-----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, MbYu8gVnnxt+78orlQ4z+yHjVTljJpVRiX83adKI6C1zaRA8exMI3F2lS8BZWu7m /OOLYJvlowCO9/S1xPpdPg== 0001092388-00-000876.txt : 20001208 0001092388-00-000876.hdr.sgml : 20001208 ACCESSION NUMBER: 0001092388-00-000876 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000929 FILED AS OF DATE: 20001207 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-K SEC ACT: SEC FILE NUMBER: 000-25393 FILM NUMBER: 784976 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-K 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K -------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ 000-25393 (Commission File Number) -------------- VARIAN, INC. (Exact Name of Registrant as Specified in its Charter) -------------- DELAWARE 77-0501995 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 3120 HANSEN WAY PALO ALTO, CALIFORNIA 94304-1030 (Address of principal executive offices) (Zip Code) (650) 213-8000 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which registered) NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE PREFERRED STOCK PURCHASE RIGHTS 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of December 1, 2000 was $1,131,363,380 The number of shares of the registrant's common stock outstanding as of December 1, 2000 was 32,869,426 DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENT DESCRIPTION 10-K PART - --------------------- --------- Certain sections, identified by caption, of the Definitive Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders (the "Proxy Statement") III ================================================================================ An index of exhibits filed with this Form 10-K is located on page 22. VARIAN, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000 TABLE OF CONTENTS PAGE --------- PART I Item 1. Business.................................................................................. 3 Item 2 Properties................................................................................ 9 Item 3. Legal Proceedings......................................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders....................................... 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 11 Item 6. Selected Financial Data................................................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11 Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................. 20 Item 8. Financial Statements and Supplementary Data............................................... 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 20 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 21 Item 11. Executive Compensation.................................................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 21 Item 13. Certain Relationships and Related Transactions............................................ 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 22
RISK FACTORS RELATING TO FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the "Company") to differ materially from management's current expectations. Those risks and uncertainties include, without limitation: new product development and commercialization; demand and acceptance for the Company's products; competitive products and pricing; economic conditions in the Company's product and geographic markets; foreign currency fluctuations if they adversely impact revenue growth and earnings; market investment in capital equipment; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS GENERAL OVERVIEW Varian, Inc. together with its subsidiaries (collectively, the "Company" or the "Registrant") is a technology company engaged in the development, manufacture, sale and service of scientific instruments and vacuum technologies, and in contract electronics manufacturing. The Company's operations are grouped into three corresponding segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. These segments, their products and the markets they serve are described below. Varian, Inc. became a separate, publicly traded company on April 2, 1999. Until that date, the business of the Company was operated as the Instruments business of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999. 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. These transactions (collectively referred to as the "Distribution") 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"). References in this section to the Company's business for periods prior to April 2, 1999 refer to the historical business and operations of the Instruments business conducted by VAI prior to the Distribution. BUSINESS SEGMENTS AND PRODUCTS The Company's products can be classified into the following three categories, which correspond to the Company's three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. SCIENTIFIC INSTRUMENTS The Company's Scientific Instruments business designs, manufactures, sells, and services chromatography, optical spectroscopy, mass spectroscopy, and nuclear magnetic resonance equipment and consumable laboratory supplies for a broad range of life science and chemical analysis applications requiring identification, quantification and analysis of the elemental, molecular, physical, or biological composition or the structure of liquids, solids, or gases. Chromatography is a technique for separating, identifying, and quantifying the individual chemical components of substances based on the physical and chemical characteristics specific to each component. The Company's chromatography instruments include gas chromatographs ("GC"), high performance liquid chromatographs ("HPLC"), sample automation products, and data analysis systems. Consumable laboratory supplies include sample preparation products, GC and HPLC columns, and GC filters. Optical spectroscopy is a technique for analyzing the individual chemical components of substances based on the absorption, or emission, by matter of electromagnetic radiation of a specific wavelength of light. The Company's optical spectroscopy instruments include atomic absorption spectrometers, inductively coupled plasma optical emissions spectrometers, fluorescence spectrometers, ultraviolet-visible ("Uv-Vis") and near-infrared spectrophotometers, sample automation products, and data analysis systems. Accessories and consumable laboratory supplies include tablet dissolution systems, sample preparation products, xenon lamps, cuvettes, and graphite furnace replacement parts. Mass spectroscopy is a technique for analyzing the individual chemical components of substances by breaking molecules into multiple electrically charged ions which are then sorted for analysis according to their mass-to-charge ratios. The Company's mass spectroscopy products include gas chromatograph/mass spectrometers, inductively coupled plasma/mass spectrometers, and related consumable laboratory supplies. 3 Nuclear magnetic resonance ("NMR") is a non-destructive instrumental technique that uses electromagnetic fields to interact with the magnetic property of atomic nuclei in order determine and analyze the molecular content and structure of liquids and solids. NMR spectroscopy is used in the study of liquids containing chemical substances including proteins, nucleic acids (DNA and RNA), carbohydrates, and membranes, and solid materials such as crystals, plastics, rubbers, ceramics, and polymers. NMR imaging systems are used to obtain non-invasive images of, primarily, biological materials and to probe the chemical processes within these materials. The Company's NMR systems include NMR spectrometers and NMR imaging spectrometers. Accessories and consumables include applications software and probes. Scientific Instruments' chromatography, optical spectroscopy, mass spectroscopy and NMR products can be generally categorized as those used principally in life science applications and those used principally in chemical analysis applications. LIFE SCIENCES: Life science products include HPLCs, HPLC columns, fluorescence and Uv-Vis spectrophotometers, high-field magnet NMR spectrometers, NMR imaging spectrometers, sample automation products, data analysis systems, tablet dissolution systems, and sample preparation products, which are primarily used by pharmaceutical companies in drug development, manufacturing, and quality control; by biotechnology and biopharmaceutical companies in studying biomolecules and the prevention, diagnosis, and treatment of diseases; by government and private laboratories in drug testing; and by research hospitals and universities in basic chemistry, biological, biochemistry, and health care research. Major life sciences customers include American Home Products, Bayer, Bristol-Myers Squibb, Eli Lilly, Glaxo Wellcome, Merck, Novartis, Pfizer, Rhone-Poulenc, SmithKline Beecham, Zeneca, various U.S. governmental agencies, and numerous academic institutions and research hospitals. CHEMICAL ANALYSIS: Chemical analysis products include GCs, gas chromatograph/mass spectrometers, atomic absorption spectrometers, near-infrared spectrophotometers, inductively coupled plasma spectrometers, inductively coupled plasma/mass spectrometers, lower-field magnet NMR spectrometers, sample automation products, data analysis systems, and sample preparation products, which are primarily used by environmental laboratories in testing water, soil, air, solids and food products; by petroleum and natural gas companies in refining and quality control; by petrochemical, agribusiness and other chemical companies in research and quality control; by mining and metallurgy companies in research and quality control; by food and beverage processing companies in research and quality control; by semiconductor companies in manufacturing and quality control; and by other industrial, governmental and academic research laboratories in forensic analysis, materials science and general research. Major chemical analysis customers include BASF, British Petroleum, Du Pont, Formosa Plastics, Huntsman Polymers, Laboratory Corporation of America, Monsanto, Proctor & Gamble, U.S. and foreign governmental agencies, and numerous academic and research institutions. VACUUM TECHNOLOGIES The Company's Vacuum Technologies business is a worldwide supplier of high vacuum pumps, leak detection equipment, and related products and services, all of which are used to create, control, measure, and/or test a vacuum environment in industrial and scientific applications requiring ultra-clean or high-vacuum environments. Vacuum Technologies' products include a wide range of high vacuum pumps (diffusion, turbo-molecular, and ion pumps), rough vacuum pumps (rotary vane, mechanical, sorption, dry screw, and dry scroll pumps), and related products (vacuum instruments, flanges, gauges, valves, meters, and other hardware) and manufacturing solutions such as assistance with the designs and integration of vacuum systems. Its products also include helium mass spectrometry leak detection equipment for use in identifying and measuring leaks in sealed components. In addition to product sales, it provides a pump exchange and repair program, applications support, and training in basic and advanced vacuum technology. Vacuum Technologies' products are used in a broad range of applications, including in the manufacture of semiconductors; in life sciences and other analytical research using mass spectrometry; in the manufacture of flat panel displays, television tubes, decorative coating, architectural glass, optical lenses, light bulbs, automobile components; in food packaging; in testing of aircraft components, automobile airbags, refrigeration components, medical devices, and industrial processing equipment; and in high-energy physics. Major customers include Abar Ipsen, Agilent Technologies, Brooks Automation, Cameca, KLA-Tencor, Lawrence Livermore Labs, PE Biosystems, Samsung, Stanford Linear Accelerator Center, Texas Instruments, Tokyo Electron, Varian Semiconductor Equipment Associates, and Von Ardenne. 4 ELECTRONICS MANUFACTURING The Company's Electronics Manufacturing business is a contract manufacturer of advanced electronic assemblies and subsystems, such as printed circuit boards, for original equipment manufacturers ("OEMs"). For some customers, the business provides total manufacturing services including design support, customized manufacturing (such as just-in-time and inventory management) and post-manufacturing services (such as direct end-user shipping, warehousing and repair depots). The Electronics Manufacturing business serves customers in a wide range of industries, including communications (e.g., satellite, networking, telephony, voice and data transfer), medical and semiconductor manufacturing. The business focuses on customers with high-mix, low-to-medium volume manufacturing needs. Major customers include GE/OEC Medical Systems, Honeywell Aerospace Electronic Systems, Inter-Tel, Microtest, Radyne/Comstream, RC Networks, Sensormatic Electronics, Varian Medical Systems, and Varian Semiconductor Equipment Associates. The business also supplies components to the Company's Scientific Instruments and Vacuum Technologies businesses. For financial information about industry segments and about foreign and domestic operations and export sales, see Note 19 of the Notes to the Consolidated Financial Statements. MARKETING AND SALES In the United States, the Company markets the largest portion of its products directly through its own sales and distribution organizations, although a few products and services are marketed through independent distributors and sales representatives. Sales to major markets outside the United States are generally made by the Company's foreign-based sales and service staff, although some sales are made directly from the United States to foreign customers. In certain foreign countries, sales are made through various representative and distributorship arrangements. The Company owns or leases sales and service offices in strategic regional locations in the United States and in foreign countries through its foreign sales subsidiaries and distribution operations. None of the Company's products are distributed through retail outlets. The markets in which the Company competes are globalized. International sales accounted for 40%, 45%, and 47% of sales for fiscal years 2000, 1999, and 1998, respectively. As a result, the Company's customers increasingly require service and support on a worldwide basis. In addition to the United States, the Company has sales and service offices located throughout Europe, Asia, and Latin America. The Company has invested substantial financial and management resources to develop an international infrastructure to meet the needs of its customers worldwide. The Company intends to continue to expand its presence in the United States and international markets. Demand for the Company's products is dependent upon the size of the markets for its products, the level of capital expenditures of the Company's customers, the rate of economic growth in the Company's major markets, and competitive considerations. No single customer accounted for 10% or more of the Company's sales in fiscal year 2000. The Company experiences some seasonal patterns in sales of its products. In particular, the first quarter of the Company's fiscal year typically experiences lower sales than the preceding fourth quarter, primarily due to the fewer working days in the first quarter and buying patterns of customers that are OEMs or governmental agencies with fiscal years that end at the same time or shortly after the Company's fourth quarter. The Company differentiates its products from those of its competitors based on customer requirements and demands, as determined through market research. Although specific customer requirements can vary depending on applications, customers in recent years have demanded superior performance, high quality, and improved levels of automation. The Company has responded to these customer demands by introducing new products in all its business segments focused on these emerging requirements in the markets it serves. For example, customers of Scientific Instruments' products have demanded higher levels of analytical throughput to support their research programs aimed at drug discovery and advanced life sciences. The Company has responded to these needs by introducing products with higher levels of automation and computerized data analysis routines. The Company believes that by focusing on emerging customer requirements, it will be able to develop and market new products that will impart significant competitive advantages in the marketplace. 5 BACKLOG The Company's recorded backlog was $201 million at September 29, 2000, $165 million at October 1, 1999, and $125 million at October 2, 1998. It is the Company's general policy to include in backlog only purchase orders or production releases that have firm delivery dates within one year. Recorded backlog in U.S. dollars is impacted by foreign currency fluctuations. In addition, recorded backlog may not result in sales because of cancellations or other factors. However, the Company currently believes that over 95% of orders included in the September 29, 2000 backlog will result in sales before the close of fiscal year 2001. COMPETITION Competition in the Company's markets is based upon the performance capabilities of products, technical support and after-market service, the manufacturer's reputation as a technological leader, and the selling price. The Company believes that performance capabilities are the most important of these criteria. The markets in which the Company competes are highly competitive and are characterized by the application of advanced technology. There are numerous companies that specialize in, and a number of larger companies that devote a significant portion of their resources to, the development, manufacture, and sale of products that compete with those manufactured or sold by the Company. Many of the Company's competitors are well-known manufacturers with a high degree of technical proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which the Company is engaged. The markets for the Company's products are characterized by specialized manufacturers that often have strength in narrow segments of these markets. While the absence of reliable statistics makes it difficult to determine the Company's relative market position in its industry segments, the Company is confident it is one of the principal manufacturers in its primary fields. Each of the Company's major business segments competes with many companies that address the same markets. The Company's Scientific Instruments business competes with Agilent Technologies, Inc.; PerkinElmer, Inc.; Shimadzu Corporation; Thermo Instrument Systems, Inc. and its affiliated companies; Waters Corporation; Bruker Analytik GmbH; JEOL, Ltd.; and other smaller suppliers. The Company's Vacuum Technologies business competes with BOC Edwards High Vacuum; Leybold-Balzers; Pfeiffer Vacuum Technology AG; Alcatel; Veeco Instruments, Inc.; and other smaller suppliers. The Company's Electronics Manufacturing business competes with numerous other high-mix, low-volume contract manufacturers, including EFTC Corporation; Xetel Corporation; CMC Industries; PLEXUS; Sigmatron International; and privately-owned regional manufacturers. MANUFACTURING The Company's principal manufacturing activities consist of precision assembly, test, calibration, and certain specialized machining activities. The Company subcontracts a portion of its assembly and machining. All other assembly, test, and calibration functions are performed by the Company. The Company believes that the ability to manufacture reliable products in a cost-effective manner is critical to meeting the "just-in-time" delivery and other demanding requirements of its original equipment manufacturer ("OEM") and end-use customers. The Company monitors and analyzes product lead times, warranty data, process yields, supplier performance, field data on mean time between failures, inventory turns, repair response time, and other indicators so that it can continuously improve its manufacturing processes. The Company has adopted a total quality management process. The Company operates 14 manufacturing facilities located throughout the world. Scientific Instruments has manufacturing facilities in Palo Alto, California; Walnut Creek, California; Harbor City, California; Ft. Collins, Colorado; Woburn, Massachusetts; Cary, North Carolina; Wakefield, Rhode Island (which was acquired after September 29, 2000); Melbourne, Australia; and Middelburg, Netherlands. Vacuum Technologies has manufacturing facilities in Lexington, Massachusetts; and Torino, Italy. Electronics Manufacturing has manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin, California (which was acquired after September 29, 2000). In 1993, the member states of the European Union ("EU") began implementation of their plan for a new unified EU market with reduced trade barriers and harmonized regulations. The EU adopted a significant international quality standard, the International Organization for Standardization Series 9000 Quality Standards ("ISO 9000"). All of the Company's manufacturing facilities, other than the recently acquired facility in Wakefield, Rhode Island, have been certified as complying with the requirements of ISO 9000. 6 RAW MATERIALS There are no specialized raw materials that are particularly essential to the operation of the Company's business. The Company's manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies, some of which are occasionally in short supply. Many components used in the Company's products, including proprietary analog and digital circuitry, are manufactured by the Company. Other components, including packaging materials, superconducting magnets, integrated circuits, microprocessors, microcomputers, and certain detector and data analysis modules, are purchased from other manufacturers. Most of the raw materials, components, and supplies purchased by the Company are available from a number of different suppliers; however, a number of items are purchased from limited or single sources of supply, and disruption of these sources could have a temporary adverse effect on shipments and the financial results of the Company. The Company believes alternative sources could ordinarily be obtained to supply these materials, but a prolonged inability to obtain certain materials or components could have a material adverse effect on the Company's financial condition or results of operations and could result in damage to its relationships with its customers. RESEARCH AND DEVELOPMENT The Company is actively engaged in basic and applied research, development, and engineering programs designed to develop new products and to improve existing products. During fiscal years 2000, 1999, and 1998, the Company spent $31.8 million, $31.6 million, and $29.6 million, respectively (net of customer funding), on company-sponsored research, development, and engineering activities. Although the Company intends to continue to conduct extensive research and development activities, there can be no assurance that it will be able to develop and market new products on a cost-effective and timely basis, that such products will compete favorably with products developed by others or that the Company's existing technology will not be superseded by new discoveries or developments. CUSTOMER SUPPORT AND SERVICE The Company believes that its customer service and support are an integral part of its competitive strategy. As part of its support services, the Company's technical support staff provides individual assistance in solving analysis problems, integrating vacuum components, designing circuit boards, etc., depending on the business. The Company offers training courses and periodically sends its customers information on applications development. The Company's products generally include a 90-day to one-year warranty. Service contracts may be purchased by customers to cover equipment no longer under warranty. Service work not performed under warranty or service contract is performed on a time-and-materials basis. The Company installs and services its products primarily through its own field service organization. PATENT AND OTHER PROPRIETARY RIGHTS As a leader in the manufacture and sale of scientific instruments and vacuum technologies, the Company has pursued a policy of seeking patent, copyright, trademark, and trade secret protection in the United States and other countries for developments, improvements, and inventions originating within its organization that are incorporated in the Company's products or that fall within its fields of interest. As of September 29, 2000, the Company owned approximately 224 patents in the United States and approximately 331 patents throughout the world, and had numerous patent applications on file with various patent agencies worldwide. The Company intends to file additional patent applications as appropriate. The Company relies on a combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying, and transferring title to protect its proprietary rights. The Company has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace. The Company also has agreements with third parties that provide for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and technology cross-licenses. While the Company places considerable importance on its licensed technology, it does not believe that the loss of any license would have a material adverse effect on the Company's financial condition or results of operation. The Company's competitors, like companies in many high-technology businesses, routinely review the products of others for possible conflict with their own patent rights. Although the Company has from 7 time to time received notices of claims from others alleging patent infringement, the Company believes that there are no pending patent infringement claims that are likely to have a material adverse effect on the Company's financial condition or results of operation. ENVIRONMENTAL MATTERS For a discussion of environmental matters, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Environmental Matters." EMPLOYEES At September 29, 2000, the Company had a total of approximately 4,000 full-time and temporary employees and contract labor worldwide - 2,600 in North America, 700 in Europe, 200 in Asia, 400 in Australia, and 100 in Latin America. The Company's employees based in certain foreign countries may, from time to time, be subject to collective bargaining agreements. Those employees are subject to a collective bargaining agreement that was recently renewed. The Company currently considers its employee relations to be good. The Company's success depends to a significant extent upon a limited number of key employees and other members of senior management of the Company. The loss of the services of one or more of these key employees could have a material adverse effect on the Company's financial condition or results of operation. The success of the Company's future operations depends in large part on the Company's ability to recruit and retain engineers and technicians, as well as marketing, sales, service, and other key personnel, who in each case are in great demand. The Company's inability to attract and retain the personnel it requires could have a material adverse effect on the Company's financial condition or results of operations. 8 EXECUTIVE OFFICERS The following table sets forth the names and ages of the Company's executive officers, together with positions and offices held within the last five years by such executive officers.
NAME AGE POSITION (BUSINESS EXPERIENCE) PERIOD - ------- ----- -------------------------------- ------- Allen J. Lauer 63 President and Chief Executive Officer, Director 1999-Present Executive Vice President, Varian Associates, Inc. 1990-1999 G. Edward McClammy 51 Vice President and Chief Financial Officer 1999-Present Vice President, Special Storage Products Group, 1998-1999 Quantum Corporation Vice President, Finance and Treasurer, Quantum Corporation 1996-1998 Acting Chief Financial Officer, Quantum Corporation 1996 Director of Finance and Treasurer, Quantum Corporation 1994-1996 A. W. Homan 41 Vice President, General Counsel and Secretary 1999-Present Associate General Counsel, Varian Associates, Inc. 1998-1999 Assistant Secretary, Varian Associates, Inc. 1993-1999 Senior Corporate Counsel, Varian Associates, Inc. 1993-1998 Sergio Piras 51 Vice President, Vacuum Technologies 2000-Present Vice President and General Manager, Vacuum 1999-2000 Technologies--Torino Vice President and General Manager, Vacuum 1992-1999 Products--Torino, Varian Associates, Inc. Garry W. Rogerson 48 Vice President, Analytical Instruments 1999-Present Vice President and General Manager, Chromatography 1994-1999 Systems, Varian Associates, Inc. C. Wilson Rudd 48 Vice President, Electronics Manufacturing 2000-Present Vice President and General Manager, Electronics 1999-2000 Manufacturing Vice President and General Manager, Tempe Electronics 1990-1999 Center, Varian, Associates, Inc. Raymond J. Shaw 51 Vice President, NMR Systems 1999-Present Vice President and General Manager, NMR Instruments, 1989-1999 Varian Associates, Inc. James L. Colbert 54 Controller 1999-Present Controller, NMR Instruments, Varian Associates, Inc. 1992-1999
ITEM 2. PROPERTIES The Company has manufacturing, warehouse, research and development, sales, service, and administrative facilities which have an aggregate floor space of approximately 791,000 and 515,000 square feet located in the United States and abroad, respectively, for a total of approximately 1,306,000 square feet worldwide. Of these facilities, aggregate floor space of approximately 580,000 square feet is leased, and the remainder is owned by the Company. The Company does not believe that there is any material long-term excess capacity in its facilities, although utilization is subject to change based on customer demand. The Company believes that its facilities and equipment generally are well maintained, in good operating condition, suitable for the Company's purposes and adequate for present operations. The Company owns or leases 14 manufacturing facilities located throughout the world. Scientific Instruments has manufacturing facilities in Palo Alto, California; Walnut Creek, California; Harbor City, California; Ft. Collins, Colorado; Woburn, Massachusetts; Cary, North Carolina; Wakefield, Rhode Island (which was acquired after September 29, 2000); Melbourne, Australia; and Middelburg, Netherlands. Vacuum Technologies has manufacturing facilities in Lexington, Massachusetts; and Torino, Italy. Electronics Manufacturing has manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin, California (which was acquired after September 29, 2000). The Company owns or leases 60 sales and service facilities located throughout the world, 52 of which are located outside the United States, including in Argentina, Australia, Austria, Belgium, Brazil, Canada, China, England, France, Germany, 9 Hong Kong, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Spain, Sweden, Switzerland, Taiwan, and Venezuela. ITEM 3. LEGAL PROCEEDINGS In the Distribution Agreement, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings relating to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS FISCAL YEAR 2000 COMMON STOCK PRICES -------------------------------------------- FIRST SECOND THIRD FOURTH COMMON STOCK QUARTER QUARTER QUARTER QUARTER - --------------- --------- ----------- ---------- --------- High.............................. $ 24 1/2 $ 50 $ 50 3/8 $ 66 1/8 Low............................... $ 16 1/2 $ 20 1/16 $ 27 1/4 $ 35 5/8 The Company's common stock is traded on the Nasdaq National Market under the trading symbol VARI. The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. There were 4,333 holders of record of the Company's common stock on December 1, 2000. ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ---------------------------------------------------------- 2000 1999 1998 1997 1996 --------- ---------- ----------- ----------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Earnings Statement Data Sales....................................... $ 704.4 $ 598.9 $ 557.8 $ 541.9 $ 504.4 Earnings before taxes....................... $ 70.8 $ 13.7 $ 38.9 $ 27.0 $ 12.7 Income tax expense.......................... $ 28.0 $ 6.1 $ 15.7 $ 12.7 $ 5.7 Net earnings................................ $ 42.8 $ 7.6 $ 23.2 $ 14.3 $ 7.0 Net earnings per share-basic................ $ 1.35 $ 0.25 $ 0.76 $ 0.47 $ 0.23 Net earnings per share-diluted.............. $ 1.26 $ 0.24 $ 0.76 $ 0.47 $ 0.23
FISCAL YEAR END --------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- --------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) Balance Sheet Data Total assets................................... $ 512.3 $ 434.4 $ 413.2 $ 367.2 $ 310.2 Long-term debt................................. $ 45.5 $ 51.2 $ -- $ -- $ --
o Varian, Inc. was established as a separate company on April 2, 1999. This selected financial data should be read in conjunction with the related consolidated financial statements and notes thereto, including Note 1 which describes Varian, Inc.'s separation from Varian Associates, Inc. o The balance sheet data at fiscal year end 1996 is unaudited. o Certain amounts prior to the third quarter of fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. o Fiscal year 2000 includes a purchased in-process research and development charge of $1.0 million. Excluding this charge, net earnings per share would have been $1.29. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Until April 2, 1999, the business of Varian, Inc. (the "Company") was operated as the Instruments Business ("IB") of Varian Associates, Inc. ("VAI"). IB included the business units that designed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing services. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian 11 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. The consolidated financial statements generally reflect the Company's results of operations and cash flows for the year ended September 29, 2000 and for the six-month period ended October 1, 1999. The interim consolidated financial results for the six months ended April 2, 1999 were carved out from the interim financial statements of VAI using the historical results of operations of IB and include the accounts of IB after elimination of inter-business balances and transactions. The consolidated financial statements also include allocations of certain VAI corporate expenses (including legal, accounting, employee benefits, insurance services, information technology services, treasury, and other corporate overhead) to IB. These amounts have been allocated to IB on the basis that is considered by management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by IB. Typical measures and activity indicators used for allocation purposes include headcount, sales revenue, and payroll expense. The Company's management believes that the methods used to allocate these amounts are reasonable. However, these allocations are not necessarily indicative of the amounts that would have been or that will be recorded by the Company on a stand-alone basis. The Company's fiscal years reported are the 52- or 53-week periods which ended on the Friday nearest September 30. Fiscal year 2000 comprises the 52-week period ended on September 29, 2000. Fiscal year 1999 comprises the 52-week period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week period ended on October 2, 1998. RESULTS OF OPERATIONS FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 SALES. Sales were $704.4 million in fiscal year 2000, an increase of 17.6% from sales of $598.9 million in fiscal year 1999. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 1.4%, 29.8%, and 71.3%, respectively. Geographically, sales in North America of $420.4 million, Europe of $179.3 million and the rest of the world of $104.7 million in fiscal year 2000 represented increases (declines) of 26%, (2)%, and 26%, respectively, as compared to fiscal year 1999. The significant increase in North America was largely due to the strong sales growth of the Electronics Manufacturing and Vacuum Technologies segments. The decline in sales in Europe resulted mainly from the strength of the U.S. dollar versus the European currencies. The significant increase in the rest of the world was primarily due to the general economic recovery of the Asian markets. GROSS PROFIT. Gross profit was $266.3 million (representing 37.8% of sales) in fiscal year 2000, compared to $224.6 million (representing 37.5% of sales) in fiscal year 1999. The lower gross profit percentage in fiscal year 1999 resulted primarily from actions taken as part of an overall reorganization of IB, which included actions to prepare IB to separate from VAI and become a stand-alone company, other organization changes and a comprehensive product review, which resulted in a decision to accelerate transition from certain older to newer products necessitating the write-down of certain excess and obsolete inventories and the lowering of prices to accelerate the liquidation of older products. The impact of these actions on gross profit in fiscal year 1999 is in addition to the impact of the restructuring charges discussed below. The gross profit margin in fiscal year 2000 reflects the revenue shift from the Scientific Instruments segment to the Vacuum Technologies and Electronics Manufacturing segments, which experienced greater sales growth but have lower gross profit margins than the Scientific Instruments segment. All three segments experienced higher gross profit margins in fiscal year 2000 compared to fiscal year 1999. SALES AND MARKETING. Sales and marketing expenses were $123.0 million (representing 17.5% of sales) in fiscal year 2000, compared to $124.6 million (representing 20.8% of sales) in fiscal year 1999. The higher costs in fiscal year 1999 resulted from actions taken as part of the above-described 12 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. Sales and marketing expenses in the fiscal year 2000 benefited from the cost savings from the fiscal year 1999 restructuring and reorganization activities, the overall leverage of higher sales as well as the effect of the stronger US dollar when translating local currency expenses into US dollars. The decrease in sales and marketing expenses as a percent of sales also resulted from the revenue shift between the segments noted above, as the faster growing Vacuum Technologies and Electronics Manufacturing segments had lower operating expenses as a percent of sales. RESEARCH AND DEVELOPMENT. Research and development expenses were $31.8 million (representing 4.5% of sales) in fiscal year 2000, compared to research and development expenses of $31.6 million (representing 5.3% of sales) in fiscal year 1999. The decrease in research and development expenses as a percent of sales was the result of the revenue shift between the segments noted above. Research and development spending within each segment as a percent of sales for fiscal year 2000 was approximately the same as last year. Fiscal year 1999 includes $1.2 million of centralized corporate research, funded by IB while still part of VAI. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $37.9 million (representing 5.4% of sales) in fiscal year 2000, compared to $41.8 million (representing 7.0% of sales) in fiscal year 1999. The improvement in general and administrative expenses is primarily the result of the Company's strategy to control these expenses as sales increase. General and administrative expenses of fiscal year 2000 were actual costs of the Company, whereas general and administrative costs in fiscal year 1999 comprise six months of actual costs of the Company and six months of allocated costs of VAI. IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of VanKel Technology Group, Inc. ("VanKel"), the Company recorded approximately $22.6 million in goodwill and other intangible assets. In addition, the Company recorded a one-time charge of $1.0 million for acquired in-process research and development in the quarter ended September 29, 2000. At the time of the acquisition, research and development of several dissolution products and related projects were in process. The percentage of completion for these products ranged from 50% to 80%. The percentage of completion for each project was determined using estimates of effort, value added, and degree of difficulty of the portion of each project completed as of the acquisition date, as compared to the remaining research and development needed to bring each project to technical feasibility. An internal appraisal was performed which used the income approach to determine the fair value of the VanKel business and its identifiable assets, including the portion of the purchase price attributed to the in-process research and development. The income approach includes an analysis of the markets, completion costs, cash flows, other required assets, contributions made by core technology, and risks associated with achieving such cash flows. A 15-25% risk-adjusted discount rate was applied to the projects' cash flows to determine the present value of the intangible assets including the in-process research and development. RESTRUCTURING CHARGES. During the first half 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 PAYMENTS ACCRUAL AT OCTOBER 1, AND OTHER SEPTEMBER 29, 1999 REDUCTIONS 2000 ------------ -------------- -------------- (IN THOUSANDS) Lease payments and other facility expenses.......... $ 1,244 $ 666 $ 578 Severance and other related employee benefits....... 1,721 1,721 -- ------------ -------------- -------------- Total............................................... $ 2,965 $ 2,387 $ 578 ============ ============== ==============
NET INTEREST EXPENSE. Net interest expense was $1.8 million (representing 0.3% of sales) for fiscal year 2000, compared to $2.0 million (representing 0.3% of sales) for fiscal year 1999. See "Liquidity and Capital Resources" below. 13 TAXES ON EARNINGS. The effective income tax rate was 39.5% (39.0% without the in-process research and development charge) for fiscal year 2000, compared to 44.5% for fiscal year 1999. The fiscal year 1999 rate was higher because the Company realized a larger proportion of high tax-rate, foreign country income in fiscal year 1999, due primarily to restructuring and related charges incurred in lower tax-rate countries. NET EARNINGS. Net earnings were $42.8 million ($1.26 diluted net earnings per share) in fiscal year 2000, compared to the net earnings of $7.6 million ($0.24 diluted net earnings per share) in fiscal year 1999. Fiscal year 1999 included IB's overall reorganization, which resulted in incremental costs primarily included in costs of sales, marketing, and restructuring charges. SEGMENTS. Scientific Instruments sales of $401.5 million in fiscal year 2000 increased 1.4% from the fiscal year 1999 sales of $396.1 million. Sales were adversely impacted by the significant drop in European currencies and from the transition to higher field magnets with longer lead times for large NMR systems. Earnings from operations in fiscal year 2000 of $44.0 million (11.0% of sales) increased from $12.9 million (3.3% of sales) in fiscal year 1999. Fiscal year 1999 earnings were adversely impacted by the overall IB reorganization discussed above. Earnings in fiscal year 2000 benefited from the cost saving measures implemented with the restructuring and reorganizations in fiscal year 1999. Fiscal year 2000 also includes the in-process research and development charge of $1.0 million resulting from the VanKel acquisition. Vacuum Technologies sales of $139.1 million in fiscal year 2000 increased 29.8% from fiscal year 1999 sales of $107.2 million. The increase in sales was primarily due to the recovery of the Asian economies and strong demand across a broad spectrum of vacuum technology applications. Demand was particularly strong from life science customers, semiconductor equipment manufacturers, and users of semiconductor equipment. Earnings from operations in fiscal year 2000 of $24.7 million (17.8% of sales) were up from $7.1 million (6.7% of sales) in fiscal year 1999, and reflect the sales increase as well as the cost savings from the fiscal year 1999 IB reorganization. Fiscal year 1999 was negatively impacted by the overall IB reorganization discussed above. Electronics Manufacturing sales in fiscal year 2000 of $163.8 million increased 71.3% from fiscal year 1999 sales of $95.6 million. The increase in sales was primarily due to strong demand from the communications and medical equipment customers and the general movement of small-to-medium-size manufacturing companies to outsource their electronics manufacturing. In addition, on January 31, 2000 the Company acquired an electronics manufacturing facility in Poway, California, which added $15.0 million to revenues following the acquisition. Earnings from operations in fiscal year 2000 of $12.6 million (7.7% of sales) increased from $6.8 million (7.2% of sales) in fiscal year 1999. The increase in earnings from operations was primarily the result of the increased sales. FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 SALES. Sales were $598.9 million in fiscal year 1999, an increase of 7.4% from sales of $557.8 million in fiscal year 1998. Sales by the Scientific Instruments and Electronics Manufacturing segments increased 9.1% and 14.8%, respectively. Sales by the Vacuum Technologies segment decreased by 3.8%. Geographically, sales in North America of $333.0 million, Europe of $183.0 million and the rest of the world of $82.9 million in fiscal year 1999 represented increases of 6.9%, 12.3%, and 0.4% respectively, as compared to fiscal year 1998. GROSS PROFIT. Gross profit was $224.6 million (representing 37.5% of sales) in fiscal year 1999, compared to $221.1 million (representing 39.6% of sales) in fiscal year 1998. The decline in gross profit as a percent of sales resulted primarily from actions taken as part of an overall reorganization that included actions to prepare the Company 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 write-down 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. SALES AND MARKETING. Sales and marketing expenses were $124.6 million (representing 20.8% of sales) in fiscal year 1999, compared to $113.9 million (representing 20.4% of sales) in fiscal year 1998. Some of the increase was due to marketing expenses of Chrompack International B.V. ("Chrompack"), which was acquired in the fourth quarter of fiscal year 1998. Additionally, the increase in the marketing 14 expenses resulted from actions taken as part of the above-described reorganization, including costs to move people and equipment to new consolidated locations, write-down 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 $31.6 million (representing 5.3% of sales) in fiscal year 1999, compared to research and development expenses of $29.6 million (representing 5.3% of sales) in 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 on nuclear magnetic resonance spectrometers and imaging spectrometers. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $41.8 million (representing 7.0% of sales) in fiscal year 1999, compared to $39.5 million (representing 7.1% of sales) in fiscal year 1998. The primary reason for this increase was the additional general and administrative costs of Chrompack, acquired in the fourth quarter of fiscal year 1998, and transition costs related to the Company's spin-off from VAI. 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:
CASH PAYMENTS ACCRUAL AT RESTRUCTURING AND OTHER OCTOBER 1, CHARGES REDUCTIONS 1999 -------------- --------------- -------------- (IN THOUSANDS) Lease payments and other facility expenses................... $ 2,205 $ 961 $ 1,244 Severance and other related employee benefits................ 7,171 5,450 1,721 Exited product line.......................................... 1,598 1,598 -- ------------- ------------- -------------- Total..................................................... $ 10,974 $ 8,009 $ 2,965 ============= ============= ==============
NET INTEREST EXPENSE. Net interest expense was $2.0 million (representing 0.3% of sales) for fiscal year 1999. Prior to the Distribution on April 2, 1999, no debt had been allocated to the Company. See "Liquidity and Capital Resources" below. TAXES ON EARNINGS. The effective income tax rate was 44.5% for fiscal year 1999, compared to 40.2% for fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate because the Company realized a larger proportion of high tax-rate, 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. The decrease in net earnings to $7.6 million ($0.24 diluted net earnings per share) in fiscal year 1999, compared to net earnings of $23.2 million ($0.76 diluted net earnings per share) in fiscal year 1998, was primarily the result of the overall reorganization described above, which resulted in incremental costs primarily included in cost of sales, sales and marketing, and restructuring charges. SEGMENTS. Scientific Instruments sales of $396.1 million in fiscal year 1999 increased 9.1% over fiscal year 1998 sales of $363.1 million. The acquisition of Chrompack in the fourth quarter of fiscal year 1998 had a significant impact on the overall increase in sales. Earnings from operations of $12.9 million (3.3% of sales) decreased from $25.1 million (6.9% of sales) in fiscal year 1998. The reduction in earnings resulted from actions taken as part of the above-described reorganization which principally affected the Scientific Instruments segment and included costs to move people and equipment to new consolidated locations, writedown excess and obsolete inventories and field demonstration equipment following the accelerated transition to newer products, and other higher than normal costs related to the reorganization. Also included in the Scientific Instruments segment earnings were $10.3 million of the restructuring charges discussed above. 15 Vacuum Technologies sales of $107.2 million in fiscal year 1999 declined 3.8% below fiscal year 1998 sales of $111.4 million primarily due to the slow down in the Asian markets and the weakness in semiconductor equipment demand. These impacts resulted in declining sales in the second half of fiscal year 1998 and through the first quarter of fiscal year 1999. In the second quarter of fiscal year 1999, demand began to strengthen and continued to grow in the third and fourth quarters of fiscal year 1999. Earnings from operations of $7.1 million (6.7% of sales) were down 38.2% from the $11.5 million (10.4% of sales) in fiscal year 1998. The decline in earnings from operations resulted primarily from the decline in sales volume and costs related to the above-described reorganization including restructuring charges of $0.7 million. Electronics Manufacturing sales of $95.6 million increased 14.8% from fiscal year 1998 sales of $83.2 million. The increase in sales was principally from the increasing demand from customers in the communications and medical equipment markets. Earnings from operations of $6.8 million (7.2% of sales) increased 21.4% from $5.6 million (6.8% of sales) in fiscal year 1998. The increase in earnings from operations was primarily due to the higher sales volume. 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 were required following the Distribution. As a result of these final adjustments, the Company recorded an increase in stockholders' equity of $1.1 million in the second quarter of fiscal year 2000. Management believes that no further adjustments are necessary, and that if any are required, they will not have a material effect on the Company's financial condition. As of September 29, 2000, the Company had $60.2 million in uncommitted credit facilities for working capital purposes. As of September 29, 2000, no amount was outstanding under these credit facilities. All of these credit facilities contain certain conditions and events of default customary for such facilities. As of September 29, 2000, the Company had $49.5 million compared to $55.5 million in term loans at October 1, 1999. As of September 29, 2000 and October 1, 1999, fixed interest rates on the 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. For fiscal year 2000, the Company was in compliance with all restrictive covenants of the term loan agreements. As of September 29, 2000, the Company also had other long-term notes payable of $2.4 million with an interest rate of 1.0% and $2.4 million with an interest rate of 2.3% as of October 1, 1999. Future principal payments on long-term debt outstanding on September 29, 2000 will be $6.4 million, $6.4 million, $3.4 million, $3.2 million, $2.5 million, and $30.0 million during fiscal years 2001, 2002, 2003, 2004, 2005, and thereafter, respectively. Based upon rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of long-term debt and notes payable approximate estimated fair value. CASH AND CASH EQUIVALENTS. The Company generated $61.8 million of cash from operations in fiscal year 2000, which compares to $22.7 million in fiscal year 1999. The primary reason for this increase in cash generated was improved net earnings, tax benefit from deductions for stock option exercises, and a reduction in working capital requirements. The Company used $53.9 million of cash for investing activities 16 in fiscal year 2000, which compares to $14.8 million in fiscal year 1999. The Company used $32.8 million of cash for the acquisitions of VanKel and an electronics manufacturing operation in Poway, California and $21.6 million for capital equipment in fiscal year 2000. Investing activity in fiscal year 1999 was for capital equipment. The Company generated $12.0 million of cash from financing activities in fiscal year 2000 compared to $15.5 million in fiscal year 1999. Proceeds from stock options represented a significant amount of the financing reduced by scheduled debt payments and the repurchase of 272,500 shares of the Company's common stock under a stock repurchase plan approved in fiscal year 2000. The Company's current business strategy contemplates possible acquisitions, further stock repurchases and/or facility expansions. Any of these activities could utilize cash currently being generated by the Company. 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 fiscal year 2001. ENVIRONMENTAL MATTERS The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the Distribution Agreement, the Company and VSEA each agreed to indemnify VMS for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring and/or remediation activities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of September 29, 2000, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.9 million to $5.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of September 29, 2000. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.9 million as of September 29, 2000. 17 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 September 29, 2000, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $8.1 million to $18.4 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of September 29, 2000. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $12.7 million at September 29, 2000. The Company therefore accrued $6.3 million as of September 29, 2000, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.9 million described in the preceding paragraph. At September 29, 2000, the Company's reserve for environmental liabilities, based upon future environmental-related costs estimated by the Company as of that date, was calculated as follows:
TOTAL RECURRING NON-RECURRING ANTICIPATED COSTS COSTS FUTURE COSTS ------------ ----------------- -------------- Fiscal Year (IN MILLIONS) - ------------- 2001........................................................... $ 0.4 $ 0.6 $ 1.0 2002........................................................... 0.4 0.8 1.2 2003........................................................... 0.4 0.2 0.6 2004........................................................... 0.4 0.0 0.4 2005........................................................... 0.4 0.0 0.4 Thereafter..................................................... 10.4 0.6 11.0 ------------ ----------------- -------------- Total costs.................................................... $ 12.4 $ 2.2 14.6 ============ ================= ============== Less imputed interest.......................................... (6.4) -------------- Reserve amount................................................. 8.2 Less current portion........................................... (1.1) -------------- Long term (included in Other liabilities)...................... $ 7.1 ==============
The amounts set forth in the foregoing table are only estimates of anticipated future environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where such investigation and remediation activities are being undertaken. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with various insurance companies, VMS is still pursuing lawsuits against an insurance company and certain other third parties for the benefit of itself, VSEA, and the Company. In addition, an insurance company has agreed to pay a portion of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.6 million receivable in Other Assets as of September 29, 2000 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. 18 LEGAL PROCEEDINGS In the Distribution Agreement, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings relating to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies (legal currencies) and one new common currency - the euro. The euro then began trading on currency exchanges and began to be used in certain business transactions. The transition period for the introduction of the euro occurs through June 2002. Beginning January 1, 2002, new euro-denominated bills and coins will be issued. Simultaneously, legacy currencies will begin to be withdrawn from circulation with the completion of the withdrawal scheduled for no later than July 1, 2002. Because of the Company's significant sales and operating profits generated in the European Union, the Company has initiated a program to identify and address risks arising from the conversion to the euro currency. These risks include, but are not limited to, converting information technology systems to handle the new currency, evaluating the competitive impact of one common currency due to, among other things, increased cross-border price transparency, evaluating the Company's exposure to currency exchange risks during and following the transition period to the euro, and determining the impact on the Company's processes for preparing and maintaining accounting and taxation records. The Company believes that it is taking appropriate steps to prepare for the euro conversion and to mitigate its effects on the Company's business, and that the euro conversion is not likely to have a material adverse effect on the Company's business or financial condition. However, the Company is still assessing the risks that might arise from the euro conversion and the costs to address those risks, and therefore cannot assure that the euro conversion will not have a material adverse effect on the Company's business or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and SFAS 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 and SFAS 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and SFAS 138 in the first quarter of fiscal year 2001. The Company does not believe the implementation of SFAS 133 and SFAS 138 will have a material effect on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. SAB 101 is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes." In October, 2000 the Securities and Exchange Commission issued SAB 101 Frequently Asked Questions and Answers which the Company is utilizing to determine the impact that adoption will have on its consolidated financial statements. 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Exchange Risk. The Company typically hedges its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. As a result, the effect of an immediate 10% change in exchange rates would not be material to the Company's financial condition or results of operations. The Company's forward exchange contracts have generally ranged from one to 12 months in original maturity, and no forward exchange contract has had an original maturity greater than one year. Forward exchange contracts outstanding as of September 29, 2000, that hedge the balance sheet and certain purchase commitments were effective on September 29, 2000, and accordingly there were no unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. FORWARD EXCHANGE CONTRACTS OUTSTANDING AS OF SEPTEMBER 29, 2000
NOTIONAL VALUE NOTIONAL SOLD VALUE PURCHASED ---------------- --------------------- (IN THOUSANDS) Australian Dollar..................... $ -- $ 25,195 Japanese Yen.......................... 19,320 -- Euro.................................. -- 14,498 Canadian Dollar....................... 5,016 -- British Pound......................... 3,313 3,091 ------ ------ Total................................. $ 27,649 $ 42,784 ====== ======
INTEREST RATE RISK The Company has no material exposure to market risk for changes in interest rates. The Company invests primarily in short-term U.S. Treasury securities, and changes in interest rates would not be material to the Company's financial condition or results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At September 29, 2000 the Company's debt obligations had fixed interest rates. The estimated fair value of the Company's debt obligations approximates the principal amounts reflected below on rates currently available to the Company for debt with similar terms and remaining maturities. Although payments under certain of the Company's operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases. DEBT OBLIGATIONS
PRINCIPAL AMOUNTS AND RELATED WEIGHTED AVERAGE INTEREST RATES BY YEAR OF MATURITY FISCAL YEARS ------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 THEREAFTER TOTAL -------- ---------- --------- ---------- ---------- -------------- ------------ (IN THOUSANDS) Long-term debt (including current portion)............... $ 6,384 $ 6,397 $3,410 $ 3,209 $2,500 $ 30,000 $ 51,900 Average interest rate..... 6.9% 6.9% 5.5% 5.7% 7.2% 6.8% 6.7%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted as a separate section to this report. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to the Company's executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption "Executive Officers." The information required by this Item with respect to the Company's directors and nominees for director is incorporated herein by reference from the information provided under the heading "Election of Directors" of the Company's Proxy Statement. The information required by Item 405 of Regulation S-K is incorporated herein by reference from the information provided under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the information provided under the heading "Executive Compensation Information" of the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference from the information provided under the heading "Stock Ownership of Certain Beneficial Owners" of the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements: (see index on page F-1 of this report) o Report of Independent Accountants o Consolidated Statements of Earnings for fiscal years 2000, 1999, and 1998 o Consolidated Balance Sheets at fiscal year-end 2000 and 1999 o Consolidated Statements of Stockholders' Equity for fiscal years 2000, 1999, and 1998 o Consolidated Statements of Cash Flows for fiscal years 2000, 1999, and 1998 o Notes to the Consolidated Financial Statements (2) Consolidated Financial Statement Schedule: (see index on page F-1 of this report) The following financial statement schedule of the registrant and its subsidiaries for fiscal years 2000, 1999, and 1998 is filed as a part of this Report and should be read in conjunction with the Consolidated Financial Statements of the registrant and its subsidiaries. Schedule II Valuation and Qualifying Accounts. All other required schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or the notes thereto. (3) Exhibits EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the registrant's Form 10-Q for the quarter ended April 2, 1999). 3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant's Form 10-Q for the quarter ended April 2, 1999). 4.1 Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant's Form 10/A filed on March 8, 1999). 4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.2 of the registrant's Form 10/A filed on March 8, 1999). 10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.2 Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.4 of the registrant's Form 10-Q for the quarter ended April 2, 1999).**
22 10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999 (incorporated herein by reference to Exhibit 10.6 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant's Form 10 filed on February 12, 1999). 10.7* Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10/A filed on February 12, 1999). 10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of the registrant's Form 10-K for the year ended October 1, 1999). 10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to Exhibit 10.8 of the registrant's Form 10/A filed on March 8, 1999). 10.10* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer (incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10-K for the year ended October 1, 1999). 10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan (incorporated herein by reference to Exhibit 10.11 of the registrant's Form 10-K for the year ended October 1, 1999). 10.12* Form of Amended and Restated Change in Control Agreement between Varian, Inc. and Garry W. Rogerson and Raymond J. Shaw (incorporated herein by reference to Exhibit 10.7 of the registrant's Form 10/A filed on March 8, 1999). 10.13* Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended July 2, 1999). 10.14* Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and James L. Colbert (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended July 2, 1999). 10.15* Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended July 2, 1999). 10.16* Description of Certain Compensatory Arrangement Between Registrant and G. Edward McClammy (incorporated herein by reference to Exhibit 10.16 of the registrant's Form 10-K for the year ended October 1, 1999). 10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors (incorporated herein by reference to Exhibit 10.17 of the registrant's Form 10-K for the year ended October 1, 1999). 10.18* Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.19* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.20* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and C. Wilson Rudd (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.21* Description of Certain Compensatory Arrangements Between Varian S.p.A. and Sergio Piras. 18.1 Preferability letter regarding inventory accounting principle change. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 27.1 Financial Data Schedule for the fiscal year ended September 29, 2000 (EDGAR filing only).
- -------------- * Management contract or compensatory plan or arrangement. ** Certain exhibits and schedules omitted. (b) Reports on Form 8-K. None. 23 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) Dated: December 6, 2000 By: /s/ G. Edward McClammy ----------------------- G. Edward McClammy Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Allen J. Lauer President and Chief Executive December 6, 2000 - ------------------------------------- Officer, Director Allen J. Lauer (Principal Executive Officer) /s/ G. Edward McClammy Vice President and December 6, 2000 - ------------------------------------- Chief Financial Officer G. Edward McClammy (Principal Financial Officer) /s/ James L. Colbert Controller December 6, 2000 - ------------------------------------- (Principal Accounting Officer) James L. Colbert /s/ D. E. Mundell Chairman of the Board December 6, 2000 - ------------------------------------- D. E. Mundell /s/ John G. McDonald Director December 6, 2000 - ------------------------------------- John G. McDonald /s/ Wayne R. Moon Director December 6, 2000 - ------------------------------------- Wayne R. Moon /s/ Elizabeth E. Tallett Director December 6, 2000 - ------------------------------------- Elizabeth E. Tallett
24 EXHIBIT INDEX Set forth below is a list of exhibits that are being filed or incorporated by reference into this Report: EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the registrant's Form 10-Q for the quarter ended April 2, 1999). 3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant's Form 10-Q for the quarter ended April 2, 1999). 4.1 Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant's Form 10/A filed on March 8, 1999). 4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.2 of the registrant's Form 10/A filed on March 8, 1999). 10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.2 Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.4 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999 (incorporated herein by reference to Exhibit 10.6 of the registrant's Form 10-Q for the quarter ended April 2, 1999).** 10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant's Form 10 filed on February 12, 1999). 10.7* Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10/A filed on February 12, 1999). 10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of the registrant's Form 10-K for the year ended October 1, 1999). 10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to Exhibit 10.8 of the registrant's Form 10/A filed on March 8, 1999). 10.10* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer (incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10-K for the year ended October 1, 1999). 10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan (incorporated herein by reference to Exhibit 10.11 of the registrant's Form 10-K for the year ended October 1, 1999). 10.12* Form of Amended and Restated Change in Control Agreement between Varian, Inc. and Garry W. Rogerson and Raymond J. Shaw (incorporated herein by reference to Exhibit 10.7 of the registrant's Form 10/A filed on March 8, 1999). 10.13* Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
25 10.14* Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and James L. Colbert (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended July 2, 1999). 10.15* Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended July 2, 1999). 10.16* Description of Certain Compensatory Arrangement Between Registrant and G. Edward McClammy (incorporated herein by reference to Exhibit 10.16 of the registrant's Form 10-K for the year ended October 1, 1999). 10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors (incorporated herein by reference to Exhibit 10.17 of the registrant's Form 10-K for the year ended October 1, 1999). 10.18* Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.19* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras (incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.20* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and C. Wilson Rudd (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended March 31, 2000). 10.21* Description of Certain Compensatory Arrangements Between Varian S.p.A. and Sergio Piras. 18.1 Preferability letter regarding inventory accounting principle change. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 27.1 Financial Data Schedule for the fiscal year ended September 29, 2000 (EDGAR filing only).
- -------------- * Management contract or compensatory plan or arrangement. ** Certain exhibits and schedules omitted. 26 VARIAN, INC. AND SUBSIDIARY COMPANIES ANNUAL REPORT ON FORM 10-K INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements of the registrant and its subsidiaries are required to be included in Item 8: Page ---- Report of Independent Accountants......................................................... F-2 Consolidated Statements of Earnings for fiscal years 2000, 1999, and 1998................. F-3 Consolidated Balance Sheets at fiscal year-end 2000 and 1999.............................. F-4 Consolidated Statements of Stockholders' Equity for fiscal years 2000, 1999, and 1998..... F-5 Consolidated Statements of Cash Flows for fiscal years 2000, 1999, and 1998............... F-6 Notes to the Consolidated Financial Statements............................................ F-7
The following consolidated financial statement schedule of the registrant and its subsidiaries for fiscal years 2000, 1999, and 1998 is filed as a part of this Report as required to be included in Item 14(a) and should be read in conjunction with the Consolidated Financial Statements of the registrant and its subsidiaries: Schedule Page - -------- ---- II Valuation and Qualifying Accounts F-23
All other required schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or the notes thereto. F-1 VARIAN, INC. AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Varian, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Varian, Inc. and its subsidiaries at September 29, 2000 and October 1, 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 29, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for inventory in fiscal 2000. /s/ PricewaterhouseCoopers LLP - ------------------------------------------------------ PricewaterhouseCoopers LLP San Jose, California October 26, 2000 F-2 VARIAN, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ----------------------------------------- 2000 1999 1998 ----------- ------------- ------------- RESTATED (1) RESTATED (1) SALES................................................................ $ 704,440 $ 598,887 $ 557,770 Cost of sales........................................................ 438,164 374,246 336,687 ----------- ------------- ------------- GROSS PROFIT......................................................... 266,276 224,641 221,083 ----------- ------------- ------------- OPERATING EXPENSES Sales and marketing.................................................. 123,002 124,597 113,854 Research and development............................................. 31,806 31,554 29,620 General and administrative........................................... 37,934 41,843 39,456 Purchased in-process research and development........................ 980 -- -- Restructuring charges................................................ -- 10,974 -- ----------- ------------- ------------- TOTAL OPERATING EXPENSES............................................. 193,722 208,968 182,930 ----------- ------------- ------------- OPERATING EARNINGS................................................... 72,554 15,673 38,153 Interest expense (income), net....................................... 1,787 2,018 (711) ----------- ------------- ------------- EARNINGS BEFORE INCOME TAXES......................................... 70,767 13,655 38,864 Income tax expense................................................... 27,982 6,076 15,615 ----------- ------------- ------------- NET EARNINGS......................................................... $ 42,785 $ 7,579 $ 23,249 =========== ============= ============= NET EARNINGS PER SHARE: Basic............................................................. $ 1.35 $ 0.25 $ 0.76 =========== ============= ============= Diluted........................................................... $ 1.26 $ 0.24 $ 0.76 =========== ============= ============= SHARES USED IN PER SHARE CALCULATIONS: Basic............................................................. 31,742 30,442 30,423 =========== ============= ============= Diluted........................................................... 33,853 31,121 30,587 =========== ============= =============
- -------------- (1) Certain amounts prior to fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. This change had no impact on diluted net earnings per share for fiscal year 1999 and resulted in a reduction of $.01 for fiscal year 1998. See Accompanying Notes to the Consolidated Financial Statements. F-3 VARIAN, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
FISCAL YEARS ----------------------------- 2000 1999 -------------- ------------- RESTATED (1) ASSETS CURRENT ASSETS Cash and cash equivalents..................................................... $ 39,708 $ 23,348 Accounts receivable, net...................................................... 168,513 151,437 Inventories................................................................... 105,450 80,997 Deferred taxes................................................................ 21,044 20,481 Other current assets.......................................................... 10,734 8,405 -------------- ------------- TOTAL CURRENT ASSETS.......................................................... 345,449 284,668 PROPERTY, PLANT AND EQUIPMENT, NET............................................... 80,632 83,654 OTHER ASSETS..................................................................... 86,238 66,090 -------------- ------------- TOTAL ASSETS..................................................................... $ 512,319 $ 434,412 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt............................................. $ 6,384 $ 6,717 Accounts payable.............................................................. 52,193 40,442 Accrued liabilities........................................................... 133,825 116,128 -------------- ------------- TOTAL CURRENT LIABILITIES..................................................... 192,402 163,287 LONG-TERM DEBT................................................................... 45,516 51,221 DEFERRED TAXES................................................................... 6,669 8,453 OTHER LIABILITIES................................................................ 11,626 7,453 -------------- ------------- TOTAL LIABILITIES................................................................ 256,213 230,414 -------------- ------------- COMMITMENTS AND CONTINGENCIES (NOTES 13 AND 18).................................. 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--32,834,000 shares at September 29, 2000 and 30,563,094 shares at October 1, 1999................. 222,838 190,839 Retained earnings............................................................. 55,944 13,159 Other comprehensive loss...................................................... (22,676) -- -------------- ------------- TOTAL STOCKHOLDERS' EQUITY.................................................... 256,106 203,998 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 512,319 $ 434,412 ============== =============
- -------------- (1) Certain amounts prior to fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. See Accompanying Notes to the Consolidated Financial Statements. F-4 VARIAN, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK TREASURY OTHER ------------------- RETAINED DIVISIONAL STOCK AT COMPREHENSIVE SHARES AMOUNT EARNINGS EQUITY COST LOSS TOTAL -------- ---------- ------------ ------------ --------- ------------- ----------- RESTATED(1) RESTATED RESTATED RESTATED (1) (1) (1) BALANCE, FISCAL YEAR-END 1997.. -- $ -- $ -- $212,560 $ -- $ -- $212,560 Net transfers from Varian Associates, Inc............. -- -- -- 16,743 -- -- 16,743 Net earnings................... -- -- -- 23,249 -- -- 23,249 -------- ---------- ------------ ------------ --------- ------------- ----------- BALANCE, FISCAL YEAR-END 1998.. -- -- -- 252,552 -- -- 252,552 Net transfers to Varian Associates, Inc. and Varian Medical Systems, Inc. (VMS). -- -- -- (57,293) -- -- (57,293) Distribution of Common Stock to Varian Associates, Inc. stockholders................ 30,423 189,679 -- (189,679) -- -- -- Issuance of common stock....... 140 1,160 -- -- -- -- 1,160 Net earnings................... -- -- 13,159 (5,580) -- -- 7,579 -------- ---------- ------------ ------------ --------- ------------- ----------- BALANCE, FISCAL YEAR-END 1999.. 30,563 190,839 13,159 -- -- -- 203,998 Net transfers from VMS......... -- 1,095 -- -- -- -- 1,095 Issuance of common stock....... 2,544 28,575 -- -- -- -- 28,575 Tax benefits from stock option plans....................... -- 12,025 -- -- -- -- 12,025 Purchase of common stock....... -- -- -- -- (9,696) -- (9,696) Retirement of treasury stock... (273) (9,696) -- -- 9,696 -- -- Currency translation adjustment -- -- -- -- -- (22,676) (22,676) Net earnings................... -- -- 42,785 -- -- -- 42,785 -------- ---------- ------------ ------------ --------- ------------- ----------- BALANCE, FISCAL YEAR-END 2000.. 32,834 $ 222,838 $ 55,944 $ -- $ -- $ (22,676) $ 256,106 ======== ========== ============ ============ ========= ============= ===========
- -------------- (1) Certain amounts prior to fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. See Accompanying Notes to the Consolidated Financial Statements. F-5 VARIAN, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEARS ----------------------------------------- 2000 1999 1998 ------------- ------------- ----------- RESTATED (1) RESTATED (1) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings......................................................... $ 42,785 $ 7,579 $ 23,249 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization..................................... 17,709 17,699 17,541 (Gain) loss on disposition of property, plant, and equipment...... (33) 687 -- Purchased in-process research and development..................... 980 -- -- Tax benefit from stock option deductions.......................... 12,025 -- -- Deferred taxes.................................................... (2,347) (1,546) (2,346) Changes in assets and liabilities Accounts receivable, net........................................ (23,214) (7,601) 2,063 Inventories..................................................... (20,455) 4,489 (969) Other current assets............................................ (2,391) (3,666) 564 Accounts payable................................................ 12,712 6,122 (9,012) Accrued liabilities............................................. 20,572 (870) (2,916) Other liabilities............................................... 4,766 591 617 Other........................................................... (1,337) (819) 8,531 ------------- ------------- ----------- Net cash provided by operating activities............................ 61,772 22,665 37,322 ------------- ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property, plant, and equipment................. 479 245 -- Purchase of property, plant, and equipment........................... (21,610) (15,028) (19,358) Purchase of businesses, net of cash acquired......................... (32,774) -- (34,707) ------------- ------------- ----------- Net cash used in investing activities................................ (53,905) (14,783) (54,065) ------------- ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net payment of short-term and long-term debt......................... (5,682) (13,536) -- Purchase of common stock............................................. (9,696) -- -- Issuance of common stock............................................. 28,575 1,160 -- Net transfers (to) from Varian Associates, Inc. and Varian Medical Systems, Inc...................................................... (1,191) 27,842 16,743 ------------- ------------- ----------- Net cash provided by financing activities............................ 12,006 15,466 16,743 ------------- ------------- ----------- Effects of exchange rate changes on cash............................. (3,513) -- -- Net increase in cash and cash equivalents............................ 16,360 23,348 -- Cash and cash equivalents at beginning of period..................... 23,348 -- -- ------------- ------------- ----------- Cash and cash equivalents at end of period........................... $ 39,708 $ 23,348 $ -- ============= ============= =========== NON-CASH INVESTING AND FINANCING ACTIVITIES Debt assumed/transferred from Varian Associates, Inc................. $ -- $ 71,465 $ -- Transfer of property, plant, and equipment........................... $ -- $ 9,900 $ -- SUPPLEMENTAL CASH FLOW INFORMATION Income taxes paid.................................................... $ 10,637 $ 11,210 $ -- Interest paid........................................................ $ 3,714 $ 1,881 $ --
- -------------- (1) Certain amounts prior to fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. See Accompanying Notes to the Consolidated Financial Statements. F-6 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Varian, Inc., (the "Company") is a major supplier of scientific instruments and consumables, vacuum technology products and services, and contract electronics manufacturing services. These businesses primarily serve life science, health care, semiconductor processing, communications, industrial, and academic customers. Until April 2, 1999, the business of the Company was operated as the Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the "Distribution Agreement"). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS, and VSEA after the Distribution, the Company, VMS, and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a Transition Services Agreement. The consolidated financial statements generally reflect the Company's results of operations and cash flows for the year ended September 29, 2000 and for the six-month period ended October 1, 1999. The interim consolidated financial results for the six months ended April 2, 1999 were carved out from the interim financial statements of VAI using the historical results of operations of IB and include the accounts of IB after elimination of inter-business balances and transactions. The consolidated financial statements also include allocations of certain VAI corporate 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. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR. The Company's fiscal years reported are the 52- or 53-week periods, which ended on the Friday nearest September 30. Fiscal year 2000 comprises the 52-week period ended on September 29, 2000. Fiscal year 1999 comprises the 52-week period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week period ended on October 2, 1998. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REVENUE RECOGNITION. Sales and related costs of sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred, fee is fixed or determinable, and collectibility is probable. The Company's products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement, or customer accommodation in costs of sales. Service revenue, which is less than 10% of the net sales in fiscal years 2000, 1999, and 1998, is recognized ratably over the period of the related contract. FOREIGN CURRENCY TRANSLATION. Effective October 2, 1999, the Company changed its functional currency to the local currency (see Note 5). The functional currencies of the Company's operations are F-7 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) primarily the U.S. dollar, and to a lesser extent the Euro, Australian dollar, Japanese yen, and various other currencies. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates at the end of the fiscal year and income and expense items are translated at effective rates of exchange prevailing during the year. Translation gains and losses are deferred and included in the cumulative translation adjustment component of other comprehensive income. Gains and losses arising from transactions denominated in currencies other than a subsidiary's functional currency are reflected in general and administrative expenses and amounted to $0.6 million during fiscal year 2000. During fiscal years 1999 and 1998, exchange gains and losses were $2.4 million, and $2.0 million, respectively, resulting from the remeasurement of monetary assets and liabilities into the U.S. dollar. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk comprise cash and cash equivalents, trade accounts receivable, and forward exchange contracts. The Company invests primarily in short-term U.S. Treasury securities. The Company sells its products and extends trade credit to a large number of customers, who are dispersed across many different industries and geographies. The Company performs ongoing credit evaluations of these customers and generally does not require collateral from them. Trade accounts receivable include allowances for doubtful accounts for fiscal years 2000 and 1999 of $1.8 million and $1.8 million, respectively. The Company seeks to minimize credit risk relating to forward exchange contracts by limiting its counter-parties to major financial institutions. CASH AND CASH EQUIVALENTS. The Company considers currency on hand, demand deposits, and all highly liquid debt securities with an original maturity of three months or less to be cash and cash equivalents. Fair value of cash, cash equivalents, and short-term investments approximate cost due to the short period of time to maturity. INVENTORIES. Inventories are stated at the lower of cost or market. Cost is computed on an average cost basis. Provisions are made for potentially excess or slow moving inventories. PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Machinery and equipment lives vary from three to 10 years, and buildings are depreciated from 20 to 40 years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is less. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. OTHER ASSETS. Goodwill and other identifiable intangible assets are amortized on a straight-line basis over periods ranging from 5 to 40 years. RESEARCH AND DEVELOPMENT. Company-sponsored research and development costs related to both present and future products are expensed currently. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and SFAS 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 and SFAS 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and SFAS 138 in the first quarter of fiscal year 2001. The Company does not believe the implementation of SFAS 133 and SFAS 138 will have a material effect on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures F-8 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) related to revenue recognition policies. SAB 101 is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes." In October 2000, the Securities and Exchange Commission issued SAB 101 Frequently Asked Questions and Answers, which the Company is utilizing to determine the impact that adoption will have on its consolidated financial statements. NOTE 3. BALANCE SHEET DETAIL (IN THOUSANDS)
FISCAL YEARS --------------------------- 2000 1999 ------------- ------------ RESTATED INVENTORIES Raw materials and parts............................................................ $ 55,649 $ 44,640 Work in process.................................................................... 10,912 5,487 Finished goods..................................................................... 38,889 30,870 ------------- ------------ $ 105,450 $ 80,997 ============= ============ PROPERTY, PLANT, AND EQUIPMENT Land and land improvements......................................................... $ 4,720 $ 4,942 Buildings.......................................................................... 62,698 63,202 Machinery and equipment............................................................ 123,590 124,620 Construction in progress........................................................... 6,339 3,584 ------------- ------------ 197,347 196,348 Less: accumulated depreciation..................................................... 116,715 112,694 ------------- ------------ Property, plant, and equipment, net................................................ $ 80,632 $ 83,654 ============= ============ OTHER ASSETS Net goodwill....................................................................... $ 80,478 $ 59,653 Other.............................................................................. 5,760 6,437 ------------- ------------ $ 86,238 $ 66,090 ============= ============ ACCRUED LIABILITIES Payroll and employee benefits...................................................... $ 34,294 $ 33,394 Income taxes....................................................................... 21,511 14,254 Deferred income.................................................................... 15,862 15,899 Contract advances.................................................................. 17,474 5,082 Insurance.......................................................................... 6,191 7,609 Product warranty................................................................... 8,417 8,961 Other.............................................................................. 30,076 30,929 ------------- ------------ $ 133,825 $ 116,128 ============= ============
F-9 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. CHANGE IN METHOD OF ACCOUNTING FOR INVENTORY The Company has accounted for all inventories using the average cost method beginning July 1, 2000, whereas in all prior years, certain inventories maintained in the U.S. were valued using the last-in, first-out (LIFO) method. The new method of accounting for inventory was adopted because the Company believes the average cost method of accounting for inventory will result in more consistent matching of product costs with revenues due to expected ongoing decreases in product costs and ongoing significant technological improvements in components. The financial statements of prior years have been restated to apply the new method retroactively, and accordingly, retained earnings as of September 26, 1997 have been increased by $9.3 million to reflect the restatement. The effect of the accounting change on net income and earnings per share as previously reported for the fiscal years ended October 1, 1999 and October 2, 1998 is as follows (in thousands, except per share amounts):
1999 1998 ---------- ----------- Net income: As previously reported.............................................................. $ 7,328 $ 23,428 Effect of change in accounting for inventories, net of income taxes................. 251 (179) ---------- ----------- As adjusted......................................................................... $ 7,579 $ 23,249 ========== =========== Basic earnings per share: As previously reported.............................................................. $ 0.24 $ 0.77 Effect of change in accounting for inventories, net of income taxes................. 0.01 (0.01) ---------- ----------- As adjusted......................................................................... $ 0.25 $ 0.76 ========== =========== Diluted earnings per share: As previously reported.............................................................. $ 0.24 $ 0.77 Effect of change in accounting for inventories, net of income taxes................. -- (0.01) ---------- ----------- As adjusted......................................................................... $ 0.24 $ 0.76 ========== ===========
NOTE 5. CHANGE IN FUNCTIONAL CURRENCY Statement of Financial Accounting Standards ("SFAS") 52 sets forth guidelines for determining the functional currency to be used for financial reporting. Subsequent to becoming independent from VAI, the Company made certain changes in the way it conducts business internationally. A majority of business transactions are now conducted in the local currencies of the respective subsidiaries. Accordingly, effective October 2, 1999, the Company changed its functional currency from the U.S. dollar to the local currencies of the respective subsidiaries as prescribed by SFAS 52. Under SFAS 52, when the local currencies are determined to be the functional currency, assets and liabilities are translated using current exchange rates at the balance sheet date, and income and expense accounts are translated at average exchange rates in effect during the period. Translation of assets and liabilities at a current exchange rate results in periodic translation gains and losses that are recorded in stockholders' equity as a component of other comprehensive income. Upon adopting a local currency functional currency, the Company recorded an initial translation loss of $6.6 million in the cumulative translation adjustment component of other comprehensive income (see Note 9). This loss principally related to translating property, plant, and equipment at current exchange rates versus the historical exchange rates previously used. NOTE 6. FORWARD EXCHANGE CONTRACTS The Company enters into forward exchange contracts to mitigate the effects of operational (firm sales order and purchase commitments) and monetary asset and liability exposures to fluctuations in foreign currency exchange rates. The Company does not enter into forward exchange contracts for trading purposes. When the Company's forward exchange contracts hedge operational exposure, the effects of movements in currency exchange rates on these instruments are recognized in income when the related revenues and expenses are recognized. All forward exchange contracts hedging operational exposure are designated and highly effective as hedges. The critical terms of all forward exchange contracts hedging operational exposure and of the forecasted transactions being hedged are substantially identical. Accordingly, the Company expects that changes in the fair value or cash flows of the hedging instruments F-10 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and the hedged transactions (for the risk that is being hedged) will completely offset at the hedge's inception and on an ongoing basis. Gains and losses related to hedges of operational exposures are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Any deferred gains or losses are included in accrued expenses in the balance sheet. If a hedging instrument is sold or terminated prior to maturity, gains and losses continue to be deferred until the hedged item is recognized in income. If a hedging instrument ceases to qualify as a hedge, any subsequent gains and losses are recognized in income. When forward exchange contracts hedge monetary asset and liability exposures to fluctuations in currency exchange rates, fluctuations in the value of such contracts are recognized in income each period as the underlying currency exchange rates change. Because the impact of movements in currency exchange rates on these forward exchange contracts generally offsets the related gains and losses arising from translation of the underlying monetary assets and liabilities being hedged, these instruments do not subject the Company to risk that would otherwise result from changes in currency exchange rates. The Company's forward exchange contracts generally range from one to 12 months in original maturity. Forward exchange contracts outstanding as of September 29, 2000 that hedge the balance sheet and certain purchase commitments were effective September 29, 2000, and accordingly there were no significant unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. Forward exchange contracts that were outstanding as of September 29, 2000 are summarized as follows: NOTIONAL NOTIONAL VALUE VALUE SOLD PURCHASED ---------- ----------- (IN THOUSANDS) Australian Dollar.............................. $ -- $ 25,195 Japanese Yen................................... 19,320 -- Euro........................................... -- 14,498 Canadian Dollar................................ 5,016 -- British Pound.................................. 3,313 3,091 ---------- ----------- ---------- ----------- Total....................................... $ 27,649 $ 42,784 ========== =========== NOTE 7. ACQUISITIONS In August 2000, the Company acquired all of the outstanding common stock of VanKel Technology Group, Inc. ("VanKel") for $25.7 million in cash and the extinguishment of debt. VanKel is a leading supplier of dissolution testing equipment and laboratory services for pharmaceutical applications in the United States. This acquisition has been accounted for under the purchase method; accordingly, the Company's combined operating results include 100% of the operating results of VanKel subsequent to the acquisition date. The Company is amortizing acquired goodwill of $18.6 million over 20 years and other purchased intangibles of $4.0 million over 5 to 20 years using the straight line method. In addition, the Company recorded a one-time charge of $1.0 million for acquired in-process research and development in the quarter ended September 29, 2000. At the time of the acquisition, research and development of several dissolution products and related projects were in process. The percentage of completion for these products ranged from 50% to 80%. The percentage of completion for each project was determined using estimates of effort, value added, and degree of difficulty of the portion of each project completed as of the acquisition date, as compared to the remaining research and development needed to bring each project to technical feasibility. An internal appraisal was performed which used the income approach to determine the fair value of the VanKel business and its identifiable assets, including the portion of the purchase price attributed to the in-process research and development. The income approach includes an analysis of the markets, completion costs, cash flows, other required assets, contributions made by core technology, and risks associated with achieving such cash flows. A 15-25% risk-adjusted discount rate was applied to the projects' cash flows to determine the present value of the intangible assets including the in-process research and development. In July 1998, the Company acquired all of the outstanding common stock of Chrompack International B.V ("Chrompack") for approximately $28.9 million in cash and the extinguishment of debt. F-11 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Chrompack is a manufacturer of chromatography products and analytical instruments used by scientific and industrial laboratories. This acquisition has been accounted for under the purchase method; accordingly, the Company's combined operating results include 100% of the operating results of Chrompack subsequent to the acquisition date. The Company is amortizing acquired goodwill of $20.9 million over 40 years using the straight line method. In October 1996, the Company acquired the principal assets and properties of the high performance liquid chromatography and columns business of Rainin Instrument Company, Inc. ("Rainin") for approximately $24.0 million. This acquisition has been accounted for under the purchase method; accordingly, the Company's combined operating results include 100 % of the operating results of Rainin subsequent to the acquisition date. The Company is amortizing acquired goodwill of $21.7 million over 40 years using the straight line method. Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effects of these acquisitions were not material on either an individual or an aggregated basis. NOTE 8. NET EARNINGS PER SHARE Basic earnings per share are calculated based on net earnings and the weighted-average number of shares outstanding during the reported period. Diluted earnings per share include dilution from potential common stock shares issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method. For periods prior to April 3, 1999, pro forma earnings per share were calculated assuming that 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 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 fiscal years ended September 29, 2000 and October 1, 1999, options to purchase 28,392 and 1,150,738, respectively, potential common stock shares with exercise prices greater than the weighted-average market value of such common stock were excluded from the calculation of diluted earnings per share. For the fiscal year ended October 2, 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. A reconciliation follows: 2000 1999 1998 ------------ ----------- --------- RESTATED RESTATED (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) BASIC Net earnings........................... $ 42,785 $ 7,579 23,249 Weighted average shares outstanding.... 31,742 30,442 30,423 Basic earnings per share............ $ 1.35 $ 0.25 $ 0.76 ============ =========== ========= DILUTED Net earnings........................... $ 42,785 $ 7,579 $ 23,249 Weighted average shares outstanding.... 31,742 30,442 30,423 Net effect of dilutive stock options... 2,111 679 164 ------------ ----------- --------- Total shares........................... 33,853 31,121 30,587 Diluted earnings per share.......... $ 1.26 $ 0.24 $ 0.76 ============ =========== ========= F-12 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and the currency translation adjustment. Comprehensive income was $20.1 million and $7.6 million for the fiscal years ended September 29, 2000 and October 1, 1999, respectively. NOTE 10. 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 were required following the Distribution. As a result of these final adjustments, the Company recorded an increase in stockholders' equity of $1.1 million in the second quarter of fiscal year 2000. Management believes that no further adjustments are necessary, and that if any are required, they will not have a material effect on the Company's financial condition. As of September 29, 2000, the Company had $60.2 million in uncommitted credit facilities for working capital purposes. As of September 29, 2000, no amount was outstanding under these credit facilities. All of these credit facilities contain certain conditions and events of default customary for such facilities. The Company had $49.5 million in term loans as of September 29, 2000 and $55.5 million as of October 1, 1999. As of September 29, 2000 and October 1, 1999, fixed interest rates on the 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. For fiscal year 2000, the Company was in compliance with all restrictive covenants of the term loan agreements. The Company also had other long-term notes payable of $2.4 million with an interest rate of 1.0% as of September 29, 2000, and $2.4 million with an interest rate of 2.3% as of October 1, 1999. Future principal payments on long-term debt outstanding on September 29, 2000 will be $6.4 million, $6.4 million, $3.4 million, $3.2 million, $2.5 million, and $30.0 million during fiscal years 2001, 2002, 2003, 2004, 2005, and thereafter, respectively. Based upon rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of long-term debt and notes payable approximate estimated fair value. NOTE 11. STOCK OPTION AND PURCHASE PLANS Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the "Plan") under which shares of common stock can be issued to officers, directors, consultants, and key employees. The maximum number of shares of the Company common stock available for awards under the Plan is 4,200,000 plus such number of shares as were granted in substitution for other options in connection with the Distribution. The Plan is administered by the Compensation Committee of the Company's Board of Directors. The exercise price for stock options granted under the Plan may not be less than 100% of the fair market value at the date of the grant. Options granted are exercisable at the times and on the terms established by the Compensation Committee, but not later than 10 years after the date of grant. Options granted are generally F-13 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) exercisable in cumulative installments of one-third each year commencing one year following the date of grant. 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. Effective April 2, 1999, 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. Subsequent to April 2, 1999, replacement options to purchase an additional 187,934 shares were granted, of which 175,898 shares were granted during the fiscal year ended September 29, 2000. This brings the total options granted in connection with the Distribution to 4,487,573 shares. Such stock options vest over the same vesting periods as the original VAI stock options, typically three years, and have the same expiration dates as the original VAI stock options. At September 29, 2000, options with respect to 1,785,352 shares were available for grant under the plan. OPTION ACTIVITY UNDER THE PLAN
2000 1999 --------------------------- ----------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- --------------- ------------ --------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Outstanding at beginning of fiscal year............. 5,687 $ 10.81 4,300(1) $ 11.16 Granted............................................. 921 $ 22.11 1,571 $ 9.65 Exercised........................................... (2,505) $ 10.50 (140) $ 8.27 Cancelled or expired................................ (33) $ 15.05 (44) $ 13.34 ---------- --------------- ------------ --------------- Outstanding at end of fiscal year................... 4,070 $ 13.51 5,687 $ 10.81 ========== =============== ============ =============== Shares exercisable at end of fiscal year............ 2,175 $ 11.63 3,401 $ 10.72 ========== =============== ============ =============== - ------------ (1) As of April 2, 1999.
OUTSTANDING AND EXERCISABLE OPTIONS AT SEPTEMBER 29, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ ----------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF REMAINING AVERAGE EXERCISE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES PRICE - ----------------------- ---------------- ------------------ ---------------- ---------------- ----------- (IN THOUSANDS) (IN YEARS) (IN THOUSANDS) $ 4.09-$ 8.77......... 259 1.9 $ 8.24 259 $ 8.24 $ 8.80-$ 9.50......... 1,354 8.5 $ 9.49 447 $ 9.48 $ 9.60-$ 11.84........ 911 5.0 $ 11.77 908 $ 11.77 $11.84-$ 14.61........ 823 6.4 $ 14.09 540 $ 14.07 $14.93-$ 54.94........ 723 9.2 $ 24.48 21 $ 30.79 ---------------- ------------------ ---------------- ---------------- ----------- Total................. 4,070 7.0 $ 13.51 2,175 $ 11.63 ================ ================== ================ ================ ===========
During the second quarter of fiscal year 2000, the Company's Board of Directors approved an Employee Stock Purchase Plan (the "ESPP") for which the Company set aside 1,200,000 shares of common stock for issuance. Beginning with the first enrollment date of April 3, 2000, eligible Company employees may set aside for purchases under the ESPP between 1% and 10% of eligible compensation through payroll deductions. The participants' purchase price is the lower of 85% of the stock's market value on the enrollment date or 85% of the stock's market value on the purchase date. Enrollment dates occur every six months and purchase dates occur each quarter. During fiscal year 2000, employees purchased 38,965 shares for $1.3 million. As of September 29, 2000, a total of 1,161,035 shares remained available for issuance under the ESPP. F-14 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has adopted the pro forma disclosure provisions of Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its stock compensation plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net earnings and net earnings per share would have been reduced to the pro forma amounts shown below: 2000 1999 ---------- -------- RESTATED (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net earnings...................................... $ 39,660 $ 6,933 Net earnings per share: Basic.......................................... $ 1.25 $ 0.23 Diluted........................................ $ 1.17 $ 0.22 The presentation of pro forma net earnings and net earnings per share does not include the effects of options granted prior to April 2, 1999, and accordingly, is not representative of future pro forma calculations. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: EMPLOYEE EMPLOYEE STOCK STOCK OPTIONS PURCHASE PLAN ------------- -------------- 2000 1999 2000 ------ ------ -------------- Expected dividend yield..................... 0.0% 0.0% 0.0% Risk-free interest rate..................... 5.9% 5.8% 6.2% Expected volatility......................... 40% 30% 40% Expected life (in years).................... 5.7 5.9 0.5 The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average estimated fair value of employee stock options granted during the fiscal year ended September 29, 2000 was $11.68 per share and $3.95 per share during the six-month period ended October 1, 1999. NOTE 12. STOCK REPURCHASE PROGRAM The Company repurchases shares of its common stock under a program to manage the dilution created by shares issued under employee stock plans. During the second quarter of fiscal year 2000, the Company's Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 28, 2001. The stock repurchases are limited by the amount of cash generated through stock option exercises since October 4, 1999 and sales of stock under the Company's Employee Stock Purchase Plan, plus the anticipated tax benefits to the Company from such exercises and sales. During the fiscal year ended September 29, 2000, the Company repurchased 272,500 shares, for an aggregate cost of $9.7 million. As of September 29, 2000, the Company had remaining authorization for future repurchases of 727,500 shares. F-15 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. CONTINGENCIES ENVIRONMENTAL MATTERS The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the Distribution Agreement, the Company and VSEA each agreed to indemnify VMS for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring and/or remediation activities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of September 29, 2000, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.9 million to $5.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of September 29, 2000. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.9 million as of September 29, 2000. 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 September 29, 2000, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $8.1 million to $18.4 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of September 29, 2000. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $12.7 million at September 29, 2000. The Company therefore accrued $6.3 million as of September 29, 2000, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.9 million described in the preceding paragraph. At September 29, 2000, the Company's reserve for environmental liabilities, based upon future environmental-related costs estimated by the Company as of that date, was calculated as follows:
TOTAL RECURRING NON-RECURRING ANTICIPATED FISCAL YEAR COSTS COSTS FUTURE COSTS - ------------ ----------- --------------- ----------------- (IN MILLIONS) 2001............................................................ $ 0.4 $ 0.6 $ 1.0 2002............................................................ 0.4 0.8 1.2 2003............................................................ 0.4 0.2 0.6 2004............................................................ 0.4 0.0 0.4 2005............................................................ 0.4 0.0 0.4 Thereafter...................................................... 10.4 0.6 11.0 ----------- --------------- ----------------- Total costs..................................................... $ 12.4 $ 2.2 14.6 =========== =============== Less imputed interest........................................... (6.4) ----------------- Reserve amount.................................................. 8.2 Less current portion............................................ (1.1) ----------------- Long term (included in Other liabilities)....................... $ 7.1 =================
F-16 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The amounts set forth in the foregoing table are only estimates of anticipated future environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where such investigation and remediation activities are being undertaken. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with various insurance companies, VMS is still pursuing lawsuits against an insurance company and certain other third parties for the benefit of itself, VSEA, and the Company. In addition, an insurance company has agreed to pay a portion of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.6 million receivable in Other Assets as of September 29, 2000 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. LEGAL PROCEEDINGS In the Distribution Agreement, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings related to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. NOTE 14. RETIREMENT PLANS Certain employees of the Company in the United States are eligible to participate in the Company's sponsored, defined contribution retirement plan. The Company's obligation is to match the participant's contribution up to 6% of their eligible compensation. Participants are entitled, upon termination or retirement, to their account balances, which are held by a third party trustee. In addition, a number of the Company's foreign subsidiaries have retirement plans for regular full-time employees. Total expenses for all plans amounted to $9.4 million, $9.0 million, and $5.9 million for fiscal years 2000, 1999, and 1998, respectively. At the Distribution, the Company assumed responsibility for pension and post-retirement benefits for active employees of the Company; the responsibility for all others, principally retirees of VAI, remained with VMS, although the Company is obligated to reimburse VMS for certain costs relating to certain VAI retirees. An allocation of assets and liabilities for foreign defined benefit pension, post-employment, and post-retirement benefits, which are not material to the Company's financial statements, has been included in these consolidated financial statements. F-17 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. 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. 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, par value $0.01 per share, for $75.00 (subject to adjustment), in the event of certain changes in the Company's ownership. 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. The Rights will expire no later than March 2009. As of September 29, 2000, no Rights had been exercised. The Company began accumulating retained earnings on April 3, 1999, the date immediately after the Distribution. NOTE 16. INCOME TAXES The sources of earnings before income taxes are as follows: 2000 1999 1998 ----------- ---------- ---------- RESTATED RESTATED (IN THOUSANDS) United States............................... $ 21,048 $ (6,014) 4,664 Foreign..................................... 49,719 19,669 34,200 ----------- ---------- ---------- Earnings before income taxes................ $ 70,767 $ 13,655 $ 38,864 =========== ========== ========== Income tax expense consists of the following: 2000 1999 1998 ---------- ---------- ---------- RESTATED RESTATED (IN THOUSANDS) CURRENT U.S. federal................................ $ 7,417 $ (696) $ -- Foreign..................................... 17,911 8,971 16,736 State and local............................. 2,400 (653) 1,500 ---------- ---------- ---------- Total current............................... 27,728 7,622 18,236 ---------- ---------- ---------- DEFERRED U.S. federal................................ (238) (14) (2,821) Foreign..................................... 492 (1,532) 200 ---------- ---------- ---------- Total deferred.............................. 254 (1,546) (2,621) ---------- ---------- ---------- Income tax expense.......................... $ 27,982 $ 6,076 $ 15,615 ========== ========== ========== F-18 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets and liabilities are recognized for the temporary differences between the tax basis and reported amounts of assets and liabilities, tax loss and credit carry-forwards, and the remittance of earnings from foreign subsidiaries. Their significant components are as follows: 2000 1999 ---------- ---------- RESTATED (IN THOUSANDS) ASSETS Product warranty.................................... $ 2,513 $ 2,619 Deferred compensation............................... 3,912 3,072 Inventory........................................... 10,768 8,779 Loss and credit carry-forwards...................... 13,518 2,413 Revenue recognition................................. 447 1,132 Other............................................... 2,450 2,466 ---------- ---------- Gross deferred tax assets........................... 33,608 20,481 ---------- ---------- Valuation allowance................................. (9,964) -- ---------- ---------- Total deferred tax assets........................... 23,644 20,481 ---------- ---------- LIABILITIES Depreciation and amortization....................... 6,669 5,853 Unremitted earnings of foreign subsidiaries......... 2,600 2,600 ---------- ---------- Total deferred tax liabilities...................... 9,269 8,453 ---------- ---------- Net deferred tax assets............................. $ 14,375 $ 12,028 ========== ========== The Company's foreign manufacturing subsidiaries have accumulated approximately $36 million of earnings that have been reinvested in their operations. The Company has not provided U.S. tax on these earnings. For the year ended September 29, 2000, the Company has U.S. loss and tax credit carry-forwards of approximately $8.8 million and $10.0 million respectively, and foreign loss carry-forwards of approximately $2.0 million. The loss carry-forwards expire in 2020 and the credit carry-forwards expire in 2005. A valuation allowance has been provided against foreign tax credit carry-forwards. If recognized, the tax benefits of these carry-forwards will be accounted for as a credit to stockholders' equity. The difference between the reported income tax rate and the federal statutory income tax rate is attributable to the following: 2000 1999 1998 ------ ------ ----- Federal statutory income tax rate..................... 35.0% 35.0% 35.0% State and local taxes, net of federal benefit......... 2.2 (3.2) 2.6 Foreign taxes in excess of federal statutory rate..... 2.3 10.8 5.3 Foreign sales corporation............................. -- (0.8) (1.2) Other................................................. -- 2.7 (1.5) ------ ------ ----- Reported income tax rate.............................. 39.5% 44.5% 40.2% ====== ====== ===== Excluding the in-process research and development charge, the tax rate for fiscal year 2000 would have been 39%. The Company's income taxes payable have been reduced, and the deferred tax assets increased by the tax benefits associated with exercises of employee stock options. These benefits were credited directly to stockholders' equity and amounted to $12.0 million. NOTE 17. 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 F-19 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Restructuring activities related to severance and other related employee benefits is complete. Restructuring regarding lease payments still includes two facilities; one lease expires in March 2001 and the other in 2006. The following table sets forth certain details associated with this restructuring:
CASH ACCRUAL PAYMENTS ACCRUAL AT OCTOBER 1, AND OTHER SEPTEMBER 29, 1999 REDUCTIONS 2000 ---------- ------------- ------------ (IN THOUSANDS) Lease payments and other facility expenses................ $ 1,244 $ 666 $ 578 Severance and other related employee benefits............. 1,721 1,721 -- ---------- ------------- ------------ Total..................................................... $ 2,965 $ 2,387 $ 578 ========== ============= ============
NOTE 18. LEASE COMMITMENTS At fiscal year-end 2000, the Company was committed to minimum rentals for certain facilities under non-cancellable operating leases for fiscal years 2001 through 2005 and thereafter, as follows, in thousands: $2,605, $2,660, $2,422, $1,957, $1,752, and $28,607, respectively. Rental expense for fiscal years 2000, 1999, and 1998, in thousands, was $5,523, $4,738, and $7,600, respectively. NOTE 19. INDUSTRY AND GEOGRAPHIC SEGMENTS INDUSTRY SEGMENTS. The Company's operations are grouped into three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. Scientific Instruments is a supplier of instruments, consumable laboratory supplies, and after sales support used in studying the chemical composition and structure of myriad substances and for imaging. These products are tools for scientists engaged in drug discovery, life sciences, genetic engineering, health care, environmental analysis, quality control and academic research. Vacuum Technologies provides products and solutions to create, maintain, contain, and measure an ultra-clean or high-vacuum environment for industrial and scientific applications. Vacuum Technologies products are used in semiconductor manufacturing equipment, life science and other analytical instruments, industrial manufacturing, and quality control. Electronics manufacturing provides contract manufacturing services for technology companies with low-volume and high-mix requirements. These segments were determined based on how management views and evaluates the Company's operations. Other factors included in segment determination were similar economic characteristics, distribution channels, manufacturing environment, technology, and customers. No single customer represents 10% or more of the Company's total sales. Corporate includes shared costs of legal, tax, accounting, human resources, real estate, information technology, treasury, and other Varian, Inc. management costs. A portion of the indirect and common costs has been allocated to the segments through the use of estimates. Also, transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company's operations to similar operations of other companies may not be meaningful. The Company operates various manufacturing and marketing operations outside the United States. In fiscal years 2000, 1999, and 1998, no single country outside the United States accounted for more than 10% of total sales. In fiscal years 2000, 1999, and 1998, no single country outside the United States accounted for more than 10% of total assets. Transactions between geographic areas are accounted for at cost and are not included in sales. Included in the total of United States sales are export sales in fiscal years 2000, 1999, and 1998 of $39 million, $37 million, and $30 million, respectively. F-20 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INDUSTRY SEGMENTS
DEPRECIATION AND SALES PRETAX EARNINGS IDENTIFIABLE ASSETS CAPITAL EXPENDITURES AMORTIZATION ------------------- ------------------------- ----------------------- -------------------- ------------------- 2000 1999 1998 2000(1) 1999(2) 1998(2) 2000 1999(2) 1998(2) 2000 1999 1998 2000 1999 1998 ------ ------ ----- ------- ------- ------- ----- ------- ------- ------ ------ ------ ------ ----- ------ (IN MILLIONS) Scientific Instruments... $ 401 $ 396 $363 $ 44 $ 13 $ 25 $ 287 $240 $ 235 $ 5 $ 5 $ 6 $ 8 $ 8 $ 7 Vacuum Technologies.. 139 107 112 25 7 11 61 61 59 4 4 5 3 4 4 Electronics Manufacturing. 164 96 83 13 7 6 85 53 46 10 2 6 3 3 2 ------ ------ ----- ----- ------ ------ ------ ----- ------ ------ ------ ------ ------ ----- ------ Total industry segments...... 704 599 558 82 27 42 433 354 340 19 11 17 14 15 13 General corporate..... -- -- -- (9) (11) (4) 79 80 73 3 4 2 4 3 5 Interest, net.... -- -- -- (2) (2) 1 -- -- -- -- -- -- -- -- -- ------ ------ ----- ----- ------ ------ ------ ----- ------ ------ ------ ------ ------ ----- ------ Continuing operations.... $ 704 $ 599 $558 $ 71 $ 14 $ 39 $ 512 $434 $ 413 $ 22 $ 15 $ 19 $ 18 $ 18 $ 18 ====== ====== ===== ===== ====== ====== ====== ===== ====== ====== ====== ====== ====== ===== ======
GEOGRAPHIC SEGMENTS
SALES TO INTERGEOGRAPHIC UNAFFILIATED SALES CUSTOMERS (3) TO AFFILIATES TOTAL SALES PRETAX EARNINGS IDENTIFIABLE ASSETS ------------------- ------------------- -------------------- ------------------------- ----------------------- 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000(1) 1999(2) 1998(2) 2000 1999(2) 1998(2) ------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- ------- ---- ------- ------- (IN MILLIONS) United States.. $ 403 $ 331 $327 $ 170 $ 126 $116 $ 573 $ 457 $ 443 $ 48 $ 14 $ 39 $ 290 $224 $ 214 International.. 301 268 223 106 105 112 407 373 335 50 22 34 143 151 159 ------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- -------- ------ ------- ------- Total geographic segments.... 704 599 550 276 231 228 980 830 778 98 36 73 433 375 373 Eliminations, corporate & other..... -- -- 8 (276) (231) (228) (276) (231) (220) (27) (22) (34) 79 59 40 ------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- -------- ------ ------- ------- Total company.. $ 704 $ 599 $558 $ -- $ -- $ -- $ 704 $ 599 $ 558 $ 71 $ 14 $ 39 $ 512 $434 $ 413 ====== ====== ===== ====== ====== ===== ====== ====== ====== ======= ======= ======== ====== ======= =======
(1) Includes purchased in-process research and development charge of $1.0 million. (2) Certain amounts have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. (3) Sales are based on the location of the operation furnishing goods and services. Sales to unaffiliated customers include sales to VAI, VMS, and VSEA. No single customer accounted for more than 10% of sales. F-21 VARIAN, INC. AND SUBSIDIARY COMPANIES QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
2000 (1) --------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (4) -------------- ---------------- --------------- ------------------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales.................................... $ 160.0 $ 177.3 $ 182.0 $ 185.1 Gross profit............................. $ 62.1 $ 67.6 $ 67.3 $ 69.3 Net earnings............................. $ 8.5 $ 10.2 $ 11.7 $ 12.4 Net earnings per share Basic.................................... $ 0.28 $ 0.33 $ 0.36 $ 0.38 Diluted.................................. $ 0.26 $ 0.30 $ 0.34 $ 0.36 ============== ================ =============== ==================
1999 (1) ------------------------------------------------------------------------ FIRST QUARTER (3) SECOND QUARTER (2)(3) THIRD QUARTER FOURTH QUARTER ----------------- -------------------- -------------- ---------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales................................. $ 133.3 $ 148.9 $ 149.6 $ 167.1 Gross profit.......................... $ 52.7 $ 47.4 $ 58.5 $ 66.0 Net earnings (loss)................... $ 4.3 $ (9.9) $ 5.6 $ 7.6 Net earnings (loss) per share Basic................................. $ 0.14 $ (0.32) $ 0.18 $ 0.25 Diluted............................... $ 0.14 $ (0.32) $ 0.18 $ 0.24 ================= ==================== ============== ================
- -------------- (1) Certain amounts prior to the third quarter of fiscal year 2000 have been restated to reflect the Company's change from the LIFO method to the Average Cost method of accounting for inventories. Amounts for gross profit, net earnings (loss), earnings (loss) per share-basic, and earnings (loss) per share-diluted prior to restatement for the four quarters of fiscal year 1999 were: $52.6, $4.3, $0.14, and $0.14; $47.2, ($10.0), ($0.33), and ($0.33); $58.4, $5.5, $0.18, and $0.18; and $66.0, $7.5, $0.25, and $0.24, respectively. Amounts for gross profit, net earnings, earnings per share-basic and earnings per share-diluted prior to restatement for the first two quarters of fiscal year 2000 were: $61.9, $8.4, $0.27, and $0.26; $67.5, $10.1, $0.32, and $0.30, respectively. (2) The loss resulted from restructuring and reorganization costs associated with preparing to spin-off from VAI, streamlining IB's worldwide sales and service network, and exiting certain product lines. (3) The results for quarters prior to the third quarter of fiscal year 1999 do not include an assumed interest expense for long-term debt taken on by the Company as part of the spin-off from VAI on April 2, 1999. (4) Includes purchased in-process research and development charge of $1.0 million. Excluding this charge, diluted net earnings per share would have been $.039. F-22 SCHEDULE II VARIAN, INC. AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS 2000, 1999, AND 1998 (IN THOUSANDS)
DEDUCTIONS -------------------------------------- BALANCE BALANCE AT CHARGED TO AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DESCRIPTION AMOUNT PERIOD ------------ ------------ --------------------------- ---------- ----------- Allowance for Doubtful Accounts Receivable: Fiscal year 2000............... $ 1,846 $ 407 Write-offs & adjustments $ 436 $ 1,817 ============ ============ ========== =========== Fiscal year 1999............... $ 713 $ 1,506 Write-offs & adjustments $ 373 $ 1,846 ============ ============ ========== =========== Fiscal year 1998............... $ 321 $ 295 Write-offs & adjustments $ (97) $ 713 ============ ============ ========== =========== Estimated Liability for Product Warranty: Fiscal year 2000............... $ 8,961 $ 6,003 Warranty expenditures $ 6,547 $ 8,417 ============ ============ ========== =========== Fiscal year 1999............... $ 7,600 $ 10,016 Warranty expenditures $ 8,655 $ 8,961 ============ ============ ========== =========== Fiscal year 1998............... $ 7,173 $ 9,641 Warranty expenditures $ 9,214 $ 7,600 ============ ============ ========== ===========
F-23 EX-10.21 2 0002.txt EXHIBIT 10.21 EXHIBIT 10.21 DESCRIPTION OF CERTAIN COMPENSATORY ARRANGEMENTS BETWEEN VARIAN S.P.A. AND SERGIO PIRAS Sergio Piras, Vice President, Vacuum Technologies, is employed by and serves as Managing Director of Registrant's wholly-owned subsidiary Varian S.p.A., an Italian corporation, at its facility in Torino, Italy. Due to his position with Varian S.p.A., Mr. Piras is classified as a manager - a "dirigenti" - along with 12 other managers at Varian S.p.A., all of whom are subject to the National Collective Agreement for Industrial Dirigenti (the "Collective Agreement"). The Collective Agreement is a union agreement that mandates certain compensatory arrangements and benefits for dirigenti working for industrial companies in Italy, which arrangements and benefits may be different from what is provided to non-dirigenti employees. One of those compensatory arrangements mandated by the Collective Agreement is a Supplementary Retirement Plan for Dirigenti in the Industrial Sector (the "PREVINDAI Plan"). Attached to this Exhibit 10.21 is a translation from Italian of the PREVINDAI Plan Rules. Mr. Piras participates in the PREVINDAI Plan. The Collective Agreement also mandates certain medical, disability and life insurance benefits for member dirigenti, including Mr. Piras. These benefits are (1) private group medical insurance that reimburses Mr. Piras for approximately 60% of the costs of private medical care incurred by him or his dependants, subject to certain maximum reimbursements, with Mr. Piras paying a portion of the premium for this coverage; (2) accidental death or disability insurance that would provide amounts equal to five times annual base salary in the event of death and six times annual base salary in the event of total permanent disability; and (c) life insurance that would provide 280,000,000 Italian lira in the event of death or total permanent disability. Mr. Piras is also provided supplemental group medical insurance that reimburses him for costs of private medical care incurred by him or his dependants to the extent not reimbursed under basic group medical insurance, and supplemental life insurance that would provide 30,000,000 Italian lira in the event of death or total permanent disability. PREVINDAI PLAN RULES - NOVEMBER 5, 1997 - ART. 1 - GENERAL RULES 1. This document summarizes the rules of the Supplementary Retirement Plan for the Executives in the Industrial Sector (PREVINDAI). The Fund, hereinafter named "The Fund", has been set up based on the Union Agreement October 3, 1989 and made compliant with the provisions of the DL 21 April 1993 n. 124 and following amendments, hereinafter named "The Decree" and the following agreements between the parties who have undersigned it. It is adopted based on the provisions of Art. 10 of the Articles of Association of the Fund. 2. The rules of this Plan apply to the members described in Section 4, paragraph 2 of the Articles of Association ("Old members") or in Section 4, paragraph 3 of the same Articles ("New members"). ART. 2 - JOINING 1. The enrollment of new participants ("New members") is made through the Employer filling in some special forms made available by the Fund or a document that is considered by the Fund as equivalent. 2. The adhesion produces consequences also with respect to what is stated in Section 4, paragraph 4 of the Articles of Association. ART. 3 - COMMUNICATIONS 1. In case of hire or appointment of an executive as "Old member", the industrial companies and the other organizations mentioned in Section 4, paragraph 1 of the Articles of Association have to communicate the private data of the participant and those regarding the participation to the previous supplementary plan, if different from PREVINDAI. 2. In case of hire or appointment of an executive who, as of 27 April 1993 was not enrolled in any supplementary plan or left a plan after this date, the industrial companies and the other organizations mentioned in Section 4, paragraph 1 of the Articles of Association have to communicate - in case of adhesion to the Fund - the relevant private data. The request of the adhesion foreseen by Section 3, paragraph 4 of the Decree, if not collected earlier by the Fund, is in any case requested. 3. The above mentioned communications have to be made in compliance with the rules set by the Board of Directors together with the additional information that might be requested by the same Board. 4. The companies have to communicate the termination of the employment with any employee enrolled in the Fund. ART. 4 - PAYMENT OF CONTRIBUTIONS 1. The payment of contributions to the Fund, as set in Art. 13 of the Articles of Association, inclusive of a share of or the entire TFR accrual foreseen by the laws regulating supplementary pension plans have to be made every three months. Also the employee contribution has to be made with the same frequency by the 20th day of the month following the end of the quarter during which the contributions are withdrawn on the pay slip except for the case of coincidence with Saturday or any other holiday. In this case it is deferred to the first working day immediately following that day. The quarters begin with the first day of the months of January, April, July and October. 2. At the moment of payment of contributions the company has to transmit to the Fund or to the subject appointed by it a list of employees showing the contributions of each executive and any other element necessary, with specific indication of the TFR accruals paid to the Plan. 3. The rules regarding the payment of contributions and the transfer of the information concerning the participants are set by the Board of Directors. 4. In case if bankruptcy, liquidation and similar procedures and in any case the credit is considered as doubtful the Board of the Fund authorise the manager making a specific request o pay also the employer's contributions together with the interests due for the delay. In this case the manager replaces the Fund in the quality of creditor of the company as set by Art. 1201 of the Civil Code, except for what is stated in the DL 80/92. ART. 5 - SUSPENSION OF PAYMENTS During the waiting period of the employment the contributions are only due for the periods during which the remuneration is paid. ART. 6 - TRANSFER OF CONTRIBUTIONS FROM ANOTHER FUND In case a manager is hired from a company for which an initiative, a Cassa or a Fund described in Art. 4 of the Articles of Association from which the transfer of funds is allowed or in any other case Art. 10 of the Decree authorises the transfer of funds, the 2 Fund - upon request of a participant - will acquire the pension position matured by the executive and will provide the benefits in line with the Plan Rules. ART. 7 - ASSETS MANAGEMENT 1. The assets management could be done through financial arrangements, insurance contracts or a mix of the two. 2. The alternatives available and the record of the contributions paid and the funds transferred, with reference to the individual accounts, will be made and publicised in accordance with the provisions of the contracts mentioned in the previous paragraph. 3. In case of insurance contracts the payment of premiums to the insurer will be made in accordance with the terms of the policy after the last day of the month in which the contributions are made available to the Fund. 4. The terms of the payment to the insurers and the transfer of funds to the Fund managers are established by the Board of Directors. ART. 8 - TERMINATION OF EMPLOYMENT 1. In case of termination of employment for reasons different from death and permanent disability before the entitlement to the retirement according to the provisions of law, the executive can keep in the Fund the contributions made and will be entitled to the performance according to the conditions set by the Articles of Association and from the Plan rules at the moment these requirement mature, not later, in any case, than age 65 and - for the "New members" - to the participation in the Plan for a minimum period of five years. 2. In case the position mentioned in the previous paragraph is kept for more than two years the Board of Director can impose the payment of an administration fee. ART. 9 - TRANSFER OF CONTRIBUTIONS TO ANOTHER FUND 1. In case the participation requirements lapse the participant can transfer his/her position in line with the provisions of Art. 10, paragraph 1, letter a) of the Decree. Always in this case the transfer foreseen by Art. 10, paragraph 1, letter b) of the Decree is allowed in case the requirement of letter a) do not recur or - in alternative to this option - only after the period of time set in paragraph 2 in case of transfer to a initiative, Cassa or Fund foreseen by Art. 4 of the Articles of Association. 2. In case the conditions set in the previous paragraph do not recur the executive can transfer the Fund to another fund provided that seven years of seniority with 3 PREVINDAI have been matured including, for a maximum of five years, the seniority deriving from other transfers made in line with Art. 6 of these Plan Rules. Subject to the continuation with the plan, the transfer is allowed from January 1st 2000. 3. In all these cases PREVINDAI has to satisfy the request within five months from the exercise of the option, defining the position to be transferred with correct financial and actuarial criteria. ART. 10 - SURRENDER In case the continuation of the participation is not possible any more and the members are not allowed to transfer the position according to Art. 10 c. 1, letter a) of the Decree within one year, the executive - not retired nor pension eligible - can withdraw the contributions in line with the provisions of Art. 10, paragraph 1, letter c) of the same Decree. In this case the executive has to submit a request stating that there is no involvement in any other supplementary plan. The possibility or surrender is allowed immediately: o To the executive maturing the right to the compulsory retirement and actually retiring without having matured the right to the supplementary pension; o To the beneficiaries mentioned in Art. 10, paragraph 3 of the Decree in case of death of the executive. ART. 11 - REQUEST FOR THE BENEFIT 1. The executive having terminated his employment and having matured the right to retire and has submitted his/her request to retire, has to submit the request to the Fund to have access to the benefit. The same request has to be submitted by the survived beneficiaries. 2. The executive has to specify in the request whether he intends to transform the annuity into a capital and if he desires also a spouse pension entitlement, appointing at the same time the beneficiaries in line with the provisions of Art 16 of the Articles of Association for the "New members". 3. The benefit will be liquidated within the time frame set by the Board of Directors of the Fund. On the basis of specific needs the Board could establish some special provisions including the extension of the time frame from the date of the last contribution to the Fund. 4. The Board will also establish the deadline for submitting the request of benefits and the forms, the terms and the conditions for the liquidation of the benefit. 4 ART. 12 - BENEFICIARIES The beneficiary of the survivor' paragraph 3 of the Articles of Association is the person appointed by the executive with the request of the benefit in line with Art. 11 of the Plan Rules. ART. 13 - ADVANCES In order to benefit from the advances set by Art. 7, paragraph 4 of the Decree the executive has to present a request with the requested documents (in case of request for medical expenses), or the notorial deed (in case of purchase of the first home for himself or the sons). In the first case the advance will be provided within three months; in the second case within six months. ART. 14 - MORTGAGES No pledges are allowed in relation to the rights associated to the participation to the Plan. ART. 15 - FINAL PROVISIONS These Plan Rules are implemented with immediate effect except for what regards the situations already defined at the date of the implementation. 5 EX-18.1 3 0003.txt EXHIBIT 18.1 EXHIBIT 18.1 October 26, 2000 Board of Directors Varian, Inc., Dear Directors: We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have audited the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 29, 2000 and issued our report thereon dated October 26, 2000. Note 4 to the consolidated financial statements describes a change in accounting principle from the Last-In-First-Out ("LIFO") method to the average cost method of accounting for the Company's inventory. It should be understood that the preferability of one acceptable method of accounting over another for inventory has not been addressed in any authoritative accounting literature, and in expressing our concurrence below we have relied on management's determination that this change in accounting principle is preferable. Based on our reading of management's stated reasons and justification for this change in accounting principle in the Form 10-K, and our discussions with management as to their judgment about the relevant business planning factors relating to the change, we concur with management that such change represents, in the Company's circumstances, the adoption of a preferable accounting principle in conformity with Accounting Principles Board Opinion No. 20. Very truly yours, /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP EX-21 4 0004.txt EXHIBIT 21 EXHIBIT 21 VARIAN, INC. SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR 2000 STATE OR OTHER JURISDICTION SUBSIDIARY OF INCORPORATION OR ORGANIZATION Chrompack, Inc. New Jersey Chrompack Onroerend Goed B.V. The Netherlands Intralab Instrumentacao Analitica Limitada Brazil Vankel Technology Group, Inc. Delaware Varian (Shanghai) International Trading Co. Ltd. China Varian A.G. Switzerland Varian AB Sweden Varian Argentina, Ltd. Delaware Varian Australia Pty. Ltd. Australia Varian Australia, LLC Delaware Varian B.V. The Netherlands Varian Belgium N.V. Belgium Varian Canada Inc. Canada Varian Chrompack International B.V. The Netherlands Varian Deutschland GmbH Germany Varian FSC, Inc. Barbados Varian Gessellschaft mbH Austria Varian Holdings (Australia) Pty. Limited Australia Varian Iberica S.L. Spain Varian India Pvt. Ltd. Delaware Varian Industria E. Comercio Limitada Brazil Varian Instruments of Puerto Rico, Inc. Delaware Varian Inter-American Corp. California Varian Limited United Kingdom Varian S.A. France Varian S.A. Mexico Varian S.p.A. Italy Varian Technologies Asia, Ltd. Delaware Varian Technologies China, Ltd. Delaware Varian Technologies Japan, Ltd. Delaware Varian Technologies Korea, Ltd. Korea Varian Technologies, C.A. Venezuela All of the above subsidiaries are included in the Company's consolidated financial statements. The names of certain consolidated subsidiaries have been omitted because, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. EX-23 5 0005.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-75527 and 333-31704) of Varian, Inc. and its subsidiaries of our report dated October 26, 2000, relating to the Financial Statements, which appears in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - --------------------------------------------- PricewaterhouseCoopers LLP San Jose, California December 6, 2000 EX-27.1 6 0006.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARIAN, INC.'S SEPTEMBER 29, 2000 FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-29-2000 OCT-02-1999 SEP-29-2000 39,708 0 168,513 0 105,450 345,449 197,347 116,715 512,319 192,402 0 0 0 328 255,778 512,319 704,440 704,440 438,164 631,886 0 0 1,787 70,767 27,982 42,785 0 0 0 42,785 1.35 1.26
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