Quarterly Report for Period ended 12/27/2002

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

-----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, JmyAGtxVp4n8aomYfwS/iBo5SLMgZ2HW6axyDBzXfNF8CfBKPG/BPkf4hNV26wSD DzjXDok7T27FKiHyXZvWHQ== 0001012870-03-000419.txt : 20030207 0001012870-03-000419.hdr.sgml : 20030207 20030207130237 ACCESSION NUMBER: 0001012870-03-000419 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021227 FILED AS OF DATE: 20030207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN INC CENTRAL INDEX KEY: 0001079028 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 770501995 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25393 FILM NUMBER: 03544047 BUSINESS ADDRESS: STREET 1: 3120 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1030 BUSINESS PHONE: 650-213-8000 10-Q 1 d10q.htm QUARTERLY REPORT FOR PERIOD ENDED 12/27/2002 Quarterly Report for Period ended 12/27/2002

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2002

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 of Incorporation or Organization)		(IRS Employer Identification No.)

3120 Hansen Way, Palo Alto, California		94304-1030
(Address of Principal Executive Offices)		(Zip Code)

(650) 213-8000

(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

The number of shares of the registrant’s common stock outstanding as of January 24, 2003 was 33,806,113.

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 2002

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements:
	Unaudited Consolidated Condensed Statement of Earnings	3
	Unaudited Consolidated Condensed Balance Sheet	4
	Unaudited Consolidated Condensed Statement of Cash Flows	5
	Notes to the Unaudited Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	25

PART II	Other Information
Item 6.	Exhibits and Reports on Form 8-K	26

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF EARNINGS

(In thousands, except per share amounts)

	Fiscal Quarter Ended
	Dec. 27, 2002		Dec. 28, 2001
Sales	$	195,743	$	184,240
Cost of sales		119,353		114,539

Gross profit		76,390		69,701

Operating expenses
Sales and marketing		33,686		30,948
Research and development		10,874		9,018
General and administrative		11,580		9,813

Total operating expenses		56,140		49,779

Operating earnings		20,250		19,922
Interest expense, net		427		344

Earnings before income taxes		19,823		19,578
Income tax expense		7,136		7,048

Net earnings	$	12,687	$	12,530

Net earnings per share:
Basic	$	0.37	$	0.38

Diluted	$	0.36	$	0.36

Shares used in per share calculations:
Basic		33,896		33,297

Diluted		35,017		34,570

See accompanying Notes to the Unaudited Consolidated Condensed Financial Statements.

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET

(In thousands, except par value amounts)

	Dec. 27, 2002			Sept. 27, 2002
ASSETS

Current assets
Cash and cash equivalents	$	81,793		$	65,145
Accounts receivable, net		155,156			168,958
Inventories		122,852			116,252
Deferred taxes		30,722			30,644
Other current assets		16,649			16,084

Total current assets		407,172			397,083
Property, plant, and equipment, net		106,337			105,871
Goodwill		115,936			115,922
Intangible assets, net		11,671			12,153
Other assets		3,574			3,575

Total assets	$	644,690		$	634,604


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current portion of long-term debt	$	3,382		$	3,321
Accounts payable		52,453			52,086
Deferred profit		22,011			20,952
Accrued liabilities		120,359			122,819

Total current liabilities		198,205			199,178
Long-term debt		36,802			37,635
Deferred taxes		8,248			8,191
Other liabilities		10,408			9,879

Total liabilities		253,663			254,883


Contingencies (Note 11)

Stockholders’ equity
Preferred stock—par value $0.01, authorized—1,000 shares; issued—none		—			—
Common stock—par value $0.01, authorized—99,000 shares; issued and outstanding—33,754 shares at Dec. 27, 2002 and 33,951 shares at Sept. 27, 2002		245,210			251,904
Retained earnings		157,106			144,419
Accumulated other comprehensive loss		(11,289	)		(16,602	)

Total stockholders’ equity		391,027			379,721

Total liabilities and stockholders’ equity	$	644,690		$	634,604

See accompanying Notes to the Unaudited Consolidated Condensed Financial Statements.

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(In thousands)

	Fiscal Quarter Ended
	Dec. 27, 2002			Dec. 28, 2001
Cash flows from operating activities
Net earnings	$	12,687		$	12,530
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		5,440			4,620
Gain on disposition of property, plant and equipment		(26	)		(6	)
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable, net		17,094			9,485
Inventories		(5,218	)		292
Other current assets		785			791
Other assets		18			164
Accounts payable		(396	)		(3,601	)
Deferred profit		1,004			514
Accrued liabilities		(3,259	)		(4,600	)
Other liabilities		502			(75	)

Net cash provided by operating activities		28,631			20,114

Cash flows from investing activities
Proceeds from sale of property, plant, and equipment		174			113
Purchase of property, plant, and equipment		(4,197	)		(3,644	)
Purchase of businesses, net of cash acquired		(532	)		(5,503	)

Net cash used in investing activities		(4,555	)		(9,034	)

Cash flows from financing activities
Net repayment of debt		(931	)		(2,634	)
Repurchase of common stock		(8,074	)		—
Issuance of common stock		1,380			1,860
Net transfers to Varian Medical Systems, Inc.		(270	)		(252	)

Net cash used in financing activities		(7,895	)		(1,026	)

Effects of exchange rate changes on cash and cash equivalents		467			(488	)

Net increase in cash and cash equivalents		16,648			9,566
Cash and cash equivalents at beginning of period		65,145			59,879

Cash and cash equivalents at end of period	$	81,793		$	69,445

Supplemental cash flow information
Income taxes paid	$	4,419		$	3,986

Interest paid	$	648		$	769

See accompanying Notes to the Unaudited Consolidated Condensed Financial Statements.

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1. Unaudited Interim Consolidated Condensed Financial Statements

These unaudited interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 September 27, 2002 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2002 filed with the SEC. In the opinion of the Company’s management, the interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter ended December 27, 2002 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Note 2. Description of Business and Basis of Presentation

The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum products and services, and electronics manufacturing services. These businesses primarily serve life science, industrial, academic, and research customers. Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian Associates, Inc. (“VAI”). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company for each share of VAI (the “Distribution”).

The Company’s fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2003 will comprise the 53-week period ending October 3, 2003, and fiscal year 2002 was comprised of the 52-week period ended September 27, 2002. The fiscal quarters ended December 27, 2002 and December 28, 2001 each comprised 13 weeks.

Note 3. Balance Sheet Detail

	Dec. 27, 2002		Sept. 27, 2002
(In thousands)
Inventories
Raw materials and parts	$	64,616	$	61,098
Work in process		11,649		12,570
Finished goods		46,587		42,584

	$	122,852	$	116,252

Note 4. Forward Exchange Contracts

The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the local functional currencies. These contracts are accounted for under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. (“FAS”) 133, Accounting for Derivative Instruments and Hedging Activities. The Company records these contracts at fair value with the related gains and losses recorded

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

in general and administrative expenses. The gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balance being hedged.

The Company also enters into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under FAS 133. At December 27, 2002, forward contracts to sell Japanese yen having an aggregate notional value of $6.9 million were designated as cash flow hedges of forecasted sale transactions. A loss of $0.1 million (net of tax) was recorded in accumulated other comprehensive loss as of December 27, 2002 relating to these forward contracts. During the fiscal quarter ended December 27, 2002, a loss of $0.1 million from hedge ineffectiveness was recognized and included in general and administrative expenses.

The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 27, 2002 follows:

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	28,037
Australian dollar		—		15,110
Japanese yen		11,507		—
Canadian dollar		5,336		—
British pound		5,066		—
Swedish krona		—		3,239

	$	21,909	$	46,386

Note 5. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for each of the Company’s reporting segments in the first quarter of fiscal year 2003 were as follows:

	Scientific Instruments		Vacuum Technologies		Electronics Manufacturing		Total
(in thousands)
Balance as of September 27, 2002	$	112,854	$	966	$	2,102	$	115,922
Effect of exchange rate fluctuations on goodwill denominated in foreign currencies		14		—		—		14

Balance as of December 27, 2002	$	112,868	$	966	$	2,102	$	115,936

In the fiscal quarter ended March 29, 2002, the Company completed its first annual impairment test as required by FAS 142 and determined that there was no impairment of goodwill. The Company expects to complete its annual impairment assessment for fiscal year 2003 in the second fiscal quarter.

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following intangible assets are recorded and are being amortized by the Company:

	Dec. 27, 2002			Sept. 27, 2002
(in thousands)
Intangible assets
Existing technology	$	6,972		$	6,972
Patents and core technology		3,072			3,072
Trade names and trademarks		1,476			1,476
Customer lists		1,105			1,105
Other		1,754			1,733

		14,379			14,358
Accumulated amortization		(2,708	)		(2,205	)

	$	11,671		$	12,153

Amortization expense relating to intangible assets was $0.5 million and $0.1 million during the fiscal quarters ended December 27, 2002 and December 28, 2001, respectively.

Note 6. Net Earnings Per Share

Basic earnings per share are calculated based on net earnings and the weighted-average number of shares outstanding during the reported period. Diluted earnings per share include dilution from potential shares of common stock issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method.

For the fiscal quarters ended December 27, 2002 and December 28, 2001, options to purchase 987,378 and 674,115 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

A reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:

	Dec. 27, 2002	Dec. 28, 2001
(in thousands)
Weighted-average basic shares outstanding	33,896	33,297
Net effect of dilutive stock options	1,121	1,273

Weighted-average diluted shares outstanding	35,017	34,570

Note 7. Comprehensive Income (Loss)

The Company’s comprehensive income is comprised of net earnings, foreign currency translation adjustments, and changes in the fair value of highly effective cash flow hedge transactions. Comprehensive income was $18.0 million and $10.0 million for the fiscal quarters ended December 27, 2002 and December 28, 2001, respectively. Accumulated other comprehensive loss is included as a component of stockholders’ equity.

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

Note 8. Guarantees

As of December 27, 2002, the Company and its subsidiaries had $55.1 million in uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 27, 2002. All of these credit facilities contain certain conditions and events of default customary for such facilities, with which the Company was in compliance. Of the $55.1 million in uncommitted and unsecured credit facilities, a total of $33.7 million was limited for use by, or in favor of, certain subsidiaries. As of December 27, 2002, a total of $15.5 million of the $33.7 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to the Company’s subsidiaries by customers for which separate liabilities were recorded in the Unaudited Consolidated Condensed Financial Statements at December 27, 2002. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.

Note 9. Warranty Liability

The Company’s products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the related sale is recognized. The amount of liability to be recorded is based on management’s best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. A rollforward of the Company’s estimated liability for product warranty for the fiscal quarter ended December 27, 2002 follows:

(in thousands)
Balance as of September 27, 2002	$	9,029
Charges to costs and expenses		2,299
Warranty expenditures		(2,242	)

Balance as of December 27, 2002	$	9,086

Note 10. Stock Repurchase Program

During fiscal year 2002, the Company’s Board of Directors provided an authorization for the Company to repurchase up to 1,000,000 shares of its common stock until October 1, 2004. During the fiscal quarter ended December 27, 2002, the Company repurchased and retired 274,000 shares under this authorization at an aggregate cost of $8.1 million. As of December 27, 2002, the Company had remaining authorization for future repurchases of 676,000 shares.

Note 11. Contingencies

Environmental matters. The Company’s operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company’s operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect on the Company’s capital expenditures, earnings, or competitive position.

Under the terms of the Distribution, the Company and Varian Semiconductor Equipment Associates, Inc. (“VSEA”) each agreed to indemnify Varian Medical Systems, Inc. (“VMS”) for one-third of certain environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below.

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

investigation, monitoring, and/or remediation activities under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities. Under the terms of the Distribution, the Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs).

For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 27, 2002, it was nonetheless estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.8 million to $4.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 27, 2002. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore had an accrual of $1.8 million as of December 27, 2002.

As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental-related activities. As of December 27, 2002, it was estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $6.2 million to $13.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 27, 2002. 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-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.5 million at December 27, 2002. The Company therefore had an accrual of $5.0 million as of December 27, 2002, which represents the best estimate of its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.8 million described in the preceding paragraph.

The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation, monitoring, and remediation activities and the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.

An insurance company agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which the Company has an indemnity obligation, and the Company therefore has a $1.3 million receivable in other assets as of December 27, 2002 for the Company’s share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.

Management believes that the Company’s reserves for the foregoing and 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 or credits to earnings may be made. Although any ultimate liability arising from environmental-related matters 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 environmental-related matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

Legal proceedings. The Company is involved in pending legal proceedings that are ordinary, routine, and incidental to its business. While the ultimate outcome of these legal matters is not determinable, the Company believes that these matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.

Note 12. Industry Segments

The Company’s operations are grouped into three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The Scientific Instruments segment designs, develops, manufactures, sells, and services equipment and consumable laboratory supplies for a broad range of life science and chemical analysis applications requiring identification, quantification, and analysis of the composition or structure of liquids, solids, or gases. The Vacuum Technologies segment designs, develops, manufactures, sells, and services high-vacuum pumps, leak detection equipment, and related products and services used to create, contain, control, and measure vacuum environments in a broad range of life science, industrial, and scientific applications requiring ultra-clean or high-vacuum environments. The Electronics Manufacturing segment provides electronics manufacturing services, including design, support, manufacturing, and post-manufacturing services, of electronic assemblies and subsystems for a wide range of customers, in particular small- and medium-sized companies with low- to medium-volume, high-mix requirements.

These segments were determined based on how management views and evaluates the Company’s operations.

Corporate includes shared costs of legal, tax, accounting, human resources, real estate, information technology, treasury, and other management costs. A portion of the indirect and common costs has been allocated to the segments through the use of estimates. Also, transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies may not be meaningful.

	Fiscal Quarter Ended				Fiscal Quarter Ended
	Dec. 27, 2002		Dec. 28, 2001		Dec. 27, 2002			Dec. 28, 2001
	Sales		Sales		Pretax Earnings			Pretax Earnings
(in millions)
Scientific Instruments	$	124.3	$	116.9	$	13.1		$	14.9
Vacuum Technologies		29.4		26.4		4.5			3.8
Electronics Manufacturing		42.0		40.9		4.7			3.1

Total industry segments		195.7		184.2		22.3			21.8
General corporate		—		—		(2.1	)		(1.9	)
Interest expense, net		—		—		(0.4	)		(0.3	)

Total	$	195.7	$	184.2	$	19.8		$	19.6

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

Note 13. Recent Accounting Pronouncements

In August 2001, the FASB issued FAS 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

In October 2001, the FASB issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting Principles Board Opinion No. (“APB”) 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. While FAS 144 carries forward many of the provisions of FAS 121 and APB 30, some of the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and amortized over their remaining service period, and the standard broadens the presentation of discontinued operations. The adoption of FAS 144 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

In July 2002, the FASB issued FAS 146, Accounting for Exit or Disposal Activities. FAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of FAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of FAS 146 in the second quarter of fiscal year 2003 to have a significant impact on its financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and warranty obligations. It also clarifies that at the time a company issues a guarantee, a company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not expect the adoption of the initial recognition and measurement provisions in the second quarter of fiscal year 2003 to have a significant impact on its financial condition or results of operations. The disclosure requirements of FIN 45, which are effective for both interim and annual periods, were adopted by the Company in the first quarter of fiscal year 2003.

is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is permitted. Upon adoption, entities may elect to either apply EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its financial condition or results of operations.

In December 2002, the FASB issued FAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FAS 123. FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of FAS 123, Accounting for Stock-Based Compensation. Since the Company intends to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of FAS 148 will not have an effect on its financial condition or results of operations. However, the Company will provide the additional disclosures required by FAS 148 beginning in the second quarter of fiscal year 2003.

Note 14. Subsequent Event

Subsequent to December 27, 2002, the Company acquired the non-clinical drugs of abuse testing business (the “DAT Business”) of Roche Diagnostics Corporation for approximately $22 million in cash. The DAT Business specializes in on-site, single-use products for rapidly detecting drugs of abuse in human bodily fluids, including several products already manufactured by the Company. As a result of this acquisition, the Company added the DAT Business’ sales and distribution capabilities and certain intellectual property to the Company’s existing consumables business.

The purchase price paid for the DAT Business is subject to adjustment pending the completion of certain activities relating to the closing balance sheet. The Company expects to complete these activities during the second quarter of fiscal year 2003, at which time the final purchase price will be established and allocated to acquired assets and liabilities including goodwill and identified intangible assets.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Until April 2, 1999, the business of Varian, Inc. (the “Company”) was operated as the Instruments business (“IB”) of Varian Associates, Inc. (“VAI”). IB included the business units that designed, developed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing services. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the “Distribution”). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. (“VSEA”) and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (“VMS”) effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the “Distribution Agreement”). 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, and a Tax Sharing Agreement.

Caution Regarding Forward-Looking Statements

Throughout this Report, and particularly in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there are forward-looking statements that are based upon management’s current expectations, estimates, and projections, and that reflect management’s beliefs and assumptions based upon information available to management at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms.

We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed below under the heading “Risk Factors.” We encourage you to read that section carefully. Other risks include: new product development, commercialization, performance, and acceptance; continued growth in sales into life science applications; the timing of shipments, installations, and the recognition of revenues on leading-edge NMR systems; renewed demand for vacuum products and contract electronics manufacturing; competitive products and pricing; economic conditions in the Company’s product and geographic markets; continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; sustained or improved market investment in capital equipment; the ability to successfully integrate acquired businesses; customers that operate in cyclical industries; government funding for research; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”). You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement.

Results of Operations

First Quarter of Fiscal Year 2003 Compared to First Quarter of Fiscal Year 2002

Sales. Sales were $195.7 million in the first quarter of fiscal year 2003, an increase of 6.2% from sales of $184.2 million in the first quarter of fiscal year 2002. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 6.4%, 11.1%, and 2.6%, respectively.

Geographically, sales in North America of $110.0 million, Europe of $57.3 million, and the rest of the world of $28.4 million in the first quarter of fiscal year 2003 represented increases of 5.6%, 6.0%, and 9.5%, respectively, as compared to the first quarter of fiscal year 2002. The increase in North America primarily resulted from increased Vacuum Technologies sales and Scientific Instruments’ acquisition of ANSYS Technologies, Inc. (“ANSYS”) in the second quarter of fiscal year 2002. The increase in Europe was due to stronger sales of Scientific Instruments. The increase in the rest of the world was primarily driven by growth in Scientific Instruments sales into the Pacific Rim, partially offset by lower sales into Latin America.

Gross Profit. Gross profit was $76.4 million (representing 39.0% of sales) in the first quarter of fiscal year 2003, compared to $69.7 million (representing 37.8% of sales) in the first quarter of fiscal year 2002. The increase in gross profit percentage was driven primarily by higher Electronics Manufacturing gross profit margins as a result of improved operational efficiencies and lower new customer start-up costs in the first quarter of fiscal year 2003, as well as lower Vacuum Technologies gross profit margins in the first quarter of the prior fiscal year due to the negative impact of decreased demand on cost of sales.

Sales and Marketing. Sales and marketing expenses were $33.7 million (representing 17.2% of sales) in the first quarter of fiscal year 2003, compared to $30.9 million (representing 16.8% of sales) in the first quarter of fiscal year 2002. The $2.8 million increase in sales and marketing expenses resulted primarily from the acquisition of ANSYS in the second quarter of fiscal year 2002 and the impact of the weaker U.S. dollar in the first quarter of fiscal year 2003.

Research and Development. Research and development expenses were $10.9 million (representing 5.6% of sales) in the first quarter of fiscal year 2003, compared to $9.0 million (representing 4.9% of sales) in the first quarter of fiscal year 2002. As a percentage of sales, research and development expenses increased from the prior-year quarter primarily because the Company continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications. The Company expects that, as a percentage of sales, research and development expenses will continue at these higher levels for fiscal year 2003.

General and Administrative. General and administrative expenses were $11.6 million (representing 5.9% of sales) in the first quarter of fiscal year 2003, compared to $9.8 million (representing 5.3% of sales) in the first quarter of fiscal year 2002. The increase in general and administrative expenses resulted primarily from restructuring charges of $2.0 million in the first quarter of fiscal year 2003. These charges consisted mainly of employee severance-related costs to realign resources in the field offices of the Scientific Instruments segment to better focus on life science applications, and costs to close a field office in Latin America.

Net Interest Expense. Net interest expense was $0.4 million (representing 0.2% of sales) in the first quarter of fiscal year 2003, compared to $0.3 million (representing 0.2% of sales) in the first quarter of fiscal year 2002.

Taxes on Earnings. The effective income tax rate was 36.0% for both the first quarter of fiscal year 2003 and the first quarter of fiscal year 2002.

Net Earnings. Net earnings for the first quarter of fiscal year 2003 were $12.7 million ($0.36 net earnings per diluted share), compared to $12.5 million ($0.36 net earnings per diluted share) in the first quarter of fiscal year 2002. Net earnings for the first quarter of fiscal year 2003 reflect the impact of $2.0 million in pretax

restructuring charges ($1.3 million net earnings or $0.04 net earnings per diluted share) recorded during the period. The negative impact of these restructuring charges in the first quarter of fiscal year 2003 was offset by increased profitability in the Vacuum Technologies and Electronics Manufacturing segments.

Segments. Scientific Instruments sales of $124.3 million in the first quarter of fiscal year 2003 increased 6.4% over the first quarter of fiscal year 2002 sales of $116.9 million. The growth in sales was primarily driven by the ANSYS acquisition in the second quarter of fiscal year 2002 and increased sales of certain products selling into life science applications. Including $1.6 million in pretax restructuring charges, earnings from operations in the first quarter of fiscal year 2003 of $13.1 million (10.5% of sales) decreased from $14.9 million (12.8% of sales) in the first quarter of fiscal year 2002. Excluding the restructuring charges, Scientific Instruments operating earnings were $14.7 million (11.8% of sales). The decrease in operating earnings as a percentage of sales resulted primarily from increased research and development spending in the first quarter of fiscal year 2003. For fiscal year 2003, high single-digit growth is expected for Scientific Instruments sales, with good growth in sales for life science applications and modest, if any, growth in sales for chemical analysis applications. Operating profit margins are expected to move toward 12% as fiscal year 2003 progresses.

Vacuum Technologies sales of $29.4 million in the first quarter of fiscal year 2003 increased 11.1% from the first quarter of fiscal year 2002 sales of $26.4 million. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the first quarter of fiscal year 2003 of $4.5 million (15.2% of sales) were up from $3.8 million (14.5% of sales) in the first quarter of fiscal year 2002. The higher earnings were primarily attributable to lower gross profit margins in the first quarter of the prior fiscal year due to the negative impact of decreased demand on cost of sales. Single-digit growth in Vacuum Technologies sales is expected for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be in the mid-teens.

Electronics Manufacturing sales in the first quarter of fiscal year 2003 of $42.0 million increased 2.6% from $40.9 million in the first quarter of fiscal year 2002. The increase in sales was primarily due to the negative impact of order delays after September 11 on sales in the first quarter of fiscal year 2002. Earnings from operations in the first quarter of fiscal year 2003 of $4.7 million (11.2% of sales) increased from $3.1 million (7.7% of sales) in the first quarter of fiscal year 2002, primarily as a result of operational efficiencies and lower new customer start-up costs. Single-digit growth in Electronics Manufacturing sales is expected for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be in the high single digits.

With respect to consolidated results for fiscal year 2003, we expect high single-digit sales growth, with an operating profit percentage similar to fiscal year 2002. Our current expectations for fiscal year 2003 assume that there is no deterioration in economic conditions in the markets in which we operate.

Liquidity and Capital Resources

The Company generated $28.6 million of cash from operating activities in the first quarter of fiscal year 2003, which compares to $20.1 million in the first quarter of fiscal year 2002. The increase in cash from operating activities resulted from stronger collection of accounts receivable, partially offset by higher inventory requirements.

The Company used $4.6 million of cash for investing activities in the first quarter of fiscal year 2003, which compares to $9.0 million in the first quarter of fiscal year 2002. The decrease in cash used for investing activities in the first quarter of fiscal year 2003 was primarily due to two acquisitions completed during the first quarter of the prior fiscal year.

The Company used $7.9 million of cash for financing activities in the first quarter of fiscal year 2003, which compares to $1.0 million used for financing activities in the first quarter of fiscal year 2002. The increase in cash used for financing activities in the first quarter of fiscal year 2003 was primarily due to the repurchase of common stock, partially offset by a reduction in debt repayments.

During fiscal year 2002, the Company established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of December 27, 2002. Borrowings under this credit facility bear interest at rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings of the Company and require the maintenance by the Company of certain levels of financial performance. The Company was in compliance with all such covenants and requirements as of December 27, 2002.

As of December 27, 2002, the Company had $36.3 million in term loans outstanding compared to $37.5 million at September 27, 2002. As of both December 27, 2002 and September 27, 2002, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.9% at both December 27, 2002 and September 27, 2002. 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. The Company was in compliance with all restrictive covenants of the term loan agreements during the first quarter of fiscal year 2003. The Company also had other long-term notes payable of $3.9 million as of December 27, 2002 with a weighted-average interest rate of 0.8% and $3.5 million as of September 27, 2002 with a weighted-average interest rate of 0.9%.

Future principal payments on long-term debt outstanding on December 27, 2002 were $2.1 million, $2.8 million, $3.9 million, $3.9 million, $2.5 million, $6.2 million, and $18.8 million during the nine months ending October 3, 2003 and fiscal years 2004, 2005, 2006, 2007, 2008, and thereafter, respectively.

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 below under the heading “Risk Factors—Environmental Matters”).

In connection with certain acquisitions, the Company has accrued but not yet paid certain purchase price amounts which have been “held back” to secure the sellers’ indemnification obligations. These “holdback” amounts, which are due to be paid at various times through fiscal year 2004 (net of any indemnification claims), totaled approximately $1.0 million at December 27, 2002. In addition to the “holdback” payments, the Company is also obligated to pay additional cash purchase price amounts in the event that contingent financial or operational milestones are met by the acquired businesses. As of December 27, 2002, up to a maximum of $15.4 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Any contingent payments made will be recorded as additional goodwill at the time they are earned.

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 next 12 months.

Contractual Obligations and Other Commercial Commitments

The following table summarizes future principal payments on outstanding long-term debt and minimum rentals due for certain facilities and other leased assets under long-term, non-cancelable operating leases as of December 27, 2002:

	Nine Months Ending Oct. 3, 2003		Fiscal Years
	Nine Months Ending Oct. 3, 2003		2004		2005		2006		2007		2008		Thereafter		Total
(in thousands)
Long-term debt (including current portion)	$	2,132	$	2,774	$	3,889	$	3,889	$	2,500	$	6,250	$	18,750	$	40,184
Operating leases		4,875		4,842		3,931		2,686		1,991		1,755		26,397		46,477

Total contractual cash obligations	$	7,007	$	7,616	$	7,820	$	6,575	$	4,491	$	8,005	$	45,147	$	86,661

In addition to the above, the Company had cancelable commitments to purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $38.3 million, net of deposits paid, as of December 27, 2002. In the event that these commitments are canceled for reasons other than the supplier’s default, the Company would be responsible for reimbursement of actual costs incurred by the supplier.

As of December 27, 2002, the Company did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of some contingent event, except for contingent payments of up to a maximum of $15.4 million related to acquisitions as discussed under “Liquidity and Capital Resources” above, the specific timing and amounts of which are not currently determinable.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“FAS”) 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

employees, and certain termination benefits provided to employees who are involuntarily terminated. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of FAS 146 in the second quarter of fiscal year 2003 to have a significant impact on its financial condition or results of operations.

In November 2002, the FASB’s Emerging Issues Task Force finalized EITF Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. However, it does not address when the criteria for revenue recognition are met or provide guidance on the appropriate revenue recognition convention for a given unit of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is permitted. Upon adoption, entities may elect to either apply the EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its financial condition or results of operations.

Risk Factors

Customer Demand. Demand for the Company’s products depends upon, among other factors, the level of capital expenditures by current and prospective customers, the rate of economic growth in the markets in which we compete, and the competitiveness of our products and services. Changes in any of these factors could have an adverse effect on the Company’s financial condition or results of operations.

In the case of our Scientific Instruments and Vacuum Technologies segments, we must continue to assess and predict customer needs, regulatory requirements, and evolving technologies. We must develop new products, including enhancements to existing products, new services, and new applications, successfully commercialize, manufacture, market, and sell these products, and protect our intellectual property in these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely affected.

In the case of the Company’s Electronics Manufacturing segment, we must respond quickly to our customers’ changing requirements. Customers may change, delay, or cancel orders for many reasons, including lack of success of their products or business strategies and economic conditions in the markets they serve. In

addition, some customers, including start-up companies, have limited product histories and financial resources, which make them riskier customers for us. We must determine, based on our judgment and our customers’ estimates of their future requirements, what levels of business we will accept, what start-up costs to incur for new customers or products, production schedules, component procurement commitments, personnel needs, and other resource requirements. All of these decisions require predictions about the future and judgments that could be wrong. Cancellations, reductions, or delays in orders by a significant customer or group of customers, or their inability to meet financial commitments with respect to orders or shipments, could have an adverse impact on the Company’s financial condition or results of operations.

Variability of Operating Results. The Company experiences some cyclical patterns in sales of its products. Generally, sales and earnings in the first quarter of the Company’s fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in our first fiscal quarter (October to December) and many customers defer December deliveries until the next calendar year, our second fiscal quarter. Our fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the other three quarters, primarily because many customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced by other factors, including general economic conditions, acquisitions, and new product introductions. Consequently, our results of operations may fluctuate significantly from quarter to quarter.

For most of the Company’s products, we operate on a short backlog, as short as a few days for some products and less than a fiscal quarter for most others. We also experience significant shipments in the last month of each quarter, in part because of how our customers place orders and schedule shipments. This can make it difficult for us to forecast our results of operations.

Certain of our leading-edge NMR systems, probes, and components (together accounting for less than 10% of the Company’s revenues and operating profits) sell for high prices and on long lead-times. These systems and components are complex; require development of new technologies and, therefore, significant research and development resources; are often intended for evolving leading-edge research applications; often have customer-specific features, custom capabilities, and specific acceptance criteria; and, in the case of NMR systems, require superconducting magnets that can be difficult to manufacture. These superconducting magnets are not manufactured by us, so our ability to ship, install and obtain customer acceptance of our leading-edge NMR systems is dependent upon the superconducting magnet supplier’s timely development, delivery, and installation of magnets that perform to customer specifications. If we are unable to meet these challenges, it could have an adverse effect on the Company’s financial condition or results of operations. In addition, all of these factors can make it difficult for us to forecast shipment, installation, and acceptance of leading-edge NMR systems and probes, which in turn can make it difficult for us to forecast the timing of revenue recognition and the achieved gross profit margin on these systems.

Competition. The industries in which the Company operates—scientific instruments, vacuum technologies, and electronics manufacturing—are highly competitive. In each of these industries, we compete against many U.S. and non-U.S. companies, most with global operations. Some of our competitors have greater financial resources than we have, which may enable them to respond more quickly to new or emerging technologies, take advantage of acquisition opportunities, compete on price, or devote greater resources to research and development, engineering, manufacturing, marketing, sales, or managerial activities. Others have greater name recognition and geographic and market presence or lower cost structures than the Company. In addition, weaker demand and excess capacity in our industries could cause greater price competition as our competitors seek to maintain sales volumes and market share. Additionally, in the case of electronics manufacturing, current and prospective customers continually evaluate the merits of manufacturing products internally; there is substantial excess manufacturing capacity in the industry; certain competitors manufacture or are seeking to manufacture outside the U.S. where there can be significant cost advantages, and certain customers may be willing to move to “off-shore” manufacturing for cost reasons; larger competitors might have greater direct buying power from suppliers; and electronics manufacturing processes are generally not subject to significant intellectual property protection. For all of the foregoing reasons, competition could result in lower

revenues due to lost sales or price reductions, lower margins, and loss of market share, which could have an adverse effect on the Company’s financial condition or results of operations.

Key Suppliers. Some items purchased by the Company for the manufacture of its products, including superconducting magnets used in NMR systems, are purchased from limited or single sources of supply. The loss of a key supplier or the inability to obtain certain key raw materials or components could cause delays or reductions in shipments of our products or increase our costs, which could have an adverse effect on the Company’s financial condition or results of operations.

We have experienced and could again experience delivery delays in superconducting magnets used in NMR systems, which has caused and could again cause delays in our product shipments. In addition, end-users of our NMR systems require helium to operate those systems; shortages of helium could result in higher helium prices, and thus higher operating costs for NMR systems, which could impact demand for those systems.

The Company’s Electronics Manufacturing segment uses electronic components in the manufacture of its products. These components can be more or less difficult and expensive to obtain, depending on the overall demand for these components as a result of general economic cycles or other factors. Consequently, the Electronics Manufacturing segment’s results of operations may fluctuate over time.

Business Interruption. The Company’s facilities, operations, and systems could be impacted by fire, flood, terrorism, or other natural or man-made disasters. In particular, we have significant facilities in areas prone to earthquakes, such as our production facilities and headquarters in California. Due to the limited availability, broad exclusions, and prohibitive costs, we do not have insurance policies that would cover losses resulting from an earthquake. If any of our facilities or surrounding areas were to be significantly damaged in an earthquake, it could disrupt our operations, delay shipments, and cause us to incur significant repair or replacement costs, which could have an adverse effect on the Company’s financial condition or results of operations.

The Company’s employees based in certain foreign countries are subject to collective bargaining agreements. Of these, the Company’s employees in Australia are subject to a collective bargaining agreement that will need to be renewed in April 2003. A work stoppage, strike, or other labor action at this or other facilities of the Company could have an adverse effect on the Company’s financial condition or results of operations.

Intellectual Property. The Company’s success depends on its intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and licensing arrangements to establish and protect that intellectual property, but these protections might not be available in all countries, might not be enforceable, might not fully protect our intellectual property, and might not provide meaningful competitive advantages. Moreover, we might be required to spend significant resources to police and enforce our intellectual property rights, and we might not detect infringements of those intellectual property rights. If we fail to protect our intellectual property and enforce our intellectual property rights, our competitive position could suffer, which could have an adverse effect on the Company’s financial condition or results of operations.

Third parties might claim that the Company infringes their intellectual property rights, and we may be unaware of intellectual property rights that we are infringing. Any litigation regarding intellectual property of others could be costly and could divert personnel and resources from our operations. Claims of intellectual property infringement might also require us to develop non-infringing alternatives or enter into royalty-bearing license agreements. We might also be required to pay damages or be enjoined from developing, manufacturing, or selling infringing products. We sometimes rely on licenses to avoid these risks, but we cannot be assured that these licenses will be available in the future or on favorable terms. Failure to protect against these risks could have an adverse effect on the Company’s financial condition or results of operations.

Acquisitions. The Company has acquired companies and operations, and intends to acquire companies and operations in the future, as part of its growth strategy. Acquisitions must be carefully evaluated and negotiated if

they are to be successful. Once completed, acquired operations must be carefully integrated to realize expected synergies, efficiencies, and financial results. Some of the challenges in doing this include retaining key employees, managing operations in new geographic areas, retaining key customers, and managing transaction costs. All of this must be done without diverting management and other resources from other operations and activities. Failure to successfully evaluate, negotiate, and integrate acquisitions could have an adverse effect on the Company’s financial condition or results of operations.

Foreign Operations and Currency Exchange Rates. A significant portion of the Company’s sales, manufacturing activities, and employees are outside of the United States. As a result, the Company is subject to various risks, including the following: duties, tariffs, and taxes; restrictions on currency conversions, fund transfers, or profit repatriations; import, export, and other trade restrictions; protective labor regulations and union contracts; compliance with local laws and regulations; travel and transportation difficulties; and adverse developments in political or economic environments in countries where we operate. Additionally, the U.S. dollar value of the Company’s sales varies with currency exchange rate fluctuations, although the Company’s manufacturing operations in other countries often act as a natural hedge against the profitability impact of foreign currency exchange fluctuations relative to the U.S. dollar. These risks could have an adverse effect on the Company’s financial condition or results of operations.

Key Personnel. The Company’s success depends upon the efforts and abilities of key personnel, including research and development, engineering, manufacturing, finance, administrative, marketing, sales, and management personnel. The availability of qualified personnel can vary significantly based on factors such as the strength of the general economy. However, even in weak economic periods, there is still intense competition for personnel with certain expertise in the geographic areas where we compete for personnel. In addition, certain employees have significant institutional and proprietary technical knowledge, which could be difficult to quickly replace. Failure to attract and retain qualified personnel, who generally do not have employment agreements or post-employment non-competition agreements, could have an adverse effect on the Company’s financial condition or results of operations.

Environmental Matters. The Company’s operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company’s operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect on the Company’s capital expenditures, earnings, or competitive position.

VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at nine sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring, and/or remediation activities under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities. Under the terms of the Distribution, the Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs).

Governmental Regulations. The Company’s businesses are subject to many governmental regulations in the U.S. and other countries, including with respect to protection of the environment, employee health and safety, labor matters, product safety, medical devices, import, export, competition, and sales to governmental entities. These regulations are complex and change frequently. We incur significant costs to comply with governmental regulations, and failure to comply could result in suspension of or restrictions on our operations, product recalls, fines and other civil and criminal penalties, private party litigation, and damage to our reputation, which could have an adverse effect on the Company’s financial condition or results of operations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

The Company typically hedges its foreign currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with certain forecasted foreign currency cash flows. The success of the Company’s hedging activities depends on its ability to forecast transaction activity in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. However, the Company believes that in most cases gains or losses would be substantially offset by losses or gains from the related foreign exchange forward contracts. As a result, the effect of an immediate 10% change in exchange rates would not be material to the Company’s

financial condition or results of operations. The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity.

At December 27, 2002, forward contracts to sell Japanese yen having an aggregate notional value of $6.9 million were designated as cash flow hedges of forecasted sale transactions. These contracts were deemed to be highly effective, and as a result, a loss of $0.1 million (net of tax) on these contracts is included in accumulated other comprehensive loss in stockholders’ equity. During the fiscal quarter ended December 27, 2002, a loss of $0.1 million from hedge ineffectiveness was recognized and included in general and administrative expenses. A summary of all forward exchange contracts that were outstanding as of December 27, 2002 follows:

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	28,037
Australian dollar		—		15,110
Japanese yen		11,507		—
Canadian dollar		5,336		—
British pound		5,066		—
Swedish krona		—		3,239

	$	21,909	$	46,386

Interest Rate Risk

The Company has no material exposure to market risk for changes in interest rates. The Company invests any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to the Company’s financial condition or results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At December 27, 2002, the Company’s debt obligations had fixed interest rates.

Based upon rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of long-term debt and notes payable approximate their estimated fair values.

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.

Debt Obligations

Principal Amounts and Related Weighted-Average Interest Rates By Year of Maturity

	Nine Months Ending Oct. 3, 2003			Fiscal Years
	Nine Months Ending Oct. 3, 2003			2004			2005			2006			2007			2008			Thereafter			Total
(dollars in thousands)
Long-term debt (including current portion)	$	2,132		$	2,774		$	3,889		$	3,889		$	2,500		$	6,250		$	18,750		$	40,184
Average interest rate		5.5	%		6.6	%		4.6	%		4.6	%		7.2	%		6.7	%		6.7	%		6.3	%

Item 4.

Controls and Procedures

Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the disclosure controls subsequent to the date of that evaluation.

PART II

OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

10.19		Change in Control Agreement, dated as of December 18, 2002, between Varian, Inc. and Martin O’Donoghue.

99.1		Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K filed during the fiscal quarter ended December 27, 2002:

None.

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)

By		/s/ G. EDWARD MCCLAMMY
		G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

Date: February 7, 2003

CERTIFICATION

I, Allen J. Lauer, certify that:

I have reviewed this quarterly report on Form 10-Q of Varian, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 7, 2003

/s/ ALLEN J. LAUER

Allen J. Lauer

Chairman of the Board

and Chief Executive Officer

CERTIFICATION

I, G. Edward McClammy, certify that:

I have reviewed this quarterly report on Form 10-Q of Varian, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: February 7, 2003

/s/ G. EDWARD MCCLAMMY

G. Edward McClammy

Senior Vice President, Chief Financial Officer

and Treasurer

EX-10.19 3 dex1019.htm CHANGE IN CONTROL AGREEMENT Change in Control Agreement

Exhibit 10.19

CHANGE IN CONTROL AGREEMENT

THIS CHANGE IN CONTROL AGREEMENT (“Agreement”) is entered into effective as of December 18, 2002, by and between VARIAN, INC., a Delaware corporation (the “Company”)¹, and Martin O’Donoghue, an employee of the Company (“Employee”).

The Company’s Board of Directors (the “Board”) has determined that it is in the best interest of the Company and its stockholders for the Company to agree to pay Employee termination compensation in the event Employee should leave the employ of the Company under the circumstances described below. The Board recognizes that the possibility of a proposal from a third person, whether or not solicited by the Company, concerning a possible “Change in Control” of the Company (as such language is defined in Section 3(d)) will be unsettling to Employee. Therefore, the arrangements set forth in this Agreement are being made to help assure a continuing dedication by Employee to Employee’s duties to the Company notwithstanding the proposal or occurrence of a Change in Control. The Board believes it imperative, should the Company receive any proposal from a third party, that Employee, without being influenced by the uncertainties of Employee’s own situation, be able to assess and advise the Board whether such proposals are in the best interest of the Company and its stockholders, and to enable Employee to take action regarding such proposals as the Board might determine to be appropriate. The Board also wishes to demonstrate to key personnel that the Company desires to enhance management relations and its ability to retain and, if needed, to attract new management, and intends to ensure that loyal and dedicated management personnel are treated fairly.

In view of the foregoing, the Company and Employee agree as follows:

EFFECTIVE DATE AND TERM OF AGREEMENT.

This Agreement is effective and binding on the Company and Employee as of the date hereof; provided, however, that, subject to Section 2(d), the provisions of Sections 3 and 4 shall become operative only upon the Change in Control Date.

EMPLOYMENT OF EMPLOYEE.

(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this Agreement shall affect any right which Employee may otherwise have to terminate Employee’s employment, nor shall anything in this Agreement affect any right which the Company may have to terminate Employee’s employment at any time in any lawful manner.

¹ “Company” shall include the Company, any successor to the Company’s business and/or assets, and any party which executes and delivers the agreement required by Section 6(e) or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law or otherwise.

(b) In the event of a Potential Change in Control, to be entitled to receive the benefits provided by this Agreement, Employee will not voluntarily leave the employ of the Company, and will continue to perform Employee’s regular duties and the services specified in the recitals of this Agreement until the Change in Control Date. Should Employee voluntarily terminate employment prior to the Change in Control Date, this Agreement shall lapse upon such termination and be of no further force or effect.

(c) If Employee’s employment terminates on or after the Change in Control Date, the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4.

(d) If Employee’s employment is terminated by the Company prior to the Change in Control Date but on or after a Potential Change in Control Date, then the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4 unless the Company reasonably demonstrates that Employee’s termination of employment neither (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control nor (ii) arose in connection with or in anticipation of a Change in Control. Solely for purposes of determining the timing of payments and the provision of benefits in Sections 3 and 4 under the circumstances described in this Section 2(d), Employee’s date of termination shall be deemed to be the Change in Control Date.

TERMINATION FOLLOWING CHANGE IN CONTROL.

(a) If a Change in Control shall have occurred, Employee shall be entitled to the benefits provided in Section 4 upon the subsequent termination of Employee’s employment within the applicable period set forth in Section 4 unless such termination is due to Employee’s death, Retirement or Disability or is for Cause or is effected by Employee other than for Good Reason (as such terms are defined in Section 3(d)).

(b) If following a Change in Control, Employee’s employment is terminated by reason of Employee’s death or Disability, Employee shall be entitled to death or long-term disability benefits from the Company no less favorable than the most favorable benefits to which Employee would have been entitled had the death or Disability occurred at any time during the period commencing one (1) year prior to the Change in Control.

(c) If Employee’s employment shall be terminated by the Company for Cause or by Employee other than for Good Reason during the term of this Agreement, the Company shall pay Employee’s Base Salary through the date of termination at the rate in effect at the time notice of termination is given, and the Company shall have no further obligations to Employee under this Agreement.

(d) For purposes of this Agreement:

“Base Salary” shall mean the annual base salary paid to Employee immediately prior to a

Change in Control, provided that such amount shall in no event be less than the annual base salary paid to Employee during the one (1) year period immediately prior to the Change in Control.

A “Change in Control” shall be deemed to have occurred if:

(i) Any individual or group constituting a “person”, as such term is used in Sections l3(d) and l4(d)(2) of the Exchange Act (other than (A) the Company or any of its subsidiaries or (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any of its subsidiaries), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company’s outstanding securities then entitled ordinarily (and apart from rights accruing under special circumstances) to vote for the election of directors; or

(ii) Continuing Directors cease to constitute at least a majority of the Board; or

(iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a “Transaction”), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company or other corporation resulting from such Transaction; or

(iv) all or substantially all of the assets of the Company are sold, liquidated or distributed;

provided, however, that a “Change in Control” shall not be deemed to have occurred under this Agreement if, prior to the occurrence of a specified event that would otherwise constitute a Change in Control hereunder, the disinterested Continuing Directors then in office, by a majority vote thereof, determine that the occurrence of such specified event shall not be deemed to be a Change in Control with respect to Employee hereunder if the Change in Control results from actions or events in which Employee is a participant in a capacity other than solely as an officer, employee or director of the Company.

“Change in Control Date” shall mean the date on which a Change in Control occurs.

“Cause” shall mean:

(i) The continued willful failure of Employee to perform Employee’s duties to the Company (other than any such failure resulting from Employee’s incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to Employee by the Board or a committee thereof; or

(ii) The willful commission by Employee of a wrongful act that caused or was

reasonably likely to cause substantial damage to the Company, or an act of fraud in the performance of Employee’s duties on behalf of the Company; or

(iii) The conviction of Employee for commission of a felony in connection with the performance of Employee’s duties on behalf of the Company; or

(iv) The order of a federal or state regulatory authority having jurisdiction over the Company or its operations or by a court of competent jurisdiction requiring the termination of Employee’s employment by the Company.

“Continuing Directors” shall mean the directors of the Company in office on the date hereof and any successor to any such director who was nominated or selected by a majority of the Continuing Directors in office at the time of the director’s nomination or selection and who is not an “affiliate” or “associate” (as defined in Regulation 12B under the Exchange Act) of any person who is the beneficial owner, directly or indirectly, of securities representing ten percent (10%) or more of the combined voting power of the Company’s outstanding securities then entitled ordinarily to vote for the election of directors.

“Disability” shall mean Employee’s incapacity due to physical or mental illness such that Employee shall have become qualified to receive benefits under the Company’s long-term disability plan as in effect on the date of the Change in Control.

“Dispute” shall mean, in the case of termination of Employee’s employment for Disability or Cause, that Employee challenges the existence of Disability or Cause, and in the case of termination of Employee’s employment for Good Reason, that the Company challenges the existence of Good Reason for termination of Employee’s employment.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Good Reason” shall mean:

(i) The assignment of Employee to duties which are materially different from Employee’s duties immediately prior to the Change in Control and which result in a material reduction in Employee’s authority and responsibility when compared to the highest level of authority and responsibility assigned to Employee at any time during the six (6) month period prior to the Change in Control Date; or

(ii) A reduction of Employee’s total compensation as the same may have been increased from time to time after the Change in Control Date other than (A) a reduction implemented with the consent of Employee or (B) a reduction that is generally comparable (proportionately) to compensation reductions imposed on senior executives of the Company generally; or

(iii) The failure to provide to Employee the benefits and perquisites, including participation on a comparable basis in the Company’s stock option, incentive, and other similar plans in which employees of the Company of comparable title and salary grade participate, as

were provided to Employee immediately prior to a Change in Control, or with a package of benefits and perquisites that are substantially comparable in all material respects to such benefits and perquisites provided prior to the Change in Control; or

(iv) The relocation of the office of the Company where Employee is employed immediately prior to the Change in Control Date (the “CIC Location”) to a location which is more than 50 miles away from the CIC Location or the Company’s requiring Employee to be based more than 50 miles away from the CIC Location (except for required travel on the Company’s business to an extent substantially consistent with Employee’s customary business travel obligations in the ordinary course of business prior to the Change in Control Date);

(v) The failure of the Company to obtain promptly upon any Change in Control the express written assumption of an agreement to perform this Agreement by any successor as contemplated in Section 6(e); or

(vi) The attempted termination of Employee’s employment for Cause on grounds insufficient to constitute a basis of termination for Cause under this Agreement; or

(vii) The failure of the Company to promptly make any payment into escrow when so required by Section 3(f).

“Potential Change in Control” shall mean the earliest to occur of (a) the execution of an agreement or letter of intent, the consummation of the transactions described in which would result in a Change in Control, (b) the approval by the Board of a transaction or series of transactions, the consummation of which would result in a Change in Control, or (c) the public announcement of a tender offer for the Company’s voting stock, the completion of which would result in a Change in Control; provided, that no such event shall be a “Potential Change in Control” unless (i) in the case of any agreement or letter of intent described in clause (a), the transaction described therein is subsequently consummated by the Company and the other party or parties to such agreement or letter of intent and thereupon constitutes a “Change in Control”, (ii) in the case of any Board-approved transaction described in clause (b), the transaction so approved is subsequently consummated and thereupon constitutes a “Change in Control” or (iii) in the case of any tender offer described in clause (c), such tender offer is subsequently completed and such completion thereupon constitutes a “Change in Control”.

“Potential Change in Control Date” shall mean the date on which a Potential Change in Control occurs.

“Retirement” shall mean Employee’s actual retirement after reaching the normal or early retirement date provided for in the Company’s Retirement and Profit-Sharing Program as in effect on the date of Employee’s termination of employment.

(e) Any termination of employment by the Company or by Employee shall be communicated by written notice, specify the date of termination, state the specific basis for termination and set forth in reasonable detail the facts and circumstances of the termination in order to provide a basis for determining the entitlement to any payments under this Agreement.

(f) If within thirty (30) days after notice of termination is given, the party to whom the notice was given notifies the other party that a Dispute exists, the parties will promptly pursue resolution of such Dispute with reasonable diligence; provided, however, that pending resolution of any such Dispute, the Company shall pay 75% of any amounts which would otherwise be due Employee pursuant to Section 4 if such Dispute did not exist into escrow pending resolution of such Dispute and pay 25% of such amounts to Employee. Employee agrees to return to the Company such amounts to which it is ultimately determined that he is not entitled.

PAYMENTS AND BENEFITS UPON TERMINATION.

(a) If within eighteen (18) months after a Change in Control, the Company terminates Employee’s employment other than by reason of Employee’s death, Disability, Retirement or for Cause, or if Employee terminates Employee’s employment for Good Reason, then the Employee shall be entitled to the following payments and benefits:

(i) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum severance payment equal to 2.50 multiplied by the sum of (A) Employee’s Base Salary, (B) the highest annual bonus that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the Company’s Management Incentive Plan (the “MIP”) or Varian Associates, Inc.’s Management Incentive Plan, and (C) the highest cash bonus for a performance period of more than one fiscal year that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the MIP.

(ii) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum payment equal to a pro rata portion (based on the number of days elapsed during the fiscal year and/or other bonus performance period in which the termination occurs) of Employee’s target bonus under the MIP for the fiscal year and for any other partially completed bonus performance period in which the termination occurs.

(iii) All waiting periods for the exercise of any stock options granted to Employee and all conditions or restrictions of any restricted stock granted to Employee shall terminate, and all such options shall be exercisable in full according to their terms, and the restricted stock shall be transferred to Employee as soon as reasonably practicable thereafter.

(iv) Employee’s participation as of the date of termination in the life, medical/dental/vision and disability insurance plans and financial/tax counseling plan of the Company shall be continued on the same terms (including any cost sharing) as if Employee were an employee of the Company (or equivalent benefits provided) until the earlier of Employee’s commencement of substantially equivalent full-time employment with a new employer or twenty-four (24) months after the date of termination; provided, however, that after the date of termination, Employee shall no longer be entitled to receive Company-paid executive physicals or, upon expiration of the applicable memberships, Company-paid airline memberships. In the

event Employee shall die before the expiration of the period during which the Company is required to continue Employee’s participation in such insurance plans, the participation of Employee’s surviving spouse and family in the Company’s insurance plans shall continue throughout such period.

(v) Employee may elect upon termination to purchase any automobile then in the possession of Employee and subject to a lease of which the Company is the lessor by payment to the Company of the residual value set forth in the lease, without any increase for remaining lease payments during the term or other lease breakage costs. Employee may elect to have any such payment deducted from any payments due the Employee hereunder.

(vi) All payments and benefits provided under this Agreement shall be subject to applicable tax withholding.

(b) Following Employee’s termination of employment for any reason, the Company shall have the unconditional right to reduce any payments owed to Employee hereunder by the amount of any due and unpaid principal and interest on any loans by the Company to Employee and Employee hereby agrees and consents to such right on the part of the Company.

GROSS-UP PAYMENT.

(a) Notwithstanding anything herein to the contrary, if it is determined that any Payment would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as an “Excise Tax”), then Employee shall be entitled to an additional payment (a “Gross-Up Payment”) in an amount that will place Employee in the same after-tax economic position that Employee would have enjoyed if the Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment shall be determined by a nationally-recognized independent public accounting firm designated by agreement between Employee and the Company (the “Accounting Firm”). No Gross-Up Payments shall be payable hereunder if the Accounting Firm determines that the Payments are not subject to an Excise Tax.

“Payment” means (i) any amount due or paid to Employee under this Agreement, (ii) any amount that is due or paid to Employee under any plan, program or arrangement of the Company and its subsidiaries and (iii) any amount or benefit that is due or payable to Employee under this Agreement or under any plan, program or arrangement of the Company and its subsidiaries not otherwise covered under clause (i) or (ii) hereof which must reasonably be taken into account under Section 280G of the Code in determining the amount the “parachute payments” received by Employee, including, without limitation, any amounts which must be taken into account under Section 280G of the Code as a result of (A) the acceleration of the vesting of any option, restricted stock or other equity award, (B) the acceleration of the time at which any payment or benefit is receivable by Employee or (C) any contingent severance or other amounts that are payable to Employee.

(b) Subject to the provisions of Section 5(c), all determinations required under this Section 5, including whether a Gross-Up Payment is required, the amount of the Payments constituting excess parachute payments, and the amount of the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to Employee and the Company within fifteen days of the date reasonably requested by Employee or the Company on which a determination under this Section 5 is necessary or advisable. The Company shall pay to Employee the initial Gross-Up Payment within 5 days of the receipt by Employee and the Company of the determination of the Accounting Firm. If the Accounting Firm determines that no Excise Tax is payable by Employee, the Company shall cause its accountants to provide Employee with an opinion that the Accounting Firm has substantial authority under the Code not to report an Excise Tax on Employee’s Federal income tax return. Any determination by the Accounting Firm shall be binding upon Employee and the Company. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is ultimately determined to be owing by Employee with respect to any Payment (hereinafter an “Underpayment”), the Company, after exhausting its remedies under Section 5(c) below, shall promptly pay to Employee an additional Gross-Up Payment in respect of the Underpayment.

(c) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notice shall be given as soon as practicable after Employee knows of such claim and shall apprise the Company of the nature of the claim and the date on which the claim is requested to be paid. Employee agrees not to pay the claim until the expiration of the thirty (30) day period following the date on which Employee notifies the Company, or such shorter period ending on the date the Taxes with respect to such claim are due (the “Notice Period”). If the Company notifies Employee in writing prior to the expiration of the Notice Period that it desires to contest the claim, Employee shall: (i) give the Company information reasonably requested by the Company relating to the claim; (ii) take such action in connection with the claim as the Company may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably acceptable to Employee; (iii) cooperate with the Company in good faith in contesting the claim; and (iv) permit the Company to participate in any proceedings relating to the claim. Employee shall permit the Company to control all proceedings related to the claim and, at its option, permit the Company to pursue or forgo any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim. If requested by the Company, Employee agrees either to pay the tax claimed and sue for refund or contest the claim in any permissible manner and to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine; provided, however, that, if the Company directs Employee to pay such claim and pursue a refund, the Company shall advance the amount of such payment to Employee on an after-tax and interest-free basis (an “Advance”). The Company’s control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and Employee shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or other taxing authority. If the Company does not notify Employee in writing prior to the end of the Notice Period of its desire to contest the claim, the Company shall pay to Employee an additional Gross-Up Payment in respect of the excess parachute payments that are

the subject of the claim, and Employee agrees to pay the amount of the Excise Tax that is the subject of the claim to the applicable taxing authority in accordance with applicable law.

(d) If, after receipt by Employee of an Advance, Employee becomes entitled to a refund with respect to the claim to which such Advance relates, Employee shall pay the Company the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by Employee of an Advance, a determination is made that Employee shall not be entitled to any refund with respect to the claim and the Company does not promptly notify Employee of its intent to contest the denial of refund, then the amount of the Advance shall not be required to be repaid by Employee and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to Employee.

(e) The Company shall indemnify Employee and hold Employee harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities (“Losses”) incurred by Employee with respect to the exercise by the Company of any of its rights under this Section 5, including, without limitation, any Losses related to the Company’s decision to contest a claim or any imputed income to Employee resulting from any Advance or action taken on Employee’s behalf by the Company hereunder. The Company shall pay all legal fees and expenses incurred under this Section 5, and shall promptly reimburse Employee for the reasonable expenses incurred by Employee in connection with any actions taken by the Company or required to be taken by Employee hereunder. The Company shall also pay all of the fees and expenses of the Accounting Firm, including, without limitation, the fees and expenses related to the opinion referred to in Section 5(b).

GENERAL.

(a) Employee shall retain in confidence under the conditions of the Company’s confidentiality agreement with Employee any proprietary or other confidential information known to Employee concerning the Company and its business so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. If required, Employee shall return to the Company any memoranda, documents or other materials proprietary to the Company.

(b) While employed by the Company and following the termination of such employment (other than a termination of employment by Employee for Good Reason or by the Company other than for Cause) for a period of two (2) years, Employee shall not, whether for Employee’s own account or for the account of any other individual, partnership, firm, corporation or other business organization, intentionally solicit, endeavor to entice away from the Company or a subsidiary of the Company (each, a “Protected Party”), or otherwise interfere with the relationship of a Protected Party with, any person who is employed by a Protected Party or any person or entity who is, or was within the then most recent twelve (12) month period, a customer or client of a Protected Party.

Employee acknowledges that a breach of any of the covenants contained in this Section 6(b) may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it may not be possible to measure damages for such injuries precisely and

that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Company may be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Section 6(b) or such other relief as may be required to specifically enforce all of the covenants in this Section 6(b). Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court in the State of California, County of Santa Clara, for that purpose. This Section 6(b) shall survive any termination of this Agreement.

(c) If litigation is brought by Employee to enforce or interpret any provision contained in this Agreement, the Company shall indemnify Employee for Employee’s reasonable attorney’s fees and disbursements incurred in such litigation and pay prejudgment interest on any money judgment obtained by Employee calculated at the prime rate of interest in effect from time to time at the Bank of America, San Francisco, from the date that payment should have been made under the Agreement, provided that Employee shall not have been found by the court in which such litigation is pending to have had no cause in bringing the action, or to have acted in bad faith, which finding must be final with the time to appeal therefrom having expired and no appeal having been taken.

(d) Except as provided in Section 4, the Company’s obligation to pay to Employee the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment.

(e) The Company shall require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Company, by written agreement to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

(f) This Agreement shall inure to the benefit of and be enforceable by Employee’s heirs, successors and assigns. If Employee should die while any amounts would still be payable to Employee hereunder if Employee had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Employee’s heirs, successors and assigns.

(g) For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:

If to Employee:		If to the Company:

Martin O’Donoghue		Varian, Inc.
		3120 Hansen Way
		Palo Alto, CA 94304-1030
		Attn: Vice President, Human Resources

or to such other address as either party furnishes to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

(h) This Agreement shall constitute the entire agreement between Employee and the Company concerning the subject matter of this Agreement.

(i) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without giving effect to the provisions, principles or policies thereof relating to choice or conflict of laws. The invalidity or unenforceability of any provision of this Agreement in any circumstance shall not affect the validity or enforceability of such provision in any other circumstance or the validity or enforceability of any other provision of this Agreement, and, except to the extent such provision is invalid or unenforceable, this Agreement shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof in such jurisdiction, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Section 6(i) shall survive any termination of this Agreement.

(j) This Agreement may be terminated by the Company pursuant to a resolution adopted by the Board at any time prior to a Potential Change in Control Date. After a Change in Control Date or a Potential Change in Control Date, this Agreement may only be terminated with the consent of Employee.

(k) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof.

(l) In the event that the Company becomes party to a transaction that is intended to qualify for “pooling of interests” accounting treatment and, but for one or more of the provisions of this Agreement would so qualify, then this Agreement shall be interpreted so as to preserve such accounting treatment, and to the extent that any provision of this Agreement would disqualify the transaction from pooling of interests accounting treatment, then such provision shall be null and void. All determinations to be made in connection with the preceding sentence shall be made by the independent accounting firm whose opinion with respect to “pooling of

interests” treatment is required as a condition to the Company’s consummation of such transaction.

IN WITNESS WHEREOF, the parties acknowledge that they have read and understand the terms of this Agreement and have executed this Agreement to be effective as of December 18, 2002.

EX-99.1 4 dex991.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER Certification of Chief Executive Officer

Exhibit 99.1

CERTIFICATION PURSUANT TO

SECTION 1350 TO CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Varian, Inc. for the period ended December 27, 2002, filed with the Securities and Exchange Commission on the date of this certification (the “Report”), the undersigned hereby certifies, pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Varian, Inc.

Dated:		February 7, 2003

/s/ ALLEN J. LAUER
Allen J. Lauer Chairman of the Board and Chief Executive Officer Varian, Inc.

EX-99.2 5 dex992.htm CERTIFICATION OF CHIEF FINANCIAL OFFICER Certification of Chief Financial Officer

Exhibit 99.2

CERTIFICATION PURSUANT TO

SECTION 1350 TO CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Dated:		February 7, 2003

/s/ G. EDWARD MCCLAMMY
G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer Varian, Inc.

-----END PRIVACY-ENHANCED MESSAGE-----

VARIAN, INC.

/s/ Arthur W. Homan

/s/ Martin O’Donoghue

Arthur W. Homan

Martin O’Donoghue

Vice President, General Counsel and Secretary