-----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, G9CkO5o62u9cw9MV9QxbS1e3YeKQ52j4V8vOclX6VDZPQ2bvfRsJfZLGzU/VUQiD AvUxZ2i3/foy7a8WG7ZY2w== 0001012870-99-002804.txt : 19990816 0001012870-99-002804.hdr.sgml : 19990816 ACCESSION NUMBER: 0001012870-99-002804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990702 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN INC CENTRAL INDEX KEY: 0001079028 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 770501995 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25393 FILM NUMBER: 99688796 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ______________ Commission File Number 000-25393 ----------------------------- VARIAN, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 77-0501995 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification Number) 3120 Hansen Way, Palo Alto, California 94304-1030 (Address of Principal Executive Offices) (Zip Code) (650) 213-8000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the Registrant's common stock outstanding as of July 30, 1999 was 30,452,768 shares of $0.01 par value common stock. TABLE OF CONTENTS Part I. Financial Information.................................................................. 3 Item 1. Financial Statements................................................................... 3 Consolidated Statements of Operations.................................................. 3 Consolidated Balance Sheets............................................................ 4 Consolidated Condensed Statements of Cash Flows........................................ 5 Notes to the Consolidated Financial Statements......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 12 Item 3. Quantitative and Qualitative Disclosure about Market Risk.............................. 20 Part II. Other Information...................................................................... 22 Item 6. Exhibits and Reports on Form 8-K....................................................... 22
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for these types of statements. These forward- looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the "Company") to differ materially from management's current expectations. Those risks and uncertainties include, without limitation: new product development and commercialization; demand for and acceptance of the Company's products; competitive products and pricing; economic conditions in the Company's product and geographic markets, including Asian markets; foreign currency fluctuations; market investment in capital equipment, including semiconductor manufacturing equipment; the ability to realize anticipated cost-savings from the recently-initiated reorganization and restructuring; the ability to increase operating margins on higher sales; costs of investigating and remediating environmentally-contaminated sites; successful implementation by the Company and certain third parties of corrective action to address the impact of the Year 2000; the lack of recent operating history for the Company as a separate entity; the risks detailed in the Company's registration statement on Form 10/A filed with the Securities and Exchange Commission; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company assumes and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Varian, Inc. and Subsidiary Companies Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited)
Quarter Ended Nine Months Ended -------------------------------- ---------------------------------- July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998 --------------- --------------- ---------------- ---------------- Sales $149,562 $129,931 $431,794 $411,844 Cost of sales 91,211 76,022 273,589 247,683 -------- -------- -------- -------- Gross profit 58,351 53,909 158,205 164,161 -------- -------- -------- -------- Operating expenses Sales and marketing 28,950 24,984 93,226 80,324 Research and development 7,667 6,422 24,107 21,427 General and administrative 10,503 13,826 28,965 33,456 Restructuring charges -- -- 10,974 -- -------- -------- -------- -------- Total operating expenses 47,120 45,232 157,272 135,207 -------- -------- -------- -------- Operating earnings 11,231 8,677 933 28,954 Interest expense, net 1,257 -- 1,257 -- -------- -------- -------- -------- Earnings (loss) before income taxes 9,974 8,677 (324) 28,954 Income tax expense (benefit) 4,438 3,463 (144) 11,579 -------- -------- -------- -------- Net earnings (loss) $ 5,536 $ 5,214 $ (180) $ 17,375 ======== ======== ======== ======== Net earnings (loss) per share: Basic $0.18 $0.17 $(0.01) $0.58 Diluted $0.18 $0.17 $(0.01) $0.57 Weighted-average common shares: Basic 30,426 30,423 30,424 30,212 Diluted 30,704 30,587 30,424 30,587
See accompanying Notes to the Consolidated Financial Statements. 3 Varian, Inc. and Subsidiary Companies Consolidated Balance Sheets (In thousands, except share and par value amounts)
July 2, October 2, 1999 1998 --------------- -------------- (Unaudited) ASSETS Current assets Cash and cash equivalents $ 23,359 $ -- Accounts receivable 143,137 143,836 Inventories 64,883 71,575 Other current assets 40,381 26,260 --------- --------- Total current assets 271,760 241,671 Property, plant and equipment 193,446 219,385 Accumulated depreciation (109,112) (124,666) --------- --------- Net property, plant and equipment 84,334 94,719 Other assets 68,851 67,709 --------- --------- Total assets $ 424,945 $ 404,099 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable $ 24,050 $ -- Accounts payable--trade 33,253 34,320 Accrued expenses 100,738 102,470 Product warranty 7,914 7,608 Advance payments from customers 9,242 5,180 --------- --------- Total current liabilities 175,197 149,578 Long-term accrued expenses 7,922 6,862 Deferred taxes 4,443 4,192 Notes payable 49,517 -- --------- --------- Total liabilities 237,079 160,632 --------- --------- Contingencies (Note 7) Stockholders' equity Preferred stock--par value $.01, authorized -- 1,000,000 shares; issued--none -- -- Common stock -- par value $.01, authorized -- 99,000,000 shares; issued and Outstanding--30,435,793 shares at July 2, 1999 and none historical 304 -- Capital in excess of par value 182,026 -- Retained earnings 5,536 -- Divisional equity -- 243,467 --------- --------- Total stockholders' equity 187,866 243,467 --------- --------- Total liabilities and stockholders' equity $ 424,945 $ 404,099 ========= =========
See accompanying Notes to the Consolidated Financial Statements. 4 Varian, Inc. and Subsidiary Companies Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended ----------------------------------- July 2, 1999 July 3, 1998 ---------------- ----------------- Net cash provided by operating activities $ 23,011 $ 24,876 -------- -------- Investing activities Purchase of property, plant and equipment (13,210) (14,392) -------- -------- Net cash used in investing activities (13,210) (14,392) -------- -------- Financing activities Net issuance/payment of debt 9,622 -- Net transfers from (to) Varian Associates, Inc./Varian Medical Systems, Inc. 4,359 (10,139) -------- -------- Net cash provided by (used in) financing activities 13,981 (10,139) -------- -------- Effects of exchange rate changes on cash (423) (345) -------- -------- Net increase in cash and cash equivalents 23,359 -- Cash and cash equivalents at beginning of period -- -- -------- -------- Cash and cash equivalents at end of period $ 23,359 $ -- ======== ======== Non-cash investing and financing activities: Debt assumed/transferred from Varian Associates, Inc. $ 77,100 ======== Transfer of property, plant and equipment $ 9,900 ======== Interest paid $ 814 ========
See accompanying Notes to the Consolidated Financial Statements. 5 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Interim Consolidated Financial Statements These interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year ended October 2, 1998 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the registration statement on the Company's Form 10/A and the Company's Form 10-Q for the period ended April 2, 1999, each filed with the Securities and Exchange Commission. In the opinion of the Company's management, the interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the third quarter and nine months ended July 2, 1999 are not necessarily indicative of the results to be expected for a full year or for any other periods. Note 2. Basis of Presentation Until April 2, 1999, the Company's business was operated as part of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business ("IB") to the Company, then on April 2, 1999 distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI and VSEA (the "Distribution Agreement"). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS and VSEA after the Distribution, the Company, VMS and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement and a Transition Services Agreement (collectively, the "Distribution Related Agreements"). The interim consolidated financial statements generally reflect IB's results of operations, financial position and cash flows through April 2, 1999, the date of the Distribution, and the Company's results of operations, financial position and cash flows from April 3, 1999 to July 2, 1999. Accordingly, the interim financial results for periods prior to April 3, 1999 included in these consolidated financial statements have been carved out from the interim financial statements of VAI using the historical results of operations and historical bases of the assets and liabilities of IB. The statements include the accounts of IB after elimination of inter-business balances and transactions. The interim consolidated financial statements include, among other things, allocations of certain VAI corporate assets (including pension assets), liabilities (including profit sharing and pension benefits), and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury and other corporate overhead) to IB. These amounts have been allocated to IB on the basis that is considered by management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by IB. Typical measures and activity indicators used for allocation purposes include headcount, sales revenue and payroll expense. The Company's management believes that the methods used to allocate these amounts are reasonable. However, these allocations are not necessarily indicative of the amounts that would have been or that will be recorded by the Company on a stand- alone basis. 6 The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 1999 will comprise the 52-week period ending October 1, 1999, and fiscal year 1998 comprises the 53-week period ended October 2, 1998. The fiscal quarters ended July 2, 1999, and July 3, 1998 each comprise 13 weeks. For purposes of interim reporting, the nine-month period ended July 2, 1999 comprises 39 weeks, and the nine-month period ended July 3, 1998 comprises 40 weeks. Note 3. Balance Sheet Detail Inventories
July 2, October 2, 1999 1998 ----------- ----------- (Dollars in millions) Raw materials and parts....................................................... $35.2 $32.1 Work in process............................................................... 5.6 6.7 Finished goods................................................................ 24.1 32.8 ----- ----- Total inventories.......................................................... $64.9 $71.6 ===== =====
Inventories are valued at the lower of cost or market (net realizable value) using the last-in, first-out (LIFO) cost for the U.S. inventories. All other inventories are valued principally at average cost. If the first-in, first-out (FIFO) method had been used for those operations valuing inventories on a LIFO basis, inventories would have been higher than reported by $14.8 million at July 2, 1999 and $13.7 million at October 2, 1998. Other Assets
July 2, October 2, 1999 1998 ----------- ----------- (Dollars in millions) Net goodwill.................................................................. $60.0 $59.6 Other......................................................................... 8.9 8.1 ----- ----- Total other assets......................................................... $68.9 $67.7 ===== =====
Accrued Expenses
July 2, October 2, 1999 1998 ----------- ----------- (Dollars in millions) Payroll and employee benefits................................................. $ 36.9 $ 33.1 Foreign income taxes payable.................................................. 2.1 19.2 Deferred income............................................................... 15.9 14.7 Group and risk insurance...................................................... 7.2 7.7 Restructuring................................................................. 5.1 -- Other......................................................................... 33.5 27.8 ------ ------ $100.7 $102.5 ====== ======
7 Note 4. Forward Exchange Contracts The Company enters into forward exchange contracts to mitigate balance sheet exposures to fluctuations in foreign currency exchange rates. When these foreign exchange contracts hedge operational exposure, the effects of movements in currency exchange rates on these instruments are recognized in income when the related revenue and expenses are recognized. When foreign exchange contracts hedge balance sheet exposure, such effects are recognized in income when the exchange rate changes. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the underlying items being hedged, these instruments do not subject the Company to risk that would otherwise result from changes in currency exchange rates. Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income upon disposition of the underlying assets or liabilities. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income upon disposition of the underlying assets or liabilities. 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. Forward exchange contracts outstanding as of July 2, 1999 were opened on July 2, 1999, and accordingly there were no unrealized gains or losses associated with such contracts. Forward exchange contracts that were outstanding as of July 2, 1999 are summarized as follows:
Notional Notional Value Value Sold Purchased ----------- ----------- (Dollars in millions) Japanese Yen $10.3 $ -- British Pound 6.5 -- Canadian Dollar 3.7 -- Euro -- 6.9 Australian Dollar -- 3.7 Swedish Krona -- 2.9 ----- ----- $20.5 $13.5 ===== =====
Note 5. Net Earnings (Loss) Per Share Basic earnings (loss) per share are calculated based on net earnings (loss) and the weighted-average number of shares outstanding during the reported period. Diluted earnings (loss) per share include dilution from potential common stock shares issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method. For periods prior to April 3, 1999, pro forma earnings (loss) per share were calculated assuming the weighted-average number of shares outstanding during the period equaled the number of shares of common stock outstanding as of the Distribution on April 2, 1999. Also, for computing pro forma diluted earnings (loss) per share, the additional shares issuable upon exercise of stock options were determined using the treasury stock method based on the number of replacement stock options issued as of the Distribution on April 2, 1999. For the quarter ended July 2, 1999, options to purchase 3,055,748 potential common stock shares with exercise prices greater than the weighted-average market value of such common stock for the period were excluded from the calculation of diluted earnings per share for the quarter. For the nine-month period ended July 2, 1999, all options to purchase common stock were excluded from the computation of diluted loss per share because their effect was anti- dilutive. For the quarter and nine-month periods ended July 3, 1998, options to purchase 3,030,355 potential common stock shares with exercise prices greater than the market value on April 2, 1999 of such common stock were excluded from the calculation of diluted earnings per share. 8 Note 6. Debt and Credit Facilities The Distribution Agreement provided for the division among the Company, VSEA and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the Company was to assume 50% of VAI's term loans and receive an amount of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets, and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, these and other adjustments may be required within 180 days following the Distribution. As a result of these adjustments the Company may be required to make cash payments to VMS and/or may be entitled to receive cash payments from VMS. While the final amounts of any such adjustments have not been determined, an estimated adjustment of $7.5 million has been included in the financial statements at July 2, 1999 as a receivable from VMS and an increase to equity. The amount of any other required adjustment cannot be estimated. As of July 2, 1999, the Company had $60.7 million in uncommitted credit facilities for working capital purposes, of which $15.9 million was outstanding. As of July 2, 1999, interest rates on these borrowings ranged from 3.6% to 5.6%, and the weighted average interest rate was 5.1%. All of these credit facilities contain certain conditions and events of default customary for such facilities. As of July 2, 1999, the Company had $55.5 million in term loans. As of July 2, 1999, interest rates on these term loans ranged from 6.7% to 7.5%, and the weighted average interest rate on the term loans was 7.0%. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. As of July 2, 1999, the Company also had other long-term notes payable of $2.2 million with an interest rate of 1.5%. Future principal payments on debt outstanding on July 2, 1999 will be $16.0 million for the fiscal quarter ending October 1, 1999, and $6.4 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004 and thereafter, respectively. Note 7. Contingencies Environmental Matters In the Distribution Agreement, the Company agreed to indemnify VMS and VSEA for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VMS 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 VMS or former VAI facilities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of July 2, 1999, it was nonetheless estimated that the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $20.6 million to $48.0 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of July 2, 1999. No amount in the foregoing range of estimated future costs is believed to 9 be more probable of being incurred than any other amount in such range and the Company has been advised that VMS accordingly accrued $20.6 million in estimated environmental costs as of July 2, 1999. The amount accrued was not discounted to present value. As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of July 2, 1999, it was estimated that the future exposure for environmental related investigation and remediation costs for these sites and facilities ranged in the aggregate from $39.1 million to $72.9 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 July 2, 1999. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these futures costs were reliably determinable. Together, these amounts totaled $50.4 million at July 2, 1999. The Company has been advised that VMS accordingly accrued $21.6 million as of July 2, 1999, which represents the best estimate of the future costs discounted at 4%, net of inflation. This accrual is in addition to the $20.6 million described in the preceding paragraph. Since the Company is obligated to reimburse VMS for one-third of the foregoing environmental-related costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs or expenses) that are paid after April 2, 1999, the Company recorded $7.7 million as its portion of these estimated future costs and expenses as of July 2, 1999. The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. The Company believes that most of these cost ranges will narrow as investigation and remediation activities progress. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial statements. Legal Proceedings In the Distribution Agreement, the Company agreed to reimburse VMS for one- third of certain costs and expenses (adjusted for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former or corporate operations of VAI. These shared liabilities will generally be managed by VMS, and expenses and losses (adjusted for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) will generally be borne one-third each by the Company, VMS and VSEA. Also, from time to time, the Company is involved in a number of legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the above legal matters is not determinable, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. Note 8. Stockholders' Equity On April 2, 1999, stockholders of record of VAI on March 24, 1999 received in the Distribution one share of the Company's common stock for each share of VAI common stock held on April 2, 1999. Immediately following the Distribution, the Company had 30,422,792 shares of common stock outstanding. 10 Each stockholder also received one Right for each share of common stock distributed, entitling the stockholder to purchase one one-thousandth of a share of Participating Preferred Stock, par value $0.01 per share, for $75.00, subject to adjustment. The Participating Preferred Stock is designed so that each one one-thousandth of a share has economic and voting terms similar to those of one share of common stock. In connection with the Distribution, certain holders of options to purchase shares of VAI common stock received replacement options from the Company to purchase shares of the Company's common stock. The Company granted such replacement options to purchase 4,299,639 shares of the Company's common stock with an average exercise price of $11.16 per share. Such stock options vest over the same vesting periods as the original VAI stock options, typically three years. On April 16, 1999 the Company issued additional non-qualified stock options to purchase 1,483,850 shares of the Company's common stock at an exercise price of $9.50 per share. At July 2, 1999, options to purchase 3,560,833 shares with an average exercise price of $10.74 were immediately exercisable. The Company began accumulating retained earnings on April 3, 1999, the date immediately after the Distribution. Note 9. Restructuring Charges During the second quarter of fiscal year 1999, IB's management approved a program to consolidate field sales and service organizations in Europe, Australia and the United States so as to fall within the direct responsibility of management at IB's principal factories in those countries, in order to reduce costs, simplify management structure and benefit from the infrastructure existing in those factories. This restructuring entailed consolidating certain sales, service and support operations. The consolidation resulted in exiting of a product line, closing or downsizing of sales offices and termination of approximately 100 personnel. The following table sets forth certain details associated with this restructuring:
Accrual at Cash Accrual at April 2, Payments/Other July 2, 1999 Reductions 1999 ----------------- --------------- ----------- (Dollars in thousands) Lease payments and other facility expenses..... $1,965 $ 168 $1,797 Severance and other related employee benefits.. 5,183 1,928 3,255 ------ ------ ------ Total........................................ $7,148 $2,096 $5,052 ====== ====== ======
Note 10. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement changes standards for the way that public business enterprises identify and report operating segments in annual and interim financial statements. This statement requires selected information about an enterprise's operating segments and related disclosure about products and services, geographic areas and major customers. The Company expects to report multiple segments when it adopts SFAS No. 131 at fiscal year-end 1999. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in the first quarter of fiscal year 2001 and is in the process of determining the impact that adoption will have on its consolidated financial statements. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Until April 2, 1999, the Company's business was operated as part of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business ("IB") to the Company, then on April 2, 1999 distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999. IB includes VAI's business units that designed, manufactured, sold and serviced analytical and research instrumentation and vacuum technologies, and a business unit that provided contract electronics manufacturing. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI and VSEA (the "Distribution Agreement"). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS and VSEA after the Distribution, the Company, VMS and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement and a Transition Services Agreement (collectively, the "Distribution Related Agreements"). The interim consolidated financial statements generally reflect IB's results of operations, financial position and cash flows through April 2, 1999, the date of the Distribution, and the Company's results of operations, financial position and cash flows from April 3, 1999 to July 2, 1999. Accordingly, the interim financial results for periods prior to April 3, 1999 included in these consolidated financial statements have been carved out from the interim financial statements of VAI using the historical results of operations and historical bases of the assets and liabilities of IB. The statements include the accounts of IB after elimination of inter-business balances and transactions. The interim consolidated financial statements include, among other things, allocations of certain VAI corporate assets (including pension assets), liabilities (including profit-sharing and pension benefits) and expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury and other corporate overhead) to IB using the allocation methodology described in Note 2 of the Notes to the Consolidated Financial Statements. The Company's management believes that the methods used to allocate these amounts are reasonable. However, these allocations are not necessarily indicative of the amounts that would have been or will be recorded by the Company on a stand-alone basis. This discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the interim consolidated financial statements of the Company and the notes thereto, as well as the Instruments Business of Varian Associates, Inc. Combined Financial Statements and the Notes thereto, and the information contained under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's registration statement on Form 10/A filed with the Securities and Exchange Commission. The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 1999 comprises the 52-week period ending October 1, 1999, and fiscal year 1998 comprises the 53-week period ended October 2, 1998. The fiscal quarters ended July 2, 1999 and July 3, 1998 each comprise 13 weeks. For purposes of interim reporting, the nine-month period ended April 2, 1999 comprises 39 weeks, and the nine-month period ended July 3, 1998 comprises 40 weeks. Results of Operations Third Quarter of Fiscal Year 1999 Compared to Third Quarter of Fiscal Year 1998 Sales. Sales were $149.6 million in the third quarter of fiscal year 1999, compared to $129.9 million in the third quarter of fiscal year 1998, a 15.1% increase. Analytical Instruments' sales increased 19.7% to $69 million. The acquisition of Chrompack International B.V. ("Chrompack") in the fourth quarter of fiscal year 1998 12 had a significant impact on this increase in Analytical Instruments' sales, but demand was also strong for its other consumable products and new analytical systems. NMR Systems' sales at $28.4 million were up 12.2% compared to the third quarter of fiscal year 1998. Vacuum Technologies' sales at $28.6 million rose 9.4% compared to the third quarter of fiscal year 1998. Electronics Manufacturing's sales of $23.6 million increased 15.4% compared to the third quarter of fiscal year 1998. Geographically, sales in North America of $89.0 million and in Europe of $41.8 million in the third quarter of fiscal year 1999 represented increases of 19.5% and 16.6%, respectively, from the third quarter of fiscal year 1998, while sales in Asia of $15.1 million in the third quarter of fiscal year 1999 represented a decrease of 2.5% from the third quarter of fiscal year 1998. Each business contributed to the increase in North America. The increase in Europe was due largely to the acquisition of Chrompack in the fourth quarter of fiscal year 1998, and the decrease in Asia resulted largely from weak economic conditions in that region. Orders during the third quarter of fiscal year 1999 were $164.2 million, compared to $133.9 million in the third quarter of fiscal year 1998. All businesses contributed to the increase, led by Electronics Manufacturing. Gross Profit. Gross profit was $58.4 million (representing 39.0% of sales) in the third quarter of fiscal year 1999, compared to $53.9 million (representing 41.5% of sales) in the third quarter of fiscal year 1998. All businesses contributed to the increase in gross profit. The higher gross margin percentage in the fiscal year 1998 period was primarily due to how VAI's financial results for that period were allocated to the Company. Sales and Marketing. Sales and marketing expenses were $29.0 million (representing 19.4% of sales) in the third quarter of fiscal year 1999, compared to $25.0 million (representing 19.2% of sales) in the third quarter of fiscal year 1998. The increase was largely due to marketing expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998. Research and Development. Research and development expenses were $7.7 million (representing 5.1% of sales) in the third quarter of fiscal year 1999, compared to research and development expenses of $6.4 million (representing 4.9% of sales) in the third quarter of fiscal year 1998. This increase was primarily due to the research and development expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and to increased spending by NMR Systems. General and Administrative. General and administrative expenses were $10.5 million (representing 7.0% of sales) in the third quarter of fiscal 1999, compared to $13.8 million (representing 10.6% of sales) in the third quarter of fiscal 1998. The third quarter of fiscal year 1999 expenses include the additional costs of Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and on-going transition costs related to the spin-off from VAI. These expenses were more than off-set by lower corporate expenses relative to the third quarter of fiscal year 1998, which included significant allocations of VAI corporate expenses. Net Interest Expense. Net interest expense was $1.3 million (representing 0.8% of sales) for the third quarter of fiscal year 1999. Prior to the Distribution on April 2, 1999, the Company had no debt. See "Liquidity and Capital Resources" below. Taxes on Earnings. The effective income tax rate was 44.5% in the third quarter of fiscal year 1999, compared to 40.0% in the third quarter of fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate because the Company expects to realize a larger proportion of high-tax foreign country income during fiscal year 1999 than it did during fiscal year 1998, due primarily to restructuring and related charges incurred in lower tax rate countries. Net Earnings. Net earnings were $5.5 million ($0.18 diluted net earnings per share) in the third quarter of fiscal year 1999, compared to net earnings of $5.2 million ($0.17 pro forma diluted net earnings per share) in the third quarter of fiscal year 1998. The results for the third quarter of fiscal year 1998 do not include any interest expense for the long-term debt assumed by the Company as part of the Distribution. 13 First Nine Months of Fiscal 1999 Compared to First Nine Months of Fiscal 1998 Sales. Sales were $431.8 million in the first nine months of fiscal year 1999, compared to $411.8 million in the first nine months of fiscal year 1998. Sales by the Analytical Instruments and Electronics Manufacturing businesses were higher during the nine-month period relative to the year-ago period. The increase in Analytical Instruments' sales was due in part to Chrompack, which was acquired in the fourth quarter of fiscal year 1998. NMR Systems experienced slightly lower sales in the first nine months of fiscal year 1999 relative to the year-ago period, due to the timing of shipments of NMR Systems products. Sales were lower in the Vacuum Technologies business in the first nine months of fiscal year 1999 relative to the year ago period, due largely to the slow-down in capital spending, particularly in Asian markets, and weakness in semiconductor equipment demand in the first six months of fiscal year 1999. Geographically, sales in North America of $238.8 million and in Europe of $133.3 million in the first nine months of fiscal year 1999 represented increases of 3.6% and 16.6%, respectively, as compared to the first nine months of fiscal year 1998, while sales in Asia of $47.4 million in the first nine months of fiscal year 1999 declined by 8.7% from the first nine months of fiscal year 1998, reflecting the general slow-down in Asian markets. Orders in the first nine months of fiscal year 1999 were $456.9 million, compared to $404.2 million in the first nine months of fiscal year 1998. All businesses except the Vacuum Technologies business contributed to the orders growth. Gross Profit. Gross profit was $158.2 million (representing 36.6% of sales) in the first nine months of fiscal year 1999, compared to $164.2 million (representing 39.9% of sales) in the first nine months of fiscal year 1998. The decline in gross profit resulted primarily from actions taken as part of an overall reorganization that included actions to prepare IB to separate from VAI and become a stand-alone company, other organizational changes and a comprehensive product review, which resulted in a decision to accelerate transition from certain older to newer products necessitating the writedown of certain excess and obsolete inventories and the lowering of prices to accelerate the liquidation of older products. The impact on gross profit of these actions was in addition to the restructuring charges discussed below. The decline in gross profit was also the result of lower sales of Vacuum Technologies products in the first six months of fiscal year 1999. Sales and Marketing. Sales and marketing expenses were $93.2 million (representing 21.6% of sales) in the first nine months of fiscal year 1999, compared to $80.3 million (representing 19.5% of sales) in the first nine months of fiscal year 1998. Some of the increase was due to marketing expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998. Additionally, the increase in marketing expenses resulted from actions taken as part of the above-described reorganization, including costs to move people and equipment to new consolidated locations, writedown of field demonstration equipment following the accelerated transition to newer products, and other higher than normal costs related to the reorganization. These charges were in addition to the restructuring charges discussed below. Research and Development. Research and development expenses were $24.1 million (representing 5.6% of sales) in the first nine months of fiscal year 1999, compared to research and development expenses of $21.4 million (representing 5.2% of sales) in the first nine months of fiscal year 1998. The increase was primarily due to the additional research and development expenses of Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and to increased spending by NMR Systems. General and Administrative. General and administrative expenses were $29.0 million (representing 6.7% of sales) in the first nine months of fiscal year 1999, compared to $33.5 million (representing 8.1% of sales) in the first nine months of 1998. The primary reason for this decrease was lower profit-sharing and management incentive compensation costs in the first nine months of fiscal year 1999, which was partially offset by the additional general and administrative costs of Chrompack, acquired in the fourth quarter of fiscal year 1998, and on-going transition costs related to the spin-off from VAI. 14 Restructuring Charges. During the second quarter of fiscal year 1999, IB's management approved a program to consolidate field sales and service organizations in Europe, Australia and the United States so as to fall within the direct responsibility of management at principal factories in those countries, in order to reduce costs, simplify management structure and benefit from the infrastructure existing in those factories. This restructuring entailed consolidating certain sales, service and support operations. The consolidation resulted in exiting of a product line, closing or downsizing of sales offices and termination of approximately 100 personnel. The following table sets forth certain details associated with this restructuring:
Accrual at Cash Accrual at April 2, Payments/Other July 2, 1999 Reductions 1999 ---------- ------------------ ------------ (Dollars in thousands) Lease payments and other facility expenses...... $1,965 $ 168 $1,797 Severance and other related employee benefits... 5,183 1,928 3,255 ------ ------ ------ Total........................................ $7,148 $2,096 $5,052 ====== ====== ======
Net Interest Expense. Net interest expense was $1.3 million (representing 0.3% of sales) for the first nine months of fiscal year 1999. Prior to the Distribution on April 2, 1999, the Company had no debt. See "Liquidity and Capital Resources. Taxes on Earnings. The effective income tax rate was 44.5% in the first nine months of fiscal year 1999, compared to 40.0% in the first nine months of fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate because the Company expects to realize a larger proportion of high-tax foreign country income during fiscal year 1999 than it did during fiscal year 1998, due primarily to restructuring and related charges incurred in lower tax rate countries. Net Earnings/Loss. The net loss of $0.2 million ($0.01 pro forma diluted net loss per share) in the first nine months of fiscal year 1999, compared to net earnings of $17.4 million ($0.57 pro forma diluted net earnings per share) in the first nine months of fiscal year 1998, was the result of the overall reorganization described above, which resulted in incremental costs primarily included in cost of sales, marketing and restructuring charges. The results for the first nine months of fiscal year 1998 do not include any interest expense for the long-term debt assumed by the Company as part of the Distribution. Liquidity and Capital Resources VAI Cash and Debt Allocations. The Distribution Agreement provided for the division among the Company, VSEA and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the Company was to assume 50% of VAI's term loans and receive an amount of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long-term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets, and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, these and other adjustments may be required within 180 days following the Distribution. As a result of these adjustments, the Company may be required to make cash payments to VMS and/or may be entitled to receive cash payments from VMS. While the final amount of any such adjustments have not been determined, an estimated adjustment of $7.5 million has been included in the financial statements at July 2, 1999 as a receivable from VMS and an increase to equity. The amount of any other required adjustment cannot be estimated. 15 Debt and Credit Facilities. In connection with the Distribution, a portion of VAI's debt was assumed by the Company as of April 2, 1999. In addition, the Company entered into new debt arrangements as of and after April 2, 1999. As of July 2, 1999, the Company had $60.7 million in uncommitted credit facilities for working capital purposes, of which $15.9 million was outstanding. As of July 2, 1999, interest rates on these borrowings ranged from 3.6% to 5.6%, and the weighted average interest rate was 5.1%. All of these credit facilities contain certain conditions and events of default customary for such facilities. As of July 2, 1999, the Company had $55.5 million in term loans. As of July 2, 1999 interest rates on these term loans ranged from 6.7% to 7.5%, and the weighted average interest rate on the term loans was 7.0%. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. As of July 2, 1999, the Company also had other long-term notes payable of $2.2 million with an interest rate of 1.5%. Future principal payments on debt outstanding on July 2, 1999 will be $16.0 million for the fiscal quarter ending October 1, 1999 and $6.4 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004 and thereafter, respectively. Cash and Cash Equivalents. Pursuant to the Distribution Agreement as described above, the Company received a cash contribution from VAI in the amount of $12.1 million as of April 2, 1999. The Company generated $23.0 million of cash from operations in the first nine months of fiscal year 1999, which compares to $24.9 million in the first nine months of fiscal year 1998. The primary reason for this decrease in cash generated was due to operating activities. The Company used $13.2 million of cash for investing activities in the first nine months of fiscal year 1999, which compares to $14.4 million in the first nine months of fiscal year 1998. The primary reason for this decrease was lower capital equipment expenditures. The Company issued net debt of $9.2 million in the third quarter of fiscal year 1999, which compares to no debt in fiscal year 1998. The debt will be used to satisfy commitments for capital expenditures and other cash requirements for the current fiscal year and fiscal year 2000. The cash flow impact of certain actions relating to the above-described overall reorganization of IB will occur for several more quarters. Management believes that the cash flow impact will be approximately $2.7 million in the remainder of fiscal year 1999 and $2.4 million in fiscal year 2000. The Company currently has no plans to materially modify or expand its facilities or to make other material capital expenditures. The Distribution Agreement provides that the Company is responsible for certain litigation to which VAI was a party, and further provides that the Company will indemnify VMS and VSEA for one-third of the costs, expenses and other liabilities relating to certain discontinued, former and corporate operations of VAI, including certain environmental liabilities (see "Environmental Matters" below). The Company's liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the Company's borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the current fiscal year and fiscal year 2000. Environmental Matters The Company's operations are subject to various foreign, federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. This includes discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require 16 manufacturers to dispose of their products at the end of their useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of such operations. In addition, under the Distribution Agreement, the Company agreed to indemnify VMS and VSEA for one-third of environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VMS 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 VMS or former VAI facilities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of July 2,1999, it was nonetheless estimated that the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $20.6 million to $48.0 million. The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of July 2, 1999. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range and the Company has been advised that VMS accordingly accrued $20.6 million in estimated environmental costs as of July 2, 1999. The amount accrued was not discounted to present value. As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of July 2, 1999, it was estimated that the future exposure for environmental related investigation and remediation costs for these sites and facilities ranged in the aggregate from $39.1 million to $72.9 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 July 2, 1999. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these futures costs were reliably determinable. Together, these amounts totaled $50.4 million at July 2, 1999. The Company has been advised that VMS accordingly accrued $21.6 million as of July 2, 1999, which represents the best estimate of the future costs discounted at 4%, net of inflation. This accrual is in addition to the $20.6 million described in the preceding paragraph. Since the Company is obligated to reimburse VMS for one-third of the foregoing environmental-related costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs or expenses) that are paid after April 2, 1999, the Company recorded $7.7 million as its portion of these estimated future costs for environmental liabilities of VAI as of July 2, 1999. The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites and facilities involved. Management believes that most of these cost ranges will narrow as investigation and remediation activities progress. Management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental- related events, management believes that the costs of these environmental- related matters are not reasonably likely to have a material adverse effect on the Company's financial statements. 17 Year 2000 General. The "Year 2000" problem refers to computer programs and other equipment with embedded microprocessors ("non-IT systems") which use only the last two digits to refer to a year, and which therefore might not properly recognize a year that begins with "20" instead of the familiar "19." As a result, those computer programs and non-IT systems might be unable to operate or process accurately certain date-sensitive data before or after January 1, 2000. Because the Company relies heavily on computer programs and non-IT systems, and relies on third parties which themselves rely on computer programs and non-IT systems, the Year 2000 problem, if not addressed, could adversely effect the Company's business, results of operations and financial condition. State of Readiness. VAI and IB previously initiated a comprehensive assessment of potential Year 2000 problems with respect to (1) the Company's internal systems, (2) the Company's products, and (3) significant third parties with which the Company does business. The Company is continuing that assessment for its businesses, although under the terms of the Transition Services Agreement among VMS, VSEA and the Company, VMS is taking certain actions and otherwise assisting the Company with respect to certain Year 2000 implications with the Company's internal systems. The Company has substantially completed its assessment of potential Year 2000 problems in internal systems, which systems have been categorized as follows, in order of importance: (a) enterprise information systems; (b) enterprise networking and telecommunications; (c) factory-specific information systems; (d) non-IT systems; (e) computers and packaged software; and (f) facilities systems. With respect to enterprise information systems, VAI initiated in 1994 replacement of its existing systems with a single company-wide system supplied by SAP America, Inc., which system is designed and tested by SAP for Year 2000 capability. Installation of the SAP enterprise information system has been staged to replace first those existing systems that are not Year 2000 capable. Installation of the SAP system for the Company is approximately 80% complete, with 90% completion expected by October 1999 and full completion expected by the end of December 1999; upgrade of networking and telecommunications systems is complete; upgrade of factory-specific information systems is complete; and upgrade of non-IT systems, computers and packaged software, and facilities systems are approximately 95% complete, with 100% completion expected by December 1999. The Company has initiated an assessment of potential Year 2000 problems in its current and previously-sold products. With respect to current products, that assessment and corrective actions are complete, and the Company believes that all of its current products are Year 2000 capable; however, that conclusion is based in substantial part on Year 2000 assurances or warranties from suppliers of computers, software and non-IT systems which are integrated into or sold with the Company's products. With respect to previously-sold products, the Company does not intend to assess Year 2000 preparedness of every product it has ever sold, but rather is focusing its assessments on products that are still 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 substantially complete. Where the Company identifies previously-sold products that are not Year 2000 capable, the Company intends in some cases to develop and offer to sell upgrades or retrofits, identify corrective measures which the customer could itself undertake or identify for the customer other suppliers of upgrades or retrofits. There may be instances where the Company will be required to repair and/or upgrade such products at its own expense. The Company is still assessing potential Year 2000 problems of third parties with which the Company has material relationships, which will be primarily suppliers of products or services. These assessments will identify and prioritize critical suppliers, review those suppliers' written assurances on their own assessments and correction of Year 2000 problems and develop appropriate contingency plans for those suppliers which might not be adequately prepared for Year 2000 problems. These assessments are expected to be substantially completed by November 1999. Costs. The Company estimates that it and IB had incurred approximately $1,228,000 as of July 2, 1999 to assess and correct Year 2000 problems. Although difficult to assess, based on its assessment to date, the Company estimates that it will incur approximately $310,000 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 18 obligations for Year 2000 problems. In addition, the Company expects that certain costs will be offset by revenues generated by the sale of upgrades and retrofits and other customer support services relating to Year 2000 problems. However, there can be no assurance that the Company's actual costs to assess and correct Year 2000 problems will not be higher than the foregoing estimate. Risks. Failure by the Company or its key suppliers to accurately assess and correct Year 2000 problems would likely result in interruption of certain of the Company's normal business operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. If the Company does not adequately identify and correct Year 2000 problems in its information systems, it could experience an interruption in its operations, including manufacturing, order processing, receivables collection, cash management and accounting, such that there would be delays in product shipments, lost data and a consequential impact on revenues, expenditures, cash flow and financial reporting. If the Company does not adequately identify and correct Year 2000 problems in its non-IT systems, it could experience an interruption in its manufacturing and related operations, such that there would be delays in product shipments and a consequential impact on results of operations. If the Company does not adequately identify and correct Year 2000 problems in previously-sold products, it could experience warranty or similar claims by users of products which do not function correctly and could incur higher warranty and service costs. If the Company does not adequately identify and correct Year 2000 problems of the significant third parties with which it does business, it could experience an interruption in the supply of key components or services from those parties, such that there would be delays in product shipments or services and a consequential impact on results of operations. Because of uncertainties as to the extent of Year 2000 problems with the Company's previously-sold products and the extent of any legal obligation for the Company to correct Year 2000 problems in those products, the Company cannot fully assess the risks to the Company with respect to those products. Because its assessments are not yet complete, the Company also cannot yet conclude that the failure of critical suppliers to assess and correct Year 2000 problems is not reasonably likely to have a material adverse effect on the Company's results of operations, and indeed the failure of certain suppliers to provide essential infrastructure services will likely have a material adverse effect on the Company's business, results of operations and financial condition. The most difficult risks for the Company to assess and prepare for relate to basic infrastructure services (such as electricity, water, gas, telecommunications, transportation, distribution and banking) provided by third parties, in particular outside the United States. Management believes that the assessments and corrective actions described above have been or will be accomplished within the cost and time estimates stated. Although it is not expected that the Company will be 100% Year 2000 compliant by the end of 1999, management does not currently believe that any Year 2000 non-compliance in the Company's information systems would have a material adverse effect on the Company's business, results of operations or financial condition. However, given the inherent complexity and implications of the Year 2000 problem, there can be no assurance that actual costs will not be higher than currently anticipated or that corrective actions will not take longer than currently anticipated to complete. Risk factors which might result in higher costs or delays include the ability to identify and correct in a timely fashion Year 2000 problems; regulatory or legal obligations to correct Year 2000 problems in previously-sold products; ability to retain and hire qualified personnel to perform assessments and corrective actions; the willingness and ability of critical suppliers to assess and correct their own Year 2000 problems, including the products they supply to the Company; and the additional complexity which will likely be caused by undertaking during fiscal year 1999 and fiscal year 2000 the separation (as a result of the Distribution) of enterprise information systems which the Company currently shares with VMS and VSEA. Contingency Plans. With respect to the Company's enterprise information systems, the Company has a contingency plan if the SAP system is not fully installed before December 31, 1999. That plan primarily involves installation where necessary of a Year 2000 capable upgrade of existing information systems pending complete installation of the SAP system. That upgrade is currently in acceptance testing, and, if functional, will be held for contingency purposes. 19 With respect to products and significant third parties, the Company is, as part of its on-going assessment of potential Year 2000 problems, developing contingency plans for the more critical problems that might not be corrected before December 31, 1999. The focus of these contingency plans will be the possible interruption of supply of key components or services from third parties. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement changes standards for the way that public business enterprises identify and report operating segments in annual and interim financial statements. This statement requires selected information about an enterprise's operating segments and related disclosure about products and services, geographic areas and major customers. The Company expects to report multiple segments when it adopts SFAS No. 131 at fiscal year-end 1999. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in the first quarter of fiscal year 2001 and is in the process of determining the impact that adoption will have on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Exchange Risk With global operations and activities, the Company faces exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as the Company's business practices evolve and could have a material adverse impact on the Company's financial results. The Company's primary exposures typically relate to non-U.S. dollar denominated sales and purchases throughout Europe and Asia. The Euro was adopted as a common currency for members of the European Monetary Union on January 1, 1999. The Company is evaluating, among other issues, the impact of the Euro conversion on its foreign currency exposure. Based on its evaluation to date, the Company does not expect the Euro conversion to create any change in its currency exposure due to the Company's existing hedging practices. The Company typically hedges its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. The Company's forward exchange contracts have generally ranged from one to three months in original maturity, and no forward exchange contract has had an original maturity greater than one year. Forward exchange contracts outstanding as of July 2, 1999 were opened on July 2, 1999, and accordingly there were no unrealized gains or losses associated with such contracts. Forward exchange contracts that were outstanding as of July 2, 1999 were:
Notional Notional Value Value Sold Purchased ---------- --------- (Dollars in millions) Japanese Yen $10.3 $ -- British Pound 6.5 -- Canadian Dollar 3.7 -- Euro -- 6.9 Australian Dollar -- 3.7 Swedish Krona -- 2.9 ----- ----- $20.5 $13.5 ===== =====
20 Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt obligations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures and acquisitions. The Company is subject to fluctuating interest rates that may impact, adversely or otherwise, its results of operations or cash flows for its variable rate debt. Fluctuations in interest rates may also impact, adversely or otherwise, the estimated fair value of the Company's fixed rate long-term obligations. The Company has no cash flow exposure due to rate changes for long- term debt obligations. The table below presents principal amounts and related weighted-average interest rates by year of maturity for the Company's debt obligations.
Fiscal quarter Fiscal year Ending October 1, -------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 Thereafter Total ----- ---- ---- ---- ---- ---- ---------- ------- (Dollars in millions) Liabilities Short-term debt $15.9 -- -- -- -- -- -- $15.9 Average interest rate....... 5.1% -- -- -- -- -- -- 5.1% Long-term debt (including current portion)......................... $ 0.1 $ 6.4 $ 6.4 $ 6.5 $ 3.0 $ 2.8 $32.5 $57.7 Average interest rate........... -- 6.9% 6.9% 6.9% 6.3% 6.6% 6.9% 6.8%
The estimated fair value of the Company's debt obligations approximates the principal amounts reflected above based on rates currently available to the Company for debt with similar terms and remaining maturities. Although payments under certain of the Company's operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases. 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit No. Description - ----------- ----------- 10.1 Change in Control Agreement Between Registrant and G. Edward McClammy. 10.2 Change in Control Agreement Between Registrant and James L. Colbert. 10.3 Description of Certain Compensatory Arrangements Between Registrant and Executive Officers. 27.1 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended July 2, 1999: None. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARIAN, INC. (Registrant) By /s/ G. Edward McClammy ----------------------------- G. Edward McClammy Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: August 13, 1999 23 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 10.1 Change in Control Agreement Between Registrant and G. Edward McClammy. 10.2 Change in Control Agreement Between Registrant and James L. Colbert. 10.3 Description of Certain Compensatory Arrangements Between Registrant and Executive Officers 27.1 Financial Data Schedule
24 EX-10.1 2 CHANGE IN CONTROL AGREEMENT Exhibit 10.1 CHANGE IN CONTROL AGREEMENT --------------------------- THIS CHANGE IN CONTROL AGREEMENT ("Agreement") is entered into effective as of April 16, 1999, by and between VARIAN, INC., a Delaware corporation (the "Company")/1/, and G. Edward McClammy, an employee of the Company ("Employee"). The Company's Board of Directors (the "Board") has determined that it is in the best interest of the Company and its stockholders for the Company to agree to pay Employee termination compensation in the event Employee should leave the employ of the Company under the circumstances described below. The Board recognizes that the possibility of a proposal from a third person, whether or not solicited by the Company, concerning a possible "Change in Control" of the Company (as such language is defined in Section 3(d)) will be unsettling to Employee. Therefore, the arrangements set forth in this Agreement are being made to help assure a continuing dedication by Employee to Employee's duties to the Company notwithstanding the proposal or occurrence of a Change in Control. The Board believes it imperative, should the Company receive any proposal from a third party, that Employee, without being influenced by the uncertainties of Employee's own situation, be able to assess and advise the Board whether such proposals are in the best interest of the Company and its stockholders, and to enable Employee to take action regarding such proposals as the Board might determine to be appropriate. The Board also wishes to demonstrate to key personnel that the Company desires to enhance management relations and its ability to retain and, if needed, to attract new management, and intends to ensure that loyal and dedicated management personnel are treated fairly. In view of the foregoing, the Company and Employee agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. ------------------------------------ This Agreement is effective and binding on the Company and Employee as of the date hereof; provided, however, that, subject to Section 2(d), the provisions of Sections 3 and 4 shall become operative only upon the Change in Control Date. - ---------------------------- /1/ "Company" shall include the Company, any successor to the Company's business and/or assets, and any party which executes and delivers the agreement required by Section 5(e) or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law or otherwise. 1 2. EMPLOYMENT OF EMPLOYEE. ---------------------- (a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this Agreement shall affect any right which Employee may otherwise have to terminate Employee's employment, nor shall anything in this Agreement affect any right which the Company may have to terminate Employee's employment at any time in any lawful manner. (b) In the event of a Potential Change in Control, to be entitled to receive the benefits provided by this Agreement, Employee will not voluntarily leave the employ of the Company, and will continue to perform Employee's regular duties and the services specified in the recitals of this Agreement until the Change in Control Date. Should Employee voluntarily terminate employment prior to the Change in Control Date, this Agreement shall lapse upon such termination and be of no further force or effect. (c) If Employee's employment terminates on or after the Change in Control Date, the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4. (d) If Employee's employment is terminated by the Company prior to the Change in Control Date but on or after a Potential Change in Control Date, then the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4 unless the Company reasonably demonstrates that Employee's termination of employment neither (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control nor (ii) arose in connection with or in anticipation of a Change in Control. Solely for purposes of determining the timing of payments and the provision of benefits in Sections 3 and 4 under the circumstances described in this Section 2(d), Employee's date of termination shall be deemed to be the Change in Control Date. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. --------------------------------------- (a) If a Change in Control shall have occurred, Employee shall be entitled to the benefits provided in Section 4 upon the subsequent termination of Employee's employment within the applicable period set forth in Section 4 unless such termination is due to Employee's death, Retirement or Disability or is for Cause or is effected by Employee other than for Good Reason (as such terms are defined in Section 3(d)). (b) If following a Change in Control, Employee's employment is terminated by reason of Employee's death or Disability, Employee shall be entitled to death or long-term disability benefits from the Company no less favorable than the most favorable benefits to which Employee would have been entitled had the death or Disability occurred at any time during the period commencing one (1) year prior to the Change in Control. 2 (c) If Employee's employment shall be terminated by the Company for Cause or by Employee other than for Good Reason during the term of this Agreement, the Company shall pay Employee's Base Salary through the date of termination at the rate in effect at the time notice of termination is given, and the Company shall have no further obligations to Employee under this Agreement. (d) For purposes of this Agreement: "Base Salary" shall mean the annual base salary paid to Employee immediately prior to a Change in Control, provided that such amount shall in no event be less than the annual base salary paid to Employee during the one (1) year period immediately prior to the Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) Any individual or group constituting a "person", as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the Company or any of its subsidiaries or (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any of its subsidiaries), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily (and apart from rights accruing under special circumstances) to vote for the election of directors; or (ii) Continuing Directors cease to constitute at least a majority of the Board; or (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Transaction"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company or other corporation resulting from such Transaction; or (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; provided, however, that a "Change in Control" shall not be deemed to have occurred under this Agreement if, prior to the occurrence of a specified event that would otherwise constitute a Change in Control hereunder, the disinterested Continuing Directors then in office, by a majority vote thereof, determine that the occurrence of such specified event shall not be deemed to be a Change in Control with respect to Employee hereunder if the Change in Control results from actions or events in which Employee is a participant in a capacity other than solely as an officer, employee or director of the Company. 3 "Change in Control Date" shall mean the date on which a Change in Control occurs. "Cause" shall mean: (i) The continued willful failure of Employee to perform Employee's duties to the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to Employee by the Board or a committee thereof; or (ii) The willful commission by Employee of a wrongful act that caused or was reasonably likely to cause substantial damage to the Company, or an act of fraud in the performance of Employee's duties on behalf of the Company; or (iii) The conviction of Employee for commission of a felony in connection with the performance of Employee's duties on behalf of the Company; or (iv) The order of a federal or state regulatory authority having jurisdiction over the Company or its operations or by a court of competent jurisdiction requiring the termination of Employee's employment by the Company. "Continuing Directors" shall mean the directors of the Company in office on the date hereof and any successor to any such director who was nominated or selected by a majority of the Continuing Directors in office at the time of the director's nomination or selection and who is not an "affiliate" or "associate" (as defined in Regulation 12B under the Exchange Act) of any person who is the beneficial owner, directly or indirectly, of securities representing ten percent (10%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily to vote for the election of directors. "Disability" shall mean Employee's incapacity due to physical or mental illness such that Employee shall have become qualified to receive benefits under the Company's long-term disability plan as in effect on the date of the Change in Control. "Dispute" shall mean, in the case of termination of Employee's employment for Disability or Cause, that Employee challenges the existence of Disability or Cause, and in the case of termination of Employee's employment for Good Reason, that the Company challenges the existence of Good Reason for termination of Employee's employment. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Equivalent Position" shall mean an employment position that: 4 (i) is in a substantive area of competence (e.g., finance, accounting, legal, operations management or human resources) that is consistent with Employee's experience and not materially different from the substantive area of competence of Employee's position with the Company prior to the Change in Control; (ii) requires that Employee serve in a role and perform duties that are functionally equivalent to the role and duties performed by Employee for the Company prior to the Change in Control; (iii) carries a title that does not connote a lesser rank or corporate role than is connoted by Employee's title with the Company prior to the Change in Control; (iv) does not constitute a material, adverse change in Employee's responsibilities or duties, when compare to Employee's responsibilities or duties with the Company prior to the Change in Control; (v) requires that Employee be deemed an executive officer (for purposes of the rules promulgated under Section 16 of the Securities Exchange Act of 1934) of a publicly-traded successor entity having net assets or annual revenues that are no less than those of the Company prior to the Change in Control; and (vi) has Employee reporting directly to the Chief Executive Officer of the combined or acquiring company. "Good Reason" shall mean: (i) The assignment to Employee of a position, title, responsibilities or duties such that he no longer holds an Equivalent Position; or (ii) A reduction of Employee's total compensation as the same may have been increased from time to time after the Change in Control Date other than (A) a reduction implemented with the consent of Employee or (B) a reduction that is generally comparable (proportionately) to compensation reductions imposed on senior executives of the Company generally; or (iii) The failure to provide to Employee the benefits and perquisites, including participation on a comparable basis in the Company's stock option, incentive, and other similar plans in which employees of the Company of comparable title and salary grade participate, as were provided to Employee immediately prior to a Change in Control, or with a package of benefits and perquisites that are substantially comparable in all material respects to such benefits and perquisites provided prior to the Change in Control; or (iv) The relocation of the office of the Company where Employee is employed immediately prior to the Change in Control Date (the "CIC Location") to a 5 location which is more than 50 miles away from the CIC Location or the Company's requiring Employee to be based more than 50 miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with Employee's customary business travel obligations in the ordinary course of business prior to the Change in Control Date); (v) The failure of the Company to obtain promptly upon any Change in Control the express written assumption of an agreement to perform this Agreement by any successor as contemplated in Section 6(e); or (vi) The attempted termination of Employee's employment for Cause on grounds insufficient to constitute a basis of termination for Cause under this Agreement; or (vii) The failure of the Company to promptly make any payment into escrow when so required by Section 3(f). "Potential Change in Control" shall mean the earliest to occur of (a) the execution of an agreement or letter of intent, the consummation of the transactions described in which would result in a Change in Control, (b) the approval by the Board of a transaction or series of transactions, the consummation of which would result in a Change in Control, or (c) the public announcement of a tender offer for the Company's voting stock, the completion of which would result in a Change in Control; provided, that no such event shall be a "Potential Change in Control" unless (i) in the case of any agreement or letter of intent described in clause (a), the transaction described therein is subsequently consummated by the Company and the other party or parties to such agreement or letter of intent and thereupon constitutes a "Change in Control", (ii) in the case of any Board-approved transaction described in clause (b), the transaction so approved is subsequently consummated and thereupon constitutes a "Change in Control" or (iii) in the case of any tender offer described in clause (c), such tender offer is subsequently completed and such completion thereupon constitutes a "Change in Control". "Potential Change in Control Date" shall mean the date on which a Potential Change in Control occurs. "Retirement" shall mean Employee's actual retirement after reaching the normal or early retirement date provided for in the Company's Retirement and Profit-Sharing Program as in effect on the date of Employee's termination of employment. (e) Any termination of employment by the Company or by Employee shall be communicated by written notice, specify the date of termination, state the specific basis for termination and set forth in reasonable detail the facts and circumstances of the termination in order to provide a basis for determining the entitlement to any payments under this Agreement. 6 (f) If within thirty (30) days after notice of termination is given, the party to whom the notice was given notifies the other party that a Dispute exists, the parties will promptly pursue resolution of such Dispute with reasonable diligence; provided, however, that pending resolution of any such Dispute, the Company shall pay 75% of any amounts which would otherwise be due Employee pursuant to Section 4 if such Dispute did not exist into escrow pending resolution of such Dispute and pay 25% of such amounts to Employee. Employee agrees to return to the Company any such amounts to which it is ultimately determined that he is not entitled. 4. PAYMENTS AND BENEFITS UPON TERMINATION. -------------------------------------- (a) If within eighteen (18) months after a Change in Control, the Company terminates Employee's employment other than by reason of Employee's death, Disability, Retirement or for Cause, or if Employee terminates Employee's employment for Good Reason, then the Employee shall be entitled to the following payments and benefits: (i) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum severance payment equal to 2.50 multiplied by the sum of (A) Employee's Base Salary, (B) the highest annual bonus that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the Company's Management Incentive Plan (the "MIP") or Varian Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for a performance period of more than one fiscal year that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the MIP; provided, however, that it shall be assumed that Employee was paid a $200,000 annual bonus in fiscal year 1998 under Varian Associates, Inc.'s Management Incentive Plan. (ii) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum payment equal to a pro rata portion (based on the number of days elapsed during the fiscal year and/or other bonus performance period in which the termination occurs) of Employee's target bonus under the MIP for the fiscal year and for any other partially completed bonus performance period in which the termination occurs. (iii) All waiting periods for the exercise of any stock options granted to Employee and all conditions or restrictions of any restricted stock granted to Employee shall terminate, and all such options shall be exercisable in full according to their terms, and the restricted stock shall be transferred to Employee as soon as reasonably practicable thereafter. (iv) Employee's participation as of the date of termination in the life, medical/dental/vision and disability insurance plans and financial/tax counseling plan of the Company shall be continued on the same terms (including any cost sharing) as if Employee were an employee of the Company (or equivalent benefits provided) until the 7 earlier of Employee's commencement of substantially equivalent full-time employment with a new employer or twenty-four (24) months after the date of termination; provided, however, that after the date of termination, Employee shall no longer be entitled to receive Company-paid executive physicals or, upon expiration of the applicable memberships, Company-paid airline memberships. In the event Employee shall die before the expiration of the period during which the Company is required to continue Employee's participation in such insurance plans, the participation of Employee's surviving spouse and family in the Company's insurance plans shall continue throughout such period. (v) Employee may elect upon termination to purchase any automobile then in the possession of Employee and subject to a lease of which the Company is the lessor by payment to the Company of the residual value set forth in the lease, without any increase for remaining lease payments during the term or other lease breakage costs. Employee may elect to have any such payment deducted from any payments due the Employee hereunder. (vi) All payments and benefits provided under this Agreement shall be subject to applicable tax withholding. (b) Following Employee's termination of employment for any reason, the Company shall have the unconditional right to reduce any payments owed to Employee hereunder by the amount of any due and unpaid principal and interest on any loans by the Company to Employee and Employee hereby agrees and consents to such right on the part of the Company. 5. GROSS-UP PAYMENT. ---------------- (a) Notwithstanding anything herein to the contrary, if it is determined that any Payment would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties with respect to such excise tax (such excise tax, together with any interest or penalties thereon, is herein referred to as an "Excise Tax"), then Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an amount that will place Employee in the same after-tax economic position that Employee would have enjoyed if the Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment shall be determined by a nationally- recognized independent public accounting firm designated by agreement between Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be payable hereunder if the Accounting Firm determines that the Payments are not subject to an Excise Tax. "Payment" means (i) any amount due or paid to Employee under this Agreement, (ii) any amount that is due or paid to Employee under any plan, program or arrangement of the Company and its subsidiaries and (iii) any amount or benefit that is due or payable to Employee under this Agreement or under any plan, program or arrangement of the 8 Company and its subsidiaries not otherwise covered under clause (i) or (ii) hereof which must reasonably be taken into account under Section 280G of the Code in determining the amount the "parachute payments" received by Employee, including, without limitation, any amounts which must be taken into account under Section 280G of the Code as a result of (A) the acceleration of the vesting of any option, restricted stock or other equity award, (B) the acceleration of the time at which any payment or benefit is receivable by Employee or (C) any contingent severance or other amounts that are payable to Employee. (b) Subject to the provisions of Section 5(c), all determinations required under this Section 5, including whether a Gross-Up Payment is required, the amount of the Payments constituting excess parachute payments, and the amount of the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to Employee and the Company within fifteen days of the date reasonably requested by Employee or the Company on which a determination under this Section 5 is necessary or advisable. The Company shall pay to Employee the initial Gross-Up Payment within 5 days of the receipt by Employee and the Company of the determination of the Accounting Firm. If the Accounting Firm determines that no Excise Tax is payable by Employee, the Company shall cause its accountants to provide Employee with an opinion that the Accounting Firm has substantial authority under the Code not to report an Excise Tax on Employee's federal income tax return. Any determination by the Accounting Firm shall be binding upon Employee and the Company. If the initial Gross-Up Payment is insufficient to cover the amount of the Excise Tax that is ultimately determined to be owing by Employee with respect to any Payment (hereinafter an "Underpayment"), the Company, after exhausting its remedies under Section 5(c) below, shall promptly pay to Employee an additional Gross-Up Payment in respect of the Underpayment. (c) Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notice shall be given as soon as practicable after Employee knows of such claim and shall apprise the Company of the nature of the claim and the date on which the claim is requested to be paid. Employee agrees not to pay the claim until the expiration of the thirty (30) day period following the date on which Employee notifies the Company, or such shorter period ending on the date the Taxes with respect to such claim are due (the "Notice Period"). If the Company notifies Employee in writing prior to the expiration of the Notice Period that it desires to contest the claim, Employee shall: (i) give the Company any information reasonably requested by the Company relating to the claim; (ii) take such action in connection with the claim as the Company may reasonably request, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably acceptable to Employee; (iii) cooperate with the Company in good faith in contesting the claim; and (iv) permit the Company to participate in any proceedings relating to the claim. Employee shall permit the Company to control all proceedings related to the claim and, at its option, permit the Company to pursue or forgo any and all administrative 9 appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim. If requested by the Company, Employee agrees either to pay the tax claimed and sue for a refund or contest the claim in any permissible manner and to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine; provided, however, that, if the Company directs Employee to pay such claim and pursue a refund, the Company shall advance the amount of such payment to Employee on an after-tax and interest-free basis (an "Advance"). The Company's control of the contest related to the claim shall be limited to the issues related to the Gross-Up Payment and Employee shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or other taxing authority. If the Company does not notify Employee in writing prior to the end of the Notice Period of its desire to contest the claim, the Company shall pay to Employee an additional Gross-Up Payment in respect of the excess parachute payments that are the subject of the claim, and Employee agrees to pay the amount of the Excise Tax that is the subject of the claim to the applicable taxing authority in accordance with applicable law. (d) If, after receipt by Employee of an Advance, Employee becomes entitled to a refund with respect to the claim to which such Advance relates, Employee shall pay the Company the amount of the refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after receipt by Employee of an Advance, a determination is made that Employee shall not be entitled to any refund with respect to the claim and the Company does not promptly notify Employee of its intent to contest the denial of refund, then the amount of the Advance shall not be required to be repaid by Employee and the amount thereof shall offset the amount of the additional Gross-Up Payment then owing to Employee. (e) The Company shall indemnify Employee and hold Employee harmless, on an after-tax basis, from any costs, expenses, penalties, fines, interest or other liabilities ("Losses") incurred by Employee with respect to the exercise by the Company of any of its rights under this Section 5, including, without limitation, any Losses related to the Company's decision to contest a claim or any imputed income to Employee resulting from any Advance or action taken on Employee's behalf by the Company hereunder. The Company shall pay all legal fees and expenses incurred under this Section 5, and shall promptly reimburse Employee for the reasonable expenses incurred by Employee in connection with any actions taken by the Company or required to be taken by Employee hereunder. The Company shall also pay all of the fees and expenses of the Accounting Firm, including, without limitation, the fees and expenses related to the opinion referred to in Section 5(b). 6. GENERAL. ------- (a) Employee shall retain in confidence under the conditions of the Company's confidentiality agreement with Employee any proprietary or other confidential information known to Employee concerning the Company and its business so 10 long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. If required, Employee shall return to the Company any memoranda, documents or other materials proprietary to the Company. (b) While employed by the Company and following the termination of such employment (other than a termination of employment by Employee for Good Reason or by the Company other than for Cause) for a period of two (2) years, Employee shall not, whether for Employee's own account or for the account of any other individual, partnership, firm, corporation or other business organization, intentionally solicit, endeavor to entice away from the Company or a subsidiary of the Company (each, a "Protected Party"), or otherwise interfere with the relationship of a Protected Party with, any person who is employed by a Protected Party or any person or entity who is, or was within the then most recent twelve (12) month period, a customer or client of a Protected Party. Employee acknowledges that a breach of any of the covenants contained in this Section 6(b) may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it may not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Company may be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Section 6(b) or such other relief as may be required to specifically enforce any of the covenants in this Section 6(b). Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court in the State of California, County of Santa Clara, for that purpose. This Section 6(b) shall survive any termination of this Agreement. (c) If litigation is brought by Employee to enforce or interpret any provision contained in this Agreement, the Company shall indemnify Employee for Employee's reasonable attorney's fees and disbursements incurred in such litigation and pay prejudgment interest on any money judgment obtained by Employee calculated at the prime rate of interest in effect from time to time at the Bank of America, San Francisco, from the date that payment should have been made under the Agreement, provided that Employee shall not have been found by the court in which such litigation is pending to have had no cause in bringing the action, or to have acted in bad faith, which finding must be final with the time to appeal therefrom having expired and no appeal having been taken. (d) Except as provided in Section 4, the Company's obligation to pay to Employee the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Employee shall not be 11 required to mitigate the amount of any payment provided for in this Agreement by seeking other employment. (e) The Company shall require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Company, by written agreement to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (f) This Agreement shall inure to the benefit of and be enforceable by Employee's heirs, successors and assigns. If Employee should die while any amounts would still be payable to Employee hereunder if Employee had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Employee's heirs, successors and assigns. (g) For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to Employee: If to the Company: 24141 Young Court Varian, Inc. Los Altos, CA 94024 3120 Hansen Way Palo Alto, CA 94304-1030 Attn: Vice President, Human Resources or to such other address as either party furnishes to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (h) This Agreement shall constitute the entire agreement between Employee and the Company concerning the subject matter of this Agreement. (i) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without giving effect to the provisions, principles or policies thereof relating to choice or conflict of laws. The invalidity or unenforceability of any provision of this Agreement in any circumstance shall not affect the validity or enforceability of such provision in any other circumstance or the validity or enforceability of any other provision of this Agreement, and, except to the extent such provision is invalid or unenforceable, this Agreement shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof in such jurisdiction, and any such prohibition or unenforceability in any 12 jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Section 6(i) shall survive any termination of this Agreement. (j) This Agreement may be terminated by the Company pursuant to a resolution adopted by the Board at any time prior to a Potential Change in Control Date. After a Change in Control Date or a Potential Change in Control Date, this Agreement may only be terminated with the consent of Employee. (k) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof including, without limitation, any Change in Control Agreement between Employee and Varian Associates, Inc. (l) In the event that the Company becomes party to a transaction that is intended to qualify for "pooling of interests" accounting treatment and, but for one or more of the provisions of this Agreement would so qualify, then this Agreement shall be interpreted so as to preserve such accounting treatment, and to the extent that any provision of this Agreement would disqualify the transaction from pooling of interests accounting treatment, then such provision shall be null and void. All determinations to be made in connection with the preceding sentence shall be made by the independent accounting firm whose opinion with respect to "pooling of interests" treatment is required as a condition to the Company's consummation of such transaction. IN WITNESS WHEREOF, the parties acknowledge that they have read and understand the terms of this Agreement and have executed this Agreement to be effective as of April 16, 1999. VARIAN, INC. EMPLOYEE /s/ Arthur W. Homan /s/ G. Edward McClammy - ---------------------------- ----------------------------- By: Arthur W. Homan G. Edward McClammy Title: Vice President, General Counsel and Secretary 13 EX-10.2 3 CHANGE IN CONTROL AGREEMENT Exhibit 10.2 CHANGE IN CONTROL AGREEMENT --------------------------- THIS CHANGE IN CONTROL AGREEMENT ("Agreement") is entered into effective as of April 2, 1999, by and between VARIAN, INC., a Delaware corporation (the "Company")/1/, and James L. Colbert, an employee of the Company or one of its subsidiaries ("Employee"). "Company" shall include the Company, any successor to the Company's business and/or assets, and any party which executes and delivers the agreement required by Section 5(e) or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law or otherwise. The Company's Board of Directors (the "Board") has determined that it is in the best interest of the Company and its stockholders for the Company to agree to pay Employee termination compensation in the event Employee should leave the employ of the Company under the circumstances described below. The Board recognizes that the possibility of a proposal from a third person, whether or not solicited by the Company, concerning a possible "Change in Control" of the Company (as such language is defined in Section 3(d)) will be unsettling to Employee. Therefore, the arrangements set forth in this Agreement are being made to help assure a continuing dedication by Employee to Employee's duties to the Company notwithstanding the proposal or occurrence of a Change in Control. The Board believes it imperative, should the Company receive any proposal from a third party, that Employee, without being influenced by the uncertainties of Employee's own situation, be able to assess and advise the Board whether such proposals are in the best interest of the Company and its stockholders, and to enable Employee to take action regarding such proposals as the Board might determine to be appropriate. The Board also wishes to demonstrate to key personnel that the Company desires to enhance management relations and its ability to retain and, if needed, to attract new management, and intends to ensure that loyal and dedicated management personnel are treated fairly. In view of the foregoing, the Company and Employee agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. ------------------------------------ This Agreement is effective and binding on the Company and Employee as of the date hereof; provided, however, that, subject to Section 2(d), the provisions of Sections 3 and 4 shall become operative only upon the Change in Control Date. 2. EMPLOYMENT OF EMPLOYEE. ---------------------- (a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this Agreement shall affect any right which Employee may otherwise have to terminate - ---------------------------- /1/ "Company shall include the Company, any successor to the Company's business and/or assets, and any party which executes and delivers the agreement required by Section 5(e) or which otherwise becomes bound by the terms and conditions of this Agreement by operation of law or otherwise. Employee's employment, nor shall anything in this Agreement affect any right which the Company may have to terminate Employee's employment at any time in any lawful manner. (b) In the event of a Potential Change in Control, to be entitled to receive the benefits provided by this Agreement, Employee will not voluntarily leave the employ of the Company, and will continue to perform Employee's regular duties and the services specified in the recitals of this Agreement until the Change in Control Date. Should Employee voluntarily terminate employment prior to the Change in Control Date, this Agreement shall lapse upon such termination and be of no further force or effect. (c) If Employee's employment terminates on or after the Change in Control Date, the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4. (d) If Employee's employment is terminated by the Company prior to the Change in Control Date but on or after a Potential Change in Control Date, then the Company will provide to Employee the payments and benefits as provided in Sections 3 and 4 unless the Company reasonably demonstrates that Employee's termination of employment neither (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control nor (ii) arose in connection with or in anticipation of a Change in Control. Solely for purposes of determining the timing of payments and the provision of benefits in Sections 3 and 4 under the circumstances described in this Section 2(d), Employee's date of termination shall be deemed to be the Change in Control Date. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. --------------------------------------- (a) If a Change in Control shall have occurred, Employee shall be entitled to the benefits provided in Section 4 upon the subsequent termination of Employee's employment within the applicable period set forth in Section 4 unless such termination is due to Employee's death, Retirement or Disability or is for Cause or is effected by Employee other than for Good Reason (as such terms are defined in Section 3(d)). (b) If following a Change in Control, Employee's employment is terminated by reason of Employee's death or Disability, Employee shall be entitled to death or long-term disability benefits from the Company no less favorable than the most favorable benefits to which Employee would have been entitled had the death or Disability occurred at any time during the period commencing one (1) year prior to the Change in Control. (c) If Employee's employment shall be terminated by the Company for Cause or by Employee other than for Good Reason during the term of this Agreement, the Company shall pay Employee's Base Salary through the date of termination at the rate in 2 effect at the time notice of termination is given, and the Company shall have no further obligations to Employee under this Agreement. (d) For purposes of this Agreement: "Base Salary" shall mean the annual base salary paid to Employee immediately prior to a Change in Control, provided that such amount shall in no event be less than the annual base salary paid to Employee during the one (1) year period immediately prior to the Change in Control. A "Change in Control" shall be deemed to have occurred if: (i) Any individual or group constituting a "person", as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the Company or any of its subsidiaries or (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any of its subsidiaries), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily (and apart from rights accruing under special circumstances) to vote for the election of directors; or (ii) Continuing Directors cease to constitute at least a majority of the Board; or (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (a "Transaction"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company or other corporation resulting from such Transaction; or (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; provided, however, that a "Change in Control" shall not be deemed to have occurred under this Agreement if, prior to the occurrence of a specified event that would otherwise constitute a Change in Control hereunder, the disinterested Continuing Directors then in office, by a majority vote thereof, determine that the occurrence of such specified event shall not be deemed to be a Change in Control with respect to Employee hereunder if the Change in Control results from actions or events in which Employee is a participant in a capacity other than solely as an officer, employee or director of the Company. "Change in Control Date" shall mean the date on which a Change in Control occurs. "Cause" shall mean: 3 (i) The continued willful failure of Employee to perform Employee's duties to the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to Employee by the Board or a committee thereof; or (ii) The willful commission by Employee of a wrongful act that caused or was reasonably likely to cause substantial damage to the Company, or an act of fraud in the performance of Employee's duties on behalf of the Company; or (iii) The conviction of Employee for commission of a felony in connection with the performance of Employee's duties on behalf of the Company; or (iv) The order of a federal or state regulatory authority having jurisdiction over the Company or its operations or by a court of competent jurisdiction requiring the termination of Employee's employment by the Company. "Continuing Directors" shall mean the directors of the Company in office on the date hereof and any successor to any such director who was nominated or selected by a majority of the Continuing Directors in office at the time of the director's nomination or selection and who is not an "affiliate" or "associate" (as defined in Regulation 12B under the Exchange Act) of any person who is the beneficial owner, directly or indirectly, of securities representing ten percent (10%) or more of the combined voting power of the Company's outstanding securities then entitled ordinarily to vote for the election of directors. "Disability" shall mean Employee's incapacity due to physical or mental illness such that Employee shall have become qualified to receive benefits under the Company's long-term disability plan as in effect on the date of the Change in Control. "Dispute" shall mean, in the case of termination of Employee's employment for Disability or Cause, that Employee challenges the existence of Disability or Cause, and in the case of termination of Employee's employment for Good Reason, that the Company challenges the existence of Good Reason for termination of Employee's employment. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Good Reason" shall mean: (i) The assignment of Employee to duties which are materially different from Employee's duties immediately prior to the Change in Control and which result in a material reduction in Employee's authority and responsibility when compared to the highest level of authority and responsibility assigned to Employee at any time during the six (6) month period prior to the Change in Control Date; or 4 (ii) A reduction of Employee's total compensation as the same may have been increased from time to time after the Change in Control Date other than (A) a reduction implemented with the consent of Employee or (B) a reduction that is generally comparable (proportionately) to compensation reductions imposed on key employees of the Company generally; or (iii) The failure to provide to Employee the benefits and perquisites, including participation on a comparable basis in the Company's stock option, incentive, and other similar plans in which employees of the Company of comparable title and salary grade participate, as were provided to Employee immediately prior to a Change in Control, or with a package of benefits and perquisites that are substantially comparable in all material respects to such benefits and perquisites provided prior to the Change in Control; or (iv) The relocation of the office of the Company where Employee is employed immediately prior to the Change in Control Date (the "CIC Location") to a location which is more than 50 miles away from the CIC Location or the Company's requiring Employee to be based more than 50 miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with Employee's customary business travel obligations in the ordinary course of business prior to the Change in Control Date); (v) The failure of the Company to obtain promptly upon any Change in Control the express written assumption of an agreement to perform this Agreement by any successor as contemplated in Section 5(e); or (vi) The attempted termination of Employee's employment for Cause on grounds insufficient to constitute a basis of termination for Cause under this Agreement; or (vii) The failure of the Company to promptly make any payment into escrow when so required by Section 3(f). "Potential Change in Control" shall mean the earliest to occur of (a) the execution of an agreement or letter of intent, the consummation of the transactions described in which would result in a Change in Control, (b) the approval by the Board of a transaction or series of transactions, the consummation of which would result in a Change in Control, or (c) the public announcement of a tender offer for the Company's voting stock, the completion of which would result in a Change in Control; provided, that no such event shall be a "Potential Change in Control" unless (i) in the case of any agreement or letter of intent described in clause (a), the transaction described therein is subsequently consummated by the Company and the other party or parties to such agreement or letter of intent and thereupon constitutes a "Change in Control", (ii) in the case of any Board-approved transaction described in clause (b), the transaction so approved is subsequently 5 consummated and thereupon constitutes a "Change in Control" or (iii) in the case of any tender offer described in clause (c), such tender offer is subsequently completed and such completion thereupon constitutes a "Change in Control". "Potential Change in Control Date" shall mean the date on which a Potential Change in Control occurs. "Retirement" shall mean Employee's actual retirement after reaching the normal or early retirement date provided for in the Company's Retirement and Profit-Sharing Program as in effect on the date of Employee's termination of employment. (e) Any termination of employment by the Company or by Employee shall be communicated by written notice, specify the date of termination, state the specific basis for termination and set forth in reasonable detail the facts and circumstances of the termination in order to provide a basis for determining the entitlement to any payments under this Agreement. (f) If within thirty (30) days after notice of termination is given, the party to whom the notice was given notifies the other party that a Dispute exists, the parties will promptly pursue resolution of such Dispute with reasonable diligence; provided, however, that pending resolution of any such Dispute, the Company shall pay 75% of any amounts which would otherwise be due Employee pursuant to Section 4 if such Dispute did not exist into escrow pending resolution of such Dispute and pay 25% of such amounts to Employee. Employee agrees to return to the Company any such amounts to which it is ultimately determined that he is not entitled. 4. PAYMENTS AND BENEFITS UPON TERMINATION. -------------------------------------- (a) If within eighteen (18) months after a Change in Control, the Company terminates Employee's employment other than by reason of Employee's death, Disability, Retirement or for Cause, or if Employee terminates Employee's employment for Good Reason, then the Employee shall be entitled to the following payments and benefits: (i) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum severance payment equal to 2.00 multiplied by the sum of (A) Employee's Base Salary, (B) the highest annual bonus that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the Company's Management Incentive Plan (the "MIP") or Varian Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for a performance period of more than one fiscal year that was paid to Employee in any of the three fiscal years ending prior to the date of termination under the MIP. 6 (ii) The Company shall pay to Employee as compensation for services rendered, no later than five (5) business days following the date of termination, a lump sum payment equal to a pro rata portion (based on the number of days elapsed during the fiscal year and/or other bonus performance period in which the termination occurs) of Employee's target bonus under the MIP for the fiscal year and for any other partially completed bonus performance period in which the termination occurs. (iii) All waiting periods for the exercise of any stock options granted to Employee and all conditions or restrictions of any restricted stock granted to Employee shall terminate, and all such options shall be exercisable in full according to their terms, and the restricted stock shall be transferred to Employee as soon as reasonably practicable thereafter. (iv) Employee's participation as of the date of termination in the life, medical/dental/vision and disability insurance plans and financial/tax counseling plan of the Company shall be continued on the same terms (including any cost sharing) as if Employee were an employee of the Company (or equivalent benefits provided) until the earlier of Employee's commencement of substantially equivalent full-time employment with a new employer or twenty-four (24) months after the date of termination; provided, however, that after the date of termination, Employee shall no longer be entitled to receive Company-paid executive physicals or, upon expiration of the applicable memberships, Company- paid airline memberships. In the event Employee shall die before the expiration of the period during which the Company is required to continue Employee's participation in such insurance plans, the participation of Employee's surviving spouse and family in the Company's insurance plans shall continue throughout such period. (v) Employee may elect upon termination to purchase any automobile then in the possession of Employee and subject to a lease of which the Company is the lessor by payment to the Company of the residual value set forth in the lease, without any increase for remaining lease payments during the term or other lease breakage costs. Employee may elect to have any such payment deducted from any payments due the Employee hereunder. (vi) All payments and benefits provided under this Agreement shall be subject to applicable tax withholding. (b) Following Employee's termination of employment for any reason, the Company shall have the unconditional right to reduce any payments owed to Employee hereunder by the amount of any due and unpaid principal and interest on any loans by the Company to Employee and Employee hereby agrees and consents to such right on the part of the Company. 5. GENERAL. -------- 7 (a) Employee shall retain in confidence under the conditions of the Company's confidentiality agreement with Employee any proprietary or other confidential information known to Employee concerning the Company and its business so long as such information is not publicly disclosed and disclosure is not required by an order of any governmental body or court. If required, Employee shall return to the Company any memoranda, documents or other materials proprietary to the Company. (b) While employed by the Company and following the termination of such employment (other than a termination of employment by Employee for Good Reason or by the Company other than for Cause) for a period of two (2) years, Employee shall not, whether for Employee's own account or for the account of any other individual, partnership, firm, corporation or other business organization, intentionally solicit, endeavor to entice away from the Company or a subsidiary of the Company (each, a "Protected Party"), or otherwise interfere with the relationship of a Protected Party with, any person who is employed by a Protected Party or any person or entity who is, or was within the then most recent twelve (12) month period, a customer or client of a Protected Party. Employee acknowledges that a breach of any of the covenants contained in this Section 5(b) may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it may not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Company may be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Section 5(b) or such other relief as may be required to specifically enforce any of the covenants in this Section 5(b). Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court in the State of California, County of Santa Clara, for that purpose. This Section 5(b) shall survive any termination of this Agreement. (c) If litigation is brought by Employee to enforce or interpret any provision contained in this Agreement, the Company shall indemnify Employee for Employee's reasonable attorney's fees and disbursements incurred in such litigation and pay prejudgment interest on any money judgment obtained by Employee calculated at the prime rate of interest in effect from time to time at the Bank of America, San Francisco, from the date that payment should have been made under the Agreement, provided that Employee shall not have been found by the court in which such litigation is pending to have had no cause in bringing the action, or to have acted in bad faith, which finding must be final with the time to appeal therefrom having expired and no appeal having been taken. (d) Except as provided in Section 4, the Company's obligation to pay to Employee the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, any setoff, counterclaim, recoupment, defense or other right 8 which the Company may have against Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment. (e) The Company shall require any successor, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Company, by written agreement to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (f) This Agreement shall inure to the benefit of and be enforceable by Employee's heirs, successors and assigns. If Employee should die while any amounts would still be payable to Employee hereunder if Employee had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Employee's heirs, successors and assigns. (g) For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to Employee: If to the Company: 890 Mockingbird Lane Varian, Inc. Palo Alto, CA 94306 3120 Hansen Way Palo Alto, CA 94304-1030 Attn: Vice President, Human Resources or to such other address as either party furnishes to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. (h) This Agreement shall constitute the entire agreement between Employee and the Company concerning the subject matter of this Agreement. (i) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without giving effect to the provisions, principles or policies thereof relating to choice or conflict of laws. The invalidity or unenforceability of any provision of this Agreement in any circumstance shall not affect the validity or enforceability of such provision in any other circumstance or the validity or enforceability of any other provision of this Agreement, and, except to the extent such provision is invalid or unenforceable, this Agreement shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions 9 hereof in such jurisdiction, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Section 5(i) shall survive any termination of this Agreement. (j) This Agreement may be terminated by the Company pursuant to a resolution adopted by the Board at any time prior to a Potential Change in Control Date. After a Change in Control Date or a Potential Change in Control Date, this Agreement may only be terminated with the consent of Employee. (k) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof including, without limitation, any Change in Control Agreement between Employee and Varian Associates, Inc. (l) In the event that the Company becomes party to a transaction that is intended to qualify for "pooling of interests" accounting treatment and, but for one or more of the provisions of this Agreement would so qualify, then this Agreement shall be interpreted so as to preserve such accounting treatment, and to the extent that any provision of this Agreement would disqualify the transaction from pooling of interests accounting treatment, then such provision shall be null and void. All determinations to be made in connection with the preceding sentence shall be made by the independent accounting firm whose opinion with respect to "pooling of interests" treatment is required as a condition to the Company's consummation of such transaction. IN WITNESS WHEREOF, the parties acknowledge that they have read and understand the terms of this Agreement and have executed this Agreement to be effective as of April 2, 1999. VARIAN, INC. EMPLOYEE /s/ Arthur W. Homan /s/ James L. Colbert - ------------------------------ --------------------------- By: Arthur W. Homan James L. Colbert Title: Vice President, General Counsel and Secretary 10 EX-10.3 4 DESCRIPTION OF CERTAIN COMPENSATORY ARRANGEMENTS Exhibit 10.3 DESCRIPTION OF CERTAIN COMPENSATORY ARRANGEMENTS ------------------------------------------------ BETWEEN REGISTRANT AND EXECUTIVE OFFICERS ----------------------------------------- Leased Automobiles The Registrant leases an automobile for each of its executive officers, subject to certain lease "cap" limitations that vary by executive officer. The Registrant reimburses the executive officer for all fuel, maintenance and repairs costs for the leased automobile, and the Registrant insures the automobile under its insurance programs. The Registrant also reimburses the executive officer (by way of a "gross-up" payment) for taxes on imputed income for personal use of the automobile. Reimbursement for Financial and Tax Counseling The Registrant reimburses its President and Chief Executive Officer for up to $15,000 (per year) of out-of-pocket expenses incurred to obtain financial advice, estate planning advice, tax advice and/or tax return preparation. The Registrant reimburses each of its other executive officers for up to $6,500 (per year) of out-of-pocket expenses incurred to obtain financial advice, estate planning advice, tax advice and/or tax return preparation. The Registrant has made available (for an annual retainer fee) a financial counseling firm to provide such services to the Registrant's executive officers. Reimbursement for Annual Medical Examination The Registrant reimburses each of its executive officers for up to $650 (per year) of out-of-pocket expenses incurred for an annual medical examination. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARIAN INC.'S JULY 2, 1999 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS OCT-01-1999 OCT-03-1998 JUL-02-1999 23,359 0 143,137 0 64,883 271,760 193,446 109,112 424,945 175,197 0 0 0 304 187,562 424,945 431,794 431,794 273,589 430,861 0 0 1,257 (324) 144 (180) 0 0 0 (180) (.01) (.01)
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