, any Purchaser or any Transferee in (A) responding to any subpoena or other legal process, including in connection with litigation, or informal investigative demand (collectively, "DEMANDS"), provided, however, that such Demand (1) is issued principally in connection with - -------- ------- this Agreement, the transactions contemplated hereby or by reason of any Purchaser's or Transferee's having acquired any Note or having acquired information regarding the Company or any Subsidiary in connection with its acquisition of any Note, (2) does not arise out of any litigation between the Purchaser and its Transferee and (3) is not issued in connection with any inquiry, audit or investigation by any governmental authority that relates principally to the business, operations or investments of the entity that received such Demand and (B) enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes, including without limitation costs and expenses incurred in any workout, restructuring or bankruptcy case. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2B may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2B and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of 40 any holder of such Note. As used herein and in the Notes, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11D(1). FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000, except as may be necessary to reflect any principal amount not evenly divisible by $1,000,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Each prepayment of principal payable on each prepayment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the prepayment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any prepayment or prepayments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duty authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and Interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's indemnity agreement (which shall be unsecured if such holder is Prudential, a Prudential Affiliate or an Institutional Investor with a tangible net worth in excess of $200,000,000), or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. 11D(2). PRIOR NOTICE TO COMPANY REGARDING RESALE; EXCLUDED TRANSFEREES. Anything contained in paragraph 11D(1) or paragraph 11E to the contrary notwithstanding, if any holder of any Note wishes to sell all or any portion of its Note or grant any participation or other interest therein to any Person other than Prudential or a Prudential Affiliate, it shall (a) give the Company written notice of (i) such intent (a "RESALE NOTICE") at the time such determination is made and (ii) as soon as such information is available, but in no event later than 10 days prior to any such sale, either a list of Persons to whom it intends to offer the Notes, if available, or, if such holder is selling its Notes through another Person, the identity of such Person, (b) for a five- day period commencing on the date such holder provides to the Company the information described in clause (a)(ii), consult with the Company in good faith regarding the acceptability to the Company of any prospective purchasers of such Notes or participations therein prior to 41 soliciting bids for such sale or participation, and (c) solicit, accept and consider in good faith bids from the Company to repurchase such holder's Notes during the same time period as such holder is soliciting offers for such Notes from third parties (as part of its bid, the Company shall certify that no Event of Default exists or would exist after giving effect to its repurchase of such Notes). If such holder has not entered into a commitment to sell its Note (or portion thereof) within 90 days after the expiration of such ten-day period, such holder shall again be obligated to give notice required by this paragraph 11D(2). Prudential and Prudential Affiliates shall not be liable for any failure to provide any Resale Notice that results from such Person's negligence. The foregoing right of notice, consultation and bidding is in addition to the obligations set forth in the next succeeding paragraph regarding Excluded Persons. The Company may, at any time, provide to the holders of the Notes a list of Excluded Persons and update such list from time to time. In designating Excluded Persons, the Company shall act reasonably and in good faith. If such list of Excluded Persons is provided or updated, as the case may be, within two Business Days of the Company's receipt of a Resale Notice, the selling holder will not knowingly sell all or any portion of or participation in its Note to any Excluded Person or any Affiliate thereof. 11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence and to the requirements set forth in paragraph 11D, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion. The Company shall be justified in dealing only with the holder of the Note who grants any participation, and shall not, except if an event of the type described in clauses (viii) through (xi) of paragraph 7A occurs with respect to such holder, be obligated to deal with such participants. 11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. 11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 42 11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that Prudential, each Purchaser and each holder of any Note (each being a "Delivering Person") may deliver copies of any financial statements and other documents delivered to it, and disclose any other information disclosed to it, by or on behalf of the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) its directors, officers, employees, agents and professional consultants, (ii) any Purchaser or holder of any Note, (iii) any Person (other than an Excluded Person) to which it offers to sell any Note or any part thereof, (iv) any Person (other than an Excluded Person) to which it sells or offers to sell a participation in all or any part of any Note, (v) to the extent that it has a legal obligation to disclose such information, any Person from which it offers to purchase any security of the Company; provided, however, that -------- ------- in the case of clause (iii), (iv) or (v), such holder will obtain from such Person an executed confidentiality agreement in the form of Exhibit F-2 before disclosing any material non-public information with respect to the Company or any Subsidiary, (vi) any federal or state regulatory authority having jurisdiction over it, (vii) the National Association of Insurance Commissioners or any similar organization, or (viii) any other Person to which such delivery or disclosure may be required (a) to comply with any law, rule, regulation or order applicable to it, (b) to respond sufficiently to Demand served on it, provided, however, that with respect to material, nonpublic information - -------- ------- regarding the Company and/or its Subsidiaries, except as prohibited by law, such Delivering Person shall provide notice to the Company of such legal requirement or Demand at least ten Business Days (or such shorter period of time as is set forth therein) prior to the date such information must be produced so that the Company can intervene on its own behalf in such proceeding to prevent, postpone or restrict such disclosure; provided further, however, that (1) not earlier -------- ------- ------- than the third Business Day prior to the date specified in such Demand for such document or information delivery or disclosure, such Delivering Person shall be free to comply with such Demand if the Company has not at such time obtained any protective or similar order preventing, postponing or restricting such disclosure and (2) Prudential and any Prudential Affiliate shall not be liable for any failure to provide any such notice to the Company that results from such Person's negligence; or (c) with the prior consent of the Company (which, if given orally initially by an Authorized Officer, shall be promptly confirmed, in writing), which consent shall not be reasonably withheld, in order to protect the investment of such Delivering Person in its Notes. 11I. INDEPENDENCE OF COVENANTS. Except to the extent the context specifically requires otherwise, all covenants hereunder shall be given independent effect so that if a particular action or condition is prohibited by any one of such covenants, the fact that it would be permitted by an exception to, or otherwise be in compliance within the limitations of' another covenant shall not (i) avoid the occurrence of a Default or Event of Default if such action is taken or such condition exists or (ii) in any way prejudice an attempt by the holder of any Note to prohibit, through equitable action or otherwise, the taking of any action by the Company or any Subsidiary which would result in a Default or Event of Default 11J. NOTICES. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached hereto (in the case of the Series A Notes, Series B Notes, Series C Notes or Series D Notes) or the Purchaser Schedule attached to the applicable Confirmation of Acceptance (in the case of any Shelf Notes) or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any 43 other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at 3120 Hansen Way, Palo Alto, California 94304-1000, Attention: Chief Financial Officer, provided, however, that any such -------- ------- communication to the Company may also, at the option of the Person sending such communication, be delivered by any other means either to the Company at its address specified above or to any Authorized Officer of the Company. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is listed for the party receiving the communication in the Information Schedule or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information. So long as Prudential is the holder of any Note outstanding, the Company shall be deemed to have given any required notices or information to Noteholders who are Prudential Affiliates so long as it timely provides such notice or information to Prudential in the manner specified by the applicable provision of this Agreement. 11K. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall not be included in the computation of the interest payable on such Business Day. 11L. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof' and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11M. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement 11N. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 44 11O. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAW OF THE STATE OF CALIFORNIA. 11P. SEVERALTY OF OBLIGATIONS. The sales of Notes to the Purchasers are to be several sales, and the obligations of Prudential and the Purchasers under this Agreement are several obligations. No failure by Prudential or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and neither Prudential nor any Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other such Person hereunder. 11Q. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11R. BINDING AGREEMENT. When this Agreement is executed and delivered by the Company and Prudential, it shall become a binding agreement between the Company and Prudential. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance. 45 11S. AMENDMENT AND RESTATEMENT OF EXISTING AGREEMENTS; RELEASE OF THE COMPANY. Upon satisfaction of the conditions specified in paragraph 3A hereof, each of the 1992 Note Agreement and the 1996 Note Agreement, insofar as the same relate to the Series A Notes, the Series B Notes, the Series C Notes or the Series D Notes, shall be amended and restated in their entirety to read as set forth herein, and the Series A Notes, the Series B Notes, the Series C Notes, the Series D Notes and any Shelf Notes shall be subject to the terms hereof. Very truly yours, VARIAN, INC. By: /s/ Franco N. Palomba _____________________ Its: Treasurer And by: /s/ Allen J. Lauer ------------------ Its: President and Chief Executive Officer The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Jeffrey L. Dickson ______________________ Vice President 46 INFORMATION SCHEDULE Authorized Officers for Prudential ---------------------------------- ALLEN A. WEAVER JEFFREY L. DICKSON Senior Managing Director Managing Director Prudential Capital Group Prudential Capital Group Two Prudential Plaza Four Embarcadero Center Suite 5600 Suite 2700 Chicago, Illinois 60601 San Francisco, California 94111 Telephone: (312) 540-4211 Telephone: (415) 291-5054 Facsimile: (312) 540-4222 Facsimile: (415) 421-6233 JOSEPH Y. ALOUF STEPHEN J. DEMARTINI Senior Vice President Senior Vice President Prudential Capital Group Prudential Capital Group Four Embarcadero Center Four Embarcadero Center Suite 2700 Suite 2700 San Francisco, California 94111 San Francisco, California 94111 Telephone:(415) 291-5056 Telephone:(415) 291-5056 Facsimile: (415) 421-6233 Facsimile:(415) 421-6233 Authorized Officers for the Company ----------------------------------- Each "Designated Officer" of the Company as such term is defined in paragraph 10B of the Agreement. Varian, Inc. 3120 Hansen Way Palo Alto, California Telephone: (650) 213-8000 Facsimile: (650) 213-8200 PURCHASER SCHEDULE Series A Notes, Series B Notes, Series C Notes and Series D Notes ----------------------------------------------------------------- VARIAN, INC. Aggregate principal amount of Series A Notes, Series B Notes, Series C Notes and Series D Notes to be issued in exchange for Existing 7.21% Notes, Existing 6.70% Notes, Existing 7.49% Notes and Existing 6.90% Notes, respectively Note Denominations(s) ------------------- --------------------- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $12,500,000 of $12,500,000 of Series A Notes Series A Notes (1) All payments on account of Series A $25,000,000 of $20,000,000 and Notes, Series B Notes in the original Series B Notes $5,000,000 of principal amount of $20,000,000, Series Series B Notes C Notes and Series D Notes in the original principal amount of $5,600,000 $14,000,000 of $14,000,000 of held by such Purchaser shall be made by Series C Notes Series C Notes wire transfer of immediately available funds for credit to: $7,000,000 of $5,600,000 and Series D Notes $1,400,000 of Series D Notes
Account No. 890-0304-391 Bank of New York New York, New York (ABA No.: 021-000-018) All payments on account of the Series B Notes in the original principal amount of $5,000,000 and Series D Notes in the original principal amount of $1,400,000 held by such Purchaser shall be made by wire transfer of immediately available funds for credit to: Account No. 890-0304-944 Bank of New York New York, New York (ABA No.: 021-000-018) Each such wire transfer shall set forth the name of the Company, a reference to "7.21% Series A Senior Notes due June 9, 2007, Security No. !INV______!", 6.70% Series B Senior Notes due April 30, 2014, Security No. "PPN922206\A INV6533", 7.49% Series C Senior Notes due June 9, 2002, Security No. "!INV______!", or 6.90% Series D Senior Notes due June 9, 2002, Security No. "!INV____!", as the case may be, and the due date and application (as among principal, interest and Yield-Maintenance Amount) of the payment being made (2) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Gateway Center Three 100 Mulberry Street Newark, New Jersey 07102 Attention: Manager, Investment Operations Group Telephone: (973) 802-5260 Telecopy: (973) 802-8055 2 (3) Address for all other communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group - Corporates Four Embarcadero Center Suite 2700 San Francisco, California 94111 Attention: Managing Director Telecopy: (415) 421-6233 (4) Recipient of telephonic prepayment notices: Manager, Investment Structure and Pricing Telephone: (201) 802-6660 Telecopy: (201) 802-9425 (5) Tax Identification No.: 22-1211670 3 EXHIBIT A-1 ----------- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND CANNOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. [FORM OF SERIES A NOTE] VARIAN, INC. 7.21% SERIES A SENIOR NOTE DUE JUNE 9, 2007 No. ________ __________________ $ ________________ __________________ FOR VALUE RECEIVED, the undersigned, Varian, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ______________________________, or registered assigns, the principal sum of _____________________on June 9, 2007 with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of 7.21% per annum from the date hereof, payable quarterly on the 9th day of March, June, September and December in each year, commencing with the March 9, June 9, September 9 or December 9 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum [from time to time]1 equal to [the greater of (i)]1 9.21% [or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to time in New York City as its prime rate]./1/ Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement and Assumption, dated as of April 2, 1999 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain cases without Yield Maintenance Amount and in other cases with the Yield Maintenance Amount specified in the Agreement. Each holder of this Note will be deemed by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in paragraph 11H of the Agreement, (ii) to have made the representation set forth in paragraph 9B of the Agreement, and (iii) to have agreed to the limitations on transfers set forth in paragraph 11D of the agreement. _____________________ /1/ Delete in the case of holder not exempt from California usury law. A-1-1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note (i) merely re-evidences a portion of the indebtedness previously evidenced by Varian Associates, Inc.'s 7.21% Series A Senior Notes due June 9, 2007 (the "Existing 7.21% Notes") which has been assumed by the Company, (ii) is given in exchange for, and not as payment of, Existing 7.21% Note(s), and (iii) is in no way intended to constitute a novation of any Existing 7.21% Notes. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This Note shall be construed and enforced in accordance with the internal law of the State of California. This Note shall be construed and enforced in accordance with the internal law of the State of California. VARIAN, INC. By:_______________________________ Title:____________________________ And by:___________________________ Title:____________________________ A-1-2 EXHIBIT A-2 ----------- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND CANNOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. [FORM OF SERIES B NOTE] VARIAN, INC. 6.70% SERIES B SENIOR NOTE DUE APRIL 30, 2014 No. ________ _______________ $ ________________ _______________ FOR VALUE RECEIVED, the undersigned, Varian, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ______________________________, or registered assigns, the principal sum of _____________________on April 30, 2014 with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of 6.70% per annum from the date hereof, payable quarterly on January 31, April 30, July 31 and October 31 in each year, commencing with the January 31, April 30, July 31 or October 31 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum [from time to time]1 equal to [the greater of (i)]1 8.70% [or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to time in New York City as its prime rate]./1/ Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement and Assumption, dated as of April 2, 1999 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain cases without Yield Maintenance Amount and in other cases with the Yield Maintenance Amount specified in the Agreement. Each holder of this Note will be deemed by its acceptance ___________________ /1/ Delete in the case of holder not exempt from California usury law. A-2-1 hereof, (i) to have agreed to the confidentiality provisions set forth in paragraph 11H of the Agreement, (ii) to have made the representation set forth in paragraph 9B of the Agreement, and (iii) to have agreed to the limitations on transfers set forth in paragraph 11D of the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note (i) merely re-evidences a portion of the indebtedness previously evidenced by Varian Associates, Inc.'s 6.70% Series B Senior Notes due April 30, 2018 (the "Existing 6.70% Notes") which has been assumed by the Company, (ii) is given in exchange for, and not as payment of, Existing 6.70% Note(s), and (iii) is in no way intended to constitute a novation of any Existing 6.70% Notes. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This Note shall be construed and enforced in accordance with the internal law of the State of California. VARIAN, INC. By:_________________________________ Title:______________________________ And by:_____________________________ Title:______________________________ A-2-2 EXHIBIT A-3 ----------- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND CANNOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. [FORM OF SERIES C NOTE] VARIAN, INC. 7.49% SERIES C SENIOR NOTE DUE JUNE 9, 2002 No. ________ ________________ $ ________________ ________________ FOR VALUE RECEIVED, the undersigned, Varian, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ______________________________, or registered assigns, the principal sum of _____________________on June 9, 2002 with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of 7.49% per annum from the date hereof, payable quarterly on the 9th day of March, June, September and December in each year, commencing with the March 9, June 9, September 9 or December 9 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum [from time to time]1 equal to [the greater of (i)]1 9.49% [or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to time in New York City as its prime rate]./1/ Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement and Assumption, dated as of April 2, 1999 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain ___________________ /1/ Delete in the case of holder not exempt from California usury law. A-3-1 cases without Yield Maintenance Amount and in other cases with the Yield Maintenance Amount specified in the Agreement. Each holder of this Note will be deemed by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in paragraph 11H of the Agreement, (ii) to have made the representation set forth in paragraph 9B of the Agreement, and (iii) to have agreed to the limitations on transfers set forth in paragraph 11D of the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note (i) merely re-evidences a portion of the indebtedness previously evidenced by Varian Associates, Inc.'s 7.49% Senior Notes due June 9, 2002 (the "Existing 7.49% Notes") which has been assumed by the Company, (ii) is given in exchange for, and not as payment of, Existing 7.49% Note(s), and (iii) is in no way intended to constitute a novation of any Existing 7.49% Notes. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This Note shall be construed and enforced in accordance with the internal law of the State of California. VARIAN, INC. By:__________________________________ Title:_______________________________ And by:______________________________ Title:_______________________________ A-3-2 EXHIBIT A-4 ----------- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND CANNOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. [FORM OF SERIES D NOTE] VARIAN, INC. 6.90% SERIES D SENIOR NOTE DUE JUNE 9, 2002 No. ________ _________________ $ ________________ _________________ FOR VALUE RECEIVED, the undersigned, Varian, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to ________________________, or registered assigns, the principal sum of _____________________on June 9, 2002 with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the rate of 6.90 % per annum from the date hereof, payable quarterly on the 9th day of March, June, September and December in each year, commencing with the March 9, June 9, September 9 or December 9 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum [from time to time]1 equal to [the greater of (i)]1 8.90% [or (ii) 2% over the rate of interest publicly announced by Bank of New York from time to time in New York City as its prime rate]./1/ Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement and Assumption, dated as of April 2, 1999 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes __________________ /1/ Delete in the case of holder not exempt from California usury law. A-4-1 party thereto, on the other hand, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to prepayment, in whole or from time to time in part, in certain cases without Yield Maintenance Amount and in other cases with the Yield Maintenance Amount specified in the Agreement. Each holder of this Note will be deemed by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in paragraph 11H of the Agreement, (ii) to have made the representation set forth in paragraph 9B of the Agreement, and (iii) to have agreed to the limitations on transfers set forth in paragraph 11D of the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. This Note (i) merely re-evidences a portion of the indebtedness previously evidenced by Varian Associates, Inc.'s 6.90% Senior Notes due June 9, 2002 (the "Existing 6.90% Notes") which has been assumed by the Company, (ii) is given in exchange for, and not as payment of, Existing 6.90% Note(s), and (iii) is in no way intended to constitute a novation of any Existing 6.90% Notes. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This Note shall be construed and enforced in accordance with the internal law of the State of California. VARIAN, INC. By:__________________________________ Title:_______________________________ And by:______________________________ Title:_______________________________ A-4-2 EXHIBIT A-5 ----------- THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND CANNOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. [FORM OF SHELF NOTE] VARIAN, INC. SENIOR SERIES ___ NOTE No. __ ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: FINAL MATURITY DATE: PRINCIPAL PREPAYMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, Varian, Inc. (herein called the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to _________________________, or registered assigns, the principal sum of _______________________ DOLLARS [on the Final Maturity Date specified above] [, payable on the Principal Prepayment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by [Morgan Guaranty Trust Company of New York] from time to time in New York City as its prime rate. Payments of principal, Yield Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, lawful money of the United States of America. A-5-1 This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to an Amended and Restated Note Purchase and Private Shelf Agreement and Assumption, dated as of April 2, 1999 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. Each holder of this Note will be deemed by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in paragraph 11H of the Agreement, (ii) to have made the representation set forth in paragraph 9B of the Agreement, and (iii) to have agreed to the limitations on transfers set forth in paragraph 11D of the Agreement. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. A-5-2 This Note shall be construed and enforced in accordance with the internal law of the State of California. VARIAN, INC. By:_____________________________ Title:__________________________ And by:_________________________ Title:__________________________ A-5-3 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARIAN, INC.'S APRIL 2, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS OCT-01-1999 OCT-03-1998 APR-02-1999 12,093 0 142,974 0 67,482 254,383 194,087 108,073 406,822 167,159 0 0 0 304 174,453 406,822 282,232 282,232 182,378 292,530 0 0 0 (10,298) 4,580 (5,718) 0 0 0 (5,718) (.19) (.19)
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