-----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, U5NLp094g9REdLAAd9saKON9pIheehzpWKrG/Z5n1cvX7y3+U6BaktIdHei6vJT/ nK4AE15CxF4jXqwHHGms6Q== 0001012870-99-000444.txt : 19990215 0001012870-99-000444.hdr.sgml : 19990215 ACCESSION NUMBER: 0001012870-99-000444 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN INC CENTRAL INDEX KEY: 0001079028 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770501995 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-25393 FILM NUMBER: 99537493 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-12G 1 FORM 10-12(G) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------- Varian, Inc. (Exact Name of Registrant as specified in Its Charter) Delaware 77-0501995 (I.R.S. Employer (State or Other Jurisdiction of Identification No.) Incorporation or Organization) 3050 Hansen Way Palo Alto, California 94304-1000 (Address of Principal Executive Offices) (Zip Code) --------------- Registrant's telephone number, including area code: (650) 493-4000 Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Item 1. Business. The information required by this item is contained under the sections "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors, and in the Combined Financial Statements of Instruments Business of Varian Associates, Inc. Item 2. Financial Information. The information required by this item is contained under the sections "Summary - Summary Financial Data," "Risk Factors," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Market Risk" and "Pro Forma Condensed Combined Financial Statements." Item 3. Properties. The information required by this item is contained under the section "Business - Properties." Item 4. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is contained under the section "Ownership of IB Common Stock." Item 5. Directors and Executive Officers. The information required by this item is contained under the sections "Management - Board of Directors" and " - Executive Officers." Item 6. Executive Compensation. The information required by this item is contained under the section "Management - Compensation of Directors," " - Executive Officer Compensation," " - Stock Options," and " - Change in Control Agreements." Item 7. Certain Relationships and Related Transactions. The information required by this item is contained under the sections "The Distribution - Relationship Among VMS, VSEA and IB After the Distribution" and "Management - Change in Control Agreements." Item 8. Legal Proceedings. The information required by this item is contained under the section "Business - Legal Proceedings." Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters. The information required by this item is contained under the sections "Risk Factors - No Dividends Anticipated," "The Distribution - Listing and Trading of IB Common Stock," " - Employee Benefits Allocation Agreement" and "Description of the Capital Stock." Item 10. Recent Sales of Unregistered Securities. On January 7, 1999, as part of its original incorporation, the Registrant issued one share of its common stock, for a total consideration of $1,000, to Varian Associates, Inc., which is and will be the Registrant's sole stockholder until the date of the distribution. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, in that such transaction did not involve a public offering. Item 11. Description of Registrant's Securities to be Registered. The information required by this item is contained under the section "Description of the Capital Stock - General" and " - Common Stock." Item 12. Indemnification of Directors and Officers. The information required by this item is contained under the section "Limitation of Liability and Indemnification Matters." Item 13. Financial Statements and Supplementary Data. The information required by this item is identified in the sections "Index to Financial Statements - Instruments Business of Varian Associates, Inc." and "Pro Forma Condensed Combined Financial Statements." Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Matters. None. Item 15. Financial Statements and Exhibits. (a) Financial Statements (1) Combined Financial Statements: The information required by this item is contained in the "Index to Financial Statements and Financial Statement Schedule." (2) Combined Financial Statement Schedule: The following financial statement schedule of the Registrant for fiscal years 1998, 1997, and 1996, and the related Report of Independent Accountants are filed as a part of this Registration Statement and should be read in conjunction with the Combined Financial Statements of the Registrant. Schedule - Report of Independent Accountants on Finacial Statement Schedule - Valuation and Qualifying Accounts All other required schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto. (b)Exhibits The following documents are filed as exhibits hereto:
Exhibit No. Description ------------------ 2.1 Distribution Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of January 14, 1999. 3.1 Form of Restated Certificate of Incorporation of Varian, Inc. to be in effect upon the effectiveness of the Distribution. 3.2 Form of By-Laws of Varian, Inc. to be in effect upon the effectiveness of the Distribution. 4.1 Specimen Common Stock Certificate.* 4.2 Form of Rights Agreement.* 10.1 Form of Employee Benefits Allocation Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.2 Form of Intellectual Property Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.4 Form of Transition Services Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.5 Form of Change in Control Agreement for CEO and Senior Executives.*
Exhibit No. Description ------------------ 10.6 Form of Indemnity Agreement with Directors and Executive Officers.* 10.7 Varian, Inc. Omnibus Stock Plan. 10.8 Varian, Inc. Management Incentive Plan. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
- ------- * To be filed by amendment. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +Information contained herein is subject to completion or amendment. A + +Registration Statement on Form 10 relating to these securities has been filed + +with the Securities and Exchange Commission. This Information Statement shall + +not constitute an offer to sell or the solicitation of an offer to buy these + +securities. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999 Information Statement Varian, Inc. Common Stock (par value $0.01 per share) This Information Statement is being furnished in connection with the distribution (the "Distribution") by Varian Associates, Inc., a Delaware corporation ("Varian"), to holders of record of the common stock of Varian, par value $1 per share ("Varian Common Stock"), at the close of business on March , 1999 (the "Distribution Record Date") of one share of common stock, par value $0.01 per share (the "IB Common Stock"), of Varian, Inc., a Delaware corporation ("IB"), for each share of Varian Common Stock owned on the Distribution Record Date. At the same time Varian will distribute to such holders one share of common stock, par value $0.01 per share ("VSEA Common Stock"), of Varian Semiconductor Equipment Associates, Inc., a Delaware corporation ("VSEA"), for each share of Varian Common Stock owned on the Distribution Record Date. See "The Distribution - Manner of Effecting the Distribution." IB and VSEA are wholly-owned subsidiaries of Varian. On or prior to the Distribution, Varian will effectuate certain transactions (the "Internal Transfers") intended to allocate assets and liabilities relating to (i) the manufacture and sale of health care systems, including linear accelerators, simulators, brachytherapy systems and related data management systems and x-ray components (the "Health Care Systems Business") to Varian; (ii) the manufacture and sale of analytical and research instruments and vacuum products (the "Instruments Business") to IB and (iii) the manufacture and sale of ion implantation processing systems used in the manufacture of integrated circuits (the "Semiconductor Equipment Business") to VSEA. As of the Distribution, Varian will change its name to "Varian Medical Systems, Inc." (Varian after the Distribution being referred to herein as "VMS"). The Distribution will be effective on or about April , 1999 (the "Distribution Date"), subject to satisfaction of certain conditions. Stock distribution statements reflecting ownership of IB Common Stock and VSEA Common Stock will be mailed as soon as practicable after the Distribution. No consideration will be paid by Varian's stockholders for shares of IB Common Stock and VSEA Common Stock received by them in the Distribution, nor will they be requested to surrender or exchange Varian Common Stock in order to receive IB Common Stock and VSEA Common Stock. There is currently no public market for the IB Common Stock, although it is expected that a "when issued" trading market will develop after the Distribution Record Date. Application has been made to quote the IB Common Stock on the Nasdaq National Market under the symbol "VARI." Each share of IB Common Stock will be accompanied by one right (a "Right") to purchase participating preferred stock of IB. Stockholders of Varian are being asked to approve the Distribution at the Combined Annual and Special Meeting of Stockholders of Varian on February 18, 1999. No proxies are being solicited in connection with this Information Statement. These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this information. Any representation to the contrary is a criminal offense. See "Risk Factors" beginning on page 10 for a discussion of certain factors that should be considered by recipients of IB Common Stock. This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities. Stockholders of Varian with inquiries related to the Distribution should contact First Chicago Trust Company of New York, the Distribution Agent for the Distribution, at 1-800-519-3111 or the Secretary of Varian at 650-493-4000. The date of this Information Statement is March , 1999. Cautionary Statement for Purposes of "Safe Harbor" Provisions of The Private Securities Litigation Reform Act of 1995. This Information Statement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, IB's prospects, developments and business strategies for its operations, all of which are subject to risks and uncertainties. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipate," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and in many cases are followed by a cross reference to "Risk Factors." When a forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, the management of IB cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward- looking statement, IB or its management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The actual results of IB may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include (i) the factors discussed under "Risk Factors" and particularly, in cases where the forward-looking statement is followed by a cross reference to "Risk Factors," the factors discussed in the section or sections under "Risk Factors" that are referred to in the cross reference, (ii) the factors discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Forecasted Capitalization," and "Business," and (iii) the following factors: product demand and market acceptance risks; the effect of general economic conditions and foreign currency fluctuations; the impact of competitive products and pricing; new product development and commercialization; the continued improvement of the various instruments markets; the ability to increase operating margins on higher sales; the impact of economic conditions in Korea and other Asian markets on sales in those areas; successful implementation by IB and certain third parties of corrective actions to address the impact of the Year 2000; completion of the Distribution on the current schedule within current budgets; the ability to sell certain surplus assets in connection with the Distribution; the ability of IB to realize anticipated cost savings resulting from the Distribution; and other risks detailed from time to time in the filings of IB with the Securities and Exchange Commission (the "Commission"). IB undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. TABLE OF CONTENTS
Page ---- Summary.................................................................. 4 Introduction............................................................. 9 Risk Factors............................................................. 10 The Distribution......................................................... 20 Selected Financial Data.................................................. 30 Management's Discussion And Analysis Of Financial Condition And Results Of Operations........................................................... 31 Market Risk.............................................................. 38 Forecasted Capitalization................................................ 40 Pro Forma Condensed Combined Financial Statements........................ 41 Business................................................................. 44
Page ---- Management................................................................. 50 The IB Omnibus Stock Plan.................................................. 57 The IB Management Incentive Plan........................................... 62 Ownership of IB Common Stock............................................... 65 Financing.................................................................. 67 Description of the Capital Stock........................................... 68 Limitation of Liability and Indemnification Matters........................ 70 Delaware Law and Certain Charter and By-Law Provisions..................... 70 Available Information...................................................... 75 Index to Financial Statements.............................................. F-1
3 SUMMARY The following is a summary of certain information contained elsewhere in this Information Statement. Reference is made to, and this summary is qualified by, the more detailed information set forth in this Information Statement, which should be read in its entirety. Unless the context otherwise requires, (i) references in this Information Statement to "IB" refer to IB and its subsidiaries after giving effect to the Internal Transfers and the Distribution and (ii) references in this Information Statement to the "Instruments Business" refer to the historical business and operations of the Instruments Business conducted by Varian prior to the Distribution. IB IB, a newly-formed, wholly-owned subsidiary of Varian, will own and operate the Instruments Business after the Distribution. IB develops, manufactures, sells and services a variety of scientific instruments and equipment. IB is a major supplier of analytical and research instruments and related equipment for studying the chemical composition of a myriad of substances, including metals, inorganic materials, organic compounds, polymers, natural substances and biochemicals. IB also develops, manufactures, sells and services nuclear magnetic resonance spectrometers for probing the structural properties of molecules and for producing non-invasive three-dimensional images of biomedical materials. IB also develops, manufactures, sells and services high vacuum products that serve a wide range of industrial and scientific applications, such as high-energy physics, surface analysis, scientific and industrial coating processes, analytical instrumentation and semiconductor manufacturing. IB is also a state-of-the-art contract manufacturer of advanced electronic assemblies and subsystems such as printed circuit boards. IB operates in 70 countries and at October 2, 1998 had approximately 3,000 employees. The principal executive offices of IB will be located at 3120 Hansen Way, Palo Alto, California 94304-1030. Its telephone number at that address is (650) [ ] THE DISTRIBUTION Distributing Company...... Varian Associates, Inc., a Delaware corporation. Concurrently with the Distribution, Varian will change its name to "Varian Medical Systems, Inc." (Varian after the Distribution being referred to herein as "VMS"). Distributed Companies..... Varian, Inc. and Varian Semiconductor Equipment Associates, Inc., each a Delaware corporation and currently a wholly-owned subsidiary of Varian. Distribution Ratio........ Each stockholder of record of Varian as of the close of business on the Distribution Record Date will receive one share of IB Common Stock and one share of VSEA Common Stock for each share of Varian Common Stock held on the Distribution Record Date and will retain the shares of Varian Common Stock held by such stockholder immediately prior to the Distribution (Varian Common Stock after the Distribution being referred to herein as "VMS Common Stock"). No consideration will be paid by Varian stockholders for shares of IB Common Stock and VSEA Common Stock to be received in the Distribution. See "The Distribution - Manner of Effecting the Distribution." Shares to be Approximately 29.9 million shares of IB Common Distributed............... Stock and VSEA Common Stock (based on 29,909,061 shares of Varian Common Stock outstanding on December 21, 1998). The shares to be distributed will constitute 100% of the outstanding shares of IB Common Stock and VSEA Common Stock. Distribution Record Close of business on March , 1999 Date...................... 4 Distribution Date......... April , 1999. On or prior to the Distribution Date, the shares of IB Common Stock and VSEA Common Stock to be distributed in the Distribution will be delivered to First Chicago Trust Company of New York, as Distribution Agent (the "Distribution Agent"). The Distribution Agent will mail stock distribution statements reflecting ownership of shares of IB Common Stock and VSEA Common Stock as soon as practicable after the Distribution. See "The Distribution - Manner of Effecting the Distribution." Conditions to the Under the terms of the Distribution Agreement dated Distribution.............. as of January 14, 1999 among Varian, IB and VSEA (the "Distribution Agreement"), the Distribution is conditioned upon, among other things, (i) the Internal Revenue Service having issued a ruling (the "Tax Ruling") in response to Varian's request in form and substance satisfactory to the Board of Directors of Varian (see " - Tax Consequences" below), (ii) stockholder approval of the Distribution at the Combined Annual and Special Meeting of Stockholders of Varian (the "Meeting") to be held on February 18, 1999 and (iii) the Registration Statement on Form 10, of which this Information Statement is a part (the "Registration Statement") having been declared effective by the Commission. Even if all conditions are satisfied, Varian has reserved the right to abandon, defer or modify the Distribution at any time prior to the Distribution Date. The Varian Board will not waive the requirement of receipt of a favorable Tax Ruling unless Varian receives an opinion of counsel that no gain or loss will be recognized by the holders of Varian Common Stock as a result of the Distribution and no gain or loss will be recognized by Varian upon the Distribution under the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the Varian Board will not waive any other condition to the Distribution or make any changes in the terms of the Distribution after the Distribution is approved by Varian's stockholders unless the Varian Board determines that such waivers or changes would not be materially adverse to Varian's stockholders. In determining whether any such waivers or changes would be materially adverse to Varian's stockholders, the Varian Board will consider, as appropriate, advice from its outside financial and legal advisors as well as the recommendation of management as to the potential impact of such waivers or changes on Varian and Varian's stockholders. See "The Distribution - Conditions; Termination." Reasons for the The Distribution is designed to separate three Distribution.............. types of businesses that have different dynamics and business cycles, serve different markets and customers, are subject to different competitive forces and must be managed with different long-term and short-term strategies and goals. The Distribution will allow the management of IB to focus on its own business, organize its capital structure, evaluate its growth opportunities, achieve market recognition, rationalize its organizational structure and design equity-based compensation programs targeted to its own performance. Internal Transfers........ On or prior to the Distribution Date, Varian intends to consummate certain internal mergers and stock and asset transfers intended to allocate assets and liabilities relating to (i) the Health Care Systems Business to VMS, (ii) the Semiconductor Equipment Business to VSEA and (iii) the Instruments 5 Business to IB (the "Internal Transfers"). See "The Distribution - Internal Mergers and Transfers" and "Pro Forma Condensed Combined Financial Statements." Relationship Among VMS, IB and VSEA After the Distribution.............. For purposes of governing certain ongoing relationships among VMS, VSEA and IB after the Distribution and to provide mechanisms for an orderly transition, Varian, IB and VSEA have entered into or will enter into certain agreements. Such agreements include: (i) the Distribution Agreement providing for, among other things, the Internal Transfers, the Distribution and cross- indemnification provisions, (ii) the Tax Sharing Agreement (as defined), (iii) the Employee Benefits Allocation Agreement (as defined), (iv) the Transition Services Agreement (as defined) and (v) the Intellectual Property Agreement (as defined) (such agreements other than the Distribution Agreement are referred to herein collectively as the "Ancillary Agreements"). See "The Distribution - Relationship Among VMS, VSEA and IB After the Distribution." Financing................. Varian is required to renegotiate the terms of its outstanding unsecured term loans (the "Term Loans") to permit 50% of these loans to be assumed by IB in connection with the Distribution. The Term Loans contain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results of the borrower. In addition, certain short-term notes payable of Varian and its subsidiaries (the "Notes Payable") may, as a result of the Internal Transfers and debt allocation provisions of the Distribution Agreement, remain outstanding as direct and indirect obligations of IB as of the Distribution Date. Based on the outstanding indebtedness of Varian under the Term Loans and Notes Payable as of October 2, 1998 and Varian's projected operating results, certain other transactions and scheduled debt repayments through the Distribution Date, it is anticipated that at the Distribution Date, IB will have between $50 million and $100 million of outstanding indebtedness under the Term Loans and Notes Payable. Based on the assumptions stated in such section, the allocation of indebtedness to IB at the Distribution Date should approximate the amounts reflected in "Forecasted Capitalization." See "The Distribution" and "Financing." IB may enter into a credit facility for working capital and other general corporate purposes. The credit facility may contain certain representations and warranties; conditions; affirmative, negative and financial covenants; and events of default customary for such facilities. It is not expected that IB will have any outstanding borrowings under its credit facility as of the Distribution. See "Financing." Tax Consequences.......... Varian has conditioned the Distribution on receipt of the Tax Ruling from the Internal Revenue Service to the effect, among other things, that receipt of shares of IB Common Stock and VSEA Common Stock by stockholders of Varian will be tax-free. The Varian Board will not waive the requirement of receipt of a favorable Tax Ruling from the Internal Revenue Service unless Varian receives an opinion of counsel that no gain or loss will be recognized 6 by the holders of Varian Common Stock as a result of the Distribution and no gain or loss will be recognized by Varian upon the Distribution. For a description of the consequences to IB and the holders of Varian Common Stock if the Distribution were not to qualify as tax-free, see "RiskFactors - Federal Income Tax Considerations." Distribution Agent........ First Chicago Trust Company of New York (the "Distribution Agent") IB AFTER THE DISTRIBUTION Board of Directors........ The following five individuals are expected to be the members of the Board of Directors of IB as of the close of business on the Distribution Date: Allen J. Lauer, John G. McDonald, Wayne R. Moon, D.E. Mundell and Elizabeth E. Tallett. Certain of the foregoing currently serve as directors of Varian and will resign from Varian's Board of Directors effective as of the Distribution Date. See "Management - Board of Directors." Trading Market............ There is currently no public market for the IB Common Stock although a "when issued" trading market is expected to develop after the Distribution Record Date. IB has applied for quotation of the IB Common Stock on the Nasdaq National Market under the symbol "VARI." See "RiskFactors - No Current Public Market for IB Common Stock" and "The Distribution - Listing and Trading of IB Common Stock." Certain Provisions of Certificate of Incorporation, By-Laws and Rights Plan........... Certain provisions of the Certificate of Incorporation and By-Laws of IB which will be in effect at the time of the Distribution may have the effect of making more difficult an acquisition of control of IB in a transaction not approved by IB's Board of Directors. In addition, IB will adopt a stockholder rights plan (the "Rights Plan"), which, under certain circumstances, would significantly dilute the interest in IB of persons seeking to acquire control of IB without the prior approval of IB's Board of Directors. See "Risk Factors - Certain Anti-takeover Features," "Description of the Capital Stock - Rights Plan" and "Delaware Law and Certain Charter and By-Law Provisions." RISK FACTORS Stockholders should consider carefully the specific investment considerations set forth under "Risk Factors," as well as the other information set forth in this Information Statement. 7 SUMMARY FINANCIAL DATA The following table presents summary historical financial data of the Instruments Business. The information set forth below should be read in conjunction with "Pro Forma Condensed Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and notes thereto of the Instruments Business included elsewhere in this Information Statement. The unaudited pro forma statement of earnings data for the fiscal year ended October 2, 1998, set forth below was prepared to give effect to the Distribution as if it had occurred on September 27, 1997, and the unaudited pro forma balance sheet data at October 2, 1998 was prepared to give effect to the Distribution as if it had occurred on October 2, 1998, and does not purport to represent what the Instruments Business' operating results or financial position would have been or to project its operating results or financial position for any future date or period. The statement of earnings data set forth below for the fiscal years ended October 2, 1998, September 26, 1997 and September 27, 1996 and the balance sheet data at October 2, 1998 and September 26, 1997 are derived from, and are qualified by reference to, the audited financial statements of the Instruments Business included elsewhere in this Information Statement. The statement of earnings data for the fiscal years 1995 and 1994 and the balance sheet data at fiscal year end 1996, 1995 and 1994 are derived from unaudited financial data of the Instruments Business not included in this Information Statement. The historical financial information may not be indicative of the Instruments Business' future performance and does not necessarily reflect what the financial position and results of operations of the Instruments Business would have been had the Instruments Business operated as a separate, stand-alone entity during the periods presented.
Fiscal Years -------------------------------------------------- Pro Forma 1998 1998 1997 1996 1995 1994 ------------------ ------- ------- ------- ------- (Dollars in millions, except per share amounts) Statement of Earnings Data Sales...................... $557.8 $557.8 $541.9 $504.4 $459.4 $425.7 Operating Earnings before Taxes..................... $ 35.1 $ 39.2 $ 26.8 $ 11.5 $ 2.7 $ 20.3 Taxes on earnings.......... $ 14.2 $ 15.8 $ 12.6 $ 5.3 $ 0.7 $ 10.0 Net Earnings............... $ 20.9 $ 23.4 $ 14.2 $ 6.2 $ 2.0 $ 10.3 Pro Forma Net Earnings Per Share(/1/)................ $ 0.70 $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30 Balance Sheet Data at Year End Total assets............... $412.1 $404.1 $357.9 $301.0 $282.0 $272.6 Long-term debt (excluding current portion).......... $ 52.0 $ -- $ -- $ -- $ -- $ --
- ------- (1) The computation of pro forma net earnings per share is based on the weighted average number of shares of Varian Common Stock outstanding during the respective periods, reflecting the anticipated ratio of one share of IB Common Stock for each share of Varian Common Stock outstanding at the time of the Distribution. 8 INTRODUCTION On , 1999, the Varian Board of Directors declared a dividend payable to each stockholder of record at the close of business on the Distribution Record Date of one share of IB Common Stock and one share of VSEA Common Stock for each share of Varian Common Stock held by such stockholder at the close of business on the Distribution Record Date. As a result of the Distribution, 100% of the outstanding shares of IB Common Stock and VSEA Common Stock will be distributed to Varian stockholders on a pro rata basis. The Distribution will be made on or about April , 1999. Stockholders of Varian with questions concerning the Distribution should contact the Distribution Agent at 1-800-519-3111 or Varian Associates, Inc., Corporate Secretary, 3050 Hansen Way, Palo Alto, California 94304, telephone number (650) 493-4000. After the Distribution Date, stockholders of IB with inquiries related to their investment in IB should contact Varian, Inc., 3120 Hansen Way, Palo Alto, California 94304, telephone (650) [ ]. No person is authorized by Varian or IB to give any information or to make any representations other than those contained in this Information Statement and, if given or made, such information or representations must not be relied upon as having been authorized. 9 RISK FACTORS The following factors, in conjunction with the other information included in this Information Statement, should be carefully considered. Lack of Recent Operating History as Separate Entities Upon consummation of the Distribution, IB will own and operate the Instruments Business which does not have a recent operating history as a separate entity. After the Distribution, IB will be a smaller and less diversified company than Varian was prior to the Distribution. The ability of IB to satisfy its obligations and maintain profitability will be solely dependent upon its own future performance, and IB will not be able to rely on the capital resources and cash flows of the other two businesses. The future performance and cash flows of IB will be subject to prevailing economic conditions and to financial, business and other factors affecting its business operations, including factors beyond its control. The division of Varian may result in some temporary dislocation and inefficiencies to the business operations, as well as the organization and personnel structure, of IB, and will also result in the duplication of certain personnel, administrative and other expenses required for the operation of independent companies. In addition, although after the Distribution IB will continue to be managed primarily by its current operating management, the management of IB has not previously operated its business as a separate public company. Accordingly, there can be no assurance that the transition will not alter or disrupt the management and/or operations of IB. Potential Responsibility for Liabilities Not Expressly Assumed The Distribution Agreement and the Ancillary Agreements allocate among VMS, VSEA and IB responsibility for various indebtedness, liabilities and obligations. See "The Distribution - Relationship Among VMS, VSEA and IB after the Distribution." It is possible that a court would disregard this contractual allocation of indebtedness, liabilities and obligations among the parties and require VMS, VSEA or IB or their respective subsidiaries to assume responsibility for obligations allocated to another party, particularly if such other party were to refuse or was unable to pay or perform any of its allocated obligations. Potential Indemnification Liabilities Under the terms of the Distribution Agreement and certain of the Ancillary Agreements, each of VMS, VSEA and IB has agreed to indemnify the other parties (and certain related persons) from and after consummation of the Distribution with respect to certain indebtedness, liabilities and obligations, which indemnification obligations could be significant. The availability of such indemnities will depend upon the future financial strength of the companies. No assurance can be given that the relevant company will be in a position to fund such indemnities. In addition, the Distribution Agreement generally provides that if a court prohibits a company from satisfying its indemnification obligations, then such indemnification obligations will be shared equally between the two other companies. See "The Distribution - Relationship Among VMS, VSEA and IB After the Distribution." Debt Leverage After the Distribution Immediately following the Distribution, IB will have somewhat greater debt leverage than Varian had prior to the Distribution. As of October 2, 1998, Varian had total long and short-term debt of approximately $158 million and total stockholders' equity of approximately $558 million. Based on Varian's outstanding indebtedness as of October 2, 1998 and projected operating results, certain other transactions and scheduled debt repayments through the anticipated Distribution Date, on a pro forma basis giving effect to the Distribution, IB would have total long-term debt (including current portion) of approximately $58 million and total stockholders' equity of approximately $205 million. The allocation of indebtedness to IB reflects, in substantial part, its expected capital requirements and cash flows. See "Forecasted Capitalization." 10 The degree to which IB is leveraged could have important consequences, including the following: (i) IB's ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a portion of IB's and its subsidiaries' cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness; (iii) the Term Loans of IB will contain, and any credit agreement of IB following the Distribution may contain, certain restrictive financial and operating covenants, including, among others, requirements that IB satisfy certain financial ratios; (iv) a portion of IB's borrowings may be at floating rates of interest, causing IB to be vulnerable to increases in interest rates; (v) IB's degree of leverage may make it more vulnerable in a downturn in general economic conditions and (vi) IB's degree of leverage may limit its flexibility in responding to changing business and economic conditions. In addition, in a lawsuit by an unpaid creditor or representative of creditors, such as a trustee in bankruptcy, a court may be asked to void the Distribution (in whole or in part) as a fraudulent conveyance and to require that the stockholders return some or all of the shares of VSEA Common Stock and/or IB Common Stock to VMS or require each of IB, VSEA and VMS to fund certain liabilities of the other companies for the benefit of creditors. See " - Fraudulent Transfer Considerations; Legal Dividend Requirements." Federal Income Tax Considerations Varian has conditioned the Distribution on the receipt of a favorable Tax Ruling. The Board of Directors of Varian will not waive the requirement of receipt of a favorable Tax Ruling unless Varian receives an opinion of counsel that no gain or loss will be recognized by the holders of Varian Common Stock as a result of the Distribution and no gain or loss will be recognized by Varian upon the Distribution. See "The Distribution - Federal Income Tax Aspects of the Distribution." Such rulings, while generally binding upon the Internal Revenue Service (the "IRS"), are subject to certain factual representations and assumptions. If such factual representations and assumptions were incorrect in any material respect, such ruling would be jeopardized. IB is not aware of any facts or circumstances that would cause such representations and assumptions to be untrue. Varian, IB and VSEA have agreed to certain restrictions on their future actions to provide further assurances that the Distribution will qualify as tax-free. See "The Distribution - Relationship Among VMS, VSEA and IB After the Distribution - Tax Sharing Agreement." If one or both of the distributions comprising the Distribution fail to qualify as a tax-free spin-off under Section 355 of the Code, then VMS will recognize gain equal to the difference between the fair market value of the stock of the nonqualifying company or companies and Varian's adjusted tax basis in such stock. If VMS were to recognize gain on one or both of the distributions, such gain and the resulting tax liability likely would be very substantial. Furthermore, if either distribution were not to qualify as a tax-free spin-off under Section 355 of the Code, each holder of Varian Common Stock who receives shares of IB Common Stock and VSEA Common Stock in the Distribution would be treated as if such stockholder received a taxable distribution in an amount equal to the fair market value of the IB Common Stock or VSEA Common Stock received, which would result in (i) a dividend to the extent of such stockholder's pro rata share of Varian's current and accumulated earnings and profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to the extent the amount received exceeds such stockholder's share of earnings and profits and (iii) gain from the exchange of Varian Common Stock to the extent the amount received exceeds both such stockholder's share of earnings and profits and such stockholder's basis in such common stock. Section 355(e), which was added to the Code in 1997, generally provides that a company that distributes shares of a subsidiary in a spin-off that is otherwise tax-free will incur federal income tax liability if 50% or more, by vote or value, of the capital stock of either the company making the distribution or the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more persons acting pursuant to a plan or series of related transactions that includes the spin-off. There is a presumption that any acquisition of 50% or more, by vote or value, of the capital stock of the company or the subsidiary that occurs within two years before or after the spin-off is pursuant to a plan that includes the spin-off. However, the presumption may be rebutted by establishing that the spin-off and the acquisition are not part of a plan or series of related transactions. Among the factual representations made by Varian to the IRS in connection with the requested Tax Ruling is the representation that each of the distributions is not part of such a plan or series of related transactions. If VMS, IB or VSEA were to undergo a 50% Ownership Shift, particularly if such 50% Ownership 11 Shift occurred within two years after the Distribution Date, there can be no assurance that the IRS will not assert that such ownership shift occurred pursuant to a plan or series of related transactions and therefore that the Distribution is taxable under Section 355(e). If a distribution is taxable solely under Section 355(e), VMS will recognize gain equal to the difference between the fair market value of the stock of VSEA and IB and Varian's adjusted tax basis in such stock. However, holders of Varian Common Stock would not recognize gain or loss as a result of the Distribution. If VMS were to recognize gain on the distributions, such gain and the resulting tax liability likely would be very substantial. The Tax Sharing Agreement will allocate responsibility for the possible corporate tax burden resulting from the Distribution. Each of VMS, IB and VSEA will be responsible for any corporate taxes resulting from the Distribution attributable to action taken or permitted by that entity or its affiliates after the Distribution. If the Distribution is found to be taxable but none of VMS, IB and VSEA has done anything to cause the Distribution to be taxable, each company generally will be liable for one-third of those taxes. See "The Distribution - Relationship Among VMS, VSEA and IB After the Distribution - Tax Sharing Agreement." No Current Public Market for IB Common Stock There is not currently a public market for the IB Common Stock, although a "when-issued" trading market is expected to develop after the Distribution Record Date. There can be no assurance as to the prices at which trading in IB Common Stock will occur after the Distribution. Until the IB Common Stock is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. IB has applied for quotation of the IB Common Stock on the Nasdaq National Market. See "The Distribution - Listing and Trading of IB Common Stock." No Dividends Anticipated Following the Distribution, IB does not anticipate paying dividends on the IB Common Stock. The Term Loans of IB will contain, and any credit agreement of IB following the Distribution may contain, provisions that limit the ability of IB (and/or its subsidiaries) to pay cash dividends. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors of IB and will be dependent upon IB's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by IB's Board of Directors. See "Financing." Certain Anti-takeover Features The Certificate of Incorporation and By-Laws of IB that will be in effect at the time of the Distribution will contain several provisions that may make the acquisition of control of IB more difficult or expensive. The Certificate of Incorporation and By-Laws, among other things, will (i) classify the Board of Directors into three classes, with directors of each class serving for a staggered three-year period, (ii) provide that directors may be removed only for cause and only upon the affirmative vote of the holders of at least a majority of the outstanding shares of IB Common Stock entitled to vote for such directors, (iii) permit the remaining directors (but not IB's stockholders) to fill vacancies and newly created directorships on the Board, (iv) eliminate the ability of stockholders to act by written consent and (v) require the vote of stockholders holding at least 66 2/3% of the outstanding shares of IB Common Stock to amend, alter or repeal the By-Laws and certain provisions of the Certificate of Incorporation, including the provisions described in the foregoing clauses (i) through (iv) and this clause (v). Such provisions would make the removal of incumbent directors more difficult and time-consuming and may have the effect of discouraging a tender offer or other takeover attempt not previously approved by the Board of Directors. Under the Certificate of Incorporation which will be in effect at the time of the Distribution, the Board of Directors of IB also has the authority to issue shares of preferred stock in one or more series and to fix the powers, preferences and rights of any such series without stockholder approval. The Board of Directors of IB could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of IB Common Stock and could make it more difficult for a third party to gain control of IB. In addition, IB will adopt a stockholder rights plan prior to the Distribution Date, which, 12 under certain circumstances, would significantly dilute the equity interest in IB of persons seeking to acquire control of IB without the prior approval of IB's Board of Directors. See "Description of the Capital Stock - Rights Plan" and "Delaware Law and Certain Charter and By-Law Provisions." Certain Consent Requirements Consummation of the Distribution and related transactions could result in a violation of Varian's existing debt and other contractual arrangements or require the consent of a third party to effect the necessary transfers of such arrangements to IB and its subsidiaries. In a substantial number of situations, an amendment, consent or waiver from third parties will be required. It is a condition of the Distribution that these amendments, consents or waivers have been obtained, except for those the failure of which to be obtained would not have a material adverse effect on VMS, VSEA or IB. Although Varian believes that no single agreement for which an amendment, consent or waiver is being sought is material, the failure of Varian or IB to receive a significant number of such amendments, waivers or consents with respect to contractual arrangements relating to the Instruments Business could have a material adverse effect on the ability of IB to continue to conduct its business as currently being conducted. Fraudulent Transfer Considerations; Legal Dividend Requirements If a court in a lawsuit by an unpaid creditor or representative of creditors, such as a trustee in bankruptcy, were to find that at the time Varian effected the Distribution, Varian, VMS, VSEA or IB, as the case may be, (i) was insolvent, (ii) was rendered insolvent by reason of the Distribution, (iii) was engaged in a business or transaction for which Varian's, VMS's, VSEA's or IB's, as the case may be, remaining assets constituted unreasonably small capital or (iv) intended to incur, or believed it would incur, debts beyond its ability to pay such debts as they matured, such court may be asked to void the Distribution (in whole or in part) as a fraudulent conveyance and require that the stockholders return some or all of the shares of VSEA Common Stock and IB Common Stock to Varian, or require VMS, VSEA or IB, as the case may be, to fund certain liabilities of the other companies for the benefit of creditors. The measure of insolvency for purposes of the foregoing will vary depending upon the jurisdiction whose law is being applied. Generally, however, each of Varian, VMS, VSEA and IB, as the case may be, would be considered insolvent if the fair value of its assets were less than the amount of its liabilities or if it incurred debt beyond its ability to repay such debt as it matures. In addition, under Section 170 of the Delaware General Corporation Law (the "DGCL") (which is applicable to Varian in the Distribution), a corporation generally may make distributions to its stockholders only out of its surplus (net assets minus capital) and not out of capital. Varian's Board of Directors and management believe that (i) Varian, and each of VMS, VSEA and IB, will be solvent before and after the Distribution (in accordance with the foregoing definitions), will be able to repay its debts as they mature following the Distribution and will have sufficient capital to carry on its businesses and (ii) the Distribution will be made entirely out of surplus, as provided under Section 170 of the DGCL. Transitioning to New Information Technology Infrastructure VMS, IB and VSEA currently share a common information technology ("IT") infrastructure. This IT infrastructure is essential to the daily operation of the companies' marketing, manufacturing, distribution, billing and collections and financial reporting processes. After the Distribution, IB will establish a separate IT infrastructure as appropriate for its separate business and will transition to this new IT infrastructure from the currently shared IT infrastructure. During this transition, certain IT services will be provided by Varian pursuant to the Transition Services Agreement described herein. This transition is not unlike transitions carried out previously by Varian in the process of divesting discontinued operations and/or integrating the operations of newly acquired companies. Consequently, management of IB believes that Varian possesses the skills and resources to design and implement and assist IB in transitioning to the new IT infrastructure. However, these activities are inherently complex and because of their significance to IB's business, unforeseen problems or errors in the transition to this new IT infrastructure could adversely affect the business and results of operations of IB. Assessment and correction of Year 2000 problems could complicate transition to this new infrastructure. See "Risk Factors - Potential Impact of the Year 2000 Issue." 13 Technological Change and New Products The markets for IB's products are characterized by changing technology, evolving industry standards and new product introductions and enhancements. While many of IB's products are based on more mature technologies, IB's future success will depend in part upon its ability to enhance its existing products with new technologies, to develop and introduce new products and technologies and to successfully expand its aftermarket support services for such new or enhanced products in order to meet changing customer requirements and serve broader industry segments. IB has devoted significant resources to the enhancement of its existing products, the development of new products and technologies and the expansion of its maintenance and aftermarket support activities. Due to the risks inherent in transitioning to new products, IB will be required to accurately forecast demand for new products while managing the transition from older products. If new products have reliability or quality problems, reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products and additional service and warranty expenses may result. There can be no assurance that IB will successfully develop and manufacture new products, or that new products introduced by it will be accepted in the marketplace. If IB does not successfully introduce new products, IB's results of operations will be materially adversely affected. See "Business - Competition." Product Liability IB's business exposes it to potential product liability claims that are inherent in the manufacturing, marketing and sale of its products, and IB may face substantial liability for damages resulting from the faulty design or manufacture of its products. Varian maintains limited product liability insurance coverage in an amount it deems sufficient for each of its businesses. Such insurance is subject to deductibles and self-insured retentions. Product liability insurance is expensive and in the future may not be available on acceptable terms or in sufficient amounts or may be unavailable. Although IB will obtain insurance coverage after the Distribution, the amount of such insurance coverage has not yet been determined and no assurance can be given that it will be adequate. A successful claim brought against IB in excess of its insurance coverage or any material claim for which insurance coverage is denied or limited and for which indemnification is not available could have a material adverse effect on IB's business, results of operations and financial condition. There can be no assurance that IB would have sufficient resources to satisfy any liability resulting from these claims. Uncertainty of Market Acceptance of New Products Certain of IB's products represent alternatives to traditional instruments and methods and as a result may be slow to achieve, or may not achieve, market acceptance, as customers may seek further validation of the efficiency and efficacy of IB's technology. This is particularly true where the purchase of the product requires a significant capital commitment. While many of IB's products are based on more mature technologies, most of the enhancements to such products are based on relatively new, emerging technologies. IB believes that, to a significant extent, its growth prospects depend on its ability to gain acceptance by a broader group of customers of the efficiency and efficacy of IB's innovative technologies. There can be no assurance that IB will be successful in obtaining such broad acceptance. Dependence on Capital Spending Policies and Government Funding IB products are used in environmental laboratories; pharmaceutical and chemical industries; chemical, life science and academic research; government laboratories; and specific areas of the health care industry. The capital spending policies of these companies and institutions can have a significant effect on the demand for IB's products. Such policies are based on a wide variety of factors, including the resources available to make such purchases, the spending priorities among various types of research equipment and the policies regarding capital expenditures during recessionary periods. Any decrease in capital spending by these companies or institutions could have a material adverse effect on IB's business and results of operations. A portion of IB's sales are to universities, government research laboratories, private foundations and other institutions where funding is dependent on grants from governmental agencies. If government funding necessary to purchase IB's products were to become unavailable to researchers for any extended period of time, or if overall research funding were 14 to decrease, IB's business and results of operations could be adversely affected. In addition, a portion of sales of IB's products is made to various governmental agencies. Any decline in purchases by those governmental agencies, including, without limitation, declines as the result of budgeting limitations, could have an adverse effect on IB's business and results of operation See "Business - Marketing and Sales." Variability of Operating Results Certain of IB's products require significant capital expenditures and other products have short delivery turnaround. The timing of sales of these products could affect IB's quarterly earnings. A delay in a shipment in any quarter due, for example, to an unanticipated shipment rescheduling, to cancellations by customers or to unexpected manufacturing difficulties experienced by IB, may cause sales in such quarter to fall significantly below IB's expectations and may thus adversely affect IB's operating results for such quarter. Further, IB's quarterly operating results may also vary significantly depending on a number of other factors, including changes in pricing by IB or its competitors, discount levels, foreign currency exchange rates, the mix of products sold, the timing of the announcement, introduction and delivery of new product enhancements by IB and its competitors, and general economic conditions. Generally IB recognizes product revenues upon shipment of its products. Because certain operating expenses of IB are based on anticipated capacity levels and a high percentage of IB's expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. There can be no assurance that any of these factors will not have a material adverse effect on IB's business or results of operations. Competition IB encounters and expects to continue to encounter intense competition in the sale of its products. Competition in IB's markets is based upon the performance capabilities of IB's products, technical support and after-market service, the manufacturer's reputation as a technological leader and the selling price. Management believes that performance capabilities are the most important of these criteria. The markets in which IB competes are highly competitive and are characterized by the application of advanced technology. There are numerous companies that specialize in, and a number of larger companies that devote a significant portion of their resources to, the development, manufacture and sale of products that compete with those manufactured or sold by IB. Many of IB's competitors are well-known manufacturers with a high degree of technical proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which IB is engaged. IB's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. An increase in competition could result in price reductions and loss of market share, which could have a material adverse effect on IB's business, financial condition or results of operations. Although IB's management believes that IB enjoys certain technological and other advantages over its competitors, realizing and maintaining such advantages will require continued investment by IB in engineering, research and development, marketing and customer service and support. There can be no assurance that IB will have sufficient resources to continue to make such investments or that IB will be successful in maintaining such advantages. See "Business - Competition." International Sales and Manufacturing The markets in which IB competes are becoming increasingly globalized. International sales accounted for approximately 47%, 47% and 50%, respectively, of IB's sales in fiscal years 1998, 1997 and 1996. As a result, IB's customers increasingly require service and support on a worldwide basis. IB has manufacturing operations in Australia, Italy and The Netherlands as well as sales and service offices located throughout Europe, Asia and Latin America. IB has invested substantial financial and management resources to develop an international infrastructure to meet the needs of its customers worldwide. IB intends to continue to expand its presence in international markets. There can be no assurance that IB will be able to compete successfully in the international market or to meet the service and support needs of such customers. International sales are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax IB's foreign 15 income, impose tariffs or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand and adversely affect the profitability in U.S. dollars of products and services provided by IB in foreign markets where payment for IB's products and services is made in the local currency; U.S. export licenses may be difficult to obtain; and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse impact on IB's business and results of operations. A portion of IB's revenue is derived from sales in Asia. Asia is experiencing a severe economic crisis, which has been characterized by sharply reduced economic activity and liquidity, highly volatile foreign-currency exchange and interest rates and unstable stock markets. Until the Asian economic uncertainty is resolved, IB's sales to Asia could be adversely affected by the region's unstable economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." On January 1, 1999, the Euro was adopted as the national currency of certain members of the European Monetary Union. The existing national currencies of the participating countries will continue to be acceptable until January 1, 2002, after which the Euro will be the sole legal tender for the participating countries. Because IB sells its products in Europe, the Euro conversion raises several economic and operational issues, such as the modification of information systems to accommodate Euro-denominated transactions, the recalculation of currency risk, the competitive impact of cross-border price transparency, the continuity of material contracts and potential tax and accounting consequences. IB has made changes in its information systems to be able to conduct Euro-denominated transactions (although full information system capability for financial reporting in Euro will not be accomplished until October 2001). IB does not expect any change in currency risk due to its existing hedging practices. IB is still evaluating the potential impact of price transparency for its products. Based on its evaluation to date, IB does not expect the Euro conversion to have a material adverse effect on its business, results of operations or financial condition. Foreign Currency Risks Varian has historically entered into forward exchange contracts in respect of the Instruments Business to mitigate the effects of operational (sales orders and purchase commitments) and balance sheet exposures to fluctuations in foreign currency exchange rates. IB's forward exchange contracts generally range from one to three months in original maturity, and no forward exchange contract has an original maturity greater than one year. At October 2, 1998, IB had forward exchange contracts to sell foreign currencies totaling $31.4 million and to buy foreign currencies totaling $23.5 million. See "Market Risk." Uncertain Protection of Patent and Other Proprietary Rights IB places considerable importance on obtaining and maintaining patent, copyright and trade secret protection for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and to the marketplace. IB intends to continue to file applications as appropriate for patents covering new products and manufacturing processes. No assurance can be given that patents now owned or that will issue from any pending or future patent applications owned by, or licensed to, IB or that the claims allowed under any issued patents, will be sufficiently broad to protect its technology position against competitors. In addition, no assurance can be given that any issued patents owned by, or licensed to, IB will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to it. IB could incur substantial costs and diversion of management resources in defending itself in suits brought against it or in suits in which it may assert its patent rights against others. If the outcome of any such litigation is unfavorable to IB, its business and results of operations could be materially adversely affected. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. There may also be pending or issued patents of which IB is not aware held by parties not affiliated with IB that relate to its products or technologies. In the event that a claim relating to proprietary technology or information is asserted against IB, it may need to acquire licenses to, or contest the validity of, a competitor's proprietary technology. There can be no assurance that any license required under any such competitor's proprietary technology would be made available 16 on acceptable terms or that IB would prevail in any such contest. If the outcome of any such contest is unfavorable to IB, its business and results of operations could be materially adversely affected. From time to time, IB has received notices from, and has issued notices to, third parties alleging infringement of patent or other intellectual property rights relating to its products. Such claims are often, but not always, settled by mutual agreement on a satisfactory basis without litigation. IB relies on a combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying and transferring title, including confidentiality agreements with its vendors, strategic partners, co- developers, employees, consultants and other third parties, to protect its proprietary rights. There can be no assurance that such protections will prove adequate and that contractual agreements will not be breached, that IB will have adequate remedies for any such breaches, or that its trade secrets will not otherwise become known to or independently developed by others. IB has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace. There can be no assurance that IB's trademarks will not be used by unauthorized third parties. IB also have agreements with third parties that provide for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and technology cross-licenses. See "Business - Patent and Other Proprietary Rights." Environmental Liabilities IB's operations are subject to various foreign, federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. This includes discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require manufacturers to dispose of their products at the end of a product's useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of such operations. Varian has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"), at eight sites where Varian is alleged to have shipped manufacturing waste for recycling or disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former Varian facilities (including facilities disposed of in connection with Varian's sale of its Electron Devices business during fiscal year 1995, and the sale of its Thin Film Systems ("TFS") business during fiscal year 1997). Expenditures by Varian for environmental investigation and remediation amounted to $5 million in fiscal year 1998, compared with $2 million in fiscal year 1997 and $5 million in fiscal year 1996. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of October 2, 1998, Varian nonetheless estimated that the future exposure for environmental investigation and remediation costs for these sites and facilities ranged in the aggregate from $22 million to $49 million. The time frame over which these costs are expected to be incurred varies with each site or facility, ranging up to approximately 30 years as of October 2, 1998. Management of Varian believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range and therefore Varian accrued $22 million in estimated environmental costs as of October 2, 1998. The amount accrued has not been discounted to present value. As to other sites and facilities, Varian has gained sufficient knowledge to be able to better estimate the scope and costs of future environmental activities. As of October 2, 1998, Varian estimated that the future exposure for environmental investigation and remediation costs for these sites and facilities ranged in the aggregate from $40 million to $74 million. The time frame over which Varian expects to incur these costs varies with each site and facility, ranging up to approximately 30 years as of October 2, 1998. As to each of these sites and facilities, management of Varian determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $51 million at October 2, 1998. Varian accordingly accrued $22 million, 17 which represents its best estimate of the future costs discounted at 4%, net of inflation. This reserve is in addition to the $22 million described in the preceding paragraph. The Distribution Agreement provides that each of VMS, IB and VSEA will indemnify the others for one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon payment of these costs. For a discussion of IB's environmental liabilities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters." The foregoing amounts are only estimates of anticipated future environmental related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. IB believes that most of these cost ranges will narrow as investigation and remediation activities progress. IB's present and past facilities have been in operation for many years, and over that time in the course of those operations, such facilities have used substances which are or might be considered hazardous, and IB has generated and disposed of wastes which are or might be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future that IB cannot now predict. Reliance on Suppliers Certain of the components and subassemblies included in IB's products are obtained from a limited group of suppliers, or in some cases a single-source supplier, including packaging materials, superconducting magnets, integrated circuits, microprocessors, microcomputers and certain detector and data analysis modules. The loss of any of these suppliers, including any single- source supplier, would require obtaining one or more replacement suppliers as well as potentially requiring a significant level of product development to incorporate new parts into IB's products. IB believes that alternative sources for such components may generally be obtained when necessary, although the need to change suppliers or to alternate between suppliers might cause material delays in delivery or significantly increase its costs. Although Varian has historically obtained and IB expects to obtain limited insurance to protect against loss due to business interruption from these and other sources, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Although IB seeks to reduce its dependence on these limited source suppliers, disruptions or loss of certain of these sources, including the ones referenced above, could have a material adverse effect on IB's business and results of operations and could result in damage to customer relationships. See "Business - Raw Materials." Dependence on Key Personnel IB's future success depends to a significant extent on the continued service of certain of its key managerial, technical and engineering personnel, and its continuing ability to attract, train and retain highly qualified engineering, technical and managerial personnel. Competition for such personnel is intense, particularly in the labor markets around the IB facilities in Palo Alto, California. The available pool of qualified candidates is limited and there can be no assurance that IB can retain its key engineering, technical and managerial personnel or that it can attract, train, assimilate or retain other highly qualified engineering, technical and managerial personnel in the future. The loss of any of IB's key personnel or the inability of IB to hire, train or retain qualified personnel could have a material adverse effect on IB's business, results of operations and financial condition. Risk of Business Interruption IB conducts a portion of its activities at facilities located in seismically active areas that have experienced major earthquakes in the past. Varian currently maintains limited earthquake insurance on these facilities. After the Distribution, it is likely that IB will not carry earthquake insurance on its facilities due to its prohibitive cost and limited available coverage. In the event of a major earthquake or other disaster affecting IB's facilities, the operations and operating results of IB could be adversely affected. 18 Potential Impact of the Year 2000 Issue The "Year 2000" problem refers to computer programs and other equipment with embedded microprocessors ("non-IT systems") which use only the last two digits to refer to a year, and which therefore might not properly recognize a year that begins with "20" instead of the familiar "19." As a result, those computer programs and non-IT systems might be unable to operate or process accurately certain date-sensitive data before or after January 1, 2000. Because IB relies heavily on computer programs and non-IT systems, and on third parties which themselves rely on computer programs and non-IT systems, the Year 2000 problem if not addressed could adversely affect IB's business, results of operations or financial condition. Failure to accurately assess and correct IB's Year 2000 problems and/or those of its key suppliers would likely result in interruption of certain of IB's normal business operations, which could have a material adverse effect on IB's business, results of operations or financial condition. If IB does not adequately identify and correct Year 2000 problems in its information systems it could experience interruptions in its operations, including manufacturing, order processing, receivables collection and accounting, such that there would be delays in product shipments, lost data and a consequential impact on revenues, expenditures and financial reporting. If IB does not adequately identify and correct Year 2000 problems in its non-IT systems it could experience interruptions in its manufacturing and related operations, such that there would be delays in product shipments and a consequential impact on revenues. If IB does not adequately identify and correct Year 2000 problems in its previously-sold products it could experience warranty or product liability claims by users of products which do not function correctly. If IB does not adequately identify and correct Year 2000 problems of the significant third parties with which it does business it could experience interruptions in the supply of key components or services from those parties, such that there would be delays in product shipments or service and a consequential impact on revenues. IB does not expect to be 100% Year 2000 compliant by the end of 1999 and given the inherent complexity of the Year 2000 problem, there can be no assurance that actual costs will not be higher than currently anticipated or that corrective actions will not take longer than currently anticipated to complete. Risk factors which might result in higher costs or delays include the ability to identify and correct in a timely fashion Year 2000 problems; regulatory or legal obligations to correct Year 2000 problems in previously- sold products; possible liability for personal injury if a safety hazard relating to Year 2000 problems is not identified and corrected; ability to retain and hire qualified personnel to perform assessments and corrective actions; the willingness and ability of critical suppliers to assess and correct their own Year 2000 problems, including the products they supply to IB; and the additional complexity which will likely be caused by undertaking during fiscal year 1999 and fiscal year 2000 the separation of currently shared enterprise information systems as a result of the Distribution. Because of uncertainties as to the extent of Year 2000 problems with IB's previously-sold products and the extent of any legal obligation of IB to correct Year 2000 problems in those products, IB cannot yet assess its risks with respect to those products. Because its assessments are not yet complete, IB cannot yet conclude that the failure of critical suppliers to assess and correct Year 2000 problems is not reasonably likely to have a material adverse effect on its results of operations. For a discussion regarding IB's state of readiness, costs associated with becoming Year 2000 compliant and contingency plans relating to Year 2000, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000." 19 THE DISTRIBUTION General The Board of Directors of Varian has approved (subject to the satisfaction of the conditions to the Distribution discussed under " - Conditions; Termination" and the actual declaration of the special dividend in respect of the Distribution) a plan to distribute the outstanding shares of IB Common Stock and the outstanding shares of VSEA Common Stock to all holders of the outstanding shares of Varian Common Stock. In the Distribution, each stockholder of record of Varian as of the Distribution Record Date will receive as special dividends one share of IB Common Stock and one share of VSEA Common Stock for each share of Varian Common Stock held on the Distribution Record Date and would retain the shares of Varian Common Stock held by such holder immediately prior to the Distribution. Reasons for the Distribution The Board of Directors of Varian approved the Distribution for the following principal reasons: Management Focus. Varian's three businesses have different dynamics and business cycles, serve different marketplaces and customer bases, are subject to different competitive forces and must be managed with different long-term and short-term strategies and goals. Varian believes that separating its businesses into independent public companies, each with its own management team and board of directors, is necessary to address current and future management issues and considerations that result from operating these diverse businesses within a single company. The separation will enable the management of each business to manage that business, and to adopt and implement strategies for that business, solely with regard to the needs and objectives of that business. In addition, as a result of the separation, the management of each business will be able to devote its full attention to managing that business. Capital Structure. Varian believes that the Distribution will allow each of the companies to organize its capital structure and allocate its resources to support the very different needs and goals of the particular business. The stock buy-back program can be discontinued, or dividends eliminated, freeing cash for acquisition and growth opportunities for IB and VMS and permitting VSEA to conserve cash for use in the cyclical downturns in its industry. Capital borrowings can be tailored to the specific needs of the various business units. Each business will be able to allocate its resources without considering the needs of the other businesses. Attracting and Retaining Key Employees. Varian's management believes that the ability to attract and retain key personnel is fundamental to its ability to further the technology required to maintain a leadership position in its business. In particular, under the existing corporate structure, Varian has been unable to offer equity-based compensation linked specifically to the performance of each separate business. The Distribution would enable each company to establish focused equity-based compensation programs that should enable each of them to better attract and retain key personnel. Acquisition Activities. Varian believes that growth through acquisition is an important ingredient of the future success of IB and VMS. Such acquisitions and growth would be financed in part through the issuance of capital stock. It is expected that the Distribution will increase the availability and decrease the cost of raising equity capital. Varian's management believes that, as a result of the Distribution, each company will have a more attractive currency, its stock, through which to make acquisitions. Investor Understanding. Debt and equity investors and securities analysts should be able to better evaluate the financial performance of each company and their respective strategies, thereby enhancing the likelihood that each will achieve appropriate market recognition. The stock of each of the three companies will also appeal to investors with differing investment objectives and risk tolerance, and will allow potential investors to focus their investments more directly to the areas of their primary interest. Cost Savings. Each company should be able to rationalize better its organizational structure after the Distribution. Accordingly, the administrative and organizational costs of each company, taken together, should be reduced from the aggregate levels experienced by Varian prior to the Distribution. 20 Manner of Effecting the Distribution The distribution of IB Common Stock and VSEA Common Stock will be made on the Distribution Date to stockholders of record as of the Distribution Record Date. Varian will declare a special dividend to stockholders of record of Varian as of the Distribution Record Date of shares of IB Common Stock and of shares of VSEA Common Stock. On or prior to the Distribution Date, all outstanding shares of IB Common Stock and VSEA Common Stock will be delivered to the Distribution Agent. As soon as practicable after the IB Common Stock and VSEA Common Stock have been distributed, stock distribution statements reflecting ownership of shares of IB Common Stock and VSEA Common Stock will be mailed by the Distribution Agent to holders of record as of the Distribution Record Date to reflect the distribution of one share of IB Common Stock and one share of VSEA Common Stock for each share of Varian Common Stock held on the Distribution Record Date. All such shares will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. The shares of IB Common Stock and VSEA Common Stock to be transferred to Varian's stockholders in the Distribution will be initially issued to Varian as consideration for the transfer of the Instruments Business and the Semiconductor Equipment Business, respectively. No holder of Varian Common Stock will be required to pay any cash or other consideration for the shares of IB Common Stock and VSEA Common Stock received in the Distribution or to surrender or exchange shares of Varian Common Stock in order to receive shares of IB Common Stock or VSEA Common Stock. The Board of Directors of IB will adopt the Rights Plan before the Distribution. Stock distribution statements evidencing shares of the IB Common Stock issued in the Distribution will therefore include the same number of Rights issued under the Rights Plan. See "Description of the Capital Stock - Rights Plan." Federal Income Tax Aspects of the Distribution Varian has conditioned the Distribution on the receipt of the Tax Ruling from the IRS under Sections 355 and 368 of the Code, in form and substance satisfactory to the Board of Directors of Varian. The Tax Ruling is expected to be substantially to the following effect: (1) No gain or loss will be recognized by (and no amount will otherwise be included in the income of) any holder of Varian Common Stock as a result of the Distribution. (2) The aggregate basis of the Varian Common Stock, IB Common Stock and VSEA Common Stock in the hands of each holder of Varian Common Stock will be the same as the basis of Varian Common Stock held by the holder immediately before the Distribution, allocated in proportion to the fair market value of each. (3) The holding period of the VSEA Common Stock and IB Common Stock received in the Distribution by each holder of Varian Common Stock will include the period during which such holder held Varian Common Stock with respect to which the Distribution is made, provided that such common stock is held as a capital asset by such holder on the Distribution Date. (4) No gain or loss will be recognized by Varian upon the Distribution. Application has been made to the IRS for the Tax Ruling. As of the date hereof, the IRS has not yet issued the Tax Ruling. Varian believes and has been advised by its outside tax advisors that the positions asserted by Varian in requesting the Tax Ruling are consistent with the Code and the rules and regulations promulgated thereunder. However, there is no certainty that the IRS will issue a favorable ruling. The receipt of the Tax Ruling from the IRS, in form and substance satisfactory to the Board of Directors of Varian, is a condition to the Distribution. The Tax Ruling, while generally binding upon the IRS, will be based on certain factual representations and assumptions. If such factual representations and assumptions were incorrect in any material respect, the holdings of such ruling would be jeopardized. Varian is not aware of any facts or circumstances that would cause such representations and assumptions to be incorrect in any material respect. Each of Varian, IB and VSEA has agreed to certain restrictions 21 on their future actions to provide further assurances that Section 355 of the Code will apply to the Distribution. See " - Relationship Among VMS, VSEA and IB After the Distribution - Tax Sharing Agreement." The Board of Directors of Varian has reserved the right to waive the receipt of such Tax Ruling as a condition to consummation of the Distribution. The Board of Directors of Varian will not waive the requirement of receipt of a favorable Tax Ruling from the IRS unless Varian receives an opinion of counsel that (1) no gain or loss will be recognized by any holder of Varian Common Stock as a result of the Distribution and (2) no gain or loss will be recognized by Varian upon the Distribution (the "Tax Opinion"). See " - Conditions; Termination." In the event the Board of Directors of Varian waives the receipt of the Tax Ruling and proceeds to consummate the Distribution based on the Tax Opinion, the Tax Opinion would represent that tax counsel's best judgment, but would not be binding on the IRS or any court. Because certain requirements of Section 355 of the Code, including those pertaining to business purpose and absence of a device for distribution of earnings and profits, as well as the requirements of Section 355(e), discussed below, are dependent on factual interpretations, are to a significant extent subjective in nature and have a relative absence of authority addressing their application to the particular facts presented by the Distribution, there can be no absolute assurance that the IRS or a court would not reach a conclusion different from the conclusion in the Tax Opinion. If one or both of the distributions comprising the Distribution fail to qualify as a tax-free spin-off under Section 355 of the Code, then VMS will recognize gain equal to the difference between the fair market value of the stock of the nonqualifying company or companies and Varian's adjusted tax basis in such stock. If VMS were to recognize gain on one or more of the distributions, such gain and the resulting tax liability likely would be very substantial. Furthermore, if either distribution were not to qualify as a tax-free spin-off under Section 355 of the Code, each holder of Varian Common Stock who receives shares of IB Common Stock and VSEA Common Stock in the Distribution would be treated as if such stockholder received a taxable distribution in an amount equal to the fair market value of the IB Common Stock or VSEA Common Stock received, which would result in (i) a dividend to the extent of such stockholder's pro rata share of Varian's current and accumulated earnings and profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to the extent the amount received exceeds such stockholder's share of earnings and profits and (iii) gain from the exchange of Varian Common Stock to the extent the amount received exceeds both such stockholder's share of earnings and profits and such stockholder's basis in such common stock. Section 355(e), which was added to the Code in 1997, generally provides that a company that distributes shares of a subsidiary in a spin-off that is otherwise tax-free will incur federal income tax liability if 50% or more, by vote or value, of the capital stock of either the company making the distribution or the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more persons acting pursuant to a plan or series of related transactions that includes the spin-off. Stock acquired by certain related persons is aggregated in determining whether the 50% test is met. There is a presumption that any acquisition of 50% or more, by vote or value, of the capital stock of the company or the subsidiary that occurs within two years before or after the spin-off is pursuant to a plan that includes the spin-off. However, the presumption may be rebutted by establishing that the spin-off and the acquisition are not part of a plan or series of related transactions. Among the factual representations made by Varian to the IRS in connection with the requested Tax Ruling is the representation that each of the distributions is not part of such a plan or series of related transactions. If VMS, IB or VSEA were to undergo a 50% Ownership Shift, particularly if such 50% Ownership Shift occurred within two years after the Distribution Date, there can be no assurance that the IRS will not assert that such ownership shift occurred pursuant to a plan or series of related transactions and therefore that the Distribution is taxable under Section 355(e). If a distribution is taxable solely under Section 355(e), VMS will recognize gain equal to the difference between the fair market value of the stock of VSEA and IB and Varian's adjusted tax basis in such stock. However, holders of Varian Common Stock would not recognize gain or loss as a result of the distributions. If VMS were to recognize gain on the distributions, such gain and the resulting tax liability likely would be very substantial. VMS, IB and VSEA will enter into the Tax Sharing Agreement to allocate responsibility for the possible corporate tax burden resulting from the Distribution. Neither VMS, IB, nor VSEA has agreed to indemnify holders of Varian 22 Common Stock for any taxes or other losses should either or both of the distributions fail to qualify under Section 355 of the Code. The Tax Sharing Agreement will provide that each of VMS, IB and VSEA will be responsible for any such corporate taxes to the extent that such taxes are attributable to action taken or permitted by that entity or its affiliates after the Distribution that is inconsistent with the tax treatment contemplated in the Tax Ruling. Under the Tax Sharing Agreement, if either distribution is found to be taxable but none of VMS, IB and VSEA has done anything to cause the distribution to be taxable, each company generally will be liable for one-third of those taxes. See " - Relationship Among VMS, VSEA and IB After the Distribution - Tax Sharing Agreement." Current Treasury regulations require each holder of Varian Common Stock who receives IB Common Stock or VSEA Common Stock pursuant to the Distribution to attach to his or her federal income tax return for the year in which the Distribution occurs a detailed statement setting forth such data as may be appropriate in order to show the applicability of Section 355 of the Code to the Distribution. Varian will convey the appropriate information to each holder of record of Varian Common Stock as of the Distribution Record Date. The foregoing summary of federal income tax consequences does not purport to cover all federal income tax consequences of the Distribution. The tax consequences may differ for stockholders that are not U.S. citizens or residents or that are otherwise subject to special treatment under the Code. Each stockholder should consult its own tax advisor regarding the federal, foreign, state and local tax consequences of the Distribution in its particular circumstances, including the application of state, local and foreign tax laws. Listing and Trading of IB Common Stock There is not currently a public market for IB Common Stock. It is presently anticipated that IB Common Stock may commence trading on a "when-issued" basis after the Distribution Record Date. The term "when-issued" means that shares can be traded by Varian stockholders prior to the time that they receive the shares of IB Common Stock and VSEA Common Stock in the Distribution. Prices at which IB Common Stock may trade prior to the Distribution on a "when-issued" basis or after the Distribution cannot be predicted. Until the IB Common Stock is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. The prices at which IB Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for such stock, investor perception of IB and the industry in which it participates, IB's dividend policy and general economic and market conditions. Such prices may also be affected by certain provisions of the Certificate of Incorporation and By-Laws of IB in effect at the time of the Distribution, which will have an anti-takeover effect. See "Delaware Law and Certain Charter and By-Law Provisions." Shares of IB Common Stock distributed to Varian's stockholders will be freely transferable, except for shares of IB Common Stock received by persons who may be deemed to be "affiliates" of IB under the Securities Act of 1933 (the "Securities Act"). Persons who may be deemed to be affiliates of IB after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with, IB and may include certain officers and directors of IB, as well as principal stockholders of IB. Persons who are affiliates of IB will be permitted to sell their shares of IB Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. IB has applied for quotation of the IB Common Stock on the Nasdaq National Market. IB initially will have approximately 5,992 stockholders of record based upon the number of stockholders of record of Varian as of December 15, 1998. For certain information regarding options to purchase IB Common Stock that will be outstanding after the Distribution, see "Management," and "The IB Omnibus Stock Plan." Conditions; Termination Under the terms of the Distribution Agreement, the Distribution is conditioned upon, among other things, (i) the IRS having issued the Tax Ruling in response to Varian's request in form and substance satisfactory to the Varian Board; (ii) stockholder approval of the Distribution; (iii) the Internal Transfers having been consummated in all material respects; (iv) the IB Common Stock having been approved for quotation on the Nasdaq National Market or listing on a national stock exchange; (v) the VSEA Common Stock having been approved for quotation on the Nasdaq National Market or 23 listing on a national stock exchange; (vi) the Registration Statements filed by IB and VSEA with the Commission having become effective; (vii) Varian, IB and VSEA having executed and delivered the Ancillary Agreements and such agreements being in full force and effect; (viii) no governmental authority having issued an injunction or other order, decree or ruling or enacted or promulgated a statute, rule, regulation or executive order that materially restricts, prohibits or prevents consummation of the Distribution and (ix) Warburg Dillon Read LLC having delivered an updated fairness opinion to Varian's Board of Directors. Even if all conditions are satisfied, Varian's Board of Directors has reserved the right to abandon, defer or modify the Distribution at any time prior to the Distribution Date. However, the Varian Board will not waive the requirement of receipt of a favorable Tax Ruling from the IRS unless Varian receives an opinion of counsel substantially to the effect that (1) no gain or loss will be recognized by any holder of Varian Common Stock as a result of the Distribution and (2) no gain or loss will be recognized by Varian upon the Distribution. In addition, Varian's Board of Directors will not waive any other condition to the Distribution or make any changes in the terms of the Distribution after the Distribution is approved by Varian's stockholders unless Varian's Board of Directors determines that such waivers or changes would not be materially adverse to Varian's stockholders. In determining whether any such waivers or changes would be materially adverse to Varian's stockholders, Varian's Board of Directors will consider, as appropriate, advice from its outside financial and legal advisors as well as the recommendation of management as to the potential impact of such waivers or changes on Varian and Varian's stockholders. Future Management Following the Distribution it is intended that IB will continue to conduct the Instruments Business in substantially the same manner in which it is currently operated. Allen J. Lauer, who is currently Executive Vice President of Varian, will serve as President and Chief Executive Officer of IB following the Distribution. The other executive officers of IB following the Distribution will be primarily drawn from the current management of Varian. See "Management - Executive Officers." Internal Mergers and Transfers On or prior to the Distribution Date, Varian will effectuate certain transactions intended to allocate assets and liabilities relating to the Health Care Systems Business to VMS, assets and liabilities relating to the Semiconductor Equipment Business to VSEA and assets and liabilities relating to the Instruments Business to IB. See " - Distribution Agreement." On the Distribution Date, following the completion of the foregoing transactions, Varian will distribute the IB Common Stock and VSEA Common Stock to the holders of Varian Common Stock on the Distribution Record Date. Relationship Among VMS, VSEA and IB After the Distribution For the purpose of governing certain of the ongoing relationships among VMS, VSEA and IB after the Distribution and to provide mechanisms for an orderly transition, Varian, IB and VSEA have entered or will enter into various agreements, and will adopt policies, as described in this section. Varian, IB and VSEA believe that the agreements are fair to each of the parties. The services to be provided by each of the companies pursuant to the various agreements described below will be billed at their fully burdened cost to the provider and in each case the terms of these agreements have been reviewed by individuals who will have senior management positions at IB, VMS or VSEA after the Distribution. The Distribution Agreement and the forms of the Ancillary Agreements have been filed as exhibits to the Registration Statement in respect of the registration of the IB Common Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act") of which this Information Statement is a part. See "Available Information." The following descriptions include a summary of all material terms of these agreements, but do not purport to be complete and are qualified by reference to the texts of such agreements, which are incorporated herein by reference. Distribution Agreement The Distribution Agreement provides for the terms of the Distribution, the conditions to the Distribution (see "- Conditions; Termination"), the various actions to be taken prior to the Distribution (see " - Internal Mergers and 24 Transfers") and the relationships among the parties subsequent to the Distribution. The Distribution Agreement provides that, from and after the Distribution Date, (i) IB shall assume, pay, perform and discharge all Instruments Liabilities (as defined in the Distribution Agreement) in accordance with their terms, (ii) VMS shall assume, pay, perform and discharge all Health Care Systems Liabilities (as defined in the Distribution Agreement) in accordance with their terms and (iii) VSEA shall assume, pay, perform and discharge all Semiconductor Equipment Liabilities (as defined in the Distribution Agreement) in accordance with their terms. In addition, the Distribution Agreement provides for cross-indemnities that require (i) IB to indemnify VMS and VSEA (and their respective subsidiaries, directors, officers, employees and agents and certain other related parties) against all losses arising out of or in connection with Instruments Liabilities or the breach of the Distribution Agreement or any Ancillary Agreement by IB, (ii) VMS to indemnify IB and VSEA (and their respective subsidiaries, directors, officers, employees and agents and certain other related parties) against all losses arising out of or in connection with the Health Care Systems Liabilities or the breach of the Distribution Agreement or any Ancillary Agreement by VMS and (iii) VSEA to indemnify IB and VMS (and their respective subsidiaries, directors, officers, employees and agents and certain other related parties) against all losses arising out of or in connection with the Semiconductor Equipment Liabilities or the breach of the Distribution Agreement or any Ancillary Agreement by VSEA, and, in each case, for contribution in certain circumstances. Each of IB, VMS and VSEA also agrees to indemnify each other for one-third of the costs and expenses associated with liabilities that are unrelated to their businesses, including certain discontinued operations and environmental liabilities associated with Varian's Palo Alto facilities. Pursuant to the Distribution Agreement, each of the parties has agreed to use commercially reasonable efforts to take or cause to be taken all action, and do or cause to be done all things, reasonably necessary or appropriate to consummate the transactions contemplated by the Distribution Agreement. As such, the Distribution Agreement provides that if any contemplated pre- Distribution transfers have not been effected on or prior to the Distribution Date, the parties will cooperate to effect such transfers as promptly thereafter as practicable. The entity retaining any asset or liability which should have been transferred prior to the Distribution Date will continue to hold that asset for the benefit of the party entitled thereto or that liability for the account of the party required to assume it, and must take such other action as may be reasonably requested by the party to whom such asset was to be transferred or by whom such liability was to be assumed in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred or assumed as contemplated by the Distribution Agreement. The Distribution Agreement (i) requires that Varian renegotiate the Term Loans, (ii) requires that Varian contribute cash to VSEA so that at the time of the Distribution VSEA will have $100 million in cash and cash equivalents and a Net Worth (as defined in the Distribution Agreement) of at least $150 million, and its Consolidated Debt (as defined in the Distribution Agreement) will not exceed $5 million, (iii) requires that IB assume 50% of the outstanding indebtedness under the Term Loans and have transferred to it such portion of the indebtedness under the Notes Payable and such amount of cash and cash equivalents, so that as of the time of the Distribution IB and VMS will each have Net Debt (as defined in the Distribution Agreement) equal to approximately 50% of the aggregate Net Debt of IB and VMS, subject to such adjustments as may be necessary to provide VMS with a Net Worth of between 40% and 50% of the aggregate Net Worth of VMS and IB, (iv) governs the conduct of the post- Distribution audit to be undertaken to ascertain the Net Worth of VMS, IB and VSEA upon consummation of the Distribution, (v) requires that post-Distribution payments be made between the parties if, and to the extent that, as of the time of the Distribution (a) VMS has a Net Worth that is less than 40% or more than 50% of the aggregate Net Worth of VMS and IB, (b) VSEA has Consolidated Debt exceeding $5 million, or less than $100 million of cash and cash equivalents or a Net Worth of less than $150 million or (c) VSEA has more than $100 million of cash and cash equivalents and a Net Worth of at least $150 million or VSEA has a Net Worth in excess of $225 million and (vi) entitles IB to receive approximately 50% of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of Varian's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets and requires IB to pay approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). 25 The Distribution Agreement also provides for the execution and delivery of certain other agreements governing the relationship among IB, VMS and VSEA at and following the Distribution. See " - Employee Benefits Allocation Agreement," " - Tax Sharing Agreement," " - Transition Services Agreement," and " - Intellectual Property Agreement." Employee Benefits Allocation Agreement On or prior to the Distribution Date, Varian, IB and VSEA will enter into an employee benefits allocation agreement (the "Employee Benefits Allocation Agreement") providing for the allocation of certain liabilities and responsibilities with respect to employee compensation, benefits and labor matters. The allocation of responsibility and adjustments to be made pursuant to the Employee Benefits Allocation Agreement are substantially consistent with the existing rights of Varian's employees under Varian's various compensation plans, with the understanding that each party will have sole responsibility for determining the benefits it will provide its employees following the Distribution. The Employee Benefits Allocation Agreement will generally provide that, effective as of the Distribution Date, each of IB and VSEA will, or will cause one or more of its subsidiaries to, assume or retain, as the case may be, all liabilities of Varian, to the extent unpaid as of the Distribution Date, under Varian's employee benefit plans, policies, arrangements, contracts and agreements, including collective bargaining agreements, with respect to employees who on or after the Distribution Date will be employees of IB or its subsidiaries or VSEA or its subsidiaries. The Employee Benefits Allocation Agreement will also provide that VMS generally will, or will cause one of its subsidiaries to, assume or retain, as the case may be, all liabilities under Varian's employee benefit plans, policies, arrangements, contracts and agreements, including collective bargaining agreements, with respect to employees who on or after the Distribution Date will be employees of VMS or its subsidiaries. The Employee Benefits Allocation Agreement will also provide that each of IB, VSEA and VMS will generally indemnify the others for one-third of the administrative costs associated with liabilities to individuals who were former Varian employees as of the Distribution Date. Defined Contribution Plans Active participation in the Varian Associates, Inc. Retirement and Profit- Sharing Program (the "Varian Profit-Sharing Plan") by IB and VSEA employees will terminate on the Distribution Date. Effective as of the Distribution Date, IB will establish a defined contribution plan for the benefit of its employees. As promptly as practicable after the Distribution, VMS will cause to be transferred to the IB defined contribution plan the account balances in, and the liabilities of, the Varian Profit-Sharing Plan to each employee of IB who elects to so transfer. IB will assume the administrative costs associated with the Varian Profit-Sharing Plan accounts of IB employees who do not elect a transfer. IB, VSEA and VMS will also each indemnify the others for one-third of the administrative costs associated with the accounts of individuals who were former Varian employees as of the Distribution Date or whose employment will terminate pursuant to severance agreements in connection with the Distribution. Non-U.S. Employee Benefits Non-U.S. employee benefits will be subject to the general principles of the Employee Benefits Allocation Agreement. To the extent practicable, IB or its subsidiaries will each assume or retain, as the case may be, any and all pension liabilities and attendant plans and their assets related to the employees of IB or its subsidiaries post-Distribution. If a person is employed by a non-U.S. subsidiary of IB but the associated liabilities are held by another of VMS, IB or VSEA, the entity employing the employees will indemnify the entity holding the liabilities. IB, VSEA and VMS will also each indemnify the others for one-third of the employee benefit liabilities associated with former employees of non-U.S. subsidiaries. Stock Options and Other Awards Stock options and restricted stock awards (collectively, "stock awards") of Varian are currently outstanding under Varian's 1982 Non-Qualified Stock Option Plan and the Varian Omnibus Stock Plan (collectively, the "Plans"). The treatment after the Distribution of stock awards that are outstanding prior to the Distribution is designed to preserve, as a general matter, the economic value of each stock award. In addition, the treatment of outstanding stock awards of 26 individuals who will continue their employment with IB is designed to provide an incentive for such employees to remain employed with IB and to benefit by their efforts to increase the market value of the IB Common Stock. Treatment of Awards Held by Employees of IB It is expected that the Varian stock options held by those individuals who will become employees of IB will be replaced with substitute stock options to purchase IB Common Stock under the IB Omnibus Stock Plan discussed below under "The IB Omnibus Stock Plan." Although such individuals are not contractually required to surrender their Varian stock options, it is expected that such individuals will do so in order to have their stock options relate to shares of the company with which they are employed after the Distribution, to preserve unvested options and to maintain the ability to exercise stock options that would otherwise expire due to termination of their employment with Varian. The surrender of such stock options will be encouraged by Varian and IB because Varian's and IB's management believe the efforts of key employees should be directed toward enhancing the value of their employer's stock. Such substitute options will be designed to preserve the economic value of the related Varian stock options, and the vesting and expiration dates and other terms of the related awards will remain in effect under the IB substitute stock options. In order to obtain such substitute stock options, the employees will be required to surrender their unexercised Varian stock options. Replacement of surrendered Varian stock options is believed to be beneficial to IB and its stockholders because it will allow IB to provide meaningful compensation incentives to its key employees. Since, except for option price and number of shares, all terms and conditions of Varian stock options will apply to the substitute stock options, the vesting provisions of the substitute options are expected to provide a continuing incentive for key employees to remain in the employ of IB after the Distribution. If an IB employee does not elect to receive a substitute option, the unvested portion of the employee's Varian option will expire upon the Distribution Date and the employee will generally have three months to exercise the vested portion for VMS Common Stock. The option exercise price of substitute IB stock options will be determined by multiplying the exercise price of the Varian stock option by a fraction, the numerator of which will be the closing price of IB Common Stock on the Distribution Date and the denominator of which will be the closing price of Varian Common Stock on the Distribution Date. The number of shares of IB Common Stock subject to substitute options will be determined by multiplying the number of shares of Varian Common Stock covered by the Varian stock option by a fraction, the numerator of which will be the closing price of Varian Common Stock on the Distribution Date and the denominator of which will be the closing price of IB Common Stock on the Distribution Date. If the Distribution Date is not a trading day for the New York Stock Exchange or the Nasdaq National Market, the foregoing prices will be calculated based on the closing price for the trading day immediately preceding the Distribution Date. Unvested Varian restricted stock held by continuing employees of IB will vest immediately prior to the Distribution. As of December 15, 1998, there were approximately 966,491 shares of Varian Common Stock subject to outstanding stock options held by individuals who will be employees of IB. It is impossible to predict with certainty how many shares of IB Common Stock will be subject to substitute IB stock options after the Distribution Date, since it is expected that some Varian stock options held by individuals who will become employees of IB will be exercised prior to the Distribution Date. The balance of unexercised Varian stock options will be adjusted according to the formula described above, but the stock prices upon which the adjustment will be based will not be known until the Distribution Date. Stockholders of IB are, however, likely to experience some dilutive impact from the above-described adjustments. Treatment of Awards Held by Employees Whose Employment will Terminate in Connection with the Distribution Employees of Varian whose employment will terminate in connection with the Distribution (other than seven employees whose employment will terminate pursuant to severance agreements) will be permitted to elect to exchange their Varian stock options for stock options with respect to VMS Common Stock, VSEA Common Stock and IB Common Stock. Individuals who so elect will have one-third of the unexercised portion of their Varian stock options exchanged for 27 each of VMS stock options, VSEA stock options and IB stock options. The seven employees whose employment will terminate pursuant to severance agreements will receive this exchange on a mandatory basis. Employees whose options are exchanged in this manner will have the unvested portion of their Varian options as of the Distribution Date vested immediately prior to the Distribution or, if later, immediately prior to termination of the employment of such employees. As of December 15, 1998, there were approximately 521,145 shares of Varian Common Stock subject to outstanding stock options held by employees whose employment will terminate in connection with the Distribution (excluding stock options held by Mr. O'Rourke, a current director of Varian who is expected to serve as a director of VSEA following the Distribution). It is impossible to predict with certainty how many shares of IB Common Stock will be subject to these stock options after the Distribution Date, since it is expected that some Varian stock options held by these individuals will be exercised prior to the Distribution Date. In addition, the balance of unexercised Varian stock options will be adjusted according to the formula described above, but the stock prices upon which the adjustment will be based will not be known until the Distribution Date. Stockholders of IB are, however, likely to experience some dilutive impact from the above-described adjustments. Treatment of Awards Held by Directors Varian stock options held by directors of Varian will be adjusted in the same manner as Varian stock options held by employees whose employment will terminate in connection with the Distribution; provided that the unvested portion of their Varian options will not vest immediately prior to the Distribution. Accordingly, these individuals will be permitted to exchange their Varian stock options for stock options with respect to VMS Common Stock, VSEA Common Stock and IB Common Stock. As of December 15, 1998, there were approximately 791,000 shares of Varian Common Stock subject to outstanding stock options held by current directors (including Mr. O'Rourke). It is impossible to predict with certainty how many shares of IB Common Stock will subject to these stock options after the Distribution Date, since it is expected that some Varian stock options held by these individuals will be exercised prior to the Distribution Date. In addition, the balance of unexercised Varian stock options will be adjusted pursuant to the formula described above, but the stock prices upon which the adjustment will be based will not be known until the Distribution Date. Stockholders of IB are, however, likely to experience some dilutive impact from the above-described adjustments. Tax Sharing Agreement Varian, IB and VSEA will enter into a tax sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights and obligations with respect to federal, state, foreign and other income or franchise taxes relating to Varian's businesses for tax periods prior to, including and following the Distribution and with respect to certain other tax matters. In general, VMS will be responsible for consolidated federal income taxes, consolidated or combined state income taxes and separate state income taxes of Varian and its subsidiaries through the Distribution Date. Liability through the Distribution Date will be determined based on a closing of the books. Liability for foreign income taxes and non-income taxes will generally be allocated to the legal entity on which such taxes are imposed, except for taxes transferred on the closing balance sheets. Adjustments to the reported tax liability for tax periods through the Distribution Date will be shared equally by the three companies. In general, and except as provided below, taxes resulting from the Distribution will be the responsibility of the legal entity on which such taxes are imposed. However, each of VSEA and IB will be responsible for any such taxes resulting from income or gain from the Distribution to the extent that such taxes are attributable to action taken or permitted by that entity or its affiliates after the Distribution that is inconsistent with the tax treatment contemplated in the Tax Ruling requested from the IRS. Each of VMS, IB and VSEA will covenant and agree not to take or permit certain actions inconsistent or potentially inconsistent with the requested Tax Ruling before January 1, 2002, unless such action has been consented to by the other companies or approved by a supplemental ruling from the IRS or an unqualified opinion of independent nationally recognized tax counsel acceptable to each of the companies. These agreements could restrict the ability of VMS, IB or VSEA to engage in certain corporate transactions, redeem stock, dispose of assets 28 except in the ordinary course of business, or be the target of an acquisition transaction, during that period. Adjustments to the anticipated income taxes resulting from the Distribution that are not attributable to action inconsistent with the Tax Ruling will be shared equally by the three companies. Furthermore, if with respect to VMS, IB or VSEA, the aggregate taxes shown on the initial tax returns filed after the Distribution (or the amounts paid with respect to such taxes) relating to periods prior to the Distribution Date exceed the aggregate amounts accrued with respect thereto on the closing balance sheets, by more than $1,000,000, the company with the unanticipated tax burden may propose a sharing of such amounts among the three companies. If the three companies cannot agree to a fair and equitable sharing of the excess taxes, the matter will be submitted to a mutually acceptable nationally recognized accounting firm for resolution. See " - Federal Income Tax Aspects of the Distribution." Transition Services Agreement On or prior to the Distribution Date, Varian, IB and VSEA will enter into a Transition Services Agreement providing for (i) the sharing of facilities and equipment for a temporary period not to exceed one year, (ii) the provision of employees and sharing of certain third-party services to provide treasury, tax, accounting, payroll, human resources and similar and related functions for a temporary period not to exceed one year and (iii) the provision of information services personnel for a period extending until June 30, 2000. Compensation for all services and facilities provided under the Transition Services Agreement will be on a fully burdened cost reimbursement basis. The management of each of VMS, VSEA and IB presently expects that its company will be able to provide these services for itself after the applicable transition period without additional material expense, although no assurance can be given that this will be the case. Each party has the right to terminate certain transition services arrangements upon a material breach by the other party thereto. Intellectual Property Agreement On or prior to the Distribution Date, Varian, IB and VSEA will enter into an Intellectual Property Agreement providing for allocation among these companies and their respective subsidiaries and associated companies of rights in the Intellectual Property (as defined in the Distribution Agreement), including patents, copyrights, trademarks, software and trade secrets, owned by Varian prior to the Distribution and for the licensing of certain of such Intellectual Property thereafter. The Intellectual Property Agreement is to provide VMS, IB and VSEA, and their respective subsidiaries and associated companies, with those continuing rights and licenses in such Intellectual Property following the Distribution Date necessary for the continued conduct of their respective businesses. Under the terms of the Intellectual Property Agreement, the Intellectual Property that relates primarily to the Instruments Business and the Semiconductor Equipment Business will be transferred to IB and VSEA, respectively, with VMS retaining the Intellectual Property that relates primarily to the Health Care Systems Business. Each company will grant a non- exclusive, perpetual, royalty-free license under the Intellectual Property that it owns to the other two companies for use in their respective fields. More specifically, as of the Distribution Date, each of VMS, IB and VSEA will hold certain rights in the mark "VARIAN," the "VA" logo and other rights to various trademarks, service marks, and trade names containing the word "VARIAN." 29 SELECTED FINANCIAL DATA The following table presents selected historical financial data of the Instruments Business. The information set forth below should be read in conjunction with "Pro Forma Condensed Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and notes thereto of the Instruments Business included elsewhere in this Information Statement. The statement of earnings data set forth below for the fiscal years ended October 2, 1998, September 26, 1997 and September 27, 1996 and the balance sheet data at October 2, 1998 and September 26, 1997 are derived from, and are qualified by reference to, the audited financial statements of the Instruments Business included elsewhere in this Information Statement The statement of earnings data for the fiscal years 1995 and 1994 and the balance sheet data at fiscal year end 1996, 1995 and 1994 are derived from unaudited financial data of the Instruments Business not included in this Information Statement. The historical financial information may not be indicative of the Instruments Business' future performance and does not necessarily reflect what the financial position and results of operations of the Instruments Business would have been had the Instruments Business operated as a separate, stand-alone entity during the periods presented.
Fiscal Years ------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (Dollars in millions, except per share amounts) Statement of Earnings Data Sales....................... $ 557.8 $ 541.9 $ 504.4 $ 459.4 $ 425.7 Operating Earnings before Taxes...................... 39.2 26.8 11.5 2.7 20.3 Taxes on earnings........... 15.8 12.6 5.3 0.7 10.0 Net Earnings................ 23.4 14.2 6.2 2.0 10.3 Pro Forma Net Earnings Per Share(/1/)................. $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30 Balance Sheet Data At Year End Total assets................ $ 404.1 $ 357.9 $ 301.0 $ 282.0 $ 272.6 Long-term debt.............. $ -- $ -- $ -- $ -- $ --
- ------- (1) The computation of pro forma net earnings per share is based on the weighted average number of shares of Varian Common Stock outstanding during the respective periods, reflecting the anticipated ratio of one share of IB Common Stock for each share of Varian Common Stock outstanding at the time of the Distribution. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the combined financial statements of the Instruments Business and notes thereto included elsewhere in this Information Statement, as well as the information contained under "Business" and "Risk Factors." The combined financial statements of the Instruments Business generally reflect the results of operations, financial position and cash flows of the operations expected to be transferred to IB in connection with the Internal Transfers and Distribution. Accordingly, the Instruments Business' combined financial statements have been carved out from the consolidated financial statements of Varian using the historical results of operations and historical basis of the assets and liabilities of the Instruments Business. The combined financial statements include, among other things, allocations of certain Varian corporate assets (including pension assets), liabilities (including profit-sharing and pension benefits) and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury and other Varian corporate overhead) to the Instruments Business using the allocation methodology described in Note 1 of the Notes to the Instruments Business Combined Financial Statements. The combined financial statements do not reflect any changes that may occur in the financing and operations of IB as a result of the Distribution. Results Of Operations Fiscal Year IB's fiscal years reported are the 52- or 53-week periods which ended on the Friday nearest September 30. Fiscal year 1998 comprises the 53-week period ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week periods ended on September 26, 1997 and September 27, 1996, respectively. Fiscal Year 1998 Compared to Fiscal Year 1997 Sales. IB's sales of $558 million in fiscal year 1998 were 3% higher than its sales of $542 million in fiscal year 1997. Fiscal year 1998 sales were driven largely by IB's Analytical Instruments and NMR Instruments lines. The effect of the stronger U.S. dollar and a softening Asian market slowed sales growth during fiscal year 1998. Geographically, sales in North America of $312 million and Europe of $163 million in fiscal year 1998 represented increases of 3% and 15%, respectively, as compared to fiscal year 1997, while sales in Asia of $57 million in fiscal year 1998 declined 18% as compared to fiscal year 1997. IB expects its sales in the United States and Europe to continue to grow but is uncertain as to the timing of any economic recovery, or increased sales, in Asia. Overall, IB expects single-digit sales growth in fiscal year 1999. However, IB may experience lower operating earnings in fiscal year 1999 depending on the extent and timing of restructuring plans currently being developed. Gross Profit. IB's gross profit of $221 million in fiscal year 1998 was 40% of sales, compared to $211 million, or 39% of sales, in fiscal year 1997. The increase in gross profit as a percentage of sales from fiscal year 1997 to fiscal year 1998 was primarily attributable to improved operating efficiencies. Research and Development. Research and development expenses of $30 million in fiscal year 1998 were 5% of sales compared to $32 million, or 6% of sales, in fiscal year 1997. This decrease reflected the shift away from outside consultants and the Ginzton Research Center to in-house employees. Marketing. Marketing expenses of $114 million in fiscal year 1998 and $110 million in fiscal year 1997, were 20% of sales in fiscal years 1998 and 1997, as increases in expenses in the United States in fiscal year 1998 were offset by lower foreign marketing expenses due to the strengthening U.S. dollar. General and Administrative. General and administrative expenses of $39 million, or 7% of sales, in fiscal year 1998, decreased from $42 million, or 8% of sales, in fiscal year 1997. The decrease in general and administrative expenses in fiscal year 1998 was due primarily to improved employee productivity and the effect of the stronger U.S. dollar on IB's expenses outside the United States. 31 Taxes on Earnings. IB's effective income tax rate was 40.2% in fiscal year 1998, compared to 47.0% in fiscal year 1997. These rates were higher than the U.S. federal statutory rate because IB had significant earnings in high-tax foreign countries. The fiscal year 1997 rate was greater than the fiscal year 1998 rate due to the larger portion of high-taxed foreign earnings in fiscal year 1997. Future tax rates may vary from the historic rates depending on the worldwide allocation of earnings and tax planning strategies. Net Earnings. Net earnings of $23 million ($0.78 pro forma per share) in fiscal year 1998 increased from the $14 million ($0.47 pro forma per share) earned in fiscal year 1997. The increase in net earnings was due primarily to revenue growth in excess of marketing and general and administrative expenses and the other factors described above. Fiscal Year 1997 Compared to Fiscal Year 1996 Sales. IB's sales of $542 million in fiscal year 1997 were 7% higher than its sales of $504 million in fiscal year 1996. All of IB's product lines contributed to the higher sales in fiscal year 1997. Geographically, sales in fiscal year 1997 in North America of $302 million and Asia of $70 million both increased 11% from fiscal year 1996, while sales in Europe of $142 million declined 3% in fiscal year 1997. Gross Profit. IB's gross profit of $211 million in fiscal year 1997 was 39% of sales, compared to $194 million, or 38% of sales, in fiscal year 1996. The increase in gross profit was attributable primarily to improved sales volume and relatively constant fixed costs. Research and Development. Research and development expenses of $32 million in fiscal year 1997 were 6% of sales compared to $30 million, or 6% of sales, in fiscal year 1996. The increase in research and development expenses, in absolute terms, was primarily due to increased consultancy costs. Marketing. Marketing expenses of $110 million in fiscal year 1997 were 20% of sales compared to $107 million, or 21% of sales in fiscal year 1996. The increase in marketing expenses, in absolute terms, was primarily due to increased new product introductions and new sales offices in Latin America. General and Administrative. General and administrative expenses of $42 million were 8% of sales in fiscal year 1997, compared to $45 million, or 9% of sales, in fiscal year 1996. The decrease in general and administrative expenses was due primarily to a reduction in corporate overhead expenses. Taxes on Earnings. IB's effective income tax rate was 47.0% in fiscal year 1997, compared to 46.1% in fiscal year 1996. These rates were higher than the U.S. federal statutory rate because IB had significant earnings in high-tax foreign countries. Net Earnings. Net earnings of $14 million ($0.47 pro forma per share) in fiscal year 1997 increased from the $6 million ($0.20 pro forma per share) earned in fiscal year 1996. The increase in net earnings was due primarily to revenue growth in excess of marketing and general and administrative expenses and the other factors described above. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. It is effective for IB's 1999 fiscal year. The impact of the implementation of SFAS No. 130 on the combined financial statements of IB has not yet been determined. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting (referred to as the "management" approach) and also requires interim reporting of segment information. It is effective for IB's 1999 fiscal year. The impact of the implementation of SFAS No. 131 on the reporting of IB's segment information has not yet been determined. 32 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and is effective for IB's 2000 fiscal year. The impact of the implementation of SFAS No. 133 on the combined financial statements of IB has not yet been determined. Liquidity and Capital Resources IB's debt has historically been incurred or managed at the parent level. In connection with the Distribution, a portion of Varian's debt will be assumed by IB. IB will not be able to rely on the earnings, assets or cash flows of VMS or VSEA after the Distribution to service this debt nor, however, will its earnings, assets or cash flows be used to contribute to the capital requirements of those entities. The debt to be assumed by or transferred to IB at the time of the Distribution will consist of between $50 and $100 million of Term Loans and Notes Payable, based on Varian's outstanding indebtedness as of October 2, 1998 and projected operating results, certain other transactions and scheduled debt repayments through the Distribution Date. See "Forecasted Capitalization." As of October 2, 1998, interest rates on Varian's outstanding Term Loans ranged from 6.70% to 7.29%, and the weighted average interest rate on these Term Loans was 7.03%. As of October 2, 1998, interest rates on Varian's outstanding Notes Payable ranged from 1.50% to 49.00%, and the weighted average interest rate on these Notes Payable was 1.96%. While IB will assume 50% of the Term Loans, the specific Term Loans and Notes Payable, if any, that IB will assume in connection with the Distribution will be determined in accordance with the Distribution Agreement. See "The Distribution - Distribution Agreement." The Term Loans currently contain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. In connection with the assumption of the Term Loans by IB, the lender may revise existing or impose additional restrictive covenants. IB may enter into one or more credit facilities for working capital and other general corporate purposes after the Distribution. Any such credit facility may contain certain representations and warranties, conditions, affirmative, negative and financial covenants and events of default customary for such facilities. IB does not expect that it will have any outstanding borrowings under any such credit facility as of the Distribution. Varian has used a centralized cash management system to finance its operations. Cash deposits from the businesses are transferred to Varian on a daily basis, and Varian funds Varian's required disbursements. As a result, IB reported no cash and cash equivalents, at October 2, 1998 and September 26, 1997, respectively. Pursuant to the Distribution Agreement, it is anticipated that IB will be entitled to receive a cash contribution from Varian in such amount so that as of the time of the Distribution, IB will have Net Debt equal to approximately 50% of the aggregate Net Debt of IB and VMS, subject to such adjustments as may be necessary to provide VMS with a Net Worth of between 40% and 50% of the aggregate Net Worth of IB and VMS. Further, IB is entitled to receive approximately 50% of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of Varian's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets and required to pay approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). See "The Distribution - Distribution Agreement." IB generated $37 million of cash from operations in fiscal year 1998, compared to $17 million in fiscal year 1997 and $23 million in fiscal year 1996. Fiscal year 1998 net earnings plus non-cash charges for depreciation totaling $41 million, which was offset by a decrease of $7 million in liabilities and a $5 million decrease in customer advances, respectively, between fiscal year 1997 and fiscal year 1998, accounted for most of the cash generated. IB used $54 million of cash for investing activities in fiscal year 1998, primarily for the acquisition of Chrompack International B. V., the remaining minority interest in Varian Iberica, S. L., as well as the replacement of machinery and equipment. This compares to $52 million used for investing activities in fiscal year 1997, primarily for the acquisitions of a product line from each of Rainin Instruments Company, Inc. and Otsuka Electronics (USA) Inc., as well as the replacement of machinery and equipment. IB used $22 million for investing activities in fiscal year 1996, primarily for capital expenditures. 33 IB currently has no plans to materially modify or expand its facilities or to make other material capital expenditures. Restructuring plans are currently being developed and are expected to result in additional costs and expenditures, the timing and amount of which have not yet been determined. In addition, the Distribution Agreement provides that IB is responsible for certain litigation described under "Business - Legal Proceedings" and further provides that IB will indemnify VSEA and VMS for one-third of the costs, expenses and other liabilities of Varian relating to certain discontinued operations of Varian, including certain environmental liabilities. See " - Environmental Matters." IB's liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although IB's cash requirements will fluctuate based on the timing and extent of these factors, IB's management believes that cash generated from operations, together with IB's borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the current fiscal year and fiscal year 2000. Environmental Matters IB's operations are subject to various foreign, federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. This includes discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require manufacturers to dispose of their products at the end of their useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of such operations. Varian has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under CERCLA at eight sites where Varian is alleged to have shipped manufacturing waste for recycling or disposal. Varian is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former Varian facilities (including facilities disposed of in connection with Varian's sale of its Electron Devices business during fiscal year l995 and the sale of its TFS business during fiscal year 1997). Expenditures by Varian for environmental investigation and remediation amounted to $5 million in fiscal year 1998, compared with $2 million in fiscal year 1997 and $5 million in fiscal year 1996. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of October 2, 1998, Varian nonetheless estimated that the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $22 million to $49 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of October 2, 1998. Management of Varian believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range and therefore Varian had accrued $22 million in estimated environmental costs as of October 2, 1998. The amount accrued has not been discounted to present value. As to other sites and facilities, Varian has gained sufficient knowledge to be able to better estimate the scope and costs of future environmental activities. As of October 2, 1998, Varian estimated that the future exposure for environmental related investigation and remediation costs for these sites and facilities ranged in the aggregate from $40 million to $74 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of October 2, 1998. As to each of these sites and facilities, management of Varian determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these futures costs were reliably determinable. Together, these amounts totaled $51 million at October 2, 1998. Accordingly, Varian had accrued $22 million as of October 2, 1998, which represents its best estimate of the future costs discounted at 4%, net of inflation. This accrual is in addition to the $22 million described in the preceding paragraph. Under the Distribution Agreement, IB has agreed to indemnify VMS and VSEA for one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon 34 the payment of these costs. Accordingly, IB had recorded $8 million as its portion of these estimated future costs for environmental liabilities as of October 2, 1998. The foregoing amounts are only estimates of anticipated future environmental related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. IB believes that most of these cost ranges will narrow as investigation and remediation activities progress. IB believes that its reserves are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to IB's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to IB's management and its best assessment of the ultimate amount and timing of environmental related events, IB's management believes that the costs of these environmental related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of IB. Year 2000 General. The "Year 2000" problem refers to computer programs and other equipment with embedded microprocessors ("non-IT systems") which use only the last two digits to refer to a year, and which therefore might not properly recognize a year that begins with "20" instead of the familiar "19." As a result, those computer programs and non-IT systems might be unable to operate or process accurately certain date-sensitive data before or after January 1, 2000. Because IB relies heavily on computer programs and non-IT systems, and relies on third parties which themselves rely on computer programs and non-IT systems, the Year 2000 problem, if not addressed, could adversely effect IB's business, results of operations or financial condition. State of Readiness. IB has initiated a comprehensive assessment of potential Year 2000 problems with respect to (1) internal systems, (2) products and (3) significant third parties with which IB does business. IB has substantially completed its assessment of potential Year 2000 problems in internal systems, which systems have been categorized as follows, in order of importance: (a) enterprise information systems; (b) enterprise networking and telecommunications; (c) factory-specific information systems; (d) non-IT systems; (e) computers and packaged software; and (f) facilities systems. With respect to enterprise information systems, Varian in 1994 initiated replacement of its existing systems with a single company-wide system supplied by SAP America, Inc., which system is designed and tested by SAP for Year 2000 capability. Installation of that system has been staged to replace first those existing systems that are not Year 2000 capable. Installation of the new SAP system is approximately 70% complete, with 90% completion expected by July 1999 and full completion expected by the end of 1999. Upgrade of enterprise information systems is approximately 61% complete, with 80% completion expected by July 1999 and 100% completion expected by December 1999; upgrade of networking and telecommunications systems is approximately 95% complete, with 100% completion expected by July 1999; upgrade of factory-specific information systems is approximately 70% complete, with 91% completion expected by July 1999 and 93% completion expected by December 1999; and upgrade of non-IT systems, computers and packaged software, and facilities systems are approximately 80% complete, with 100% completion expected by July 1999. IB has initiated an assessment of potential Year 2000 problems in its current and previously-sold products. With respect to current products, that assessment and corrective actions are complete, and IB believes that all of its current products are Year 2000 capable; however, that conclusion is based in part on Year 2000 assurances or warranties from suppliers of computer programs and non- IT systems which are integrated into or sold with IB's current products. With respect to previously-sold products, IB does not intend to assess Year 2000 preparedness of every product it has ever sold, but rather is focusing its assessments on products that will be under written warranties or are still relatively early in their useful life, are more likely to be dependent on non- IT systems that are not Year 2000 capable, and/or cannot be easily upgraded with readily available externally-utilized computers and packaged software. These assessments are expected to be substantially completed by July 1999. Where IB identifies previously-sold products that are not 35 Year 2000 capable, IB intends in some cases to develop and offer to sell upgrades or retrofits, identify corrective measures which the customer could itself undertake or identify for the customer other suppliers of upgrades or retrofits. There may be instances where IB will be required to repair and/or upgrade such products at its own expense. Schedules for completing those corrective actions vary considerably among IB's businesses and products, but are generally expected to be substantially completed by July 1999. IB is still assessing potential Year 2000 problems of third parties with which IB has material relationships, which will be primarily suppliers of products or services. These assessments will identify and prioritize critical suppliers, review those suppliers' written assurances on their own assessments and correction of Year 2000 problems and develop appropriate contingency plans for those suppliers which might not be adequately prepared for Year 2000 problems. These assessments are expected to be substantially completed by April 1999. Costs. As of October 2, 1998, IB estimates that it had incurred approximately $700,000 to assess and correct Year 2000 problems. Although difficult to assess, based on its assessment to date, IB estimates that it will incur approximately $550,000 in additional costs to assess and correct Year 2000 problems, which costs are expected to be incurred throughout fiscal year 1999 and the first half of fiscal year 2000. All of these costs have been and will continue to be expensed as incurred. This estimate of future costs has not been reduced by expected recoveries from certain third parties, which are subject to indemnity, reimbursement or warranty obligations for Year 2000 problems. In addition, IB expects that certain costs will be offset by revenues generated by the sale of upgrades and retrofits and other customer support services relating to Year 2000 problems. However, there can be no assurance that IB's actual costs to assess and correct Year 2000 problems will not be higher than the foregoing estimate. Risks. Failure of IB or its key suppliers to accurately assess and correct Year 2000 problems would likely result in interruption of certain of IB's normal business operations, which could have a material adverse effect on IB's business, results of operations or financial condition. If IB does not adequately identify and correct Year 2000 problems in its information systems, it could experience an interruption in its operations, including manufacturing, order processing, receivables collection and accounting, such that there would be delays in product shipments, lost data and a consequential impact on revenues, expenditures and financial reporting. If IB does not adequately identify and correct Year 2000 problems in its non-IT systems, it could experience an interruption in its manufacturing and related operations, such that there would be delays in product shipments and a consequential impact on revenues. If IB does not adequately identify and correct Year 2000 problems in previously-sold products, it could experience warranty or product liability claims by users of products which do not function correctly. If IB does not adequately identify and correct Year 2000 problems of the significant third parties with which it does business, it could experience an interruption in the supply of key components or services from those parties, such that there would be delays in product shipments or services and a consequential impact on revenues. Management of IB believes that appropriate corrective actions have been or will be accomplished within the cost and time estimates stated above. Although IB does not expect to be 100% Year 2000 compliant by the end of 1999, IB does not currently believe that any Year 2000 non-compliance in IB's information systems would have a material adverse effect on IB's business, results of operations or financial condition. However, given the inherent complexity of the Year 2000 problem, there can be no assurance that actual costs will not be higher than currently anticipated or that corrective actions will not take longer than currently anticipated to complete. Risk factors which might result in higher costs or delays include the ability to identify and correct in a timely fashion Year 2000 problems; regulatory or legal obligations to correct Year 2000 problems in previously-sold products; ability to retain and hire qualified personnel to perform assessments and corrective actions; the willingness and ability of critical suppliers to assess and correct their own Year 2000 problems, including the products they supply to IB; and the additional complexity which will likely be caused by undertaking during fiscal year 1999 and fiscal year 2000 the separation of currently shared enterprise information systems as a result of the Distribution. See "Risk Factors - Transitioning to New Information Technology Infrastructure." Because of uncertainties as to the extent of Year 2000 problems with IB's previously-sold products and the extent of any legal obligation of IB to correct Year 2000 problems in those products, IB cannot yet assess risks to IB with respect to 36 those products. Because its assessments are not yet complete, IB also cannot yet conclude that the failure of critical suppliers to assess and correct Year 2000 problems is not reasonably likely to have a material adverse effect on IB's results of operations. Contingency Plans. With respect to IB's enterprise information systems, IB has a contingency plan if the SAP system is not fully installed before December 31, 1999. That plan primarily involves installation where necessary of a Year 2000 capable upgrade of existing information systems pending complete installation of the SAP system. That upgrade is currently in acceptance testing, and, if functional, will be held for contingency purposes. With respect to products and significant third parties, IB intends, as part of its on-going assessment of potential Year 2000 problems, to develop contingency plans for the more critical problems that might not be corrected December 31, 1999. It is currently anticipated that the focus of these contingency plans will be the possible interruption of supply of key components or services from third parties. 37 MARKET RISK Foreign Currency Exchange Risk As a global concern, IB faces exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as IB's business practices evolve and could have a material adverse impact on IB's financial results. Historically, IB's primary exposures have related to non-U.S. dollar denominated sales and purchases throughout Europe and Asia. The Euro was adopted as a common currency for members of the European Monetary Union on January 1, 1999. IB is evaluating, among other issues, the impact of the Euro conversion on its foreign currency exposure. Based on its evaluation to date, IB does not expect the Euro conversion to create any change in its currency exposure due to IB's existing hedging practices. At the present time, Varian hedges its currency exposures in respect of the Instruments Business that are associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. Varian does not enter into forward exchange contracts for trading purposes. IB's forward exchange contracts generally range from one to three months in original maturity, and no forward exchange contract has an original maturity greater than one year. Forward exchange contracts outstanding and their unrealized gains and losses as of October 2, 1998 are summarized as follows:
Notional Value Notional Unrealized Purchased Value Sold Gain/(Loss) Fair Value --------- ---------- ---------- ---------- (Dollars in thousands) Japanese yen....................... $ -- $ 1,637 $ 5 $ 31 French francs...................... -- 11,550 -- (467) Canadian dollars................... -- 7,042 206 260 British pounds..................... 12,044 4,050 537 515 Italian lira....................... -- 4,196 -- (217) German marks....................... -- 1,955 -- (100) Spanish pesetas.................... -- 691 -- (38) Korean won......................... -- 283 -- 1 Australian dollars................. 6,396 -- -- 23 Swiss francs....................... 246 -- -- 10 Swedish kronor..................... 4,789 -- -- (5) ------- ------- ---- ---- Total............................ $23,475 $31,404 $748 $ 13 ======= ======= ==== ====
The fair value of forward exchange contracts generally reflects the estimated amounts that IB would receive or pay to terminate the contracts at the reporting date, thereby taking into account and approximating the current unrealized and realized gains or losses of open contracts. The notional amounts of forward exchange contracts are not a measure of IB's exposure. Interest Rate Risk Although payments under certain of the operating leases for IB's facilities are tied to market indices, IB is not exposed to material interest rate risk associated with its operating leases. 38 SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS The following financial forecast of the capitalization of IB is based on forecasts and assumptions by Varian's management concerning events and circumstances that are expected to occur subsequent to the latest historical balance sheet date but prior to and including April 1, 1999 (the anticipated Distribution Date), including future results of operations and other events. For purposes of the forecasted capitalization at April 1, 1999, net earnings in the first six months of fiscal year 1999 are assumed to approximate the same level as in the last six months of fiscal year 1998. In addition, restructuring plans are currently being developed and may result in additional charges to IB's equity. Assumptions with respect to events that will occur between October 3, 1998 and April 1, 1999 include the following: . Receipt of a cash contribution from Varian of $8 million and the assumption of long-term debt (including current portion) of $58 million from Varian. . Amendment of IB's Certificate of Incorporation to give IB authorized capital stock of (i) 99,000,000 shares of IB Common Stock of which approximately 29,909,061 shares will be issued and outstanding upon the Distribution (based upon the number of shares of Varian Common Stock outstanding as of December 15, 1998) and (ii) 1,000,000 shares of preferred stock, $.01 par value per share, none of which will be issued and outstanding upon the Distribution. In Varian's management's judgment, the listed assumptions and forecasts reflect those material events or transactions that occurred since October 3, 1998 or are expected to occur prior to the anticipated Distribution Date, other than the potential restructuring charge discussed in the first paragraph above. There have been no changes in accounting principles anticipated in this capitalization forecast nor are any such changes currently contemplated. Limitations On Projections And Forecasts The assumptions and estimates underlying the projected and forecasted data and information in this Information Statement are inherently uncertain and, although considered reasonable by management of Varian, are subject to significant business, economic and competitive uncertainties, many of which are beyond the control of Varian and its subsidiaries. Accordingly, there can be no assurance that the projected and forecasted financial results will be realized. In fact, actual results in the future usually will differ from the forecasted financial results and the differences may be material. Neither IB nor any of its subsidiaries intends after the date of this Information Statement to update any forecasted or projected financial data or information contained in this Information Statement and the absence of such an update should not be construed as any indication regarding the views or beliefs of management of Varian (or of IB after the Distribution) concerning the forecasted or projected data or information contained in this Information Statement 39 FORECASTED CAPITALIZATION The following table sets forth the combined capitalization of IB as of October 2, 1998 on a historical basis, forecasted at April 1, 1999 (the anticipated Distribution Date), and as adjusted to give effect to the Distribution and the other transactions contemplated by the Distribution Agreement. The significant assumptions used below have been described in "Summary of Significant Capitalization Forecast Assumptions" on the preceding page. The following data is qualified in its entirety by the financial statements of the Instruments Business and other information contained elsewhere in this Information Statement.
Forecasted October 2, At April 1998 1, Pro Forma After Historical 1999(/1/) Distribution(/1/) ---------- ---------- ----------------- (Dollars in millions) Cash and cash equivalents.............. $ -- $ -- $ 8.0 ====== ====== ====== Notes payable.......................... $ -- $ -- $ -- ====== ====== ====== Long-term Debt, including current portion............................... $ -- $ -- $ 58.0 ------ ------ ------ Equity: Divisional Equity.................... $243.5 $ -- $ -- Common stock, par value $.01 per share: authorized - 99,000,000 shares issued and outstanding - none historical and 29,909,061 pro forma........................... -- 0.3 0.3 Preferred stock, par value $.01 per share: authorized - 1,000,000 shares issued and outstanding - none historical or pro forma............. Capital in Excess of Par Value....... 254.2 204.2 ------ ------ ------ Total Equity....................... 243.5 254.5 204.5 ------ ------ ------ Total Capitalization............. $243.5 $254.5 $262.5 ====== ====== ======
- ------- (1) See "Summary of Significant Capitalization Forecast Assumptions" on the preceding page. 40 PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The unaudited pro forma condensed combined financial statements of the Instruments Business, which will become Varian, Inc. following the Distribution, set forth below consist of a pro forma balance sheet as of October 2, 1998 and a pro forma statement of earnings for the year ended October 2, 1998. The pro forma balance sheet was prepared to give effect to the Distribution as if it had occurred on October 2, 1998 and the pro forma statement of earnings was prepared to give effect to the Distribution as if it had occurred on September 27, 1997. The unaudited pro forma balance sheet set forth below does not purport to represent what the Instruments Business' financial position actually would have been had the Distribution occurred on the date indicated or to project the Instruments Business' financial position for any future date. The unaudited pro forma statement of earnings set forth below does not purport to represent what the Instruments Business' operations actually would have been or to project the Instruments Business' operating results for any future period. The unaudited pro forma adjustments are based upon currently available information and certain assumptions that the Instruments Business' management believes are reasonable. The unaudited pro forma statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of the Instruments Business and the notes thereto appearing elsewhere in this Information Statement. 41 Unaudited Pro Forma Condensed Combined Balance Sheet October 2, 1998
IB Pro Forma IB Pro Historical Adjustments(/1/) Forma ---------- ---------------- ------ (Dollars in millions) Assets Current Assets Cash and cash equivalents................. $ -- $ 8.0 $ 8.0 Other current assets...................... 241.7 -- 241.7 ------ ------- ------ Total current assets...................... 241.7 8.0 249.7 Property, Plant and Equipment, net........ 94.7 -- 94.7 Other Assets.............................. 67.7 -- 67.7 ------ ------- ------ Total Assets.............................. $404.1 $ 8.0 $412.1 ====== ======= ====== Liabilities And Stockholders' Equity Current Liabilities Notes payable and current portion of long- term debt................................ $ -- $ 6.0 $ 6.0 Other current liabilities................. 149.6 -- 149.6 ------ ------- ------ Total Current Liabilities................. 149.6 6.0 155.6 Long-term Debt............................ -- 52.0 52.0 Other liabilities......................... 11.0 -- 11.0 ------ ------- ------ Total Liabilities......................... 160.6 58.0 218.6 Equity.................................... 243.5 (50.0) 193.5 ------ ------- ------ Total Liabilities and Equity.............. $404.1 $ 8.0 $412.1 ====== ======= ======
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet (1) Assumes a cash contribution by Varian to IB of $8.0 million and the assumption by IB of $58.0 million in long-term debt, including current portion, from Varian in connection with the Distribution. 42 Unaudited Pro Forma Condensed Combined Statement Of Earnings Fiscal Year 1998
IB Pro Forma IB Pro Historical Adjustments(/1/) Forma ---------- ---------------- ------ (Dollars in millions, except per share amounts) Sales..................................... $557.8 $ -- $557.8 ------ ----- ------ Operating Costs and Expenses Cost of sales............................. 336.4 -- 336.4 Research and development.................. 29.6 -- 29.6 Marketing................................. 113.9 -- 113.9 General and administrative................ 38.7 -- 38.7 ------ ----- ------ Total operating costs and expenses........ 518.6 -- 518.6 ------ ----- ------ Operating Earnings........................ 39.2 -- 39.2 Interest expense.......................... -- (4.1) (4.1) ------ ----- ------ Operating Earnings before Taxes........... 39.2 (4.1) 35.1 Taxes on earnings......................... 15.8 (1.6) 14.2 ------ ----- ------ Net Earnings.............................. $ 23.4 $(2.5) $ 20.9 ====== ===== ====== Pro Forma Net Earnings Per Share(/2/)..... $ 0.78 $ 0.70 ====== ======
Notes to Unaudited Pro Forma Condensed Combined Statement Of Earnings (1) Reflects pro forma adjustment for interest expense on $58.0 million of long-term debt at an estimated annual rate of interest of 7.03%. A change of 25 basis points in this estimated annual rate of interest would impact pro forma interest expense by $145,000. The pro forma adjustment for income taxes is based upon statutory income tax rates. (2) The computation of pro forma net earnings per share is based on the weighted average number of shares of Varian Common Stock outstanding during fiscal year 1998, reflecting the anticipated ratio of one share of IB Common Stock for each share of Varian Common Stock outstanding at the time of the Distribution. 43 BUSINESS General IB, a newly-formed, wholly-owned subsidiary of Varian, will own and operate the Instruments Business after the Distribution. References in this section to "IB" refer to IB and its subsidiaries after giving effect to the Internal Transfers and the Distribution. References in this section to the "Instruments Business" refer to the historical business and operations of the Instruments Business conducted by Varian prior to the Distribution. Overview IB develops, manufactures, sells and services a variety of scientific instruments and equipment. IB is a major supplier of analytical and research instruments and related equipment for studying the chemical composition of a myriad of substances, including metals, inorganic materials, organic compounds, polymers, natural substances and biochemicals. IB also develops, manufactures, sells and services nuclear magnetic resonance spectrometers for probing the structural properties of molecules and for producing non-invasive three- dimensional images of biomedical materials. IB also develops, manufactures, sells and services high vacuum products that serve a wide range of industrial and scientific applications, such as high-energy physics, surface analysis, scientific and industrial coating processes, analytical instrumentation and semiconductor manufacturing. IB is also a state-of-the-art contract manufacturer of advanced electronic assemblies and subsystems such as printed circuit boards. IB operates in 70 countries and at October 2, 1998 had approximately 3,000 employees. Products IB's products can be broadly classified into the following categories: analytical instruments, nuclear magnetic resonance instruments, vacuum products and electronic components assembly. Analytical Instruments Analytical Instruments includes Chromatography Systems and Optical Spectroscopy Instruments operations, which manufacture liquid and gas chromatographs, gas chromatograph/mass spectrometers, ultraviolet/visible/near-infrared spectrometers, atomic absorption spectrometers, inductively coupled plasma spectrometers, inductively coupled plasma/mass spectrometers, data management systems and small disposable tools used to prepare chemical samples for analysis. These products are used in environmental monitoring and analysis, biological and biochemical research, and quality control and research in such industries as pharmaceuticals, foods, metals, chemicals and petroleum as well as in independent test laboratories. They are employed in analyzing chemical substances including metals, inorganic materials, organic compounds, polymers, natural substances and biochemicals. The Chromatography Systems operation ("CS") is a major international supplier of gas and liquid chromatographs, data management systems and gas chromatograph/mass spectrometer systems, as well as sample preparation products and other consumable supplies. Chromatography is a technique that separates a mixture of substances by taking advantage of the characteristics specific to each component. CS's systems are used for chemical analysis, industrial hygiene, pollution monitoring, pharmaceutical analysis and drug discovery and monitoring applications. CS supplies a complete line of products to provide all analytical and preparative requirements. CS's manufacturing facilities are located in Walnut Creek, California, Woburn, Massachusetts, Middelburg, The Netherlands and Harbor City, California. The Optical Spectroscopy Instruments operation ("OSI") is a leading worldwide supplier of atomic absorption, inductively coupled plasma, inductively coupled plasma/mass spectrometers and ultraviolet/ visible/near infrared spectrophotometers - instruments that are used to measure compounds and some 66 different metals in various substances. Optical spectroscopy is a method of chemical analysis based on the absorption, or emission, by matter of electromagnetic radiation of a specific wavelength or frequency. OSI's manufacturing facility is located in Melbourne, Australia. 44 Nuclear Magnetic Resonance Instruments Nuclear Magnetic Resonance Instruments ("NMRI") is a leading worldwide supplier of nuclear magnetic resonance ("NMR") spectrometers for advanced biomolecular, chemical and material science research, as well as for the more routine analytical work typically performed in industrial and academic environments. NMRI's manufacturing facilities are located in Palo Alto, California, and Fort Collins, Colorado. NMR spectroscopy gives researchers the ability to determine the structure of many biomolecules including proteins, nucleic acids (DNA and RNA) and carbohydrates. NMRI's systems are used in a variety of laboratories, including those conducting basic research and larger facilities that are creating new pharmaceuticals. NMRI's systems can be found in all major pharmaceutical companies worldwide, where they are key tools in developing new drugs to fight disease. Approximately 80% of NMRI's systems are used for analysis on liquids, 15% on solids and 5% on imaging (producing pictures). The imaging capability of NMR allows researchers to non-invasively capture a cross-sectional view of an object, for example the brain, to map and understand its various parts. Solid sample NMR research allows researchers to determine the microstructure of crystals, plastics, rubbers, ceramics, polymers and other solids. Vacuum Products Vacuum Products is a worldwide supplier of products used to create, maintain and contain a vacuum environment. These include vacuum pumps, helium leak detectors and related instruments and gauges, which are used in many commercial and scientific applications, including industrial processes, semiconductor manufacturing, high-energy physics, surface analysis and space research. Vacuum Products' manufacturing facilities are located in Lexington, Massachusetts and Torino, Italy. Vacuum Products offers four types of vacuum pumps: primary, diffusion, turbo- molecular and ion. Primary pumps include rotary vane and dry diaphragm mechanical pumps, sorption pumps and dry scroll pumps. Diffusion pumps include the Very High Speed-Series products. Turbo-molecular pumps provide a high speed/compression ratio in a compact package. Ion pumps, used to achieve ultra- high vacuum environments, are used primarily to create ultra-high vacuum in a variety of applications, from electron microscopes to linear accelerators. Vacuum Products also has been a worldwide leader in helium mass spectrometer leak detectors since the 1960s. These products are used in many commercial and scientific applications, including industrial processes, analytical instruments and high-energy physics. Vacuum Products also produces an extensive line of vacuum instruments and gauges. Its gauge controllers and gauge tubes are designed for industrial use, where simplicity of operation and rugged design are important, as well as for research applications. Electronic Components Assembly Tempe Electronics Center ("TEC") is a contract electronic manufacturer of printed wiring assemblies. It supplies components to each of Varian's businesses; however, 80% of its sales are to customers other than Varian. Services range from design layout to total system integration, shipping to end customers and repair depot facilities. TEC has expertise in high-mix manufacturing, producing up to 1,800 different products each month. In addition to printed wiring assemblies, TEC performs electronic subassembly contract manufacturing and integrates complete systems. TEC serves a wide range of industries, including telecommunications, medical, network products, gaming, industrial controls, avionics and satellite communications. TEC's manufacturing facilities are located in Tempe, Arizona. Marketing and Sales In the United States, IB markets the largest portion of its products directly through its own sales and distribution organizations, although certain products are marketed through independent distributors and sales representatives. Sales 45 to major markets outside the United States are generally made by IB's foreign- based sales and service staff, although some sales are made directly from the United States to foreign customers. In certain foreign countries, sales are made through various representative and distributorship arrangements. IB owns or leases sales and service offices in strategic regional locations in the United States and in foreign countries through its foreign sales subsidiaries and distribution operations. None of IB's products are distributed through retail outlets. The markets in which IB competes are globalized. International sales accounted for 47%, 47% and 50% of sales for fiscal years 1998, 1997 and 1996, respectively. As a result, IB's customers increasingly require service and support on a worldwide basis. In addition to the United States, IB has manufacturing operations in Australia, Italy and The Netherlands as well as sales and service offices located throughout Europe, Asia and Latin America. IB has invested substantial financial and management resources to develop an international infrastructure to meet the needs of its customers worldwide. IB intends to continue to expand its presence in international markets. Demand for IB's products is dependent upon the size of the markets for its products, the level of capital expenditures of IB's customers, the rate of economic growth in IB's major markets and competitive considerations. IB believes that demand for its products does not exhibit any significant seasonal pattern. No single customer accounted for 10% or more of IB's sales in fiscal 1998. Virtually all new analytical methods and tests originate in academic research in universities and medical schools. If the utility of a new method or test is demonstrated by fundamental research, it often will then be used by pharmaceutical investigators, biotechnology companies, teaching hospitals or specialized clinical laboratories in an investigatory mode. In some cases, these new techniques eventually emerge in routine, high-volume clinical testing at hospitals and research labs. Generally, devices used at each stage from research to routine clinical applications employ the same fundamental processes but may differ in operating features such as number of tests performed per hour and degree of automation. By serving several customer groups with differing needs related through common science and technology, IB has the opportunity to broadly apply and leverage its expertise. IB's customers are continually searching for processes and systems that can perform tests faster, more efficiently and at lower costs. IB believes that its focus on automated and high throughput systems positions it to capitalize on this need. Backlog IB's recorded backlog was $125 million at October 2, 1998 and $132 million at September 26, 1997. It is IB's general policy to include in backlog only purchase orders or production releases that have firm delivery dates within one year. Recorded backlog may not result in sales because of cancellations or other factors. It is anticipated that all orders included in the October 2, 1998 backlog will be delivered before the close of fiscal year 1999. Competition Competition in IB's markets is based upon the performance capabilities of IB's products, technical support and after-market service, the manufacturer's reputation as a technological leader and the selling price. Management believes that performance capabilities are the most important of these criteria. The markets in which IB competes are highly competitive and are characterized by the application of mature but advanced technology. There are numerous companies that specialize in, and a number of larger companies that devote a significant portion of their resources to, the development, manufacture and sale of products that compete with those manufactured or sold by IB. Many of IB's competitors are well-known manufacturers with a high degree of technical proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which IB is engaged. The markets for IB's products are characterized by specialized manufacturers that often have strength in narrow segments of these markets. While the absence of reliable statistics makes it difficult to determine IB's relative market position in its industry segments, IB is confident it is one of the principal manufacturers in its primary fields. See "Risk Factors - Technological Change and New Products." Each of IB's major businesses competes with many companies that address the same markets. In Analytical Instruments, IB competes with Hewlett-Packard, Waters Corporation, Perkin-Elmer, Thermo Electron, Shimadzu Corporation and 46 numerous local suppliers. NMRI has two major competitors: Bruker and JEOL. In Vacuum Products, the primary competitors are Edwards High Vacuum, Pfeiffer, Leybold-Balzers and Alcatel. High-mix numerous local suppliers. NMRI has two major competitors: Bruker and JEOL. In Vacuum Products, the primary competitors are Edwards High Vacuum, Pfeiffer, Leybold-Balzers and Alcatel. High-mix contract manufacturers that compete with the Tempe Electronics Center include EFTCX Corporation, Xetel Corporation, CMC Industries, Sigmatron International and Smartflex Systems. See "Risk Factors - Competition." Manufacturing IB's principal manufacturing activities consist of precision assembly, test, calibration and machining activities. IB subcontracts a portion of its assembly, machining and printed circuit board assembly and testing. All other assembly, test and calibration functions are performed by IB. Some critical assembly activities are performed in clean-room environments at IB's facilities. IB believes that the ability to manufacture reliable products in a cost- effective manner is critical to meeting the "just-in-time" delivery and other demanding requirements of its original equipment manufacturer ("OEM") and end- use customers. IB monitors and analyzes product lead times, warranty data, process yields, supplier performance, field data on mean time between failures, inventory turns, repair response time and other indicators so that it can continuously improve its manufacturing processes. IB has adopted a total quality management process. IB has ten manufacturing facilities located throughout the world. Analytical Instruments has manufacturing facilities in Walnut Creek, California, Woburn, Massachusetts, Middelburg, The Netherlands, Harbor City, California, and Melbourne, Australia. NMRI has manufacturing facilities in Palo Alto, California, and Fort Collins, Colorado. Vacuum Products has manufacturing facilities in Lexington, Massachusetts, and Torino, Italy. Tempe Electronics Center has manufacturing facilities in Tempe, Arizona. In 1993, the member states of the European Union ("EU") began implementation of their plan for a new unified EU market with reduced trade barriers and harmonized regulations. The EU adopted a significant international quality standard, the International Organization for Standardization Series 9000 Quality Standards ("ISO 9000"). All of IB's manufacturing facilities have been certified as complying with the requirements of ISO 9001. Raw Materials There are no specialized raw materials that are particularly essential to the operation of IB's business. IB's manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials and other supplies, some of which are occasionally found to be in short supply. Many components used in IB's products, including proprietary analog and digital circuitry, are manufactured by IB. Other components, including packaging materials, superconducting magnets, integrated circuits, microprocessors, microcomputers and certain detector and data analysis modules, are acquired from other manufacturers. Most of the raw materials, components and supplies purchased by IB are available from a number of different suppliers; however, a number of items are purchased from limited or single sources of supply, and disruption of these sources could have a temporary adverse effect on shipments and the financial results of IB. IB believes alternative sources could ordinarily be obtained to supply these materials, but a prolonged inability to obtain certain materials or components could have an adverse effect on IB's financial condition or results of operations and could result in damage to its relationships with its customers. See "Risk Factors - Reliance on Suppliers." Research and Development IB is actively engaged in basic and applied research, development and engineering programs designed to develop new products and to improve existing products. During fiscal years 1998, 1997 and 1996, IB spent $29.6 million, $32.0 million and $29.9 million, respectively (net of customer funding), on company-sponsored research, development and engineering activities. 47 Although IB intends to continue to conduct extensive research and development activities, there can be no assurance that it will be able to develop and market new products on a cost-effective and timely basis, that such products will compete favorably with products developed by others or that IB's existing technology will not be superseded by new discoveries or developments. See "Risk Factors - Uncertainty of Market Acceptance of New Products." Customer Support and Service IB believes that its customer service and support are an integral part of its competitive strategy. As part of its support services, IB's technical support staff provides, typically at no additional cost, individual assistance in solving analysis problems, integrating vacuum components, designing circuit boards, etc., depending on the business. IB offers training courses and periodically sends its customers information on applications development. IB's products generally include a 90-day to one-year warranty, installation and certain user training, all at no additional cost. Service contracts may be purchased by customers to cover equipment no longer under warranty. Service work not performed under warranty or service contract is performed on a time and materials basis. IB installs and services its products primarily through its own field service organization. Patent and Other Proprietary Rights As a leader in the manufacture and sale of analytical and research instruments and vacuum products, IB has pursued a policy of seeking patent, copyright, trademark and trade secret protection in the United States and other countries for developments, improvements and inventions originating within its organization that are incorporated in IB's products or that fall within its fields of interest. As of October 2, 1998, IB owned approximately 205 patents in the United States and approximately 260 patents throughout the world, and had approximately 272 patent applications on file with various patent agencies worldwide. IB intends to file additional patent applications as appropriate. IB relies on a combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying and transferring title to protect its proprietary rights. IB has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace. IB also has agreements with third parties that provide for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and technology cross-licenses. While IB places considerable importance on its licensed technology, IB does not believe that the loss of any license would have a material adverse effect on IB's business. IB's competitors, like companies in many high-technology businesses, routinely review the products of others for possible conflict with their own patent rights. Although IB has from time to time received notices of claims from others alleging patent infringement, IB believes that there are no pending patent infringement claims that might have a material adverse effect on the business of IB. See "Risk Factors - Uncertain Protection of Patent and Other Proprietory Rights." Environmental Matters For a discussion of environmental matters, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters." Employees At October 2, 1998, IB had a total of approximately 3,033 full-time and temporary employees worldwide - 1,905 in North America, 532 in Western Europe, 125 in Asia, 386 in Australia and 85 in Latin America. IB's employees based in certain foreign countries may, from time to time, be subject to collective bargaining agreements. IB's OSI employees based in Australia conducted a strike in 1997, which was quickly resolved. Those employees are subject to a collective bargaining agreement that is scheduled for renewal in early 1999. IB currently considers its employee relations to be good. IB's success depends to a significant extent upon a limited number of key employees and other members of senior management of IB. The loss of the service of one or more of these key employees could have a material adverse effect 48 on IB. The success of IB's future operations depends in large part on IB's ability to recruit and retain engineers and technicians, as well as marketing, sales, service and other key personnel, who in each case are in great demand. IB's inability to attract and retain the personnel it requires could have a material adverse effect on IB's results of operations. Properties IB has manufacturing, warehouse, research and development, sales, service and administrative facilities which have an aggregate floor space of 661,000 and 506,500 square feet located in the United States and abroad, respectively, for a total of 1,167,500 square feet worldwide. Of these facilities, aggregate floor space of approximately 332,750 square feet is leased, and the remainder is owned by IB. The management of IB does not believe that there is any material long-term excess capacity in its facilities, although utilization is subject to change based on customer demand. The management of IB believes that the Instruments Business' facilities and equipment generally are well maintained, in good operating condition and suitable for IB's purposes and adequate for present operations. IB has ten manufacturing facilities located throughout the world. IB's facilities are located in Palo Alto, California, Walnut Creek, California, Harbor City, California, Woburn, Massachusetts, Lexington, Massachusetts, Fort Collins, Colorado, Tempe, Arizona, Melbourne, Australia, Middelburg, The Netherlands, and Torino, Italy. IB has 70 sales and service facilities located throughout the world, sixty-one of which are located outside the United States, including facilities located in Argentina, Australia, Austria, Belgium, Brazil, Canada, France, Japan, Korea, Mexico, The Netherlands, Spain, Sweden, Switzerland, Taiwan, the United Kingdom and Venezuela. Legal Proceedings Pursuant to the Distribution Agreement, IB has agreed to indemnify VSEA and VMS for any costs, liabilities or expenses with respect to any legal proceedings relating to the Instruments Business. In addition, IB has agreed to pay for one-third of the costs, liabilities and expenses of VSEA and VMS with respect to certain legal proceedings relating to discontinued operations of Varian. See "The Distribution - Distribution Agreement." IB is also involved in certain other legal proceedings arising in the ordinary course of its business. While there can be no assurances as to the ultimate outcome of any litigation involving IB, IB's management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on IB's financial position, results of operations or cash flow. 49 MANAGEMENT Board Of Directors As of the Distribution Date, the five persons identified below are expected to constitute the board of directors of IB (the "IB Board"). Each individual listed below (other than Allen J. Lauer) is currently a director of Varian and will resign from the Board of Directors of Varian effective as of the Distribution Date. The IB Board will be divided into three classes. Directors for each class will be elected at the annual meeting of stockholders held in the year in which the term for such class expires and will serve thereafter for three years. The following table sets forth names, in alphabetical order, and information about the five persons who are expected to serve as directors of IB after the Distribution:
Initial Name, Age and Current Term Principal Occupation Expires Information --------------------- --------- ----------- Allen J. Lauer, 61.................. 2000 Mr. Lauer is the Executive Executive Vice President of Varian Vice President of Varian responsible for the Instruments Business. In more than 30 years with Varian, Mr. Lauer has served in numerous key management roles. He was named a corporate Vice President of Varian in 1981, was elevated to Senior Vice President of Varian in 1989, and became Executive Vice President of Varian in 1990. John G. McDonald, 61................ 2001 Professor McDonald is The The Industrial Bank of Japan Industrial Bank of Japan Professor of Finance at Stanford Professor of Finance at University's Graduate School of Stanford University's Graduate Business School of Business, where he has served on the faculty since 1968. He is a director of Golden State Vintners, Inc., Scholastic Corporation and TriNet Corporate Realty Trust, Inc., and is an independent trustee of eight mutual funds managed by Capital Research & Management Co. and its affiliates. Professor McDonald has been a director of Varian since 1988. Wayne R. Moon, 58 .................. 2001 Mr. Moon is Chairman of the Chairman of the Board and Chief Board and Chief Executive Executive Officer of Blue Shield of Officer of Blue Shield of California California (a health care company), positions he has held since 1993. From 1990 to 1993, he served as President and Chief Operating Officer of Kaiser Foundation Health Plan, Inc. and Kaiser Foundation Hospitals (health maintenance organizations). Mr. Moon has been a director of Varian since 1995. D.E. Mundell, 67.................... 2002 Mr. Mundell is Chairman of the Chairman of the Board of ORIX USA Board of ORIX USA Corporation Corporation and Advisor (a board-level position) to ORIX Corporation (both financial services companies), positions he has held since 1991. He is director of Beazer Homes USA, Inc. and Stockton Holdings, Ltd. Mr. Mundell has been a director of Varian since 1992. Elizabeth E. Tallett, 49............ 2002 Ms. Tallett is President and President and Chief Executive Chief Executive Officer of Officer of Dioscor, Inc., and of Dioscor, Inc. (a Ellard Pharmaceuticals Inc. biopharmaceutical company), positions she has held since 1996. Ms. Tallett is also President and Chief Executive Officer of Ellard Pharmaceuticals Inc. (a pharmaceutical company), positions she has held since 1998. From 1992 to 1996, Ms. Tallett served as President and Chief Executive Officer of Transcell Technologies, Inc. (a biotechnology company). Ms. Tallett is a director of The Principal Mutual Life Insurance Company, Coventry Health Care Inc. and Integrated America Inc., and is Chairman of the Board of Huma Scan, Inc. She has been a director of Varian since 1996.
50 Compensation Of Directors Each director who is not an IB employee will receive an annual retainer fee of $20,000, plus $1,000 for each IB Board and committee meeting attended. The non- employee Chairman of the IB Board will receive a retainer fee of $90,000 (in lieu of any other annual retainer or committee chair fee), and directors chairing standing committees of the IB Board will each receive a retainer fee of $5,000. Under the IB Omnibus Stock Plan, each director who is not an IB employee will also receive, upon initial appointment or election to the IB Board, a non-qualified stock option to acquire 10,000 shares of IB Common Stock, and will receive annually thereafter a non-qualified stock option to acquire 5,000 shares of IB Common Stock. In lieu of these grants, any non- employee Chairman will receive upon initial appointment a non-qualified stock option to acquire 50,000 shares of IB Common Stock. Such stock options will be granted with an exercise price equal to the fair market value of IB Common Stock on the date of grant, becoming exercisable immediately on the date of grant and having a ten-year term. Directors who are IB employees will receive no compensation for their services as directors. Committees of the IB Board Of Directors The business of IB will be managed under the direction of the IB Board. The IB Board will have Audit and Compensation Committees. Members of the Audit and Compensation Committees will not be employees of IB. Audit Committee The Audit Committee's principal functions will be to review the scope of the annual audit of IB by its independent auditors, review the annual financial statements of IB and the related audit report as prepared by the independent auditors, recommend the selection of independent auditors each year and review any non-audit fees paid to the independent auditors. The members of the Audit Committee on the Distribution Date are expected to be the following non- employee directors: John G. McDonald (Chairman), Wayne R. Moon, D.E. Mundell and Elizabeth E. Tallett. Compensation Committee The Compensation Committee will administer the stock and cash incentive plans of IB and in this capacity it will make option grants or awards under these plans. In addition, the Compensation Committee will determine the compensation of the President and Chief Executive Officer and the other senior executives. The Compensation Committee will also recommend the establishment of policies dealing with various compensation and employee benefit plans for IB. The members of the Compensation Committee on the Distribution Date are expected to be the following non-employee directors: John G. McDonald, Wayne R. Moon, D.E. Mundell (Chairman) and Elizabeth E. Tallett. 51 Executive Officers Set forth below is certain information with respect to the persons who are expected to serve as executive officers of IB immediately following the Distribution. Those persons listed below who are currently officers of Varian will relinquish their positions with Varian effective as of the Distribution Date.
Business Experience Prior to Becoming an Executive Name and Title Age Officer of IB -------------- --- ------------------------- Allen J. Lauer................................ 61 Mr. Lauer is the Executive President and Chief Executive Officer Vice President of Varian responsible for the Instruments Business. In more than 30 years with Varian, Mr. Lauer has served in numerous key management roles. He was named a corporate Vice President of Varian in 1981, was elevated to Senior Vice President of Varian in 1989, and became Executive Vice President of Varian in 1990. Garry W. Rogerson............................. 46 Mr. Rogerson is Vice Vice President, Analytical Instruments President of Varian's Analytical Instruments business, which includes the Chromatography Systems business and Optical Spectroscopy Instruments business, a position he has held since 1998. Mr. Rogerson has been Vice President and General Manager of Varian's Chromatography Systems business (which is expected to be a continuing responsibility) since 1994. Prior to this, Mr. Rogerson served as Sales and Marketing Manager for Varian's NMR Instruments business. Mr. Rogerson has held various other positions in the Instruments Business during his 19 years with Varian. Raymond J. Shaw............................... 49 Mr. Shaw is Vice President Vice President, NMR Instruments and General Manager of Varian's NMR Instruments business, positions he has held since 1989. Mr. Shaw has held various other positions in the Instruments Business during his 20 years with Varian. Arthur W. Homan............................... 39 Mr. Homan is Associate Vice President, General Counsel and Secretary General Counsel and Assistant Secretary of Varian, positions he has held since 1998 and 1993, respectively. From 1993 to 1998, he served as Senior Corporate Counsel. Mr. Homan has held various positions in the legal department during his 10 years with Varian. James L. Colbert.............................. 52 Mr. Colbert is Controller Controller of Varian's NMR Instruments business, a position he has held since 1992. Mr. Colbert has held various other positions during his 26 years with Varian.
52 Executive Officer Compensation Summary of Compensation Table I below sets forth a summary of the compensation paid by Varian for the last three fiscal years to the individual expected to be the chief executive officer of IB, and the four additional most highly compensated individuals (based on their fiscal year 1998 compensation from Varian) who are expected to be executive officers of IB immediately after the Distribution. Table I Summary Compensation Table
Long-Term Compensation ------------------------------ Awards Payouts --------------------- -------- Annual Compensation Securities ---------------------------------- Restricted Underlying Other Annual Stock Options/ LTIP All Other Name and Salary Bonus Compensation Award(s) SARs Payouts Compensation Principal Position Year ($) ($)(/1/) ($)(/2/) ($)(/2/) (#)(/4/) ($)(/5/) ($)(/6/) - ------------------ ---- ------ -------- ------------ ---------- ---------- -------- ------------ Allen J. Lauer 1998 338,910 232,936 33,050 0 36,000 347,454 101,096 President and Chief 1997 323,148 359,300 22,594 244,388 36,000 461,552 117,958 Executive Officer 1996 310,990 532,363 35,458 204,225 36,000 628,056 93,274 Garry W. Rogerson 1998 166,388 62,566 7,791 0 8,500 98,969 20,516 Vice President, 1997 156,024 89,372 8,796 52,369 7,200 88,644 15,487 Analytical Instruments 1996 148,564 108,864 9,307 43,763 5,500 83,344 17,419 Raymond J. Shaw 1998 164,731 63,210 5,232 0 7,500 87,125 22,853 Vice President, 1997 156,494 104,812 6,309 52,369 7,200 88,586 25,149 NMR Instruments 1996 150,522 124,416 6,164 43,763 6,000 152,048 23,438 Arthur W. Homan 1998 150,836 29,221 4,476 20,366 8,000 0 16,669 Vice President, General 1997 122,770 62,273 4,764 14,588 6,000 0 15,857 Counsel and Secretary 1996 117,233 66,372 3,057 37,125 5,000 0 12,872 James L. Colbert 1998 120,330 28,802 0 0 1,050 0 13,280 Controller 1997 115,703 33,386 0 0 1,050 0 14,655 1996 112,211 27,111 0 0 1,000 0 12,374
- ------- (1) Consists of Varian Management Incentive Plan awards, Cash Profit-Sharing Plan allocations and (in some cases) special cash bonuses. (2) Consists of amounts reimbursed for the payment of taxes on certain perquisites and personal benefits and (in some cases) cash payments for unused accrued vacation time. (3) Consists of restricted shares of Varian Common Stock (valued at the closing market price on the date of grant), which shares are released from restrictions in three equal installments over a three-year period (the principal restriction being continued employment until the respective release dates), during which dividends, if any, are paid on such shares. The number and value (at $34.375 per share) of aggregate restricted stock holdings at the end of fiscal year 1998 were as follows: Mr. Lauer, 8,400 shares, $288,750; Mr. Rogerson, 1,800 shares, $61,875; Mr. Shaw, 1,800 shares, $61,875; Mr. Homan, 800 shares, $27,500; and Mr. Colbert, 0 shares, $0. Shares of restricted stock awarded for fiscal years 1998, 1997 and 1996, respectively, which partially vest in under three years were as follows: Mr. Lauer, 0 shares, 4,200 shares and 4,200 shares; Mr. Rogerson 0 shares, 900 shares and 900 shares; Mr. Shaw, 0 shares, 900 shares and 900 shares; Mr. Homan, 350 shares, 300 shares and 750 shares; and Mr. Colbert, 0 shares, 0 shares and 0 shares. (4) Consists of shares of Varian Common Stock that may be acquired under stock options granted pursuant to the Varian Omnibus Stock Plan (no stock appreciation rights have been granted). (5) Consists of cash payouts in fiscal years 1999, 1998 and 1997 under the long-term incentive feature of the Varian Omnibus Stock Plan for three-year cycles ended with fiscal years 1998, 1997 and 1996, respectively. (6) Consists of (a) Varian contributions (including interest) to Retirement and Profit-Sharing Program and Supplemental Retirement Plan (or similar plan in Australia for Mr. Shaw) accounts for fiscal years 1998, 1997 and 1996, respectively (Mr. Lauer, $98,941, $116,157 and $91,816; Mr. Rogerson, $19,389, $14,604 and $16,718; Mr. Shaw, $22,836, $25,134 and $23,424; Mr. Homan, $16,184, $15,603 and $12,677; and Mr. Colbert, $12,516, $14,020 and $11,861); and (b) Varian-paid premiums for group term life insurance in fiscal years 1998, 1997 and 1996, respectively (Mr. Lauer, $2,155, $1,801 and $1,458; Mr. Rogerson, $1,127, $883 and $701; Mr. Shaw, $17, $15 and $14; Mr. Homan, $485, $254 and $195; and Mr. Colbert, $764, $635 and $513). 53 Stock Options Grant of Options Table II below sets forth information with respect to grants of options to purchase Varian Common Stock during the year ended October 2, 1998 to the individuals listed in Table I. These grants were made pursuant to the Varian Omnibus Stock Plan and are reflected in Table I. Table II Option/SAR Grants In Last Fiscal Year
Individual Grants --------------------------------------------------- Potential Realizable Percent of Value at Assumed Number of Total Options/ Annual Rates ofStock Securities SARs Granted Exercise Price Appreciation for Underlying to or Base Option Term(2) Options/SARs Employees in Price Expiration ----------------------- Name Granted (#)(/1/) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - ---- ---------------- -------------- -------- ---------- ----------- ----------- Allen J. Lauer.......... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702 Garry W. Rogerson....... 8,500 0.84 58.1563 11/20/07 310,881 787,832 Raymond J. Shaw......... 7,500 0.74 58.1563 11/20/07 274,306 695,146 Arthur W. Homan......... 8,000 0.79 58.1563 11/20/07 292,593 741,489 James L. Colbert........ 1,050 0.10 58.1563 11/20/07 38,403 97,330
- ------- (1) Consists of stock options, which were granted at an exercise price of 100% of the market price of the underlying shares on the date of grant, become exercisable over three years at the rate of approximately one-third each year and expire ten years from the date of grant. Payment of the exercise price may be made under a promissory note or by delivery of already-owned shares. (2) The 5% and 10% assumed annual rates of stock price appreciation would result from per share prices of $94.73 and $150.84, respectively. Such assumed rates are not intended to represent a forecast of possible future appreciation of Varian Common Stock or total stockholder return. Aggregated Option Exercises and Year-End Values Table III sets forth as of October 2, 1998, for each of the individuals listed in Table I (i) the total number of shares of Varian Common Stock received upon exercise of options during 1998, (ii) the value realized upon such exercise (based on the fair market value of the underlying shares of Varian Common Stock on the exercise date), (iii) the total number of unexercised options to purchase Varian Common Stock (exercisable and unexercisable) and (iv) the value of such options which were in-the-money at October 2, 1998 (based on the closing price of Varian Common Stock at October 2, 1998, $34.375). 54 Table III Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised Shares Underlying Unexercised IntheMoney Acquired Options/SARs at Fiscal Options/SARs at Fiscal on Value Year-End(#) YearEnd ($) Exercise Realized ------------------------- ------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------- ----------- ------------- ----------- ------------- Allen J. Lauer.......... 0 0 126,000 72,000 717,150 0 Garry W. Rogerson....... 0 0 6,284 15,134 0 0 Raymond J. Shaw......... 0 0 19,600 14,300 65,016 0 Arthur W. Homan......... 1,000 27,875 6,333 13,667 0 0 James L. Colbert........ 1,000 19,500 1,566 2,084 0 0
Long-Term Incentive Plans--Awards In Last Fiscal Year(/1/)
Estimated Future Payouts under Number of Performance or NonStock PriceBased Plans Shares, Units Other Period Until -------------------------------------- or Other Maturation or Threshold Target Manixmum Name Rights (#) Payout ($)(/2/) ($)(/2/) ($)(/4/) - ---- ------------- ------------------ ----------- ----------- --------- Allen J. Lauer.......... N/A 1998-2000 25,604 67,423 -- Garry W. Rogerson....... N/A 1998-2000 5,717 22,582 -- Raymond J. Shaw......... N/A 1998-2000 5,033 19,880 -- Arthur W. Homan......... N/A N/A N/A N/A -- James L. Colbert........ N/A N/A N/A N/A --
- ------- (1) Determinations by Varian's Organization and Compensation Committee (the "Varian Committee") that a named executive officer may participate in the long-term incentive feature of the Varian Omnibus Stock Plan ("LTI") and might receive a payout for a specified period is an award for purposes of this table. Awards (i.e., the determination of participation in the LTI) for the 1998-2000 cycle were made in fiscal year 1998. Under the LTI, each named executive officer is eligible to receive compensation payable in cash or in Varian Common Stock, or a combination thereof, based upon Varian's achievement of objectives for average annual return on net assets ("RONA") and revenue growth ("RG") over a three-year cycle. No estimate or assumption made in connection with this table is intended to represent a forecast of possible future performance of Varian. (2) If the minimum level of RONA or RG established by the Varian Committee at the beginning of the three-year cycle is achieved, the minimum amount payable ranges from 3% to 7.5% of annual base salary as of the end of the last fiscal year of the cycle. If neither RONA nor RG for the three-year cycle equals the applicable minimum level, no amount will be paid. The minimum amount payable, if any amount is paid at all, depends on each named executive's base salary in the last year of the cycle, and the amounts set forth above assume that each named executive officer's annual base salary at the end of fiscal year 2000 will be identical to the executive officer's 1999 annual base salary. (3) A "Target" award is not determinable under the LTI. The amounts shown are estimates of the payout for the three-year cycle assuming (a) that the RONA and revenues for the remaining years of the cycle are the same as RONA and revenues for fiscal year 1998 and (b) that each named executive officer's annual base salary at the end of fiscal year 2000 will be identical to his 1999 annual base salary. The actual payment for the three-year cycle may be greater or less than the estimates shown in this column, depending upon the actual RONA and revenues for fiscal years 1998, 1999 and 2000, the actual base salary of the named executive officer at the end of fiscal year 2000, and the aggregate payout to all participants (see footnote 4 below). (4) The maximum amount payable is not determinable or estimable prior to the end of the three-year cycle for the following reason: If the maximum levels of RONA and RG established by the Varian Committee at the beginning of the three-year cycle are achieved or exceeded, the maximum amount payable ranges from 100% to 200% of annual base salary as of the end of the last fiscal year of the cycle. The maximum amount payable is reduced, however, if the aggregate LTI payout to all participants (including the named executive officers) would exceed 5% (before such payouts) of Varian's pre- tax operating earnings in the last fiscal year of the three-year cycle. This variable makes the maximum amount not determinable or estimable. 55 Change In Control Agreements Certain IB executive officers are already parties to change in control agreements (the "Agreements") with Varian which provide for the payment of specified compensation and benefits upon certain terminations of their employment following a change in control of Varian. These change in control agreements will be assumed by IB pursuant to the terms of such Agreements. Some of these Agreements are expected to be amended to reflect the executive officers' new and increased responsibilities with IB. In addition, IB executive officers not already parties to Agreements with Varian may be offered similar change in control agreements with IB. Under the current Agreements, a change in control of the company is defined to occur (a) if any individual or group becomes the beneficial owner of 30% or more of the combined voting power of the company's outstanding securities, (b) if "continuing directors" (defined as the directors of the company as of the date of the Agreement and any successor to any such directors who was nominated or selected by a majority of the directors in office at the time of his nomination or selection and who is not affiliated or associated in any way with an individual or group who is a beneficial owner of more than 10% of the combined voting power of the company's outstanding securities) cease to constitute at least a majority of the board of directors, or (c) if there occurs a reorganization, merger, consolidation or other corporate transaction involving the company in which the stockholders of the company do not own more than 50% of the combined voting power of the company or other corporation resulting from such transaction, or (d) if all or substantially all of the company's assets are sold, liquidated or distributed. The Distribution will not be deemed a change in control under the Agreements. In the Agreements, the affected executive officers have agreed that they will not voluntarily leave the company's employ during a tender or exchange offer, proxy solicitation in opposition to the board of directors or other effort by any party to effect a change in control of the company. This is intended to assure that management will continue to act in the interest of the stockholders rather than be affected by personal uncertainties during any attempts to effect a change in control of the company, and to enhance the company's ability to attract and to retain executives. Each Agreement provides that if within 18 months of a change in control (i) the company terminates the employee's employment other than by reason of his death, disability, retirement or for cause (as defined in the Agreement) or (ii) the employee terminates his employment for "good reason," the employee will receive a lump sum severance payment equal to 2.50 (in the case of the senior executives) times the sum of the employee's annual base salary plus the highest annual bonus paid to the employee in any of the three years ending prior to the date of termination. "Good reason" is defined as the following after a change in control of the company: certain material changes in assignment of duties; certain reductions in compensation; certain material changes in employee benefits and perquisites; a change in the site of employment; the company's failure to obtain the written assumption by its successor of the obligations contained in the Agreement; attempted termination of employment for cause on grounds insufficient to constitute a basis of termination for cause under the terms of the Agreement; or the company's failure to promptly make any payment required under the terms of the Agreement in the event of a dispute relating to employment termination. Each Agreement provides that upon termination or resignation occurring under the circumstances described above, the employee will receive a continuation of all insurance and other benefits on the same terms as if he remained an employee or equivalent benefits will be provided until the earlier to occur of commencement of substantially equivalent full-time employment with a new employer or 24 months after the date of termination of employment with the company. Each Agreement also provides that all stock options granted become exercisable in full according to their terms, and that any unreleased restricted stock be released from restrictions. Each Agreement also provides that all outstanding long-term incentive award cycles under the Varian Omnibus Stock Plan shall be paid out at the "target" level without pro-rating for remaining periods under these cycles. Each Agreement further provides that in the event that any payments and benefits received by the employee from the company would subject that person to the excise tax contained in Section 280G of the Code the employee will be entitled to receive an additional payment that will place the employee in the same after-tax economic position that the employee would have enjoyed if such excise tax had not applied. 56 THE IB OMNIBUS STOCK PLAN The IB Omnibus Stock Plan is expected to be adopted by the IB Board effective as of the Distribution. Purpose of the IB Omnibus Stock Plan The IB Omnibus Stock Plan is intended to promote the success of IB by providing a vehicle under which a variety of stock-based incentive and other awards can be granted to employees and consultants and to directors of IB who are not employees of IB or any affiliate ("non-employee directors"). Description of the IB Omnibus Stock Plan The following paragraphs provide a summary of the principal features of the IB Omnibus Stock Plan and its operation. The IB Omnibus Stock Plan has been filed as an exhibit to the Registration Statement of which this Information Statement is a part. See "Available Information." General The IB Omnibus Stock Plan provides for the granting of stock options, stock appreciation rights ("SARs"), restricted stock, performance units and performance shares (collectively, "IB Awards") to eligible IB Omnibus Stock Plan participants. The maximum number of shares of IB Common Stock available for IB Awards under the IB Omnibus Stock Plan will be 4,200,000, plus such number of shares as may be granted in substitution for other options in connection with the Distribution. Administration of the IB Omnibus Stock Plan The IB Omnibus Stock Plan will be administered by the Compensation Committee of the IB Board. The members of the Compensation Committee must qualify as "non- employee directors" under Rule 16b-3 under the Exchange Act, and as "outside directors" under Section 162(m) of the Code ("Section 162(m)") (for purposes of qualifying the IB Omnibus Stock Plan as performance-based compensation under Section 162(m)). Subject to the terms of the IB Omnibus Stock Plan, the Compensation Committee has the sole discretion to determine the employees and consultants who will be granted IB Awards, the size and types of such IB Awards, and the terms and conditions of such IB Awards. The Compensation Committee may delegate its authority to grant and administer awards to one or more officers or directors appointed by the Compensation Committee, but only the Compensation Committee can make awards to participants who are subject to Section 16 of the Exchange Act. Eligibility to Receive Awards Employees and consultants of IB and its affiliates are eligible to be selected to receive one or more IB Awards. The actual number of individuals who will receive IB Awards under the IB Omnibus Stock Plan cannot be determined because eligibility for participation in the IB Omnibus Stock Plan is in the discretion of the Compensation Committee. The IB Omnibus Stock Plan also provides for the grant of non-qualified stock options to IB's non-employee directors. Such options will be granted pursuant to an automatic, non-discretionary formula. Options The Compensation Committee may grant non-qualified stock options, incentive stock options (which are entitled to favorable tax treatment), or a combination thereof. The number of shares covered by each option will be determined by the Compensation Committee, but during any fiscal year of IB, no participant may be granted options for more than 1,000,000 shares. The price of the shares of IB Common Stock subject to each stock option is set by the Compensation Committee but cannot be less than 100% of the fair market value (on the date of grant) of the shares covered by the option. In addition, the exercise price of an incentive stock option must be at least 110% of fair market value if (on the grant date) the participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of IB or any 57 of its subsidiaries. Nevertheless, substitute options may be granted at less than fair market value to employees or consultants who receive such options in connection with a corporate reorganization. Also, the aggregate fair market value of the shares (determined on the grant date) covered by incentive stock options which first become exercisable by any participant during any calendar year may not exceed $100,000. The exercise price of each option must be paid in full at the time of exercise. The Compensation Committee also may permit payment through the tender of shares of IB Common Stock that are already owned by the participant, or by any other means which the Compensation Committee determines to be consistent with the IB Omnibus Stock Plan's purpose. Any taxes required to be withheld must be paid by the participant at the time of exercise. Options become exercisable at the times and on the terms established by the Compensation Committee. Options expire at the times established by the Compensation Committee but not later than 10 years after the date of grant (except in certain cases involving the death of the optionee). The Compensation Committee may extend the maximum term of any option granted under the IB Omnibus Stock Plan, subject to the preceding limits. Non-Employee Director Options Under the IB Omnibus Stock Plan, each non-employee director automatically will receive, as of the later of (a) the non-employee director's appointment or election to the IB Board, or (b) ten business days after the effective date of the IB Omnibus Stock Plan, a non-qualified stock option to purchase 10,000 shares. Each non-employee director will also automatically receive a non- qualified stock option to purchase 5,000 shares coincident with each subsequent annual meeting of IB, provided the non-employee director serves continuously as a director through the next grant date. In lieu of the above grants, any non- employee Chairman of the IB Board automatically will receive, as of the later of (a) the date he or she becomes Chairman or (b) ten business days after the effective date of the IB Omnibus Stock Plan, a non-qualified stock option to purchase 50,000 shares. The exercise price of each non-employee director and Chairman option will be 100% of the fair market value (on the date of grant) of the shares covered by the option. Nevertheless, substitute options may be granted at less than fair market value to non-employee directors who receive such options in connection with a corporate reorganization. Each option will become exercisable on the grant date. All options granted to non-employee directors generally will have a term of ten years from the date of grant. If a director terminates service on the IB Board prior to an option's normal expiration date, the period of exercisability of the option may be shorter, depending upon the reason for the termination. In addition, non-employee directors may elect to receive shares of IB Common Stock under the IB Omnibus Stock Plan in lieu of cash compensation. Stock Appreciation Rights The Compensation Committee determines the terms and conditions of each SAR. SARs may be granted in conjunction with an option, or may be granted on an independent basis. The number of shares covered by each SAR will be determined by the Compensation Committee, but during any fiscal year of IB, no participant may be granted SARs for more than 1,000,000 shares. Upon exercise of an SAR, the participant will receive payment from IB in an amount determined by multiplying: (1) the difference between the fair market value of a share on the date of exercise over the grant price (fair market value of a share on the grant date), times (2) the number of shares with respect to which the SAR is exercised. SARs may be paid in cash or shares of IB Common Stock, as determined by the Compensation Committee. SARs are exercisable at the times and on the terms established by the Compensation Committee. Restricted Stock Awards Restricted stock awards are shares of IB Common Stock that vest in accordance with terms and conditions established by the Compensation Committee. The number of shares of restricted stock granted to a participant (if any) will be determined by the Compensation Committee, but during any fiscal year of IB, no participant may be granted more than 100,000 shares. 58 In determining whether an award of restricted stock should be made and/or the vesting schedule for an award, the Compensation Committee may impose whatever conditions to vesting it determines to be appropriate. For example, the Compensation Committee may determine to grant restricted stock only if performance goals established by the Compensation Committee are satisfied. Any performance goals may be applied on a company-wide or an individual business unit basis, as determined by the Compensation Committee. See discussion below of " - Performance Goals." Performance Units And Performance Shares Performance Units and Performance Shares are IB Awards which will result in a payment to a participant only if performance goals established by the Compensation Committee are satisfied. The initial value of each Performance Unit and each Performance Share shall not exceed the fair market value (on the date of grant) of a share of IB Common Stock. The applicable performance goals will be determined by the Compensation Committee, and may be applied on a company-wide or an individual business unit basis, as deemed appropriate in light of the participant's specific responsibilities. See " - Performance Goals." In addition to the performance requirements discussed above, Performance Units and Performance Shares are subject to additional limits set forth in the IB Omnibus Stock Plan. During any fiscal year of IB, no participant shall receive more than 100,000 Performance Units or Performance Shares. Performance Goals The Compensation Committee in its discretion may make performance goals applicable to a participant with respect to an IB Award. At the Compensation Committee's discretion, one or more of the following performance goals may apply: EBIT, EBITDA, earnings per share, net income, operating cash flow, return on assets, return on equity, return on sales, revenue and stockholder return. The Compensation Committee may also use other performance goals. EBIT means IB's or a business unit's income before reductions for interest and taxes. EBITDA means IB's or a business unit's income before reductions for interest, taxes, depreciation and amortization. Earnings per share means IB's or a business unit's net income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding. Net income means IB's or a business unit's income after taxes. Operating cash flow means IB's or a business unit's sum of net income plus depreciation and amortization less capital expenditures plus certain specified changes in working capital. Return on assets means the percentage equal to IB's or a business unit's EBIT (but before incentive compensation), divided by IB's or a business unit's, as applicable, average net assets. Return on equity means the percentage equal to IB's net income, divided by average stockholders' equity. Return on sales means the percentage equal to IB's or a business unit's EBIT (but before incentive compensation), divided by IB's or the business unit's, as applicable, revenue. Revenue means IB's or a business unit's sales. Stockholder return means the total return (change in share price plus reinvestment of any dividends) of a share of the IB Common Stock. Nontransferability of IB Awards IB Awards granted under the IB Omnibus Stock Plan may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution. Tax Aspects A recipient of a stock option or SAR will not have taxable income upon the grant of the option. For options and SARs other than incentive stock options, the participant will recognize ordinary income upon exercise in an amount equal to the excess of the fair market value of the shares over the exercise price (the "appreciation value") on the date of exercise. Any gain or loss recognized upon any later disposition of the shares generally will be capital gain or loss. Purchase of shares upon exercise of an incentive stock option will not result in any taxable income to the participant, except for purposes of the alternative minimum tax. Gain or loss recognized by the participant on a later sale or other disposition will either be long-term capital gain or loss or ordinary income depending upon whether the participant 59 holds the shares transferred upon the exercise for a specified period. Any ordinary income recognized will be in the amount, if any, by which the lesser of the fair market value of such shares on the date of exercise or the amount realized from the sale exceeds the option price. Unless the participant elects to be taxed at the time of receipt of restricted stock, Performance Units or Performance Shares, the participant will not have taxable income upon the receipt of the IB Award, but upon vesting will recognize ordinary income equal to the fair market value of the shares or cash at the time of vesting. At the discretion of the Compensation Committee, the IB Omnibus Stock Plan allows a participant to satisfy tax withholding requirements under federal and state tax laws in connection with the exercise or receipt of an IB Award by electing to have shares of IB Common Stock withheld, or by delivering to IB already-owned shares, having a value equal to the amount required to be withheld. IB generally will be entitled to a tax deduction in connection with an IB Award under the IB Omnibus Stock Plan only in an amount equal to the ordinary income realized by the participant and at the time the participant recognizes such income. However, IB may not be entitled to a deduction in connection with certain substitute stock options issued in connection with the Distribution. In addition, Section 162(m) contains special rules regarding the federal income tax deductibility of compensation paid to IB's Chief Executive Officer and to each of the other four most highly compensated executive officers. The general rule is that annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1 million. However, IB can preserve the deductibility of certain compensation in excess of $1 million if it complies with conditions imposed by Section 162(m), including the establishment of a maximum number of shares with respect to which IB Awards may be granted to any one employee during one year, and for IB Awards other than options and SARs, the IB Omnibus Stock Plan sets forth performance goals which must be achieved prior to payment of the IB Awards. The IB Omnibus Stock Plan has been designed to permit the Compensation Committee to grant IB Awards which satisfy the requirements of Section 162(m), thereby permitting IB to continue to receive a federal income tax deduction in connection with such IB Awards. Amendment and Termination of the IB Omnibus Stock Plan The IB Board generally may amend or terminate the IB Omnibus Stock Plan at any time and for any reason. 60 THE IB MANAGEMENT INCENTIVE PLAN The IB Management Incentive Plan is expected to be adopted by the IB Board effective as of the Distribution. Background and Reasons for Adoption Under Section 162(m), the federal income tax deductibility of compensation paid to IB's Chief Executive Officer and to each of its next four most highly compensated executive officers may be limited to the extent that it exceeds $1 million in any one year. IB can deduct compensation in excess of that amount if it qualifies as "performance-based compensation" under Section 162(m). The IB Management Incentive Plan is intended to permit IB to pay incentive compensation which qualifies as performance-based compensation, thereby permitting IB to receive a federal income tax deduction for the payment of such incentive compensation. Description of the IB Management Incentive Plan The following paragraphs provide a summary of the principal features of the IB Management Incentive Plan and its operation. The IB Management Incentive Plan has been filed as an exhibit to the Registration Statement of which this Information Statement is a part. Purpose of the IB Management Incentive Plan The IB Management Incentive Plan is intended to motivate IB's key employees to increase stockholder value by (1) linking a portion of their cash compensation to IB's financial performance, (2) providing rewards for improving IB's financial performance and (3) helping to attract and retain key employees. Administration of the IB Management Incentive Plan The IB Management Incentive Plan will be administered by the Compensation Committee. The members of the Compensation Committee must qualify as "outside directors" under Section 162(m) (for purposes of qualifying the IB Management Incentive Plan as performance-based compensation under such section). Subject to the terms of the IB Management Incentive Plan, the Compensation Committee has the sole discretion to determine the key employees who will be granted awards, and the amounts, terms and conditions of each award. The Compensation Committee may delegate its authority to grant and administer awards to one or more officers or directors appointed by the Compensation Committee, but only with respect to awards that are not intended to qualify as performance-based compensation under Section 162(m). Eligibility to Receive Awards Eligibility for the IB Management Incentive Plan is determined in the discretion of the Compensation Committee. In selecting participants for the IB Management Incentive Plan, the Compensation Committee will choose key employees of IB and its affiliates who are likely to have a significant impact on IB performance. Awards and Performance Goals Under the IB Management Incentive Plan, the Compensation Committee will establish (1) the performance goals which must be achieved in order for the participant to actually be paid an award and (2) a formula or table for calculating a participant's award, depending upon how actual performance compares to the preestablished performance goals. A participant's award will increase or decrease as actual performance increases or decreases. The Compensation Committee also will determine the periods for measuring actual performance (the "performance period"). Performance periods may last as long as three fiscal years of IB. The Compensation Committee may set performance periods and performance goals which differ from participant to participant. For example, the Compensation Committee may choose performance goals based on either company-wide or business unit results, as deemed appropriate in light of the participant's specific responsibilities. For purposes of qualifying awards as performance-based compensation under Section 162(m), the Compensation Committee will specify performance goals from the following list: EBIT, EBITDA, earnings per share, net income, operating cash flow, return on assets, return on equity, return on sales, revenue and stockholder return. 61 EBIT means IB's or a business unit's income before reductions for interest and taxes. EBITDA means IB's or a business unit's income before reductions for interest, taxes, depreciation and amortization. Earnings per share means IB's or a business unit's net income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding. Net income means IB's or a business unit's income after taxes. Operating cash flow means IB's or a business unit's sum of net income plus depreciation and amortization less capital expenditures plus certain specified changes in working capital. Return on assets means the percentage equal to IB's or a business unit's EBIT (but before incentive compensation), divided by IB's or a business unit's, as applicable, average net assets. Return on equity means the percentage equal to IB's net income, divided by average stockholders' equity. Return on sales means the percentage equal to IB's or a business unit's EBIT (but before incentive compensation), divided by IB's or the business unit's, as applicable, revenue. Revenue means IB's or a business unit's sales. Stockholder return means the total return (change in share price plus reinvestment of any dividends) of a share of IB Common Stock. For any performance period, no participant may receive an award of more than the lesser of (1) 200% of the participant's annualized salary rate on the last day of the performance period or (2) $2 million. Also, the total of all awards for any performance period cannot exceed 8% of IB's EBIT before incentive compensation for the most recent completed fiscal year of IB. Awards which exceed this overall limit will be pro-rated so that the total does not exceed such limit. Determination of Actual Awards After the end of each performance period, a determination will be made as to the extent to which the performance goals applicable to each participant were achieved or exceeded. The actual award (if any) for each participant will be determined by applying the formula to the level of actual performance which was achieved. However, the Compensation Committee retains discretion to eliminate or reduce the actual award payable to any participant below that which otherwise would be payable under the applicable formula. Awards under the IB Management Incentive Plan generally will be payable in cash or IB Common Stock within 120 days after the performance period during which the award was earned. Amendment and Termination of the IB Management Incentive Plan The IB Board may amend or terminate the IB Management Incentive Plan at any time and for any reason. 62 OWNERSHIP OF IB COMMON STOCK IB is currently a wholly owned subsidiary of Varian. Table IV sets forth information as to the beneficial ownership of IB Common Stock, as of the Distribution Date (and following the Distribution) as if the Distribution took place on December 15, 1998, by (a) each expected officer named in Table I, (b) each expected director of IB, (c) all expected directors and executive officers of IB as a group and (d) each person who, to IB's knowledge, beneficially owned more than 5% of the outstanding shares. The information in Table IV is based on the ownership of Varian Common Stock as of December 15, 1998 and the number of shares of IB Common Stock expected to be distributed to each existing stockholder of Varian in the Distribution. Table IV Directors and Officers
Percent of Shares of IB Common Stock Outstanding Shares expected to be expected to be Name Beneficially Owned(/1/)(/2/) Beneficially Owned(/1/) - ---- ---------------------------- ----------------------- John G. McDonald........ 19,800(/8/) * Wayne R. Moon........... 6,836(/4/) * D.E. Mundell............ 16,400(/5/) * Elizabeth F. Tallett.... 5,100(/6/) * Allen J. Lauer.......... 233,510(/7/) * Garry W. Rogerson....... 15,751(/8/) * Raymond J. Shaw......... 34,516(/9/) * Arthur W. Homan......... 14,842(/10/) * James L. Colbert........ 4,000(/11/) * All Expected Directors and Executive Officers of IB as a Group (9 persons)............... 350,755(/12/) 1.2 Principal Stockholders Name and Address of Beneficial Owner - ------------------- FMR Corp./Edward C. Johnson 3d/Abigail P. Johnson................ 3,051,000(/13/) 10.2 82 Devonshire Street Boston, Massachusetts 02109 Neuberger & Berman, LLC.................... 2,389,150(/14/) 8.0 605 Third Avenue New York, New York 10158 State Treasurer......... 2,075,760(/15/) 6.9 State of Michigan c/o Director of Investments P.O. Box 1128 Lansing, Michigan 48901 Oppenheimer Capital..... 1,908,400(/16/) 6.4 World Financial Center New York, New York 10281 Princeton Services, Inc./Merrill Lynch Asset Management, Inc.................... 1,840,000(/17/) 6.2 Merrill Lynch Capital Fund, Inc.............. 1,750,000(/17/) 5.9 800 Scudders Mill Road Plainsboro, New Jersey 08536 Sound Shore Management, Inc.................... 1,649,000(/18/) 5.5 8 Sound Shore Drive Greenwich, Connecticut 06836
63 - ------- * The percentage of shares of IB Common Stock expected to be beneficially owned does not exceed one percent of the shares of IB Common Stock expected to be outstanding. (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of IB Common Stock which such person has the right to acquire within 60 days following December 15, 1998. For purposes of computing the percentage of outstanding shares of IB Common Stock held by each person or group of persons named above, any security which such person or persons has or have the right to acquire within 60 days following December 15, 1998 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Fractional shares are rounded down to the nearest whole share. (2) To IB's knowledge, unless otherwise indicated, the person named in the table has sole voting and investment power with respect to the shares or shares such voting and investment power with such person's spouse or children. (3) Includes 16,000 shares which may be acquired under exercisable stock options granted pursuant to the Varian Omnibus Stock Plan. (4) Includes 6,000 shares which may be acquired under exercisable stock options granted pursuant to the Varian Omnibus Stock Plan. (5) Includes (a) 12,000 shares which may be acquired under exercisable stock options granted pursuant to the Varian Omnibus Stock Plan and (b) 3,400 shares held in a trust of which Mr. Mundell is co-trustee with his wife. (6) Includes 4,000 shares which may be acquired under exercisable stock options granted pursuant to the Varian Omnibus Stock Plan. (7) Includes (a) 4,200 shares of restricted stock granted pursuant to the Varian Omnibus Stock Plan, (b) 162,000 shares which may be acquired on or within 60 days of December 15, 1998 under stock options granted pursuant to the Varian Omnibus Stock Plan and (c) 63,110 shares held in a trust of which Mr. Lauer is co-trustee with his wife. (8) Includes (a) 900 shares of restricted stock granted pursuant to the Varian Omnibus Stock Plan and (b) 13,351 shares which may be acquired on or within 60 days of December 15, 1998 under stock options granted pursuant to the Varian Omnibus Stock Plan. (9) Includes (a) 900 shares of restricted stock granted pursuant to the Varian Omnibus Stock Plan and (b) 26,500 shares which may be acquired on or within 60 days of December 15, 1998 under stock options granted pursuant to the Varian Omnibus Stock Plan. (10) Includes (a) 584 shares of restricted stock granted pursuant to the Varian Omnibus Stock Plan and (b) 11,666 shares which may be acquired on or within 60 days of December 15, 1998 under stock options granted pursuant to the Varian Omnibus Stock Plan. (11) Includes 2,600 shares which may be acquired on or within 60 days of December 15, 1998 under stock options granted pursuant to the Varian Omnibus Stock Plan. (12) Includes (a) 7,484 shares of restricted stock granted to executive officers pursuant to the Varian Omnibus Stock Plan, (b) 278,117 shares which may be acquired on or within 60 days of December 15, 1998 by executive officers and directors under stock options granted pursuant to the Varian Omnibus Stock Plan and (c) 66,510 shares as to which voting and/or investment power is shared (see certain of the foregoing footnotes). To IB's knowledge, unless otherwise indicated, the person named in the table has sole voting and investment power with respect to the shares. (13) According to an amendment to a Schedule 13G dated January 10, 1998, FMR Corp. has sole voting power over 163,100 of these shares and sole dispositive power over all 3,051,000 shares. Fidelity Management Trust Varian ("FMTC"), a wholly owned subsidiary of FMR Corp., is the beneficial owner of 293,000 of these shares in its capacity as investment manager of certain institutional accounts. Edward C. Johnson 3d and Abigail P. Johnson own 12.0% and 24.5%, respectively, of the voting stock of FMR Corp. and therefore may be deemed to have beneficial ownership of the shares referenced. (14) According to an amendment to a Schedule 13G dated February 9, 1998, Neuberger & Berman, LLC has sole voting power over 1,367,524 of these shares and shared dispositive power over all 2,389,150 shares. Also according to that amendment to Schedule 13G, Newberger & Berman Management, Inc. shares the voting and dispositive power with Neuberger & Berman, LLC with respect to 774,800 of such shares. (15) Based on a Schedule 13D dated August 12, 1997. (16) According to a Schedule 13G dated February 27, 1998, Oppenheimer Capital has shared voting and shared dispositive power over all these shares. (17) According to a Schedule 13G dated January 29, 1998, Princeton Services, Inc. and Merrill Lynch Asset Management, L.P. have shared voting power and shared dispositive power over all 1,840,000 shares. Also according to that Schedule 13G, Merrill Lynch Capital Fund, Inc. has shared voting power and shared dispositive power over 1,750,000 of such shares. (18) According to a Schedule 13G dated January 15, 1998, Sound Shore Management, Inc. has sole voting power over 1,505,800 of such shares, shared voting power over 32,200 of such shares and sole dispositive power over all 1,649,00 shares. 64 FINANCING On an historical basis, Varian incurred or managed indebtedness at the parent level, and IB was not allocated any of Varian's debt as Varian used a centralized approach to cash management and the financing of its operations. The amount of debt to be retained by VMS and assumed by or transferred to IB and VSEA and the determination of the initial capital structures of IB, VSEA and VMS as of the Distribution Date are based upon the goals of maximizing combined stockholder value for Varian's present stockholders while enabling VSEA to maintain sufficient cash flow to cover anticipated operating deficits caused by the current downturn in the semiconductor equipment market. Varian is required to renegotiate the terms of the Term Loans to permit 50% of the outstanding indebtedness under the Term Loans to be assumed by IB in connection with the Distribution. The Term Loans contain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results of the borrower. In addition, the Notes Payable may, as a result of the Internal Transfers and debt allocation provisions of the Distribution Agreement, remain outstanding as direct and indirect obligations of IB as of the Distribution Date. Based on the outstanding indebtedness of Varian under the Term Loans and Notes Payable as of October 2, 1998 and Varian's projected operating results, certain other transactions and scheduled debt repayments through the Distribution Date, it is anticipated that at the Distribution Date, IB will have between $50 million and $100 million of outstanding indebtedness under the Term Loans and Notes Payable. It is anticipated that in connection with the Distribution, IB will be entitled to a cash contribution from Varian so that as of the time of the Distribution, IB will have Net Debt equal to approximately 50% of the aggregate Net Debt of IB and VMS, subject to such adjustments as may be necessary to provide VMS with a Net Worth of between 40% and 50% of the aggregate Net Worth of IB and VMS. Based on the assumptions stated therein, the allocation of indebtedness to IB at the Distribution Date should approximate the amounts reflected in "Forecasted Capitalization." Management of IB believes that there is sufficient financing capability in respect of IB to accomplish the contemplated allocation of indebtedness. See "Forecasted Capitalization." In connection with the Distribution, Varian intends to sell its long-term leasehold interest in certain of its Palo Alto facilities, together with the related buildings and other corporate assets, from which it expects to receive proceeds of $55 million in the aggregate. In addition, Varian will be required to pay the net expenses associated with the Internal Transfers and Distribution, estimated at approximately $50 million. IB is entitled to receive approximately 50% of the estimated proceeds, if any, to be received by VMS after the Distribution from the sales of these facilities and assets and is required to pay approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). IB may enter into a credit facility for working capital and other general corporate purposes. The credit facility may contain certain customary financial and operating covenants, including restrictions upon incurring indebtedness and liens, making certain fundamental changes, selling assets and paying dividends. It is not expected that IB will have any outstanding borrowings under its credit facility as of the Distribution. 65 DESCRIPTION OF THE CAPITAL STOCK General Pursuant to IB's Certificate of Incorporation which will be in effect at the time of the Distribution, the authorized capital stock of IB will consist of (i) 99,000,000 shares of IB Common Stock of which approximately 29,909,061 million shares will be issued and outstanding upon consummation of the Distribution (based on the number of shares of Varian Common Stock outstanding as of December 15, 1998) and (ii) 1,000,000 shares of preferred stock, $.01 par value per share ("IB Preferred Stock"), none of which will be issued and outstanding upon consummation of the Distribution. All outstanding shares of IB Common Stock are, and the shares to be issued in the Distribution will be, validly issued, fully paid and nonassessable. Common Stock Each holder of IB Common Stock is entitled to one vote for each share owned of record on all matters submitted to a vote of stockholders. There are no cumulative voting rights. Accordingly, the holders of a majority of the shares voting for the election of directors can elect all the directors if they choose to do so, subject to any voting rights of holders of IB Preferred Stock to elect directors. Subject to the preferential rights of any outstanding series of IB Preferred Stock, and to the restrictions on payment of dividends imposed by the Term Loans and any credit facilities that may be entered into by IB, the holders of IB Common Stock will be entitled to such dividends as may be declared from time to time by the IB Board from funds legally available therefor, and will be entitled, after payment of all prior claims, to receive pro rata all assets of IB upon the liquidation, dissolution or winding up of IB. Holders of IB Common Stock have no redemption or conversion rights or preemptive rights to purchase or subscribe for securities of IB. Certain provisions of the Certificate of Incorporation and By-Laws of IB that will be in effect at the time of the Distribution may have the effect of making more difficult an acquisition of control of IB in a transaction not approved by the IB Board. See "Delaware Law and Certain Charter and By-Law Provisions." IB has applied for quotation of the IB Common Stock on the Nasdaq National Market under the symbol "VARI." Preferred Stock The authorized capital stock of IB includes shares of Preferred Stock, none of which are currently issued or outstanding. The IB Board is authorized to divide the Preferred Stock into series and, with respect to each series, to determine the preferences and rights and the qualifications, limitations or restrictions thereof, including the dividend rights, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions, the number of shares constituting the series and the designation of such series. The IB Board could, without stockholder approval, issue Preferred Stock with voting and other rights that could adversely affect the voting power of the holders of IB Common Stock and which could have certain anti-takeover effects. If, as anticipated, the IB Board adopts a rights plan, it will authorize shares of Participating Preferred (the "Participating Preferred"). For a description of the rights, powers and preferences of the Participating Preferred for IB, see " - Rights Plan." Rights Plan It is anticipated that the IB Board will adopt the Rights Plan pursuant to which one right (a "Right") to purchase one one-thousandth of a share of Participating Preferred at a purchase price (substantially above the expected current trading value for IB) to be determined, subject to adjustment, would be distributed with the IB Common Stock in the Distribution. The Rights will be issuable on the terms and subject to the conditions set forth in the Rights Plan. The Rights will expire no later than on the tenth anniversary of the record date for the dividend in 2009. The Rights will be exercisable on the earlier to occur of (i) the first date of public announcement (or such earlier or later date as the IB Board may determine) that a person or "group" has acquired beneficial ownership of 15% or more of the outstanding 66 IB Common Stock (an "Acquiring Person") and (ii) ten business days (or such later date as the IB Board may determine) following the commencement of a tender or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person. If any person or group becomes an Acquiring Person or commences a tender or exchange offer upon consummation of which such person or group would become an Acquiring Person, each Right not owned by such Acquiring Person or certain related parties would entitle its holder to purchase, at the Right's then current exercise price, shares of IB Common Stock, or, in the discretion of the IB Board, shares of Participating Preferred, having a value equal to twice the Right's then current exercise price. The effect would be to significantly dilute the equity interest of the Acquiring Person. In addition, if, after a person or group becomes an Acquiring Person, IB is involved in a merger or other business combination transaction in which (i) the holders of all of the outstanding IB Common Stock immediately prior to the consummation of the transaction are not the holders of the surviving corporation's voting power or (ii) more than 50% of IB's assets or earning power is sold or transferred, each Right will entitle its holder to purchase, at the Right's then current exercise price, common shares of the acquiring company having a value equal to twice the Right's then current exercise price. The purchase price payable, and the shares issuable, upon exercise of the Rights will be subject to adjustment from time to time as specified in the Rights Plan. IB will generally be entitled to redeem the Rights in whole, but not in part, at $0.001 per Right at any time prior to the earlier to occur of (i) a person becoming an Acquiring Person or (ii) expiration of the Rights. Shares of Participating Preferred purchasable upon exercise of the Rights will not be redeemable and will be designed so that each one one-thousandth of a share has economic and voting terms similar to one share of IB Common Stock. Each share of Participating Preferred will be entitled to a minimum preferential quarterly dividend payment of $2.50 per share but, if greater, will be entitled to an aggregate dividend per share of 1,000 times the dividend declared per share of IB Common Stock. In the event of liquidation of IB, the holders of Participating Preferred will be entitled to a minimum preferential liquidation payment of $100.00, provided that they will be entitled to an aggregate payment per share of at least 1,000 times the aggregate payment made per share of IB Common Stock. Each share of Participating Preferred will have one thousand votes, voting together with the IB Common Stock. These rights are protected by customary anti-dilution provisions. Transfer Agent and Rights Agent The transfer agent for the IB Common Stock is First Chicago Trust Company of New York. It is expected that First Chicago Trust Company of New York will also be the Rights Agent under the Rights Plan. 67 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Certificate of Incorporation of IB that will be in effect at the time of the Distribution (the "IB Charter") will provide that a director will not be personally liable to IB or its stockholders for monetary damages for any breach of fiduciary duty as a director, except in certain cases where liability is mandated by the DGCL. The IB Charter and/or By-Laws of IB that will be in effect as of the Distribution also provide for indemnification, to the fullest extent permitted by law, of any person who is or was involved in any manner in any pending, threatened or completed investigation, claim or other proceeding by reason of the fact that such person is or was a director, officer, employee or agent of IB, or, at the request of IB, is or was serving as a director, officer, employee or agent of another entity, against all expenses, liabilities, losses and claims incurred or suffered by such person in connection with the investigation, claim or other proceeding. IB has entered into, or intends to enter into, agreements to provide indemnification for directors and certain officers in addition to the indemnification provided for in the IB Charter and By-Laws. These agreements, among other things, will indemnify directors and certain officers to the fullest extent permitted by law for certain expenses (including attorneys' fees) and all losses, claims, liabilities, judgments, fines and settlement amounts incurred by such person arising out of or in connection with such person's service as a director or officer of IB or another entity for which such person was serving as an officer or director at the request of IB. Other than as described herein, there is no pending litigation or proceeding involving a director, officer, employee or other agent of IB or any other entity as to which indemnification is being sought under these provisions from IB, and IB is not aware of any pending or threatened litigation that may result in claims for indemnification under these provisions by a director, officer, employee or other agent. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Delaware Law IB is subject to the provisions of Section 203 of the DGCL ("Section 203"). In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more of the corporation's voting stock. Under Section 203, a business combination between the corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions: (i) the board of directors must have previously approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; or (ii) on consummation of the transaction that resulted in the stockholders becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation, outstanding at the time the transaction commenced (excluding, for purposes of determining the number of shares outstanding, shares owned by (a) persons who are directors and also officers and (b) employee stock plans, in certain instances); or (iii) the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Certain Charter and By-Law Provisions The IB Charter will contain provisions that will make more difficult the acquisition of control of IB by means of a tender offer, open market purchases, a proxy fight or otherwise that are not approved by the IB Board. The IB By- Laws will also contain provisions that could have an anti-takeover effect. The purposes of such provisions of the IB Charter and By-Laws are to discourage certain types of transactions, described below, which may involve an actual or threatened change of control of IB and to encourage persons seeking to acquire control of IB to negotiate the terms of any proposed business combination or offer with the IB Board. The provisions are designed to reduce the vulnerability of IB to an unsolicited proposal for a takeover that does not contemplate the acquisition of all outstanding shares or is otherwise unfair to stockholders of IB, or an unsolicited proposal for the restructuring or sale of all or part of IB. IB believes that, as a general rule, such proposals would not be in the best 68 interests of IB or its stockholders. These provisions will help ensure that the IB Board, if confronted by a surprise proposal from a third party which has acquired a block of stock, will have sufficient time to review the proposal and appropriate alternatives to the proposal and to act in what it believes to be the best interests of the stockholders. There has been a marked increase in hostile takeover activity during the last several years. IB believes that the provisions discussed herein may provide some measure of protection for stockholders against certain potentially coercive takeover tactics. Such takeover tactics include the accumulation of substantial stock positions in public companies by third parties as a prelude to proposing a takeover, a restructuring or sale of all or part of the company or another similar extraordinary corporate action. Such actions are often undertaken by a third party without advance notice to, or consultation with, the management or board of directors of a company. In many cases, the purchaser seeks representation on a company's board of directors in order to increase the likelihood that its proposal will be implemented by a company. If a company resists the efforts of the purchaser to obtain representation on the company's board, a purchaser may commence a proxy contest to have its nominees elected to the board of directors in place of certain directors or in place of the entire board of directors. In some cases, a purchaser may not truly be interested in taking over a company, but may use the threat of a proxy fight and/or a bid to take over a company as a means of forcing the company to repurchase its equity position at a substantial premium over market price. IB believes that the threat of imminent removal of the IB management or IB Board in such situations would severely curtail the ability of management or the IB Board to negotiate effectively with such purchasers. Management or the IB Board would be deprived of the time and information necessary to evaluate the takeover proposal, to study alternative proposals and to help ensure that the best price is obtained in any transaction involving IB that may ultimately be undertaken. If the real purpose of a takeover bid were to force IB to repurchase an accumulated stock interest at a premium price, management or the IB Board would face the risk that, if it did not repurchase the purchaser's stock interest, IB's business and management would be disrupted, perhaps irreparably. These provisions, individually and collectively, may impede or discourage a merger, tender offer or proxy fight, even if such transaction or occurrence may be favorable to the interests of the stockholders, and may delay or frustrate the assumption of control by a holder of a large block of IB Common Stock and the removal of incumbent management, even if such removal might be beneficial to stockholders. Furthermore, these provisions may deter or could be used to frustrate a future takeover attempt which is not approved by the incumbent board of directors, but which the holders of a majority of the shares may deem to be in their best interests or in which stockholders may receive a substantial premium for their stock over prevailing market prices of such stock. By discouraging takeover attempts these provisions might have the incidental effect of inhibiting certain changes in management (some or all of the members of which might be replaced in the course of a change of control) and also the temporary fluctuations in the market price of the stock which often result from actual and rumored takeover attempts. Set forth below is a description of such provisions in the IB Charter and By- Laws. Such description is intended as a summary only and is qualified in its entirety by reference to the IB Charter and By-Laws, which have been filed as exhibits to the Registration Statement. Capitalized terms used and not defined herein are defined in the IB Charter or By-Laws. Classified Boards of Directors The IB Charter provides for the IB Board to be divided into three classes serving staggered terms. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the board of directors in a relatively short period of time. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the board of directors. Such a delay may help ensure that the IB Board, if confronted by a stockholder's attempt to force a stock repurchase at a premium above market price, a proxy contest or an extraordinary corporate transaction, will have sufficient time to review the proposal and appropriate alternatives to the proposal and to act in what they believe are the best interests of the stockholders. IB also believes that a classified board of directors will help to assure the continuity and stability of the IB Board and the business strategies and policies of IB as determined by the IB Board, because generally a majority of the directors at any given time will have had prior experience as directors of IB. 69 The classified board provision could have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of IB as the case may be, even though such an attempt might be beneficial to IB and its stockholders. The classified board provision could thus increase the likelihood that incumbent directors will retain their positions. Number of Directors; Removal; Filling Vacancies The IB Charter will provide that the specific number of directors (which must be at least three) shall be fixed by resolution of the IB Board. In addition, the IB Charter will provide that, subject to any rights of the holders of preferred stock, only a majority of the IB Board then in office shall have the authority to fill any vacancies on the IB Board. Accordingly, the existing board members could prevent any stockholder from obtaining majority representation on the respective IB Board by enlarging the IB Board and filling the new directorships with its own nominees. Moreover, the IB Charter will provide that directors may be removed only for cause by the affirmative vote of holders of at least a majority of the voting power of all of the then-outstanding shares of IB Common Stock. This provision, when coupled with the provisions of the IB Charter authorizing only the IB Board to fill vacant directorships, would preclude stockholders from removing incumbent directors without cause and filling the vacancies created by such removal with their own nominees. These provisions reflect existing Delaware law absent a contrary provision in a company's charter. Limitations on Stockholder Action by Written Consent; Special Meetings Under the DGCL, unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken by the stockholders of a Delaware corporation may be taken without a meeting, without prior notice and without a stockholder vote if a written consent setting forth the action to be taken is signed by the holders of outstanding stock having the requisite number of shares that would be necessary to authorize such action at a meeting at which all shares entitled to vote thereon were present and voted. The IB Charter will provide that stockholder action can be taken only at an annual or special meeting of stockholders, and prohibit stockholder action by written consent in lieu of a meeting. The IB By-Laws will provide that, subject to the rights of holders of any series of Preferred Stock, special meetings of stockholders can be called only by the Chairman of the Board, the Chief Executive Officer, the Vice Chairman of the Board (if any), the President or the IB Board. Stockholders are not permitted to call a special meeting or to require that the IB Board call a special meeting of stockholders. Moreover, the business permitted to be conducted at any special meeting of stockholders will be limited to the purpose or purposes of the meeting as stated in the notice of the meeting. The provisions of the IB Charter restricting stockholder action by written consent may have the effect of delaying consideration of a stockholder proposal until the next annual meeting unless a special meeting is called by the Chairman of the Board, the Chief Executive Officer, the Vice Chairman of the Board (if any), the President or pursuant to a board resolution. These provisions would also prevent the holders of a majority of the voting power of IB Common Stock from using the written consent procedure to take stockholder action and from taking action by consent without giving all the stockholders entitled to vote on a proposed action the opportunity to participate in determining such proposed action. Moreover, a stockholder could not force stockholder consideration of a proposal over the opposition of the IB Board by calling a special meeting of stockholders prior to the time the IB Board believed such consideration to be appropriate. Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals The IB By-Laws will establish an advance notice procedure with regard to the nomination, other than by or at the direction of the IB Board, of candidates for election as directors (the "Nomination Procedure") and with regard to certain matters to be brought before an annual meeting of stockholders (the "Business Procedure"). Pursuant to the IB By-Laws, the Nomination Procedure provides that only persons who are nominated by, or at the direction of, the IB Board or by a stockholder of record who has given timely prior written notice to the Secretary prior to the meeting at which directors are to be elected will be eligible for election as directors. The Business Procedure provides that at an annual meeting only such business can be conducted as has been brought before the meeting pursuant to the notice of the meeting, by, or at the direction of, the IB Board or by a stockholder of record who has 70 given timely prior written notice to the Secretary of such stockholder's intention to bring such business before the meeting. To be timely, notice must generally be received by not less than 60 days nor more than 90 days prior to the first anniversary of the mailing of the proxy statement in connection with the previous year's annual meeting. For notice of a stockholder nomination to be made at a special meeting at which directors are to be elected to be timely, such notice must be received not earlier than the 90th day before such meeting and not later than the later of (1) the 60th day prior to such meeting and (2) the tenth day after public announcement of the date of such meeting is first made. Under the Nomination Procedure, notice from a stockholder who proposes to nominate a person at a meeting for election as director must contain certain information about that person, including such person's consent to be nominated and such information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee, and certain information about the stockholder proposing to nominate that person or the beneficial owner, if any, on whose behalf the nomination is made. Under the Business Procedure, notice relating to the conduct of business must contain certain information about such business and about the stockholder who proposes to bring the business before the meeting including a brief description of the business the stockholder proposes to bring before the meeting, the reasons for conducting such business at such meeting, the class and number of shares of stock beneficially owned by such stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made, and any material interest of such stockholder, and such beneficial owner in the business so proposed. If the Chairman or other officer presiding at a meeting determines that a person was not nominated in accordance with the Nomination Procedure, such person will not be eligible for election as a director, or if he or she determines that other business was not properly brought before such meeting in accordance with the Business Procedure, such business will not be conducted at such meeting. The purpose of the Nomination Procedure is, by requiring advance notice of nominations by stockholders, to afford the IB Board a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the IB Board, to inform stockholders about such qualifications. The purpose of the Business Procedure is, by requiring advance notice of proposed business, to provide a more orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the IB Board to provide the IB Board with a meaningful opportunity to inform stockholders, prior to such meeting, of any business proposed to be conducted at such meetings, together with any recommendation as to the IB Board's position or belief as to action to be taken with respect to such business, so as to enable stockholders better to determine whether they desire to attend such meeting or grant a proxy to the IB Board as to the disposition of any such business. Although the IB By-Laws will not give the IB Board any power to approve or disapprove stockholder nominations for the election of directors or of any other business desired by a stockholder to be conducted at an annual meeting, the By-Laws may have the effect of precluding a nomination for the election of directors or precluding the conducting of business at a particular annual meeting if the proper procedures are not followed, and may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of IB, even if the conduct of such solicitation or such attempt might be beneficial to IB and its stockholders. Amendment of Certain Charter and By-Law Provisions The IB Charter will contain provisions requiring the affirmative vote of the holders of at least 66 2/3% of the outstanding IB Common Stock to amend the provisions of such charter pertaining to classification of the IB Board, filling vacancies in the IB Board, removal of directors and the requirement that stockholders can act only at annual or special meetings and not by written consent. The IB Charter and By-Laws will also require the vote of at least 66 2/3% of the outstanding IB Common Stock for stockholders to adopt, amend or repeal any provision of the IB By-Laws. These provisions will make it more difficult for stockholders to change the IB Charter and By-Laws, including changes designed to facilitate the exercise of control over IB. In addition, the requirement for approval by at least a 66 2/3% stockholder vote will enable the holders of a minority of IB's capital stock to prevent holders of a less than 66 2/3% majority from amending the indicated provisions of the IB Charter and By-Laws. 71 Preferred Stock The IB Charter will authorize the IB Board to establish series of Preferred Stock and to determine, with respect to any series of Preferred Stock, the voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as are stated in the board resolutions providing for such series. The number of authorized shares of IB Preferred Stock will be 1,000,000. IB believes that the availability of such Preferred Stock will provide IB with increased flexibility in structuring possible future financing and acquisitions, and in meeting other corporate needs which might arise. Having such authorized shares available for issuance will allow IB to issue shares of Preferred Stock without the expense and delay of a special stockholders' meeting. The authorized shares of Preferred Stock, as well as shares of IB Common Stock, will be available for issuance without further action by stockholders, unless such action is required by applicable law or the rules of any stock exchange on which the securities may be listed. Although the IB Board does not have any intention at the present time of doing so, it could issue a series of Preferred Stock that could, subject to certain limitations imposed by the securities laws and stock exchange rules, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. For instance, such series of Preferred Stock might impede a business combination by including class-voting rights that would enable the holder to block such a transaction. The IB Board will make any determination to issue such shares based on its judgment as to the best interests of IB and its then existing stockholders. The board, in so acting, could issue Preferred Stock having terms which could discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then-market price of such stock. The authorized and unissued Preferred Stock of IB as well as the authorized and unissued IB Common Stock would be available, and the IB Charter explicitly authorizes use of capital stock, for the above purposes. In connection with the Rights Plan, the IB Board will authorize shares of Participating Preferred. No such shares of Participating Preferred are currently outstanding. For a description of the rights, powers and preferences of the Participating Preferred, see "Description of the Capital Stock - Rights Plan." Common Stock The IB Charter will authorize the IB Board to issue up to 99,000,000 shares of IB Common Stock. The authorized but unissued IB Common Stock will provide IB with the ability to meet future capital needs and to provide shares for possible acquisitions and stock dividends or stock splits. The IB Board would have the ability, in the event of a proposed merger, tender offer or other attempt to gain control of IB that was not approved by such board, to issue additional common stock that would dilute the stock ownership of the acquiror. Rights Plan IB will enter into the Rights Plan. The Rights to be distributed in accordance with the Rights Plan will have certain anti-takeover effects. Each of the Rights will cause substantial dilution to a person or group that attempts to acquire IB and thereby effect a change in the composition of the IB Board on terms not approved by the IB Board, including by means of a tender offer at a premium to the market price. The Rights should not interfere with any merger or business combination approved by the IB Board, since the Rights may be redeemed by IB, at the applicable redemption price, prior to the time that a person or group has become an Acquiring Person. See "Description of the Capital Stock - Rights Plan." 72 AVAILABLE INFORMATION IB has filed with the Commission a Registration Statement under the Exchange Act with respect to the IB Common Stock being received by the stockholders of Varian Common Stock in the Distribution. This Information Statement does not contain all of the information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Statements made in this Information Statement as to the contents of any contract, agreement or other documents referred to herein are not necessarily complete. With respect to each such contract, agreement or other documents filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto filed by IB with the Commission may be inspected at the public reference facilities of the Commission listed below. After the Distribution, IB will be subject to the information requirement of the Exchange Act, and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material maybe obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. IB intends to furnish its stockholders with annual reports containing consolidated financial statements (beginning with fiscal year 1999) audited by independent accountants. No person is authorized by Varian or IB to give any information or to make any representations other than those contained in this Information Statement and, if given or made, such information or representations must not be relied upon as having been authorized. 73 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Instruments Business of Varian Associates, Inc. - ----------------------------------------------- Report of Independent Accountants........................................ F-2 Combined Statements of Earnings for the three fiscal years ended October 2, 1998................................................................. F-3 Combined Balance Sheets at October 2, 1998 and September 26, 1997........ F-4 Combined Statements of Divisional Equity for the three fiscal years ended October 2, 1998......................................................... F-5 Combined Statements of Cash Flows for the three fiscal years ended October 2, 1998......................................................... F-6 Notes to Combined Financial Statements................................... F-7 Report of Independent Accountants on Financial Statement Schedule........ S-I Schedule II - Valuation and Qualifying Accounts.......................... S-II
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Varian Associates, Inc.: In our opinion, the accompanying combined balance sheets and the related combined statements of earnings, divisional equity, and cash flows present fairly, in all material respects, the financial position of the Instruments Business of Varian Associates, Inc. (the "Company") at October 2, 1998 and September 26, 1997, and the results of its operations and its cash flows for each of the three years in the period ended October 2, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP ------------------------------- PricewaterhouseCoopers LLP San Jose, California October 31, 1998 F-2 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Combined Statements of Earnings
Fiscal Years -------------------------- 1998 1997 1996 -------- -------- -------- (In thousands, except per share amounts) Sales............................................... $557,770 $541,946 $504,394 -------- -------- -------- Operating Costs and Expenses Cost of sales....................................... 336,387 330,845 310,753 Research and development............................ 29,620 31,987 29,897 Marketing........................................... 113,854 110,009 107,244 General and administrative.......................... 38,745 42,303 45,053 -------- -------- -------- Total operating costs and expenses.................. 518,606 515,144 492,947 -------- -------- -------- Operating Earnings before Taxes..................... 39,164 26,802 11,447 Taxes on earnings................................... 15,736 12,597 5,277 -------- -------- -------- Net Earnings........................................ $ 23,428 $ 14,205 $ 6,170 ======== ======== ======== Pro Forma Net Earnings Per Share.................... $ 0.78 $ 0.47 $ 0.20 ======== ======== ======== Shares used in pro forma per share computations..... 29,910 30,451 31,024 ======== ======== ========
See accompanying Notes to the Combined Financial Statements. F-3 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Combined Balance Sheets
Fiscal Year-End -------------------- 1998 1997 --------- --------- (Dollars in thousands) ASSETS Current Assets Accounts receivable...................................... $ 143,836 $ 131,641 Inventories.............................................. 71,575 64,797 Other current assets..................................... 26,260 24,723 --------- --------- Total Current Assets..................................... 241,671 221,161 --------- --------- Property, Plant, and Equipment........................... 219,385 201,373 Accumulated depreciation and amortization................ (124,666) (114,448) --------- --------- Net Property, Plant, and Equipment....................... 94,719 86,925 --------- --------- Other Assets............................................. 67,709 49,820 --------- --------- Total Assets............................................. $ 404,099 $ 357,906 ========= ========= LIABILITIES AND DIVISIONAL EQUITY Current Liabilities Accounts payable - trade................................. $ 34,320 $ 34,968 Accrued expenses......................................... 102,470 92,704 Product warranty......................................... 7,608 7,173 Advance payments from customers.......................... 5,180 9,214 --------- --------- Total Current Liabilities................................ 149,578 144,059 Long-Term Accrued Expenses............................... 6,862 6,245 Deferred Taxes........................................... 4,192 4,306 --------- --------- Total Liabilities........................................ 160,632 154,610 --------- --------- Commitments and Contingencies (Notes 9 and 10) Divisional Equity........................................ 243,467 203,296 --------- --------- Total Liabilities and Divisional Equity.................. $ 404,099 $ 357,906 ========= =========
See accompanying Notes to the Combined Financial Statements. F-4 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Combined Statements of Divisional Equity
(Dollars in thousands) Balance, Fiscal Year-End, 1995...................................... $150,813 Net earnings for the year........................................... 6,170 Net transfers (to) from Varian Associates, Inc...................... (2,090) -------- Balance, Fiscal Year-End, 1996...................................... 154,893 Net earnings for the year........................................... 14,205 Net transfers (to) from Varian Associates, Inc...................... 34,198 -------- Balance, Fiscal Year-End, 1997...................................... 203,296 Net earnings for the year........................................... 23,428 Net transfers (to) from Varian Associates, Inc...................... 16,743 -------- Balance, Fiscal Year-End, 1998...................................... $243,467 ========
See accompanying Notes to the Combined Financial Statements. F-5 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Combined Statements of Cash Flows
Fiscal Years ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Operating Activities Net Cash Provided by Operating Activities........ $ 36,856 $ 16,627 $ 22,779 -------- -------- -------- Investing Activities Purchase of property, plant, and equipment....... (19,358) (20,803) (17,915) Purchase of businesses, net of cash acquired..... (34,707) (30,998) (4,396) -------- -------- -------- Net Cash Used in Investing Activities............ (54,065) (51,801) (22,311) -------- -------- -------- Financing Activities Net transfers (to) from Varian Associates, Inc... 16,743 34,198 (2,090) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities...................................... 16,743 34,198 (2,090) -------- -------- -------- Effects of Exchange Rate Changes on Cash......... 466 976 1,622 -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents..................................... -- -- -- Cash and Cash Equivalents at Beginning of Fiscal Year............................................ -- -- -- -------- -------- -------- Cash and Cash Equivalents at End of Fiscal Year.. $ -- $ -- $ -- ======== ======== ======== Detail of Net Cash Provided by Operating Activities Net Earnings..................................... $ 23,428 $ 14,205 $ 6,170 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation..................................... 17,541 19,449 15,975 Deferred taxes................................... (2,225) (811) (458) Changes in assets and liabilities Accounts receivable.............................. 2,063 (15,201) (12,997) Inventories...................................... (1,269) (6,172) (3,942) Other current assets............................. 98 (125) 1,689 Accounts payable--trade.......................... (9,012) 7,531 2,884 Accrued expenses................................. 958 3,893 (750) Product warranty................................. 637 1,578 714 Advance payments from customers.................. (4,511) (3,384) 6,425 Long-term accrued expenses....................... 617 284 5,961 Other............................................ 8,531 (4,620) 1,108 -------- -------- -------- Net Cash Provided by Operating Activities........ $ 36,856 $ 16,627 $ 22,779 ======== ======== ========
See accompanying Notes to the Combined Financial Statements. F-6 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements Note 1. Basis of Presentation On August 21, 1998, the Board of Directors of Varian Associates, Inc. ("VAI") announced a plan to reorganize into three publicly traded independent companies by spinning off two of its businesses to stockholders in a tax-free distribution (the "Distribution"). The Distribution is subject to final approval by VAI's Board of Directors. Among other things, this approval is conditioned upon the receipt of a ruling from the Internal Revenue Service that the spin-off of the two businesses will be a tax free transaction for VAI stockholders, VAI, the Semiconductor Equipment Business of VAI ("VSEA"), and the Instruments Business of VAI (the "Company") and upon the approval of the plan for the Distribution by VAI stockholders. Under the plan for the Distribution, the Company and VSEA will be incorporated as Varian, Inc. and Varian Semiconductor Equipment Associates, Inc., respectively, and will become publicly traded companies. Also under the plan for the Distribution, each of VAI and the Company will have between $50 and $100 million of outstanding indebtedness under VAI's term loans and notes payable, and VAI will contribute cash to VSEA so that at the Distribution, VSEA will have approximately $100 million in cash and cash equivalents and consolidated debt not exceeding $5 million. The Company will include VAI's business units that manufacture and sell analytical and research instrumentation and related equipment for studying the chemical composition of substances. Significant products of the VAI business units that will comprise the Company include nuclear magnetic resonance instruments, chromatography systems, optical spectroscopy instruments, vacuum products, and printed wiring assemblies. The Company will be incorporated in Delaware in December 1998, with 99,000,000 shares of common stock and 1,000,000 shares of preferred stock authorized. Upon incorporation, all outstanding shares of the Company's common stock will be owned by VAI. For purposes of these financial statements and notes to these financial statements, the Company includes the assets, liabilities, operating results and cash flows of the VAI business units described above that will comprise the Company under the plan for the Distribution. The combined financial statements of the Company have been prepared using VAI's historical bases in the assets and liabilities and historical results of operations of the Company's businesses, except for the accounting for income taxes (see Note 2). The combined financial statements of the Company include the accounts of the Company's businesses after elimination of inter-business balances and transactions. The Company's fiscal years reported are the 52- or 53-week period ended on the Friday nearest September 30. Fiscal year 1998 comprises the 53-week period ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week periods ended on September 26, 1997 and September 27, 1996, respectively. The combined financial statements generally reflect the financial position, operating results, and cash flows of the Company as if it were a separate entity for all periods presented. Where it was practicable to identify specifically VAI corporate amounts with the activities of the Company, such amounts have been included in the accounts of the Company. The combined financial statements also include allocations of certain VAI corporate assets (including pension assets), liabilities (including profit sharing and pension benefits), and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury, and other VAI corporate overhead) to the Company. These amounts have been allocated to the Company on the basis that is considered by management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by the Company. Typical measures and activity indicators used for allocation purposes include headcount, sales revenue, and payroll expense. Management believes that the methods used to allocate these amounts are reasonable. However, these allocations are not necessarily indicative of the amounts that would have been or that will be recorded by the Company on a stand-alone basis. For purposes of governing certain of the ongoing relationships between the Company, VAI, and VSEA after the Distribution and to provide for an orderly transition, the Company, VAI, and VSEA have entered or will enter F-7 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) into various agreements including a distribution agreement, tax sharing agreement, employee benefits allocation agreement, intellectual property agreement, and transition services agreement (collectively, the "Distribution Related Agreements"). Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Foreign Currency Translation For non-U.S. operations, the U.S. dollar is the functional currency. Monetary assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. Nonmonetary assets such as inventories and property, plant, and equipment are translated at historical rates. Income and expense items are translated at effective rates of exchange prevailing during each year, except that inventories and depreciation charged to operations are translated at historical rates. The aggregate exchange loss included in general and administrative expenses for fiscal years 1998, 1997, and 1996 was $2.0 million, $2.6 million, and $.3 million, respectively. Revenue Recognition Sales and related costs of sales are recognized upon shipment of products.The Company's products are generally subject to warranty, and the Company provides for the estimated future costs of repair, replacement, or customer accommodation in costs of sales. Sales and related costs of sales under long- term contracts to commercial customers and the U.S. Government are recognized as units are delivered. Service revenue is recognized ratably over the period of the related contract. Legal Expenses The Company accrues estimated amounts for legal fees expected to be incurred in connection with loss contingencies. Financial Instruments The Company considers currency on hand, demand deposits, and all highly liquid debt securities with an original maturity of three months or less to be cash and cash equivalents. Financial instruments that potentially subject the Company to concentrations of credit risk comprise trade accounts receivable and forward exchange contracts. The Company sells its products and extends trade credit to a large number of customers, who are dispersed across many different industries and geographies. The Company performs ongoing credit evaluations of these customers and generally does not require collateral from them. Trade accounts receivable are stated net of allowances for doubtful accounts of $713,000 at the end of fiscal year 1998 and $321,000 at the end of fiscal year 1997. The Company enters into forward exchange contracts to mitigate the effects of operational (sales orders and purchase commitments) and balance sheet exposures to fluctuations in foreign currency exchange rates. The Company does not enter into forward exchange contracts for trading purposes. When the Company's foreign exchange contracts hedge operational exposure, the effects of movements in currency exchange rates on these instruments are recognized in F-8 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) income when the related revenues and expenses are recognized. All forward exchange contracts hedging operational exposure are designated and highly effective as hedges. The critical terms of all forward exchange contracts hedging operational exposure and of the forecasted transactions being hedged are substantially identical. Accordingly, the Company expects that changes in the fair value or cash flows of the hedging instruments and the hedged transactions (for the risk that is being hedged) will completely offset at the hedge's inception and on an ongoing basis. When foreign exchange contracts hedge balance sheet exposure, such effects are recognized in income when the exchange rate changes in accordance with the requirements for other foreign currency transactions. Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Any deferred gains or losses are included in accrued expenses in the balance sheet. If a hedging instrument is sold or terminated prior to maturity, gains and losses continue to be deferred until the hedged item is recognized in income. If a hedging instrument ceases to qualify as a hedge, any subsequent gains and losses are recognized currently in income. The Company's forward exchange contracts generally range from one to three months in original maturity. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the underlying items being hedged, forward exchange contracts do not subject the Company to risk that would otherwise result from changes in currency exchange rates. The Company's forward exchange contracts contain credit risk in that its banking counter- parties may be unable to meet the terms of the agreements. The Company seeks to minimize such risk by limiting its counter-parties to major financial institutions. Also, the potential risk of loss with any one party resulting from this type of credit risk is monitored by management of the Company. The fair value of forward exchange contracts generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account and approximating the current unrealized and realized gains or losses of open contracts. The notional amounts of forward exchange contracts are not a measure of the Company's exposure. Pro Forma Net Earnings per Share The computation of pro forma net earnings per share for fiscal years 1998, 1997, and 1996 is based on the weighted average number of shares of VAI common stock outstanding during the respective periods, reflecting the anticipated ratio of one share of Company common stock for each share of VAI common stock at the time of Distribution. Divisional Equity Divisional equity includes historical investments and advances from VAI, including net transfers to/from VAI, third party liabilities paid on behalf of the Company by VAI, amounts due from affiliates related to sales, amounts due to/from VAI for services and other charges, and current period net earnings of the Company. Interim Financial Statements (Unaudited) The unaudited condensed combined interim financial information reflects all adjustments, which consist of only normal, recurring adjustments, necessary to present fairly the results of operations of the Company for each fiscal quarter during fiscal years 1998 and 1997. Inventories Inventories are valued at the lower of cost or market (realizable value) using last-in, first-out (LIFO) cost for the U.S. inventories. All other inventories are valued principally at average cost. If the first-in, first-out (FIFO) method had been used for those operations valuing inventories on a LIFO basis, inventories would have been higher than reported by $13.7 million in fiscal 1998, $14.0 million in fiscal 1997, and $12.7 million in fiscal 1996. F-9 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight- line method for financial reporting purposes and accelerated methods for tax purposes. Machinery and equipment lives vary from 1 to 40 years, and buildings are depreciated from 3 to 40 years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is less. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from retirements or disposals are included in earnings from operations. Other Assets Goodwill, which is the excess of the cost of acquired businesses over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, is amortized on a straight-line basis over periods ranging from 3 to 40 years. Investments in affiliated companies over whose operations the Company has significant influence but not control are accounted for under the equity method. Impairment of Long-Lived Assets Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets and goodwill related to those assets may not be recoverable, the Company estimates the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Research and Development Company-sponsored research and development costs related to both present and future products are expensed currently. Costs related to research and development contracts are included in inventory and charged to cost of sales upon recognition of related revenue. Total expenditures on research and development for fiscal years 1998, 1997, and 1996, were $31.2 million, $33.1 million, and $31.2 million, respectively, of which $1.6 million, $1.1 million, and $1.3 million, respectively, were funded by customers. Taxes on Earnings The Company's operating results historically have been included in VAI's consolidated U.S. and state income tax returns and in tax returns of certain VAI foreign subsidiaries. Except for the utilization of foreign tax credits, the provision for income taxes in the Company's combined financial statements has been determined on a separate-return basis, under which the Company's provision for income taxes comprises its estimated tax liability and the change in its deferred income taxes. Foreign tax credits are benefited to the extent they were utilized in VAI's consolidated tax returns. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Income taxes paid on behalf of the Company by VAI are included in divisional equity. Effective after the Distribution, the Company will file separate income tax returns. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. It is effective for the Company's fiscal year 1999. The impact of the implementation of SFAS No. 130 on the combined financial statements of the Company has not yet been determined. F-10 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting (referred to as the "management" approach) and also requires interim reporting of segment information. It is effective for the Company's fiscal year 1999. The Company has not determined the impact of its implementation on the reporting of the Company's segment information. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and is effective for the Company's fiscal year 2000. The impact of the implementation of SFAS No. 133 on the combined financial statements of the Company has not yet been determined. Note 3. Balance Sheet Detail Inventories
1998 1997 ------ ------ (Dollars in millions) Raw materials and parts.......................................... $ 42.6 $ 54.3 Work in process.................................................. 8.9 6.4 Finished goods................................................... 20.1 4.1 ------ ------ Total Inventories.............................................. $ 71.6 $ 64.8 ====== ====== Property, Plant, and Equipment 1998 1997 ------ ------ (Dollars in millions) Land and land improvements....................................... $ 5.3 $ 5.1 Buildings........................................................ 76.8 65.0 Machinery and equipment.......................................... 135.4 127.3 Construction in progress......................................... 1.9 4.0 ------ ------ Total Property, Plant, and Equipment........................... $219.4 $201.4 ====== ====== Other Assets 1998 1997 ------ ------ (Dollars in millions) Goodwill......................................................... $ 66.1 $ 44.7 Less accumulated amortization.................................... 6.5 5.1 ------ ------ Net goodwill..................................................... 59.6 39.6 ------ ------ Other............................................................ 8.1 10.2 ------ ------ Total Other Assets............................................. $ 67.7 $ 49.8 ====== ======
Amortization expense for goodwill was $1.4 million, $1.0 million, and $0.5 million for fiscal years 1998, 1997, and 1996, respectively. F-11 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Accrued Expenses
1998 1997 ------ ----- (Dollars in millions) Payroll and employee benefits..................................... $ 33.1 $35.1 Foreign income taxes payable...................................... 19.2 13.6 Deferred income................................................... 14.7 13.1 Group and risk insurance.......................................... 7.7 7.8 Other............................................................. 27.8 23.1 ------ ----- Total Accrued Expenses.......................................... $102.5 $92.7 ====== =====
Note 4. Acquisitions In July 1998, the Company acquired all of the outstanding common stock of Chrompack International B.V. ("Chrompack") for approximately $28.9 million in cash and the extinguishment of debt. Chrompack is a manufacturer of chromatography products and analytical instruments used by scientific and industrial laboratories. This acquisition has been accounted for under the purchase method; accordingly, the Company's combined operating results include 100% of the operating results of Chrompack subsequent to the acquisition date. The Company is amortizing acquired goodwill of $20.9 million over 40 years. In June 1998, the Company acquired the outstanding minority ownership interest of Varian Iberica, S.L. ("Iberica") for approximately $6.7 million in cash. Iberica is engaged in the business of buying and selling scientific apparatuses, products for laboratories, and chemical and medical products in general. The acquisition of the minority ownership interest has been accounted for using the purchase method; accordingly, the Company's combined operating results include the operating results of Iberica subsequent to the acquisition date. The Company is amortizing acquired goodwill of $0.8 million over 13 years. In October 1996, the Company acquired the principal assets and properties of the high pressure liquid chromatography and columns business of Rainin Instrument Company, Inc. ("Rainin") for approximately $24.0 million in cash and the extinguishment of debt. This acquisition has been accounted for under the purchase method; accordingly, the Company's combined operating results include 100% of the operating results of Rainin subsequent to the acquisition date. The Company is amortizing acquired goodwill of $21.7 million over 40 years. Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effects of these acquisitions were not material on either an individual or an aggregated basis. F-12 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Note 5. Forward Exchange Contracts Forward exchange contracts outstanding and their unrealized gains and losses as of fiscal year-end 1998 are summarized as follows:
Notional Notional Value Value Unrealized Fair Purchased Sold Gain/(Loss) Value --------- -------- ---------- ----- (Dollars in thousands) Japanese yen............................. $ - $ 1,637 $ 5 $ 31 French francs............................ - 11,550 - (467) Canadian dollars......................... - 7,042 206 260 British pounds........................... 12,044 4,050 537 515 Italian lira............................. - 4,196 - (217) German marks............................. - 1,955 - (100) Spanish pesetas.......................... - 691 - (38) Korean won............................... - 283 - 1 Australian dollars....................... 6,396 - - 23 Swiss francs............................. 246 - - 10 Swedish kronor........................... 4,789 - - (5) ------- ------- ---- ----- Total.................................. $23,475 $31,404 $748 $ 13 ======= ======= ==== =====
Note 6. Employee Stock Plans Under VAI's Omnibus Stock and Employee Stock Purchase Plans, certain employees of the Company are eligible for the grant of stock options and restricted stock and are eligible to purchase VAI common stock. The exercise price for incentive and non-qualified stock options granted under the Omnibus Stock Plan may not be less than 100% of the fair market value of VAI common stock at the date of grant. Options granted are exercisable at such times and are subject to such restrictions and conditions as determined by the Organization and Compensation Committee of the Board of Directors of VAI, but no option shall be exercisable later than ten years from the date of grant. Options granted are generally exercisable in cumulative installments of one-third each year, commencing one year following the date of grant, and expire if not exercised within seven or ten years from the date of grant. Restricted stock grants may be awarded at prices ranging from 0% to 50% of the fair market value of VAI common stock and may be subject to restrictions on transferability and continued employment as determined by the Organization and Compensation Committee. Participants in the Employee Stock Purchase Plan are eligible to purchase VAI common stock at the lower of 85% of the closing market price of VAI common stock on the first trading day of the VAI fiscal quarter of the first trading day of the next VAI fiscal quarter. This discount is treated as equivalent to the cost of issuing common stock for financial reporting purposes. VAI intends to suspend the Employee Stock Purchase Plan prior to the Distribution. At fiscal year-end 1998, outstanding options for VAI common stock held by Company employees totaled approximately 958,000, of which approximately 506,000 had vested and were exercisable. At fiscal year-end 1998, the exercise prices of outstanding options range from $10.91 to $61.31. At fiscal year-end 1997, outstanding options for VAI common stock held by Company employees totaled approximately 740,000, of which approximately 332,000 had vested and were exercisable. At fiscal year-end 1997, the exercise prices of outstanding options range from $10.91 to $61.31. At fiscal year-end 1996, outstanding options for VAI common stock held by Company employees totaled approximately 748,000, of which approximately 327,000 had vested and were exercisable. At fiscal year-end 1996, the exercise prices of outstanding options range from $10.60 to $61.31. F-13 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Immediately following the Distribution, it is anticipated that the majority of outstanding awards under the VAI Omnibus Stock Plan held by Company employees will be replaced by substitute awards under the IB Omnibus Stock Plan. The substitute awards will have the same ratio of the exercise price per share to the market value per share, the same aggregate difference between market value and exercise price, and the same vesting provisions, option periods, and other terms and conditions as the awards they replace. The Company will comply with the pro forma disclosure requirements set forth in SFAS No. 123, "Accounting for Stock-Based Compensation," once the number of shares and related exercise prices under substitute awards are determined. These determinations cannot be made until subsequent to the Distribution. Note 7. Retirement Plans Certain employees of the Company in the United States and Canada are eligible to participate in the VAI-sponsored defined contribution plan. The Company's major obligation is to contribute an amount based on a percentage of each participant's base pay. The Company also contributes 5% of its combined operating earnings, as adjusted for discretionary items, as retirement plan profit sharing. Participants are entitled, upon termination or retirement, to their portion of the retirement fund assets, which are held by a third-party trustee. Included in the accompanying combined statements of earnings is an allocation of total pension expense for Company employees under the VAI- sponsored defined contribution plan of $5.9 million, $5.6 million, and $6.6 million, for fiscal years 1998, 1997, and 1996, respectively. At the Distribution, the Company will assume responsibility for pension and postretirement benefits for active employees of the Company; the responsibility for all others, principally retirees of VAI, will remain with VAI. An allocation of assets and liabilities for foreign defined benefit pension, postemployment, and postretirement benefits, which are not material to the Company's financial statements, has been included in these combined financial statements. Note 8. Taxes on Earnings Taxes on earnings from operations are as follows:
1998 1997 1996 ----- ----- ----- (Dollars in millions) Current U.S. federal............................................ $ -- $ 0.4 $ -- Non-U.S................................................. 16.7 11.4 9.8 State and local......................................... 1.5 1.6 0.5 ----- ----- ----- Total current......................................... 18.2 13.4 10.3 ----- ----- ----- Deferred U.S. federal............................................ (2.7) (1.1) (4.6) Non-U.S................................................. 0.2 0.3 (0.4) ----- ----- ----- Total deferred........................................ (2.5) (0.8) (5.0) ----- ----- ----- Taxes on Earnings......................................... $15.7 $12.6 $ 5.3 ===== ===== =====
F-14 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Significant items making up deferred tax assets and liabilities are as follows:
1998 1997 ----- ----- (Dollars in millions) Assets: Product warranty................................................. $ 1.9 $ 1.5 Deferred compensation............................................ 1.3 2.5 Inventory adjustments............................................ 8.6 5.2 Deferred income.................................................. 3.7 3.6 Other............................................................ 4.0 5.2 ----- ----- 19.5 18.0 ----- ----- Liabilities: Accelerated depreciation......................................... 3.1 3.2 Other............................................................ 1.1 1.1 ----- ----- 4.2 4.3 ----- ----- Net deferred tax asset......................................... $15.3 $13.7 ===== =====
The classification of the net deferred tax asset on the combined balance sheets is as follows:
1998 1997 ----- ----- (Dollars in millions) Net current deferred tax asset (included in other current assets)......................................................... $19.5 $18.0 Net long-term deferred tax liability............................. (4.2) (4.3) ----- ----- Net deferred tax asset......................................... $15.3 $13.7 ===== =====
Operating earnings before taxes consist of the following:
1998 1997 1996 --------------------- (Dollars in millions) U.S..................................................... $ 5.0 $ 7.9 $(14.2) Foreign................................................. 34.2 18.9 25.6 ------ ------ ------- $39.2 $26.8 $11.4 ====== ====== =======
The effective tax rate on earnings from operations differs from the U.S. federal statutory tax rate as a result of the following:
1998 1997 1996 ---- ---- ---- Federal statutory income tax rate............................. 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit............. 2.6 3.9 2.7 Foreign taxes in excess of U.S. statutory rate, net........... 5.3 13.9 7.8 Foreign sales corporation..................................... (1.2) (2.4) (3.6) Other......................................................... (1.5) (3.4) 4.2 ---- ---- ---- Effective tax rate.......................................... 40.2% 47.0% 46.1% ==== ==== ====
F-15 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Note 9. Lease Commitments At fiscal year-end 1998, the Company was committed to minimum rentals under non-cancellable operating leases for fiscal years 1999 through 2003 and thereafter, as follows, in millions: $4.7, $3.7, $2.6, $2.1, $1.6, and $10.1, respectively. Rental expense for fiscal years 1998, 1997, and 1996, in millions, was $7.6, $8.6, and $8.4, respectively. Prior to the Distribution, the Company will enter into certain lease or sublease agreements with VAI, an affiliate, or third parties for certain lease facilities and other equipment, which agreements principally are a continuation of existing lease commitments at market rates. These commitments are included in the amounts above. Note 10. Contingencies Environmental Remediation VAI has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where the Company is alleged to have shipped manufacturing waste for recycling or disposal. VAI is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, federal, state, and/or local agencies at certain current or former VAI facilities (including facilities disposed of in connection with VAI's sale of its Electron Devices Business during fiscal 1995, and the sale of the Thin Film Systems business of VSEA during fiscal 1997). VAI's expenditures for environmental investigation and remediation amounted to $4.9 million in fiscal 1998, compared with $2.3 million in fiscal 1997 and with $5.2 million in fiscal 1996. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of October 2, 1998, VAI nonetheless estimated that the future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $21.6 million to $48.9 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of October 2, 1998. VAI management believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range, and therefore, VAI has accrued $21.6 million in estimated environmental costs as of October 2, 1998. This amount accrued by VAI has not been discounted to present value. As to other sites and facilities, VAI has gained sufficient knowledge to be able to better estimate the scope and costs of future environmental activities. As of October 2, 1998, VAI estimated that the future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $39.7 million to $73.7 million. The time frame over which these costs are expected to be incurred varies with each site, ranging up to approximately 30 years as of October 2, 1998. As to each of these sites and facilities, VAI management has determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $51.1 million at October 2, 1998. VAI accordingly has accrued $22.3 million, which represents this best estimate of the future costs discounted at 4%, net of inflation. This VAI reserve is in addition to the $21.6 million described above. Under the Distribution Related Agreements, the Company has agreed to indemnify VAI and VSEA for one-third of these environmental investigation and remediation costs, as adjusted for insurance proceeds in respect of these environmental costs and for the tax benefits expected to be realized by VAI upon the payment of the Company's portion of these environmental costs (Note 11). As of October 2, 1998, the Company's reserve for F-16 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) its portion of environmental liabilities, based upon future environmental related costs estimated by VAI as of that date and included in long-term and current accrued expenses, is calculated as follows:
Total Recurring Non-recurring Anticipated Year Costs Costs Future Costs - ---- --------- ------------- ------------ (Dollars in millions) 1999..................................... $ 0.4 $0.7 $ 1.1 2000..................................... 0.5 0.2 0.7 2001..................................... 0.5 0.1 0.6 2002..................................... 0.5 0.0 0.5 2003..................................... 0.5 0.0 0.5 Thereafter............................... 9.6 0.8 10.4 ----- ---- ------- Total costs............................ $12.0 $1.8 13.8 ===== ==== ------- Imputed interest......................... (6.0) ------- Total reserve.......................... $ 7.8 =======
The amounts set forth in the foregoing table are only estimates of anticipated future environmental related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where VAI is undertaking such investigation and remediation activities. VAI believes that most of these cost ranges will narrow as investigation and remediation activities progress. The Company believes that its reserves are adequate, but as the scope of the obligations becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to management and its best assessment of the ultimate amount and timing of environmental related events, the Company's management believes that the costs of these environmental related matters are not reasonably likely to have a material adverse effect on the combined financial statements of the Company. Legal Proceedings Under the Distribution Related Agreements, the Company has agreed to reimburse VAI for one-third of the costs and expenses, adjusted for any tax benefits recognized or realized by VAI from the incurrence or payment of these amounts, with respect to certain legal proceedings relating to discontinued operations of VAI (Note 11). Also, from time to time, the Company is involved in a number of legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the above legal matters is not determinable, management believes the resolution of these matters will not have a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Note 11. Other Transactions with Affiliates Sales to VAI and VSEA for fiscal years 1998, 1997, and 1996 totaled $14.6 million, $14.8 million, and $23.3 million, respectively. F-17 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) VAI uses a centralized cash management system to finance its operations. Cash deposits from most of the Company's businesses are transferred to VAI on a daily basis, and VAI funds the Company's required disbursements. No interest has been charged or credited to the Company for these transactions. VAI provided certain centralized services (see Note 1 to the combined financial statements) to the Company. Cost allocations relating to these centralized services were $26.5 million, $27.1 million, and $25.9 million in fiscal years 1998, 1997, and 1996, respectively, and are included in operating costs in the combined statements of earnings. Amounts due to VAI for these expenses are included in Divisional Equity. Net transfers to or from VAI, included in Divisional Equity, include advances and loans from affiliates, net cash transfers to or from VAI, third party liabilities paid on behalf of the Company by VAI, amounts due from affiliates related to sales, amounts due to or from VAI for services and other charges, and income taxes paid on behalf of the Company by VAI. The weighted average balance due to VAI was $213 million, $200 million, and $140 million for fiscal years 1998, 1997 and 1996, respectively. The activity in net transfers (to) from VAI for fiscal years 1998, 1997, and 1996 included in divisional equity in the combined statements of divisional equity is summarized as follows:
1998 1997 1996 ----- ----- ------ (Dollars in millions) VAI services and other charges............................ $26.5 $27.1 $ 25.9 Cash transfers, net....................................... (9.8) 7.1 (28.0) ----- ----- ------ Net transfers (to) from VAI............................. $16.7 $34.2 $ (2.1) ===== ===== ======
The Distribution Related Agreements provide that, from, and after the Distribution, VAI, VSEA, and the Company will indemnify each and their respective subsidiaries, directors, officers, employees and agents against all losses arising in connection with shared liabilities (including certain environmental and legal liabilities). All shared liabilities will be managed and administered by VAI and expenses and losses, net of proceeds and other receivables, will be borne one-third each by VAI, VSEA, and the Company; the Distribution Related Agreements also provide that the Company shall assume all Company liabilities, other than shared liabilities (including accounts payable, accrued payroll, and pension liabilities) in accordance with their terms. Note 12. Industry and Geographic Segments The Company operates in one industry segment: instrumentation, equipment and accessories for analytical, research, industrial, and scientific applications. Company products are used in biological and biochemical research; in independent test labs; in quality control and research in industries such as pharmaceuticals, foods, metals, chemicals, and petroleum; for environmental monitoring and analysis; in semiconductor and automotive manufacturing; in high-energy physics; in surface analysis, space research and petrochemical refining. The Company operates various manufacturing and marketing operations outside the United States. Inter-business sales between geographic areas are accounted for at cost plus prevailing markups arrived at through negotiations between otherwise independent profit centers (Note 1). No customer accounted for more than 10% of total sales in fiscal years 1998, 1997, and 1996. F-18 INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. Notes to Combined Financial Statements--(Continued) Included in the total of United States sales are export sales of $30 million in fiscal 1998, $36 million in fiscal 1997, and $32 million in fiscal 1996. Sales under prime contracts from the U.S. Government were approximately $7 million in fiscal 1998, $9 million in fiscal 1997, and $8 million in fiscal 1996.
Sales to Intergeographic Unaffiliated Sales to Pre-tax Identifiable Customers(/1/) Affiliates Total Sales Earnings Assets -------------- ------------------- ------------------- ---------------- -------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- (Dollars in millions) United States.......... $327 $325 $284 $ 116 $ 114 $ 109 $ 443 $ 439 $ 393 $ 39 $ 43 $ 32 $214 $193 $140 International.......... 223 216 219 112 97 98 335 313 317 34 23 25 159 130 144 ---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- Total geographic segments............. 550 541 503 228 211 207 778 752 710 73 66 57 373 323 284 Eliminations, corporate & other............... 8 1 1 (228) (211) (207) (220) (210) (206) (34) (39) (46) 31 35 17 ---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- Total Company......... $558 $542 $504 $ - $ - $ - $ 558 $ 542 $ 504 $ 39 $ 27 $ 11 $404 $358 $301 ==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
- ------- (1) Includes sales to VAI and VSEA (Note 11). Total sales is based on the location of the operation furnishing goods and services. International sales based on final destination of products sold are $261 million in fiscal 1998, $253 million in fiscal 1997, and $250 million in fiscal 1996. Note 13. Quarterly Financial Data (Unaudited)
1998 1997 ------------------------------- ------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in millions, except per share amounts) Sales................... $141.0 $141.0 $129.9 $145.9 $124.9 $134.9 $137.5 $144.6 ------ ------ ------ ------ ------ ------ ------ ------ Gross profit............ 54.5 55.8 53.9 57.2 49.8 52.0 53.7 55.6 ------ ------ ------ ------ ------ ------ ------ ------ Net Earnings............ 5.8 6.4 5.2 6.0 3.5 3.5 3.7 3.5 ====== ====== ====== ====== ====== ====== ====== ====== Pro forma net earnings per share.............. $ 0.19 $ 0.22 $ 0.17 $ 0.20 $ 0.12 $ 0.11 $ 0.13 $ 0.11 ====== ====== ====== ====== ====== ====== ====== ======
F-19 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Varian Associates, Inc.: Our report on the combined financial statements of the Instruments Business of Varian Associates, Inc. is included on page F-2 of this Form 10. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page F-1 of this Form 10. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP --------------------------------------- PricewaterhouseCoopers LLP San Jose, California October 31, 1998 S-I SCHEDULE II INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. VALUATION AND QUALIFYING ACCOUNTS for the fiscal years 1998, 1997, and 1996 (Dollars in Thousands)
Balance at Charged to Balance atDeductions Beginning Costs and ------------------------------------- End of Description of Period Expenses Description Amount Period - ----------- ---------- ---------- ------------------------------ ------ ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE: Fiscal Year Ended 1998.. $ 321 $ 295 Write-offs & Adjustments...... $ (97) $ 713 ====== ====== ====== ====== Fiscal Year Ended 1997.. $ 642 $ 151 Write-offs & Adjustments...... $ 472 $ 321 ====== ====== ====== ====== Fiscal Year Ended 1996.. $ 652 $ 601 Write-offs & Adjustments...... $ 611 $ 642 ====== ====== ====== ====== ESTIMATED LIABILITY FOR PRODUCT WARRANTY: Fiscal Year Ended 1998.. $7,173 $9,641 Actual Warranty Expenditures.. $9,206 $7,608 ====== ====== ====== ====== Fiscal Year Ended 1997.. $5,688 $9,764 Actual Warranty Expenditures.. $8,279 $7,173 ====== ====== ====== ====== Fiscal Year Ended 1996.. $4,919 $9,077 Actual Warranty Expenditures.. $8,308 $5,688 ====== ====== ====== ======
S-II SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized. Varian, Inc. /s/ Arthur W. Homan By______________________________________ Name: Arthur W. Homan Title: Secretary Date: February 12, 1999 EXHIBIT INDEX
Exhibit No. Description ------------------ 2.1 Distribution Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of January 14, 1999. 3.1 Form of Restated Certificate of Incorporation of Varian, Inc. to be in effect upon the effectiveness of the Distribution. 3.2 Form of By-Laws of Varian, Inc. to be in effect upon the effectiveness of the Distribution. 4.1 Specimen Common Stock Certificate.* 4.2 Form of Rights Agreement.* 10.1 Form of Employee Benefits Allocation Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.2 Form of Intellectual Property Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.4 Form of Transition Services Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. 10.5 Form of Change in Control Agreement for CEO and Senior Executives.* 10.6 Form of Indemnity Agreement with Directors and Executive Officers.* 10.7 Varian, Inc. Omnibus Stock Plan. 10.8 Varian, Inc. Management Incentive Plan. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
- ------- * To be filed by amendment. EX-2.1 2 DISTRIBUTION AGREEMENT Exhibit 2.1 DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT is made and entered into as of this 14th day of January, 1999, among VARIAN ASSOCIATES, INC., a Delaware corporation ("Varian"), VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC., a Delaware corporation ("SEB"), and VARIAN, INC., a Delaware corporation ("IB"). R E C I T A L S WHEREAS, the Board of Directors of Varian has deemed it appropriate and desirable to: (a) separate and divide the existing businesses of Varian so that (i) the business of the manufacture, sale and service of ion implanters for semiconductor equipment fabrication facilities will be owned and conducted directly or indirectly by SEB, (ii) the business of the manufacture, sale and service of analytical and research instruments and high vacuum products and fabrication of circuit boards and electronic subassemblies will be owned and conducted directly or indirectly by IB, and (iii) the business of the manufacture, sale and service of integrated cancer-care systems, including medical linear accelerators and brachytherapy systems for treatment, simulators for therapy planning and verification, and ancillary equipment, software and networking systems and related data management, and of x-ray tubes for the diagnostic imaging industry and imaging subsystems, will be retained and conducted directly or indirectly by Varian, which will be renamed Varian Medical Systems, Inc. immediately following the Distributions (as hereinafter defined); and (b) distribute, after such separation and division, as a dividend to the holders of shares of common stock, par value $1.00 per share, of Varian (the "VAI Common Stock"), all of the then-outstanding shares of common stock, par value $.01 per share, of SEB (the "SEB Common Stock"), and all of the then- outstanding shares of common stock, par value $.01 per share, of IB (the "IB Common Stock"); and WHEREAS, each of Varian, SEB and IB has determined that it is necessary and desirable to set forth the principal corporate transactions required to effect such separation, division and Distributions and to set forth agreements that will govern certain other matters before and after the Distributions. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. General. As used in this Agreement, the following terms ------- have the following meanings: "AAA" has the meaning ascribed to such term in Section 9.02(b). --- "AAA Rules" has the meaning ascribed to such term in Section 9.02(c). --------- "Action" means any action, suit, arbitration, inquiry, proceeding or ------ investigation by or before any Governmental Authority or any arbitration tribunal. "Affiliate" means, when used with respect to a specified Person, another --------- Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. "After-tax Differential" means the positive or negative amount determined ---------------------- by adding the amounts of the Disposition Proceeds received after the Effective Time and the Tax Benefit and subtracting therefrom the amounts of the Transaction Expenditures paid after the Effective Time and the Tax Cost. 1 "Agent" means First Chicago Trust Company of New York, or such other trust ----- company or bank designated by Varian, who shall act as agent for the holders of VAI Common Stock in connection with the Distributions. "Agreement" means this Distribution Agreement among Varian, SEB and IB, --------- including all amendments hereto and all Schedules and Exhibits hereto. "Agreement Date" means the date set forth in the first paragraph of this -------------- Agreement. "Agreement Disputes" has the meaning ascribed to such term in Section ------------------ 9.01(a). "Aircraft Disposition" has the meaning ascribed to such term in Section -------------------- 2.01(b). "Ancillary Agreements" means, collectively, the Employee Benefits -------------------- Allocation Agreement, the Tax Sharing Agreement, the Transition Services Agreement and the Intellectual Property Agreement. "Arbitration Demand Notice" has the meaning ascribed to such term in ------------------------- Section 9.02(b). "Assets" means assets, properties and rights (including goodwill), wherever ------ located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including: (i) all accounting and other books, records and files whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other form; (ii) all apparatus, computers and other electronic data processing equipment, fixtures, machinery, equipment, capital and other spares, furniture, office equipment, automobiles, trucks, aircraft and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property; (iii) all inventories of materials, parts, raw materials, supplies, work- in-process, consigned goods, finished goods, packaging and all products and product samples; (iv) all interests in real property of whatever nature, including easements, leases and licenses, whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor, lessee, sublessee or otherwise; (v) all buildings and other improvements to real property; (vi) all interests in any capital stock or other equity interests of any Subsidiary or any other Person, all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person, all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person and all other investments in securities of any Person; (vii) all license agreements, leases of personal property, open purchase orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale of products, other sales or purchase agreements, distributions arrangements, and other contracts, agreements or commitments; (viii) all deposits, letters of credit and performance and surety bonds; (ix) all technical information, data, research and development information, engineering drawings, operating and maintenance manuals, and materials and analyses prepared by consultants and other third parties; (x) all Intellectual Property; 2 (xi) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, quality records and reports and other books, records, studies, surveys, reports, plans and documents; (xii) all prepaid expenses, trade accounts and other accounts and notes receivables; (xiii) all rights under contracts, agreements, warranties or guarantees, all claims or rights or judgments against any Person, all rights in connection with any bids or offers and all claims, choses in action, rights of recovery and rights of set-off or similar rights, whether accrued or contingent, and refunds and deposits; (xiv) all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution; (xv) all licenses, permits, approvals and authorizations which have been issued by any Governmental Authority; (xvi) advertising and marketing materials and other printed or written materials; (xvii) employee contracts, including any rights thereunder to restrict an employee or former employee from competing in certain respects and personnel and medical files and records; (xviii) Cash and Cash Equivalents, bank accounts, lock boxes and other deposit arrangements; and (xix) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements. "Assignee" has the meaning ascribed to such term in Section 2.04(b). -------- "Auditors" has the meaning ascribed to such term in Section 5.10(a). -------- "Books and Records" means all books, records, manuals, agreements and other ----------------- materials (in any form or medium), including all mortgages, licenses, indentures, contracts, financial data, customer lists, marketing materials and studies, advertising materials, price lists, correspondence, distribution lists, supplier lists, production data, sales and promotional materials and records, purchasing materials and records, personnel records, manufacturing and quality control records and procedures, blue prints, research and development files, records, data and laboratory books, accounts records, sales order files, litigation files, computer files, microfiche, tape recordings and photographs. "Cash and Cash Equivalents" has the meaning ascribed to such term under ------------------------- GAAP. "Claims Administration" means the processing of claims made under the --------------------- Company Policies, including the reporting of losses, management and defense of claims (except to the extent settlement authority remains with another party as contemplated by Section 7.07) and providing for appropriate releases upon settlement of claims. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Commission" means the Securities and Exchange Commission. ---------- "Company Policies" means all Policies, current or past, which are as of the ---------------- Effective Time, or at any time were, maintained by, on behalf of, or for the benefit or protection of Varian or any of its Subsidiaries or any of its predecessors which relate to any Shared Liability, the Instruments Business, the Health Care Systems Business or the Semiconductor Equipment Business, or current or past directors, officers, employees or agents of any of the foregoing. 3 "Consent" means any approval, consent or waiver required to be obtained ------- from any Governmental Authority or other third party for the consummation of a specified transaction, including any option, right of first refusal or other similar right of a third party triggered by a specified transaction. "Consolidated Debt" means with respect to any Person (without duplication), ----------------- every obligation of such Person and its consolidated Subsidiaries (i) for money borrowed, (ii) evidenced by bonds, debentures, notes or other similar instruments, (iii) for reimbursement with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person or its consolidated Subsidiaries, (iv) for the deferred purchase price of property or services if, and to the extent that, such obligation would appear as a Liability upon a balance sheet of such Person or its consolidated Subsidiaries prepared in accordance with GAAP (but excluding trade accounts payable or accrued Liabilities arising in the ordinary course of business), excluding capital leases, and (v) to guarantee or otherwise be liable for, any obligation of the type referred to in clauses (i) through (iv) of another Person. "Conveyancing and Assumption Instruments" means, collectively, the various --------------------------------------- written agreements, instruments and other documents to be entered into to effect the Corporate Reorganization Transactions or otherwise to effect the transfer of Assets and the assumption of Liabilities in the manner contemplated by this Agreement and the Ancillary Agreements. "Corporate Reorganization Transactions" means, collectively, each of the ------------------------------------- distributions, transfers, conveyances, contributions, assignments and other transactions described and set forth on Exhibit A, and those described or contemplated by the Proxy Statement and the private ruling request submissions made to the Internal Revenue Service in connection therewith, which are intended to separate and divide the existing businesses of Varian so that, except as otherwise expressly provided on Exhibit A: (i) the Semiconductor Equipment Assets, Semiconductor Equipment Liabilities and Semiconductor Equipment Business shall be owned or held, directly or indirectly, by SEB; (ii) the Instruments Assets, Instruments Liabilities and Instruments Business shall be owned or held, directly or indirectly, by IB; and (iii) the businesses, Assets and Liabilities of Varian that remain after the transactions described in clauses (i) and (ii) above, after giving effect to the Distributions, including the Health Care Systems Assets, Health Care Systems Liabilities and Health Care Systems Business shall be owned or held, directly or indirectly, by HCS. "Cost" means (i) the salary, fringe benefits and overhead expense of ---- personnel (or an allocable portion thereof) plus (ii) out-of-pocket expenses. "DGCL" means the Delaware General Corporation Law, as amended. ---- "Dispositions" means, collectively, the Palo Alto Property Disposition and ------------ the Aircraft Disposition. "Disposition Proceeds" means the proceeds from the Palo Alto Property -------------------- Disposition (or any of its component parts) or the Aircraft Disposition, net of the expenses of such sale or other disposition. "Disputing Party" has the meaning ascribed to such term in Section 9.03(a). --------------- "Distribution Date" means the date determined by the Board of Directors of ----------------- Varian as of which the Distributions shall be effected. "Distribution Proposals" means, collectively, Proposals One through Ten ---------------------- set forth in the Proxy Statement. "Distribution Record Date" means the time designated by the Board of ------------------------ Directors of Varian for the purpose of determining the holders of record of VAI Common Stock entitled to receive the Distributions. "Distributions" means, collectively, the SEB Distribution and the IB ------------- Distribution. "Effective Time" means 11:59 p.m. California time on the Distribution Date. -------------- 4 "Employee Benefits Allocation Agreement" means the Employee Benefits -------------------------------------- Allocation Agreement among Varian, SEB and IB (including all exhibits and schedules thereto) substantially in the form of Exhibit B. "Environmental Laws" means any and all federal, state, local and foreign ------------------ statutes, Laws, regulations, ordinances, rules, principles of common law, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions (including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq.), whether now or hereafter in existence, relating to the environment, natural resources, human health or safety, endangered or threatened species of fish, wildlife and plants, or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including indoor or outdoor air, surface water, groundwater and surface or subsurface soils), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the investigation, cleanup or other remediation thereof. "Environmental Matters" means all matters relating in any way to (i) soil, --------------------- air and water and groundwater pollution or contamination, including any on-site or off-site pollution or contamination, (ii) damages to the natural environment or natural resources, (iii) Releases or discharges of waste, Hazardous Materials, or pollutants or contaminants, or (iv) recycling or disposal of Hazardous Materials or wastes (including garbage, refuse, slag, sludge and other discarded materials, whether solid, liquid, semisolid or gaseous and whether on- site or off-site). "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "GAAP" means United States generally accepted accounting principles and ---- practices, as in effect on the date of this Agreement, as promulgated by the Financial Accounting Standards Board and its predecessors. "Governmental Authority" means any government or any agency, bureau, board, ---------------------- commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "Group" means (i) with respect to HCS, the Health Care Systems Group, (ii) ----- with respect to SEB, the Semiconductor Equipment Group, and (iii) with respect to IB, the Instruments Group. "Hazardous Materials" means those elements, compounds and substances ------------------- identified in any of the Environmental Laws as "hazardous materials," "hazardous substances," or "hazardous waste," as well as any other elements, compounds or substances which are listed or identified as "pollutants," "contaminants," "hazardous," "toxic" (or other term of similar meaning) under any Environmental Law. The term "Hazardous Materials" expressly includes radioactive materials, petroleum products and asbestos. "HCS" means Varian, after giving effect to the Corporate Reorganization --- Transactions and the Distributions or as if the Corporate Reorganization Transactions and the Distributions had occurred, as the context requires. "HCS Adjusted Closing Balance Sheet" has the meaning ascribed to such term ---------------------------------- in Section 9.03(b). "HCS Closing Balance Sheet" has the meaning ascribed to such term in ------------------------- Section 5.10(a). "HCS Common Stock" means VAI Common Stock after the Distributions. ---------------- "HCS Dispute" has the meaning ascribed to such term in Section 9.03(a). ----------- "HCS Indemnitees" means HCS, the HCS Subsidiaries and each Affiliate --------------- thereof after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of any of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. 5 "HCS Pro Forma Balance Sheet" means the pro forma balance sheet of HCS at --------------------------- October 2, 1998, attached as Exhibit F and the accounting records supporting such balance sheet. "HCS Records" has the meaning ascribed to such term in Section 6.01(c). ----------- "HCS Subsidiaries" means the Subsidiaries of Varian listed on Exhibit I and ---------------- all other Subsidiaries of Varian other than IB, SEB, the IB Subsidiaries and the SEB Subsidiaries. "Health Care Systems Assets" means, collectively, all the Assets that are -------------------------- owned or held by HCS or any HCS Subsidiary as of the Effective Time (and those Assets to be transferred to HCS or a HCS Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the HCS Subsidiaries; (ii) all the Assets included on the HCS Pro Forma Balance Sheet that are owned or held by HCS or any HCS Subsidiary as of the Effective Time; (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the HCS Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the HCS Pro Forma Balance Sheet had they been acquired on or before the date of the HCS Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the HCS Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by HCS or any HCS Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of HCS and the HCS Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Health Care Systems Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Instruments Group or the Semiconductor Equipment Group. "Health Care Systems Business" means the business that, after giving effect ---------------------------- to the Corporate Reorganization Transactions and the Distributions, is conducted by HCS, the HCS Subsidiaries and/or any other member of the Health Care Systems Group. "Health Care Systems Group" means HCS, the HCS Subsidiaries and the Persons ------------------------- that become Subsidiaries of HCS after the consummation of the Corporate Reorganization Transactions and the Distributions. "Health Care Systems Liabilities" means, collectively, all the Liabilities ------------------------------- of HCS, the HCS Subsidiaries and the other members of the Health Care Systems Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the HCS Pro Forma Balance Sheet that remain outstanding as of the Effective Time; (ii) all the Liabilities of Varian arising or assumed after the date of the HCS Pro Forma Balance Sheet and that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the HCS Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the HCS Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of HCS on the HCS Pro Forma Balance Sheet; (iii) all the Liabilities expressly assumed or retained by HCS, any HCS Subsidiary and any other member of the Health Care Systems Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; 6 (iv) the obligations of HCS, the HCS Subsidiaries and any other member of the Health Care Systems Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Health Care Systems Business or the Health Care Systems Assets before, on or after the Distribution Date, and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Health Care Systems Business or the Health Care Systems Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of HCS and any other member of the Health Care Systems Group to third parties (regarding of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, sold or distributed at any time on or before the Distribution Date by the Health Care Systems Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Health Care Systems Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (viii) all the Liabilities of the parties or their respective Subsidiaries (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Health Care Systems Business or ownership of the Health Care Systems Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of HCS, the HCS Subsidiaries or the other members of the Health Care Systems Group in the Registration Statements or the Proxy Statement), except as otherwise expressly provided herein. Notwithstanding the foregoing, the Health Care Systems Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a); or (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Instruments Group or the Semiconductor Equipment Group. "IB" has the meaning ascribed to such term in the first paragraph of this -- Agreement. "IB Adjusted Closing Balance Sheet" has the meaning ascribed to such term --------------------------------- in Section 9.03(b). "IB Claim" has the meaning ascribed to such term in Section 8.01(b). -------- "IB Closing Balance Sheet" has the meaning ascribed to such term in Section ------------------------ 5.10(a). "IB Common Shares" means the shares of IB Common Stock owned by Varian ---------------- immediately before the Distributions. "IB Common Stock" has the meaning ascribed to such term in the recitals to --------------- this Agreement. 7 "IB Distribution" means the distribution, on the Distribution Date, as a --------------- dividend by Varian to the Varian Holders of the IB Common Shares on the basis provided in Section 3.02. "IB Dispute" has the meaning ascribed to such term in Section 9.03(a). ---------- "IB Indemnitees" means IB, the IB Subsidiaries and each Affiliate thereof -------------- after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "IB Pro Forma Balance Sheet" means the pro forma balance sheet of IB at -------------------------- October 2, 1998, attached as Exhibit G and the accounting records supporting such balance sheet. "IB Records" has the meaning ascribed to such term in Section 6.01(b). ---------- "IB Notes Payable" means the Notes Payable assumed by IB pursuant to ---------------- Sections 2.05(c) and (d). "IB Subsidiaries" means the Subsidiaries listed on Exhibit J. --------------- "IB Term Loans" has the meaning ascribed to such term in Section ------------- 2.05(c)(i). "Income Tax" means (i) any Tax imposed by Subtitle A or F of the Code, (ii) ---------- any Tax imposed by any state of the United States or by any political subdivision of any such state which is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income, and (iii) any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession that is an income tax as defined in Treasury Regulation Section 1.901-2. "Indemnifiable Losses" means, with respect to any Person, any and all -------------------- losses, obligations, claims, damages, deficiencies, penalties, judgments, settlements, payments, fines, interest, costs and expenses (including reasonable attorneys', accountants', consultants' or other professionals' fees, investigation expenses and any and all other out-of-pocket expenses) or other Liabilities whatsoever that are assessed, imposed, awarded against or incurred by such Person excluding exemplary, special or punitive damages or lost profits except to the extent actually paid by an Indemnitee in respect of a Third Party Claim or Action either (i) in investigating, preparing for, defending against any Actions, any potential or threatened Actions or any Third Party Claims or potential or threatened Third Party Claims or in settling any of the foregoing or in satisfaction of any judgment, fine or penalty rendered in or resulting from any of the foregoing or otherwise arising out of, relating to or resulting from any Actions, any potential or threatened Actions or any Third Party Claims or potential or threatened Third Party Claims for which such Person would be entitled to indemnification under Article VII hereof, or (ii) in respect of any other event, occurrence or matter for which such Person would be entitled to indemnification under Article VII hereof, in each case whether accrued before, on or after the date of this Agreement. "Indemnifying Party" has the meaning ascribed to such term in Section ------------------ 7.06(a). "Indemnitee" has the meaning ascribed to such term in Section 7.06(a). ---------- "Independent Auditors" has the meaning ascribed to such term in Section -------------------- 9.03(b). "Instruments Assets" means, collectively, all the Assets that are owned or ------------------ held by IB or any IB Subsidiary as of the Effective Time (and those Assets to be transferred to IB or an IB Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the IB Subsidiaries; (ii) all the Assets included on the IB Pro Forma Balance Sheet that are owned or held by IB or any IB Subsidiary as of the Effective Time; 8 (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the IB Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the IB Pro Forma Balance Sheet had they been acquired on or before the date of the IB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the IB Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by IB or any IB Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of IB and the IB Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Instruments Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Semiconductor Equipment Group or the Health Care Systems Group. "Instruments Business" means the business that, after giving effect to the -------------------- Corporate Reorganization Transactions and the Distributions, is conducted by IB, the IB Subsidiaries and/or any other member of the Instruments Group. "Instruments Group" means IB, the IB Subsidiaries and the Persons that ----------------- become Subsidiaries of IB after the consummation of the Corporate Reorganization Transactions and the Distributions. "Instruments Liabilities" means, collectively, all the Liabilities of IB, ----------------------- the IB Subsidiaries and the other members of the Instruments Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the IB Pro Forma Balance Sheet that remain outstanding as of the Effective Time; (ii) all the Liabilities of Varian arising or assumed after the date of the IB Pro Forma Balance Sheet and that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the IB Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the IB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of IB on the IB Pro Forma Balance Sheet; (iii) all the Liabilities expressly assumed or retained by IB, any IB Subsidiary and any other member of the Instruments Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions, the IB Term Loans and the IB Notes Payable; (iv) the obligations of IB, the IB Subsidiaries and any other member of the Instruments Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Instruments Business or the Instruments Assets before, on or after the Distribution Date, and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Instruments Business or the Instruments Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of IB and any other member of the Instruments Group to third parties (regarding of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, 9 sold or distributed at any time on or before the Distribution Date by the Instruments Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Instruments Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (viii) all the Liabilities of the parties or their respective Subsidiaries (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Instruments Business or ownership of the Instruments Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of IB, the IB Subsidiaries or the other members of the Instruments Group in the Registration Statements or the Proxy Statement), except as otherwise expressly provided herein. Notwithstanding the foregoing, the Instruments Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a); (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Semiconductor Equipment Group or the Health Care Systems Group. "Insurance Administration" means, with respect to each Company Policy, the ------------------------ accounting for premiums, retrospectively calculated additional or return premiums or assessments, policy dividends or audited exposure, defense costs, indemnity payments, deductibles and retentions, as appropriate, under the terms and conditions of each of the Company Policies; the reporting to excess insurance carriers of any losses or claims that may cause the per occurrence, per claim or aggregate limits of any Company Policy to be exceeded and the distribution of Insurance Proceeds as contemplated by this Agreement. "Insurance Proceeds" means, with respect to any insured party, those ------------------ monies, net of any applicable premium adjustment, retrospectively calculated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured, which are either: (i) received by an insured from an insurer; or (ii) paid by an insurer on behalf of an insured. "Insured Claims" means those Liabilities that, individually or in the -------------- aggregate, are covered within the terms and conditions of any of the Company Policies, whether or not subject to deductibles, co-insurance, uncollectability or retrospectively calculated premium adjustments. "Intellectual Property" means the intellectual property rights owned, --------------------- licensed to or otherwise held throughout the world by any person, including, without limitation, all of the rights, title and interests in the following: (i) all United States and foreign patents, patent applications (including any continuations, continuation-in-part and divisionals), patent applications under preparation, invention disclosures and invention disclosures under preparation; (ii) all United States and foreign registered and unregistered copyrights and mask works, including applications and applications under preparation therefor; 10 (iii) all United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor; (iv) all trade secrets, know-how, ideas, concepts, discoveries, improvements, processes, procedures, methods, recipes, formulae, data and specifications; (v) all computer programs and other software (in executable or source code format), including operating software, applications, networks software, firmware, middleware, design software, design tools, test and diagnostic software and systems configurations; and (vi) all documentation, schematics, drawings, designs, manuals, reports, records, instructions, studies, surveys, plans, books or other written materials (whether in hard copy or magnetic form) relating to or including any of the (i) through (v) above. "Intellectual Property Agreement" means the Intellectual Property Agreement ------------------------------- among Varian, SEB and IB (including all exhibits and schedules thereto), substantially in the form of Exhibit C. "Law" means all laws, statutes, ordinances, regulations, rules, orders and --- regulations of any Governmental Authority. "Liabilities" means any and all debts, liabilities, obligations, ----------- responsibilities, charges, claims, actions, injuries, losses, damages (whether compensatory, punitive or treble), fines, penalties and sanctions, absolute or contingent, matured or unmatured, liquidated or unliquidated, foreseen or unforeseen, joint, several or individual, asserted or unasserted, accrued or unaccrued, known or unknown, whenever arising, including those arising under or in connection with any Law (including any Environmental Law), Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator, and those arising under any contract, guarantee, commitment or undertaking, whether sought to be imposed by a Governmental Authority, private party or party to this Agreement, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, or otherwise, and including any costs, expenses, interest, attorneys' fees, disbursements and expenses of counsel, experts' and consultants' fees and costs related thereto or to investigating, preparing for or defending or settling any of the foregoing. "Managing Party" has the meaning ascribed to such term in Section 7.07(c). -------------- "Meeting" means the Combined Annual and Special Meeting of holders of VAI ------- Common Stock to consider the Distribution Proposals and the other proposals included by the Board of Directors of Varian in the notice of the Meeting. "Meeting Date" means the date determined by the Board of Directors of ------------ Varian for the Meeting. "Meeting Record Date" means the time determined by the Board of Directors ------------------- of Varian for the purpose of determining the holders of record of VAI Common Stock entitled to vote at the Meeting. "Nasdaq" means The Nasdaq Stock Market. ------ "Net Debt" means the difference between (i) the sum of the Notes Payable -------- and VAI Term Loans assumed or retained by a party as of the date of determination and (ii) the amount of Cash and Cash Equivalents of such party as of the date of determination. "Net Worth" has the meaning ascribed to such term under GAAP, as calculated --------- in accordance with this Agreement, but without giving effect to any Liabilities or expenditures related to the discretionary restructuring of a business between the date hereof and the Effective Time, including reductions in force, facilities' closures, product line abandonment and revaluing impaired assets. "Nondisclosure Agreements" means all of the nondisclosure or ------------------------ confidentiality agreements entered into by Varian and its Subsidiaries from time to time before the Distribution Date. 11 "Notes Payable" has the meaning ascribed to such term in Varian's audited ------------- consolidated financial statements for the fiscal year ended October 2, 1998. "Notice" has the meaning ascribed to such term in Section 10.05. ------ "NYSE" means the New York Stock Exchange, Inc. ---- "Palo Alto Property Disposition" has the meaning ascribed to such term in ------------------------------ Section 2.01(b). "Panel" has the meaning ascribed to such term in Section 9.02(c). ----- "Person" means any natural person, corporation, business trust, joint ------ venture, association, company, partnership, limited liability company or other entity or any Governmental Authority. "Policies" means insurance policies and insurance contracts of any kind -------- (other than life and benefits policies or contracts), including primary, excess and umbrella policies, commercial general liability policies, officers' liability, fiduciary liability, automobile, aircraft, property and casualty, workers' compensation and employee dishonesty insurance policies, bonds and self-insurance and captive insurance arrangements, together with the rights, benefits and privileges thereunder. "Privilege" has the meaning ascribed to such term in Section 6.07(a). --------- "Privileged Information" has the meaning ascribed to such term in Section ---------------------- 6.07(b). "Proxy Statement" means the Proxy Statement sent to the holders of VAI --------------- Common Stock in connection with the Meeting, including any amendments or supplements thereto. "Registration Statements" means the Registration Statements on Form 10 to ----------------------- be filed by SEB and IB with the Commission pursuant to the requirements of the Exchange Act and the rules and regulations thereunder in order to register the SEB Common Stock and the IB Common Stock, respectively, under the Exchange Act, including any amendments thereto. "Release" means any spilling, leaking, pumping, pouring, emitting, ------- discharging, injecting, escaping, leaching, dumping or disposing into the environment of any Hazardous Material, including the abandonment or discarding of containers and other receptacles containing any Hazardous Materials and any passive migration of any Hazardous Material. "Remediation" means any investigation, remediation, prevention, containment ----------- or abatement of releases or threatened releases of materials into the workplace or the environment and the assessment and mitigation of risks and/or restoration of any harm arising therefrom and any related actions. "Representative" means, with respect to any Person, any of such Person's -------------- directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives. "SEB" has the meaning ascribed to such term in the first paragraph of this --- Agreement. "SEB Adjusted Closing Balance Sheet" has the meaning ascribed to such term ---------------------------------- in Section 9.03(b). "SEB Claim" has the meaning ascribed to such term in Section 8.01(c). --------- "SEB Closing Balance Sheet" has the meaning ascribed to such term in ------------------------- Section 5.10(a). "SEB Common Shares" means the shares of SEB Common Stock owned by Varian ----------------- immediately before the Distributions. "SEB Common Stock" has the meaning ascribed to such term in the recitals to ---------------- this Agreement. 12 "SEB Dispute" has the meaning ascribed to such term in Section 9.03(a). ----------- "SEB Distribution" means the distribution, on the Distribution Date, as a ---------------- dividend by Varian to the Varian Holders of the SEB Common Shares on the basis provided in Section 3.02. "SEB Indemnitees" means SEB, the SEB Subsidiaries and each Affiliate --------------- thereof after giving effect to the Corporate Reorganization Transactions and the Distributions, and each of the past, present and future directors, officers, employees and agents of the foregoing and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "SEB Pro Forma Balance Sheet" means the pro forma balance sheet of SEB at --------------------------- October 2, 1998, attached as Exhibit H and the accounting records supporting such balance sheet. "SEB Records" has the meaning ascribed to such term in Section 6.01(a). ----------- "SEB Subsidiaries" means the Subsidiaries listed on Exhibit K. ---------------- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Securities Liabilities" means any Liabilities whatsoever that are ---------------------- assessed, imposed, awarded against, incurred or accrued by a Person arising out of, relating to or resulting from, in whole or in part, any Action, any potential or threatened Action or any Third Party Claim (or any potential or threatened Third Party Claim) by any Governmental Authority or any other Person that is based on any violations or alleged violations of the Securities Act, Exchange Act, any of the rules or regulations of the Commission promulgated under the Securities Act or Exchange Act, or any other securities or other similar Law, or on any alleged breach of duty by a Person in causing, permitting or failing to prevent any such violation or alleged violation. "Security Interest" means any mortgage, security interest, pledge, lien, ----------------- charge, claim, option, right to acquire, voting or other restriction, right-of- way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. "Semiconductor Equipment Assets" means, collectively, all the Assets that ------------------------------ are owned or held by SEB or any SEB Subsidiary as of the Effective Time (and those Assets to be transferred to SEB or a SEB Subsidiary at a later time as provided in Section 2.14), including: (i) the capital stock of, or other ownership interests in, the SEB Subsidiaries; (ii) all the Assets included on the SEB Pro Forma Balance Sheet that are owned or held by SEB or any SEB Subsidiary as of the Effective Time; (iii) all the Assets acquired by Varian or any of its Subsidiaries after the date of the SEB Pro Forma Balance Sheet which are owned or held by Varian or any of its Subsidiaries as of the Effective Time and which are of a nature or type that would have resulted in such Assets being included as Assets on the SEB Pro Forma Balance Sheet had they been acquired on or before the date of the SEB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Assets included on the SEB Pro Forma Balance Sheet; (iv) all the Assets expressly allocated to or retained by SEB or any SEB Subsidiary under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (v) rights to the Company Policies to the extent set forth in Article VIII; and (vi) the rights of SEB and the SEB Subsidiaries under this Agreement and the Ancillary Agreements. Notwithstanding the foregoing, the Semiconductor Equipment Assets shall not include any and all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement as Assets to be allocated to or retained by any member of the Instruments Group or the Health Care Systems Group. 13 "Semiconductor Equipment Business" means the business that, after giving -------------------------------- effect to the Corporate Reorganization Transactions and the Distributions, is conducted by SEB, the SEB Subsidiaries and/or any other member of the Semiconductor Equipment Group. "Semiconductor Equipment Group" means SEB, the SEB Subsidiaries and the ----------------------------- Persons that become Subsidiaries of SEB after the consummation of the Corporate Reorganization Transactions and the Distributions. "Semiconductor Equipment Liabilities" means, collectively, all of the ----------------------------------- Liabilities of SEB, the SEB Subsidiaries and the other members of the Semiconductor Equipment Group after giving effect to the Corporate Reorganization Transactions and the Distributions, including: (i) all the Liabilities included on the SEB Pro Forma Balance Sheet that remain outstanding as of the Effective Time; (ii) all the Liabilities of Varian arising or assumed after the date of the SEB Pro Forma Balance Sheet that remain outstanding as of the Effective Time, which are of a nature or type that would have resulted in such Liabilities being included as Liabilities on the SEB Pro Forma Balance Sheet had they arisen or been assumed on or before the date of the SEB Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Liabilities of SEB on the SEB Pro Forma Balance Sheet; (iii) all the Liabilities expressly assumed or retained by SEB, any SEB Subsidiary and any other member of the Semiconductor Equipment Group under this Agreement or any Ancillary Agreement, including the Corporate Reorganization Transactions; (iv) the obligations of SEB, the SEB Subsidiaries and any other member of the Semiconductor Equipment Group under this Agreement and the Ancillary Agreements; (v) all actual or alleged Liabilities (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) relating to Environmental Matters or arising under any Environmental Laws (including all claims for death, bodily injury, personal injury and property damage relating to Environmental Matters or arising under any Environmental Laws) arising out of, relating to or resulting from (A) the activities, operations, acts or omissions at, from or with respect to the Semiconductor Equipment Business or the Semiconductor Equipment Assets before, on or after the Distribution Date and (B) Remediation of any Release arising out of, relating to or resulting from activities, operations, acts or omissions at, from or with respect to the Semiconductor Equipment Business or the Semiconductor Equipment Assets before, on or after the Distribution Date wherever such Remediation may be performed; (vi) all actual or alleged Liabilities of SEB and any other member of the Semiconductor Equipment Group to third parties (regardless of whether any claim with respect to such Liabilities is asserted before, on or after the Distribution Date) arising out of, relating to or resulting from the transportation, handling, possession, processing, treatment, storage, disposal, manufacture, further manufacture, use, reuse, sale or resale of any goods manufactured, processed, sold or distributed at any time on or before the Distribution Date by the Semiconductor Equipment Business, including all such Liability for personal injury, bodily injury (including death or aggravation of previously existing illness, injury disability or condition) or property damage; (vii) all the Liabilities of the parties or their respective Subsidiaries, (whether arising before, on or after the Distribution Date) arising out of, relating to or resulting from the management or conduct before, on or after the Distribution Date of the Semiconductor Equipment Business or ownership of the Semiconductor Equipment Assets (including Securities Liabilities to the extent arising out of, relating to or resulting from information concerning the management, business or operations of SEB, the SEB Subsidiaries or the other members of the Semiconductor Equipment Group in the Registration Statements and Proxy Statement), except as otherwise expressly provided herein; (viii) all Liabilities to persons employed by Varian or its Subsidiaries on or before the Effective Time, the services of whom were primarily dedicated to the Semiconductor Equipment Business, including Liabilities arising out of, relating to or resulting from the termination or alleged termination of such person's employment as a result of the Corporate Reorganization Transactions or the Distributions and Liabilities arising out of, relating to or 14 resulting from the assertion by any such person of employment by a member of another Group as a result of the Corporate Reorganization Transactions; and (ix) all Liabilities, including those expressly enumerated in clauses (i) through (vii), arising out of, related to, or resulting from the Thin Film Systems Business and the acquisition, ownership, use and disposition of the Assets related thereto. Notwithstanding the foregoing, the Semiconductor Equipment Liabilities shall not include: (x) any Liability set forth on Schedule 1.01(a); or (y) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be assumed or retained by any member of the Instruments Group or the Health Care Systems Group. "Separation Committee" has the meaning ascribed to such term in Section -------------------- 9.01(a). "Shared Assets" means (i) the Assets listed on Schedule 1.02, (ii) any ------------- claim or right of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) arising out of, relating to or resulting from, the management or conduct before the Distributions of the business of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions), which Asset is not expressly included in the definitions of "Health Care Systems Assets," "Instruments Assets" or "Semiconductor Equipment Assets" and which claim or right, whenever arising, has accrued before the Distribution Date and (iii) any Asset received in respect of a Shared Liability, the amount of which exceeds the amount of the Shared Liability then due and owing. "Shared Liabilities" means (i) the Liabilities listed on Schedule 1.01(a), ------------------ (ii) any Liability (whether arising before, on or after the Distributions) of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) arising out of, relating to or resulting from, the management or conduct before the Distributions of the businesses of Varian or its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and the Distributions) or their respective Assets, which Liability is not expressly included in the definitions of "Health Care Systems Liabilities," "Instruments Liabilities" or "Semiconductor Equipment Liabilities," including those Liabilities listed on Schedule 1.01(b), Securities Liabilities of Varian and its Subsidiaries (before giving effect to the Corporate Reorganization Transactions and Distributions) and/or any of its and their respective directors, officers, employees, agents or representative at or before the Distributions (other than Securities Liabilities specifically assumed by HCS, SEB and IB in this Agreement) and Liabilities arising out of, relating to or resulting from any alleged breach of fiduciary duty by the Board of Directors of Varian or any member thereof at or before the Distributions, (iii) the Costs of personnel and third party service providers involved in Insurance Administration with respect to the Company Policies, and (iv) the cost of any Policies, letters of credit or surety bonds insuring against or otherwise covering the Liabilities included in clauses (i) and (ii) and the Costs of personnel and third party service providers involved in Insurance Administration or Claims Administration with respect to such Policies. "Subsidiary" means, with respect to any Person: ---------- (i) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of a contingency) is at the time, directly or indirectly, owned or controlled by such Person or by such Person and one or more of its Subsidiaries; or (ii) any non-corporate entity in which such Person or such Person and one or more Subsidiaries of such Person either (A) directly or indirectly, at the date of determination thereof, has at least majority ownership interest, or (B) at the date of determination is a general partner or an entity performing similar functions (e.g., manager of a limited liability company or a trustee of a trust). 15 "Tax" or "Taxes" means any income, gross income, gross receipts, profits, --- ----- capital stock, franchise, withholding, payroll, social security, workers' compensation, unemployment, registration, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated, or other similar tax (including any fee, assessment or other charge in the nature of or in lieu of any tax) imposed by any Governmental Authority, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing. "Tax Benefit" means the product determined by multiplying the sum of all ----------- Transaction Expenditures (whether paid before, on or after the Effective Time) that are deductible for U.S. federal income tax purposes by 38%. "Tax Cost" means the sum of the products determined by multiplying the -------- gains on the Dispositions (whether recognized before, on or after the Effective Time) for U.S. federal income tax purposes by 38%. "Tax Sharing Agreement" means the Tax Sharing Agreement among Varian, IB --------------------- and SEB (including all exhibits or schedules thereto) substantially in the form of Exhibit D. "Thin Film Systems Business" means the business of the development, -------------------------- manufacture, sale and service of products for physical vapor disposition and chemical vapor disposition of thin films sold to Novellus Systems, Inc. effective June 13, 1997. "Third Party Claim" has the meaning ascribed to such term in Section ----------------- 7.07(a). "Transaction Expenditures" means all cash costs, expenses or other ------------------------ expenditures incurred before or after the date hereof in connection with the preparation, execution and delivery of this Agreement and the Ancillary Agreements and the effectuation of the Corporate Reorganization Transactions and the Distributions, including the items listed on Schedule 1.03, but excluding (i) taxes, (ii) the costs associated with the termination of personnel employed other than in the United States, (iii) Liabilities and expenditures related to the discretionary restructuring of a business, and (iv) Shared Liabilities. "Transition Services Agreement" means the Transition Services Agreement ----------------------------- among SEB, IB and Varian (including all exhibits or schedules thereto), substantially in the form of Exhibit E. "VAI Common Stock" has the meaning ascribed to such term in the recitals to ---------------- this Agreement. "VAI Term Loans" means the indebtedness outstanding under the Senior Notes -------------- of Varian issued and outstanding under the Master Shelf Agreement dated as of May 11, 1992 and the Note Purchase and Private Master Shelf Agreement dated as of October 18, 1996. "Varian" has the meaning ascribed to such term in the first paragraph of ------ this Agreement. "Varian Holders" means the holders of record of VAI Common Stock as of the -------------- Distribution Record Date. Section 1.02. References; Interpretation. References in this Agreement to -------------------------- any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. 16 ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS Section 2.01. Corporate Reorganization Transactions; Dispositions. --------------------------------------------------- (a) Corporate Reorganization. On or before the Distribution Date (but ------------------------ in all events before the Distributions), each of Varian, IB and SEB shall, and shall cause each of their respective Subsidiaries to, as applicable, take such action or actions as is necessary or appropriate to cause, effect and consummate the Corporate Reorganization Transactions in accordance with the terms and provisions set forth in Exhibit A. Notwithstanding the foregoing, each of Varian, IB and SEB agrees that before the Distributions, one or more of the Corporate Reorganization Transactions may be amended, modified, supplemented or eliminated by Varian in any manner determined by Varian in its sole discretion to be necessary or appropriate, including to qualify any of such transactions for tax-free treatment under the Code; provided, however, that no Corporate -------- ------- Reorganization Transaction may be amended, modified, supplemented or eliminated after the Varian stockholders approve the Distributions, unless it would not be materially adverse to the Varian stockholders. (b) Dispositions. ------------ (i) Varian shall use commercially reasonable efforts to sell Varian's leasehold interest in and buildings and fixtures for four of its buildings in the Stanford Research Park (the Ginzton Research Center at 3075 Hansen Way and the three buildings at 3030-3050 Hansen Way, Palo Alto) before the Distribution Date (the "Palo Alto Property Disposition"). (ii) Varian shall use commercially reasonable efforts to sell its Gulf Stream III aircraft, model year 1980 before the Distribution Date (the "Aircraft Disposition"). Section 2.02. Conveyance of Assets. Except as otherwise expressly provided -------------------- in this Agreement or the Ancillary Agreements, on or before the Distribution Date, (a) Health Care Systems Transfers. Varian shall, on behalf of itself and ----------------------------- the HCS Subsidiaries, transfer or cause to be transferred to IB or an IB Subsidiary all of Varian's and the HCS Subsidiaries' right, title and interest in the Instruments Assets. Varian shall, on behalf of itself and the HCS Subsidiaries, transfer or cause to be transferred to SEB or a SEB Subsidiary all of Varian's and the HCS Subsidiaries' right, title and interest in the Semiconductor Equipment Assets. (b) Instruments Transfers. IB shall, on behalf of itself and the IB --------------------- Subsidiaries, transfer or cause to be transferred to Varian or a HCS Subsidiary all of IB's and the IB Subsidiaries' right, title and interest in the Health Care Systems Assets. IB shall, on behalf of itself and the IB Subsidiaries, transfer or cause to be transferred to SEB or a SEB Subsidiary, all of IB's and the IB Subsidiaries' right, title and interest in the Semiconductor Equipment Assets. (c) Semiconductor Equipment Transfers. SEB shall, on behalf of itself --------------------------------- and the SEB Subsidiaries, transfer or cause to be transferred to Varian or a HCS Subsidiary all of SEB's and the SEB Subsidiaries' right, title and interest in the Health Care Systems Assets. SEB shall, on behalf of itself and the SEB Subsidiaries, transfer or cause to be transferred to IB or an IB Subsidiary all of SEB's and the SEB Subsidiaries' right, title and interest in the Instruments Assets. (d) Designation of Owner. Each of Varian, IB and SEB may designate the -------------------- member of its Group to which each Asset is to be transferred. Section 2.03. Transfer and Assignment of Certain Licenses and Permits. ------------------------------------------------------- Without limiting the generality of Section 2.02 and except as otherwise expressly provided in this Agreement or the Ancillary Agreements, on or before the Distribution Date: (a) Semiconductor Equipment Licenses. Each of Varian and IB shall (and, -------------------------------- if applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and 17 validly transferred to the appropriate member of the Semiconductor Equipment Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Health Care Systems Group or the Instruments Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Semiconductor Equipment Business and are not otherwise required by the Health Care Systems Business or the Instruments Business, respectively. (b) Instruments Licenses. Each of Varian and SEB shall (and, if -------------------- applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Instruments Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Health Care Systems Group or the Semiconductor Equipment Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Instruments Business and are not otherwise required by the Health Care Systems Business or the Semiconductor Equipment Business, respectively. (c) Health Care Systems Licenses. Each of SEB and IB shall (and, if ---------------------------- applicable, shall cause any other Person over which it has direct or indirect control to), duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Health Care Systems Group all transferable licenses, permits and authorizations issued by any Governmental Authority which are held in the name of any member of the Semiconductor Equipment Group or the Instruments Group, or any of their respective employees, officers, directors, stockholders or agents that relate to the Health Care Systems Business and are not otherwise required by the Semiconductor Equipment Group or the Instruments Group, respectively. Section 2.04. Transfer and Assignment of Certain Agreements. --------------------------------------------- (a) Transfers. Without limiting the generality of Section 2.02 and --------- except as otherwise expressly provided in this Agreement or the Ancillary Agreements, on or before the Distribution Date, and subject to the limitations set forth in this Section 2.04: (i) Each of SEB and IB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to), assign, transfer and convey to the appropriate member of the Health Care Systems Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Health Care Systems Business or any member of the Health Care Systems Group. (ii) Each of Varian and IB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to) assign, transfer and convey to the appropriate member of the Semiconductor Equipment Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Semiconductor Equipment Business or any member of the Semiconductor Equipment Group. (iii) Each of Varian and SEB shall (and, if applicable, shall cause any other Person over which it has direct or indirect control to) assign, transfer and convey to the appropriate member of the Instruments Group all its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Instruments Business or any member of the Instruments Group. (b) Obligations of Assignees. The assignee of any agreement assigned, ------------------------ in whole or in part, under this Agreement (an "Assignee") shall assume and agree to pay, perform and fully discharge all obligations of the assignor under such agreement (whether such obligations arose or were incurred before, on or after the Distribution Date and irrespective of whether such obligations have been asserted as of the Distribution Date) or, in the case of a partial assignment, such Assignee's portion of such obligations. (c) No Assignment of Certain Agreements. Notwithstanding anything in this ----------------------------------- Agreement to the contrary, this Agreement shall not constitute an agreement to assign any agreement, in whole or in part, or any rights thereunder if the agreement to assign or attempt to assign, without the consent of a third party, would constitute a breach thereof or in any way adversely affect the rights of the Assignee thereof. Until such consent is obtained or if an attempted assignment thereof would be ineffective or would adversely affect the rights of any party so that the Assignee would not, in fact, receive all such rights, the provisions of Section 2.14 shall apply to such agreement. 18 Section 2.05. Certain Financial and Other Arrangements. ---------------------------------------- (a) Settlement of Intercompany Accounts. All intercompany receivables, ----------------------------------- payables and loans (other than receivables, payables and loans otherwise expressly provided for in this Agreement or an Ancillary Agreement), including in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, (i) between any member of the Semiconductor Equipment Group, on the one hand, and any member of the Health Care Systems Group, on the other hand, (ii) between any member of the Health Care Systems Group, on the one hand, and any member of the Instruments Group, on the other hand, and (iii) between any member of the Instruments Group, on the one hand, and any member of the Semiconductor Equipment Group, on the other hand, shall, as of the Effective Time, be settled, capitalized or converted into ordinary trade accounts in accordance with the Corporate Reorganization Transactions and, if applicable, shall be paid or settled in the ordinary course of business in a manner consistent with payment or settlement of similar accounts arising from transactions with third parties. (b) SEB Capital Contribution; Consolidated Debt. ------------------------------------------- (i) Capital Contributions. In addition to any other obligations --------------------- under this Agreement, on or before the Distribution Date, Varian shall contribute to SEB an amount of Cash and Cash Equivalents such that after giving effect to the Corporate Reorganization Transactions (A) the aggregate Cash and Cash Equivalents of the members of the Semiconductor Equipment Group as of the Effective Time would equal at least $100,000,000 and (B) SEB would have a consolidated Net Worth as of the Effective Time of at least $150,000,000. Such contribution shall be based on Varian's good faith estimate of the Cash and Cash Equivalents of the Semiconductor Equipment Group and the consolidated Net Worth of SEB as of the Effective Time and shall be subject to adjustment as provided in Section 9.03(c)(i). (ii) Consolidated Debt. Varian shall not cause or permit the transfer ----------------- to or retention by any member of the Semiconductor Equipment Group of Notes Payable or other Consolidated Debt if, as a result thereof, the Consolidated Debt of SEB as of the Effective Time would exceed $5,000,000. If as a result of the Corporate Reorganization Transactions, the Consolidated Debt of SEB would exceed such amount, Varian shall take such actions as shall be necessary, which may include but shall not be limited to, payment, partial payment or provision for payment in the form of the contribution of additional Cash and Cash Equivalents of one or more Liabilities comprising such Consolidated Debt to reduce the amount thereof to no more than $5,000,000. The Consolidated Debt caused or permitted to be transferred or retained shall be based on Varian's good faith estimate of the Notes Payable and other Consolidated Debt of the Semiconductor Equipment Group as of the Effective Time and shall be subject to adjustment as provided in Secetion 9.03(c)(i). (c) IB Capital Contribution; Term Loans; Notes Payable. -------------------------------------------------- (i) Term Loans. As of the Effective Time, IB shall assume as an ---------- Instruments Liability 50% of the VAI Term Loans outstanding as of the Effective Time (the "IB Term Loans"). (ii) Notes Payable; IB Capital Contribution. As of the Effective -------------------------------------- Time, the Instruments Group shall assume or retain as an Instruments Liability an amount of the Notes Payable and shall retain or have contributed to it as of the Effective Time an aggregate amount of Cash and Cash Equivalents such that the Net Debt of IB as of the Effective Time would be equal to 50% of the combined Net Debt of HCS and IB as of the Effective Time, after giving effect to the provisions of Section 2.05(b) but before giving effect to the provisions of Section 2.05(d). Notwithstanding the foregoing, if the assumptions, contributions and retentions contemplated by the immediately preceding sentence (after giving effect to the provisions of Section 2.05(b) but before giving effect to the provisions of Section 2.05(d)) would cause the consolidated Net Worth of HCS as of the Effective Time (A) to exceed 50% of the combined consolidated Net Worths of HCS and IB as of the Effective Time or (B) to be less than 40% of the combined consolidated Net Worths of HCS and IB as of the Effective Time, then, in the case of (A) the amount of Notes Payable to be assumed or retained by the Instruments Group shall be decreased (and/or the Cash and Cash Equivalents contributed to IB by Varian increased) such that the consolidated Net Worth of HCS as of the Effective Time would equal 50% of the combined consolidated Net Worths of HCS and IB as of the Effective Time and, in the case of (B) the amount of Notes Payable to be assumed or retained by the Instrument Group 19 shall be increased (and/or the Cash and Cash Equivalents contributed to IB by Varian decreased) such that the consolidated Net Worth of HCS as of the Effective Time would equal 40% of the combined consolidated Net Worths of HCS and IB as of the Effective Time. For purposes of this Section 2.05(c)(ii), the consolidated Net Worth of HCS shall be determined without giving effect to any Transaction Expenditures or Dispositions (including associated tax benefit and tax cost) that have been accrued, paid or received by HCS as of the Effective Time. The amounts of Notes Payable, Cash and Cash Equivalents and Net Worth used to determine the assumptions, contributions and retentions provided in this Section 2.05(c)(ii) shall be based on Varian's good faith estimates and shall be subject to adjustment as provided in Section 9.03(c)(ii). (d) Additional Allocations. In addition to the Notes Payable to be ---------------------- assumed or retained by the Instruments Group and/or the capital contributions to be made to IB by Varian contemplated by paragraph (c) above, if the After-tax Differential is a positive number, then the amount of Notes Payable to be assumed or retained by the Instruments Group shall be decreased (and/or the Cash and Cash Equivalents contributed to IB by Varian increased) by an amount equal to 50% of the After-tax Differential. If, instead, the After-tax Differential is a negative number, then the amount of Notes Payable to be assumed or retained by the Instruments Group shall be increased (and/or the Cash and Cash Equivalents contributed to IB by Varian decreased) by an amount equal to 50% of the absolute After-tax Differential (i.e., irrespective of its negative sign). The components of the After-tax Differential which are not determined as of the Effective Time shall be based on Varian's good faith estimates immediately before the Effective Time and shall be subject to adjustment as provided in Section 9.04. (e) Renegotiation and Allocation. Varian shall use its reasonable ---------------------------- efforts to obtain, before the Distribution Date, all required consents, waivers or amendments or other actions by the lenders under the VAI Term Loans and the Notes Payable to permit the transfers, assumptions and retentions contemplated by Sections 2.05(b), (c) and (d). Notwithstanding the foregoing, Notes Payable shall first be transferred to or retained by the member of the Group to which any related Asset is transferred, or by which any related Asset is retained, and shall only be allocated to another Group to the extent otherwise required by this Section 2.05. Section 2.06. Assumption and Satisfaction of Liabilities. Except as ------------------------------------------ otherwise expressly provided in this Agreement or any Ancillary Agreement, from and after the Effective Time, (a) Health Care Systems Liabilities. HCS shall, and shall cause the other ------------------------------- members of the Health Care Systems Group to, assume, pay, perform and discharge all Health Care Systems Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions; (b) Semiconductor Equipment Liabilities. SEB shall, and shall cause the ----------------------------------- other members of the Semiconductor Equipment Group to, assume, pay, perform and discharge all Semiconductor Equipment Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions; and (c) Instruments Liabilities. IB shall, and shall cause the other members ----------------------- of the Instruments Group to, assume, pay, perform and discharge all Instruments Liabilities in accordance with their terms, when determinable, and otherwise in accordance with the practice of the parties before the Distributions. Section 2.07. Stock Issuance; Dividends. On or before the Distribution ------------------------- Date (but in all events before the Distributions), (a) IB Common Stock. IB shall take all necessary actions so that on the --------------- Distribution Date, the number of shares of IB Common Stock outstanding and held by Varian is equal to the number of shares of VAI Common Stock outstanding on the Distribution Record Date. (b) SEB Common Stock. SEB shall take all necessary actions so that on ---------------- the Distribution Date, the number of shares of SEB Common Stock outstanding and held by Varian is equal to the number of shares of VAI Common Stock outstanding on the Distribution Record Date. Section 2.08. Charters; By-laws; Rights Plans. On or before the ------------------------------- Distribution Date (but in all events before the Distributions): 20 (a) SEB Governance Matters. Each of Varian and SEB shall take all ---------------------- necessary actions so that as of the Effective Time the Certificate of Incorporation and By-laws of SEB will be substantially in the forms filed as exhibits to SEB's Registration Statement at the time it becomes effective and a Rights Agreement in substantially the form filed as an exhibit to SEB's Registration Statement at the time it becomes effective shall have been executed and delivered. (b) IB Governance Matters. Each of Varian and IB shall take all necessary --------------------- actions so that as of the Effective Time the Certificate of Incorporation and By-laws of IB will be substantially in the forms filed as exhibits to IB's Registration Statement at the time it becomes effective and a Rights Agreement in substantially the form filed as an exhibit to IB's Registration Statement at the time it becomes effective shall have been executed and delivered. (c) HCS Governance Matters. Varian shall take all necessary actions so ---------------------- that as of the Effective Time the Amended and Restated Certificate of Incorporation or Certificate of Amendment of Varian will be substantially in the form attached as an annex to the Proxy Statement, the By-laws of Varian will be in substantially the form of Exhibit L. Section 2.09. Directors, Officers and Employees. --------------------------------- (a) Election of Directors of IB and SEB. On or before the Distribution ----------------------------------- Date: (i) Each of Varian and SEB shall take all necessary actions so that as of the Effective Time the directors of SEB will be as set forth in the Proxy Statement. (ii) Each of Varian and IB shall take all necessary actions so that as of the Effective Time the directors of IB will be as set forth in the Proxy Statement. (b) Election of Officers. On or before the Distribution Date, each of -------------------- Varian, SEB and IB, as applicable, shall take all necessary actions so that as of the Effective Time the officers of Varian, SEB and IB, respectively, will be as set forth in the Proxy Statement. (c) Resignations. Subject to the provisions of Sections 2.09(a) and ------------ 2.09(b), each of Varian, SEB and IB, shall take all necessary action to cause their respective directors and employees, and those of the members of their respective Groups, to resign, as of the Effective Time, from all boards of directors or similar governing bodies of each member of the other Groups on which they serve, and from all positions as officers or employees of any member of such other Groups, except as otherwise set forth in the Proxy Statement or mutually agreed to in writing on or before the Distribution Date by Varian, on the one hand, and, as applicable, SEB and/or IB, on the other hand. Section 2.10. Other Transactions. On or before the Distributions, each ------------------ of Varian, IB and SEB shall have consummated those other transactions in connection with the Corporate Reorganization Transactions and the Distributions that are contemplated by the Proxy Statement and the ruling request submission by Varian to the Internal Revenue Service and not specifically referred to in Sections 2.01 through 2.09, subject, however, to the limitation set forth in Section 2.01. Section 2.11. Meeting; Proxy Statement; Other Filings. --------------------------------------- (a) Meeting. The Board of Directors of Varian shall establish the Meeting ------- Record Date and the Meeting Date and shall take all necessary or appropriate actions with respect to the Meeting. At the Meeting there shall be submitted to the Varian stockholders for their vote the Distribution Proposals and such other proposals as are included in the notice of the Meeting. (b) Proxy Statement; Registration Statements; NYSE Notice. Varian, SEB ----------------------------------------------------- and IB shall prepare the Proxy Statement and the Registration Statements. Varian shall file the Proxy Statement with the Commission and shall mail the Proxy Statement to the holders of VAI Common Stock as of the Meeting Record Date. Each of SEB and IB shall file their respective Registration Statements with the Commission. Varian shall, to the extent possible, give the NYSE not less than ten days advance notice of the Distribution Record Date in compliance with Rule 10b- 21 17 under the Exchange Act. Each of Varian, SEB and IB shall use reasonable commercial efforts to cause the Registration Statements to become effective under the Exchange Act on or before the Distribution Date. (c) Other Filings. Varian, SEB and IB shall cooperate in preparing, ------------- filing with the Commission under the Securities Act and causing to become effective any registration statements or amendments thereto that are appropriate to reflect the establishment of or amendments to any employee benefit plan contemplated by the Employee Benefits Allocation Agreement, the Proxy Statement or otherwise as necessary to reflect the transactions contemplated by this Agreement. Section 2.12. State Securities Laws. Before the Distribution Date, each --------------------- of Varian, SEB and IB shall take all necessary or appropriate actions under the securities or blue sky Laws of states or other political subdivisions of the United States in order to effect the Distributions. Section 2.13. Listing Application. Before the Distribution Date, IB and ------------------- SEB shall prepare and file with a national securities exchange or Nasdaq listing applications and related documents and shall take all other necessary or appropriate actions in order to cause a national securities exchange to list, or Nasdaq to approve for quotation on its National Market, on or before the Distribution Date the SEB Common Shares and the IB Common Shares. Section 2.14. Transfers Not Effected Before the Distributions; Transfers ---------------------------------------------------------- Deemed Effective as of the Effective Time. If any transfers contemplated by - ----------------------------------------- this Article II are not consummated at or before the Effective Time, the parties shall (and shall cause their respective Affiliates and members of their respective Groups to) cooperate to effect such transfers as promptly as practicable after the Effective Time. Nothing herein shall be deemed to require the transfer of any Assets or the assumption of any Liabilities which by their terms or operation of Law cannot be transferred or assumed; provided, however, -------- ------- that the parties shall (and shall cause their respective Affiliates and members of their respective Groups to) cooperate to seek to obtain any necessary Consents for the transfer of all Assets and Liabilities contemplated to be transferred pursuant to this Article II. Where any transfer of Assets or Liabilities has not been consummated at or before the Effective Time, from and after the Effective Time the party retaining such Asset or Liability (or, as applicable, such other member or members of such party's Group) shall hold such Asset in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto) or retain such Liability for the account of the party by whom such Liability is to be assumed, as the case may be, and take such other action as may be reasonably requested by the party to whom such Asset is to be transferred, or by whom such Liability is to be assumed, as the case may be, in order to place such party, to the extent reasonably possible, in the same position as it would have been had such Asset or Liability been transferred or assumed as contemplated by this Agreement. As, when and if any such Asset or Liability becomes transferable or assumable, such transfer or assumption shall be effected as promptly as practicable. As of the Effective Time, each party (or, if applicable, such other member or members of such party's Group) shall be deemed to have acquired (or, as applicable, retained) complete and sole beneficial ownership over all Assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all the Liabilities, and all duties, obligations and responsibilities incident thereto, which such party (or any member of such party's Group) is entitled to acquire or required to assume under this Agreement. Section 2.15. Ancillary Agreements. On or before the Distribution Date, -------------------- each of Varian, SEB and IB shall enter into, and/or where applicable shall cause such other members of their respective Groups to enter into, (a) the Ancillary Agreements, (b) the Conveyancing and Assumption Instruments, and (c) any other agreements in respect of the Distributions as are reasonably necessary or appropriate in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. Section 2.16. Operations in Ordinary Course. Except as otherwise ----------------------------- expressly provided in this Agreement, between the Agreement Date and the Effective Time, each of Varian, SEB and IB shall, and shall cause its Subsidiaries to, conduct its business in a manner substantially consistent with current and past operating practices and in the ordinary course, including with respect to the payment and administration of accounts payable and the collection and administration of accounts receivable, the purchase of capital assets and equipment and the management of inventories. 22 ARTICLE III THE DISTRIBUTIONS Section 3.01. Record Date and Distribution Date. Subject to the --------------------------------- satisfaction or, if applicable, waiver of the conditions set forth in Section 4.01, the Board of Directors of Varian shall establish the Distribution Record Date and the Distribution Date and any appropriate procedures in connection with the Distributions. Section 3.02. The Distributions. ----------------- (a) On or before the Distribution Date, Varian shall: (i) deliver to the Agent the certificates representing the IB Common Shares and the SEB Common Shares, in each case, endorsed by Varian in blank, for the benefit of the Varian Holders; and (ii) instruct the Agent to distribute, on or as soon as practicable after the Distribution Date, to the Varian Holders, (A) one share of IB Common Stock for each share of VAI Common Stock; and (B) one share of SEB Common Stock for each share of VAI Common Stock. (b) Duties and Responsibilities of SEB and IB. All shares of SEB Common ----------------------------------------- Stock issued in the SEB Distribution shall be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive (or similar) rights. All shares of IB Common Stock issued in the IB Distribution shall be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive (or similar) rights. As soon as practicable after the Distribution Date, certificates for shares of IB Common Stock and SEB Common Stock shall be mailed by the Agent to the Varian Holders, unless the Agent uses a book entry system of stock record keeping, in which event no certificates for shares of IB Common Stock or SEB Common Stock will be used unless a stockholder so requests. If certificates are used, each of SEB and IB shall provide, or cause to be provided, to the Agent sufficient certificates representing SEB Common Stock and IB Common Stock, respectively, in such denominations as the Agent may request in order to effect the Distributions. (c) Unclaimed Stock or Cash. Any shares of SEB Common Stock, shares of IB ----------------------- Common Stock or any dividends or distributions, if any, with respect to SEB Common Stock or IB Common Stock that remain unclaimed 180 days after the Distribution Date shall be returned to HCS and the Persons entitled thereto shall look only to HCS for such shares of SEB Common Stock, shares of IB Common Stock, and any dividends or distributions, subject in each case to applicable escheat or other abandoned property Laws. ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS Section 4.01. Conditions Precedent to the Distributions. The obligations ----------------------------------------- of the parties to consummate the Distributions are subject to the satisfaction or waiver as determined by Varian in its sole discretion (except as provided in Section 4.02 below), of each of the following conditions: (a) Declaration of Distributions and Establishment of Distribution Date. ------------------------------------------------------------------- The Board of Directors of Varian shall have, in its sole discretion and subject to and in accordance with the applicable rules of the NYSE and provisions of the DGCL, declared the Distributions and established the Distribution Record Date, the Distribution Date, the date on which shares of SEB Common Stock and IB Common Stock, and any cash in lieu of fractional shares shall be mailed to the Varian Holders and all appropriate procedures in connection with the Distributions to the extent not provided in this Agreement. (b) Tax Sharing Agreement. Varian, SEB and IB shall have executed and --------------------- delivered the Tax Sharing Agreement and such agreement shall be in full force and effect. (c) Employee Benefits Allocation Agreement. Varian, SEB and IB shall -------------------------------------- have executed and delivered the Employee Benefits Allocation Agreement and such agreement shall be in full force and effect. 23 (d) Transition Services Agreement. Varian, SEB and IB shall have ----------------------------- executed and delivered the Transition Services Agreement and such agreement shall be in full force and effect. (e) Intellectual Property Agreement. Varian, SEB and IB shall have ------------------------------- executed and delivered the Intellectual Property Agreement and such agreement shall be in full force and effect. (f) Effective Date of Registration Statements. The Registration ----------------------------------------- Statements shall have been declared effective by order of the Commission and no stop order shall have been entered, and no proceeding for that purpose shall have been initiated or threatened by the Commission with respect thereto. (g) Listing. The SEB Common Stock and the IB Common Stock shall have been ------- approved for listing on a national securities exchange or quotation on the Nasdaq National Market, on or before consummation of the Distributions. (h) Tax Ruling. Varian shall have received rulings from the Internal ---------- Revenue Service in form and substance satisfactory to the Board of Directors of Varian, which rulings shall be in full force and effect as of the Distribution Date. (i) Pre-Distribution Transactions. Each of the transactions and other ----------------------------- matters contemplated by Article II (including each of the distributions, transfers, conveyances, contributions, assignments or other transactions included in, or otherwise necessary to consummate, the Corporate Reorganization Transactions) shall have been consummated in all material respects. (j) Covenants. The covenants contained in Article V of this Agreement --------- that are required to be performed on or before the Distribution Date shall have been fully performed. (k) No Prohibitions. No temporary, preliminary or permanent injunction or --------------- other order, decree or ruling issued by a Governmental Authority and no statute, rule, regulation or executive order promulgated or enacted by any Governmental Authority shall be in effect materially restricting, preventing or prohibiting the consummation of the Distributions. (l) Consents. Each of Varian, SEB and IB and the other members of their -------- respective Groups shall have obtained all Consents the failure of which to obtain would, in the determination of the Board of Directors of Varian, have a material adverse effect on HCS, SEB or IB. (m) Stockholder Approval. The Distribution Proposals shall have been -------------------- approved by the requisite vote of the holders of VAI Common Stock in accordance with the DGCL and the provisions of Varian's Restated Certificate of Incorporation. (n) Fairness Opinion. Warburg Dillon Read LLC shall have delivered its ---------------- written opinion to the Board of Directors of Varian dated as of the date the Distributions are declared confirming that the Distributions are fair, from a financial point of view, to the Varian Holders, and such opinion shall not have been withdrawn or rescinded. Section 4.02. Waivers. After the Varian stockholders approve the ------- Distribution Proposals, the conditions set forth in Section 4.01 may only be waived if the Board of Directors of Varian determines such waiver would not be materially adverse to the Varian stockholders. Further, the Board of Directors may only waive the condition set forth in Section 4.0(h) with respect to receipt of Internal Revenue Service tax rulings if it has received an opinion of counsel substantially to the effect that, for federal income tax purposes, no gain or loss will be recognized by any holder of VAI Common Stock as a result of the Distributions and no gain or loss will be recognized by the Company upon the Distributions, which opinion shall not have been withdrawn or rescinded as of the Effective Time. ARTICLE V COVENANTS Section 5.0. Further Assurances; Consents. In addition to the actions ---------------------------- otherwise expressly provided in this Agreement, each party shall use its commercially reasonable efforts to (a) execute and deliver, or cause to be 24 executed and delivered, such instruments and documents and take, or cause to be taken, such further or other actions as any other party may reasonably request to effectuate the purposes of this Agreement and carry out the terms hereof, and (b) take or cause to be taken all actions, and to do, or cause to be done, all things reasonably necessary or appropriate under applicable Laws, agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including (notwithstanding Section 5.05(c)) using its commercially reasonable efforts to obtain any Consents, to enter into amendatory agreements and to make any filings and applications necessary or appropriate in order to consummate the transactions contemplated by this Agreement; provided, however, -------- ------- that no party shall be obligated to pay any consideration therefor (except for filing fees and other similar charges) to any third party from whom such Consents or amendments are requested or to take any action or omit to take any action if the taking or omission would be unreasonable burdensome to the party or its Group or the Group's business. Section 5.02. Intellectual Property Matters. ----------------------------- (a) Intellectual Property Agreement Controls. Each party acknowledges ---------------------------------------- that, after the Distribution Date, it shall have no interest in nor any right to use or display the name or any Intellectual Property of another party in any way, except to the extent expressly provided in this Agreement or in any Ancillary Agreement and except for any use which is otherwise permissible as "fair use" under applicable Law. Each party further understands and agrees that the rights, obligations and responsibilities of the parties with respect to Intellectual Property matters shall be governed by the Intellectual Property Agreement to the extent therein provided. (b) No Representation of Affiliation. After the Distribution Date, no -------------------------------- party shall represent or permit to be represented to any third party that it or any member of its Group has a business affiliation with any other party or any member of such other party's Group, except as expressly permitted by an Ancillary Agreement. Section 5.03. Employees; Employee Benefits. ---------------------------- (a) Treatment of Employees. As of the Effective Time, except as expressly ---------------------- provided in the Employee Benefits Allocation Agreement, (i) those Persons employed in the Health Care Systems Business shall remain or become employees of the applicable member of the Health Care Systems Group, (ii) those Persons employed in the Instruments Business shall become employees of the applicable member of the Instruments Group, and (iii) those Persons employed in the Semiconductor Equipment Business shall become employees of the applicable member of the Semiconductor Equipment Group. (b) Employee Benefits Allocation Agreement Controls. Each party further ----------------------------------------------- understands and agrees that the rights, obligations and responsibilities of the parties with respect to employees and employee benefit matters shall be governed by the Employee Benefits Allocation Agreement to the extent therein provided. Section 5.04. Tax Matters. Each party intends that (a) the contributions ----------- of Assets to IB and SEB each be treated as a reorganization within the meaning of section 368(a)(1)(D) of the Code with respect to which no gain or loss is recognized by any of the parties, and (b) the Distributions be treated as tax- free distributions under section 355 of the Code and each such party shall use its best efforts to cause the Distributions to so qualify. Each party further understands and agrees that the rights, obligations and responsibilities of the parties with respect to Tax matters will be governed by the Tax Sharing Agreement to the extent therein provided. Section 5.05. No Representations or Warranties. -------------------------------- (a) General. Each party understands and agrees that, except as otherwise ------- expressly provided in any Ancillary Agreement or paragraph (c) below, no party is, in this Agreement or in any other agreement or document contemplated by this Agreement (including the Conveyancing and Assumption Instruments) or otherwise, making any representation or warranty whatsoever, including representing or warranting in any way as to the Assets, businesses or Liabilities retained, transferred or assumed as contemplated by this Agreement, as to the value or freedom from Security Interests, or any other matter concerning any Assets or Liabilities of such party, or as to the absence of any defenses or right of set- off or freedom from counterclaim with respect to any claim or other Asset, including any account receivable or any Liability of any party, or as to the legal sufficiency of any assignment, document or instrument delivered under this Agreement to convey title to any Asset or any other thing of value upon the execution, delivery and filing thereof. 25 (b) Disclaimer of Merchantability or Fitness of Assets. Each party -------------------------------------------------- further understands and agrees that there are no warranties, express or implied, as to the merchantability or fitness of any of the Assets either transferred to or retained by the parties, and that, notwithstanding anything to the contrary expressly provided in the applicable Conveyancing and Assumption Instrument, all Assets either transferred or retained by the parties shall be "as is, where is" and that, subject to Section 5.01, the party to which any such Assets are transferred, or which retains any such Assets, shall bear the economic and legal risks that any conveyances of such Assets shall prove to be insufficient to vest in the transferee good and marketable title, free and clear of any Security Interest. (c) No Representations or Warranties Regarding Consents. Each party --------------------------------------------------- understands and agrees that, except as otherwise expressly provided in the applicable Conveyancing and Assumption Instruments, no party is representing or warranting in any way that the obtaining of any Consents, the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable Laws. Each party further understands and agrees that the party to which any Assets are transferred pursuant to this Agreement shall bear the economic and legal risk that any necessary Consents are not obtained, that any necessary amendatory agreements are not executed and delivered or that the provisions of any applicable agreements or requirements of applicable Laws are not satisfied. Section 5.06. Removal of Certain Guarantees; Releases from Liabilities. -------------------------------------------------------- (a) Removal of Varian as Guarantor of Semiconductor Equipment Liabilities ---------------------------------------------------------------------- and Instruments Liabilities. Except as otherwise expressly provided in an - --------------------------- Ancillary Agreement, each party shall use its commercially reasonable efforts to have, on or before the Distribution Date, or as soon as practicable thereafter, (i) Varian and any other member of the Health Care Systems Group removed as a guarantor of, or obligor under or for, any Semiconductor Equipment Liability or Instruments Liability, (ii) SEB and any other member of the Semiconductor Equipment Group removed as a guarantor of, or obligor under or for, any Health Care Systems Liability or Instruments Liability, and (iii) IB and any other member of the Instruments Group removed as a guarantor of, or obligor under or for, any Health Care Systems Liability or Semiconductor Equipment Liability. (b) Indemnification for Guaranties. If (i) a party is unable to obtain, ------------------------------ or to cause to be obtained, any removal described in paragraph (a) above, or (ii) Liabilities arise from and after the Effective Time but before a guarantor or obligor with reference to any such Liability is removed pursuant to Section 5.06(a), then such guarantor or obligor shall be indemnified for all Liabilities incurred by it in its capacity as guarantor or obligor by (A) HCS with respect to any Health Care Systems Liabilities, (B) SEB with respect to any Semiconductor Equipment Liabilities, and (C) IB with respect to any Instruments Liabilities. Without limiting the foregoing, each party shall, or shall cause a member of its Group to, reimburse any such guarantor or obligor as soon as practicable (but in no event later than 30 days) following receipt of notice of a payment made pursuant to this Section 5.06(b) in respect of the party's Liabilities. (c) Additional Obligations. In the event that at any time before or ---------------------- after the Distribution Date, a party identifies any letters of credit, interest rate or foreign exchange contracts or other contracts (excluding guarantees) that relate primarily to one business but for which a member of another Group has contingent, secondary, joint, several or other Liability of any nature whatsoever, the party the business of which is primarily liable shall, at its expense, take such actions and enter into such agreements and arrangements as the other party may reasonably request to effect such party's (or the member of each party's Group) release or substitution. (d) Other Releases. Each party shall use commercially reasonable efforts -------------- to obtain, or cause to be obtained, any Consent, substitution or amendment required to novate or assign all obligations under agreements, leases, licenses and other obligation or Liabilities of any nature whatsoever transferred under this Agreement, or to obtain in writing the unconditional release of the assignor so that in each such case, IB shall be solely responsible for the Instruments Liabilities, HCS shall be solely responsible for the Health Care Systems Liabilities and SEB shall be solely responsible for the Semiconductor Equipment Liabilities; provided, however, that no party shall be obligated to -------- ------- pay any consideration therefor (except for filing fees or other similar charges) to any third party from whom such Consents, substitutions, amendments or releases are requested. Whether or not any such Consent, substitution, amendment or release is obtained, nothing in this Section 5.06(d) shall in any way limit the obligations of the parties under Article VII. 26 Section 5.07. Intercompany Agreements. As of the Effective Time, each ----------------------- party shall (and shall cause each other member of its Group to) terminate each agreement between it and any member of any other Groups (other than this Agreement, the Ancillary Agreements, the Conveyancing and Assumption Instruments and any agreements that do not take effect until the Effective Time); provided, -------- however, that such termination shall not affect any of the rights and/or - ------- obligations of the parties to such agreements that accrued or were incurred before the Effective Time (subject to the terms of Section 2.05(a)). Section 5.08. Nondisclosure Agreements. Each of SEB and IB agrees to be ------------------------ bound by and subject to the terms and provisions of each of the Nondisclosure Agreements for the same period of time and to the same extent as Varian (or the applicable Subsidiary of Varian that is a party to such Nondisclosure Agreement). Varian shall not, amend, supplement, terminate or waive any provisions of the Nondisclosure Agreements (a) that relate to the Instruments Business without the prior written consent of IB, or (b) that relate to the Semiconductor Equipment Business without the prior written consent of SEB. Section 5.09. Receipts after the Distribution Date. From and after the ------------------------------------ Distribution Date each party shall (or shall cause the applicable member of its Group to) promptly transfer to the appropriate other party, or the appropriate member of such other party's Group, any property it receives that is an Asset of such other party or a member of the other party's Group. Without limiting the foregoing, funds received by a member of one Group upon payment of accounts receivable that belong to a member of another Group shall be transferred to the other Group as soon as practicable (but in no event later than 30 business days) after receipt of such funds. Section 5.10. Post-Distribution Audit. ----------------------- (a) Preparation of Closing Balance Sheets. As soon as practicable after ------------------------------------- the Effective Time, Varian shall cause PricewaterhouseCoopers LLP (or another comparable independent accounting firm selected by Varian (the "Auditors")) to: (i) conduct an audit of IB and the IB Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for IB and the IB Subsidiaries as of the Effective Time (the "IB Closing Balance Sheet"); (ii) conduct an audit of HCS and the HCS Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for HCS and the HCS Subsidiaries as of the Effective Time (the "HCS Closing Balance Sheet"); (iii) conduct an audit of SEB and the SEB Subsidiaries in order to prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet for SEB and the SEB Subsidiaries, as of the Effective Time (the "SEB Closing Balance Sheet"); and to deliver such Closing Balance Sheets within 90 days after the Distribution Date. (b) Audit Requirements. Each of the IB Closing Balance Sheet, the HCS ------------------ Closing Balance Sheet and the SEB Closing Balance Sheet shall be prepared on the basis of an audit conducted by the Auditors in accordance with GAAP consistently applied and without giving effect to any change in accounting principles required on account of the consummation of the Distributions, except that, to the extent that any definition contained herein contemplates inclusion or exclusion of an item that would not be included or excluded under GAAP, the Auditors shall compute such item in accordance with such definition. During the course of the preparation of the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet by the Auditors, and during any period in which there is a dispute regarding either the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet, each of HCS, IB and SEB, as the case may be, shall cooperate with the Auditors and the other parties and shall have access to all pertinent accounting and each other's records. Each party also shall use its reasonable efforts to cause the work papers of the Auditors in respect of its business to be made available to each of the other parties. 27 ARTICLE VI ACCESS TO INFORMATION; CONFIDENTIALITY Section 6.01. Provision, Transfer and Delivery of Applicable Corporate -------------------------------------------------------- Records. Except as expressly provided in any Ancillary Agreement, - ------- (a) Provision, Transfer and Delivery of SEB Records. Each of HCS and IB ----------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at SEB's expense) to SEB the Books and Records in its possession that relate primarily to the Semiconductor Equipment Assets, the Semiconductor Equipment Liabilities or the Semiconductor Equipment Business or are necessary to operate the Semiconductor Equipment Business (collectively, the "SEB Records"), except to the extent such items are already in the possession of any member of the Semiconductor Equipment Group. (b) Provision, Transfer and Delivery of IB Records. Each of HCS and SEB ---------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at IB's expense) to IB the Books and Records in its possession that relate primarily to the Instruments Assets, the Instruments Liabilities or the Instruments Business or are necessary to operate the Instruments Business (collectively, the "IB Records"), except to the extent such items are already in the possession of any member of the Instruments Group. (c) Provision, Transfer and Delivery of HCS Records. Each of SEB and IB ----------------------------------------------- shall (and shall cause each other member of its Group to) as soon as practicable after the Distribution Date transport (at HCS's expense) to HCS the Books and Records in its possession that relate primarily to the Health Care Systems Assets, the Health Care Systems Liabilities or the Health Care Systems Business or are necessary to operate the Health Care Systems Business (collectively, the "HCS Records"), except to the extent such items are already in the possession of any member of the Health Care Systems Group. Section 6.02. Access to Books and Records. Unless otherwise contemplated --------------------------- by Section 6.06, from and after the Distribution Date, each of HCS, SEB and IB shall (and shall cause each other member of its Group to) afford to each other party and its authorized Representatives reasonable access and duplicating rights during normal business hours, subject to appropriate restrictions for classified, privileged or confidential information, to the personnel, properties, Books and Records and other data and information of such party and each other member of such party's Group created before the Distributions insofar as such access is reasonably required by the requesting party for the conduct of the requesting party's business (but not for competitive purposes). Section 6.03. Confidentiality. --------------- (a) General Restriction on Disclosure. From and after the Distribution --------------------------------- Date, none of HCS, SEB and IB shall (or permit any other member of its Group to) use without the prior written consent of the applicable party and shall (and shall cause each other member of its Group to) hold, and shall cause its Representatives to (and those of any other member of its Group to) hold, in strict confidence, all information concerning each other party and the other members of each other party's Group in its possession, custody or control to the extent such information either: (i) relates to the period up to the Distribution Date; (ii) relates to any Ancillary Agreement; or (iii) is obtained in the course of performing services for the other party pursuant to any Ancillary Agreement, and shall not (and shall cause each other member of its Group not to) otherwise release or disclose such information to any other Person, except its Representatives (who shall be bound by this Section 6.03), without the prior written consent of the applicable party or parties, unless compelled by judicial or administrative process or, in the opinion of such party's counsel, required by Law and such party has used commercially reasonable efforts to consult with the applicable party or parties before such disclosure. 28 (b) Exceptions to Confidential Treatment. Notwithstanding paragraph (a), ------------------------------------ no party shall be prohibited from using or permitting the use of, or required to hold in confidence and not release or disclose, any information to the extent that (i) such information has been or is in the public domain through no fault of such party, (ii) such information was used or held for use in such party's business before the Distribution Date, (iii) such information is, after the Distribution Date, lawfully acquired from other sources by such party, (iv) this Agreement, any Ancillary Agreement or any other agreement entered into pursuant to this Agreement permits the use or disclosure of such information by such party, or (v) such information is necessary for such party to investigate, evaluate, defend or prosecute any claim or Action involving any other party to this Agreement. Section 6.04. Witness Services. From and after the Distribution Date, ---------------- each of HCS, SEB and IB shall use its commercially reasonable efforts to make available to each other party, upon reasonable written request, the officers, directors, employees and agents of each member of its Group for consultation and/or as witnesses to the extent that (a) such Persons may reasonably be useful or required in connection with the prosecution or defense of any Action or the investigation of any claim which involves the interests of the requesting party or any member of its Group; and (b) there is no conflict in the Action or claim between the requesting party or any member of its respective Group and the party to which a request is made pursuant to this Section or any member of such party's Group. The employing party agrees that such consultant or witness shall be made available to the requesting party to the same extent that the employing party would have made such consultant or witness available if the Distributions had not occurred. Section 6.05. Reimbursement; Other Matters. Except as otherwise ---------------------------- contemplated by this Agreement (including circumstances in which indemnification is sought pursuant to Article VII) or by any Ancillary Agreement, a party providing Books and Records or access to information or consulting or witness services to any other party (or such party's Representatives) under this Article VI shall be entitled to receive from such other party, upon the presentation of invoices therefor reimbursement for all Costs (including the Costs of employees providing consulting and witness services in connection with litigation and Costs of employees providing information), as may be reasonably incurred in providing such Books and Records or access to information, consulting or witness services. Section 6.06. Retention of Records. Except when a longer period is -------------------- required by Law or is expressly provided for in this Agreement, any Ancillary Agreement or the retention policy of Varian as of the date of this Agreement, each party shall (and shall cause the members of its Group to) retain, for a period of at least seven years after the Distribution Date, all material information (including all material Books and Records) relating to such Group and its operations before the Distribution Date. Notwithstanding the foregoing, when retention of information is no longer required by Law or expressly provided for in another Section of this Agreement or any Ancillary Agreement, any party may offer in writing to deliver to the other parties all or a portion of such information that relates to members of the offering party's Group and, if such offer is accepted in writing within 90 days after receipt thereof, the offering party shall promptly deliver such information (or copies thereof) to each accepting party (at the expense of the accepting party). If such offer is not so accepted, the offered information may be destroyed or otherwise disposed of by the offering party at any time after expiration of such 90-day period. Section 6.07. Privileged Matters. ------------------ (a) Privileged Information. Each party shall (and shall cause the ---------------------- members of its Group to) use its reasonable efforts to maintain, preserve, protect and assert all privileges against disclosure (including the attorney- client privilege, the attorney work product privilege and the self-evaluation privilege) that apply to any Books and Records or other information of any member of any other Group relating to any period before the Distribution Date ("Privilege" or "Privileges"). Each party shall use its reasonable efforts not to waive (or permit any member of its Group to waive) any such Privilege that could be asserted under applicable Law without the prior written consent of the other party or parties having the right to assert or waive such Privilege pursuant to this Section. HCS shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of any and all Privileges which relate primarily to the Health Care Systems Business or to Health Care Systems Liabilities; SEB shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of all Privileges which relate primarily to the Semiconductor Equipment Business or to Semiconductor Equipment Liabilities; and IB shall be entitled in perpetuity to require the assertion, or to decide whether to consent to the waiver, of all Privileges which relate primarily to the Instruments Business or to Instruments Liabilities. 29 (b) Compelled Disclosure. To the extent that a party is compelled by -------------------- judicial or administrative process to disclose any information under circumstances in which any Privilege would be available ("Privileged Information"), such party agrees to assert such Privilege in good faith before making such disclosure. Each party shall consult with each applicable party upon receipt by a party or any member of its Group of any subpoena, discovery or other request that calls for production or disclosure of Privileged Information, or if a party or any member of its Group obtains knowledge that any current or former employee of such party or any member of its Group has received any subpoena, discovery or other request which calls for the production or disclosure of Privileged Information, including regarding whether any Privilege is available. Each party shall cooperate with each applicable party and its counsel participating in any hearing or other proceeding in respect of such disclosure and assertion of Privilege. Nothing in this Section requires any party to subject itself to sanctions in connection with any compelled disclosure. Notwithstanding the foregoing, each party shall be permitted to disclose Privileged Information in any proceeding in which such party is in an adversarial position to any other party to this Agreement. (c) No Waiver. The parties understand and agree that the transfer of --------- any Books and Records or other information between any members of the Health Care Systems Group, the Semiconductor Equipment Group or the Instruments Group shall be made in reliance on the agreements of Varian, SEB and IB, as set forth in Section 6.03 and this Section, to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. The Books and Records being transferred pursuant to Section 6.01, the access to information being granted pursuant to Section 6.02, the agreement to provide witnesses and individuals pursuant to Section 6.04 and the transfer of Privileged Information to any party pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section or otherwise. Nothing in this Agreement shall operate to reduce, minimize or condition the rights granted to each party in, or the obligations imposed upon each party by, this Section. ARTICLE VII INDEMNIFICATION Section 7.01. Survival of Agreements. All covenants and agreements of the ---------------------- parties contained in this Agreement and all covenants and agreements of the parties contained in the Ancillary Agreements shall survive the Distribution Date except as expressly provided herein and therein, and shall not be merged into any deeds or other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. Section 7.02. Taxes. This Article VII shall not be applicable to any ----- Indemnifiable Losses related to (a) Taxes, which shall be governed by the Tax Sharing Agreement, or (b) which are otherwise expressly provided for in the Ancillary Agreements. Section 7.03. Indemnification by HCS. Except as expressly provided in ---------------------- this Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) HCS shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the SEB Indemnitees and the IB Indemnitees from and against any and all Indemnifiable Losses of the SEB Indemnitees and the IB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Health Care Systems Liabilities or (ii) the breach by HCS or Varian of any provision of this Agreement, or any Ancillary Agreement and (b) HCS shall bear the cost of and indemnify, defend and hold harmless the SEB Indemnitees and the IB Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, ------------------ that, except as otherwise provided in this Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Health Care Systems Business and the Instruments Business or the Health Care Systems Business and the Semiconductor Equipment Business, HCS shall bear the cost of and indemnify, defend and hold harmless IB and SEB, respectively, from one-half of the Indemnifiable Losses, as incurred. Section 7.04. Indemnification by SEB. Except as expressly provided in ---------------------- this Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) SEB shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the HCS Indemnitees and the IB Indemnitees from and against any and all Indemnifiable Losses of the HCS Indemnitees and the IB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Semiconductor Equipment Liabilities, or (ii) the breach by SEB of any provision of this Agreement or any Ancillary Agreement, and (b) SEB shall bear the cost of and indemnify, defend and hold harmless the HCS Indemnitees and the IB Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, ------------------ that, except as otherwise provided in this 30 Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Semiconductor Equipment Business and the Instruments Business or the Semiconductor Equipment Business and the Health Care Systems Business, SEB shall bear the cost of and indemnify, defend and hold harmless IB and HCS, respectively, from one-half of the Indemnifiable Losses as incurred. Section 7.05. Indemnification by IB. Except as expressly provided in this --------------------- Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a) IB shall, to the fullest extent permitted by Law, indemnify, defend and hold harmless the HCS Indemnitees and the SEB Indemnitees from and against any and all Indemnifiable Losses of the HCS Indemnitees and the SEB Indemnitees, respectively, arising out of, relating to or resulting from either (i) the Instruments Liabilities or (ii) the breach by IB of any provision of this Agreement or any Ancillary Agreement, and (b) IB shall bear the cost of and indemnify, defend and hold harmless the HCS Indemnitees and the SEB Indemnitees from one-third of the Indemnifiable Losses as incurred, arising out of, relating to or resulting from the Shared Liabilities; provided, however, that, except as ------------------ otherwise provided in this Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in respect of a Shared Liability arising out of, relating to or resulting from the management or conduct of the Instruments Business and the Health Care Systems Business or the Instruments Business and the Semiconductor Equipment Business, IB shall bear the cost of and indemnify, defend and hold harmless HCS and SEB, respectively, from one-half of the Indemnifiable Losses, as incurred. Section 7.06. Limitations on Indemnification Obligations. ------------------------------------------ (a) Reductions for Insurance Proceeds and Other Recoveries. The amount ------------------------------------------------------ that any party (an "Indemnifying Party") is or may be required to pay to any other Person (an "Indemnitee") pursuant to Section 7.03, 7.04 or 7.05, as applicable, shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related Indemnifiable Loss. The existence of a claim by an Indemnitee for monies from an insurer or against a third party in respect of any Indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather the Indemnifying Party shall make payment in full of the amount determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for Insurance Proceeds or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the parties that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, or (ii) relieved of the responsibility to pay any claims for which it is obligated. If an Indemnitee has received the payment required by this Agreement from an Indemnifying Party in respect of any Indemnifiable Loss and later receives Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnitee shall hold such Insurance Proceeds or other amounts in trust for the benefit of the Indemnifying Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as promptly as practicable after receipt, a sum equal to the amount of such Insurance Proceeds or other amounts received, up to the aggregate amount of any payments received from the Indemnifying Party pursuant to this Agreement in respect of such Indemnifiable Loss (or, if there is more than one Indemnifying Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share (based on payments received from the Indemnifying Parties) of such Insurance Proceeds). (b) Adjustments for Taxes. The amount of any Indemnifiable Loss shall be --------------------- appropriately adjusted so that the amount of such Indemnifiable Loss is (i) increased by the amount of all Income Taxes payable with respect to any payments received from the Indemnifying Party or Indemnifying Parties, and (ii) reduced by the amount of all Income Tax benefits from the incurrence or payment of any such Indemnifiable Loss by the Indemnitee, as determined pursuant to the next paragraph. In computing the amount of Income Taxes payable or Income Tax benefit, (i) in the absence of any change in treatment under the Code or applicable Tax Law, payments with respect to contingent Liabilities attributable to periods before the Distribution Date shall be treated for income tax purposes by the Indemnitee and the Indemnifying Parties (and if Varian is neither the Indemnitee nor the Indemnifying Party, by Varian) as distributions or capital contributions, as appropriate, occurring immediately before the Distributions on the Distribution Date, (ii) it shall be assumed that the highest marginal Tax rates in effect are applicable to the Indemnitee, and (iii) such determination shall be made without regard to whether any actual increase or decrease in Tax is realized by the Indemnitee. 31 If, notwithstanding the manner in which indemnity payments are reported, there is an adjustment to the Tax Liability of a party as a result of its receipt of an indemnity payment pursuant to this Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof, shall equal the amount of the payment which the Indemnitee would otherwise be entitled to receive pursuant to this Agreement. (c) Foreign Currency Adjustments. In the event that any indemnification ---------------------------- payment required to be made hereunder shall be denominated in a currency other than U.S. Dollars, the amount of such payment shall be translated into U.S. Dollars using the foreign exchange rate for such currency determined as follows: (i) with respect to any Indemnifiable Loss arising from the payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the foreign exchange rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed; (ii) with respect to any Indemnifiable Loss covered by insurance, the foreign exchange rate for such currency shall be the foreign exchange rate employed by the insurer in settling such Indemnifiable Losses with the Indemnifying Party; and (iii) with respect to any Indemnifiable Loss not covered by either clause (i) or (ii) above, the foreign exchange rate for such currency shall be determined as of the date that notice of the claim with respect to such Indemnifiable Loss is given to the Indemnitee. Section 7.07. Procedures for Indemnification. Except as expressly ------------------------------ provided in any Ancillary Agreement: (a) Notice of Third Party Claims (Other than Shared Liabilities). If a ------------------------------------------------------------ claim or demand is made against an Indemnitee by any Person who is not a party to this Agreement or a Subsidiary thereof (a "Third Party Claim") for which an Indemnifying Party may be liable under this Agreement other than with respect to a Shared Liability, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 30 business days) after receipt by such Indemnitee of written notice of the Third Party Claim; provided, however, that no delay by the -------- ------- Indemnitee in giving such notice shall affect the Indemnitee's right to indemnification hereunder except to the extent the Indemnifying Party is actually prejudiced by such delay (except that the Indemnifying Party shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within ten business days) after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. (b) Legal Defense of Third Party Claims. If a Third Party Claim is made ----------------------------------- against an Indemnitee, the Indemnifying Party shall be entitled to participate in the defense thereof and, if it so chooses and acknowledges in writing its obligation to indemnify the Indemnitee for the Third Party Claim, to assume the defense thereof with counsel selected by the Indemnifying Party. Should the Indemnifying Party assume the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnitee for legal or other expenses subsequently incurred by the Indemnitee in connection with the defense of such Third Party Claim. The Indemnifying Party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnifying Party has failed to assume the defense of the Third Party Claim (other than the period during which the Indemnitee failed to give notice of the Third Party Claim). If the Indemnifying Party elects to assume the defense of any Third Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party in the defense or prosecution thereof. (c) Third Party Claims (Shared Liabilities). If a Third Party Claim in --------------------------------------- respect of a Shared Liability is made against an Indemnitee, such Indemnitee shall notify the Indemnifying Parties in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 30 business days) after receipt by such Indemnitee of written notice of the Third Party Claim; provided, -------- however, that no delay by the Indemnitee in giving such notice shall affect the - ------- Indemnitee's right to indemnification hereunder except to the extent an Indemnifying Party is actually prejudiced by such delay (except that the Indemnifying Party or Parties shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party or Parties, promptly (and in any event within ten business days) after the 32 Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. The party designated on Schedule 1.01(a) or (b) to have management responsibility for the related Shared Liability (the "Managing Party") shall have management and administrative responsibility for the Third Party Claim (unless no party is so designated, in which case the Managing Party shall be as agreed among the affected parties). Such management and administrative responsibility shall entail the defense of such Third Party Claim, negotiation with claimants and potential claimants (subject to the limitations in the following paragraph) and other reasonably related activities. Unless the Managing Party is an Indemnifying Party that does not acknowledge in writing its obligations to indemnify the Indemnitee for the Third Party Claim to the extent contemplated by this Agreement, the Managing Party may assume the defense thereof with counsel selected by such Managing Party. If the Managing Party assumes the defense of the Third Party Claim, the legal or other expenses in respect of such Third Party Claim incurred by or on behalf of any Person other than such Managing Party shall not be Indemnifiable Losses for purposes of this Agreement, except for the reasonable fees and expenses of counsel employed by the Indemnitee for any period during which the Managing Party has failed to assume the defense of the Third Party Claim (other than the period during which the Indemnitee failed to give notice of the Third Party Claim). Each Indemnitee and each Indemnifying Party shall cooperate with any Managing Party and each other in the defense or prosecution of such Third Party Claim. All costs and expenses (including attorneys' fees and all out-of-pocket expenses, together with the Costs of the Managing Party (if the Managing Party assumes the defense of the Third Party Claim)) incurred in connection with a Third Party Claim in respect of a Shared Liability shall be included as a part of the Indemnifiable Losses. (d) Notwithstanding Sections 7.07(b) and 7.07(c): (i) an Indemnifying Party (or the Managing Party, as applicable) shall not be entitled to assume the defense of any Third Party Claim (and shall be liable to the Indemnitee for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim to the extent contemplated by this Agreement) if the Third Party Claim seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnitee which the Indemnitee reasonably determines, after conferring with its counsel, cannot be separated from any related claim for money damages and is materially prejudicial to the Indemnitee's business; provided, however, that if such equitable relief or other relief -------- ------- portion of the Third Party Claim can be so separated from that for money damages, the Indemnifying Party (or the Managing Party, as applicable) shall be entitled, but not required, to assume the defense of the portion relating to money damages; (ii) an Indemnifying Party (or the Managing Party, as applicable) shall not be entitled to assume the defense of any Third Party Claim (and shall be liable to the Indemnitee for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim to the extent contemplated by this Agreement) if, in the Indemnitee's reasonable judgment, a conflict of interest between such Indemnitee and any Indemnifying Party exists, in respect of such Third Party Claim; and (iii) if at any time after assuming the defense of a Third Party Claim an Indemnifying Party (or the Managing Party, as applicable) shall fail to assume or withdraws from the defense of such Third Party Claim, the Indemnitee may resume the defense thereof and the Indemnifying Party (or Indemnifying Parties as applicable) shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnitee in such defense. (e) Settlement of Third Party Claims. -------------------------------- (i) No Indemnitee (or the Managing Party, as applicable) shall admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim or consent to the entry of any judgment without each Indemnifying Party's prior written consent; provided, however, that the -------- ------- Indemnitee shall have the right to settle, compromise or discharge such Third Party Claim or consent to the entry of any judgment without the prior written consent of the Indemnifying Party or Indemnifying Parties if (A) the Indemnitee releases each Indemnifying Party from its indemnification obligation hereunder with respect to such Third Party Claim and such settlement, compromise or discharge would not otherwise materially adversely affect the Indemnifying Party or Indemnifying Parties, or (B) the Indemnifying Party (or the 33 Managing Party, as applicable) has failed to assume the defense of the Third Party Claim within 90 days after the receipt of notice thereof. (ii) No Indemnifying Party (or Managing Party, as applicable) shall settle, compromise or discharge any Third Party Claim or consent to any judgment without each Indemnitee's prior written consent unless (A) an unconditional term of such settlement, compromise or discharge thereof is delivery by the claimant or the plaintiff to the Indemnitee of a written release of all Liability in respect of such Third Party Claims, (B) the Indemnifying Party pays the full amount of the Liability in connection with such Third Party Claim, and (C) such settlement, compromise or discharge would not otherwise materially adversely affect the Indemnitee. (f) Other Claims. Any claim for an Indemnifiable Loss which does not ------------ result from a Third Party Claim shall be asserted by the Indemnitee by written notice and in reasonable detail to the applicable Indemnifying Party. The Indemnifying Party shall have 90 days from the date that it receives written notice during which to notify the Indemnitee in writing of its good faith objections, if any, to the Indemnitee's notice of claims for indemnification describing in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying Party does not deliver a written notice of objection within such 90-day period, the Indemnifying Party shall be deemed not have any objections to such notice or such claim. If the Indemnifying Party does deliver such written notice of objection within such 90-day period, the Indemnifying Party and the Indemnitee shall attempt in good faith to resolve any such dispute within 90 days of receipt by the Indemnitee of such written notice of objection. If the Indemnifying Party and the Indemnitee are unable to resolve any such dispute within such 90-day period, such dispute shall be submitted to the Separation Committee in accordance with the procedures set forth in Article IX. Section 7.08. Indemnification Payments. Indemnification required by this ------------------------ Article VII shall be made by quarterly payments of the amount thereof (other than individual amounts of $100,000 or more, which shall be paid within ten business days) during the course of the investigation or defense; provided, -------- however, that if the applicable Indemnitee is a Subsidiary of a party that is - ------- organized under a jurisdiction not in the United States, the payments shall, in lieu thereof, be made to HCS, IB or SEB, as applicable. Section 7.09. Certain Legal Proceedings. ------------------------- (a) IB Third Party Claims. On the Distribution Date, IB shall assume --------------------- (or shall cause one of its Subsidiaries to assume) (i) the prosecution of all claims which are Instruments Assets and are pending on the Distribution Date, and (ii) control of the defense against all Third Party Claims which are Instruments Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(a). (b) SEB Third Party Claims. On the Distribution Date, SEB shall assume ---------------------- (or shall cause one of its Subsidiaries to assume) (i) the prosecution of all claims which are Semiconductor Equipment Assets and are pending on the Distribution Date and (ii) control of the defense against all Third Party Claims which are Semiconductor Equipment Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(b). (c) HCS Third Party Claims. HCS (or its Subsidiaries) shall retain (i) ---------------------- the prosecution of all claims which are Health Care Systems Assets and are pending on the Distribution Date, and (ii) control of the defense against all Third Party Claims which are Health Care Systems Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(c). (d) Shared Assets/Shared Liabilities. The Managing Party shall assume or -------------------------------- retain the (i) prosecution of all claims that are Shared Assets and are pending on the Distribution Date and (ii) control of the defense against all Third Party Claims which are Shared Liabilities and are pending on the Distribution Date, including, in each case, those set forth on Schedule 7.09(d). Section 7.10. Survival of Indemnities. The obligations of HCS, SEB and IB ----------------------- under this Article VII shall survive the sale or other transfer by any of them of any Assets or businesses or the assignment by any of them of any Liabilities with respect to any Indemnifiable Loss of any Indemnitee related to such Assets, businesses or Liabilities. 34 Section 7.11. Contribution. To the extent that indemnification provided ------------ for under Section 7.03, 7.04 or 7.05 is unavailable to hold harmless an Indemnitee in respect of any Indemnifiable Loss, then the Indemnifying Party under such Section, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such Indemnifiable Loss in such proportion as is appropriate to reflect the relative fault (to be determined through the procedures provided for in Article IX) of the Indemnifying Party on the one hand and of the Indemnitee on the other hand in connection with the action, inaction, statements or omissions that resulted in such Indemnifiable Loss as well as any other relevant equitable considerations. Section 7.12. Exclusive Mechanism; Waiver of Jury Trial. Each of IB, SEB ----------------------------------------- and HCS, on behalf of itself and each member of its Group, agrees that the procedures set forth in this Article VII, together with Article IX, shall be the sole and exclusive mechanism for the resolution of any dispute, controversy or claim relating to any of the matters set forth in Sections 7.03, 7.04 and 7.05. Each of IB, SEB and HCS, on behalf of itself and each member of its Group, irrevocably waives any right to any trial by jury with respect to any dispute, controversy or claim arising out of, relating to or resulting from this Agreement or any Ancillary Agreement. Section 7.13. Failure to Satisfy Indemnification Obligation. In the --------------------------------------------- event that (a) it is finally determined that an Indemnifying Party is liable to an Indemnitee hereunder in respect of an Indemnifiable Loss, and (b) a court of competent jurisdiction prohibits such Indemnifying Party from satisfying all or a part of its obligations to the Indemnitee hereunder(for indemnification or contribution) in respect of such Indemnifiable Loss, then the amount of the Indemnifiable Loss that is not satisfied shall be treated as a Shared Liability of the parties to this Agreement other than the Indemnifying Party, with each such other party bearing one-half of such amount. Section 7.14. Treatment of Shared Assets. -------------------------- (a) Prosecution of Claims. The Managing Party in respect of a Shared --------------------- Asset, or such other party as the parties hereto shall agree (or if they cannot agree, HCS) shall have sole and exclusive authority to commence, prosecute, settle, manage, control, conduct, waive, forego, release, discharge, forgive and otherwise determine all matters whatsoever with respect to any Shared Asset. (b) Disposition of Benefit. Any benefit that may be received from a ---------------------- Shared Asset shall be shared, one-third each, among HCS, IB and SEB, except to the extent that the benefit relates to a Shared Asset received in respect of a Shared Liability, the indemnification obligations for which are borne by only two of the parties pursuant to Sections 7.03, 7.04 or 7.05, in which event such benefit shall be shared, one-half each, by the parties bearing the indemnification obligation. (c) Shared Asset Payments. The amount of any benefit from a Shared Asset --------------------- shall be payable by the party receiving the benefit (net of the Costs incurred in collecting such benefit, if the party is not otherwise indemnified with respect to such Costs under other provisions of this Article VII) to the other parties quarterly (other than individual amounts of $100,000 or more, which shall be paid within ten business days) as such benefits are received. (d) Adjustment for Taxes. The amount of benefits determined pursuant to -------------------- this Section 7.14 shall be appropriately adjusted to take into account Income Taxes in a manner consistent with Section 7.06(b). ARTICLE VIII INSURANCE Section 8.01. Policies and Rights Included within Assets. ------------------------------------------ (a) New and Existing Insurance. As of the Effective Time, each of the -------------------------- Groups shall be responsible for arranging separate Policies with respect to Actions and Liabilities arising after the Effective Time with respect to such Group and its business. As of the Effective Time, all prepaid and unused premiums, and all refunds received thereafter with respect to each Company Policy that inured to the benefit of more than one Group before the Effective Time, except as provided in Section 8.04, shall be distributed or retained one- third each to HCS, IB and SEB (or one-half each to the affected parties if only two parties were insured under the applicable Company Policy). To the extent any party receives any such refund, the party receiving the refund shall promptly transfer to the other parties the portion of such refund to which each such other party is entitled. 35 (b) IB's Insurance. Without limiting the generality of the definition of -------------- the Instruments Assets set forth in Section 1.01 or the effect of Section 2.02, the Instruments Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto for Actions or Liabilities arising before the Effective Time, including rights of indemnity and the right to be defended by or at the expense of the insurer, with respect to all Actions or Liabilities incurred or claimed to have been incurred before the Distribution Date by any party in connection with the Instruments Assets or the conduct of the Instruments Business or, to the extent any claim is made against IB or any IB Subsidiary, the conduct of the Health Care Systems Business or the Semiconductor Equipment Business (a "IB Claim"); provided, however, that nothing in this paragraph (b) shall be deemed -------- ------- to constitute (or to reflect) an assignment of such Company Policies, or any of them, to IB. Except for Insurance Proceeds paid to or on behalf of any member of the Health Care Systems Group or the Semiconductor Equipment Group at the direction of IB in satisfaction of a claim that would otherwise be subject to indemnification by IB under Article VII, IB shall be entitled to receive from Varian any Insurance Proceeds with respect to any IB Claims under the Company Policies, including reimbursement for Instruments Liabilities. (c) SEB's Insurance. Without limiting the generality of the definition --------------- of the Semiconductor Equipment Assets set forth in Section 1.01 or the effect of Section 2.02, the Semiconductor Equipment Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto for Actions or Liabilities arising before the Effective Time, including rights of indemnity and the right to be defended by or at the expense of the insurer, with respect to all Actions or Liabilities incurred or claimed to have been incurred before the Distribution Date by any party in connection with the Semiconductor Equipment Assets or the conduct of the Semiconductor Equipment Business or, to the extent any claim is made against SEB or any SEB Subsidiary, the conduct of the Instruments Business or the Health Care Systems Business, (an "SEB Claim"); provided, however, that -------- ------- nothing in this paragraph (c) shall be deemed to constitute (or to reflect) an assignment of such Company Policies, or any of them, to SEB. Except for Insurance Proceeds paid to or on behalf of any member of the Instruments Group or the Health Care Systems Group at the direction of SEB in satisfaction of a claim that would otherwise be subject to indemnification by SEB under Article VII, SEB shall be entitled to receive from Varian any Insurance Proceeds with respect to any SEB Claims under the Company Policies, including reimbursement for Semiconductor Equipment Liabilities. (d) HCS's Insurance. Without limiting the generality of the definition --------------- of the Health Care Systems Assets set forth in Section 1.01, the Health Care Systems Assets shall include any and all rights of an insured party or an additional named insured party under the Company Policies and all predecessor Policies thereto including rights of indemnity and the right to be defended by or at the expense of the insurer, other than the rights that are included in the Instruments Assets or the Semiconductor Equipment Assets. Section 8.02. Claims. ------ (a) Assignment of Rights to the Instruments Group. --------------------------------------------- (i) The parties agree that as of the Effective Time, Varian shall be deemed (A) to have assigned to the Instruments Group, all the other Groups' rights, if any, as an insured party or an additional named insured party including rights of indemnity and the right to be defended by or at the expense of the insurer, under all of the Company Policies with respect to such IB Claims as are pending on the Distribution Date, and (B) to the extent necessary to provide the Instruments Group all the benefit of such insurance with respect to IB Claims, to designate IB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, -------- however, that nothing in this Section 8.02(a) shall be deemed to constitute ------- or reflect the assignment of any of the Company Policies to the Instruments Group. If, after the Distribution Date, the Instruments Group shall be entitled to payment or reimbursement with respect to an IB Claim or any Person shall assert an IB Claim, then HCS shall at the time such IB Claim arises or is asserted be deemed (A) to assign, without need of further documentation, to the Instruments Group all of the Health Care Systems Group's rights, if any, as an insured party or an additional named insured party, including right of indemnity and the right to be defended by or at the expense of the insurer, under the applicable Company Policy with respect to such IB Claim and (B) to the extent necessary to provide the Instruments Group with the benefit of such insurance with respect to IB Claims, to designate IB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this -------- ------- Section 8.02(a) shall be deemed to constitute or 36 reflect the assignment of any of the Company Policies to the Instruments Group. In the event an insurer refuses to honor such agency or to pay such Insurance Proceeds to the Instruments Group, HCS shall use all reasonable efforts to collect such Insurance Proceeds and forward them to IB. (ii) In the event of payment of an IB Claim by the Instruments Group after the Distribution Date, IB, or the applicable member of the Instruments Group shall be subrogated to and stand in the place of HCS or the applicable member of any other Group as to any rights, events or circumstances in respect of which IB or the applicable member of the Instruments Group may have any right or claim under this Agreement or otherwise against any such insurer relating to such IB Claim. The parties shall cooperate with the Instruments Group in a reasonable manner in prosecuting any subrogated right or claim. (b) Assignment of Rights to the Semiconductor Equipment Group. --------------------------------------------------------- (i) The parties agree that as of the Effective Time, Varian shall be deemed (A) to have assigned to the Semiconductor Equipment Group, all the other Groups' rights, if any, as an insured party or an additional named insured party including rights of indemnity and the right to be defended by or at the expense of the insurer, under all of the Company Policies with respect to such SEB Claims as are pending on the Distribution Date, and (B) to the extent necessary to provide the Semiconductor Equipment Group all the benefit of such insurance with respect to SEB Claims, to designate SEB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this Section 8.02(b) shall be deemed to -------- ------- constitute or reflect the assignment of any of the Company Policies to the Semiconductor Equipment Group. If, after the Distribution Date, the Semiconductor Equipment Group shall be entitled to payment or reimbursement with respect to a SEB Claim or any Person shall assert a SEB Claim, then HCS shall at the time such SEB Claim arises or is asserted be deemed (A) to assign, without need of further documentation, to the Semiconductor Equipment Group all of the Health Care Systems Group's rights, if any, as an insured party or an additional named insured party, including right of indemnity and the right to be defended by or at the expense of the insurer, under the applicable Company Policy with respect to such SEB Claim and (B) to the extent necessary to provide the Semiconductor Equipment Group with the benefit of such insurance with respect to SEB Claims, to designate SEB, without need of further documentation, as the agent and attorney-in-fact to assert and to collect any Insurance Proceeds under such Company Policies; provided, however, that nothing in this Section 8.02(b) shall be deemed to -------- ------- constitute or reflect the assignment of any of the Company Policies to the Semiconductor Equipment Group. In the event an insurer refuses to honor such agency or to pay such Insurance Proceeds to the Semiconductor Equipment Group, HCS shall use all reasonable efforts to collect such Insurance Proceeds and forward them to SEB. (ii) In the event of payment of a SEB Claim by the Semiconductor Equipment Group after the Distribution Date, SEB, or the applicable member of the Semiconductor Equipment Group shall be subrogated to and stand in the place of HCS or the applicable member of any other Group as to any rights, events or circumstances in respect of which SEB or the applicable member of the Semiconductor Equipment Group may have any right or claim under this Agreement or otherwise against any such insurer relating to such SEB Claim. The parties shall cooperate with the Semiconductor Equipment Group in a reasonable manner in prosecuting any subrogated right or claim. Section 8.03. Administration; Other Matters. Consistent with the ----------------------------- provisions of Article VII, after the Distribution Date, (a) HCS's Responsibilities. HCS shall be responsible for (i) Insurance ---------------------- Administration of the Company Policies, and (ii) Claims Administration with respect to any Health Care Systems Liabilities, any Health Care Systems Assets or any claims as to which the Health Care Systems Group has retained rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. It is understood that the retention of the Company Policies by HCS is in no way intended to limit, inhibit or preclude any right to insurance coverage for any Insured Claim or any other rights under the Company Policies. (b) IB's Responsibilities. IB shall be responsible for Claims --------------------- Administration with respect to any Instruments Liabilities, Instruments Assets or any claims as to which the Instruments Group has rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. 37 (c) SEB's Responsibilities. SEB shall be responsible for Claims ---------------------- Administration with respect to any Semiconductor Equipment Liabilities, Semiconductor Equipment Assets or any claims as to which the Semiconductor Equipment Group has rights of reimbursement or subrogation under this Agreement or any Ancillary Agreement. (d) The Managing Party's Responsibilities. The Managing Party shall be ------------------------------------- responsible for Claims Administration with respect to Insured Claims for Shared Liabilities. (e) Notice. In the event that HCS, SEB or IB makes an Insured Claim ------ under a Company Policy, such party shall deliver notice to the other parties of such Insured Claim and shall keep the other parties periodically updated as to the status of such Insured Claim. Section 8.04. Retrospectively Calculated Insurance Premiums. Each party --------------------------------------------- shall pay or receive its share of retrospectively calculated additional or return premiums or assessments, policy dividends or audited exposures after the Distribution Date for coverage under the Company Policies with respect to their respective Liabilities which are Insured Claims under the Company Policies. Such shares shall be determined consistent with losses incurred or audited exposure with respect to the Assets or businesses of the parties for that specific line of insurance coverage, as determined in an independent underwriting analysis. Each party shall have the right, but not the obligation, to pay any additional premiums under the Company Policies with respect to the other parties' Liabilities which are Insured Claims under the Company Policies to the extent that one or more other parties does not pay such premium, in which event the non-paying party or parties shall promptly reimburse the payor for any premiums paid by the payor with respect to such non-paying party's Liabilities. Section 8.05. Allocation of Insurance Proceeds; Cooperation. --------------------------------------------- (a) Allocation of Insurance Proceeds. Except as otherwise provided in -------------------------------- Section 8.01, Insurance Proceeds received with respect to claims, costs and expenses under the Company Policies shall be paid to HCS with respect to Health Care Systems Liabilities that are Insured Claims, to IB with respect to Instruments Liabilities that are Insured Claims and to SEB with respect to Semiconductor Equipment Liabilities that are Insured Claims. Payment of the allocable portions of indemnity costs of Insurance Proceeds resulting from the Company Policies shall be made to the appropriate party upon receipt from the insurer. Insurance Proceeds received with respect to Shared Liabilities shall be paid to the party or other Person bearing the Liability that represents the Insured Claim. (b) Maximization of Coverage. Each party agrees to use commercially ------------------------ reasonable efforts to maximize available coverage under the Company Policies for all Insured Claims whether or not such party is the expected beneficiary of Insurance Proceeds under such Company Policies in respect of such Insured Claims. As part of such efforts to maximize insurance coverage, each party agrees to take all commercially reasonable actions to recover such amounts as are or might be due from all other responsible parties in respect of an Insured Claim, including Insured Claims as to which coverage limits under the Company Policies would be or would have been exceeded as a result of such Insured Claim and whether or not such party is expected to benefit directly from such effort and to engage in reasonable settlement negotiations and consider reasonable offers of settlement or compromise with respect to any Liabilities that represent Insured Claims. Each party further agrees to name each other party to this Agreement as an additional insured (up to a maximum of $10,000,000) under each liability Policy maintained by such Party during the three-year period commencing on the Distribution Date for claims under Article VII of this Agreement. (c) Multiple Claims. Where Health Care Systems Liabilities and/or --------------- Instruments Liabilities and/or Semiconductor Equipment Liabilities, as applicable, are covered under the same Company Policies for periods before the Distribution Date, or covering claims made after the Distribution Date with respect to an event or an occurrence before the Distribution Date, then the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, as applicable, may claim coverage for Insured Claims under such Company Policies to the extent of liability or other coverage of such Company Policies. Each party may receive Insurance Proceeds in respect of its Insured Claims as and when payable under the terms of the applicable Company Policies without regard to whether the Insured Claim covers Health Care Systems Liabilities, Instruments Liabilities or Semiconductor Equipment Liabilities; provided, -------- however, that before receiving payment under a Company Policy, the party making - ------- the claim shall be required to have retained a portion of the Liability underlying such Insured Claim equal to the amount of the self insurance retention or deductible. In the event that the aggregate limits on any 38 Company Policy is exceeded by the aggregate of paid Insured Claims, no Group shall be entitled to reimbursement from another Group. Section 8.06. Reimbursement of Expenses. Each of IB or SEB shall ------------------------- reimburse the applicable insurer (or any applicable third-party administrator) to the extent required under any Company Policy (or service agreement) for any services performed after the Distribution Date with respect to any and all IB Claims or SEB Claims, respectively, which are paid, settled, adjusted, defended and/or otherwise handled by such insurer or third-party administrator under the terms and conditions of such Company Policy (or any service agreement with any such third-party administrator). Section 8.07. Insurer Insolvency or Coverage Controversy. None of IB, ------------------------------------------ HCS and SEB shall be liable to one another for claims not reimbursed by insurers for any reason, including co-insurance provisions, deductibles, adequacy of limits, self-insurance retentions, bankruptcy or insolvency of any insurer, any coverage disputes, any failure to timely claim or any defect in such claim or its processing or exhaustion of Company Policy aggregates. Section 8.08. Agreement for Waiver of Conflict and Shared Defense. In the --------------------------------------------------- event that Insured Claims of more than one of the parties exist relating to the same occurrence, the applicable parties shall jointly defend and waive any conflict of interest necessary to the conduct of the joint defense. Nothing in this Section 8.08 shall be construed to limit or otherwise alter in any way the obligations of the parties to this Agreement, including those created by this Agreement, by operation of Law or otherwise. Section 8.09. Direct Responsibility for Claims; Additional Insurance; No ---------------------------------------------------------- Modifications. - ------------- (a) Notification to Insurers. Varian agrees to use commercially ------------------------ reasonable efforts to notify all known liability insurers under the Company Policies of the Distributions and to seek an endorsement by such insurers that the coverage provided by such Company Policies will apply to the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, as organized and existing on the Distribution Date, with the same force and effect and subject to the same terms, conditions and exclusions as if the separation of Varian and the Distributions had not occurred (it being understood that Varian shall be under no obligation to pay any amounts or otherwise incur any Liabilities in connection therewith). In the event such endorsement is refused, Varian agrees to use commercially reasonable efforts to place the Instruments Group and the Semiconductor Equipment Group in the same position as each would have been had such endorsement been agreed upon by such insurers (it being understood that Varian shall be under no obligation to pay any amounts or otherwise incur any Liabilities in connection therewith). Each of HCS, IB and SEB shall have the right to use commercially reasonable efforts to negotiate agreements with any and all insurers or third party administrators for the assumption of direct responsibility for any and all Liabilities related to it under any Company Policies, and Varian shall provide commercially reasonable assistance in this effort. (b) Post-Distribution Date Actions. After the Distribution Date, none ------------------------------ of HCS, IB or SEB or any member of their respective Groups shall, without the prior written consent of the other parties, provide any insurer with a release, or amend, modify or waive any rights under any Policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights to coverage of any member of the other Groups thereunder; provided, however, that, except as expressly provided in this Agreement, the - -------- ------- foregoing shall not (i) preclude any member of any Group from presenting any claim or, subject to Section 8.05, from exhausting any Policy limit, (ii) require any member of any Group to pay any premium or other amount or to incur any Liability, or (iii) require any member of any Group to renew, extend or continue any Policy in force. Each of HCS, IB and SEB shall share such information as is reasonably necessary in order to permit the others to manage and conduct its insurance matters in an orderly fashion. (c) Additional Insurance. Nothing in this Agreement shall be deemed to -------------------- restrict any member of the Instruments Group or the Semiconductor Equipment Group from acquiring, at its own expense, any other insurance policy in respect of any Liabilities or covering any period to the extent such insurance policy does not contravene or abrogate any rights of any member of the other Groups under any of the Company Policies or increase (or potentially increase) premiums thereunder, whether prospectively or retroactively. 39 ARTICLE IX DISPUTE RESOLUTION Section 9.01. Separation Committee. -------------------- (a) Composition and Responsibility of Committee. As of the Effective ------------------------------------------- Time, HCS, IB and SEB shall form a committee (the "Separation Committee") comprised of one representative designated from time-to-time by the chief executive officer of each of the parties. Except as otherwise expressly provided in this Agreement, until the tenth anniversary of the Effective Time, the Separation Committee shall be responsible for resolving any and all controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement or any Ancillary Agreement (or any amendment hereto or thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement or any of the Ancillary Agreements, including any dispute as to (i) whether any Action or other Liability is an Instruments Liability, a Health Care Systems Liability, a Semiconductor Equipment Liability or a Shared Liability, (ii) whether any Asset is a Instruments Asset, a Health Care Systems Asset, a Semiconductor Equipment Asset or a Shared Asset, (iii) the interpretation of any provision of this Agreement or any Ancillary Agreement, and (iv) such other matters as are contemplated by this Agreement or any Ancillary Agreement to be resolved by the Separation Committee (collectively, "Agreement Disputes"). (b) Resolution Procedures. In the event of an Agreement Dispute, each --------------------- of the parties shall have the right to refer such Agreement Dispute in writing to the Separation Committee (or, if the Agreement Dispute involves only two of the parties, to the representatives of the affected parties that are members thereof) for resolution. The Separation Committee (or such members) shall seek to render a unanimous written decision with respect to any Agreement Dispute within 60 days after receipt of the referral. The decision of the Separation Committee (or such members) with respect to any Agreement Dispute shall be binding on the affected parties, the members of their respective Groups and their respective successors and assigns. In the event that the Separation Committee (or such members) is unable to reach a unanimous written decision as to any Agreement Dispute within 60 days after receipt of the referral, any of the affected parties shall have the right to submit such Agreement Dispute to arbitration in accordance with the procedures described in Section 9.02. The parties shall each bear their own expenses and costs in connection with the procedures described in this Section 9.01. Section 9.02. Binding Arbitration. ------------------- (a) Submission of Agreement Disputes. Until 60 days after the tenth -------------------------------- anniversary of the Effective Time, the resolution of any and all such Agreement Disputes not resolved in accordance with Section 9.01 shall be exclusively governed, settled and resolved in accordance with the mandatory binding arbitration provided for in this Section 9.02. (b) Commencement of Arbitration. Any affected party may commence --------------------------- arbitration proceedings by delivering a written notice to the other party or parties, describing in reasonable detail the Agreement Dispute to the other(s), and expressly requesting arbitration (an "Arbitration Demand Notice") and by filing with the American Arbitration Association ("AAA") a claim. Any such arbitration shall be final, conclusive and binding on the parties, the members of their respective Groups and their respective successors and assigns. (c) Selection of Panel. The arbitration shall be conducted in Palo Alto, ------------------ California by three arbitrators acting by majority vote (the "Panel"). The parties involved in the arbitration shall jointly select the three arbitrators from a list provided by AAA. If the parties are unable to agree as to the Panel within 30 days after delivery of the Arbitration Demand Notice, the arbitrators shall be appointed by the AAA pursuant to the commercial arbitration rules of the American Arbitration Association, as amended from time to time (the "AAA Rules"). If an arbitrator so selected or appointed becomes unable to serve, his or her successor shall be similarly selected or appointed. Notwithstanding the foregoing, if the affected parties agree, the Panel may consist of one arbitrator jointly selected by the affected parties. The Panel shall be the sole judge of the existence and extent of its jurisdiction. (d) Arbitration Procedures. The arbitration shall be conducted under the ---------------------- AAA Rules. (e) Conduct of Hearing. All hearings shall be conducted on an expedited ------------------ schedule and all proceedings shall be confidential. Any affected party may at its expense make a stenographic record thereof, which 40 shall then be shared with the other affected parties which so request a copy (which parties shall then share equally in the expense) and which shall be given to the Panel as the official record of the proceedings. Hearings with respect to an Agreement Dispute shall begin not later than 120 days after selection or appointment of the Panel and shall not be more than 30 days in length. The Panel shall be required to issue a final award within 30 days of the conclusion of the hearings. The award shall be in writing and shall specify the factual and legal basis for the award. The Panel shall apportion all costs and expenses of arbitration, including the Panel's fees and expenses, fees and expenses of experts and reasonable attorneys' fees, among the affected parties as the Panel deems fair and reasonable. The parties agree that money damages may be inadequate and that any party shall be entitled to seek, and that the Panel shall be empowered to enter, equitable and injunctive relief, including preliminary and temporary injunctive relief, in addition to any other appropriate relief or remedy. The parties consent to the jurisdiction of the Panel to award such relief and to the binding nature of any such relief award by the Panel. Any arbitration award shall be binding and enforceable against the affected parties and each member of their respective Groups and judgment may be entered thereon in any court of competent jurisdiction. (f) Limitation on Damages. In no event may the Panel award exemplary, --------------------- special or punitive damages or lost profits, except to the extent that exemplary, special or punitive damages or lost profits are actually paid by a party or a member of a party's Group to a third party. Section 9.03. Disputes Regarding Closing Balance Sheets; Payments. --------------------------------------------------- Notwithstanding Sections 9.01 and 9.02, the following shall govern disputes with respect to the IB Closing Balance Sheet, the HCS Closing Balance Sheet and SEB Closing Balance Sheet. (a) Disputes Regarding Closing Balance Sheets. Unless (i) in the case ----------------------------------------- of the IB Closing Balance Sheet, IB delivers written notice to HCS and SEB on or before the 60th day after its receipt of the IB Closing Balance Sheet that it disputes the value of any item set forth on the IB Closing Balance Sheet (a "IB Dispute"), or (ii) in the case of the SEB Closing Balance Sheet, SEB delivers written notice to HCS and IB on or before the 60th day after its receipt of the SEB Closing Balance Sheet that it disputes the value of any item set forth on the SEB Closing Balance Sheet (a "SEB Dispute"), or (iii) in the case of the HCS Closing Balance Sheet, HCS delivers a written notice to IB and SEB on or before the 60th day after its receipt of the HCS Balance Sheet that it disputes the value of any item set forth on the HCS Closing Balance Sheet (a "HCS Dispute"), then the parties shall be deemed to have accepted and agreed to the IB Closing Balance Sheet, the HCS Closing Balance Sheet or the SEB Closing Balance Sheet, as applicable, in the form in which it was delivered to it by the Auditors. If such a notice of a dispute is given by a party (the "Disputing Party") within such 60-day period, then the parties shall, within 30 days after the giving of any such notice, attempt to resolve the IB Dispute, HCS Dispute or SEB Dispute, as the case may be, and agree in writing upon the final content of the affected Closing Balance Sheet. Notwithstanding the foregoing, the values assigned to each Asset and Liability on the IB Closing Balance Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet will be conclusively presumed to be correct, and no party shall have the right to dispute the value of any item if the values assigned to such Assets and Liabilities are the same as the values recorded on Varian's balance sheet immediately prior to the Effective Time. (b) If the parties are unable to resolve any IB Dispute, HCS Dispute or SEB Dispute, as the case may be, within such 30-day period, then a mutually acceptable independent accounting firm (the "Independent Auditors") shall be employed as arbitrator hereunder to settle such IB Dispute, HCS Dispute and/or SEB Dispute, as the case may be, as soon as practicable. In resolving such IB Dispute, HCS Dispute or SEB Dispute, the Independent Auditors shall (i) be granted access to all documents and facilities necessary to perform its function as arbitrator; (ii) permit each party and its representatives to make written and oral presentations to the Independent Auditors; (iii) resolve such IB Dispute, HCS Dispute and/or SEB Dispute by following relevant internal accounting methods and policies consistently applied, to the extent such methods and policies are not inconsistent with GAAP or any term of this Agreement; (iv) make a final decision regarding such IB Dispute, HCS Dispute and/or SEB Dispute within such period of time mutually agreed upon by the relevant parties and specified at the time of appointment of the Independent Auditors; and (v) issue a written statement explaining the basis for its final decision. The determination of the Independent Auditors with respect to any IB Dispute, HCS Dispute and/or SEB Dispute, as the case may be, shall be final and binding on the applicable parties. Each affected party shall pay its proportionate share of the fees and expenses of the Independent Auditors for such services. HCS and the Disputing Party (or Disputing Parties) each agree to execute, if requested by the Independent Auditors, a reasonable engagement letter. The term "IB Adjusted Closing Balance Sheet" as used herein shall mean the definitive IB Closing Balance Sheet agreed to by the parties or, as the case may be, the definitive IB Closing Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this Section 9.03 (in addition to the matters 41 theretofore agreed to by IB and HCS). The term "HCS Adjusted Closing Balance Sheet" as used herein shall mean the definitive HCS Balance Sheet agreed to by the parties or, as the case may be, the definitive HCS Closing Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this Section 9.03 (in addition to the matters theretofore agreed to by HCS and the Disputing Party or Disputing Parties). The term "SEB Adjusted Closing Balance Sheet" as used herein shall mean the definitive SEB Closing Balance Sheet agreed to by the parties or, as the case may be, the definitive SEB Balance Sheet resulting from the determinations made by the Independent Auditors in accordance with this Section 9.03 (in addition to the matters theretofore agreed to by SEB and HCS). (c) Post-Distribution Adjustments, Cash Payments and Other Actions. -------------------------------------------------------------- (i) If the SEB Adjusted Closing Balance Sheet indicates that the targets for the minimum Cash and Cash Equivalents provided in Section 2.05(b)(i)(A) or minimum consolidated Net Worth provided in Section 2.05(b)(i)(B) or the maximum Consolidated Debt of SEB provided in Section 2.05(b)(ii) were not met as of the Effective Time, then each of HCS and IB shall pay to SEB, in cash, an amount equal to 50% of the amount that would have been sufficient to cause SEB to meet such targets, or to reimburse SEB for any Consolidated Debt in excess of $5,000,000, as of the Effective Time, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. If the SEB Adjusted Closing Balance Sheet indicates that the target for the minimum Cash and Cash Equivalents provided in Section 2.05(b)(i)(A) has been exceeded but the target for minimum consolidated Net Worth provided in Section 2.05(b)(i)(B) has been satisfied, then SEB shall pay to each of HCS and IB, in cash, an amount equal to 50% of the amount by which (A) the Cash and Cash Equivalents of SEB set forth on the SEB Adjusted Closing Balance Sheet exceed (B) the sum of (y) $100,000,000 and (z) the amount, if any, that would be required to reimburse SEB for any Consolidated Debt in excess of $5,000,000, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. If the consolidated Net Worth set forth on the SEB Adjusting Closing Balance Sheet exceeds $225,000,000, then SEB shall pay to each of HCS and IB, in cash, an amount equal to 50% of the amount by which the such consolidated Net Worth exceeds $225,000,000, within ten days after the date the SEB Adjusted Closing Balance Sheet is determined and provided to the parties. (ii) If the HCS Adjusted Closing Balance Sheet indicates that the consolidated Net Worth of HCS set forth on the HCS Adjusted Closing Balance Sheet is less than 40% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet, then IB shall pay to HCS an amount in cash that would have been sufficient to cause the consolidated Net Worth of HCS to have equaled 40% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet as of the Effective Time, within ten days after the later of the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet is determined and provided to the parties. If the HCS Adjusted Closing Balance Sheet indicates that the consolidated Net Worth of HCS set forth on the HCS Adjusted Closing Balance Sheet is more than 50% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet, then HCS shall pay to IB an amount in cash that would have been sufficient to cause the consolidated Net Worth of HCS to have equaled 50% of the combined consolidated Net Worths of HCS and IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet as of the Effective Time, within ten days after the later of the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet is determined and provided to the parties. For purposes of this Section 9.03(c)(ii), the consolidated Net Worth of HCS shall be determined without giving effect to any Transaction Expenditures or Dispositions (including associated tax benefit and tax cost) that have been accrued, paid or received by HCS as of the Effective Time or any of the transactions effected pursuant to Section 2.05(d), but shall include any adjustments required by Section 9.03(c)(i). Section 9.04. Post Distribution Adjustment in Respect of Transaction ------------------------------------------------------ Expenditures and Disposition Proceeds. On the date that is 180 days after the - ------------------------------------- Distribution Date (or, if such date is not a business day, the immediately following business day), HCS and IB shall recompute the After-tax Differential (including HCS's and IB's good faith estimates of the components thereof that are not yet determinable as of such 180th day). If the positive or negative difference between the After-tax Differential determined as of such date and the After-tax Differential determined pursuant to the provisions of Section 2.05(d) is more than $1,000,000, then IB shall pay HCS, or HCS shall pay IB (as applicable to put the parties in the positions they would have been if the After-tax 42 Differential computed pursuant to the provisions of Section 2.05(d) was equal to the recomputed After-tax Differential) 50% of the amount of such difference. Section 9.05. Specific Performance. Each party acknowledges that there -------------------- is no adequate remedy at Law for the failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages. Accordingly, each party agrees that the agreement contained in Section 9.02 with respect to arbitration of Agreement Disputes and in Section 9.03 with respect to resolution of Disputes by the Independent Auditors may be specifically enforced without the requirement of posting a bond or other security. ARTICLE X MISCELLANEOUS Section 10.01. Complete Agreement; Construction. This Agreement and the -------------------------------- Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and any Schedule or Exhibit, the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there is a conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement, the Ancillary Agreement shall prevail, except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX, which shall prevail over any inconsistent provisions of any Ancillary Agreement other than the Tax Sharing Agreement. Section 10.02. Ancillary Agreements. This Agreement is not intended to -------------------- address, and should not be interpreted to address, the matters expressly covered by the Ancillary Agreements. Section 10.03. Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 10.04. Responsibility for Expenses. --------------------------- (a) Transaction Expenditures. Except as otherwise expressly provided in ------------------------ this Agreement, any Ancillary Agreement or any instrument or agreement contemplated thereby, and subject to the provisions of this Agreement with respect to After-tax Transaction Expenditures, all Transaction Expenditures shall be charged to and paid by Varian. (b) Expenses Incurred or Accrued after the Distribution Date. Except as -------------------------------------------------------- otherwise set forth in this Agreement or any Ancillary Agreement, each party shall bear its own costs and expenses incurred in connection with the transactions contemplated by this Agreement. Section 10.05. Notices. All notices, consents, requests, waivers, claims ------- or other communications (each a "Notice") required or permitted under this Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to Varian before the Distributions, at: 3050 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer Telecopy: (650) 424-5754 with a copy to: 43 3050 Hansen Way Palo Alto, California 94304 Attn: General Counsel Telecopy: (650) 858-2018 If to HCS before the Distributions, at: 3100 Hansen Way Palo Alto, California 94304 Attn: Elisha W. Finney Telecopy: (650) 424-5358 with a copy to: 3050 Hansen Way Palo Alto, California 94304 Attn: Joseph B. Phair Telecopy: (650) 858-2018 If to SEB before the Distributions, at: 35 Dory Road Gloucester, Massachusetts 01930 Attn: Ernest L. Godshalk III Telecopy: (978) 283-0445 If to IB before the Distributions, at: 3050 Hansen Way Palo Alto, California 94304 Attn: Wayne P. Somrak Telecopy: (650) 424-5754 with a copy to: 3100 Hansen Way Palo Alto, California 94304 Attn: A.W. Homan Telecopy: (650) 424-5998 If to HCS after the Distributions, at: 3100 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer With a copy to: 3100 Hansen Way Palo Alto, California 94304 Attn: General Counsel If to SEB after the Distributions, at: 35 Dory Road Gloucester, Massachusetts 01930 Attention: Chief Financial Officer With a copy to: 44 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel If to IB after the Distributions, at: 3120 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer with a copy to: 3120 Hansen Way Palo Alto, California 94304 Attn: General Counsel or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. Section 10.06. Waivers. The failure of any party to require strict ------- performance by any other party of any provision in or rights or remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. Section 10.07. Amendments. This Agreement may be amended or supplemented, ---------- or its provisions waived only by an agreement in writing signed by each of the parties; provided, however, that (i) after the Varian stockholders approve the -------- ------- Distributions no such amendment, supplement or waiver may be effected unless it would not be materially adverse to the Varian stockholders, and (ii) Article VII may not be amended after the Distributions in respect of third party beneficiaries thereof without the consent of such Persons. Section 10.08. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above or Section 7.10, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 10.09. Successors and Assigns. Subject to Section 10.08, this ---------------------- Agreement shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 10.10. Termination. This Agreement may be terminated and the ----------- Distributions may be abandoned at any time before the Distributions by Varian in its sole discretion without the approval of SEB or IB or the Varian stockholders. In the event of such termination, no party shall have any Liability of any kind to any other party. After the Distributions, this Agreement may not be terminated except by an agreement in writing signed by each of the parties; provided, however, that Article VII may not be terminated after -------- ------- the Distributions in respect of the third party beneficiaries thereof without the consent of such Persons. Section 10.11. Third Party Beneficiaries. Except as expressly ------------------------- contemplated by Article VII (relating to Indemnitees), this Agreement is solely for the benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and permitted assigns, and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. 45 Section 10.12. Exhibits and Schedules. The Exhibits and Schedules ---------------------- attached to this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. Section 10.13. Governing Law. This Agreement, the Ancillary Agreements ------------- and any other agreements entered into in connection with the transactions contemplated hereby (except for the Conveyancing and Assumption Instruments, which shall be governed by local Law) shall be governed by, and construed and enforced in accordance with, the Laws of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of Agreement Disputes. Section 10.14. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Section 10.15. Subsidiaries. Each party shall cause to be performed, and ------------ hereby guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. Section 10.16. Titles and Headings. Titles and headings to sections ------------------- herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement or of any Ancillary Agreement. Section 10.17. Consent to Jurisdiction. Without limiting any of the ----------------------- provisions of Article IX, each party hereby submits to the exclusive jurisdiction of the Chancery Court of the State of Delaware and the Federal courts of the United States of America located in Delaware in respect of the transactions contemplated by this Agreement, and hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the transactions contemplated by this Agreement, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in such courts or that the Agreement may not be enforced in or by such courts or that its property is exempt or immune from execution, that the suit, action or proceeding is brought in an inconvenient forum, or that the venue of the suit, action or proceeding is improper. 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN ASSOCIATES, INC. By /s/ Richard M. Levy ------------------- Name: Richard M. Levy Title: Executive Vice President VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By /s/ Richard A. Aurelio ---------------------- Name: Richard A. Aurelio Title: President and Chief Executive Officer VARIAN, INC. By /s/ Allen J. Lauer ------------------ Name: Allen J. Lauer Title: President and Chief Executive Officer 47 EX-3.1 3 FORM OF RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF VARIAN, INC. A Delaware Corporation ARTICLE I NAME The name of the corporation is Varian, Inc. (the "Corporation"). ARTICLE II REGISTERED OFFICE AND AGENT The address of the registered office of the Corporation in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III PURPOSES The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV CAPITAL STOCK The Corporation shall be authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares of both classes of stock which the Corporation has authority to issue is one hundred million (100,000,000) shares, consisting of: ninety nine million (99,000,000) shares of Common Stock, $0.01 par value per share, and one million (1,000,000) shares of Preferred Stock, $0.01 par value per share. The Board of Directors of the Corporation (the "Board of Directors") is authorized, subject to limitations prescribed by applicable law and the provisions of this Article IV, to provide for the issuance of the shares of Preferred Stock from time to time in one or more series, each of which series shall have such distinctive designation or title as shall be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series of Preferred Stock shall have such voting powers, shall consist of such number of shares, shall be issued for such consideration and shall otherwise have such powers, designations, preferences and relative, participating, optional or other rights, if any, and such qualifications, limitations or restrictions, if any, as shall be stated in such resolution or resolutions providing for the issue of such series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with applicable law. The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as may be provided in this Certificate of Incorporation or in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV that shall be in effect under the General Corporation Law of the State of Delaware (a "Preferred Stock Designation"), the holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. Pursuant to authority granted by this Article IV, the Board of Directors adopted a resolution creating a series of Preferred Stock, $0.01 par value per share, and stated the designation and number of shares, and fixed the powers, designations, preferences and relative, participating, optional or other rights, if any, of the shares of such series and the qualifications, limitations or restrictions thereof, if any, as set forth in a Certificate of Designation of Participating Preferred Stock of Varian, Inc. filed with the Secretary of State of the State of Delaware, which is attached hereto as Annex A and incorporated -------- herein by reference. ARTICLE V ELECTION OF DIRECTORS Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the then authorized number of directors of the Corporation, but in no event shall the number of directors be fewer than three. The directors, other than those who may be elected solely by the holders of any series of Preferred Stock (unless the relevant Preferred Stock Designation shall so provide), shall be divided into three classes, as nearly equal in number as possible, designated "Class I," "Class II" and "Class III." Directors of each class shall serve for a term ending on the third annual meeting of stockholders following the annual 2 meeting at which such class was elected, except that the term of office of the initial Class I director shall expire on the date of the annual meeting in 2000, the term of office of the initial Class II directors shall expire on the date of the annual meeting in 2001 and the term of office of the initial Class III directors shall expire on the date of the annual meeting in 2002. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless such director shall die, resign, retire or be disqualified or removed. At all elections of directors, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed. If for any reason the number of directors in the various classes shall not be as nearly equal as possible, the Board of Directors may redesignate any director into a different class in order that the balance of directors in such classes shall be as nearly equal as possible. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies in the Board of Directors resulting from one or more directors' death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class, at a meeting called for that purpose. Elections of directors of the Corporation need not be by written ballot except and to the extent the by-laws of the Corporation (the "By-Laws") so provide. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article V. For purposes of this Certificate of Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. 3 ARTICLE VI POWERS OF THE BOARD OF DIRECTORS In furtherance and not in limitation of the powers conferred by applicable law, the Board of Directors shall have the power to (1) adopt, amend or repeal By-Laws, subject to the power of the stockholders of the Corporation under the General Corporation Law of the State of Delaware to adopt, amend or repeal any By-Law; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock required by applicable law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required for stockholders to adopt, amend or repeal any provision of the By- Laws; and (2) from time to time determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with clause (1) of the preceding sentence. The Corporation may in its By-Laws confer powers upon its Board of Directors in addition to the powers and authorities expressly conferred upon it by applicable law. ARTICLE VII LIABILITY OF DIRECTORS To the fullest extent permitted by the General Corporation Law of the State of Delaware, as it exists on the date hereof or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director of the Corporation. Without limiting the effect of the preceding sentence, if the General Corporation Law of the State of Delaware is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. 4 ARTICLE VIII INDEMNIFICATION Each person who is or was a director or officer of the Corporation, or each such person who is or was serving or who has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executor, administrators or estate of such person), shall be indemnified by the Corporation to the fullest extent permitted from time to time by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. The Corporation may, by action of the Board of Directors, provide indemnification to employees and agents of the Corporation, and to any such persons serving as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise, at the request of the Corporation, with the same scope and effect as the foregoing indemnification of directors and officers. The Corporation shall be required to indemnify any person seeking indemnification in connection with any action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person's claim to indemnification pursuant to the rights granted by this Certificate of Incorporation or otherwise by the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater than or different from that provided in this Article VIII. Any amendment or repeal of this Article VIII shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. ARTICLE IX ACTION BY STOCKHOLDERS Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of at least 66 2/3% of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article IX. ARTICLE X AMENDMENTS Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be 5 added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article X; provided, however, that any amendment or repeal of Article VII or Article VIII of this Certificate of Incorporation shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal; and provided further that no Preferred Stock Designation shall be amended after the issuance of any shares of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law. 6 EX-3.2 4 FORM OF BY-LAWS EXHIBIT 3.2 BY-LAWS OF VARIAN, INC. A Delaware Corporation As adopted on February __, 1999, to be effective on March ___, 1999 TABLE OF CONTENTS
PAGE ARTICLE I OFFICES................................................................................. 1 Section 1. Registered Office.................................................................. 1 Section 2. General Office and Other Offices................................................... 1 ARTICLE II STOCKHOLDERS' MEETINGS.................................................................. 1 Section 3. Annual Meeting..................................................................... 1 Section 4. Business to be Conducted at Annual Meeting......................................... 1 Section 5. Special Meetings................................................................... 2 Section 6. Place of Meetings.................................................................. 2 Section 7. Notice of Meetings................................................................. 3 Section 8. Nominations of Directors........................................................... 3 Section 9. List of Stockholders............................................................... 4 Section 10. Quorum............................................................................. 4 Section 11. Voting and Required Vote........................................................... 5 Section 12. Proxies............................................................................ 5 Section 13. Inspectors of Election; Polls...................................................... 5 Section 14. Organization....................................................................... 5 Section 15. No Stockholder Action by Written Consent........................................... 5 ARTICLE III BOARD OF DIRECTORS...................................................................... 6 Section 16. General Powers, Number, Term of Office............................................. 6 Section 17. Vacancies.......................................................................... 6 Section 18. Chairman of the Board.............................................................. 6 Section 19. Regular Meetings................................................................... 7 Section 20. Special Meetings................................................................... 7 Section 21. Notices............................................................................ 7 Section 22. Conference Telephone Meetings...................................................... 7 Section 23. Quorum............................................................................. 7 Section 24. Organization....................................................................... 8 Section 25. Resignations....................................................................... 8 Section 26. Removal............................................................................ 8 Section 27. Action Without a Meeting........................................................... 8 Section 28. Location of Books.................................................................. 8
-i- TABLE OF CONTENTS (CONTINUED)
PAGE Section 29. Dividends.......................................................................... 8 Section 30. Compensation of Directors.......................................................... 8 Section 31. Additional Powers.................................................................. 9 ARTICLE IV COMMITTEES OF DIRECTORS................................................................. 9 Section 32. Designation, Power, Alternate Members.............................................. 9 Section 33. Quorum, Manner of Acting........................................................... 9 Section 34. Minutes............................................................................ 9 ARTICLE V ADVISORY DIRECTORS...................................................................... 10 Section 35. Advisory Directors................................................................. 10 ARTICLE VI OFFICERS................................................................................ 10 Section 36. Designation........................................................................ 10 Section 37. Election and Term.................................................................. 10 Section 38. Removal............................................................................ 10 Section 39. Resignations....................................................................... 10 Section 40. Vacancies.......................................................................... 10 Section 41. Chief Executive Officer............................................................ 10 Section 42. President.......................................................................... 11 Section 43. Vice Presidents.................................................................... 11 Section 44. Secretary.......................................................................... 11 Section 45. Assistant Secretaries.............................................................. 11 Section 46. Chief Financial Officer............................................................ 11 Section 47. Treasurer.......................................................................... 11 Section 48. Assistant Treasurers............................................................... 12 Section 49. Controller......................................................................... 12 Section 50. Assistant Controllers.............................................................. 12 ARTICLE VII CONTRACTS, INSTRUMENTS AND PROXIES...................................................... 12 Section 51. Contracts and Other Instruments.................................................... 12 Section 52. Proxies............................................................................ 12 ARTICLE VIII CAPITAL STOCK........................................................................... 13 Section 53. Stock Certificates; Book-Entry Accounts............................................ 13 Section 54. Record Ownership................................................................... 13
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PAGE Section 55. Record Dates....................................................................... 13 Section 56. Transfer of Stock.................................................................. 13 Section 57. Lost, Stolen or Destroyed Certificates............................................. 13 Section 58. Terms of Preferred Stock........................................................... 14 ARTICLE IX INDEMNIFICATION......................................................................... 14 Section 59. Right of Indemnification Generally................................................. 14 Section 60. Written Request; Determination of Entitlement...................................... 15 Section 61. Recovery of Unpaid Claim........................................................... 15 Section 62. Exclusivity; Subsequent Modification............................................... 15 Section 63. Insurance.......................................................................... 16 Section 64. Other Persons Granted Right of Indemnification..................................... 16 Section 65. Illegality; Unenforceability....................................................... 16 Section 66. Form and Delivery of Communications................................................ 16 ARTICLE X MISCELLANEOUS........................................................................... 16 Section 67. Corporate Seal..................................................................... 16 Section 68. Fiscal Year........................................................................ 17 Section 69. Auditors........................................................................... 17 Section 70. Waiver of Notice................................................................... 17 ARTICLE XI AMENDMENT TO BY-LAWS.................................................................... 17 Section 71. Amendments......................................................................... 17
-iii- BY-LAWS OF VARIAN, INC. A Delaware Corporation As adopted on February ___, 1999, to be effective on March ___, 1999 ARTICLE I OFFICES Section 1. Registered Office. The name of the registered agent of ----------------- Varian, Inc. (the "Corporation") is The Corporation Trust Company and the registered office of the Corporation shall be located in the City of Wilmington, County of New Castle, State of Delaware. Section 2. General Office and Other Offices. The Corporation shall have -------------------------------- its General Offices in the City of Palo Alto, State of California (the "General Offices"), and may also have offices at such other places in or outside the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time designate or the business of the Corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS Section 3. Annual Meeting. An annual meeting of stockholders shall be -------------- held on such day and at such time as may be designated by the Board of Directors for the purpose of electing directors and for the transaction of such other business as properly may come before such meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders. Section 4. Business to be Conducted at Annual Meeting. ------------------------------------------ (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Corporation's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to clause (a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such meeting's anniversary date, notice by the stockholder must be received not earlier than the 90/th/ day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60/th/ day prior to such date of mailing of proxy materials or the 10/th/ day following the day on which public announcement of the date of the annual meeting is first made. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business. For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law. The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, and any such proposal so included shall be deemed timely given for purposes of this By-Law. Section 5. Special Meetings. Special meetings of stockholders for any ---------------- proper purpose or purposes, unless otherwise provided by the General Corporation Law of the State of Delaware or in any Certificate of Designation designating any series of Preferred Stock pursuant to Article IV of the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") that shall be in effect under the General Corporation Law of the State of Delaware (a "Preferred Stock Designation"), may be called by the Chairman of the Board, the Chief Executive Officer or the President, or in the absence of each of them, by the Secretary at the written request of a majority of the directors. Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of the meeting. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders. Section 6. Place of Meetings. All meetings of stockholders shall be held ----------------- at such place as may be determined by resolution of the Board of Directors. 2 Section 7. Notice of Meetings. Except as otherwise required by ------------------ applicable law, notice of each meeting of the stockholders, whether annual or special, shall, at least 10 days but not more than 60 days before the date of the meeting, be given to each stockholder of record entitled to vote at the meeting by mailing such notice in the U.S. mail, postage prepaid, addressed to such stockholder at such stockholder's address as the same appears on the records of the Corporation. Such notice shall state the place, date and hour of the meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof. Section 8. Nominations of Directors. ------------------------ (a) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this By-Law. (b) Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 90/th/ day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60/th/ day prior to such date of mailing of proxy materials or the 10/th/ day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special meeting at which directors are to be elected, not earlier than the 90/th/ day prior to such special meeting and not later than the close of business on the later of the 60/th/ day prior to such special meeting or the 10/th/ day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made. In the case of a special meeting of stockholders at which directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Corporation's notice of meeting as being up for election at such meeting. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Corporation's books, of such stockholder and the class and number of shares of the Corporation's stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and number of shares of the Corporation's stock which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary that information required to be 3 set forth in a stockholder's notice of nomination that pertains to the nominee. Notwithstanding anything in this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the General Offices not later than the close of business on the 10/th/ day following the day on which such public announcement is first made by the Corporation. (c) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Section 9. List of Stockholders. -------------------- (a) The Secretary of the Corporation shall prepare, at least 10 days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (b) The stock ledger of the Corporation shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any meeting of stockholders, or (ii) to exercise the rights in accordance with applicable law to examine the stock ledger, the list required by this By-Law or the books and records of the Corporation. Section 10. Quorum. The holders of a majority of the stock issued and ------ outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by applicable law, by the Certificate of Incorporation or by these By-Laws. The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum. Whether or not a quorum is present, either the Chairman of the meeting or a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting. If the adjournment is for more than 30 days, or if after the 4 adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 11. Voting and Required Vote. Subject to the provisions of the ------------------------ Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder. Subject to the provisions of the Certificate of Incorporation and applicable law, directors shall be chosen by the vote of a plurality of the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. Elections of directors shall be by written ballot. Section 12. Proxies. Each stockholder entitled to vote at a meeting of ------- stockholders may authorize another person or persons to act for such stockholder by proxy, provided the instrument authorizing such proxy to act shall have been executed in writing in the manner prescribed by applicable law. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 13. Inspectors of Election; Polls. Before each meeting of ----------------------------- stockholders, the Chairman of the Board or another officer of the Corporation designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act. If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the chairman of the meeting. Each inspector shall have such duties as are provided by applicable law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting. Section 14. Organization. The Chairman of the Board of Directors, or in ------------ the Chairman's absence, (i) the Chief Executive Officer, (ii) the Vice Chairman of the Board of Directors, (iii) the President, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meetings of the stockholders, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting. The order of business and the procedure at any meeting of stockholders shall be determined by the chairman of the meeting. Section 15. No Stockholder Action by Written Consent. Any action required ---------------------------------------- or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. 5 ARTICLE III BOARD OF DIRECTORS Section 16. General Powers, Number, Term of Office. The business of the -------------------------------------- Corporation shall be managed under the direction of its Board of Directors. Subject to the rights of the holders of any series of preferred stock, $0.01 par value per share, of the Corporation ("Preferred Stock") to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by resolution of a majority of the then authorized number of directors of the Corporation (the number of then authorized directors of the Corporation is referred to herein as the "Whole Board"), but in no event shall the number of directors be fewer than three. The directors, other than those who may be elected solely by the holders of any series of Preferred Stock (unless the relevant Preferred Stock Designation shall so provide), shall be divided into three classes, as nearly equal in number as possible, designated "Class I," "Class II" and "Class III." Directors of each class shall serve for a term ending on the third annual meeting of stockholders following the annual meeting at which such class was elected, except that the term of office of the initial Class I director shall expire on the date of the annual meeting in 2000, the term of office of the initial Class II directors shall expire on the date of the annual meeting in 2001 and the term of office of the initial Class III directors shall expire on the date of the annual meeting in 2002. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless such director shall die, resign, retire or be disqualified or removed. At all elections of directors, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed. If for any reason the number of directors in the various classes shall not be as nearly equal as possible, the Board of Directors may redesignate any director into a different class in order that the balance of directors in such classes shall be as nearly equal as possible. Section 17. Vacancies. Subject to the rights of the holders of any series --------- of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 18. Chairman of the Board. The Chairman of the Board of Directors --------------------- shall be chosen from among the directors. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under applicable law. The Chairman shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Corporation. The Chairman, alone or with the Chief Executive Officer, the President, and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time. The 6 Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws or the Board of Directors. The Board of Directors may also choose a Vice Chairman of the Board of Directors from among the directors, which Vice Chairman if chosen shall perform such duties as may be assigned by these By-Laws, the Board of Directors or the Chairman of the Board. Section 19. Regular Meetings. Following the annual meeting of ---------------- stockholders, the first meeting of each newly elected Board of Directors may be held, without notice, on the same day and at the same place as such stockholders' meeting. The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each director, as provided in Section 21 below, who was not present at the meeting at which such action was taken. Section 20. Special Meetings. Special meetings of the Board of Directors ---------------- shall be held whenever called by the Chairman of the Board of Directors, the Vice Chairman of the Board, the Chief Executive Officer or the President, or in the absence of each of them, by the Secretary at the written request of a majority of the directors. Section 21. Notices. Notice of any special meeting of the Board of ------- Directors shall be addressed to each director at such director's residence or business address and shall be sent to such director by mail, electronic mail, telecopier, telegram or telex or telephoned or delivered to such director personally. If such notice is sent by mail, it shall be sent not later than three days before the day on which the meeting is to be held. If such notice is sent by electronic mail, telecopier, telegram or telex, it shall be sent not later than 24 hours before the time at which the meeting is to be held. If such notice is delivered personally, it shall be received not later than 24 hours before the time at which the meeting is to be held. If such notice is telephoned, it shall be to such telephone number or numbers of which the director from time to time shall advise the Secretary for receiving such notice. If given by telephone call, notice shall be deemed given to a director when a message stating the time, place and purpose of the meeting is left with a person answering the telephone at any such number with a request that the director be so informed, or if no such telephone number is answered, then when at least two attempts have been made to reach each telephone number designated by the director for receiving telephonic notice, with an interval of not less than one hour. A certification shall be prepared and filed with the minutes stating the date, time and results of telephonic notice given to any director not present at a meeting with respect to which his waiver of notice of meeting is not filed with the minutes. In all cases, such notice shall state the time, place and purpose or purposes of the meeting. Section 22. Conference Telephone Meetings. Members of the Board of ----------------------------- Directors or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 23. Quorum. One-half of the total number of directors ------ constituting the Whole Board, but not less than two, shall constitute a quorum for the transaction of business at any 7 meeting of the Board of Directors, but if less than such required number of directors for a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. Except as otherwise specifically provided by applicable law, the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 24. Organization. At each meeting of the Board of Directors, the ------------ Chairman of the Board or, in the Chairman's absence, (i) the Chief Executive Officer, if a member of the Board of Directors, (ii) the Vice Chairman of the Board, (iii) the President, if a member of the Board of Directors, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 25. Resignations. Any Director may resign at any time by giving ------------ written notice to the Chairman of the Board, the Chief Executive Officer, the President or the Secretary of the Corporation. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 26. Removal. Subject to the rights of the holders of any series ------- of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class. For purposes of these By-Laws, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. Section 27. Action Without a Meeting. Unless otherwise restricted by the ------------------------ Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 28. Location of Books. Except as otherwise provided by resolution ----------------- of the Board of Directors and subject to applicable law, the books of the Corporation may be kept at the General Offices and at such other places as may be necessary or convenient for the business of the Corporation. Section 29. Dividends. Subject to the provisions of the Certificate of --------- Incorporation and applicable law, dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. Section 30. Compensation of Directors. Directors shall receive such ------------------------- compensation and benefits as may be determined by resolution of the Board of Directors for their services as members of the Board of Directors and committees. Directors shall also be reimbursed for their 8 expenses of attending Board of Directors and committee meetings. Nothing contained herein shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Section 31. Additional Powers. In addition to the powers and authorities ----------------- by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. ARTICLE IV COMMITTEES OF DIRECTORS Section 32. Designation, Power, Alternate Members. The Board of Directors ------------------------------------- may, by resolution or resolutions passed by a majority of the Whole Board, designate an Executive Committee and one or more additional committees, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in said resolution or resolutions and subject to any limitations provided by applicable law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If at a meeting of any committee one or more of the members thereof is absent or disqualified, and if either the Board of Directors has not so designated any alternate member or members, or the number of absent or disqualified members exceeds the number of alternate members who are present at such meeting, then the member or members of such committee (including alternates) present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified member. The term of office of the members of each committee shall be as fixed from time to time by the Board of Directors; provided, however, that any committee member who ceases to be a member of the Board of Directors shall automatically cease to be a committee member. Section 33. Quorum, Manner of Acting. At any meeting of a committee, the ------------------------ presence of one-half of its members then in office shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By- Laws or by resolution of the Board of Directors, make rules for the conduct of its business. Section 34. Minutes. The committees shall keep minutes of their ------- proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. 9 ARTICLE V ADVISORY DIRECTORS Section 35. Advisory Directors. The Board of Directors may, by resolution ------------------ adopted by a majority of the Whole Board, appoint such Advisory Directors as the Board of Directors may from time to time determine. The Advisory Directors shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board of Directors. ARTICLE VI OFFICERS Section 36. Designation. The officers of the Corporation shall be the ----------- Chief Executive Officer, a President, a Secretary, a Chief Financial Officer, a Treasurer and a Controller. The Board of Directors may also elect one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers as it shall deem necessary. Any number of offices may be held by the same person. Section 37. Election and Term. At its first meeting after each annual ----------------- meeting of stockholders, the Board of Directors shall elect the officers of the Corporation and at any time thereafter the Board of Directors may elect additional officers of the Corporation, and each such officer shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation or removal. Alternatively, at the last regular meeting of the Board of Directors prior to an annual meeting of stockholders, the Board of Directors may elect the officers of the Corporation, contingent upon the election of the persons nominated to be directors by the Board of Directors; and each such officer so elected shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation or removal. Section 38. Removal. Any officer shall be subject to removal or ------- suspension at any time, for or without cause, by the affirmative vote of a majority of the Whole Board. Section 39. Resignations. Any officer may resign at any time by giving ------------ written notice to the Chairman of the Board, the President or to the Secretary. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 40. Vacancies. A vacancy in any office because of death, --------- resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors. Section 41. Chief Executive Officer. The Chief Executive Officer shall ----------------------- have the general and active management and supervision of the business of the Corporation. The Chief Executive Officer, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are 10 carried into effect. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer's absence. Section 42. President. The President shall perform such duties as may be --------- assigned to the President by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. Section 43. Vice Presidents. Each Executive Vice President, Senior Vice --------------- President, Group Vice President and each other Vice President shall perform the duties and functions and exercise the powers assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. Section 44. Secretary. The Secretary shall attend all meetings of the --------- Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Corporation. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. Section 45. Assistant Secretaries. The Assistant Secretaries shall, -------------------- during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by these By- Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Section 46. Chief Financial Officer. The Chief Financial Officer shall ----------------------- have overall responsibility for causing (1) the funds and securities of the Corporation to be deposited in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; (2) the disbursement of funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; (3) the investment of funds of the Corporation when authorized by the Board of Directors or a committee thereof; and (4) to be kept full and accurate account of receipts and disbursements in books of the Corporation. The Chief Financial Officer shall render to the Board of Directors, the Chief Executive Officer, or the President, whenever requested, an account of all transactions as Chief Financial Officer and shall also perform all duties incident to the office of Chief Financial Officer and such other duties as may be assigned to the Chief Financial Officer by these By-Laws, the Board of Directors, the Chief Executive Officer, or the President. Section 47. Treasurer. The Treasurer shall have the custody of the funds --------- and securities of the Corporation and shall deposit them in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse 11 funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Corporation when authorized by the Board of Directors or a committee thereof. The Treasurer shall render to the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer. Section 48. Assistant Treasurers. The Assistant Treasurers shall, during -------------------- the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Section 49. Controller. The Controller shall serve as the principal ---------- accounting officer of the Corporation and shall keep full and accurate account of receipts and disbursements in books of the Corporation and render to the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer, whenever requested, an account of all transactions as Controller and of the financial condition of the Corporation. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. Section 50. Assistant Controllers. The Assistant Controllers shall, --------------------- during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Controller. ARTICLE VII CONTRACTS, INSTRUMENTS AND PROXIES Section 51. Contracts and Other Instruments. Except as otherwise required ------------------------------- by applicable law, the Certificate of Incorporation or these By-Laws, any contracts or other instruments may be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile. Such authority may be general or confined to specific instances as the Board of Directors or such officer or officers may determine. Section 52. Proxies. Except as otherwise provided by resolution of the ------- Board of Directors, any officer of the Corporation shall each have full power and authority, in behalf of the Corporation, to exercise any and all rights of the Corporation with respect to any meeting of stockholders of any corporation in which the Corporation holds stock, including the execution 12 and delivery of proxies therefor, and to consent in writing to action by such corporation without a meeting. ARTICLE VIII CAPITAL STOCK Section 53. Stock Certificates; Book-Entry Accounts. The interest of each --------------------------------------- stockholder of the Corporation shall be evidenced by (a) certificates signed by, or in the name of the Corporation by, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer or the Treasurer, and by the Secretary or any Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation, or (b) registration in book-entry accounts without certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. Any of or all the signatures on a stock certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 54. Record Ownership. The Corporation shall be entitled to treat ---------------- the person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Corporation shall have notice thereof, except as otherwise provided by applicable law. Section 55. Record Dates. In order that the Corporation may determine the ------------ stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. Section 56. Transfer of Stock. Transfers of shares of stock of the ----------------- Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by the registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon, or by appropriate book-entry procedures. Section 57. Lost, Stolen or Destroyed Certificates. The Board of -------------------------------------- Directors may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of 13 Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 58. Terms of Preferred Stock. The provisions of these By-Laws, ------------------------ including those pertaining to voting rights, election of directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation, any Preferred Stock Designation and in any resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of directors which shall constitute the Whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional directors as and to the extent specifically provided by the provisions of such Preferred Stock. ARTICLE IX INDEMNIFICATION Section 59. Right of Indemnification Generally. ---------------------------------- (a) Directors, Officers and Employees. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a legal representative, director, officer, employee or agent of another corporation or of a limited liability company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that except as provided in Section 60 below, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. (b) Advance of Expenses; Undertaking. Each person referred to in paragraph (a) of this By-Law shall be paid by the Corporation the expenses incurred in connection with any proceeding described in paragraph (a) of this By-Law in advance of its final disposition, such advances to be paid by the Corporation within 30 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that, if the General Corporation Law of the State of Delaware requires, 14 the advancement of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not, unless otherwise required by applicable law, in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) prior to the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article IX or otherwise. (c) Contract Right. The right to indemnification conferred in this Article IX and the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition conferred in this Article IX each shall be a contract right. Section 60. Written Request; Determination of Entitlement. To obtain --------------------------------------------- indemnification under this Article IX, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made at the option of the person seeking indemnification, by the directors as set forth in the General Corporation Law of the State of Delaware or by independent legal counsel selected by such person with the consent of the Corporation (which consent shall not unreasonably be withheld). Section 61. Recovery of Unpaid Claim. If a claim under Section 58 above ------------------------ is not paid in full by the Corporation within 30 days after a written claim pursuant to Section 59 above has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than actions brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 62. Exclusivity; Subsequent Modification. The right to ------------------------------------ indemnification and the payment of expenses incurred in connection with a proceeding in advance of its final disposition conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, 15 By-Laws, agreement, vote of stockholders or directors or otherwise. No repeal or modification of this Article IX shall in any way diminish or adversely affect the rights hereunder of any director, officer or employee or of any agent who has been expressly granted indemnification by the Corporation pursuant to Section 63 below in respect of any occurrence or matter arising prior to any such repeal or modification. Section 63. Insurance. The Corporation may maintain insurance, at its --------- expense, to protect itself and any legal representative, director, officer, employee or agent of the Corporation or another corporation, limited liability company, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such legal representative, director, officer or employee, and each such agent to which rights to indemnification have been granted as provided in Section 63 below shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such legal representative, director, officer, employee or agent. Section 64. Other Persons Granted Right of Indemnification. The ---------------------------------------------- Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the Corporation to the fullest extent of the provisions of this Article IX with respect to the indemnification and advancement of expenses of directors, officers and employees of the Corporation. Section 65. Illegality; Unenforceability. If any provision or provisions ---------------------------- of this Article IX shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Article IX (including, without limitation, each portion of any Section or subsection of this Article IX containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Article IX (including, without limitation, each such portion of any Section or subsection of this Article IX containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 66. Form and Delivery of Communications. Any notice, request or ----------------------------------- other communication required or permitted to be given to the Corporation under this Article IX shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation. ARTICLE X MISCELLANEOUS Section 67. Corporate Seal. The seal of the Corporation shall be circular -------------- in form, containing the words "Varian, Inc." and the word "Delaware" on the circumference surrounding 16 the word "Seal." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 68. Fiscal Year. The fiscal year of the Corporation is the 51- to ----------- 53-week period that ends on the Friday nearest September 30. Section 69. Auditors. The Board of Directors shall select certified -------- public accountants to audit the books of account and other appropriate corporate records of the Corporation annually and at such other times as the Board of Directors shall determine by resolution. Section 70. Waiver of Notice. Whenever notice is required to be given ---------------- pursuant to applicable law, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these By-Laws. ARTICLE XI AMENDMENT TO BY-LAWS Section 71. Amendments. These By-Laws may be amended or repealed, or new ---------- By-Laws may be adopted, at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than 24 hours prior to the meeting; provided, however, that in the case of amendment, repeal or adoption by stockholders, notwithstanding any other provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock required by applicable law, the Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required for the stockholders to adopt, amend or repeal any provision of these By-Laws. 17 EX-10.1 5 FORM OF EMPLOYEE BENEFITS ALLOCATION AGREEMENT EXHIBIT 10.1 - -------------------------------------------------------------------------------- EMPLOYEE BENEFITS ALLOCATION AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of _______________, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS........................................................................................ 1 Section 1.01. Definitions..................................................................................... 1 ARTICLE II GENERAL EMPLOYMENT MATTERS......................................................................... 2 Section 2.01. General Obligations............................................................................. 2 Section 2.02. Initial Compensation of Active Employees........................................................ 2 Section 2.03. No Additional Employment Rights Created......................................................... 2 Section 2.04. Corporate and Transition Employees.............................................................. 2 Section 2.05. Retiree Payments................................................................................ 2 ARTICLE III UNITED STATES RETIREMENT AND PROFIT-SHARING PLAN BENEFITS.......................................... 2 Section 3.01. Varian Associates, Inc. Retirement and Profit-Sharing Program................................... 2 Section 3.02. Establishment of Varian Semiconductor Equipment Associates, Inc. Defined Contribution Plan...... 2 Section 3.03. Establishment of Varian, Inc. Defined Contribution Plan......................................... 3 Section 3.04. Reimbursement and Indemnification............................................................... 3 ARTICLE IV EMPLOYEE BENEFITS MATTERS OUTSIDE THE UNITED STATES................................................ 3 Section 4.01. Employee Benefits Matters Outside the United States............................................. 3 ARTICLE V EXECUTIVE COMPENSATION............................................................................. 3 Section 5.01. Supplemental Retirement Plan.................................................................... 3 Section 5.02. Management Incentive Plan....................................................................... 4 Section 5.03. Long-Term Incentives............................................................................ 4 Section 5.04. Deferred Cash Compensation...................................................................... 4 Section 5.05. Restricted Stock Program........................................................................ 4 Section 5.06. Options......................................................................................... 4 Section 5.07. Restricted Stock................................................................................ 6 ARTICLE VI WELFARE BENEFITS................................................................................... 6 Section 6.01. Welfare Plans................................................................................... 6 Section 6.02. Allocation and Discharge of Welfare Plan Liabilities............................................ 6 ARTICLE VII GENERAL............................................................................................ 6 Section 7.01. Post-Distribution Administration of Plans....................................................... 6 Section 7.02. Costs and Expenses.............................................................................. 6 Section 7.03. Sharing of Participant Information.............................................................. 6 ARTICLE VIII INDEMNIFICATION.................................................................................... 7 Section 8.01. Rights and Obligations.......................................................................... 7 ARTICLE IX DISPUTE RESOLUTION................................................................................. 7 Section 9.01. Distribution Agreement to Control............................................................... 7 ARTICLE X MISCELLANEOUS...................................................................................... 7
-i- TABLE OF CONTENTS (CONTINUED)
PAGE Section 10.01. Complete Agreement; Construction................................................................ 7 Section 10.02. Other Agreements................................................................................ 7 Section 10.03. Counterparts.................................................................................... 7 Section 10.04. Survival of Agreements.......................................................................... 7 Section 10.05. Expenses........................................................................................ 7 Section 10.06. Notices......................................................................................... 7 Section 10.07. Waivers......................................................................................... 8 Section 10.08. Amendments...................................................................................... 9 Section 10.09. Assignment...................................................................................... 9 Section 10.10. Successors and Assigns.......................................................................... 9 Section 10.11. Termination..................................................................................... 9 Section 10.12. No Third Party Beneficiaries.................................................................... 9 Section 10.13. Titles and Headings; Interpretation............................................................. 9 Section 10.14. Governing Law................................................................................... 9 Section 10.15. Severability.................................................................................... 9
-ii- EMPLOYEE BENEFITS ALLOCATION AGREEMENT THIS EMPLOYEE BENEFITS ALLOCATION AGREEMENT is made and entered into as of this _______ day of _________, 1999 by and among Varian Associates, Inc., a Delaware corporation ("Varian" or "HCS"), Varian Semiconductor Equipment Associates, Inc., a Delaware corporation ("SEB"), and Varian, Inc., a Delaware corporation ("IB"). WHEREAS, pursuant to the terms of that certain Distribution Agreement by and among Varian, SEB and IB and dated as of January 14, 1999 (the "Distribution Agreement"), the parties have entered into this Agreement regarding certain employment, compensation and benefit matters occasioned by the Distributions. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement and the Distribution Agreement, each of the parties hereto, on behalf of itself and each other member of its Group, hereby agrees as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. The following terms, when capitalized herein, ----------- shall have the meanings set forth below in this Article I. All other capitalized terms which are used but are not otherwise defined herein shall have the meanings ascribed to them in the Distribution Agreement. "Active Employees" means, with respect to each Group, all employees ---------------- actively engaged in the performance of services to, for or on behalf of any member of such Group as of the Effective Time, including any employee who is not actively performing services because of (a) PPL, (b) leave of absence within a job protection period, or (c) disability within a job protection period, and the dependents of such persons (and, as applicable, the alternate payees of such persons). "Active Employees" includes, with respect to a Group, non-employee directors of Varian Associates, Inc. providing services as a director to any member of the Group as of the Effective Time. "Former Employees" means, with respect to each Group, all former ---------------- employees and former non-employee directors of Varian and/or its Subsidiaries as of the Effective Time (including, but not limited to, such employees who, as of the Effective Time, are (a) on leave of absence outside of a job protection period, (b) on disability outside of a job protection period, (c) in RIF status, (d) on salary continuation, or (f) within termination notice periods, and the dependents and, as applicable, the alternate payees, of those persons, and including retirees but excluding the Retirees) who, if they were actively engaged in the performance of services to, for or on behalf of Varian or any of its Subsidiaries at the Effective Time, would be an Active Employee of such Group, determined on a basis consistent with the determination of the Active Employees of such Group and shall, with respect to the Health Care Systems Group, include former employees of previously disposed of businesses, discontinued operations and the corporate office of Varian. "Retirees" means J. Tracy O'Rourke, Robert A. Lemos, Joseph B. Phair, -------- Wayne P. Somrak, Ernest M. Felago, Derrel B. De Passe and James Hennessy, and the dependents and, as applicable, the alternate payees of such persons. "Varian Welfare Plans" means, collectively, the Varian Business Travel -------------------- Accident Plan, the Varian Dental Plan, the Varian Dependent Care Assistance Plan, Varian Dependent Life Insurance, the Varian Disability Plan, the Varian HMO Plans, Varian Life and AD&D Insurance, the Varian Major Medical Plan, the Varian Out-of-Area Medical Plans, the Varian Personal Paid Leave Plan, the Varian Retiree Medical Plans and the Varian Vision Plan. 1 ARTICLE II GENERAL EMPLOYMENT MATTERS Section 2.01. General Obligations. Except as specifically provided herein, ------------------- from and after the Distribution Date, each of HCS, SEB and IB shall, as applicable, cause each of the other members of its respective Group to (a) continue the employment of all of the Active Employees of its respective Group, subject, however to the terms of Section 2.03 below and (b) except as otherwise specifically provided herein, assume, pay, perform and discharge any and all labor, employment, compensation and benefit Liabilities with respect to all Active Employees of its respective Group. Except as otherwise specifically provided herein, all labor, employment, compensation and benefit Liabilities of HCS, IB or SEB, as the case may be, with respect to Former Employees of all Groups and Retirees shall constitute Shared Liabilities. Section 2.02. Initial Compensation of Active Employees. The initial base ---------------------------------------- salary or wage level of each Active Employee of each Group shall be no less than the base salary or wage level of such Active Employee immediately prior to the Distribution Date. Section 2.03. No Additional Employment Rights Created. Nothing in this --------------------------------------- Agreement shall give any Active Employee of any Group any right to continued employment by any member of that Group or any other Group beyond the Distribution Date, which is in addition to or supplemental to any such right he or she may have arising under contract or otherwise. Section 2.04. Corporate and Transition Employees. Costs associated with ---------------------------------- the termination or severance of Corporate Employees (listed on Schedule 1) and Transition Employees (listed on Schedule 2), including the cost of any claim, suit or dispute relating to such severance or termination, shall constitute Transaction Expenditures. Costs associated with the termination or severance of all Former Employees not terminated in connection with the Distributions, including the cost of any claim, suit or dispute relating to such severance or termination, shall constitute Shared Liabilities. Section 2.05. Retiree Payments. All payments made to the Retirees pursuant ---------------- to their severance agreements shall constitute Transaction Expenditures. ARTICLE III UNITED STATES RETIREMENT AND PROFIT-SHARING PLAN BENEFITS Section 3.01. Varian Associates, Inc. Retirement and Profit-Sharing ----------------------------------------------------- Program. The active participation in the Varian Associates, Inc. Retirement and - ------- Profit-Sharing Program (the "Varian Profit-Sharing Plan") by persons other than the Active Employees of the Health Care Systems Group will cease, effective as of the Distribution Date. In addition, as of the Distribution Date, all members of the Semiconductor Equipment Group and all members of the Instruments Group will cease to be participating employers in the Varian Profit Sharing Plan and the members of the Health Care Systems Group will become the only participating employers in the Varian Profit-Sharing Plan. All payments to or on behalf of Active Employees and Former Employees under the Varian Profit-Sharing Plan with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 3.02. Establishment of Varian Semiconductor Equipment Associates, ---------------------------------------------------------- Inc. Defined Contribution Plan. - ------------------------------ (a) Varian Semiconductor Equipment Associates, Inc. DC Plan. SEB will ------------------------------------------------------- establish or make available, effective as of the Distribution Date, a defined contribution plan for the benefit of the United States Active Employees of the Semiconductor Equipment Group (the "SEB DC Plan"). (b) Transfer of Account Balances to Varian Semiconductor Associates, --------------------------------------------------------------- Inc. DC Plan. As promptly as practicable after the Distribution Date (but ------------ in no event later than December 31 of the second calendar year after the Distribution Date), HCS shall cause the trustee of the Varian Profit- Sharing Plan to 2 transfer to the trustee of the SEB DC Plan, as a direct rollover, the account balance of those Active Employees of the Semiconductor Equipment Group who elect direct rollovers and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. In addition, at two times to be mutually agreed by the parties (but in no event later than 12 months following the Distribution Date), HCS shall cause the trustee of the Varian Profit-Sharing Plan to transfer to the trustee of the SEB DC Plan, as a direct rollover, the current balance of those Active Employees of the Semiconductor Equipment Group who elect to participate in such batch rollover and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. The trustee of the SEB DC Plan shall accept such rollovers in accordance with its standard procedures, except that the trustee shall accept the direct rollovers described in the preceding sentence on an in kind basis. Section 3.03. Establishment of Varian, Inc. Defined Contribution Plan. ------------------------------------------------------- (a) Varian, Inc. DC Plan. IB will establish or make available, -------------------- effective as of the Distribution Date, a defined contribution plan for the benefit of the United States Active Employees of the Instruments Group (the "IB DC Plan"). (b) Transfer of Account Balances to Varian, Inc. DC Plan. As promptly ---------------------------------------------------- as practicable after the Distribution Date (but in no event later than December 31 of the second calendar year after the Distribution Date), HCS shall cause the trustee of the Varian Profit-Sharing Plan to transfer to the trustee of the IB DC Plan as a direct rollover, the account balance of those Active Employees of the Instruments Group who elect direct rollovers and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. In addition, at two times to be mutually agreed by the parties (but in no event later than 12 months following the Distribution Date), HCS shall cause the trustee of the Varian Profit- Sharing Plan to transfer to the trustee of the IB DC Plan, as a direct rollover, the current balance of those Active Employees of the Instruments Group who elect to participate in such batch rollover and with respect to whom the Varian Profit-Sharing Plan maintains an account as of the Effective Time. The trustee of the IB DC Plan shall accept such rollovers in accordance with its standard procedures, except that the trustee of the IB DC Plan shall accept the direct rollovers described in the preceding sentence on an in kind basis. Section 3.04. Reimbursement and Indemnification. IB and SEB, respectively, --------------------------------- shall assume all direct and indirect administrative costs associated with the Varian Profit-Sharing Plan with respect to Active Employees of the Instruments Group and the Semiconductor Equipment Group, respectively, which would otherwise be borne by HCS, and such costs shall constitute Instruments Liabilities and Semiconductor Equipment Liabilities, respectively. All direct and indirect administrative costs associated with the Varian Profit-Sharing Plan with respect to Former Employees and Retirees of all Groups shall constitute Shared Liabilities. ARTICLE IV EMPLOYEE BENEFITS MATTERS OUTSIDE THE UNITED STATES Section 4.01. Employee Benefits Matters Outside the United States. With --------------------------------------------------- respect to the business and operations of each Group in jurisdictions outside the United States, each of the parties hereto shall (and, as applicable, shall cause each other member of its Group over which it has direct or indirect legal or effective control to) assume, or retain, as the case may be, any and all employee benefits Liabilities and attendant plans and their assets related to the Active Employees of its Group. Except as otherwise provided on Schedule 3, all non-United States employee benefits Liabilities of HCS, IB or SEB with respect to Former Employees shall constitute Shared Liabilities. ARTICLE V EXECUTIVE COMPENSATION Section 5.01. Supplemental Retirement Plan. At or promptly after the ---------------------------- Distribution Date, Varian Associates, Inc. will distribute the account balances existing as of the Distribution Date of all current and former 3 participants in the Supplemental Retirement Plan of Varian Associates, Inc. (the "SRP"). Such distributions shall constitute Transaction Expenditures. As of the Distribution Date, only Active Employees of the Health Care Systems Group will be eligible to accrue benefits under the SRP. Section 5.02. Management Incentive Plan. None of the Active Employees of ------------------------- the Semiconductor Equipment Group or the Instruments Group will accrue any benefits under the Varian Associates, Inc. Management Incentive Plan (the "MIP") from and after the Distribution Date. All payments made under the MIP to United States employees with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 5.03. Long-Term Incentives. None of the Active Employees of the -------------------- Semiconductor Equipment Group or the Instruments Group will accrue any benefits under the "long-term incentive" feature ("LTI") of the Varian Associates, Inc. Omnibus Stock Plan from and after the Distribution Date. All payments made under the LTI to United States employees with respect to pre-Distribution service shall constitute Transaction Expenditures. Section 5.04. Deferred Cash Compensation. At or promptly after the -------------------------- Distribution Date, all deferred cash compensation with respect to pre- Distribution service of current and former employees and non-employee directors will be distributed. Such distributions shall constitute Transaction Expenditures. Section 5.05. Restricted Stock Program. None of the Active Employees of ------------------------ the Semiconductor Equipment Group or the Instruments Group will receive grants of restricted stock under the "restricted stock program" of the Varian Associates, Inc. Omnibus Stock Plan from and after the Distribution Date. Section 5.06. Options. SEB and IB have established, respectively, the ------- Varian Semiconductor Equipment Associates, Inc. Omnibus Stock Plan (the "SEB Stock Plan") and the Varian, Inc. Omnibus Stock Plan (the "IB Stock Plan"). For purposes of this Section 5.06, if the markets upon which VAI Common Stock, HCS Common Stock, IB Common Stock or SEB Common Stock are open for trading on the Distribution Date but no trade is made, the average of the last high bid and the last low ask price reported on the Distribution Date shall govern with respect to the Common Stock so affected. If such markets are not open for trading on the Distribution Date, then the closing prices of the VAI Common Stock, the HCS Common Stock, the IB Common Stock and the SEB Common Stock on the trading day immediately preceding the Distribution Date shall govern (unless there is no trade on such date, in which case the average of the last high bid and the last low ask price reported on such date shall govern with respect to the Common Stock so affected). (a) Active Employees of HCS. Effective as of the Distribution Date, ----------------------- all outstanding options in respect of VAI Common Stock ("Current Options") held immediately prior to the Effective Time by Active Employees of the Health Care Systems Group (other than non-employee directors of Varian Associates, Inc.) will be adjusted as follows to reflect the Distributions ("Adjusted Options"): The option exercise price for Adjusted Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of HCS Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of HCS Common Stock subject to an Adjusted Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of HCS Common Stock on the Distribution Date. Adjusted Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (b) Active Employees of IB. Effective as of the Distribution Date, ---------------------- Current Options held immediately prior to the Effective Time by Active Employees of the Instruments Group (other than non-employee directors of Varian Associates, Inc.) who so elect prior to the Distribution Date will be replaced with substitute options in respect of IB Common Stock ("Spinoff IB Options"). The option exercise price for Spinoff IB Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of IB Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of IB Common Stock subject to a Spinoff IB Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator 4 of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of IB Common Stock on the Distribution Date. Active Employees of IB who do not elect to receive Spinoff IB Options will receive Adjusted Options, which will terminate pursuant to their terms. Spinoff IB Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (c) Active Employees of SEB. Effective as of the Distribution Date, ----------------------- Current Options held immediately prior to the Effective Time by Active Employees of the Semiconductor Group (other than non-employee directors of Varian Associates, Inc.) who so elect prior to the Distribution Date will be replaced with substitute options in respect of SEB Common Stock ("Spinoff SEB Options" and, together with Spinoff IB Options, "Spinoff Options"). The option exercise price for Spinoff SEB Options will be determined by multiplying the Current Option exercise price by a fraction, the numerator of which is the closing price of SEB Common Stock on the Distribution Date and the denominator of which is the closing price of VAI Common Stock on the Distribution Date. The number of shares of SEB Common Stock subject to a Spinoff SEB Option will be determined by multiplying the number of shares of VAI Common Stock subject to the corresponding Current Option by a fraction, the numerator of which is the closing price of VAI Common Stock on the Distribution Date and the denominator of which is the closing price of SEB Common Stock on the Distribution Date. Active Employees of SEB who do not elect to receive Spinoff SEB Options will receive Adjusted Options, which will terminate pursuant to their terms. Spinoff SEB Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (d) Retirees. Effective as of the Distribution Date, Current Options -------- held immediately prior to the Effective Time by Retirees will be replaced with options in respect of each of HCS Common Stock, IB Common Stock and SEB Common Stock ("Converted Options"). The option exercise price and number of shares subject to Converted Options will be calculated by subjecting 1/3 of the shares subject to the relevant Current Option to each of the calculations described above for Adjusted Options, Spinoff IB Options and Spinoff SEB Options. Current Options held by Retirees will be fully vested as of the Effective Time. (e) Non-Employee Directors. Effective as of the Distribution Date, ---------------------- Current Options held by non-employee directors of Varian Associates, Inc. who so elect prior to the Distribution Date will be exchanged for Converted Options. Non-employee directors of Varian Associates, Inc. who do not elect to receive Converted Options will receive Adjusted Options. Converted Options shall be subject to the same vesting and expiration terms and substantially the same other terms applicable to the Current Options to which they relate. (f) Former Employees. Effective as of the Distribution Date, Current ---------------- Options held immediately prior to the Effective Time by Former Employees not terminated in connection with the Distributions will be replaced with Adjusted Options. (g) Employees Terminated in Connection with the Distributions. --------------------------------------------------------- Effective as of the Distribution Date, Current Options held by Former Employees whose employment is terminated on or before the Distribution Date in connection with the Distributions (as determined by the employer) and who so elect will be replaced with Converted Options. Options held by Active Employees whose employment terminates after the Distribution Date but in connection with the Distributions (as determined by the employer) and who so elect will be replaced with options in respect of each of HCS, IB and SEB. The number and exercise price of such options shall be calculated consistent with the principles governing Converted Options, using the respective prices as of the Distribution Date. Current Options and Adjusted Options held by employees whose employment was or is terminated in connection with the Distributions and who elect a conversion pursuant to this Section 5.06(g) will be fully vested as of the Effective Time or, if later, the employee's final work day. Current Options and Adjusted Options held by employees whose employment was or is terminated in connection with the Distributions but who do not elect a conversion pursuant to this Section 5.06(g) will terminate according to their terms without any accelerated vesting of Current Options or Adjusted Options not vested as of the Distribution Date or the employee's last work day, as applicable. 5 (h) Transition Employees Transferred Subsequent to the Distributions. ---------------------------------------------------------------- Transition Employees transferred from employment with HCS, IB or SEB to employment with another of HCS, IB or SEB following the Distribution who so elect will have their Adjusted Options or Spinoff Options replaced with options in the entity to which they are transferred. The number and exercise price of such options shall be calculated consistent with the principles governing Spinoff Options, using the respective prices as of the Distribution Date. (i) Survivors of Former Employees. Effective as of the Distribution ----------------------------- Date, persons who hold Current Options granted to Former Employees who are deceased as of the Effective Time will receive Converted Options, if the holder so elects. Holders who do not so elect will receive Adjusted Options. Section 5.07. Restricted Stock. All unvested Restricted Stock held by ---------------- employees and non-employee directors of the Health Care Systems Group, the Semiconductor Equipment Group and the Instruments Group shall be fully vested immediately prior to the Distributions. ARTICLE VI WELFARE BENEFITS Section 6.01. Welfare Plans. As of the Effective Time, HCS shall serve as ------------- the sole sponsor of the Varian Welfare Plans from and after the Distribution Date. Section 6.02. Allocation and Discharge of Welfare Plan Liabilities. As of ---------------------------------------------------- the Effective Time, all Liabilities under the Varian Welfare Plans (including administrative expenses) with respect to Active Employees of the Semiconductor Equipment Group and their dependents shall be assumed by the Semiconductor Equipment Group and shall constitute Semiconductor Equipment Liabilities. As of the Effective Time, all Liabilities (including administrative expenses) under the Varian Welfare Plans with respect to Active Employees of the Instruments Group and their dependents shall be assumed by the Instruments Group and shall constitute Instruments Liabilities. As of the Effective Time, all Varian Welfare Plan Liabilities (including administrative expenses) with respect to Active Employees of the Health Care Systems Group and their dependents shall constitute Health Care Systems Liabilities. As of the Effective Time, all Varian Welfare Plan Liabilities with respect to (a) Retirees and (b) Former Employees not terminated in connection with the Distributions shall constitute Shared Liabilities. As of the Effective Time, all Varian Welfare Plan Liabilities with respect to other employees terminated in connection with the Distributions shall constitute Transaction Expenditures. ARTICLE VII GENERAL Section 7.01. Post-Distribution Administration of Plans. The parties ----------------------------------------- hereto will administer all plans consistently herewith, and to the extent necessary will amend their respective employee benefit plans accordingly. Section 7.02. Costs and Expenses. Each party shall bear all costs and ------------------ expenses, including but not limited to legal and actuarial fees, incurred from and after the Distribution Date in the design, drafting and implementation of any and all plans and compensation structures which it establishes or creates and the amendment of its existing plans or compensation structures. Section 7.03. Sharing of Participant Information. From and after the ---------------------------------- Distribution Date, HCS, IB and SEB shall share, and shall cause each member of their respective Groups to share, with each other and with their respective agents and vendors all participant information necessary and appropriate for the efficient and accurate administration of each party's respective employee benefit plans and performance of their respective obligations under this Agreement. HCS, IB and SEB shall, subject to all applicable laws concerning confidentiality, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of another party, to the extent necessary and appropriate for such administration and performance. 6 ARTICLE VIII INDEMNIFICATION Section 8.01. Rights and Obligations. Article VII of the Distribution ---------------------- Agreement shall govern the rights and obligations of HCS, IB, SEB and the members of their respective Groups with respect to indemnification for any and all Indemnifiable Losses related to the subject matter of this Agreement. The term "Third Party Claim" in that Article shall be read to include all claims or demands made by any Person who is not a party to this Agreement or a Subsidiary of the party concerning the subject matter of this Agreement. ARTICLE IX DISPUTE RESOLUTION Section 9.01. Distribution Agreement to Control. Any and all --------------------------------- controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in, Article IX of the Distribution Agreement. ARTICLE X MISCELLANEOUS Section 10.01. Complete Agreement; Construction. This Agreement, and the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. Section 10.02. Other Agreements. This Agreement is not intended to ---------------- address, and should not be interpreted to address, the matters expressly covered by the Distribution Agreement and/or the other Ancillary Agreements. Section 10.03. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 10.04. Survival of Agreements. All covenants and agreements of the ---------------------- parties contained in this Agreement shall survive the Distribution Date except as expressly provided herein and shall not be merged into any other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. Section 10.05. Expenses. Except as otherwise expressly provided in this -------- Agreement or the Distribution Agreement, all costs and expenses incurred or accrued on or before the Distribution Date (whether or not paid on or before the Distribution Date) in connection with the preparation, execution, delivery and implementation of this Agreement and the consummation of the transactions contemplated hereby shall be charged to and paid by Varian. Section 10.06. Notices. All Notices required or permitted under this ------- Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: 7 If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel Telecopy: (650) ___-____ If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel Telecopy: (650) ___-____ If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy (978) ___-____ with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) ___-____ or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. Section 10.07. Waivers. The failure of any party to require strict ------- performance by any other party of any provision of this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof. 8 Section 10.08. Amendments. This Agreement may be amended or supplemented, ---------- or its provisions waived, only by an agreement in writing signed by each of the parties. Section 10.09. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 10.10. Successors and Assigns. This Agreement shall be binding ------------- upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 10.11. Termination. This Agreement may be terminated at any time ----------- before the Distributions by Varian in its sole discretion without the approval of SEB or IB or the Varian stockholders. In the event of such termination, no party shall have any Liability of any kind to any other party. After the Distributions, this Agreement may not be terminated except by an agreement in writing signed by each of the parties. Section 10.12. No Third Party Beneficiaries. This Agreement is solely for ---------------------------- the benefit of the parties and the members of their respective Groups and Affiliates and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. Section 10.13. Titles and Headings; Interpretation. Titles and headings to ----------------------------------- sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, and Schedules shall be deemed references to Articles and Sections of, and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. Section 10.14. Governing Law. This Agreement shall be governed by, and ------------- construed and enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder, to the extent not preempted by the Employee Retirement Income Security Act of 1974. Section 10.15. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, of the application of such provision to Persons or circumstances other than those as to which it has held invalid," void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner adverse to any party. 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By:____________________________________ Name: [NAME] Title: [TITLE] VARIAN ASSOCIATES, INC. By:____________________________________ Name: [NAME] Title: [TITLE] VARIAN, INC. By:____________________________________ Name: [NAME] Title: [TITLE] 10 EX-10.2 6 FORM OF INTELLECTUAL PROPERTY AGREEMENT EXHIBIT 10.2 - ------------------------------------------------------------------------------- INTELLECTUAL PROPERTY AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of __________, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS............................................................................... 1 Section 1.01. General.............................................................................. 1 ARTICLE II OWNERSHIP OF INTELLECTUAL PROPERTY........................................................ 2 Section 2.01. General Principles of Allocation and Recognition..................................... 2 Section 2.02. Distribution of Rights............................................................... 3 Section 2.03. Rights Arising in Future............................................................. 4 Section 2.04. No Warranties........................................................................ 4 Section 2.05. Recognition of Non-Party Rights...................................................... 4 Section 2.06. Effectuating Transfer of Rights...................................................... 4 Section 2.07. Limitations and Obligations in Jointly Owned Intellectual Property................... 5 ARTICLE III CROSS LICENSING OF RIGHTS................................................................. 5 Section 3.01. Grants by Varian..................................................................... 5 Section 3.02. Grants by IB......................................................................... 6 Section 3.03. Grants by SEB........................................................................ 6 Section 3.04. Limitations of Rights................................................................ 6 Section 3.05. Restrictions on Sublicensing......................................................... 6 ARTICLE IV TRADEMARKS OF VARIAN ASSOCIATES, INC...................................................... 6 Section 4.01. Grant of Licenses.................................................................... 6 Section 4.02. Protection of Licensed Property...................................................... 7 Section 4.03. Costs and Administration............................................................. 7 Section 4.04. Extending the Rights in the Marks.................................................... 7 Section 4.05. Reducing the Rights in the Marks..................................................... 7 Section 4.06. Non-use or Abandonment of the Marks.................................................. 7 Section 4.07. Limitations on Concurrent Use........................................................ 8 Section 4.08. Notice and Publicity................................................................. 8 Section 4.09. Domain Name and Internet Hyperlinks.................................................. 8 Section 4.10. Duty to Avoid Confusion.............................................................. 8 Section 4.11. Consent to Registration.............................................................. 8 Section 4.12. Limitations on Sublicensing.......................................................... 8 Section 4.13. Transition Period.................................................................... 9 ARTICLE V COVENANTS................................................................................. 9 Section 5.01. Further Assurances................................................................... 9 Section 5.02. Cooperation.......................................................................... 9 Section 5.03. Intellectual Property Records........................................................ 9 ARTICLE VI INDEMNIFICATION........................................................................... 9 Section 6.01. Rights and Obligations............................................................... 9
-i- TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE VII DISPUTE RESOLUTION........................................................................ 9 Section 7.01. Distribution Agreement to Control.................................................... 9 ARTICLE VIII MISCELLANEOUS............................................................................. 10 Section 8.01. Complete Agreement; Construction..................................................... 10 Section 8.02. Other Agreements..................................................................... 10 Section 8.03. Counterparts......................................................................... 10 Section 8.04. Survival of Agreements............................................................... 10 Section 8.05. Expenses............................................................................. 10 Section 8.06. Notices.............................................................................. 10 Section 8.07. Waivers.............................................................................. 11 Section 8.08. Amendments........................................................................... 11 Section 8.09. Assignment........................................................................... 11 Section 8.10. Successors and Assigns............................................................... 12 Section 8.11. Third Party Beneficiaries............................................................ 12 Section 8.12. Schedules............................................................................ 12 Section 8.13. Titles and Headings; Interpretation.................................................. 12 Section 8.14. Governing Law........................................................................ 12 Section 8.15. Severability......................................................................... 12 Section 8.16. Subsidiaries......................................................................... 12
-ii- FORM OF INTELLECTUAL PROPERTY AGREEMENT THIS INTELLECTUAL PROPERTY AGREEMENT (this "Agreement") is made and entered into as of this __th day of _____________, 1999, between and among VARIAN ASSOCIATES, INC., a Delaware corporation ("Varian"), VARIAN, INC., a Delaware corporation ("IB"), and VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC., a Delaware corporation ("SEB"). RECITALS WHEREAS, Varian, directly and through its Subsidiaries and Affiliates, currently owns various intellectual property rights used in connection with a number of businesses, which businesses are described in the Distribution Agreement dated as of January 14, 1999, among Varian, IB and SEB (the "Distribution Agreement"); and WHEREAS, the parties have determined that this Agreement is appropriate in order to effectuate the purposes of the Distribution Agreement as described therein, and in order to promote a clear understanding of their respective intellectual property rights after the Distributions (as defined in the Distribution Agreement) contemplated thereby; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein and therein, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. General. Except for the defined terms set forth below, the ------- capitalized terms used in this Agreement have the meanings ascribed to them in Article I, Section 1.01 of the Distribution Agreement, except that for purposes of this Agreement the terms "HCS," "IB" and "SEB" shall include the other members of the Health Care Systems Group, the Instruments Group and the Semiconductor Equipment Group, respectively, unless the context otherwise requires. "Fields" means certain combinations of, or collectively, the product ------ markets of the Health Care Systems Business, the Instruments Business and the Semiconductor Equipment Business, as defined herein below. "Field of Health Care Systems" means the product markets to which the ---------------------------- Health Care Systems Business directs its marketing, sales, engineering, research and development efforts, as further described in Exhibit A. "Field of Instruments" means the product markets to which the Instruments -------------------- Business directs its marketing, sales, engineering, research and development efforts, as further described in Exhibit A. "Field of Semiconductor Equipment" means the product markets to which the -------------------------------- Semiconductor Equipment Business directs its marketing, sales, engineering, research and development efforts, as further described in Exhibit A. "HCS Intellectual Property" shall have the meaning set forth in Section ------------------------- 2.01(a). "IB Intellectual Property" shall have the meaning set forth in Section ------------------------ 2.01(b). "Infringement" means any unauthorized use or conduct in violation or ------------ derogation of the rights in question. "Intellectual Property" means the intellectual property rights owned, --------------------- licensed to or otherwise held by Varian, and its Subsidiaries and Affiliates, throughout the world, as of the Distribution Date, including, without limitation, all of the rights, title and interests in the following: (i) all United States and foreign patents, patent applications (including any continuations, continuation-in-part and divisionals), patent applications under preparation, invention disclosures and invention disclosures under preparation; (ii) all United States and foreign registered and unregistered copyrights and mask works, including applications and applications under preparation therefor; (iii) all United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor; (iv) all trade secrets, know-how, ideas, concepts, discoveries, improvements, processes, procedures, methods, recipes, formulae, data and specifications; (v) all computer, programs and other software (in executable or source code format), including operating software, applications, network software, firmware, middleware, design software, design tools, test and diagnostic software, systems configurations; and (vi) all documentation, schematics, drawings, designs, manuals, reports, records, instructions, studies, surveys, plans, books or other written materials (whether in hard copy or magnetic form) relating to or including any of the (i) through (v) above. "Residual Intellectual Property" shall have the meaning set forth in ------------------------------ Section 2.01(d). "SEB Intellectual Property" shall have the meaning set forth in Section ------------------------- 2.01(c). "Specified Intellectual Property" shall have the meaning set forth in ------------------------------- Section 2.01(e). ARTICLE II OWNERSHIP OF INTELLECTUAL PROPERTY Section 2.01. General Principles of Allocation and Recognition. ------------------------------------------------ (a) Without limiting any obligation or Liability of Varian under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, Varian (or another member of the Health Care Systems Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Health Care Systems Business or primarily in connection with the Health Care Systems Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Health Care Systems Business or in connection with the Health Care Systems Assets; (iii) was developed exclusively or primarily for the conduct of the Health Care Systems Business or in connection with the Health Care Systems Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Health Care Systems Business or in connection with the Health Care Systems Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Health Care Systems Business or in connection with the Health Care Systems Assets; and/or (vi) as of the Effective Time, is allocated to HCS by mutual agreement of the parties (collectively "HCS Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (b) or paragraph (c) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. 2 (b) Without limiting any obligation or Liability of IB under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, IB (or another member of the Instruments Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Instruments Business or primarily in connection with the Instruments Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Instruments Business or in connection with the Instruments Assets; (iii) was developed exclusively or primarily for the conduct of the Instruments Business or in connection with the Instruments Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Instruments Business or in connection with the Instruments Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Instruments Business or in connection with the Instruments Assets; and/or (vi) as of the Effective Time, is allocated to IB by mutual agreement of the parties (collectively "IB Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (a) or in paragraph (c) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. (c) Without limiting any obligation or Liability of SEB under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Distributions, SEB (or another member of the Semiconductor Equipment Group) shall own all rights, title and/or interest in all Intellectual Property that: (i) originated primarily with the conduct of the Semiconductor Equipment Business or primarily in connection with the Semiconductor Equipment Assets; (ii) was obtained by, exclusively or primarily for the conduct of, the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (iii) was developed exclusively or primarily for the conduct of the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (iv) arose from funding by, exclusively or primarily for the benefit of the conduct of, the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; (v) as of the Effective Time, is used or held for use exclusively or primarily for the conduct of the Semiconductor Equipment Business or in connection with the Semiconductor Equipment Assets; and/or (vi) as of the Effective Time, is allocated to SEB by mutual agreement of the parties (collectively "SEB Intellectual Property"). If a conflict exists between or among any of the clauses (i) through (iv) set forth in this paragraph or in paragraph (a) or in paragraph (b) of this Section 2.01, on the one hand, and clause (v) of this paragraph, on the other hand, then clause (v) shall prevail. (d) Subject to the provisions of Section 2.01(a), (b) and (c) above, any Intellectual Property that: (i) did not originate primarily with the conduct of the business or primarily in connection with the Assets of any Group; (ii) was not obtained by, exclusively or primarily for the conduct of, any Group or in connection with the Assets of any Group; (iii) was not developed exclusively or primarily for the conduct of the business or in connection with the Assets of any Group; (iv) did not arise from funding by, exclusively or primarily for the benefit of any Group or in connection with the Assets of any Group; (v) is not used or held for use exclusively or primarily for the conduct of the business or in connection with the Assets of any Group as of the Effective Time; and (vi) has not been allocated to one of the parties under this Agreement (the Intellectual Property satisfying each of the foregoing clauses (i)-(vi) hereinafter, collectively, "Residual Intellectual Property"), shall be jointly owned by the parties. (e) Notwithstanding the provisions in Section 2.01(a), (b), (c) and (d) above, effective as of the Effective Time, the parties acknowledge that joint ownership in the rights, title and interests in certain Intellectual Property specified in or pursuant to this Agreement may be held by two or more parties ("Specified Intellectual Property"). Section 2.02. Distribution of Rights. ---------------------- (a) Varian hereby irrevocably transfers and assigns, effective as of the Effective Time, to IB the ownership of all rights, title and/or interest in the IB Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(a). In addition, Varian hereby irrevocably transfers and assigns to IB, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(a), subject to the provisions of Section 2.07 below. 3 (b) Varian hereby irrevocably transfers and assigns, effective as of the Effective Time, to SEB the ownership of all rights, title and/or interest in the SEB Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(b). In addition, Varian hereby irrevocably transfers and assigns to SEB, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(b), subject to the provisions of Section 2.07 below. (c) Varian hereby irrevocably retains, effective as of the Effective Time, the ownership of all rights, title and/or interest in the HCS Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(c), and subject to the provisions of Article IV below, in the "Varian" and "VA logo" trademarks. In addition, Varian hereby irrevocably retains, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Specified Intellectual Property, an exclusive description of which is set forth in Schedule 2.02(c), subject to the provisions of Section 2.07 below. (d) Varian hereby irrevocably transfers and assigns to IB and SEB, and irrevocably retains for itself, effective as of the Effective Time, joint ownership of all rights, title and/or interest in the Residual Intellectual Property, a non-exclusive description of which is set forth in Schedule 2.02(d), subject to the provisions of Section 2.07 below. (e) Without limiting any obligation or Liability of any party under the Distribution Agreement or any other Ancillary Agreement, and subject to the provisions of Article III below, after the Effective Time, all rights, title and/or interest in all Intellectual Property identified on Schedule 2.02(a) through (d) shall be owned solely or jointly by or vested in the party indicated therein. Section 2.03. Rights Arising in Future. Subject to the provisions of ------------------------ Article III below, after the Effective Time: (a) any and all intellectual property created by or on behalf of a party, including common-law rights related thereto, shall belong solely and exclusively to such party; and (b) any and all subsequent ownership, possession and use by each party of the Intellectual Property that it will own subsequent to the Distributions under the terms of this Agreement (excluding any possession or use pursuant to license granted by another party), including common-law rights related thereto, shall inure solely to such party's sole and exclusive benefit. Section 2.04. No Warranties. No party to this Agreement, the Distribution ------------- Agreement, or any other agreement contemplated herein or otherwise (notwithstanding anything to the contrary expressly provided in any Conveyancing and Assumption Instrument), is making any representation or warranty whatsoever regarding the Intellectual Property transferred, distributed or licensed under this Agreement, including, as to title, value or legal sufficiency thereof. Any and all Intellectual Property and related Assets transferred or retained by the parties, as the case may be, shall be "AS IS, WHERE IS". Section 2.05. Recognition of Non-Party Rights. The recognition among the ------------------------------- parties of the transfers of rights in the Intellectual Property under Sections 2.01-2.03 of this Agreement is subject to all pre-existing rights, obligations and restrictions of Persons that are not parties to this Agreement as of the Effective Time. The provisions of Section 2.14 of the Distribution Agreement shall govern the rights and obligations of the parties with regard to obtaining any necessary Consents and taking other actions relating to such transfers of rights. Section 2.06. Effectuating Transfer of Rights. The parties shall execute ------------------------------- all such documents, and to take all such actions before, at and after the Effective Time, as may be necessary to achieve, perfect or confirm the respective ownership of rights in the Intellectual Property, as contemplated in this Article II, by the Effective Time. 4 Section 2.07. Limitations and Obligations in Jointly Owned Intellectual --------------------------------------------------------- Property. - -------- (a) Each party shall have the unlimited right to use the Residual Intellectual Property and/or Specified Intellectual Property, as applicable, except to make, have made or sell competing products in the Fields of the other parties, as set forth in Article I above. (b) The parties shall share equally in all costs and fees, if any, associated with obtaining, perfecting and/or maintaining the Residual Intellectual Property and the Specified Intellectual Property, to the extent that each party has an ownership interest therein. The parties shall designate a party, by mutual agreement, to have administrative responsibility for tracking, coordinating and submitting payment of such costs and fees ("Designated Party"). The Designated Party that is responsible for a particular cost or fee shall deliver, at least forty-five (45) days before such cost or fee becomes due, an invoice to the other party or parties ("Invoiced Party) requesting submission of their share of such cost or fee. The Invoiced Party shall have thirty (30) days from the date of the receipt to pay such invoice. If an Invoiced Party, at any time, does not pay the invoiced amount in a timely manner, the Designated Party shall send a written notice, by facsimile transmission or overnight mail, to such Invoiced Party requesting payment of such invoice within fifteen (15) business days. The failure by the Invoiced Party to make such payment shall constitute abandonment of all rights in the Residual Intellectual Property or Specified Intellectual Property relating to such payment and shall result in such rights shall be reapportioned equally between the remaining parties. If a Designated Party decides to abandon its rights in certain Residual Intellectual Property or Specified Intellectual Property for which it has administrative responsibility, such Designated Party shall provide the other parties with written notice of its decision at least sixty (60) days prior to the due date of any cost or fee, and the parties shall confer to determine which party shall be allocated such administrative responsibility. The effect of such abandonment shall be to remove the restriction set forth in Section 2.07(a) above and to permit the other party, or parties, retaining rights in the Residual Intellectual Property or Specified Intellectual Property to enforce those rights against the abandoning party. (c) Each party shall be responsible for policing its rights in the Residual Intellectual Property and Specified Intellectual Property, as applicable, against Infringement in its respective Field, as set forth in Article I above. ARTICLE III CROSS LICENSING OF RIGHTS Section 3.01. Grants by Varian. ---------------- (a) Varian hereby grants to IB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the HCS Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Health Care Systems Business) to make, have made, use and sell products only in the Field of Instruments, subject to the provisions of this Article III. (b) Varian hereby grants to SEB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the HCS Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Health Care Systems Business) to make, have made, use and sell products only in the Field of Semiconductor Equipment, subject to the provisions of this Article III. 5 Section 3.02. Grants by IB. ------------ (a) IB hereby grants to Varian a limited, non-exclusive, perpetual, royalty-free, worldwide license under the IB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Instruments Business) to make, have made, use and sell products only in the Field of Health Care Systems, subject to the provisions of this Article III. (b) IB hereby grants to SEB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the IB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Instruments Business) to make, have made, use and sell products only in the Field of Semiconductor Equipment, subject to the provisions of this Article III. Section 3.03. Grants by SEB. ------------- (a) SEB hereby grants to Varian a limited, non-exclusive, perpetual, royalty-free, worldwide license under the SEB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Semiconductor Equipment Business) to make, have made, use and sell products only in the Field of Health Care Systems, subject to the provisions of this Article III. (b) SEB hereby grants to IB a limited, non-exclusive, perpetual, royalty-free, worldwide license under the SEB Intellectual Property (except for the United States and foreign registered and unregistered trademarks, trade names, trade dress, service marks, services names, artwork, logos and other marks, including applications and applications under preparation therefor, used primarily in the Semiconductor Equipment Business) to make, have made, use and sell products only in the Field of Instruments, subject to the provisions of this Article III. Section 3.04. Limitations of Rights. Nothing in the foregoing grants of --------------------- license shall be construed as providing a grantee party the right to make, have made, use or sell any product that competes, directly or indirectly, with the products of a grantor party. Section 3.05. Restrictions on Sublicensing. The parties shall have no ---------------------------- right to sublicense to any third party the rights granted by another party, pursuant to this Article III, without the prior written consent of the grantor party, which consent shall not be unreasonably withheld. ARTICLE IV TRADEMARKS OF VARIAN ASSOCIATES, INC. Section 4.01. Grant of Licenses. ----------------- (a) Varian hereby grants to IB a limited, exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the "Varian" and "VA logo" trademarks in the Field of Instruments, subject to the provisions of this Article IV. (b) Varian hereby grants to SEB a limited, exclusive, perpetual, irrevocable, royalty-free, worldwide license to use the "Varian" and "VA logo" trademarks in the Field of Semiconductor Equipment, subject to the provisions of this Article IV. 6 (c) Varian hereby retains a limited, exclusive, perpetual, irrevocable, royalty-free, worldwide right to use the name "Varian" and the "VA logo" trademarks in the Field of Health Care Systems, subject to the provisions of this Article IV. (d) After the Effective Time, each of Varian, IB and SEB shall possess the right to use the "Varian" name or "VA logo" standing alone or by itself for use on products, advertising or marketing purposes, etc., subject to the provisions of this Article IV. Section 4.02. Protection of Licensed Property. After the Effective Time, ------------------------------- each of Varian, IB and SEB shall use the "Varian" and "VA logo" trademarks (hereinafter the "Marks") in a manner that protects the goodwill and other rights associated therewith, that associates the Marks with high quality products, that avoids disparagement, dilution or otherwise adversely affects the validity of the Marks, and that is in accordance with the policies and guidelines established for the protection of that party's other trademarks. Each party shall be responsible for policing and preventing Infringement by third parties of the Marks in their respective Fields. Any party's failure to use the Marks in accordance with the foregoing or material failure to prevent Infringement by third parties shall be grounds for revocation of the rights granted in this Article IV, pursuant to the provisions of Article VII below. Section 4.03. Costs and Administration. The parties shall share equally in ------------------------ all costs and fees associated with maintaining the Marks, and Varian shall have the administrative responsibility for tracking, coordinating and submitting payments therefor. Varian shall deliver, at least forty-five (45) days before such costs or fees become due, an invoice to the other parties ("Invoiced Party") requesting submission of each party's share of such costs or fees. The Invoiced Party shall have thirty (30) days from the date of receipt to pay such invoice. If, at any time, an Invoiced Party does not pay, in full, the invoiced amount in a timely manner, Varian shall send a written notice, by facsimile transmission or overnight mail, to such Invoiced Party requesting payment of such invoiced amount within fifteen (15) business days. The failure by the Invoiced Party to make such payment shall constitute abandonment of all rights in the Marks. If Varian decides to abandon its rights in the Marks, Varian shall provide the other parties with written notice of its decision at least sixty (60) days prior to the due date that any cost or fee, and the parties shall confer to determine which of IB or SEB shall be given the administrative responsibility for the Marks. The effect of such abandonment shall be to require the immediate cessation of all use of the Marks by the abandoning party. Section 4.04. Extending the Rights in the Marks. In the event that a party --------------------------------- desires to extend the rights in the Marks by registrations in additional countries or additional classes, such party shall, in writing, request that Varian seek such registrations. Varian shall comply with such request by engaging trademark counsel within thirty (30) days thereof, and such requesting party agrees to pay all costs and fees associated with such applications for registrations. Upon completion of the registrations, the maintenance costs and fees shall be governed by the provisions of Section 4.03 above. Section 4.05. Reducing the Rights in the Marks. The scope of rights in the ------------------------------- Marks may not be reduced, e.g., by abandoning registrations in certain countries or classes, without the mutual written consent of each party, which consent shall not be unreasonably withheld. Section 4.06. Non-use or Abandonment of the Marks. In the event that ----------------------------------- Varian, IB and/or SEB choose, for any reason, not to use any of the Marks for a period greater than one (1) year, such non-use shall constitute abandonment of such Marks and shall serve as the basis for revoking the rights granted therein by this Article IV. (a) If either IB or SEB abandons the Marks through non-use thereof, Varian shall provide the abandoning party with no less than thirty (30) days written notice of its intent to revoke such party's rights to use such Marks. The noticed party may prevent such revocation by providing proof of its use within the past year or by resuming its use of any of the Marks within such thirty (30) day period, provided its use is on a continuous basis thereafter for not less than six (6) months. If, for any reason, Varian fails to provide such written revocation notice, either IB or SEB, as appropriate, may request, in writing, that Varian deliver such notice within fifteen (15) business days of receipt of such request. If 7 Varian does not comply with such written request, either IB or SEB, as appropriate, shall have the right to provide such written revocation notice as the authorized agent of Varian. (b) If Varian abandons the Marks through non-use thereof, either IB or SEB may provide Varian with written notice requiring that Varian execute an assignment of the ownership rights in the Marks to either IB or SEB, as appropriate, within forty-five (45) days of receiving such notice. A copy of such notice shall be provided to the party not initiating the procedure set forth in this paragraph. Varian may prevent its loss of ownership rights in and rights to use the Marks by providing proof of its use of the Marks within the past year or by resuming its use of any of the Marks within thirty (30) days after receipt of such notice, provided its use is on a continuous basis thereafter for not less than six (6) months. If Varian refuses to execute such assignment of ownership, the ownership rights in the Marks shall automatically pass to either IB or SEB, as appropriate as the party sending such notice. Section 4.07. Limitations on Concurrent Use. The parties shall not use the ----------------------------- Marks in the Fields of the other parties. Otherwise, the provisions in this Article IV shall in no way restrict the rights of the parties to sell any product or service or enter into any business identical or similar to any product or service sold, or business conducted by, the other parties before the Distribution Date, provided the Marks are not used, in any way, to describe or identify such product, service, or business. Section 4.08. Notice and Publicity. After the Distribution Date, the -------------------- parties will give or cause to be given, in each distinct geographic area or line of business in which they intend to operate or to sell any product or service, such notice and publicity of their separation and distinct identities as the source of any such business, product or service as may be reasonable under the circumstances or required by the relevant local law, where the local law imposes such a duty so to notify and/or publicize. Section 4.09. Domain Name and Internet Hyperlinks. The parties will ----------------------------------- mutually agree on the ownership of Internet domain name "www.varian.com." In any event, each of the parties shall provide and maintain on the "home page" of its internet or website, for a period of two (2) years after the Distribution Date, a hyperlink to the principal internet or website of the other two parties. Furthermore, each of the parties will cooperate reasonably in the identification of appropriate addresses and/or domain names and in resolving technical issues necessary to establish, design and maintain such hyperlinks. Section 4.10. Duty to Avoid Confusion. The parties confirm their belief ----------------------- that the likelihood of confusion will not result from the parties' use of the Marks, as provided for in this Agreement, due to the differences in the goods and services associated therewith and the differences in the customers to whom the goods and services are primarily offered and sold. The parties further believe that any potential future confusion will be prevented under the provisions of this Agreement. Furthermore, in order to enable and permit each other to continue using and to register their respective trademarks and to ensure that there is no confusion among them in any relevant marketplace, the parties will use commercially reasonable efforts to avoid actual or potential confusion arising from their use, to advise any other affected party of any instance of actual or potential confusion that comes to a party's attention concerning use of their respective trademarks, to take all such actions as may be necessary or appropriate to remedy any actual or potential confusion caused by their actions, and to cooperate with each other in good faith to avoid and prevent actual or potential confusion. Section 4.11. Consent to Registration. Subject to the other provisions of ----------------------- this Article IV, each party consents to the other parties' use of a copy of this Agreement to evidence the other parties' express consent to registration of the party's trademarks, if necessary to obtain or maintain a registration of such trademark in the United States Patent and Trademark Office or any other pertinent governmental agency in any country or group of countries; and further will take any other necessary action that any other party may reasonably request to express or confirm such consent. Section 4.12. Limitations on Sublicensing. No party may sublicense any --------------------------- rights in the Marks to any non-Affiliated third party without the express written consent of the other parties. 8 Section 4.13. Transition Period. During the longest time period set forth ----------------- in the schedules to the Transition Services Agreement, after the Distribution Date, the parties shall have the right to continue to use existing supplies of product brochures, marketing literature, letterhead stationary and other pre- printed materials that include the Marks and the names "Varian Associates" or "Varian Associates, Inc." After such period, the parties may continue to use existing supplies of product brochures, marketing literature, letterhead stationary and other pre-printed materials that include the Marks, provided such pre-printed materials do not cause misidentification as to the source thereof and/or confusion in the marketplace. ARTICLE V COVENANTS Section 5.01. Further Assurances. Without limiting the obligations of any ------------------ party under other Articles of this Agreement, each party shall use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, such instruments and documents and take, or cause to be taken, such further or other actions as any other party may reasonably request to effectuate the purposes of this Agreement and carry out the terms hereof. Section 5.02. Cooperation. Without limiting the obligations of any party ----------- under other Articles of this Agreement, each party shall reasonably cooperate with the other parties with respect to any filings with any Governmental Authority or any other actions reasonably necessary to perfect, maintain and enforce the rights to the Intellectual Property covered by this Agreement. Section 5.03. Intellectual Property Records. Without limiting the ----------------------------- obligations of any party under other Articles of this Agreement, each party shall provide each other party with access to Books and Records relating to Intellectual Property in its possession or control that were created before the Distributions, in accordance with and subject to Article VI of the Distribution Agreement. ARTICLE VI INDEMNIFICATION Section 6.01. Rights and Obligations. Article VII of the Distribution ---------------------- Agreement shall govern the rights and obligations of HCS, IB, SEB and the members of their respective Groups with respect to indemnification for any and all Indemnifiable Losses related to the Intellectual Property. The term "Health Care System Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by HCS or the HCS Subsidiaries under this Agreement. The term "Instruments Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by IB or the IB Subsidiaries under this Agreement. The term "Semiconductor Equipment Liabilities" in that Article shall be read to include all Liabilities relating to the Intellectual Property to be owned, licensed to or otherwise held by SEB or the SEB Subsidiaries under this Agreement. The term "Third Party Claim" in that Article shall be read to include all claims or demands made by any Person that is not a party to this Agreement or a Subsidiary thereof concerning the Intellectual Property, including claims for Infringement accruing or arising before the Distribution Date. Furthermore, no party shall be entitled to any indemnification under this Agreement, the Distribution Agreement, or any other agreement contemplated herein, by virtue of having used, practiced or applied the grants of license as provided by the other parties in Article III. ARTICLE VII DISPUTE RESOLUTION Section 7.01. Distribution Agreement to Control. Any and all --------------------------------- controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, 9 performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in Article IX of the Distribution Agreement. ARTICLE VIII MISCELLANEOUS Section 8.01. Complete Agreement; Construction. This Agreement and the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. Section 8.02. Other Agreements. This Agreement is not intended to address, ---------------- and should not be interpreted to address, the matters expressly covered by the Distribution Agreement and/or the other Ancillary Agreements. Section 8.03. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. Section 8.04. Survival of Agreements. All covenants and agreements of the ---------------------- parties contained in this Agreement shall survive the Distribution Date except as expressly provided herein and shall not be merged into any other transfer or closing instruments or documents, including the Conveyancing and Assumption Instruments. Section 8.05. Expenses. Except as otherwise expressly provided in this -------- Agreement or the Distribution Agreement, all costs and expenses incurred or accrued on or before the Distribution Date (whether or not paid on or before the Distribution Date) in connection with the preparation, execution, delivery and implementation of this Agreement and the consummation of the transactions contemplated hereby shall be charged to and paid by Varian. Except as otherwise provided in this Agreement, each party shall bear its own costs and expenses related to the Intellectual Property, including the performance of any obligation arising under Articles III, IV and V of this Agreement. Section 8.06. Notices. All Notices required or permitted under this ------- Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ 10 with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel Telecopy: (650) ___-____ If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel Telecopy: (650) ___-____ If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy (978) ___-____ with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) ___-____ or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. Section 8.07. Waivers. The failure of any party to require strict ------- performance by any other party of any provision in or rights and remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. Section 8.08. Amendments. After the execution of this Agreement by all ---------- parties, and solely to the extent that a change is desired by and restricted to any two parties without affecting the licenses and rights of the third party hereto, such two parties may separately amend in writing any provision of this Agreement which governs the licenses and rights exchanged between them without notifying the third party hereto. Except as expressly provided herein, this Agreement may be amended or supplemented or its provisions waived only by an agreement in writing signed by each of the parties. 11 Section 8.09. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. Section 8.10. Successors and Assigns. Subject to Section 8.08, this ---------------------- Agreement shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. Section 8.11. Third Party Beneficiaries. This Agreement is solely for the ------------------------- benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and assigns and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Section 8.12. Schedules. The Schedules shall be construed with and as an --------- integral part of this Agreement to the same extent as if they had been set forth verbatim herein. Section 8.13. Titles and Headings; Interpretation. Titles and headings to ----------------------------------- sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words "include," "includes" and "including" when used in this Agreement shall be deemed to be followed by the phrase "without limitation." Unless the context otherwise requires, references in this Agreement to Articles, Sections, and Schedules to, this Agreement. Unless the context otherwise requires, the words "hereof," "hereby" and "herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement. Section 8.14. Governing Law. This Agreement shall be governed by, and ------------- construed and enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitration of Agreement Disputes. Section 8.15. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner adverse to any party. Section 8.16. Subsidiaries. Each of the parties shall cause to be ------------ performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that is contemplated to be a Subsidiary of such party on and after the Distribution Date. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. VARIAN ASSOCIATES, INC. By:______________________________ Name:____________________________ Title:___________________________ VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By:______________________________ Name:____________________________ Title:___________________________ VARIAN, INC. By:______________________________ Name:____________________________ Title:___________________________ 13 EX-10.3 7 FORM OF TAX SHARING AGREEMENT EXHIBIT 10.3 TAX SHARING AGREEMENT among VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. and VARIAN, INC. TABLE OF CONTENTS
PAGE SECTION 1. Definition of Terms........................................................................ 1 SECTION 2. Allocation of Tax Liabilities.............................................................. 7 SECTION 3. Proration of Taxes for Straddle Periods................................................... 10 SECTION 4. Tax Contests.............................................................................. 10 SECTION 5. Tax Payments and Intercompany Billings.................................................... 14 SECTION 6. Preparation and Filing of Tax Returns..................................................... 16 SECTION 7. Assistance and Cooperation................................................................ 18 SECTION 8. Tax Records............................................................................... 18 SECTION 9. Effective Date; Termination of Prior Intercompany Tax Allocation Agreements............... 19 SECTION 10. No Inconsistent Actions................................................................... 19 SECTION 11. Survival of Obligations................................................................... 20 SECTION 12. Employee Matters.......................................................................... 20 SECTION 13. Treatment of Payments; Tax Gross Up....................................................... 20 SECTION 14. Disagreements............................................................................. 20 SECTION 15. Late Payments............................................................................. 20 SECTION 16. Expenses.................................................................................. 20 SECTION 17. Nonqualified Stock Options................................................................ 21 SECTION 18. General Provisions........................................................................ 21
-i- TAX SHARING AGREEMENT This Agreement is entered into as of _______, 1999 by and among Varian Associates, Inc., a Delaware corporation, to be renamed Varian Medical Systems, Inc. ("Varian" or "HCS"), Varian, Inc., a Delaware corporation ("IB"), and Varian Semiconductor Equipment Associates, Inc., a Delaware corporation ("SEB"). Capitalized terms used in this Agreement are defined in Section 1 below. Unless otherwise indicated, all "Section" references in this Agreement are to sections of this Agreement. RECITALS WHEREAS, as of the opening of business on the date hereof , Varian was the common parent of an affiliated group of corporations, which has elected to file consolidated Federal income tax returns; and WHEREAS, Varian has been engaged through various divisions in, among other things, the Health Care Systems Business, the Instruments Business and the Semiconductor Equipment Business; and WHEREAS, the Board of Directors of Varian has determined that the interests of its businesses would be best served by separating its business into three separate companies, one consisting of the Health Care Systems Business, one consisting of the Instruments Business, and one consisting of the Semiconductor Equipment Business; and WHEREAS, as set forth in the Distribution Agreement dated as of January 14, 1999, and subject to the terms and conditions thereof, Varian wishes (a) to transfer and assign to IB substantially all of the assets of the Instruments Business, in exchange for (i) the assumption by IB of substantially all the liabilities and obligations relating to the Instruments Business, and (ii) the issuance to Varian by IB of shares of IB common stock, and (b) to transfer and assign to SEB substantially all of the assets of the Semiconductor Equipment Business, in exchange for (i) the assumption by SEB of substantially all the liabilities and obligations relating to the Semiconductor Equipment Business, and (ii) the issuance to Varian by SEB of shares of SEB common stock, in transactions intended to be reorganizations under Section 368(a)(l)(D) of the Code; and WHEREAS, pursuant to the Distribution Agreement, Varian will distribute all of the outstanding shares of common stock of IB and SEB to Varian stockholders, in transactions intended to qualify as tax-free distributions under Section 355 of the Code; and WHEREAS, as a result of the Distributions, IB and SEB, and their respective subsidiaries, will cease to be members of the affiliated group of which Varian is the common parent, effective as of the Distribution Date; and WHEREAS, as of the Distribution Date, Varian will be renamed Varian Medical Systems, Inc.; and WHEREAS, the Companies desire to provide for and agree upon the allocation between and among the parties of liabilities for Taxes arising prior to, as a result of, and subsequent to the transactions contemplated by the Distribution Agreement, and to provide for and agree upon other matters relating to Taxes; NOW THEREFORE, in consideration of the mutual agreements contained herein, the Companies hereby agree as follows: SECTION 1. Definition of Terms. For purposes of this Agreement ------------------- (including the recitals hereof), the following terms have the following meanings: "Accounting Cutoff Date" means, with respect to each of HCS, IB and SEB, any date as of the end of which there is a closing of the financial accounting records for such entity. "Adjustment" means the deemed increase or decrease in a Tax, determined on an issue-by-issue or transaction-by-transaction basis, as appropriate, and using the assumptions set forth in the next sentence, resulting from an adjustment made or proposed by a Tax Authority with respect to any amount reflected or required to be reflected on any Tax Return. For purposes of determining such deemed increase or decrease in a Tax, the following assumptions will be used: (a) in the case of any Income Tax, the highest marginal Tax rate, or, in the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Tax Period or any portion of the Tax Period to which the adjustment relates, shall apply; and (b) such determination shall be made without regard to whether any actual increase or decrease in such Tax will in fact be realized with respect to the Tax Return to which such adjustment relates. "Adjustment Request" means any formal or informal claim or request filed with any Tax Authority, or with any administrative agency or court, for the adjustment, refund, or credit of Taxes, including (a) any amended Tax return claiming adjustment to the Taxes as reported on the Tax Return or, if applicable, as previously adjusted, or (b) any claim for refund or credit of Taxes previously paid, except for any claim for refund or credit arising from a carryback of an item from a Post-Distribution Period. "Affiliate" means any entity that directly or indirectly is "controlled" by the person or entity in question. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract or otherwise. Except as otherwise provided herein, the term Affiliate shall refer to Affiliates of a person as determined immediately after the Distributions. "Agreement" means this Tax Sharing Agreement. "Carryback" means any net operating loss, net capital loss, excess tax credit, or other similar Tax item which may or must be carried from one Tax Period to another Tax Period under the Code or other applicable Tax Law. "Closing Balance Sheet" means the HCS Adjusted Closing Balance Sheet, the IB Adjusted Closing Balance Sheet, or the SEB Adjusted Closing Balance Sheet, as the case may be. "Code" means the United States Internal Revenue Code of 1986, as amended, or any successor law. "Companies" means HCS, IB, and SEB, collectively, and "Company" means any one of HCS, IB or SEB. "Consolidated or Combined Income Tax" means any Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated or Combined State Income Tax" means any State Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated Return" means any Tax Return with respect to any Consolidated or Combined Income Tax. "Consolidated Tax Liability" means, with respect to any Varian Federal Consolidated Return, the "tax liability of the group" as that term is used in Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest, additions to the tax, additional amounts, and penalties as provided in the Code), provided that such tax liability shall be treated as including any alternative minimum tax liability under Code Section 55. "Controlling Party" means HCS or any other member of the Health Care Systems Group, IB or any other member of the Instruments Group or SEB or any other member of the Semiconductor Equipment Group, as the case may be, that filed or, if no such Tax Return has been filed, was required to file, a Tax Return that is the subject of any Tax Contest, or any successor and/or assign of any of the foregoing; provided, however, that in the 2 case of any Consolidated Return, the person that actually filed such Consolidated Return (or any successor and/or assign of such person) will be the Controlling Party. For purposes of this Agreement, each of HCS, IB or SEB may act as the Controlling Party with respect to all matters for which one of their Affiliates is the Controlling Party (e.g., for purposes of providing notices and receiving payments hereunder). "Correlative Adjustment" means, in the case of an Adjustment, the net present value of any future increases or decreases in a Tax that would be realized, using the assumptions set forth in the next sentence, by any member of the Health Care Systems Group, the Instruments Group, or the Semiconductor Equipment Group, as the case may be, in one or more Tax Periods (or any portion of a Tax Period) but only if such increases or decreases are a direct result of such an Adjustment to that Tax. For purposes of determining the net present value of any such future increases or decreases in a Tax, the following assumptions will be used: (i) a discount rate equal to the sum of the Prime Rate as of the date of the recomputation of Tax or the Final Determination relating to such Adjustment plus 2.0%; (ii) in the case of any Income Tax, the highest marginal Tax rate, or, in the case of any other Tax, the highest applicable Tax rate, in each case in effect with respect to that Tax for the Tax Period, or portion of the Tax Period, in which the Adjustment was made; (iii) the depreciation, amortization or credit rate or lives, if applicable, in effect for the Tax Period, or portion of the Tax Period, in which the Adjustment was made; and (iv) such determination shall be made without regard to whether any actual increases or decreases in such Tax will in fact be realized with respect to the future Tax Returns to which such Correlative Adjustment relates. "Disputed Adjustment" has the meaning set forth in Section 4.04(b). "Distribution Agreement" means the agreement, as amended from time to time, setting forth the transactions required to effect the transfer of the Transferred Businesses to IB and SEB and the distribution to the holders of Varian common shares of all of the common shares of SEB and IB, and to which a form of this Tax Sharing Agreement is attached as an exhibit. "Distribution Date" means the Distribution Date, as that term is defined in the Distribution Agreement. "Distributions" means the SEB Distribution and the IB Distribution, as such terms are defined in the Distribution Agreement. "Federal Income Tax" means any Tax imposed by Subtitle A or F of the Code. "Final Determination" means the final resolution of liability for any Tax for any Tax Period, including any related interest or penalties, by or as a result of: (i) a final and unappealable decision, judgment, decree or other order by any court of competent jurisdiction; (ii) a closing agreement or accepted offer in compromise under Code Section 7121 or 7122, or comparable agreement under the laws of other jurisdictions which resolves the entire Tax liability for any Tax Period; (iii) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered by the jurisdiction imposing the Tax; or (iv) any other final disposition, including by reason of the expiration of the applicable statute of limitations. "Foreign Income Tax" means any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession, which is an income tax as defined in Treasury Regulation Section 1.901-2. "Group" means the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group, as the context requires. "HCS Adjusted Closing Balance Sheet" means the HCS Adjusted Closing Balance Sheet as that term is defined in the Distribution Agreement. "Health Care Systems Business" means the Health Care Systems Business, as that term is defined in the Distribution Agreement. 3 "HCS" means Varian Medical Systems, Inc., a Delaware corporation, and any successor. "Health Care Systems Group" means HCS and its Affiliates, excluding any entity that is a member of the Semiconductor Equipment Group or the Instruments Group. "IB Adjusted Closing Balance Sheet" means the IB Adjusted Closing Balance Sheet as that term is defined in the Distribution Agreement. "IB Distribution" means the IB Distribution, as that term is defined in the Distribution Agreement. "Income Tax" means any Federal Income Tax, State Income Tax, or Foreign Income Tax. "Indemnified Party" has the meaning set forth in Section 5.06(d). "Indemnifying Party" has the meaning set forth in Section 5.06(d). "Independent Auditors" means the Independent Auditors as that term is defined in the Distribution Agreement. "Independent Third Party" means a nationally recognized law firm or any of the following "Big Five" accounting firms or their successors: Arthur Andersen LLP, Ernst & Young LLP, KPMG Peat Marwick, Deloitte & Touche LLP, and PricewaterhouseCoopers LLP. "Initial Determination" has the meaning set forth in Section 4.05(b)(i). "IB" means Varian, Inc., a Delaware corporation, and any successor. "Instruments Business" means the Instruments Business, as that term is defined in the Distribution Agreement. "Instruments Group" means IB and its Affiliates as determined immediately after the Distributions. "Interested Party" means HCS or any other member of the Health Care Systems Group, IB or any other member of the Instruments Group or SEB or any other member of the Semiconductor Equipment Group (including any successor and/or assign of any of each of the foregoing), as the case may be, to the extent (a) such Person is not the Controlling Party with respect to a Tax Contest; and (b) such Person (i) may be liable for, or required to make, any indemnity payment, reimbursement or other payment pursuant to the provisions of this Agreement with respect to such Tax Contest; or (ii) may be entitled to receive any indemnity payment, reimbursement or other payment pursuant to the provisions of this Agreement with respect to such Tax Contest; provided, however, that in no event shall a member of either the Health Care Systems Group, the Instruments Group or the Semiconductor Equipment Group, as the case may be, be an Interested Party in a Tax Contest in which another member of its Group is the Controlling Party with respect to the Tax Contest. "Interested Party Notice" has the meaning set forth in Section 4.04(b). "IRS" means the United States Internal Revenue Service. "Payment Date" means (i) with respect to any Varian Federal Consolidated Return, the due date for any required installment of estimated taxes determined under Code Section 6655, the due date (determined without regard to extensions) for filing the return determined under Code Section 6072, and the date the return is filed, and (ii) with respect to any Tax Return for any Consolidated or Combined State Income Tax, the corresponding dates determined under the applicable Tax Law. 4 "Post-Distribution Period" means any Tax Period beginning after the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period beginning the day after the Distribution Date. "Pre-Distribution Consolidated Tax Liability" means Consolidated Tax Liability with respect to all Tax Periods ending on or prior to the Distribution Date and in the case of the Tax Period which includes the Distribution Date, the Consolidated Tax Liability computed as if the Distribution Date were the last day of the Tax Period. "Pre-Distribution Period" means any Tax Period ending on or before the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period ending on the Distribution Date. "Prime Rate" means the base rate on corporate loans charged by Citibank, N.A., New York, New York from time to time, compounded daily on the basis of a year of 365 or 366 (as applicable) days and actual days elapsed. "Prior Intercompany Tax Allocation Agreements" means any written or oral agreement or any other arrangements relating to allocation of Taxes existing between or among members of the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group as of the Distribution Date (other than this Agreement and other than any such agreement or arrangement between or among persons who are members of a single Group). "Responsible Company" means, with respect to any Tax Return, the Company having responsibility for preparing and filing such Tax Return under this Agreement. "Restructuring Tax" means the Income Taxes described in Section 2.05(a) (relating to Tax resulting from any income or gain recognized as a result of the Transactions). "Ruling Request" means the letter filed by Varian with the Internal Revenue Service requesting a ruling from the Internal Revenue Service regarding certain tax consequences of the Transactions (including all attachments, exhibits, and other materials submitted with such ruling request letter) and any amendment or supplement to such ruling request letter. "SEB Adjusted Closing Balance Sheet" means the SEB Adjusted Closing Balance Sheet, as that term is defined in the Distribution Agreement. "SEB Distribution" means the SEB Distribution, as that term is defined in the Distribution Agreement. "SEB" means Varian Semiconductor Equipment Associates, Inc., a Delaware corporation, and any successor. "Semiconductor Equipment Business" means the Semiconductor Equipment Business, as that term is defined in the Distribution Agreement. "Semiconductor Equipment Group" means SEB and its Affiliates as determined immediately after the Distributions. "Separate Company Tax" means any Tax computed by reference to the assets and activities of a member or members of a single Group. "Separation Committee" means the Separation Committee, as that term is defined in the Distribution Agreement. "Sharing Percentage" shall mean one-third for the Health Care Systems Group, one-third for the Instruments Group, and one-third for the Semiconductor Equipment Group. 5 "Significant Obligation" means, in the case of an Interested Party, and with respect to any Tax Detriment, an obligation to make or right to receive any indemnity payment, reimbursement or other payment with respect to any such Tax Detriment (including the effect of a Correlative Adjustment relating thereto) pursuant to the terms of the Agreement that is greater than $1,000,000. "State Income Tax" means any Tax imposed by any State of the United States or by any political subdivision of any such State which is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income. "Straddle Period" means any Tax Period that begins on or before and ends after the Distribution Date. "Tainting Act" shall have the meaning provided in Section 10. "Tax" or "Taxes" means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, registration, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax) imposed by any governmental entity or political subdivision thereof, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing. "Tax Authority" means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision. "Tax Benefit" means, with respect to any Tax Period or portion of a Tax Period, and as computed separately with respect to each Tax, the net decrease in each such Tax equal to the sum of all Adjustments (including the effect of any Correlative Adjustment relating thereto) with respect to each such Tax for each such Tax Period or portion of a Tax Period. "Tax Contest" means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes of any of the Companies or their Affiliates (including any administrative or judicial review of any claim for refund). "Tax Detriment" means, with respect to any Tax Period or portion of a Tax Period, and as computed separately with respect to each Tax, the net increase in such Tax equal to the sum of all Adjustments (including the effect of any Correlative Adjustment relating thereto) with respect to each such Tax for each such Tax Period or portion of a Tax Period. "Tax Item" means, with respect to any Income Tax, any item of income, gain, loss, deduction, and credit. "Tax Law" means the law of any governmental entity or political subdivision thereof relating to any Tax. "Tax Period" means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law. "Tax Records" means Tax Returns, Tax Return workpapers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority. "Tax Return" means any report of Taxes due, any claims for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, or document required to 6 be filed under the Code or other Tax Law, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing. "Transaction Tax" means the Taxes described in Sections 2.05(a) (relating to Tax incurred as a result of the Transactions), including any Restructuring Tax. "Transactions" means the transactions contemplated by the Distribution Agreement (including the Corporate Restructuring Transactions and Distributions, as defined in the Distribution Agreement). "Transferred Instruments Business" means the Instruments Business transferred to IB pursuant to the Distribution Agreement. "Transferred Semiconductor Equipment Business" means the Semiconductor Equipment Business transferred to SEB pursuant to the Distribution Agreement. "Treasury Regulations" means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Period. "Ultimate Determination" has the meaning set forth in Section 4.05(b)(iii). "Varian Federal Consolidated Return" means any United States federal Tax Return for the affiliated group (as that term is defined in Code Section 1504) that includes Varian as the common parent and includes any member of the Instruments Group or the Semiconductor Equipment Group. SECTION 2. Allocation of Tax Liabilities. The provisions of this Section ----------------------------- 2 are intended to determine each Company's liability for Taxes with respect to Pre-Distribution Periods and Post-Distribution Periods. Once the liability has been determined under this Section 2, Section 5 determines the time when payment of the liability is to be made, and whether the payment is to be made to the Tax Authority directly or to another Company. 2.01. General Rule. ------------ (a) HCS Liability. Health Care Systems shall be liable for, and ------------- shall indemnify and hold harmless the Semiconductor Equipment Group and the Instruments Group from and against any liability for Taxes, which are HCS's responsibility or which are allocated to HCS under this Section 2. (b) IB Liability. IB shall be liable for, and shall indemnify ------------ and hold harmless the Semiconductor Equipment Group and the Health Care Systems Group from and against any liability for Taxes, which are Instrument's responsibility or are allocated to IB under this Section 2. (c) SEB Liability. SEB shall be liable for, and shall ------------- indemnify and hold harmless the Health Care Systems Group and the Instruments Group from and against any liability for Taxes, which are SEB's responsibility or are allocated to SEB under this Section 2. 2.02. Responsibilities for United States Federal Income Tax. Except as ----------------------------------------------------- otherwise provided in this Agreement: (a) HCS. HCS (i) shall be responsible for all Pre-Distribution --- Consolidated Tax Liability, and (ii) shall be entitled to all refunds with respect thereto; provided, that HCS shall be responsible for or shall be entitled to HCS's Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. (b) IB. IB shall be responsible for or shall be entitled to -- Instrument's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Pre-Distribution Consolidated Tax Liability. 7 (c) SEB. SEB shall be responsible for or shall be entitled to --- SEB's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Pre-Distribution Consolidated Tax Liability. 2.03. Allocation of State Income Taxes. Except as otherwise provided in -------------------------------- this Agreement, State Income Taxes shall be allocated as follows: (a) Separate Company Taxes. In the case of any State Income Tax ---------------------- which is a Separate Company Tax that is apportioned under this Agreement to a Pre-Distribution Period, except as otherwise provided in this Agreement, HCS (i) shall be liable (A) to IB for such Tax imposed on any member of the Instruments Group, and (B) to SEB for such Tax imposed on any member of the Semiconductor Equipment Group, and (ii) shall be entitled to all refunds with respect thereto; provided, that HCS shall be responsible for or shall be entitled to HCS's Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. IB shall be responsible for or shall be entitled to Instrument's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Separate Company Tax that is apportioned under this Agreement to a Pre-Distribution Period. SEB shall be responsible for or shall be entitled to SEB's Sharing Percentage of any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any Separate Company Tax that is apportioned under this Agreement to a Pre- Distribution Period and shall be entitled to SEB's Sharing Percentage of any Tax Benefit with respect thereto. (b) Consolidated or Combined State Income Taxes. ------------------------------------------- (i) Allocation of Tax Reported on Tax Returns Filed After ---------------------------------------------------- the Distribution Date. Except as otherwise provided in this --------------------- Agreement, any Consolidated or Combined State Income Tax that is apportioned under this Agreement to a Pre-Distribution Period shall be allocated to the Health Care Systems Group. (ii) Allocation of Combined or Consolidated State Income --------------------------------------------------- Tax Adjustments. HCS, IB and SEB shall each be responsible for or --------------- shall be entitled to their respective Sharing Percentages of any Tax Benefit or Tax Detriment resulting from any Adjustment relating to Consolidated or Combined State Income Tax reported on any Tax Return (or as previously adjusted) that is apportioned under this Agreement to a Pre-Distribution Period. 2.04. Allocation of Foreign Income Taxes and Other Taxes. Except as -------------------------------------------------- provided in Sections 2.05 and 2.07, all Taxes (including without limitation any Foreign Income Taxes and any Taxes with respect to Post-Distribution Periods) other than those specifically allocated pursuant to Sections 2.02 through 2.04 shall be allocated based on the legal entity on which the legal incidence of the Tax is imposed; provided, however, that (x) the amounts of any such Taxes (other than Income Taxes) specifically related to the business and assets transferred by Varian to SEB in the Transactions (the "Transferred Semiconductor Equipment Businesses") and which are accrued on the SEB Adjusted Closing Balance Sheet shall be allocated to SEB and the amounts of any such Taxes specifically related to the business and assets transferred by Varian to IB in the Transactions (the "Transferred Instruments Business") and which are accrued on the IB Adjusted Closing Balance Sheet shall be allocated to IB, and (y) each of the Companies shall be entitled to or shall be responsible for its respective Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect to any such Taxes. Subject to the proviso in the preceding sentence, as between the parties to this Agreement, HCS shall be liable for all Taxes imposed on any member of the Health Care Systems Group, SEB shall be liable for all Taxes imposed on any member of the Semiconductor Equipment Group and IB shall be liable for all Taxes imposed on any member of the Instruments Group. The Companies believe that there is no Tax not specifically allocated pursuant to Sections 2.02 through 2.04 relating to Pre- Distribution Periods which is legally imposed on more than one legal entity or is not solely allocable to the Transferred Semiconductor Equipment Businesses or the Transferred Instruments Business (e.g., joint and several liability); however, if there is any such Tax, it shall be allocated in accordance with past practices as reasonably determined by the affected Companies, or in the absence of such practices, in accordance with any allocation method agreed upon by the affected Companies. 8 2.05. Transaction Taxes. ----------------- (a) HCS Liability. Except as otherwise provided in this Section ------------- 2.05 or Section 2.07, all Taxes resulting from the Transactions ("Transaction Tax"), including: (i) any sales and use, gross receipts, or other transfer Taxes, or any Foreign Income Taxes, imposed on the transfers occurring pursuant to the Transactions; (ii) any Tax resulting from any income or gain recognized under Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions of other applicable Tax Laws of the United States or any political subdivision thereof) as a result of the Transactions; and (iii) any Tax resulting from any income or gain recognized as a result of any of the Transactions contemplated by the Distribution Agreement failing to qualify for tax-free treatment under Code Sections 332, 351, 355, 361, or other provisions of the Code (as contemplated in the Ruling Request) or other applicable Tax Laws of the United States or any political subdivision thereof; shall be allocated based on the legal entity on which the legal incidence of the Tax is imposed; provided, however, that except as otherwise provided in this Agreement each of the Companies shall be entitled to or shall be responsible for its respective Sharing Percentage with respect to any Tax Benefit or Tax Detriment resulting from any Adjustment with respect thereto. For purposes of this Section 2.05(a), the legal incidence of any Income Tax shall be determined without regard for Treasury Regulation Section 1.1502-6 or corresponding provisions of other Tax Laws. (b) Indemnity for Inconsistent Acts. IB shall be liable for, and ------------------------------- shall indemnify and hold harmless the Health Care Systems Group and the Semiconductor Equipment Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of Instrument's representations or covenants under Section 10 or any Tainting Act by IB or its Affiliates. SEB shall be liable for, and shall indemnify and hold harmless the Health Care Systems Group and the Instruments Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of SEB's representations or covenants under Section 10 or any Tainting Act by SEB or its Affiliates. HCS shall be liable for and shall indemnify and hold harmless the Semiconductor Equipment Group and the Instruments Group from and against any liability for, any Restructuring Tax to the extent arising from any breach of HCS's representations or covenants under Section 10 or any Tainting Act by HCS or its Affiliates. 2.06. Tax Detriments and Benefits. In the case of any Adjustment for any --------------------------- Pre-Distribution Period or with respect to any Transaction Tax, each Group's liability for, and/or right to receive, the amount of any resulting Tax Detriment or Tax Benefit, as the case may be, shall be determined on a jurisdiction-by-jurisdiction basis such that each Group bears its respective Sharing Percentage of such Tax Detriment or Tax Benefit; provided, however, that in the event that there is any Correlative Adjustment with respect to any such Tax Detriment or Tax Benefit, then the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group shall share such Tax Detriment or Tax Benefit in the following manner in order to ensure that the party or parties that will bear the burden or receive the benefit of the Correlative Adjustment in the future will share the Tax Detriment or Tax Benefit in proportion to each of their respective Sharing Percentages after giving effect to such Correlative Adjustment: (i) first, the amount of any such Tax Detriment or Tax Benefit shall be increased or decreased, as appropriate, by the amount of the Correlative Adjustment, the net amount resulting from such increase or decrease being hereinafter referred to as the "Net Adjustment" for purposes of this Section 2.06; (ii) second, the Net Adjustment shall be allocated among the Health Care Systems Group, the Instruments Group, and the Semiconductor Equipment Group in proportion to their 9 respective Sharing Percentages, taking into account the extent each party is liable for and/or has an obligation to make, or has the right to receive, as the case may be, any payment to any Tax Authority or any indemnity payment, reimbursement, or other payment with respect to such Tax Detriment or Tax Benefit under this Agreement; and (iii) finally, with respect to a party to which a Correlative Adjustment is attributable, that party's share of the Net Adjustment as allocated pursuant to paragraph (ii) of this Section 2.06 will be increased or decreased, as appropriate, by the amount, if any, of the Correlative Adjustment that is attributable to such party in order to determine the amount of such party's share of the Tax Detriment or Tax Benefit. 2.07. Unanticipated Tax Amounts. In the event that for any Company, (a) ------------------------- aggregate Taxes shown as due on the initial Tax Returns filed with respect to any Taxes (or, in the case of Taxes that do not require the filing of a Tax Return, the amounts paid with respect to such Tax), in each case relating to Tax Periods or portions of Tax Periods ending on or before the Distribution Date, exceed (b) the aggregate amounts accrued with respect thereto on the Closing Balance Sheet for that Company (such excess an "Unanticipated Tax Amount"), by more than $1,000,000, such Company may propose a sharing of the Unanticipated Tax Amount among the three Companies. If the affected Companies do not agree on a resolution, such proposal shall be referred to the Separation Committee under the procedures set forth in Section 9.01 of the Distribution Agreement. If the Separation Committee is not able to resolve the dispute within 30 days, the matter shall be treated as a balance sheet dispute and submitted to the Independent Auditors under the provisions of Section 9.03(b) of the Distribution Agreement. SECTION 3. Proration of Taxes for Straddle Periods. --------------------------------------- 3.01. General Method of Proration. In the case of any Straddle Period, --------------------------- Tax Items shall be apportioned between Pre-Distribution Periods and Post- Distribution Periods in accordance with the principles of Treasury Regulation Section 1.1502-76(b) as reasonably interpreted and applied by the Companies. No election shall be made under Treasury Regulation Section 1.1502-76(b)(2)(ii) (relating to ratable allocation of a year's items). If the Distribution Date is not an Accounting Cutoff Date, the provisions of Treasury Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably allocate the items (other than extraordinary items) for the month which includes the Distribution Date. 3.02. Transaction Treated as Extraordinary Item. In determining the ----------------------------------------- apportionment of Tax Items between Pre-Distribution Periods and Post- Distribution Periods, any Tax Item relating to the Transactions shall be treated as an extraordinary item described in Treasury Regulation Section 1.1502- 76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and any Taxes related to such items shall be treated under Treasury Regulation Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall be allocated to Pre-Distribution Periods. SECTION 4. Tax Contests. ------------ 4.01. Notification Of Tax Contests. The Controlling Party shall promptly ---------------------------- notify all Interested Parties of (a) the commencement of any Tax Contest pursuant to which such Interested Parties may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this Agreement; and (b) as required and specified in Section 4.04 hereof, any Final Determination made with respect to any Tax Contest pursuant to which such Interested Parties may be required to make or entitled to receive any indemnity payment, reimbursement or other payment under this Agreement. The failure of a Controlling Party to promptly notify any Interested Party as specified in the preceding sentence shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. 4.02. Tax Contest Settlement Rights. The Controlling Party shall have the ----------------------------- sole right to contest, litigate, compromise and settle any Adjustment that is made or proposed in a Tax Contest without obtaining the prior consent of any Interested Party; provided, however, that, unless waived by the parties in writing, the Controlling Party shall, in connection with any proposed or assessed Adjustment in a Tax Contest for which an Interested Party may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this 10 Agreement (a) keep all such Interested Parties informed in a timely manner of all actions taken or proposed to be taken by the Controlling Party; and (b) provide all such Interested Parties with copies of any correspondence or filings submitted to any Tax Authority or judicial authority, in each case in connection with any contest, litigation, compromise or settlement relating to any such Adjustment in a Tax Contest. The failure of a Controlling Party to take any action as specified in the preceding sentence with respect to an Interested Party shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. The Controlling Party may, in its sole discretion, take into account any suggestions made by an Interested Party with respect to any such contest, litigation, compromise or settlement of any Adjustment in a Tax Contest. All costs of any Tax Contest are to be borne by the Controlling Party; provided, however, that (x) all reasonable external costs incurred by the Controlling Party in connection with any Tax Contest with respect to a Pre-Distribution Period or with respect to any Restructuring Tax are to be shared equally by HCS, SEB, and IB on an after-tax basis in the same manner as Tax Detriments are shared under this Agreement, (y) any costs related to an Interested Party's attendance at any meeting with a Tax Authority or hearing or proceeding before any judicial authority pursuant to Section 4.03 hereof shall be borne by such Interested Party, and (z) the costs of any legal or other representatives retained by an Interested Party in connection with any Tax Contest that is subject to the provisions of this Agreement shall be borne by such Interested Party. 4.03. Tax Contest Participation. Unless waived by the parties in writing, ------------------------- the Controlling Party shall provide an Interested Party with written notice reasonably in advance of, and such Interested Party shall have the right to attend, any formally scheduled meetings with Tax Authorities or hearings or proceedings before any judicial authorities in connection with any contest, litigation, compromise or settlement of any proposed or assessed Adjustment that is the subject of any Tax Contest pursuant to which such Interested Party may be required to make or entitled to receive an indemnity payment, reimbursement or other payment under this Agreement. In addition, unless waived by the parties in writing, the Controlling Party shall provide each such Interested Party with draft copies of any correspondence or filings to be submitted to any Tax Authority or judicial authority with respect to such Adjustments for such Interested Party's review and comment. The Controlling Party shall provide such draft copies reasonably in advance of the date that they are to be submitted to the Tax Authority or judicial authority and the Interested Party shall provide its comments, if any, with respect thereto within in a reasonable time before such submission. The failure of a Controlling Party to provide any notice, correspondence or filing as specified in this Section 4.03(a) to an Interested Party shall not relieve any such Interested Party of any liability and/or obligation which it may have to the Controlling Party under this Agreement except to the extent that the Interested Party was materially prejudiced by such failure, and in no event shall such failure relieve the Interested Party from any other liability or obligation which it may have to such Controlling Party. 4.04. Tax Contest Waiver. ------------------ (a) The Controlling Party shall promptly provide written notice, sent postage prepaid by United States mail, certified mail, return receipt requested, to all Interested Parties in a Tax Contest (i) that a Final Determination has been made with respect to such Tax Contest; and (ii) enumerating the amount of the Interested Party's share of each Tax Benefit or Tax Detriment reflected in such Final Determination of the Tax Contest for which such Interested Party may be required to make or entitled to receive or has made or been entitled to receive an indemnity payment, reimbursement or other payment under this Agreement. (b) Within ninety (90) days after an Interested Party receives the notice described in Section 4.04(a) hereof from the Controlling Party, such Interested Party shall execute a written statement giving notice to the Controlling Party (i) that the Interested Party agrees with each Tax Benefit or Tax Detriment (and its share thereof) enumerated in the notice described in Section 4.04(a) hereof except with respect to those Tax Benefits or Tax Detriments (and/or its shares thereof) that, in the good faith judgment of the Interested Party, it disagrees with and has specifically enumerated its disagreement with, including the amount of such disagreement, in the statement (each such disagreed Tax Benefit or Tax Detriment (and/or share thereof) hereinafter referred to as a "Disputed Adjustment"); and (ii) that the Interested Party thereby waives it right to a determination by an Independent Third Party pursuant to the provisions of Section 4.05 hereof with respect to all Tax Benefits or Tax Detriments to which it agrees with its share (this statement hereinafter referred to as the "Interested Party Notice"). The failure of an Interested Party to provide the Interested Party Notice to the Controlling Party within the ninety (90) day period 11 specified in the preceding sentence shall be deemed to indicate that such Interested Party agrees with its share of all Tax Benefits or Tax Detriments enumerated in the notice described in Section 4.04(a) hereof and that such Interested Party waives it right to a determination by an Independent Third Party with respect to all such Tax Benefits or Tax Detriments (and its shares thereof) pursuant to Section 4.05 hereof. (c) During the ninety (90) day period immediately following the Controlling Party's receipt of the Interested Party Notice described in Section 4.04(b) above, the Controlling Party and the Interested Party shall in good faith confer with each other to resolve any disagreement over each Disputed Adjustment that was specifically enumerated in such Interested Party Notice. At the end of the ninety (90) day period specified in the preceding sentence, unless otherwise extended in writing by the mutual consent of the parties, the Interested Party shall be deemed to agree with all Disputed Adjustments that were specifically enumerated in the Interested Party Notice and waive its right to a determination by an Independent Third Party pursuant to Section 4.05 hereof with respect to all such Disputed Adjustments unless, and to the extent, that at any time during such ninety (90) day (or extended) period, either the Controlling Party or the Interested Party has given the other party written notice that it is seeking a determination by an Independent Third Party pursuant to Section 4.05 hereof regarding the propriety of any such Disputed Adjustment. (d) Notwithstanding anything in this Agreement to the contrary, an Interested Party that does not have a Significant Obligation with respect to a Tax Detriment has no right to a determination by an Independent Third Party under Section 4.05 hereof with respect to any such Tax Detriment. 4.05. Tax Contest Dispute Resolution. ------------------------------ (a) In the event that either a Controlling Party or an Interested Party has given the other party written notice as required in Section 4.04(c) hereof that it is seeking a determination by an Independent Third Party pursuant to this Section 4.05 with respect to any Disputed Adjustment that was enumerated in an Interested Party Notice, then the parties shall, within thirty (30) days after a party has received such notice, jointly select an Independent Third Party to make such determination. In the event that the parties cannot jointly agree on an Independent Third Party to make such determination within such thirty (30) day period, then the Controlling Party and the Interested Party shall each immediately select an Independent Third Party and the Independent Third Parties so selected by the parties shall jointly select, within twenty (20) days of their selection, another Independent Third Party to make such determination. (b) In making its determination as to the propriety of any Disputed Adjustment, the Independent Third Party selected pursuant to Section 4.05(a) above shall assume that the Interested Party is not required or entitled under applicable law to be a member of any Consolidated Return. In addition, the Independent Third Party shall make its determination according to the following procedure: (i) The Independent Third Party shall first analyze each Disputed Adjustment for which a determination is sought pursuant to this Section 4.05 on a stand-alone basis to determine whether the actual outcome reached with respect to such Disputed Adjustment as reflected in the Final Determination of the Tax Contest was fair and appropriate taking into account the following exclusive criteria: (A) the facts relating to such Adjustment; (B) the applicable law, if any, with respect to such Adjustment; (C) the position of the applicable Tax Authority with respect to compromise, settlement or litigation of such Adjustment; (D) the strength of the factual and legal arguments made by the Controlling Party in reaching the outcome with respect to such Adjustment as reflected in the Final Determination of the Tax Contest; and (E) the strength of the factual and legal arguments being made by the Interested Party for the alternative outcome being asserted by such Interested Party (including the availability of facts, information and documentation to support such alternative outcome). Based on this analysis, the Independent Third Party shall determine what is the fair and appropriate outcome (hereinafter referred to as the "Initial Determination") with respect to each such Disputed Adjustment. (ii) The Interested Party shall not be entitled to modification of its share of a Disputed Adjustment under this Section 4.05 if, as the case may be, either (A) the amount that would be paid by the Interested Party under the Initial Determination with respect to such 12 Disputed Adjustment is 80% or more than the amount that would be paid by the Interested Party with respect to such Disputed Adjustment under the actual outcome reached with respect to such Disputed Adjustment; or (B) the amount that would be received by the Interested Party under the Initial Determination with respect to such Disputed Adjustment is 120% or less than the amount that the Interested Party would receive with respect to such Disputed Adjustment under the actual outcome reached with respected to such Disputed Adjustment. The Independent Third Party will provide notice to the Controlling Party and the Interested Party in the event the Interested Party is not entitled to modification of its share of the Disputed Adjustment pursuant to this paragraph (ii). (iii) If the modification of an Interested Party's share of a Disputed Adjustment under this Section 4.05 is not prohibited pursuant to paragraph (ii) above, then the Independent Third Party shall determine what is the fair and appropriate outcome (hereinafter referred to as the "Ultimate Determination") to the Interested Party with respect to such Disputed Adjustment in the context of the entire Tax Contest as it relates to the Interested Party. In making this determination, the Independent Third Party shall consider the Disputed Adjustment as if it were raised in an independent audit of the Interested Party by the appropriate Tax Authority and the Independent Third Party shall take into account and give appropriate weight in its sole discretion to the following exclusive criteria: (A) the strength of the legal and factual support for other potential, non-frivolous Adjustments with respect to matters that were actually raised and contested by the applicable Tax Authority in the Tax Contest for which the Interested Party could have been liable under this Agreement but which were eliminated or reduced as a result of the Controlling Party agreeing to the Disputed Adjustment as reflected in the Final Determination of the Tax Contest; (B) the effect of the actual outcome reached with respect to the Disputed Adjustment on other Tax Periods and on other positions taken or proposed to be taken in Returns filed or proposed to be filed by the Interested Party; (C) the realistic possibility of avoiding examination of potential, non-frivolous issues for which the Interested Party could be liable under this Agreement and that were contemporaneously identified in writings by the party or parties during the course of the Tax Contest but which had not been raised and contested by the applicable Tax Authority in the Tax Contest; and (D) the benefits to the Interested Party in reaching a Final Determination, and the strategy and rationale with respect to the Interested Party's Disputed Adjustment that the Controlling Party had for agreeing to such Disputed Adjustment in reaching the Final Determination, in each case that were contemporaneously identified in writings by the party or parties during the course of the Tax Contest. (iv) The Interested Party shall only be entitled to modification of its share of a Disputed Adjustment under this Section 4.05 if, as the case may be, either (A) the amount that would be paid by the Interested Party under the Ultimate Determination with respect to such Disputed Adjustment is less than 80% of the amount that would be paid by the Interested Party with respect to such Disputed Adjustment under the actual outcome reached with respect to such Disputed Adjustment; or (B) the amount that would be received by the Interested Party under the Ultimate Determination with respect to such Disputed Adjustment is more than 120% of the amount that the Interested Party would receive with respect to such Disputed Adjustment under the actual outcome reached with respected to such Disputed Adjustment. If an Interested Party is entitled to modification of its share of any Disputed Adjustment under the preceding sentence, the amount the Interested Party is entitled to receive, or is required to pay, as the case may be, with respect to such Disputed Adjustment shall be equal to the amount of the Ultimate Determination of such Disputed Adjustment. The Independent Third Party will provide notice to the Controlling Party and the Interested Party stating whether the Interested Party is entitled to modification of its share of the Disputed Adjustment pursuant to this paragraph (iv) and, if the Interested Party is entitled to such modification, the amount as determined in the preceding sentence that the Interested Party is entitled to receive from, or required to pay to, the Controlling Party with respect to such Disputed Adjustment. (c) Any determination made or notice given by an Independent Third Party pursuant to this Section 4.05 shall be (i) in writing; (ii) made within ninety (90) days following the selection of the Independent Third Party as set forth in Section 4.05(a) of this Agreement unless such period is otherwise extended by the mutual 13 consent of the parties; and (iii) final and binding upon the parties. The costs of any Independent Third Party retained pursuant to this Section 4.05 shall be shared equally by the parties. The Controlling Party and the Interested Party shall provide the Independent Third Party jointly selected pursuant to Section 4.05(a) hereof with such information or documentation as may be appropriate or necessary in order for such Independent Third Party to make the determination requested of it. Upon issuance of an Independent Third Party's notice under Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof, the Controlling Party or the Interested Party, as the case may be, shall pay as specified in Section 5 of this Agreement, the amount, if any, of the Disputed Adjustment to the appropriate party. SECTION 5. Tax Payments and Intercompany Billings. -------------------------------------- 5.01. Payment of Taxes With Respect to Varian Federal Consolidated Returns -------------------------------------------------------------------- Filed After the Distribution Date. In the case of any Varian Federal - --------------------------------- Consolidated Return the due date for which (including extensions) is after the Distribution Date, HCS shall compute and pay the Tax required to be paid to the IRS (taking into account the requirements of Section 6.04, relating to consistent accounting practices) with respect to such Tax Return. 5.02. Payment of State Income Tax Relating to Pre-Distribution Periods ---------------------------------------------------------------- With Respect to Returns Filed After the Distribution Date. - --------------------------------------------------------- (a) Computation and Payment of Tax Due. At least ten business ---------------------------------- days prior to any Payment Date for any Tax Return with respect to any State Income Tax relating to a Pre-Distribution Period, the Responsible Company shall compute the amount of Tax required to be paid to the applicable Tax Authority (taking into account the requirements of Section 4.04 relating to consistent accounting practices) with respect to such Tax Return on such Payment Date and (i) If such Tax Return is with respect to a Consolidated or Combined State Income Tax, HCS will pay such amount to such Tax Authority on or before such Payment Date. (ii) If such Tax Return is with respect to a Separate Company Tax, the Responsible Company shall, if it is not the Company liable for the Tax reported on such Tax Return, notify the Company liable for such Tax in writing of the amount of Tax required to be paid on such Payment Date. The Company liable for such Tax will pay such amount to such Tax Authority on or before such Payment Date. 5.03. Payment of Other Taxes. Each Company shall pay, or shall cause to ---------------------- be paid, to the applicable Tax Authority when due all Separate Company Taxes, Foreign Income Taxes, and Other Taxes owed by such Company or a member of such Company's Group. 5.04. Tax Payments for Account of Other Party. --------------------------------------- (a) If any Company (the "payor") is required to pay to a Tax Authority a Tax that another Company (the "identified party") is required to pay to such Tax Authority under this Agreement, the identified party shall reimburse the payor within 30 days of delivery by the payor to the identified party of an invoice for the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. The reimbursement shall include interest on the Tax payment computed at the Prime Rate based on the number of days from the date of the payment to the Tax Authority to the date of reimbursement under this Section 5.05. (b) In the event that (x) it is finally determined that any Company (the "Responsible Party") is liable to another Company (the "Protected Party") hereunder in respect of any payment obligation under this Agreement (a "Protected Loss") and (y) a court of competent jurisdiction prohibits such Responsible Party from satisfying all or a part of its obligations to the Protected Party hereunder in respect of such Protected Loss, then the amount of the Protected Loss that is not satisfied shall be treated as a liability of the parties to this Agreement other than the Responsible Party, with the Sharing Percentage of the Group of which each such other party is a member equal to 50%. 14 5.05. Tax Refunds for Account of Other Party. If a member of one Group -------------------------------------- receives any Tax refund or credit against a Tax liability with respect to any Taxes for which a member of another Group is liable hereunder, the Company receiving such Tax refund or credit shall make a payment to the Company that is liable for such Taxes hereunder within 30 days following receipt of the Tax refund in an amount equal to the Tax refund, plus interest on such amount computed at the Prime Rate based on the number of days from the date that is five (5) days after the date of receipt of the Tax refund to the date of payment of such amount under this Section 5.05. 5.06. Payment of Taxes Related to Adjustments. --------------------------------------- (a) Adjustments Resulting in Underpayments. The Controlling Party -------------------------------------- shall pay to the appropriate Tax Authority when due any additional Tax required to be paid as a result of any Adjustment with respect to any Pre-Distribution Period. Each other Company shall pay to whichever of HCS, IB or SEB controls the Controlling Party its share of any Tax Detriment resulting from such Adjustment (that has not yet been paid pursuant to the terms of this Agreement) determined in accordance with Section 2.06 within 90 days from the later of (i) the date the amount of the Adjustment was paid or (ii) the date of receipt by the indemnifying party of a written notice and demand from the Controlling Party (or whichever of HCS, IB and SEB the Controlling Party is an Affiliate) for payment of the amount due, accompanied by evidence of payment and a statement detailing the Tax Detriment and describing in reasonable detail the particulars relating thereto. Each indemnifying party shall also pay to the Controlling Party interest on their respective shares of such Tax Detriment computed at the Prime Rate plus 2.0%, per annum, based on the number of days from the date interest ceased to run with respect to the relevant recomputation of Tax to the date of their respective payments under this Section 5.06(a). (b) Adjustments Resulting in Overpayments. Within 30 days of ------------------------------------- receipt of any Tax refund or adjustment to Tax liability resulting from any Adjustment relating to a Pre-Distribution Period, whichever of HCS, IB or SEB Controls the person that received the related Tax Benefit shall pay to any party entitled to a share such Tax Benefit (that has not yet been paid pursuant to the terms of this Agreement) their respective shares thereof determined in accordance with Section 2.06. Any payments required under this Section 5.06(b) shall include interest computed at the Prime Rate plus 2.0%, per annum, based on the number of days from the date of the recomputation of Tax to the date of payment under this Section 5.06(b). (c) Recomputations of Tax. For purposes of this Agreement, an --------------------- Adjustment occurs, and the respective liabilities of the parties shall be recomputed: (i) in each instance when payments are to be made to, or refunds received from, the relevant Tax Authority, (ii) when no payment is to be made or refund is to be received due to offsetting adjustments, upon filing of an amended return, completion of an IRS audit and completion of an IRS appellate review or the equivalent steps with respect to State Income Taxes or Foreign Income Taxes; and (iii) to reflect the results of any Final Determination. (d) Procedures After Final Determination. If an Interested Party ------------------------------------ has any liability and/or obligation to make or has previously made, or the right to receive or has previously received, any indemnity payment, reimbursement or other payment with respect to a Tax Benefit or Tax Detriment under this Agreement for which it does not have a right to a determination by an Independent Third Party under Section 4.05 hereof, then the amount of any such Tax Benefit or Tax Detriment not previously paid shall be immediately due and payable upon receipt by the Interested Party of a notice of Final Determination of a Tax Contest as required and specified in Section 4.04(a) hereof. If after (i) notice of a Final Determination of a Tax Contest as required and specified in Section 4.04(a) hereof has been given by a Controlling Party to an Interested Party; and (ii) the Interested Party receiving such notice has either: (A) failed to provide the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period set forth in Section 4.04(b); (B) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) agreeing to all Tax Benefits or Tax Detriments (and the Interested Party's share of all such amounts) and waiving the right to an Independent Third Party determination pursuant to Section 4.05 hereof with 15 respect to all such Tax Benefits or Tax Detriments (and the Interested Party's share of such amounts); (C) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) agreeing with some, but not all, Tax Benefits or Tax Detriments (and the Interested Party's share of such agreed amounts) and waiving the right to an Independent Third Party Determination pursuant to Section 4.05 hereof with respect to all such agreed Tax Benefits or Tax Detriments (and the Interested Party's share of such amounts); or (D) provided the Interested Party Notice specified in Section 4.04(b) hereof within the ninety (90) day period specified in Section 4.04(b) specifically enumerating the Disputed Adjustments to which it does not agree and for which the notice specified in either Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof relating to any such Disputed Adjustment has been given by an Independent Third Party, then the amount of any Tax Detriment or Tax Benefit agreed to or deemed to be agreed to by the Interested Party, or for which an Independent Third Party notice has been given pursuant to either Section 4.05(b)(ii) or Section 4.05(b)(iv) hereof, as set forth in each of clauses (A), (B, (C) or (D) above, shall be immediately due and payable. Any Person entitled to any indemnification, reimbursement or other payment under this Agreement with respect to the amount of any Tax Detriment or Tax Benefit that has become immediately due and payable under this Section 5.02(d) (the "Indemnified Party") shall notify in writing the Person against whom such indemnification, reimbursement or other payment is sought (the "Indemnifying Party") of its right to and the amount of such indemnification, reimbursement or other payment; provided, however, that the failure to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability and/or obligation which it may have to an Indemnified Party on account of the provisions contained in this Agreement except to the extent that the Indemnifying Party was prejudiced by such failure, and in no event shall such failure relieve the Indemnifying Party from any other liability or obligation which it may have to such Indemnified Party. The Indemnifying Party shall make such indemnity payment, reimbursement or other payment to the Indemnified Party within thirty (30) days of the receipt of the written notice specified in the preceding sentence; provided, however, that, in the case of any Final Determination of a Tax Contest involving a state, local or municipal Tax in which the Indemnifying Party is also the Controlling Party with respect to such Tax Contest and, as Controlling Party, is entitled to receive an overall net refund from the applicable state, local or municipal Tax Authority with respect to such state, local or municipal Tax, then the Indemnifying Party shall be required to make such indemnity payment, reimbursement or other payment to the Indemnified Party within thirty (30) days from the date the Indemnifying Party actually receives payment of or obtains the benefit of the net refund due from the applicable state, local or municipal Tax Authority. SECTION 6. Preparation and Filing of Tax Returns. ------------------------------------- 6.01. General. Except as otherwise provided in this Section 6, Tax ------- Returns shall be prepared and filed when due (including extensions) by the person obligated to file such Tax Returns under the Code or applicable Tax Law. The Companies shall provide, and shall cause their Affiliates to provide, assistance and cooperate with one another in accordance with Section 7 with respect to the preparation and filing of Tax Returns, including providing information required to be provided in Section 7. 6.02. Post-Distribution Period Tax Returns. Except as otherwise provided ------------------------------------ in this Section 6: (1) All Tax Returns related to the Health Care Systems Group for Post- Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by HCS, (2) All Tax Returns related to the Semiconductor Equipment Group for Post-Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by SEB. (3) All Tax Returns related to the Instruments Group for Post- Distribution Periods shall be prepared and filed (or caused to be prepared and filed) by IB. 16 6.03. Manner of Filing. All Tax Returns filed or caused to be filed by ---------------- HCS, IB or SEB and the Affiliates of each of them after the Distribution Date shall be prepared on a basis that is consistent with any IRS or other Tax ruling obtained by Varian in connection with the restructuring of Varian contemplated by the Distribution Agreement (in the absence of a controlling change in law or circumstances), and shall be filed on a timely basis by the party responsible for such filing under this Agreement. 6.04. Right to Review Tax Returns. --------------------------- (a) General. The Responsible Company with respect to any Tax ------- Return shall make such Tax Return and related workpapers available for review by the other Companies, if requested, to the extent (i) such Tax Return relates to Taxes for which the requesting party may be liable, (ii) such Tax Return relates to Taxes for which the requesting party may be liable in whole or in part for any additional Taxes owing as a result of adjustments to the amount of Taxes reported on such Tax Return, (iii) such Tax Return relates to Taxes for which the requesting party may have a claim for Tax Benefits under this Agreement, or (iv) the requesting party reasonably determines that it must inspect such Tax Return to confirm compliance with the terms of this Agreement. The Responsible Company shall use its reasonable best efforts to make such Tax Return available for review as required under this paragraph sufficiently in advance of the due date for filing such Tax Returns to provide the requesting party with a meaningful opportunity to analyze and comment on such Tax Returns and have such Tax Returns modified before filing, taking into account the person responsible for payment of the tax (if any) reported on such Tax Return and the materiality of the amount of Tax liability with respect to such Tax Return. The Companies shall attempt in good faith to resolve any issues arising out of the review of such Tax Returns. (b) Execution of Returns Prepared by Other Party. In the case of -------------------------------------------- any Tax Return which is required to be prepared and filed by one Company under this Agreement and which is required by law to be signed by another Company (or by its authorized representative), the Company which is legally required to sign such Tax Return shall not be required to sign such Tax Return under this Agreement if there is no reasonable basis for the tax treatment of any material items reported on the Tax Return. Any such Tax Return shall be supplied by the Company responsible for its preparation and filing to the Company responsible for its signing at least five days prior to the due date of such Tax Return (including applicable extensions) and such signing Company shall deliver an executed copy of such Tax Return to the filing Company at least two days prior to the due date of such Tax Return (including applicable extensions). 6.05. Claims for Refund, Carrybacks, and Self-Audit Adjustments. --------------------------------------------------------- (a) Carrybacks. Each of the Companies shall be permitted, without ---------- the consent of any other Company, to file claims for refund or credit or amended returns with respect to Tax Returns for which it is the Responsible Company to carry back Tax items from Post-Distribution Periods. (b) Consent Required for Adjustment Requests Related to --------------------------------------------------- Consolidated or Combined Income Taxes. Except as provided in paragraph (c) - ------------------------------------- below, each of the Companies hereby agrees that, unless each of the other Companies consents in writing, which consent shall not be unreasonably withheld, no Adjustment Request with respect to any Consolidated or Combined Income Tax for a Pre-Distribution Period shall be filed. Any Adjustment Request which the Companies consent to make under this Section 6.06 shall be prepared and filed by the Responsible Company under Sections 6.02 and 6.03 for the Tax Return to be adjusted. The Company requesting the Adjustment Request shall provide to the Responsible Company all information required for the preparation and filing of such Adjustment Request in such form and detail as reasonably requested by the Responsible Company, and shall bear all external costs incurred in connection with the preparation and filing of such Adjustment Request. (c) Exception for Adjustment Requests Related to Audit -------------------------------------------------- Adjustments. Each of the Companies shall be entitled, without the consent of - ----------- any other Company, to require HCS to file an Adjustment Request to take into account any net operating loss, net capital loss, deduction, credit, or other adjustment attributable to such Company or any member of its Group corresponding to any adjustment resulting from any audit by the IRS or other Tax Authority with respect to Consolidated or Combined Income Taxes for any Pre-Distribution Period. For example, if the Internal Revenue Service requires a Company to capitalize an item deducted for the taxable year 1996, such Company shall be entitled, without the consent of any other Company, to require HCS to file an Adjustment Request for the taxable year 1997 (and later years) to take into account any depreciation or 17 amortization deductions in such years directly related to the item capitalized in 1996. In addition, each of the Companies shall be entitled to require any other Company, as appropriate, to file an Adjustment Request of the same sort with respect to Separate Company Taxes or Foreign Income Taxes for any Pre- Distribution Periods. The Company that requires another Company to file an Adjustment Request shall bear all external costs in connection with the preparation and filing of the Adjustment Request. (d) Other Adjustment Requests Permitted. Nothing in this Section ----------------------------------- 6.06 shall prevent any Company or its Affiliates from filing any Adjustment Request with respect to Income Taxes which are not Consolidated or Combined Income Taxes or with respect to any Taxes other than Income Taxes; provided, however, that without the written consent of the Company responsible for the relevant Tax (which consent shall not be unreasonably withheld) no Company shall file an amended Tax Return with respect to Taxes for which another Company is liable under this Agreement. Any refund or credit obtained as a result of any such Adjustment Request (or otherwise) shall be for the account of the person liable for the Tax under this Agreement. (e) Payment of Refunds. Any refunds or other Tax Benefits ------------------ received by any Company (or any of its Affiliates) as a result of any Adjustment Request which are for the account of another Company (or member of such other Company's Group) shall be paid by the Company receiving (or whose Affiliate received) such refund or Tax Benefit to such other Company in accordance with Section 5. SECTION 7. Assistance and Cooperation. -------------------------- 7.01. General. After the Distribution Date, each of the Companies shall ------- cooperate (and cause their respective Affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Companies and their Affiliates including (i) preparation and filing of Tax Returns, (ii) determining the liability for and amount of any Taxes due (including estimated Taxes) or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include making all information and documents in their possession relating to the other Companies and their Affiliates available to such other Companies as provided in Section 7. Each of the Companies shall also make available to each other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the Companies or their respective Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes Any information or documents provided under this Section 6 shall be kept confidential by the Company receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. 7.02. Income Tax Return Information. Each Company will provide to each ----------------------------- other Company information and documents relating to their respective Groups required by the other Companies to prepare Tax Returns. The Responsible Company shall determine a reasonable compliance schedule for such purpose in accordance with VA's past practices. Any additional information or documents the Responsible Company requires to prepare such Tax Returns will be provided in accordance with past practices, if any, or as the Responsible Company reasonably requests and in sufficient time for the Responsible Company to file such Tax Returns timely. SECTION 8. Tax Records. ----------- 8.01. Retention of Tax Records. Except as provided in Section 8.02, each ------------------------ Company shall preserve and keep all of its Tax Records for Pre-Distribution Tax Periods until the later of (i) seven years after the Distribution Date or (ii) a Final Determination with respect to any Tax Contest for which such Tax Records may be relevant. Before disposing of any such Tax Records, a Company shall provide 90 days prior notice to each other Company. Such notice shall include a list of the records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Companies shall have the opportunity, at their cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records. If, prior to the end of such seven-year period, a Company reasonably determines that any Tax Records which it is required to preserve and keep under this Section 7 are no longer material in the administration of any matter under the Code or other applicable Tax Law, such Company may dispose of such records upon 90 days prior notice to each other Company. 18 Such notice shall include a list of the records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Companies shall have the opportunity, at their cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records. 8.02. State Income Tax Returns. Tax Returns with respect to State Income ------------------------ Taxes and workpapers prepared in connection with preparing such Tax Returns shall be preserved and kept, in accordance with the guidelines of Section 8.01, by the Company responsible for preparing and filing the applicable Tax Return. 8.03. Access to Tax Records. The Companies and their respective --------------------- Affiliates shall make available to each other for inspection and copying during normal business hours upon reasonable notice all Tax Records in their possession to the extent reasonably required by the other Company in connection with the preparation of Tax Returns, audits, litigation, or the resolution of items under this Agreement. SECTION 9. Effective Date; Termination of Prior Intercompany Tax ----------------------------------------------------- Allocation Agreements. This Agreement shall be effective on the Distribution - --------------------- Date. Each of the Companies represents and warrants that there are no Prior Intercompany Tax Allocation Agreements in effect as of the Distribution Date. SECTION 10. No Inconsistent Actions. ----------------------- (a) Each of the Companies covenants and agrees that it will use its best efforts to cause the Distributions to qualify under Section 355 of the Code. Each of the Companies covenants and agrees that it will not take or permit any action, and it will cause its Affiliates to refrain from taking or permitting any action, which may be inconsistent with the Tax treatment of the Transactions as contemplated in the Ruling Request or any Tax ruling received with respect to Tax consequences related to the Transaction in a foreign jurisdiction (any such action is referred to in this Section 10 as a "Tainting Act"), unless (i) the Company or Affiliate thereof proposing such Tainting Act (the "Requesting Party") either (A) obtains a ruling with respect to the Tainting Act from the IRS or other applicable Tax Authority that is reasonably satisfactory to each other Company (the "Requested Parties") (except that the Requesting Party shall not submit any such ruling request if a Requested Party determines in good faith that filing such request might have a materially adverse effect upon such Requested Party), or (B) obtains an unqualified opinion of independent nationally recognized tax counsel acceptable to each Requested Party, on a basis of assumed facts and representations consistent with the facts at the time of such action, that such Tainting Act will not affect the Tax treatment of the Transactions as contemplated in the Ruling Request, or (ii) each Requested Party consents in writing to such Tainting Act, which consent shall be granted or withheld in the sole and absolute discretion of each such Requested Party. A Tainting Act of a Company shall include a transaction involving that Company to which Section 355(e) of the Code is applicable, regardless of whether the Company could have prevented such transaction. Without limiting the foregoing: (i) No Inconsistent Plan or Intent. Each of the Companies ------------------------------ represents and warrants that neither it nor any of its Affiliates has any plan or intent to take any action which is inconsistent with any factual statements or representations in the Ruling Request. Regardless of any change in circumstances, each of the Companies covenants and agrees that it will not take or permit, and it will cause its Affiliates to refrain from taking or permitting, any such inconsistent action on or before the last day of the calendar year ending after the second anniversary of the Distribution Date other than as permitted in this Section 10. (ii) Amended or Supplemental Rulings. Each of the Companies ------------------------------- covenants and agrees that it will not file, and it will cause its Affiliates to refrain from filing, any amendment or supplement to the Ruling Request subsequent to the Distribution Date without the consent of the other Companies, which consent shall not be unreasonably withheld. (b) Notwithstanding anything to the contrary in this Agreement, each Company shall be solely liable for, and shall indemnify and hold harmless each other Company from any Restructuring Tax resulting from a Tainting Act by such first Company or its Affiliates, regardless of whether clause (i) or (ii) of Section 10(a) was satisfied with respect to such Tainting Act. 19 SECTION 11. Survival of Obligations. The representations, warranties, ----------------------- covenants and agreements set forth in this Agreement shall be unconditional and absolute and shall remain in effect without limitation as to time. SECTION 12. Employee Matters. Each of the Companies shall utilize, or ---------------- cause its Affiliates to utilize, the alternative procedure set forth in Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage reporting. SECTION 13. Treatment of Payments; Tax Gross Up. ----------------------------------- 13.01. Tax Treatment of Payments. In the absence of any change in tax ------------------------- treatment under the Code or other applicable Tax Law, any Tax indemnity, Tax Detriment, Tax Benefit or other payments made by a Company hereunder shall be reported for Tax purposes by the payor and the recipient (and, if HCS is neither the payor nor the recipient, by HCS) as distributions or capital contributions, as appropriate, occurring immediately before the Distributions on the Distribution Date, except to the extent the payment relates to a Tax allocated to the payor in accordance with Treasury Regulation Section 1.1502-33(d) (or under corresponding principles of other applicable Tax Laws). 13.02. Tax Gross Up. If notwithstanding the manner in which Tax ------------ indemnity, Tax Detriment or Tax Benefit payments were reported, there is an adjustment to the Tax liability of a Company as a result of its receipt of a payment pursuant to this Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof (but taking into account all correlative Tax benefits resulting from the payment of such Income Taxes), shall equal the amount of the payment which the Company receiving such payment would otherwise be entitled to receive pursuant to this Agreement. For purposes of determining such Income Taxes, it shall be assumed that the highest marginal Tax rates in effect are applicable. 13.03. Interest Under This Agreement. Anything herein to the contrary ----------------------------- notwithstanding, to the extent one Company ("indemnitor") makes a payment of interest to another Company ("indemnitee") under this Agreement with respect to the period from the date that the indemnitee made a payment of Tax to a Tax Authority to the date that the indemnitor reimbursed the indemnitee for such Tax payment, or with respect to the period from the date that the indemnitor received a Tax Benefit to the date indemnitor paid the Tax Benefit to the indemnitee, the interest payment shall be treated as interest expense to the indemnitor (deductible to the extent provided by law) and as interest income by the indemnitee (includible in income to the extent provided by law). The amount of the payment shall not be adjusted under Section 13.02 to take into account any associated Tax benefit to the indemnitor or increase in Tax to the indemnitee. SECTION 14. Disagreements. Except to the extent of the specific dispute ------------- resolutions set forth in Sections 4.04 and 4.05 of this Agreement, any and all controversies, disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, nonperformance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in, Article IX of the Distribution Agreement. SECTION 15. Late Payments. Any amount owed by one party to another party ------------- under this Agreement which is not paid when due shall bear interest at the Prime Rate plus two percent, compounded semiannually, from the due date of the payment to the date paid. To the extent interest required to be paid under this Section 15 duplicates interest required to be paid under any other provision of this Agreement, interest shall be computed at the higher of the interest rate provided under this Section 15 or the interest rate provided under such other provision. SECTION 16. Expenses. Except as provided in Sections 4.02, 6.05 or 14, -------- each party and its Affiliates shall bear their own expenses incurred in connection with preparation of Tax Returns, Tax Contests, and other matters related to Taxes under the provisions of this Agreement. 20 SECTION 17. Nonqualified Stock Options. Each of the Companies shall -------------------------- report exercises of nonqualified stock options in a manner consistent with any ruling letter issued by the IRS with respect to the Distributions. The Companies shall cooperate fully (including development of any reasonably necessary procedures) to satisfy applicable reporting and withholding requirements and obtain allowable Tax deductions upon the exercise of such options. SECTION 18. General Provisions ------------------ 18.01. Complete Agreement; Construction. This Agreement, the Distribution -------------------------------- Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there is a conflict between the provisions of this Agreement and the provisions of the Distribution Agreement or any other Ancillary Agreement, this Agreement shall prevail. 18.02. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one and the same Agreement. 18.03. Notices. All notices, consents, requests, waivers, claims or other ------- communications (each a "Notice") required or permitted under this Agreement shall be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier, or (c) if sent by registered or certified mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS, at: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer Telecopy: (650) ___-____ With a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304 Attn: General Counsel Telecopy: (650) ___-____ If to SEB, at: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy: (978) ___-____ With a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) ___-____ 21 If to IB, at: Varian, Inc. 3120 Hansen Way Palo Alto, California 94304 Attn: Chief Financial Officer Telecopy: (650) ___-____ With a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94304 Attn: General Counsel Telecopy: (650) ___-____ or such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. 18.04. Waivers. The failure of any party to require strict performance by ------- any other party of any provision in or rights or remedies with respect to this Agreement shall not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. 18.05. Amendments. This Agreement may be amended or supplemented, or its ---------- provisions waived only by an agreement in writing signed by each of the parties. 18.06. Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a) above, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. 18.07. Successors and Assigns. Subject to Section 18.06, this Agreement ---------------------- shall be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. 18.08. Third Party Beneficiaries. This Agreement is solely for the ------------------------- benefit of the parties and the members of their respective Groups and Affiliates and their respective successors and permitted assigns, and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. 18.09. Governing Law. This Agreement, the other Ancillary Agreements and ------------- any other agreements entered into in connection with the transactions contemplated hereby shall be governed by, and construed and enforced in accordance with, the Laws of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of disputes governed by the Distribution Agreement. 18.10. Severability. If any provision of this Agreement or the ------------ application thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated 22 thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 18.11. Subsidiaries. Each party shall cause to be performed, and hereby ------------ guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. 18.12. Titles and Headings. Titles and headings to sections herein are ------------------- inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 18.13. Further Action. The parties shall execute and deliver all -------------- documents, provide all information, and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement, including the execution and delivery to the other parties and their Affiliates and representatives of such powers of attorney or other authorizing documentation as is reasonably necessary or appropriate in connection with Tax Contests (or portions thereof) under the control of such other parties in accordance with Section 4. 18.14. No Double Recovery; Subrogation. No provision of this Agreement ------------------------------- shall be construed to provide an indemnity or other recovery for any costs, damages, or other amounts for which the damaged party has been fully compensated under any other provision of this Agreement or under any other agreement or action at law or equity. Unless expressly required in this Agreement, a party shall not be required to exhaust all remedies available under other agreements or at law or equity before recovering under the remedies provided in this Agreement. Subject to any limitations provided in this Agreement (for example, the limitation on filing claims for refund in Section 6.06), the indemnifying party shall be subrogated to all rights of the Indemnified Party for recovery from any third party. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the respective officers as of the date set forth above. VARIAN ASSOCIATES, INC. By: ____________________________________ Name: Title: VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By: ____________________________________ Name: Title: VARIAN, INC. By: ____________________________________ Name: Title: 23 EX-10.4 8 FORM OF TRANSITION SERVICES AGREEMENT EXHIBIT 10.4 - -------------------------------------------------------------------------------- TRANSITION SERVICES AGREEMENT AMONG VARIAN ASSOCIATES, INC., VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND VARIAN, INC. Dated as of ________, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE I SERVICES PROVIDED......................................................... 1 1.1 Transition Services....................................................... 1 1.2 Personnel................................................................. 1 1.3 Representatives........................................................... 2 1.4 Level of Transition Services.............................................. 2 1.5 Corrective Efforts........................................................ 2 1.6 Force Majeure............................................................. 2 1.7 Modification of Procedures................................................ 3 1.8 No Obligation to Continue to Use Services................................. 3 1.9 Provider Access........................................................... 3 ARTICLE II COMPENSATION.............................................................. 3 2.1 Consideration............................................................. 3 2.2 Invoices.................................................................. 3 2.3 Payment of Amounts Due.................................................... 4 2.4 Provider's Rights on Failure to Pay....................................... 4 ARTICLE III CONFIDENTIALITY........................................................... 4 3.1 Obligation................................................................ 4 ARTICLE IV TERM AND TERMINATION...................................................... 4 4.1 Term...................................................................... 4 4.2 Extension................................................................. 4 4.3 Termination............................................................... 5 4.4 Termination of Obligations................................................ 5 4.5 Survival of Certain Obligations........................................... 5 ARTICLE V DISPUTE RESOLUTION........................................................ 5 5.1 Distribution Agreement to Control......................................... 5 ARTICLE VI INSURANCE; INDEMNIFICATION................................................ 5 6.1 Insurance and Indemnity................................................... 5 6.2 Recipients' Indemnity for Services........................................ 6 6.3 Providers' Indemnity for Services......................................... 6 ARTICLE VII MISCELLANEOUS............................................................. 6 7.1 Complete Agreement; Construction.......................................... 6 7.2 Other Agreements.......................................................... 6 7.3 Counterparts.............................................................. 6 7.4 Notices................................................................... 6 7.5 Waivers................................................................... 7 7.6 Amendments................................................................ 7
-i- TABLE OF CONTENTS (CONTINUED)
PAGE 7.7 Assignment .................................................................. 8 7.8 Successors and Assigns....................................................... 8 7.9 Third Party Beneficiaries.................................................... 8 7.10 Schedules.................................................................... 8 7.11 Governing Law................................................................ 8 7.12 Severability................................................................. 8 7.13 Subsidiaries................................................................. 8 7.14 Title and Headings........................................................... 8 7.15 Laws and Government Regulations.............................................. 8 7.16 Relationship of Parties...................................................... 8 7.17 Definitions.................................................................. 9 FORM OF SCHEDULE TO TRANSITION SERVICES AGREEMENT.............................................. 10
-ii- FORM OF TRANSITION SERVICES AGREEMENT THIS TRANSITION SERVICES AGREEMENT (this "Agreement") is made and entered into as of this __th day of _____, 1999 between and among VARIAN ASSOCIATES, INC., a Delaware corporation ("HCS"), VARIAN, INC., a Delaware corporation ("IB"), and VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, Inc., a Delaware corporation ("SEB") (collectively, the "parties" or individually a "party"). WHEREAS, HCS, IB and SEB have entered into a Distribution Agreement dated as of January 14, 1999 (the "Distribution Agreement") which, among other matters, contemplates that one or more parties thereto will provide, or cause one or more of its Subsidiaries to provide, to the other parties and their respective Subsidiaries, certain transitional, administrative and support services on the terms set forth in this Agreement. Each party when providing a service under this Agreement (together with any Subsidiaries or Affiliates providing services) is referred to as "Provider" and each party when receiving a service under this Agreement (together with any Subsidiaries or Affiliates receiving services) is referred to as "Recipient." NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree as follows: ARTICLE I SERVICES PROVIDED 1.1 Transition Services. ------------------- (a) Upon the terms and subject to the conditions of this Agreement, the relevant Provider shall provide to the relevant Recipient the services indicated on the Schedules hereto (each, a "Transition Service" and, collectively, the "Transition Services") during the time period for such Transition Service set forth in the applicable Schedule (each, a "Time Period"). (b) Subject to the other provisions of this Agreement, the Transition Services set forth on such Schedules may be amended from time to time, as the relevant parties shall agree in writing to add, omit or redefine any of the Transition Services, the term for which such Transition Services are to be rendered and/or the compensation therefor. 1.2 Personnel. --------- (a) Each party in its capacity as Provider shall make a sufficient number of competent employees (and/or third party contractors to the extent that third party services are routinely utilized to provide similar services to other businesses of such Provider or are reasonably necessary for the efficient performance of any Transition Service) to render the Transition Services to be provided under this Agreement when required, for so long as Provider provides said services to itself. Except to the extent specific individuals are designated on a Schedule, a Provider of a Transition Service shall determine both the staffing required and the particular personnel assigned to perform the Transition Service, including but not limited to, clerical staff, technicians, professionals or others. The personnel assigned by a Provider under this Agreement to perform Transition Services for a Recipient shall not be deemed to be in the employ of the Recipient or entitled to receive any compensation or benefits therefrom. (b) Each Recipient shall not, without the Provider's prior written consent, solicit any employees of a Provider assigned by the Provider to the Recipient for the performance of such services while such employee is employed by Provider or within the six-month period after the date any employee ceases to provide Transition Services. 1.3 Representatives. --------------- (a) Each of HCS, IB and SEB shall designate a representative to act as its primary contact person for the provision of all Transition Services (each, a "Primary Coordinator"). The initial Primary Coordinators shall be designated in writing by notice to the others in accordance with paragraph (b) on or before the Distribution Date. The initial coordinators for each specific Transition Service shall be the individuals named in the Schedule relating to such Transition Service (each, a "Service Coordinator"). Each party may treat an act of another party's Primary Coordinator or Service Coordinator as authorized by such other party without inquiring behind such act or ascertaining whether such Primary Coordinator or Service Coordinator had actual authority so to act, provided, however, that neither the Primary Coordinator nor the Service Coordinator shall have authority to amend or modify the Agreement. All communications relating to the provision of the Transition Services shall be directed to the Primary Coordinators. (b) Each of the relevant Provider and the relevant Recipient of a Transition Service shall notify the other in writing of any change in its Primary Coordinator and/or its Service Coordinator for each Transition Service. Any such notice shall (i) set forth the name of the Primary Coordinator or Service Coordinator to be replaced and the name of the replacement, and (ii) certify that the replacement Primary Coordinator is authorized to act for such party in all matters relating to this Agreement or that the replacement Service Coordinator is authorized to act for such party in all matters relating to the relevant Transition Service, as applicable, as provided in Section 1.3 (a) above. 1.4 Level of Transition Services. (a) Each party, in its capacity as Provider, shall exercise the same degree of care when performing Transition Services as it exercises in performing the same or similar services for its own account, with priority equal to that provided to its own businesses. Nothing in this Agreement shall require any party in its capacity as Provider to favor the businesses of a Recipient over its own businesses. (b) No Provider shall be required to provide the Recipient of Transition Services with a quantity of Transition Services in excess of that provided by Provider as of the date of this Agreement and shall specifically not be required to provide extraordinary levels of Transition Services, special studies, training, or the like or the advantage of systems, equipment, facilities, training, or improvements procured, obtained or made after the Distribution Date by such Provider. (c) Transition Services provided by third parties shall be subject to the terms and conditions of this Agreement and any agreements between the Provider of such Transition Services and such third parties. 1.5 Corrective Efforts. Notwithstanding anything to the contrary ------------------ contained in this Agreement, if a Provider incorrectly performs any Transition Service, the Provider, at the Recipient's request, shall use commercially reasonable efforts to correct or re-perform the Transition Service at no additional cost to the Recipient, but shall have no other obligation to correct the subject Transition Service. In the event Recipient does not request such correction of the Transition Service or Provider does not correct the performance, any damages recoverable by Recipient shall be limited to the amount paid by Recipient to Provider for the item of Service in respect of which a claim is made. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR LOSS OF PROFITS OR OPPORTUNITIES, OR ANY EXEMPLARY OR PUNITIVE DAMAGES ARISING OUT OF ANY BREACH OF THIS AGREEMENT, REGARDLESS OF THE CIRCUMSTANCES FROM WHICH SUCH DAMAGES AROSE. 1.6 Force Majeure. Any failure or omission by a party in the performance ------------- of any obligation under this Agreement shall not be deemed a breach of this Agreement or create any liability, if the failure or omission arises from any cause or causes beyond the control of the party, including, but not limited to, the following, which for purposes of this Agreement shall be regarded as beyond the control of each of the parties hereto: acts of God, fire, storm, flood, earthquake, governmental regulation or direction, acts of the public enemy, war, rebellion, insurrection, riot, invasion, strike or lockout; provided, however, -------- ------- that the party shall resume the performance whenever such causes are removed. Notwithstanding the foregoing, if a party cannot perform under this Agreement 2 for a period of 45 days due to such cause or causes, the affected party may terminate this Agreement with the defaulting party by providing written notice thereto. 1.7 Modification of Procedures. Each party, in its capacity as Provider, -------------------------- may make changes from time to time in its standards and procedures for performing any of the Transition Services for which it is responsible; provided, -------- however, that, except as provided in Section 1.1(b) or required by Law, no party - ------- in its capacity as Provider shall implement any substantial changes affecting a Recipient of a Transition Service unless: (a) Provider has furnished Recipient notice (which shall be the same notice such Provider shall provide its own businesses) thereof; (b) Provider changes the procedures for its own businesses at the same time; and (c) Provider gives Recipient a reasonable period of time for Recipient (i) to adapt its operations to accommodate the changes or (ii) to reject the proposed changes. In the event Recipient fails to accept or reject a proposed change on or before a date specified in the notice of change, Recipient shall be deemed to have accepted the change. Subject to Section 1.8, in the event Recipient rejects a proposed change but does not terminate the provision of the Transition Service, Recipient shall pay any charges resulting from Provider's need to maintain different versions of the same systems, procedures, technologies, or services or resulting from requirements of third party vendors or suppliers. 1.8 No Obligation to Continue to Use Services. Except as provided in the ----------------------------------------- Schedules, no Recipient shall have any obligation to continue to use any of the Transition Services and a Recipient may delete any or all Transition Services from the Transition Services that a Provider is providing to the Recipient by giving the Provider written notice thereof in accordance with the notice provisions of this Agreement and the applicable Schedules. 1.9 Provider Access. Recipient shall provide the personnel of a Provider --------------- with access to its equipment, office space, plants, telecommunications and computer equipment and systems, and any other areas and equipment to the extent reasonably required for personnel of a Provider to perform any Transition Service. ARTICLE II COMPENSATION 2.1 Consideration. As consideration for the Transition Services, each ------------- party in its capacity as Recipient shall pay to each Provider the aggregate amount specified in the Schedules relating to the Transition Services provided by Provider to Recipient. 2.2 Invoices. The monthly fixed charges or fees for Transition Services -------- set forth on the Schedules shall be paid on the first day of each month in which the Transition Services are to be performed. Any fees not payable as fixed amounts shall be invoiced monthly by the Provider to the Recipient no later than the 30th day of the calendar month next following the calendar month in which the Transition Services were performed. All invoices shall be sent by the Provider to the Recipient at the following address or to such other address as the Recipient shall have specified by notice in writing to the Provider of the Transition Services: To HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attention: Chief Financial Officer Fax: (___) ___-____ 3 To IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attention: Chief Financial Officer Fax: (___) ___-____ To SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attention: Chief Financial Officer Fax: (___) ___-____ 2.3 Payment of Amounts Due. Payment of all amounts due for Transition ---------------------- Services shall be made by check or electronic funds transmission in U.S. Dollars, without any offset or deduction of any nature whatsoever, within 30 days of the invoice date or as specified in the applicable Schedules. All payments shall be made in accordance with the terms of the applicable Schedules, the instructions set forth on or accompanying the invoice or as otherwise agreed to in writing between the relevant Provider and the relevant Recipient. Books and Records of a Provider pertaining to the services provided and all reimbursed costs shall be available for inspection and audit by the Recipient during normal business hours for three months following the delivery of the invoice for the period for which the Transition Services were provided. 2.4 Provider's Rights on Failure to Pay. If any fixed fee or invoice is ----------------------------------- not paid when due, the Provider shall have the right, in its sole and absolute discretion, without any liability to the Recipient that has not paid such fixed fee or invoice or anyone claiming by or through the Recipient, to immediately cease providing any or all of the Transition Services provided by the Provider to the Recipient until such payment is received. ARTICLE III CONFIDENTIALITY 3.1 Obligation. ---------- (a) All information with respect to any Recipient obtained by a party in its capacity as Provider shall be held and used by Provider only in accordance with Section 6.03 of the Distribution Agreement. (b) All information with respect to any Provider obtained by a party in its capacity as Recipient shall be held and used by the Recipient only in accordance with Section 6.03 of the Distribution Agreement. ARTICLE IV TERM AND TERMINATION 4.1 Term. This Agreement shall become effective on the Distribution Date ---- and shall remain in force with respect to a party until the expiration of the longest Time Period specified in any Schedule affecting such party as either Provider or Recipient, including any extension thereof, unless all of the Transition Services to be performed or received by such party are deleted or this Agreement is earlier terminated with respect to such party, in each case, in accordance with the terms of this Agreement. 4.2 Extension. The Time Period for which a Transition Service shall be --------- provided may be extended by written agreement among the Recipient and the Provider of the Transition Service. 4 4.3 Termination. If any party (the "Defaulting Party") shall fail to ----------- perform or default in the performance of any of its obligations under this Agreement (other than a payment default subject to Section 2.4), the party entitled to the benefit of the performance (the "Non-Defaulting Party") may give written notice to the Defaulting Party specifying the nature of the failure or default and stating that the Non-Defaulting Party intends to terminate this Agreement with respect to the Defaulting Party if the failure or default is not cured within 30 days of the written notice. If any failure or default so specified is not cured within the 30-day period, the Non-Defaulting Party may elect immediately to terminate this Agreement with respect to the Defaulting Party; provided, however, that if the failure or default relates to a dispute -------- ------- contested in good faith by the Defaulting Party, the Non-Defaulting Party may not terminate this Agreement pending resolution of the dispute in accordance with Article V hereof. Such termination shall be effective upon giving a written notice of termination from the Non-Defaulting Party to the Defaulting Party and shall be without prejudice to any other remedy which may be available to the Non-Defaulting Party against the Defaulting Party. 4.4 Termination of Obligations. All obligations of each Provider to -------------------------- provide each Transition Service for which the Provider is responsible shall immediately cease upon the expiration of the Time Period (and any extension thereof in accordance with Section 4.2) for the Transition Service, and each Provider's obligations to provide all of the Transition Services for which the Provider is responsible shall immediately cease upon the termination of this Agreement with respect to the Provider and all relevant Recipients. Upon the cessation of a Provider's obligation to provide any Transition Service, the Recipient of the Transition Service shall immediately cease using, directly or indirectly, the Transition Service (including, without limitation, any and all software of Provider or third party software provided through Provider, telecommunications services or equipment, or computer systems or equipment). 4.5 Survival of Certain Obligations. Without prejudice to the survival of ------------------------------- the other agreements of the parties, the following obligations shall survive the termination of this Agreement: (a) the obligations of each party under Articles III, IV and VI; and (b) each Provider's right to receive the compensation for the Transition Services provided in Section 2.1 accruing prior to the effective date of termination. ARTICLE V DISPUTE RESOLUTION 5.1 Distribution Agreement to Control. Any and all controversies, --------------------------------- disputes or claims arising out of, relating to, in connection with or resulting from this Agreement (or any amendment thereto or any transaction contemplated hereby or thereby), including as to its existence, interpretation, performance, non-performance, validity, breach or termination, including any claim based on contract, tort, statute or constitution and any claim raising questions of law, whether arising before or after termination of this Agreement, shall be deemed an Agreement Dispute as defined in Section 9.01 of the Distribution Agreement and shall be resolved exclusively by, in accordance with, and subject to the limitations set forth in Article IX of the Distribution Agreement. ARTICLE VI INSURANCE; INDEMNIFICATION 6.1 Insurance and Indemnity. Each party shall comply with all applicable ----------------------- workers' compensation statutes either by obtaining a policy with the limits required by law or by qualifying legally to self insure. Each party shall, or shall cause its insurer to, waive the right of subrogation or recovery against any other party in connection with this Agreement for any work-related injury or disease. Each party shall carry employer's liability insurance with minimum limits of $1,000,000 per accident. Each party shall carry general liability insurance, with minimum limits of $1,000,000 per occurrence, to cover such party's indemnification obligations under this Agreement. Each party shall carry automobile liability insurance to cover claims arising out of the operation, maintenance or use of any motor vehicles owned, hired, rented or used by such party in connection with this Agreement. 5 A party in its capacity as Provider shall not be responsible to a Recipient for damage to the Recipient's real or personal property at Recipient's premises, or any other place, when Recipient's property is in the care, custody or control of Provider. All deductibles or self insured retentions, on policies of insurance required to be maintained under this Agreement, will be borne by the responsible parties as set forth in Sections 6.2 and 6.3 below. 6.2 Recipients' Indemnity for Services. Each party in its capacity as ---------------------------------- Recipient shall indemnify, defend and hold harmless each Provider, and the Provider's directors, officers, employees and agents, against any and all Liabilities incurred by any of them in connection with Transition Services provided under this Agreement except to the extent arising out of, relating to or resulting from Provider's gross negligence or intentional misconduct. 6.3 Providers' Indemnity for Services. Each party in its capacity as --------------------------------- Provider shall indemnify, defend and hold harmless each Recipient, and the Recipient's directors, officers, employees and agents, against all Liabilities incurred by any of them in connection with Transition Services provided under this Agreement to the extent arising out of, relating to or resulting from Provider's gross negligence or intentional misconduct; provided, however, that -------- ------- any Liabilities claimed by Recipient and the Recipient's directors, officers, employees and agents shall be limited to the amount of the charges paid to Provider for such item of Transition Service in respect of which a claim is made; and provided, further, that Provider will defend, indemnify and hold -------- ------- harmless each Recipient of Transition Services from such Provider, and such Recipient's directors, officers, employees and agents, against all Liabilities incurred by any of them in connection with the Provider's operation, maintenance or use of a motor vehicle in the course of providing Transition Services to the Recipient. ARTICLE VII MISCELLANEOUS 7.1 Complete Agreement; Construction. This Agreement, including the -------------------------------- Schedules hereto, the Distribution Agreement and the other Ancillary Agreements shall constitute the entire agreement among the parties with respect to the subject matter hereof and shall supersede all prior agreements, negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and any Schedule hereto, the Schedule shall prevail. In the event of any inconsistency between this Agreement and the Distribution Agreement, this Agreement shall prevail except for inconsistencies with respect to Sections 5.05 and 6.07 and Article IX of the Distribution Agreement, which sections shall prevail over any inconsistent provision of this Agreement. 7.2 Other Agreements. This Agreement is not intended to address, and ---------------- should not be interpreted to address, the matters expressly covered by the Distribution Agreement and the other Ancillary Agreements. 7.3 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same Agreement. 7.4 Notices. All Notices required or permitted under this Agreement shall ------- be in writing and shall be sufficiently given or made (a) if hand delivered or sent by telecopy (with delivery confirmed by voice or otherwise), (b) if sent by nationally recognized overnight courier or (c) if sent by registered or certified U.S. mail, postage prepaid, return receipt requested, and in each case addressed as follows: If to HCS: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ 6 with a copy to: Varian Medical Systems, Inc. 3100 Hansen Way Palo Alto, California 94304-1030 Attn: General Counsel Telecopy: (650) ___-____ If to IB: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: Chief Financial Officer Telecopy (650) ___-____ with a copy to: Varian, Inc. 3120 Hansen Way Palo Alto, California 94303-1030 Attn: General Counsel Telecopy: (650) ___-____ If to SEB: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer Telecopy (978) ___-____ with a copy to: Varian Semiconductor Equipment Associates, Inc. 35 Dory Road Gloucester, Massachusetts 01930 Attn: General Counsel Telecopy: (978) ___-____ or at such other address as shall be furnished by any of the parties in a Notice. Any Notice shall be deemed to have been duly given or made when the Notice is received. 7.5 Waivers. The failure of any party to require strict performance by ------- any other party of any provision in or rights and remedies with respect to this Agreement will not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof or right or remedy. 7.6 Amendments. After the execution of this Agreement by all parties, and ---------- solely to the extent that a change is desired by and restricted to any two parties without affecting the rights of the third party hereto, such two parties may separately amend in writing any provision of this Agreement which governs the rights exchanged between them without notifying the third party hereto. Except as expressly provided herein, this Agreement may be amended or supplemented or its provisions waived only by an agreement in writing signed by each of the parties. 7 7.7 Assignment. ---------- (a) No party to this Agreement shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into such party (other than a merger or consolidation in which the party is the surviving or continuing corporation), or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of its Assets, unless the resulting, surviving or transferee Person expressly assumes, by instrument in form and substance reasonably satisfactory to the other parties, all of the obligations of the party under this Agreement. (b) Except as expressly provided in paragraph (a), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable, directly or indirectly, by any party without the prior written consent of the other parties, and any attempt to so assign without such consent shall be void. 7.8 Successors and Assigns. Subject to Section 7.7, this Agreement shall ---------------------- be binding upon, inure to the benefit of and be enforceable by the successors and permitted assigns of the parties. 7.9 Third Party Beneficiaries. This Agreement is solely for the benefit ------------------------- of the parties and the members of their respective Groups and Affiliates and their respective successors and assigns and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. 7.10 Schedules. The Schedules shall be construed with and as an integral --------- part of this Agreement to the same extent as if they had been set forth verbatim herein. 7.11 Governing Law. This Agreement shall be governed by, and construed and ------------- enforced in accordance with, the Law of the State of Delaware without regard to the principles of conflicts of Laws thereunder. Notwithstanding the foregoing, the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability of disputes. 7.12 Severability. If any provision of this Agreement or the application ------------ thereof to any Person or circumstance is determined to be invalid, void or unenforceable in any respect, the remaining provisions hereof, the application of such provision to Persons or circumstances other than those as to which it has been held invalid, void or unenforceable, shall remain in full force and effect and in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 7.13 Subsidiaries. Each of the parties shall cause to be performed, and ------------ hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that is contemplated to be a Subsidiary of such party on and after the Distribution Date. 7.14 Title and Headings. Titles and headings to sections herein are ------------------ inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 7.15 Laws and Government Regulations. Each party in its capacity as ------------------------------- Recipient shall be responsible for (a) compliance with all Laws affecting its businesses and (b) any use it may make of the Transition Services to assist it in complying with such Laws . While a party in its capacity as Provider shall not have any responsibility for the compliance by any Recipient with such Laws, Provider shall use reasonable commercial efforts to cause the Transition Services to be designed in such manner that the Transition Services shall be able to assist the Recipient in complying with applicable legal and regulatory responsibilities. 7.16 Relationship of Parties. Nothing in this Agreement shall be construed ----------------------- to create a partnership, agency or other relationship between the parties or to make any party liable for any debts or obligations incurred by another party. 8 7.17 Definitions. Capitalized terms used in this Agreement and not ----------- otherwise defined herein have the meanings ascribed to such terms in Article I, Section 1.01 of the Distribution Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Transition Services Agreement to be executed as of the day and year first above written. VARIAN ASSOCIATES, INC. By:_____________________________________ Name: Title: VARIAN, INC. By:_____________________________________ Name: Title: VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. By:_____________________________________ Name: Title: 9 FORM OF SCHEDULE TO TRANSITION SERVICES AGREEMENT Description of Transition Service (including the identity of the Recipient(s) of such Transition Service): Payment: Time Period (including terms of extension, if any): Service Coordinator for Provider: Service Coordinator for each Recipient: Notice Period for Deletion of Transition Services: Any Other Terms: 10 EX-10.7 9 VARIAN, INC. STOCK PLAN EXHIBIT 10.7 VARIAN, INC. OMNIBUS STOCK PLAN TABLE OF CONTENTS
Page SECTION 1 BACKGROUND, PURPOSE AND DURATION............................ 1 1.1 Effective Date................................................. 1 1.2 Purpose of the Plan............................................ 1 SECTION 2 DEFINITIONS................................................. 1 2.1 "1934 Act"..................................................... 1 2.2 "Affiliate".................................................... 1 2.3 "Award"........................................................ 1 2.4 "Award Agreement".............................................. 1 2.5 "Board"........................................................ 1 2.6 "Code"......................................................... 1 2.7 "Committee".................................................... 1 2.8 "Company"...................................................... 1 2.9 "Consultant"................................................... 1 2.10 "Director"..................................................... 1 2.11 "Disability"................................................... 2 2.12 "EBIT"......................................................... 2 2.13 "EBITDA"....................................................... 2 2.14 "Earnings Per Share"........................................... 2 2.15 "Employee"..................................................... 2 2.16 "Exercise Price"............................................... 2 2.17 "Fair Market Value"............................................ 2 2.18 "Fiscal Year".................................................. 2 2.19 "Grant Date"................................................... 2 2.20 "Incentive Stock Option"....................................... 2 2.21 "Net Income"................................................... 2 2.22 "Non-employee Director"........................................ 2 2.23 "Non-qualified Stock Option"................................... 2 2.24 "Operating Cash Flow".......................................... 2 2.25 "Option"....................................................... 2 2.26 "Participant".................................................. 3 2.27 "Performance Goals"............................................ 3 2.28 "Performance Period"........................................... 3 2.29 "Performance Share"............................................ 3 2.30 "Performance Unit"............................................. 3 2.31 "Period of Restriction"........................................ 3 2.32 "Plan"......................................................... 3 2.33 "Restricted Stock"............................................. 3 2.34 "Retirement"................................................... 3 2.35 "Return on Assets"............................................. 3 2.36 "Return on Equity.............................................. 3 2.37 "Return on Sales".............................................. 3 2.38 "Revenue"...................................................... 3 2.39 "Rule 16b-3"................................................... 3 2.40 "Section 16 Person"............................................ 4 2.41 "Shareholder Return"........................................... 4 2.42 "Shares"....................................................... 4 2.43 "Stock Appreciation Right"..................................... 4 2.44 "Subsidiary"................................................... 4 2.45 "Termination of Service"....................................... 4 2.46 "VAI".......................................................... 4
-i- TABLE OF CONTENTS (continued)
Page SECTION 3 ADMINISTRATION.............................................. 4 3.1 The Committee................................................... 4 3.2 Authority of the Committee...................................... 4 3.3 Delegation by the Committee..................................... 4 3.4 Non-employee Directors.......................................... 5 3.5 Decisions Binding............................................... 5 SECTION 4 SHARES SUBJECT TO THE PLAN.................................. 5 4.1 Number of Shares................................................ 5 4.2 Lapsed Awards................................................... 5 4.3 Adjustments in Awards and Authorized Shares..................... 5 SECTION 5 STOCK OPTIONS............................................... 5 5.1 Grant of Options................................................ 5 5.2 Award Agreement................................................. 5 5.3 Exercise Price.................................................. 5 5.3.1 Non-qualified Stock Options.............................. 6 5.3.2 Incentive Stock Options.................................. 6 5.3.3 Substitute Options....................................... 6 5.4 Expiration of Options........................................... 6 5.4.1 Expiration Dates......................................... 6 5.4.2 Death of Participant..................................... 6 5.4.3 Committee Discretion..................................... 6 5.5 Exercisability of Options....................................... 6 5.6 Payment......................................................... 7 5.7 Restrictions on Share Transferability........................... 7 5.8 Certain Additional Provisions for Incentive Stock Options....... 7 5.8.1 Exercisability........................................... 7 5.8.2 Termination of Service................................... 7 5.8.3 Company and Subsidiaries Only............................ 7 5.8.4 Expiration............................................... 7 5.9 Grant of Reload Options......................................... 7 SECTION 6 STOCK APPRECIATION RIGHTS................................... 8 6.1 Grant of SARs................................................... 8 6.2 Exercise Price and Other Terms.................................. 8 6.3 SAR Agreement................................................... 8 6.4 Expiration of SARs.............................................. 8 6.5 Payment of SAR Amount........................................... 8 6.6 Payment Upon Exercise of SAR.................................... 8 SECTION 7 RESTRICTED STOCK............................................ 8 7.1 Grant of Restricted Stock....................................... 8 7.2 Restricted Stock Agreement...................................... 8 7.3 Transferability................................................. 8 7.4 Other Restrictions.............................................. 8 7.4.1 General Restrictions..................................... 9 7.4.2 Section 162(m) Performance Restrictions.................. 9 7.4.3 Legend on Certificates................................... 9
-ii- TABLE OF CONTENTS (continued)
Page 7.5 Removal of Restrictions....................................... 9 7.6 Voting Rights................................................. 9 7.7 Dividends and Other Distributions............................. 9 7.8 Return of Restricted Stock to Company......................... 9 SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES.................. 9 8.1 Grant of Performance Units and Shares......................... 9 8.2 Initial Value................................................. 9 8.3 Performance Objectives and Other Terms........................ 10 8.3.1 General Performance Objectives......................... 10 8.3.2 Section 162(m) Performance Objectives.................. 10 8.4 Earning of Performance Units and Performance Shares........... 10 8.5 Form and Timing of Payment.................................... 10 8.6 Cancellation.................................................. 10 SECTION 9 NON-EMPLOYEE DIRECTORS.................................... 10 9.1 Granting of Options........................................... 10 9.1.1 Non-employee Directors................................. 10 9.1.2 Chairman............................................... 11 9.2 Terms of Options.............................................. 11 9.2.1 Option Agreement....................................... 11 9.2.2 Exercise Price......................................... 11 9.2.3 Exercisability......................................... 11 9.2.4 Expiration of Options.................................. 11 9.2.5 Death of Director...................................... 11 9.2.6 Not Incentive Stock Options............................ 11 9.2.7 Other Terms............................................ 11 9.3 Substitute Options............................................ 11 9.4 Elections by Non-employee Directors........................... 12 SECTION 10 MISCELLANEOUS.............................................. 12 10.1 No Effect on Employment or Service............................ 12 10.2 Participation................................................. 12 10.3 Indemnification............................................... 12 10.4 Successors.................................................... 12 10.5 Beneficiary Designations...................................... 12 10.6 Nontransferability of Awards.................................. 12 10.7 No Rights as Stockholder...................................... 12 10.8 Withholding Requirements...................................... 13 10.9 Withholding Arrangements...................................... 13 10.10 Deferrals..................................................... 13 SECTION 11 AMENDMENT, TERMINATION AND DURATION........................ 13 11.1 Amendment, Suspension or Termination.......................... 13 11.2 Duration of the Plan.......................................... 13 SECTION 12 LEGAL CONSTRUCTION......................................... 13 12.1 Gender and Number............................................. 13 12.2 Severability.................................................. 13 12.3 Requirements of Law........................................... 13 12.4 Governing Law................................................. 13 12.5 Captions...................................................... 14
-iii- VARIAN, INC. OMNIBUS STOCK PLAN SECTION 1 BACKGROUND, PURPOSE AND DURATION 1.1 Effective Date. The Plan is effective as of the date on which -------------- VAI distributes the Company's Shares to the stockholders of VAI, subject to the approval of the Plan by a majority of the shares of the common stock of VAI which are present in person or by proxy and entitled to vote at the 1999 Annual and Special Meeting of the Stockholders of VAI. 1.2 Purpose of the Plan. The Plan is intended to increase ------------------- incentives and to encourage Share ownership on the part of (1) employees of the Company and its Affiliates, (2) consultants who provide significant services to the Company and its Affiliates, and (3) directors of the Company who are employees of neither the Company nor any Affiliate. The Plan also is intended to further the growth and profitability of the Company. The Plan is intended to permit the grant of Awards that qualify as performance-based compensation under section 162(m) of the Code. SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 2.1 "1934 Act" means the Securities Exchange Act of 1934, as -------- amended. Reference to a specific section of the 1934 Act or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. 2.2 "Affiliate" means any corporation or any other entity --------- (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company. 2.3 "Award" means, individually or collectively, a grant under the ----- Plan of Non-qualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units or Performance Shares. 2.4 "Award Agreement" means the written agreement setting forth the --------------- terms and provisions applicable to each Award granted under the Plan. 2.5 "Board" means the Board of Directors of the Company. ----- 2.6 "Code" means the Internal Revenue Code of 1986, as amended. ---- Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. 2.7 "Committee" means the committee appointed by the Board --------- (pursuant to Section 3.1) to administer the Plan. 2.8 "Company" means Varian, Inc., a Delaware corporation, or any ------- successor thereto. 2.9 "Consultant" means any consultant, independent contractor, or ---------- other person who provides significant services to the Company or its Affiliates, but who is neither an Employee nor a Director. 2.10 "Director" means any individual who is a member of the Board. -------- C-1 2.11 "Disability" means a permanent and total disability within the ---------- meaning of section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Committee in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time. 2.12 "EBIT" means as to any Performance Period, the Company's or a ---- business unit's income before reductions for interest and taxes, determined in accordance with generally accepted accounting principles. 2.13 "EBITDA" means as to any Performance Period, the Company's or a ------ business unit's income before reductions for interest, taxes, depreciation and amortization, determined in accordance with generally accepted accounting principles. 2.14 "Earnings Per Share" means as to any Performance Period, the ------------------ Company's or a business unit's Net Income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding, determined in accordance with generally accepted accounting principles. 2.15 "Employee" means any employee of the Company or of an -------- Affiliate, whether such employee is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan. 2.16 "Exercise Price" means the price at which a Share may be -------------- purchased by a Participant pursuant to the exercise of an Option. 2.17 "Fair Market Value" means the last quoted per share selling ----------------- price for Shares on the relevant date, or if there were no sales on such date, the arithmetic mean of the highest and lowest quoted selling prices on the nearest day before and the nearest day after the relevant date, as determined by the Committee. Notwithstanding the preceding, for federal, state and local income tax reporting purposes, fair market value shall be determined by the Committee in accordance with uniform and nondiscriminatory standards adopted by it from time to time. 2.18 "Fiscal Year" means the fiscal year of the Company. ----------- 2.19 "Grant Date" means, with respect to an Award, the date that the ---------- Award was granted. 2.20 "Incentive Stock Option" means an Option to purchase Shares ---------------------- which is designated as an Incentive Stock Option and is intended to meet the requirements of section 422 of the Code. 2.21 "Net Income" means as to any Performance Period, the Company's ---------- or a business unit's income after taxes, determined in accordance with generally accepted accounting principles. 2.22 "Non-employee Director" means a Director who is an employee of --------------------- neither the Company nor of any Affiliate. 2.23 "Non-qualified Stock Option" means an option to purchase Shares -------------------------- which is not intended to be an Incentive Stock Option. 2.24 "Operating Cash Flow" means as to any Performance Period, the ------------------- Company's or a business unit's sum of Net Income plus depreciation and amortization less capital expenditures plus changes in working capital comprised of accounts receivable, inventories, other current assets, trade accounts payable, accrued expenses, product warranty, advance payments from customers and long-term accrued expenses, determined in accordance with generally acceptable accounting principles. 2.25 "Option" means an Incentive Stock Option or a Non-qualified ------ Stock Option. C-2 2.26 "Participant" means an Employee, Consultant, or Non-employee ----------- Director who has an outstanding Award. 2.27 "Performance Goals" means the goal(s) (or combined goal(s)) ----------------- determined by the Committee (in its discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) EBIT, (b) EBITDA, (c) Earnings Per Share, (d) Net Income, (e) Operating Cash Flow, (f) Return on Assets, (g) Return on Equity, (h) Return on Sales, (i) Revenue, and (j) Shareholder Return. The Performance Goals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Committee shall determine whether any significant element(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participant. "Determination Date" means the latest possible date that will not jeopardize an Award's qualification as performance-based compensation under section 162(m) of the Code. Notwithstanding the previous sentence, for Awards not intended to qualify as performance-based compensation, "Determination Date" shall mean such date as the Committee may determine in its discretion. 2.28 "Performance Period" means any fiscal period not to exceed ------------------ three consecutive Fiscal Years, as determined by the Committee in its sole discretion. 2.29 "Performance Share" means a Performance Share granted to a ----------------- Participant pursuant to Section 8. 2.30 "Performance Unit" means a Performance Unit granted to a ---------------- Participant pursuant to Section 8. 2.31 "Period of Restriction" means the period during which shares of --------------------- Restricted Stock are subject to forfeiture and/or restrictions on transferability. 2.32 "Plan" means the Varian, Inc. Omnibus Stock Plan, as set forth ---- in this instrument and as hereafter amended from time to time. 2.33 "Restricted Stock" means an Award granted to a Participant ---------------- pursuant to Section 7. 2.34 "Retirement" means, in the case of an Employee or a ---------- Non-employee Director, "Retirement" as defined pursuant to the Company's or the Board's Retirement Policies, as they may be established from time to time. With respect to a Consultant, no Termination of Service shall be deemed to be on account of "Retirement." 2.35 "Return on Assets" means as to any Performance Period, the ---------------- percentage equal to the Company's or a business unit's EBIT before incentive compensation, divided by average net Company or business unit, as applicable, assets, determined in accordance with generally accepted accounting principles. 2.36 "Return on Equity" means as to any Performance Period, the ---------------- percentage equal to the Company's Net Income divided by average stockholder's equity, determined in accordance with generally accepted accounting principles. 2.37 "Return on Sales" means as to any Performance Period, the --------------- percentage equal to the Company's or a business unit's EBIT before incentive compensation, divided by the Company's or the business unit's, as applicable, Revenue, determined in accordance with generally accepted accounting principles. 2.38 "Revenue" means as to any Performance Period, the Company's or ------- a business unit's net sales, determined in accordance with generally accepted accounting principles. 2.39 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, ---------- as amended, and any future regulation amending, supplementing or superseding such regulation. C-3 2.40 "Section 16 Person" means a person who, with respect to the ----------------- Shares, is subject to section 16 of the 1934 Act. 2.41 "Shareholder Return" means as to any Performance Period, the ------------------ total return (change in share price plus reinvestment of any dividends) of a Share. 2.42 "Shares" means shares of the Company's common stock, $.01 par ------ value. 2.43 "Stock Appreciation Right" or "SAR" means an Award, granted ------------------------ alone, in connection or in tandem with a related Option, that pursuant to Section 6 is designated as a SAR. 2.44 "Subsidiary" means any corporation in an unbroken chain of ---------- corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.45 "Termination of Service" means (a) in the case of an Employee, ---------------------- a cessation of the employee-employer relationship between an Employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate; (b) in the case of a Consultant, a cessation of the service relationship between a Consultant and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous re-engagement of the consultant by the Company or an Affiliate; and (c) in the case of a Non-employee Director, a cessation of the Non-employee Director's service on the Board for any reason. 2.46 "VAI" means Varian Associates, Inc., a Delaware corporation. --- SECTION 3 ADMINISTRATION 3.1 The Committee. The Plan shall be administered by the ------------- Committee. The Committee shall consist of not less than two (2) Directors. The members of the Committee shall be appointed from time to time by, and serve at the pleasure of, the Board. Each member of the Committee shall qualify as (a) a "non-employee director" under Rule 16b-3, and (b) an "outside director" under section 162(m) of the Code. If it is later determined that one or more members of the Committee do not so qualify, actions taken by the Committee prior to such determination shall be valid despite such failure to qualify. 3.2 Authority of the Committee. It shall be the duty of the -------------------------- Committee to administer the Plan in accordance with the Plan's provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees and Consultants shall be granted Awards, (b) prescribe the terms and conditions of the Awards (other than the Options granted to Non-employee Directors pursuant to Section 9), (c) interpret the Plan and the Awards, (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Employees, Consultants and Directors who are foreign nationals or employed outside of the United States, (e) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (f) interpret, amend or revoke any such rules. Notwithstanding any contrary provision of the Plan, the Committee may reduce the amount payable under any Award (other than an Option) after the grant of such Award. 3.3 Delegation by the Committee. The Committee, in its sole --------------------------- discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee may not delegate its authority and powers (a) with respect to Section 16 Persons, (b) in any way which would jeopardize the Plan's qualification under Rule 16b-3, or (c) with respect to awards which are intended to qualify as performance-based compensation under section 162(m) of the Code. C-4 3.4 Non-employee Directors. Notwithstanding any contrary provision ---------------------- of this Section 3, the Board shall administer Section 9 of the Plan, and the Committee shall exercise no discretion with respect to Section 9. In the Board's administration of Section 9 and the Options and any Shares granted to Non- employee Directors, the Board shall have all of the authority and discretion otherwise granted to the Committee with respect to the administration of the Plan. 3.5 Decisions Binding. All determinations and decisions made by ----------------- the Committee, the Board, and any delegate of the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law. SECTION 4 SHARES SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to adjustment as provided in Section ---------------- 4.3, the total number of Shares available for grant under the Plan shall not exceed 4,200,000, plus such number of Shares as are granted pursuant to substitute Options under Sections 5.3.3 and 9.3 in connection with the distribution of Shares to the stockholders of VAI. Shares granted under the Plan may be either authorized but unissued Shares or treasury Shares. 4.2 Lapsed Awards. If an Award terminates, expires, or lapses for ------------- any reason, any Shares subject to such Award again shall be available to be the subject of an Award. In addition, if any Shares are tendered to the Company (whether by physical delivery or attestation) as full or partial payment for the exercise of an Option or in satisfaction of a tax withholding obligation pursuant to an Award, only the net Shares issued shall be deemed granted for purposes of determining the maximum number of Shares that may be granted under Section 4.1. Also, Shares granted pursuant to Awards assumed or granted in substitution of other awards in connection with the acquisition by the Company of an unrelated entity shall not reduce the maximum number of Shares issuable under Section 4.1. 4.3 Adjustments in Awards and Authorized Shares. In the event of ------------------------------------------- any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, the Committee shall adjust the number and class of Shares which may be delivered under the Plan, the number, class, and price of Shares subject to outstanding Awards, and the numerical limit of Section 5.1 in such manner as the Committee (in its sole discretion) shall determine to be appropriate to prevent the dilution or diminution of such Awards. In the case of Options granted to Non-employee Directors pursuant to Section 9, the foregoing adjustments shall be made by the Board, and any such adjustments also shall apply to the future grants provided by Section 9. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number. SECTION 5 STOCK OPTIONS 5.1 Grant of Options. Subject to the terms and provisions of the ---------------- Plan, Options may be granted to Employees and Consultants at any time and from time to time as determined by the Committee in its sole discretion. The Committee, in its sole discretion, shall determine the number of Shares subject to each Option, provided that during any Fiscal Year, no Participant shall be granted Options covering more than 1,000,000 Shares. The Committee may grant Incentive Stock Options, Non-qualified Stock Options, or a combination thereof. 5.2 Award Agreement. Each Option shall be evidenced by an Award --------------- Agreement that shall specify the Exercise Price, the expiration date of the Option, the number of Shares to which the Option pertains, any conditions to exercise of the Option, and such other terms and conditions as the Committee, in its discretion, shall determine. The Award Agreement shall specify whether the Option is intended to be an Incentive Stock Option or a Non-qualified Stock Option. 5.3 Exercise Price. Subject to the provisions of this Section 5.3, -------------- the Exercise Price for each Option shall be determined by the Committee in its sole discretion. C-5 5.3.1 Non-qualified Stock Options. In the case of a --------------------------- Non-qualified Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date. 5.3.2 Incentive Stock Options. In the case of an Incentive ----------------------- Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date; provided, however, that if on the Grant Date, the Employee (together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code) owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the Exercise Price shall be not less than one hundred and ten percent (110%) of the Fair Market Value of a Share on the Grant Date. 5.3.3 Substitute Options. Notwithstanding the provisions of ------------------ Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Employees or Consultants on account of such transaction may be granted Options in substitution for options granted by their former employer. If such substitute Options are granted, the Committee, in its sole discretion and consistent with section 424(a) of the Code, shall determine the exercise price of such substitute Options. 5.4 Expiration of Options. --------------------- 5.4.1 Expiration Dates. Each Option shall terminate no later ---------------- than the first to occur of the following events: (a) The expiration of ten (10) years from the Grant Date; or (b) The expiration of three (3) months from the date of the Participant's Termination of Service for a reason other than the Participant's death, Disability or Retirement; or (c) The expiration of one (1) year from the date of the Participant's Termination of Service by reason of Disability; or (d) The expiration of three (3) years from the date of the Participant's Retirement (subject to Section 5.8.2 regarding Incentive Stock Options); or (e) The date of the Participant's Termination of Service by the Company for cause (as determined by the Company); or (f) The date for termination of the Option determined by the Committee in its sole discretion and set forth in the written Award Agreement. 5.4.2 Death of Participant. Notwithstanding Section 5.4.1, -------------------- if a Participant who is an Employee dies prior to the expiration of his or her Options, his or her Options shall be exercisable until the expiration of three (3) years after the date of death. If a Participant who is a Consultant dies prior to the expiration of his or her Options, the Committee, in its discretion, may provide that his or her Options shall be exercisable for up to three (3) years after the date of death. 5.4.3 Committee Discretion. Subject to the limits of Section -------------------- 5.4.1 and 5.4.2, the Committee, in its sole discretion, (a) shall provide in each Award Agreement when each Option expires and becomes unexercisable, and (b) may, after an Option is granted and before such Option expires, extend the maximum term of the Option (subject to Section 5.8.4 regarding Incentive Stock Options). 5.5 Exercisability of Options. Options granted under the Plan shall ------------------------- be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine in its sole discretion. After an Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of the Option. If a C-6 Participant dies while an Employee, the exercisability of his or her Options shall be fully accelerated to the date of Termination of Service. 5.6 Payment. Options shall be exercised by the Participant's ------- delivery of a written notice of exercise to the Secretary of the Company (or its designee), setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in cash or its equivalent. The Committee, in its sole discretion, also may permit exercise (a) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (b) by any other means which the Committee, in its sole discretion, determines to both provide legal consideration for the Shares, and to be consistent with the purposes of the Plan. As soon as practicable after receipt of a written notification of exercise and full payment for the Shares purchased, the Company shall deliver to the Participant (or the Participant's designated broker), Share certificates (which may be in book entry form) representing such Shares. 5.7 Restrictions on Share Transferability. The Committee may ------------------------------------- impose such restrictions on any Shares acquired pursuant to the exercise of an Option as it may deem advisable, including, but not limited to, restrictions related to applicable Federal securities laws, the requirements of any national securities exchange or system upon which Shares are then listed or traded, or any blue sky or state securities laws. 5.8 Certain Additional Provisions for Incentive Stock Options. --------------------------------------------------------- 5.8.1 Exercisability. The aggregate Fair Market Value -------------- (determined on the Grant Date(s)) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries) shall not exceed $100,000. 5.8.2 Termination of Service. If any portion of an Incentive ---------------------- Stock Option is exercised more than three (3) months after the Participant's Termination of Service for any reason other than Disability or death (unless (a) the Participant dies during such three-month period, and (b) the Award Agreement or the Committee permits later exercise), the portion so exercised shall be deemed a Non-qualified Stock Option. 5.8.3 Company and Subsidiaries Only. Incentive Stock Options ----------------------------- may be granted only to persons who are employees of the Company or a Subsidiary on the Grant Date. 5.8.4 Expiration. No Incentive Stock Option may be exercised ---------- after the expiration of ten (10) years from the Grant Date; provided, however, that if the Option is granted to an Employee who, together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any of its Subsidiaries, the Option may not be exercised after the expiration of five (5) years from the Grant Date. 5.9 Grant of Reload Options. The Committee may provide in an Award ----------------------- Agreement that a Participant who exercises all or part of an Option by payment of the Exercise Price with already-owned Shares, shall be granted an additional option (a "Reload Option") for a number of shares of stock equal to the number of Shares tendered to exercise the previously granted Option plus, if the Committee so determines, any Shares withheld or delivered in satisfaction of any tax withholding requirements. As determined by the Committee, each Reload Option shall (a) have a Grant Date which is the date as of which the previously granted Option is exercised, and (b) be exercisable on the same terms and conditions as the previously granted Option, except that the Exercise Price shall be determined as of the Grant Date. C-7 SECTION 6 STOCK APPRECIATION RIGHTS 6.1 Grant of SARs. Subject to the terms and conditions of the ------------- Plan, SARs may be granted to Employees and Consultants at any time and from time to time as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion to determine the number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant shall be granted SARs covering more than 1,000,000 Shares. 6.2 Exercise Price and Other Terms. The Committee, subject to the ------------------------------ provisions of the Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the Plan. However, the exercise price of an SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date. 6.3 SAR Agreement. Each SAR grant shall be evidenced by an Award ------------- Agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Committee, in its sole discretion, shall determine. 6.4 Expiration of SARs. A SAR granted under the Plan shall expire ------------------ upon the date determined by the Committee, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 5.4 also shall apply to SARs. 6.5 Payment of SAR Amount. Upon exercise of a SAR, a Participant --------------------- shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times (b) The number of Shares with respect to which the SAR is exercised. 6.6 Payment Upon Exercise of SAR. At the discretion of the ---------------------------- Committee, payment for a SAR may be in cash, Shares or a combination thereof. SECTION 7 RESTRICTED STOCK 7.1 Grant of Restricted Stock. Subject to the terms and provisions ------------------------- of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Employees and Consultants in such amounts as the Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall determine the number of Shares to be granted to each Participant, provided that during any Fiscal Year, no Participant shall be granted more than 100,000 Shares of Restricted Stock. 7.2 Restricted Stock Agreement. Each Award of Restricted Stock -------------------------- shall be evidenced by an Award Agreement that shall specify the Period of Restriction, the number of Shares granted, any price to be paid for the Shares, and such other terms and conditions as the Committee, in its sole discretion, shall determine. Unless the Committee determines otherwise, Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on such Shares have lapsed. 7.3 Transferability. Shares of Restricted Stock may not be sold, --------------- transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction. 7.4 Other Restrictions. The Committee, in its sole discretion, may ------------------ impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate, in accordance with this Section 7.4. C-8 7.4.1 General Restrictions. The Committee may set -------------------- restrictions based upon the achievement of specific performance objectives (Company-wide, business unit or individual), applicable federal or state securities laws, or any other basis determined by the Committee in its discretion. 7.4.2 Section 162(m) Performance Restrictions. For purposes --------------------------------------- of qualifying grants of Restricted Stock as "performance-based compensation" under section 162(m) of the Code, the Committee, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Restricted Stock to qualify as "performance-based compensation" under section 162(m) of the Code. In granting Restricted Stock which is intended to qualify under section 162(m) of the Code, the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under section 162(m) of the Code (e.g., in determining the Performance Goals). 7.4.3 Legend on Certificates. The Committee, in its ---------------------- discretion, may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. For example, the Committee may determine that some or all certificates representing Shares of Restricted Stock shall bear the following legend: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Varian, Inc. Omnibus Stock Plan, and in a Restricted Stock Agreement. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of Varian, Inc." 7.5 Removal of Restrictions. Shares of Restricted Stock covered by ----------------------- each Restricted Stock grant made under the Plan shall be released from escrow as soon as practicable after the last day of the Period of Restriction. The Committee, in its discretion, may accelerate the time at which any restrictions shall lapse, and remove any restrictions. After the restrictions have lapsed, the Participant shall be entitled to have any legend or legends under Section 7.4 removed from his or her Share certificate, and the Shares shall be freely transferable by the Participant. 7.6 Voting Rights. During the Period of Restriction, Participants ------------- holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless otherwise provided in the Award Agreement. 7.7 Dividends and Other Distributions. During the Period of --------------------------------- Restriction, Participants holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. 7.8 Return of Restricted Stock to Company. On the date set forth ------------------------------------- in the Award Agreement, the Restricted Stock for which restrictions have not lapsed shall revert to the Company and again shall become available for grant under the Plan. SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES 8.1 Grant of Performance Units and Shares. Performance Units and ------------------------------------- Performance Shares may be granted to Employees and Consultants at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to any Participant, provided that during any Fiscal Year no more than 100,000 Performance Units or Performance Shares may be granted to any Participant. 8.2 Initial Value. Each Performance Unit shall have an initial ------------- value that is established by the Committee on or before the Grant Date, provided that such value shall not exceed the Fair Market Value of a Share C-9 on the Grant Date. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the Grant Date. 8.3 Performance Objectives and Other Terms. The Committee shall -------------------------------------- set performance objectives in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units or Shares that will be paid out to the Participants. The Committee may set performance objectives based upon the achievement of Company-wide, business unit, or individual goals, or any other basis determined by the Committee in its discretion. The time period during which the performance objectives must be met shall be called the "Performance Period." Each Award of Performance Units or Shares shall be evidenced by an Award Agreement that shall specify the Performance Period, and such other terms and conditions as the Committee, in its sole discretion, shall determine. 8.3.1 General Performance Objectives. The Committee may set ------------------------------ performance objectives based upon the achievement of Company-wide, business unit or individual goals, or any other basis determined by the Committee in its discretion. 8.3.2 Section 162(m) Performance Objectives. For purposes of ------------------------------------- qualifying grants of Performance Units or Shares as "performance-based compensation" under section 162(m) of the Code, the Committee, in its discretion, may determine that the performance objectives applicable to Performance Units or Shares shall be based on the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Performance Units or Shares to qualify as "performance-based compensation" under section 162(m) of the Code. In granting Performance Units or Shares which are intended to qualify under section 162(m) of the Code, the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Units or Shares under section 162(m) of the Code (e.g., in determining the Performance Goals). 8.4 Earning of Performance Units and Performance Shares. After the --------------------------------------------------- applicable Performance Period has ended, the Participant shall be entitled to receive a payout of the number of Performance Units or Shares earned during the Performance Period, depending upon the extent to which the applicable performance objectives have been achieved. After the grant of a Performance Unit or Share, the Committee, in its sole discretion, may reduce or waive any performance objectives for Award. 8.5 Form and Timing of Payment. Payment of earned Performance -------------------------- Units or Performance Shares shall be made as soon as practicable after the expiration of the applicable Performance Period. The Committee, in its sole discretion, may pay such earned Awards in cash, Shares or a combination thereof. 8.6 Cancellation. On the date set forth in the Award Agreement, ------------ all unearned or unvested Performance Units or Performance Shares shall be forfeited to the Company, and again shall be available for grant under the Plan. SECTION 9 NON-EMPLOYEE DIRECTORS 9.1 Granting of Options. ------------------- 9.1.1 Non-employee Directors. Each Non-employee Director ---------------------- shall be granted an Option to purchase 10,000 Shares (an "Initial Grant") on the later of (a) ten (10) business days after the Effective Date of the Plan or (b) the date of the Non-employee Director's appointment or election as a Non- employee Director. Thereafter, for so long as the Non-employee Director serves as such, he or she annually shall be granted an Option for an additional 5,000 Shares (each a "Subsequent Grant"). Each such Subsequent Grant shall be made on the first business day after each Annual Meeting of Stockholders occurring after the date of the Initial Grant or previous Subsequent Grant, but only if the Non- employee Director has continuously served as such through the Grant Date. C-10 9.1.2 Chairman. Each Chairman of the Company who is a Non- -------- employee Director shall be granted an Option to purchase 50,000 Shares (an "Initial Chairman's Grant") on the later of (a) ten (10) business days after the Effective Date of the Plan or (b) the date such individual becomes Chairman. Any Initial Chairman's Grant shall be in lieu of any Initial Grant or Subsequent Grant the Chairman otherwise would be entitled to under Section 9.1.1 while he or she serves as Chairman. If a Chairman ceases to serve as such but remains a Non-employee Director, he or she shall be entitled to Subsequent Grants under Section 9.1.1, provided he or she has continuously served as a Non-employee Director through the applicable Grant Date. 9.2 Terms of Options. ---------------- 9.2.1 Option Agreement. Each Option granted pursuant to this ---------------- Section 9 shall be evidenced by a written stock option agreement which shall be executed by the Non-employee Director and the Company. 9.2.2 Exercise Price. The Exercise Price for the Shares -------------- subject to each Option granted pursuant to this Section 9 shall be one hundred percent (100%) of the Fair Market Value of such Shares on the Grant Date. 9.2.3 Exercisability. Each Option granted pursuant to this -------------- Section 9 shall be fully exercisable on the Grant Date. 9.2.4 Expiration of Options. Each Option shall terminate --------------------- upon the first to occur of the following events: (a) The expiration of ten (10) years from the Grant Date; or (b) The expiration of three (3) months from the date of the Non-employee Director's Termination of Service for a reason other than death, Disability, resignation or Retirement; or (c) The expiration of three (3) years from the date of the Non-employee Director's Termination of Service by reason of completion of the Participant's term as a Director, Disability or Retirement; or (d) The expiration of one (1) month from the date of the Non-employee Director's Termination of Service by reason of resignation. 9.2.5 Death of Director. Notwithstanding Section 9.2.4, if ----------------- a Non-employee Director dies prior to the expiration of his or her options in accordance with Section 9.2.4, his or her options shall terminate three (3) years after the date of his or her death. 9.2.6 Not Incentive Stock Options. Options granted pursuant --------------------------- to this Section 9 shall not be designated as Incentive Stock Options. 9.2.7 Other Terms. All provisions of the Plan not ----------- inconsistent with this Section 9 shall apply to Options granted to Non-employee Directors; provided, however, that Section 5.2 (relating to the Committee's discretion to set the terms and conditions of Options) shall be inapplicable with respect to Non-employee Directors. 9.3 Substitute Options. Notwithstanding the provisions of Section ------------------ 9.2.2, in the event that the Company or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Non-employee Directors on account of such transaction may be granted Options in substitution for options granted by their former employer. If such substitute Options are granted, the Committee, in its sole discretion and consistent with section 424(a) of the Code, shall determine the exercise price of such substitute Options. C-11 9.4 Elections by Non-employee Directors. Pursuant to such ----------------------------------- procedures as the Board (in its discretion) may adopt from time to time, each Non-employee Director may elect to forego receipt of all or a portion of the annual retainer, committee chair fees, meeting attendance fees and other cash compensation otherwise due to the Non-employee Director in exchange for Shares. The number of Shares received by any Non-employee Director shall equal the amount of foregone compensation divided by the Fair Market Value of a Share on the date that the compensation otherwise would have been paid to the Non- employee Director, rounded up to the nearest whole number of Shares. SECTION 10 MISCELLANEOUS 10.1 No Effect on Employment or Service. Nothing in the Plan shall ---------------------------------- interfere with or limit in any way the right of the Company to terminate any Participant's employment or service at any time, with or without cause. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only. 10.2 Participation. No Employee or Consultant shall have the right ------------- to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. 10.3 Indemnification. Each person who is or shall have been a --------------- member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Award Agreement, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. 10.4 Successors. All obligations of the Company under the Plan, ---------- with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business or assets of the Company. 10.5 Beneficiary Designations. If permitted by the Committee, a ------------------------ Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate and, subject to the terms of the Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant's estate. 10.6 Nontransferability of Awards. No Award granted under the Plan ---------------------------- may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 10.5. All rights with respect to an Award granted to a Participant shall be available during his or her lifetime only to the Participant. 10.7 No Rights as Stockholder. Except to the limited extent ------------------------ provided in Sections 7.6 and 7.7, no Participant (nor any beneficiary) shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable pursuant to an Award (or exercise thereof), unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant (or beneficiary). C-12 10.8 Withholding Requirements. Prior to the delivery of any Shares ------------------------ or cash pursuant to an Award (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant's FICA obligation) required to be withheld with respect to such Award (or exercise thereof). Notwithstanding any contrary provision of the Plan, if a Participant fails to remit to the Company such withholding amount within the time period specified by the Committee (in its discretion), the Participant's Award may, in the Committee's discretion, be forfeited and in such case the Participant shall not receive any of the Shares subject to such Award. 10.9 Withholding Arrangements. The Committee, in its sole ------------------------ discretion and pursuant to such procedures as it may specify from time to time, may permit or require a Participant to satisfy all or part of the tax withholding obligations in connection with an Award by (a) having the Company withhold otherwise deliverable Shares, or (b) delivering to the Company already- owned Shares having a Fair Market Value equal to the amount required to be withheld. The amount of the withholding requirement shall be deemed to include any amount which the Committee determines, not to exceed the amount determined by using the maximum federal, state, local and foreign jurisdiction marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the taxes are required to be withheld. 10.10 Deferrals. The Committee, in its sole discretion, may permit a --------- Participant to defer receipt of the payment of cash or the delivery of Shares that would otherwise be delivered to a Participant under the Plan. Any such deferral elections shall be subject to such rules and procedures as shall be determined by the Committee in its sole discretion. SECTION 11 AMENDMENT, TERMINATION AND DURATION 11.1 Amendment, Suspension or Termination. The Board, in its sole ------------------------------------ discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted to such Participant. No Award may be granted during any period of suspension or after termination of the Plan. 11.2 Duration of the Plan. The Plan shall commence on the date -------------------- specified herein, and subject to Section 11.1 (regarding the Board's right to amend or terminate the Plan), shall remain in effect thereafter. However, without further stockholder approval, no Incentive Stock Option may be granted under the Plan after ten (10) years from the Effective Date. SECTION 12 LEGAL CONSTRUCTION 12.1 Gender and Number. Except where otherwise indicated by the ----------------- context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 12.2 Severability. In the event any provision of the Plan shall be ------------ held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 12.3 Requirements of Law. The granting of Awards and the issuance ------------------- of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 12.4 Governing Law. The Plan and all Award Agreements shall be ------------- construed in accordance with and governed by the laws of the State of California, but without regard to its conflict of law provisions. C-13 12.5 Captions. Captions are provided herein for convenience only, -------- and shall not serve as a basis for interpretation or construction of the Plan. EXECUTION IN WITNESS WHEREOF, Varian, Inc., by its duly authorized officer, has executed the Plan on the date indicated below. VARIAN, INC. Dated: _______________, ____ By________________________________ Name: Title: C-14 EX-10.8 10 VARIAN, INC. INCENTIVE PLAN EXHIBIT 10.8 VARIAN, INC. MANAGEMENT INCENTIVE PLAN TABLE OF CONTENTS
Page SECTION 1 BACKGROUND, PURPOSE AND DURATION............................ 1 1.1 Effective Date.................................................. 1 1.2 Purpose of the Plan............................................. 1 SECTION 2 DEFINITIONS................................................. 1 2.1 "Actual Award".................................................. 1 2.2 "Affiliate"..................................................... 1 2.3 "Base Salary"................................................... 1 2.4 "Board"......................................................... 1 2.5 "Code".......................................................... 1 2.6 "Committee"..................................................... 1 2.7 "Company"....................................................... 1 2.8 "Disability".................................................... 1 2.9 "EBIT".......................................................... 1 2.10 "EBITDA"........................................................ 2 2.11 "Earnings Per Share"............................................ 2 2.12 "Employee"...................................................... 2 2.13 "Fiscal Year"................................................... 2 2.14 "Maximum Award"................................................. 2 2.15 "Net Income".................................................... 2 2.16 "Operating Cash Flow"........................................... 2 2.17 "Participant"................................................... 2 2.18 "Payout Formula"................................................ 2 2.19 "Performance Goals"............................................. 2 2.20 "Performance Period"............................................ 2 2.21 "Plan".......................................................... 2 2.22 "Retirement".................................................... 2 2.23 "Return on Assets".............................................. 3 2.24 "Return on Equity".............................................. 3 2.25 "Return on Sales"............................................... 3 2.26 "Revenue"....................................................... 3 2.27 "Shareholder Return"............................................ 3 2.28 "Shares"........................................................ 3 2.29 "Target Award".................................................. 3 2.30 "VAI"........................................................... 3 SECTION 3 SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS....... 3 3.1 Selection of Participants....................................... 3 3.2 Determination of Performance Goals.............................. 3 3.3 Determination of Target Awards.................................. 3 3.4 Determination of Payout Formula or Formulae..................... 3 3.5 Determination of Actual Awards.................................. 3 SECTION 4 PAYMENT OF AWARDS........................................... 4 4.1 Right to Receive Payment........................................ 4 4.2 Timing of Payment............................................... 4 4.3 Form of Payment................................................. 4 4.4 Payment in the Event of Death................................... 4 SECTION 5 ADMINISTRATION.............................................. 4 5.1 Committee is the Administrator.................................. 4 5.2 Committee Authority............................................. 4 5.3 Decisions Binding............................................... 4 5.4 Delegation by the Committee..................................... 5
-i- TABLE OF CONTENTS (continued)
Page SECTION 6 GENERAL PROVISIONS.......................................... 5 6.1 Tax Withholding................................................. 5 6.2 No Effect on Employment or Service.............................. 5 6.3 Participation................................................... 5 6.4 Indemnification................................................. 5 6.5 Successors...................................................... 5 6.6 Beneficiary Designations........................................ 5 6.7 Nontransferability of Awards.................................... 5 6.8 Deferrals....................................................... 6 SECTION 7 AMENDMENT, TERMINATION AND DURATION......................... 6 7.1 Amendment, Suspension or Termination............................ 6 7.2 Duration of the Plan............................................ 6 SECTION 8 LEGAL CONSTRUCTION.......................................... 6 8.1 Gender and Number............................................... 6 8.2 Severability.................................................... 6 8.3 Requirements of Law............................................. 6 8.4 Governing Law................................................... 6 8.5 Captions........................................................ 6
-ii- VARIAN, INC. MANAGEMENT INCENTIVE PLAN SECTION 1 BACKGROUND, PURPOSE AND DURATION 1.1 Effective Date. The Plan is effective as of the date on which VAI -------------- distributes shares of the Company's common stock to the stockholders of VAI, subject to the approval of the Plan by a majority of the shares of the common stock of VAI which are present in person or by proxy and entitled to vote at the 1999 Annual and Special Meeting of Stockholders of VAI. 1.2 Purpose of the Plan. The Plan is intended to increase shareholder ------------------- value and the success of the Company by motivating key executives (1) to perform to the best of their abilities, and (2) to achieve the Company's objectives. The Plan's goals are to be achieved by providing such executives with incentive awards based on the achievement of goals relating to the performance of the Company and its business units. The Plan is intended to permit the grant of awards that qualify as performance-based compensation under section 162(m) of the Code. SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 2.1 "Actual Award" means as to any Performance Period, the actual ------------ award (if any) payable to a Participant for the Performance Period. Each Actual Award is determined by the Payout Formula for the Performance Period, subject to the Committee's authority under Section 3.5 to reduce the award otherwise determined by the Payout Formula. 2.2 "Affiliate" means any corporation or other entity (including, but --------- not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company. 2.3 "Base Salary" means as to any Performance Period, the ----------- Participant's annualized salary rate on the last day of the Performance Period. Such Base Salary shall be before both (a) deductions for taxes or benefits, and (b) deferrals of compensation pursuant to Company-sponsored plans. 2.4 "Board" means the Board of Directors of the Company. ----- 2.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. 2.6 "Committee" means the committee appointed by the Board (pursuant --------- to Section 5.1) to administer the Plan. 2.7 "Company" means Varian, Inc., a Delaware corporation, or any ------- successor thereto. 2.8 "Disability" means a permanent and total disability determined in ---------- accordance with uniform and nondiscriminatory standards adopted by the Committee from time to time. 2.9 "EBIT" means as to any Performance Period, the Company's or a ---- business unit's income before reductions for interest and taxes, determined in accordance with generally accepted accounting principles. D-1 2.10 "EBITDA" means as to any Performance Period, the Company's or a ------ business unit's income before reductions for interest, taxes, depreciation and amortization, determined in accordance with generally accepted accounting principles. 2.11 "Earnings Per Share" means as to any Performance Period, the ------------------ Company's or a business unit's Net Income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding, determined in accordance with generally accepted accounting principles. 2.12 "Employee" means any employee of the Company or of an Affiliate, -------- whether such employee is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan. 2.13 "Fiscal Year" means any fiscal year of the Company. ----------- 2.14 "Maximum Award" means as to any Actual Award to any Participant ------------- for any Performance Period, the lesser of two hundred percent (200%) of Base Salary or $2 million. 2.15 "Net Income" means as to any Performance Period, the Company's ---------- or a business unit's income after taxes, determined in accordance with generally accepted accounting principles. 2.16 "Operating Cash Flow" means as to any Performance Period, the ------------------- Company's or a business unit's sum of Net Income plus depreciation and amortization less capital expenditures plus changes in working capital comprised of accounts receivable, inventories, other current assets, trade accounts payable, accrued expenses, product warranty, advance payments from customers and long-term accrued expenses, determined in accordance with generally acceptable accounting principles. 2.17 "Participant" means as to any Performance Period, an Employee ----------- who has been selected by the Committee for participation in the Plan for that Performance Period. 2.18 "Payout Formula" means as to any Performance Period, the formula -------------- or payout matrix established by the Committee pursuant to Section 3.4 in order to determine the Actual Awards (if any) to be paid to Participants. The formula or matrix may differ from Participant to Participant. 2.19 "Performance Goals" means the goal(s) (or combined goal(s)) ----------------- determined by the Committee (in its discretion) to be applicable to a Participant for a Target Award for a Performance Period. As determined by the Committee, the Performance Goals for any Target Award applicable to a Participant may provide for a targeted level or levels of achievement using one or more of the following measures: (a) EBIT, (b) EBITDA, (c) Earnings Per Share, (d) Net Income, (e) Operating Cash Flow, (f) Return on Assets, (g) Return on Equity, (h) Return on Sales, (i) Revenue, and (j) Shareholder Return. The Performance Goals may differ from Participant to Participant and from award to award. Prior to the Determination Date, the Committee shall determine whether any significant element(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participants. "Determination Date" means the latest possible date that will not jeopardize a Target Award's qualification as performance-based compensation under section 162(m) of the Code. 2.20 "Performance Period" means any fiscal period not to exceed three ------------------ consecutive Fiscal Years, as determined by the Committee in its sole discretion. 2.21 "Plan" means the Varian, Inc. Management Incentive Plan, as set ---- forth in this instrument and as hereafter amended from time to time. 2.22 "Retirement" means, with respect to any Participant, ---------- "Retirement" as defined by the Company's Retirement Policies, as they may be established from time to time. D-2 2.23 "Return on Assets" means as to any Performance Period, the ---------------- percentage equal to the Company's or a business unit's EBIT before incentive compensation, divided by average net Company or business unit, as applicable, assets, determined in accordance with generally accepted accounting principles. 2.24 "Return on Equity" means as to any Performance Period, the ---------------- percentage equal to the Company's Net Income divided by average stockholder's equity, determined in accordance with generally accepted accounting principles. 2.25 "Return on Sales" means as to any Performance Period, the --------------- percentage equal to the Company's or a business unit's EBIT before incentive compensation, divided by the Company's or the business unit's, as applicable, Revenue, determined in accordance with generally accepted accounting principles. 2.26 "Revenue" means as to any Performance Period, the Company's or a ------- business unit's net sales, determined in accordance with generally accepted accounting principles. 2.27 "Shareholder Return" means as to any Performance Period, the ------------------ total return (change in share price plus reinvestment of any dividends) of a Share. 2.28 "Shares" means shares of the Company's common stock, $.01 par ------ value. 2.29 "Target Award" means the target award payable under the Plan to ------------ a Participant for the Performance Period, expressed as a percentage of his or her Base Salary, as determined by the Committee in accordance with Section 3.3. 2.30 "VAI" means Varian Associates, Inc., a Delaware corporation. --- SECTION 3 SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS 3.1 Selection of Participants. The Committee, in its sole ------------------------- discretion, shall select the Employees of the Company who shall be Participants for any Performance Period. Participation in the Plan is in the sole discretion of the Committee, and on a Performance Period by Performance Period basis. Accordingly, an Employee who is a Participant for a given Performance Period in no way is guaranteed or assured of being selected for participation in any subsequent Performance Period or Periods. 3.2 Determination of Performance Goals. The Committee, in its sole ---------------------------------- discretion, shall establish the Performance Goals for each Participant for the Performance Period. Such Performance Goals shall be set forth in writing. 3.3 Determination of Target Awards. The Committee, in its sole ------------------------------ discretion, shall establish a Target Award for each Participant. Each Participant's Target Award shall be determined by the Committee in its sole discretion, and each Target Award shall be set forth in writing. 3.4 Determination of Payout Formula or Formulae. On or prior to the ------------------------------------------- Determination Date, the Committee, in its sole discretion, shall establish a Payout Formula or Formulae for purposes of determining the Actual Award (if any) payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be based on a comparison of actual performance to the Performance Goals, (c) provide for the payment of a Participant's Target Award if the Performance Goals for the Performance Period are achieved, and (d) provide for an Actual Award greater than or less than the Participant's Target Award, depending upon the extent to which actual performance exceeds or falls below the Performance Goals. Notwithstanding the preceding, no Participant's Actual Award under the Plan may exceed his or her Maximum Award. 3.5 Determination of Actual Awards. After the end of each ------------------------------ Performance Period, the Committee shall certify in writing the extent to which the Performance Goals applicable to each Participant for the Performance Period were achieved or exceeded. The Actual Award for each Participant shall be determined by D-3 applying the Payout Formula to the level of actual performance which has been certified by the Committee. Notwithstanding any contrary provision of the Plan, the Committee, in its sole discretion, may (a) eliminate or reduce the Actual Award payable to any Participant below that which otherwise would be payable under the Payout Formula, and (b) determine what Actual Award, if any, will be paid in the event of a termination of employment prior to the end of the Performance Period. The total aggregate Actual Awards under the Plan with respect to any Performance Period shall not exceed eight percent (8%) of the Company's EBIT (but before incentive compensation) for the most recent completed Fiscal Year. If the total aggregate Actual Awards with respect to a Performance Period would exceed this aggregate limit, all such Actual Awards shall be pro- rated on an equal basis among all Participants according to a formula established by the Committee. SECTION 4 PAYMENT OF AWARDS 4.1 Right to Receive Payment. Each Actual Award that may become ------------------------ payable under the Plan shall be paid solely from the general assets of the Company. Nothing in this Plan shall be construed to create a trust or to establish or evidence any Participant's claim of any right other than as an unsecured general creditor with respect to any payment to which he or she may be entitled. 4.2 Timing of Payment. Payment of each Actual Award shall be made ----------------- within 120 days after the end of the Performance Period during which the Award was earned. 4.3 Form of Payment. Each Actual Award normally shall be paid in cash --------------- (or its equivalent) in a single lump sum. However, the Committee, in its sole discretion, may declare any Actual Award, in whole or in part, payable in stock granted under the Company's Omnibus Stock Plan. The number of Shares granted shall be determined by dividing the cash amount foregone by the fair market value of a Share on the date that the cash payment otherwise would have been made. For this purpose, "fair market value" shall mean the closing price on the Nasdaq National Market for the day in question. 4.4 Payment in the Event of Death. If a Participant dies prior to the ----------------------------- payment of an Actual Award earned by him or her prior to death for a prior Performance Period, the Award shall be paid to his or her estate. SECTION 5 ADMINISTRATION 5.1 Committee is the Administrator. The Plan shall be administered by ------------------------------ the Committee. The Committee shall consist of not less than two (2) members of the Board. The members of the Committee shall be appointed from time to time by, and serve at the pleasure of, the Board. Each member of the Committee shall qualify as an "outside director" under section 162(m) of the Code. If it is later determined that one or more members of the Committee do not so qualify, actions taken by the Committee prior to such determination shall be valid despite such failure to qualify. 5.2 Committee Authority. It shall be the duty of the Committee to ------------------- administer the Plan in accordance with the Plan's provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees shall be granted awards, (b) prescribe the terms and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside of the United States, (e) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (f) interpret, amend or revoke any such rules. 5.3 Decisions Binding. All determinations and decisions made by the ----------------- Committee, the Board, and any delegate of the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law. D-4 5.4 Delegation by the Committee. The Committee, in its sole --------------------------- discretion and on such terms and conditions as it may provide, may delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee may delegate its authority and powers only with respect to awards that are not intended to qualify as performance-based compensation under section 162(m) of the Code. SECTION 6 GENERAL PROVISIONS 6.1 Tax Withholding. The Company shall withhold all applicable taxes --------------- from any Actual Award, including any federal, state and local taxes (including the Participant's FICA obligation). 6.2 No Effect on Employment or Service. Nothing in the Plan shall ---------------------------------- interfere with or limit in any way the right of the Company to terminate any Participant's employment or service at any time, with or without cause. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only. The Company expressly reserves the right, which may be exercised at any time and without regard to when during a Performance Period such exercise occurs, to terminate any individual's employment with or without cause, and to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant. 6.3 Participation. No Employee shall have the right to be selected to ------------- receive an award under this Plan, or, having been so selected, to be selected to receive a future award. 6.4 Indemnification. Each person who is or shall have been a member --------------- of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any award, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. 6.5 Successors. All obligations of the Company under the Plan, with ---------- respect to awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company. 6.6 Beneficiary Designations. If permitted by the Committee, a ------------------------ Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 6.7 Nontransferability of Awards. No award granted under the Plan may ---------------------------- be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 6.6. All rights with respect to an award granted to a Participant shall be available during his or her lifetime only to the Participant. D-5 6.8 Deferrals. The Committee, in its sole discretion, may permit a --------- Participant to defer receipt of the payment of cash that would otherwise be delivered to a Participant under the Plan. Any such deferral elections shall be subject to such rules and procedures as shall be determined by the Committee in its sole discretion. SECTION 7 AMENDMENT, TERMINATION AND DURATION 7.1 Amendment, Suspension or Termination. The Board, in its sole ------------------------------------ discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Target Award theretofore granted to such Participant. No award may be granted during any period of suspension or after termination of the Plan. 7.2 Duration of the Plan. The Plan shall commence on the date -------------------- specified herein, and subject to Section 7.1 (regarding the Board's right to amend or terminate the Plan), shall remain in effect thereafter. SECTION 8 LEGAL CONSTRUCTION 8.1 Gender and Number. Except where otherwise indicated by the ----------------- context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 8.2 Severability. In the event any provision of the Plan shall be ------------ held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 8.3 Requirements of Law. The granting of awards under the Plan shall ------------------- be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 8.4 Governing Law. The Plan and all awards shall be construed in ------------- accordance with and governed by the laws of the State of California, but without regard to its conflict of law provisions. 8.5 Captions. Captions are provided herein for convenience only, and -------- shall not serve as a basis for interpretation or construction of the Plan. EXECUTION IN WITNESS WHEREOF, Varian, Inc., by its duly authorized officer, has executed the Plan on the date indicated below. VARIAN, INC. Dated: ____________________________ By:__________________________________ Name: Title: D-6 EX-21 11 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of Varian, Inc. The Registrant currently has no subsidiaries; on or prior to the Distribution, the Registrant will have the following subsidiaries: Country of Subsidiaries Incorporation - ------------ ------------- Varian Australia L.L.C. USA, DE Varian Argentina, Ltd. USA, DE Varian China, Ltd. USA, DE Varian India Pvt. Ltd. USA, DE Varian Technologies Japan, Ltd. USA, DE Varian Instruments of Puerto Rico, Inc. USA, DE Varian Technologies Asia, Ltd. USA, DE Varian Inter-American Corp.* USA, CA Chrompack, Inc.* USA, New Jersey Varian Australia Pty. Limited Australia Varian Holdings (Australia) Pty. Limited Australia Varian Gesellschaft m.b.H. Austria Varian Chrompack Belgium B.V.* Belgium Varian Belgium N.V. Belgium Intralab Instrumentacao Analytica Ltda Brazil Varian Industria e Comercio Limitada Brazil Varian Canada Inc. Canada Varian Chrompack France S.a.r.l.* France Varian S.A. France Varian Chrompack Germany GmbH Germany Varian Germany G.m.b.H. Germany Varian Chrompack Italia s.r.l.* Italy Varian S.p.A. Italy Varian Technologies Korea, Ltd. Korea Varian S.A. Mexico Caribbean Charter Company* Netherlands Chrompack B.V.* Netherlands Chrompack Holding B.V.* Netherlands Varian Chrompack International B.V. Netherlands Chrompack Lease B.V.* Netherlands Varian Chrompack Nederland B.V.* Netherlands Europe Chemical Services Beheer B.V.* Netherlands Chrompack Onroerend Goed B.V. Netherlands Varian B.V. Netherlands Chrompack Norge AS* Norway Varian Iberica S.L. Spain Chrompack Sverige AB* Sweden Varian AB Sweden Varian A.G. Switzerland Varian Chrompack UK Ltd. United Kingdom Varian Technologies, C.A. Venezuela _______________ * To be merged or dissolved EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMBINED STATEMENT OF EARNINGS AND COMBINED BALANCE SHEETS FOR THE INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR YEAR OCT-02-1998 SEP-26-1997 SEP-27-1996 SEP-27-1997 SEP-28-1996 SEP-30-1995 OCT-02-1998 SEP-26-1997 SEP-27-1996 0 0 0 0 0 0 143,836 131,641 0 0 0 0 71,575 64,797 0 241,671 221,161 0 219,385 201,373 0 124,666 114,448 0 404,099 357,906 0 149,578 144,059 0 0 0 0 0 0 0 0 0 0 0 0 0 243,467 203,296 0 404,099 357,906 0 557,770 541,946 504,394 557,770 541,946 504,394 336,387 330,845 310,753 518,606 515,144 492,947 0 0 0 0 0 0 0 0 0 39,164 26,802 11,447 15,736 12,597 5,277 23,428 14,205 6,170 0 0 0 0 0 0 0 0 0 23,428 14,205 6,170 0.78 0.47 0.20 0.78 0.47 0.20
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