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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 October 1, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-25393
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VARIAN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0501995
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
3120 Hansen Way, Palo Alto, California 94304-1030
(650) 213-8000
(Address and telephone number of principal executive offices)
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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
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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. YES [_] NO [X]
The aggregate market value of the registrant's common stock held by non-
affiliates as of December 1, 1999 was $646,689,393.
The number of shares of the registrant's common stock outstanding as of
December 13, 1999 was 30,976,250.
Documents Incorporated by Reference:
Document Description 10-K Part
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Certain sections, identified by caption, of the Definitive Proxy
Statement for the Registrant's 2000 Annual Meeting of Stockholders
(the "Proxy Statement")............................................ III
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An index of exhibits filed with this Form 10-K is located on page 24.
VARIAN, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1999
TABLE OF CONTENTS
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 7
Item 3. Legal Proceedings.............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............ 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 9
Item 6. Selected Financial Data........................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...... 18
Item 8. Financial Statements and Supplementary Data.................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant............. 20
Item 11. Executive Compensation......................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 20
Item 13. Certain Relationships and Related Transactions................. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 21
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,
which provides a "safe harbor" for these types of statements. These forward-
looking statements are subject to risks and uncertainties that could cause
actual results of Varian, Inc. (the "Company") to differ materially from
management's current expectations. Those risks and uncertainties include,
without limitation: new product development and commercialization; demand and
acceptance for the Company's products; competitive products and pricing;
economic conditions in the Company's product and geographic markets; foreign
currency fluctuations; market investment in capital equipment; the ability to
realize anticipated cost-savings from the Company's reorganization and
restructuring; the lack of recent operating history for the Company as a
separate entity; increased operating margins on higher sales; successful
implementation by the Company and certain third parties of corrective action
to address the impact of the Year 2000; and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
i
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, and nuclear magnetic
resonance equipment used in a broad range of life science, environmental,
industrial and research applications requiring identification, quantification
and analysis of the elemental, molecular, physical, and biological composition
and structure of liquids, solids, and gases. The business is organized into
the Chromatography Systems, Optical Spectroscopy Instruments, and NMR Systems
operations.
The Chromatography Systems operation is a worldwide supplier of
chromatography instruments and consumable laboratory supplies. The instruments
include gas chromatographs (GC), high performance liquid chromatographs
(HPLC), gas chromatograph/mass spectrometers, sample automation products, and
data analysis systems. The consumable laboratory supplies include sample
preparation products, GC and HPLC columns, and GC filters. The business also
provides related customer support services such as applications consulting,
training, and product service. 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.
Mass spectroscopy is a technique for further analysis of components by
breaking molecules into multiple electrically charged ions which are then
sorted for analysis.
The Optical Spectroscopy Instruments (OSI) operation is a worldwide
supplier of spectroscopy instruments and consumable laboratory supplies. The
instruments include atomic absorption spectrometers, inductively
1
coupled plasma spectrometers, inductively coupled plasma/mass spectrometers,
fluorescence spectrometers, ultraviolet/visible and near-infrared
spectrophotometers, sample automation products, and data analysis systems. The
consumable laboratory supplies include sample preparation products, xenon
lamps, cuvettes, and graphite furnace replacement parts. The business also
provides related customer support services such as applications consulting,
training, and product service. 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 or frequency.
The NMR Systems operation is a worldwide supplier of nuclear magnetic
resonance ("NMR") spectrometers, NMR imaging spectrometers, and related
accessories, such as probes, applications software, and customer support
services. NMR is a non-destructive analytical technique that uses magnetic and
electromagnetic fields to interact with the magnetic property of atomic
nuclei. NMR spectroscopy is used to determine and analyze the molecular
content and structure of liquids and solids. This type of spectroscopy is used
in the study of liquids containing substances such as 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. They find application in
the studies of material science, drug metabolism, the characterization of
human diseases and in helping to understand the function of the human brain.
Scientific Instruments' products are used in a broad range of applications,
including by pharmaceutical companies in drug development, manufacturing and
quality control; by biotechnology and biopharmaceutical companies in studying
human genomics and ways to prevent, diagnose and treat diseases; by
environmental laboratories in testing waters, 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 semiconductor companies in manufacturing and quality
control; by food and beverage processing companies in research and quality
control; by government and private laboratories in forensic analysis and drug
testing; by research hospitals in biological and biochemistry research; and by
other industrial, governmental and academic research laboratories in general
research. Major customers include American Home Products, Bayer, Bristol-Myers
Squibb, Eli Lilly, Glaxo Wellcome, Merck, Novartis, Pfizer, Rhone-Poulenc,
SmithKline Beecham, Zeneca, Du Pont, Monsanto, British Petroleum, BASF,
Formosa Plastics, Huntsman Polymers, Proctor & Gamble, Laboratory Corporation
of America, various U.S. governmental agencies, and numerous academic
institutions and research hospitals.
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, 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 and life science and other
analytical research. Major customers include Samsung, Texas Instruments,
Brooks Automation, KLA-Tencor, Tokyo Electron, Varian Semiconductor Equipment
Associates, Agilent Technologies,
2
PE Biosystems, Abar Ipsen, Cameca, Von Ardenne, Lawrence Livermore Labs, and
Stanford Linear Accelerator Center.
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 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 Anchor Gaming, Inter-Tel,
Microtest, OEC Medical Systems, 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 (although 85% of its sales are to customers other than
the Company).
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 certain products 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 45%, 47%, and 47% of sales for fiscal years 1999, 1998,
and 1997, 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. The Company believes that demand for its products
does not exhibit any significant seasonal pattern. No single customer
accounted for 10% or more of the Company's sales in fiscal year 1999.
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.
3
Backlog
The Company's recorded backlog was $165 million at October 1, 1999, $125
million at October 2, 1998, and $132 million at September 26, 1997. 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 may not result in sales because of cancellations or other factors.
However, the Company currently believes that over 95% of orders included in
the October 1, 1999 backlog will be delivered before the close of fiscal year
2000.
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; and Sigmatron International.
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 ten 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; Melbourne, Australia; and Middelburg,
Netherlands. Vacuum Technologies has manufacturing facilities in Lexington,
Massachusetts; and Torino, Italy. Electronics Manufacturing has a
manufacturing facility in Tempe, Arizona.
In 1993, the member states of the European Union ("EU") began
implementation of their plan for a new unified EU market with reduced trade
barriers and harmonized regulations. The EU adopted a significant
international quality standard, the International Organization for
Standardization Series 9000 Quality Standards
4
("ISO 9000"). All of the Company's manufacturing facilities have been
certified as complying with the requirements of ISO 9000.
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 found to be 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 1999, 1998, and 1997, the Company spent
$31.6 million, $29.6 million, and $32.0 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 October 1, 1999, the Company
owned approximately 184 patents in the United States and approximately 271
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.
5
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 time to time received
notices of claims from others alleging patent infringement, the Company
believes that there are no pending patent infringement claims that might 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 October 1, 1999, the Company had a total of approximately 3,500 full-
time and temporary employees worldwide--2,000 in North America, 800 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. The Company's OSI employees in
Australia conducted a strike in 1997, which was quickly resolved. 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.
6
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 (Director).. 62 President and Chief Executive 1999-Present
Officer
Executive Vice President, 1990-1999
Varian Associates, Inc.
G. Edward McClammy......... 50 Vice President and Chief 1999-Present
Financial Officer
Vice President, Special Storage 1998-1999
Products Group, Quantum
Corporation
Vice President, Finance and 1996-1998
Treasurer, Quantum Corporation
Acting Chief Financial Officer, 1996
Quantum Corporation
Director of Finance and 1994-1996
Treasurer, Quantum Corporation
A. W. Homan................ 40 Vice President, General Counsel 1999-Present
and Secretary
Associate General Counsel, 1998-1999
Varian Associates, Inc.
Assistant Secretary, Varian 1993-1999
Associates, Inc.
Senior Corporate Counsel, 1993-1998
Varian Associates, Inc.
Garry R. Rogerson.......... 47 Vice President, Analytical 1999-Present
Instruments
Vice President and General 1994-1999
Manager, Chromatography
Systems, Varian Associates,
Inc.
Raymond J. Shaw............ 50 Vice President, NMR Systems 1999-Present
Vice President and General 1989-1999
Manager, NMR Instruments,
Varian Associates, Inc.
James L. Colbert........... 53 Controller 1999-Present
Controller, NMR Instruments, 1992-1999
Varian Associates, Inc.
Item 2. Properties
The Company has manufacturing, warehouse, research and development, sales,
service, and administrative facilities which have an aggregate floor space of
approximately 668,000 and 502,000 square feet located in the United States and
abroad, respectively, for a total of approximately 1,170,000 square feet
worldwide. Of these facilities, aggregate floor space of approximately 449,000
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 and suitable for the Company's
purposes and adequate for present operations.
The Company owns or leases ten 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; Melbourne, Australia; and Middelburg,
Netherlands. Vacuum Technologies has manufacturing facilities in Lexington,
Massachusetts; and Torino, Italy. Electronics Manufacturing has a
manufacturing facility in Tempe, Arizona. The Company owns or leases 60 sales
and service facilities located throughout the world, 51 of which are located
outside the United States, including in Argentina, Australia, Austria,
Belgium, Brazil, Canada, England, France, Germany, India, Italy, Japan,
Hong Kong, Korea, Mexico, Netherlands, Spain, Sweden, Switzerland, Taiwan, and
Venezuela.
7
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the
ordinary course of its business. In addition, pursuant to the Distribution
Agreement, the Company agreed to indemnify VSEA and VMS for any costs,
liabilities, or expenses with respect to any legal proceedings relating to
VAI's Instruments Business. In addition, the Company has agreed to pay for
one-third of the costs, liabilities, and expenses of VSEA and VMS with respect
to certain legal proceedings relating to discontinued operations of VAI. While
there can be no assurances as to the ultimate outcome of any litigation
involving the Company, the Company does not believe that any pending legal
proceeding will result in a judgment or settlement that will have a material
adverse effect on the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
1999 Common Stock
Third Fourth
Common Stock Quarter Quarter
------------ ------- ---------
High..................................................... $13 1/2 $17 3/4
Low...................................................... $ 8 1/4 $12 13/16
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 5,076 holders of record of the Company's common stock on
December 1, 1999.
Item 6. Selected Financial Data
Fiscal Years
----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In millions, except per share
amounts)
Earnings Statement Data:
Sales.................................... $598.9 $557.8 $541.9 $504.4 $459.4
Earnings before taxes.................... $ 13.2 $ 39.2 $ 26.8 $ 11.5 $ 2.7
Income tax expense....................... $ 5.9 $ 15.8 $ 12.6 $ 5.3 $ 0.7
Net earnings............................. $ 7.3 $ 23.4 $ 14.2 $ 6.2 $ 2.0
Net earnings per share--basic............ $ 0.24 $ 0.77 $ 0.47 $ 0.20 $ 0.07
Net earnings per share--diluted.......... $ 0.24 $ 0.77 $ 0.46 $ 0.20 $ 0.07
Fiscal Year End
----------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Balance Sheet Data:
Total assets.............................. $425.1 $404.1 $357.9 $301.0 $282.0
Long-term debt............................ $ 51.2 $ -- $ -- $ -- $ --
. 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.
. The earnings statement data for fiscal year 1995 and the balance sheet
data at fiscal year end 1996 and 1995 are unaudited.
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. 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
9
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 IB's results of
operations, financial position, and cash flows through April 2, 1999, the date
of the Distribution, and the Company's results of operations, financial
position, and cash flows from April, 3, 1999 to October 1, 1999. Accordingly,
the financial results for periods prior to April 3, 1999 included in these
consolidated financial statements have been carved out from the interim
financial statements of VAI using the historical results of operations and
historical bases of the assets and liabilities of IB. The consolidated
financial statements include the accounts of IB after elimination of inter-
business balances and transactions. The consolidated financial statements also
include, among other things, allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit-sharing and pension
benefits) and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other
corporate overhead) to IB using the allocation methodology described in Note 1
of the Notes to the Consolidated Financial Statements. The Company's
management believes that the methods used to allocate these amounts are
reasonable. However, these allocations are not necessarily indicative of the
amounts that would have been or will be recorded by the Company on a stand-
alone basis.
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. 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. Fiscal year 1997 comprises the 52-week period
ended on September 26, 1997.
Results of Operations
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 $330.0 million, Europe of $183.0
million and Asia of $67.4 million in fiscal year 1999 represented increases of
6.9%, 12.3%, and 4.0% respectively, as compared to fiscal year 1998.
Orders in fiscal year 1999 were $644.2 million, compared to $560.9 million
in fiscal year 1998. All businesses contributed to the orders growth.
Gross Profit. Gross profit was $224.2 million (representing 37.4% of sales)
in fiscal year 1999, compared to $221.4 million (representing 39.7% 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 writedown of certain excess and
obsolete inventories and the lowering of prices to accelerate the liquidation
of older products. The impact on gross profit of these actions was in addition
to the restructuring charges discussed below.
10
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 expenses resulted from actions taken as part of the
above-described reorganization, including costs to move people and equipment
to new consolidated locations, writedown of field demonstration equipment
following the accelerated transition to newer products, and other higher than
normal costs related to the reorganization. These charges were in addition to
the restructuring charges discussed below.
Research and Development. Research and development expenses were $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 $7.3 million ($0.24 diluted
net earnings per share) in fiscal year 1999, compared to net earnings of $23.4
million ($0.77 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
11
significant impact on the overall increase in sales. Earnings from operations
of $12.5 million (3.2% of sales) decreased from $25.4 million (7.0% 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.
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.
Fiscal Year 1998 Compared To Fiscal Year 1997
Sales. Sales of $557.8 million in fiscal year 1998 were 2.9% higher than
sales of $541.9 million in fiscal year 1997. Sales by the Scientific
Instruments and Vacuum Technologies segments increased 5.3% and
2.7%, respectively. Sales by the Electronics Manufacturing segment decreased
by 6.2%. The effect of the stronger U.S. dollar and a softening Asian market
slowed sales growth during fiscal year 1998.
Geographically, sales in North America of $311.5 million and Europe of
$163.0 million in fiscal year 1998 represented increases of 3.0% and 15.0%,
respectively, as compared to fiscal year 1997, while sales in Asia of $57.0
million in fiscal year 1998 declined 18.0% as compared to fiscal year 1997.
Gross Profit. Gross profit of $221.4 million in fiscal year 1998 was 39.7%
of sales, compared to $211.1 million, or 39.0% of sales, in fiscal year 1997.
The increase in gross profit as a percentage of sales from fiscal year 1997 to
fiscal year 1998 was primarily attributable to improved operating
efficiencies.
Sales and Marketing. Sales and marketing expenses of $113.9 million in
fiscal year 1998 and $110.0 million in fiscal year 1997, were 20.4% of sales
in fiscal year 1998 and 20.3% of sales in fiscal year 1997, as increases in
expenses in the United States in fiscal year 1998 were offset by lower foreign
marketing expenses due to the strengthening U.S. dollar.
Research and Development. Research and development expenses of $29.6
million in fiscal year 1998 were 5.3% of sales compared to $32.0 million, or
5.9% of sales, in fiscal year 1997. This decrease reflected the shift away
from outside consultants and the former Ginzton Research Center to in-house
employees.
General and Administrative. General and administrative expenses of $39.5
million, or 7.1% of sales, in fiscal year 1998, decreased from $42.3 million,
or 7.8% of sales, in fiscal year 1997. The decrease in general and
administrative expenses in fiscal year 1998 was due primarily to improved
productivity and the effect of the stronger U.S. dollar on expenses outside
the United States.
Taxes on Earnings. The effective income tax rate was 40.2% in fiscal year
1998, compared to 47.0% in fiscal year 1997. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings
12
in high-tax foreign countries. The fiscal year 1997 rate was greater than the
fiscal year 1998 rate due to the larger portion of high-taxed foreign earnings
in fiscal year 1997.
Net Earnings. Net earnings of $23.4 million ($0.77 diluted net earnings per
share) in fiscal year 1998 increased from the $14.2 million ($0.46 diluted net
earnings per share) earned in fiscal year 1997. The increase in net earnings
was due primarily to revenue growth in excess of marketing and general and
administrative expenses and the other factors described above.
Segments. Scientific Instruments sales of $363.1 million in fiscal year
1998 increased 5.3% over fiscal year 1997 sales of $344.7 million due to the
increased shipments of high-end NMR spectrometers and the acquisition of
Chrompack in the fourth quarter of fiscal year 1998. Earnings from operations
of $25.4 million (7.0% of sales) in fiscal year 1998 increased from $18.9
million (5.5% of sales) in fiscal year 1997. The improvement in earnings
resulted from the sales growth and cost reduction programs.
Vacuum Technologies sales of $111.4 million in fiscal year 1998 increased
2.7% over fiscal year 1997 sales of $108.5 million. The effect of the stronger
U.S. dollar and a softening Asian market slowed sales growth during fiscal
year 1998. Earnings from operations in fiscal year 1998 of $11.5 million
(10.4% of sales) were down from $ 11.7 million (10.8% of sales) in fiscal year
1997. The slight decline in earnings in fiscal year 1998 was principally from
the above-mentioned effect of the stronger U.S. dollar and the softening Asian
market.
Electronics Manufacturing sales of $83.2 million in fiscal year 1998
declined 6.2% from fiscal year 1997 sales of $88.7 million. Electronics
Manufacturing sales declined as a result of the slow down in the semiconductor
market and softening Asian market. Earnings from operations of $5.6 million
(6.8% of sales) increased 7.5% from fiscal year 1997 earnings from operations
of $5.2 million (5.9% of sales). The earnings increase was the result of cost
control measures.
Liquidity and Capital Resources
VAI Cash and Debt Allocations. The Distribution Agreement provided for the
division among the Company, VSEA, and VMS of VAI's cash and debt as of April
2, 1999. Under the Distribution Agreement, the Company was to assume 50% of
VAI's term loans and receive an amount of cash from VAI such that it would
have net debt (defined in the Distribution Agreement as the amount outstanding
under the term loans and notes payable, less cash and cash equivalents) equal
to approximately 50% of the net debt of the Company and VMS, subject to such
adjustment as was necessary to provide VMS with a net worth (as defined in the
Distribution Agreement) of between 40% and 50% of the aggregate net worth of
the Company and VMS, and subject to further adjustment to reflect the
Company's approximately 50% share of the estimated proceeds, if any, to be
received by VMS after the Distribution from the sale of VAI's long-term
leasehold interest at certain of its Palo Alto facilities, together with
certain related buildings and other corporate assets, and the Company's
obligation for approximately 50% of any estimated transaction expenses to be
paid by VMS after the Distribution (in each case reduced for estimated taxes
payable or tax benefits received from all sales and transaction expenses).
Since the amounts transferred immediately prior to the Distribution were based
on estimates, these and other adjustments may be required following the
Distribution. As a result of these adjustments, the Company may be required to
make cash payments to VMS and/or may be entitled to receive cash payments from
VMS. Adjustments through October 1, 1999 resulted in net cash payments from
VMS and an increase in stockholders' equity. The amount of any other required
adjustment cannot be estimated, but management believes that any further
adjustments will not have a material effect on the Company's financial
condition.
As of October 1, 1999, the Company had $71.0 million in uncommitted credit
facilities for working capital purposes. As of October 1, 1999, 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 October 1, 1999, the Company had $55.5 million in term loans. As of
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
13
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 1999, the
Company was in compliance with all restrictive covenants of the term loan
agreements. As of October 1, 1999, the Company also had other long-term notes
payable of $2.4 million with an interest rate of 2.3%.
Future principal payments on long-term debt outstanding on October 1, 1999
will be $6.7 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million,
and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004
and thereafter, respectively.
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 $22.7 million of cash from
operations in fiscal year 1999, which compares to $37.3 million in fiscal year
1998. The primary reason for this decrease in cash generated was lower net
earnings due to the reorganization expenses and restructuring costs mentioned
above. The company used $14.8 million of cash for investing activities in
fiscal year 1999, which compares to $54.1 million in fiscal year 1998. The
higher investing activity in fiscal 1998 was due to the acquisition of
Chrompack. As of October 1, 1999 the Company has repaid all of the short-term
debt taken on as part of the Distribution.
The cash flow impact of certain actions relating to the above-described
overall reorganization will continue for several more quarters. Management
believes that the cash outflow will be approximately $3.0 million in fiscal
year 2000.
The Company currently has no plans to materially modify or expand its
facilities or to make other material capital expenditures.
The Distribution Agreement provides that the Company is responsible for
certain litigation to which VAI was a party, and further provides that the
Company will indemnify VMS and VSEA for one-third of the costs, expenses, and
other liabilities relating to certain discontinued, former, and corporate
operations of VAI, including certain environmental liabilities (see
"Environmental Matters" below).
The Company's liquidity is affected by many other factors, some based on
the normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's
cash requirements will fluctuate based on the timing and extent of these
factors, management believes that cash generated from operations, together
with the Company's borrowing capability, will be sufficient to satisfy
commitments for capital expenditures and other cash requirements for fiscal
year 2000.
Environmental Matters
The Company's operations are subject to various foreign, federal, state,
and/or local laws regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment. This includes
discharges into soil, water and air, and the generation, handling, storage,
transportation, and disposal of waste and hazardous substances. In addition,
several countries are reviewing proposed regulations that would require
manufacturers to dispose of their products at the end of their useful life.
These laws could increase costs and potential liabilities associated with the
conduct of the Company's operations.
In addition, 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,
14
as amended, at nine 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.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 1, 1999, 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 $4.6 million to $10.5 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 October 1, 1999.
No amount in the foregoing range of estimated future costs is believed to be
more probable of being incurred than any other amount in such range, and the
Company therefore accrued $4.6 million as of October 1, 1999.
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 October 1, 1999, 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 $13.7 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 October 1, 1999. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $9.4 million at October 1, 1999. The Company therefore
accrued $4.2 million as of October 1, 1999, 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 $4.6 million described in the preceding
paragraph. At October 1, 1999, 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)
2000.................................. $ 0.4 $1.0 $1.4
2001.................................. 0.6 0.4 1.0
2002.................................. 0.5 0.0 0.5
2003.................................. 0.5 0.0 0.5
2004.................................. 0.5 0.0 0.5
Thereafter............................ 9.6 0.5 10.1
----- ---- ----
Total costs........................... $12.1 $1.9 14.0
===== ====
Less imputed interest................. (5.2)
----
Reserve amount........................ 8.8
Less current portion.................. (1.4)
----
Long term (included in other
liabilities)......................... $7.4
====
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.
15
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. VMS is now pursuing such
recovery claims for the benefit of itself, VSEA and the Company. 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 $1.3 million receivable in Other Assets as of
October 1, 1999 for the Company's share of such recovery. The Company has not
reduced any environmental-related liability in anticipation of recovery with
respect to 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 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. These shared liabilities are generally managed by VMS, and
expenses and losses (adjusted for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs and expenses) are generally borne
one-third each by the Company, VMS, and VSEA. Also, 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.
Year 2000
General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which therefore might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because the Company relies heavily on computer programs and
non-IT systems, and relies on third parties which themselves rely on computer
programs and non-IT systems, the Year 2000 problem, if not addressed, could
adversely affect the Company's business, results of operations, and financial
condition.
State of Readiness. VAI and IB previously initiated a comprehensive
assessment of potential Year 2000 problems with respect to (1) the Company's
internal systems, (2) the Company's products, and (3) significant third
parties with which the Company does business. The Company is continuing that
assessment for its businesses, although under the terms of the Transition
Services Agreement among VMS, VSEA, and the Company, VMS is taking certain
actions and otherwise assisting the Company with respect to certain Year 2000
implications with the Company's internal systems.
The Company has substantially completed its assessment of potential Year
2000 problems in internal systems, which systems have been categorized as
follows, in order of importance: (a) enterprise information systems; (b)
enterprise networking and telecommunications; (c) factory-specific information
systems; (d) non-IT systems; (e) computers and packaged software; and (f)
facilities systems. With respect to enterprise information
16
systems, VAI initiated in 1994 replacement of its existing systems with a
single company-wide system supplied by SAP America Inc., which system is
designed and tested by SAP for Year 2000 capability. Installation of the SAP
enterprise information system has been staged to replace first those existing
systems that are not Year 2000 capable. Installation of the SAP system for the
Company is approximately 99% complete, and full completion is expected by the
end of December 1999; upgrade of networking and telecommunications systems is
complete; upgrade of factory-specific information systems is complete; and
upgrade of non-IT systems, computers and packaged software, and facilities
systems are approximately 98% complete, with 100% completion expected by the
end of December 1999.
The Company has initiated an assessment of potential Year 2000 problems in
its current and previously sold products. With respect to current products,
that assessment and corrective actions are complete, and the Company believes
that all of its current products are Year 2000 capable; however, that
conclusion is based in substantial part on Year 2000 assurances or warranties
from suppliers of computers, software, and non-IT systems which are integrated
into or sold with the Company's products. With respect to previously sold
products, the Company does not intend to assess Year 2000 preparedness of
every product it has ever sold. Rather it focused its assessments on products
that (1) are still under written warranties or are still relatively early in
their useful life, (2) are more likely to be dependent on non-IT systems that
are not Year 2000 capable, and/or (3) cannot be easily upgraded with readily
available externally utilized computers and packaged software. These
assessments are substantially complete. Where the Company identifies
previously sold products that are not Year 2000 capable, the Company intends
in some cases to develop and offer to sell upgrades or retrofits, identify
corrective measures which the customer could itself undertake, or identify for
the customer other suppliers of upgrades or retrofits. There may be instances
where the Company will be required to repair and/or upgrade such products at
its own expense.
The Company has substantially completed its assessment of its potential
Year 2000 problems of third parties with which the Company has material
relationships, primarily suppliers of products or services. These assessments
have identified and prioritized critical suppliers, reviewed those suppliers'
written assurances on their own assessments and correction of Year 2000
problems, and developed appropriate contingency plans for those suppliers
which might not be adequately prepared for Year 2000 problems.
Costs. The Company estimates that it had incurred approximately $1.2
million as of October 1, 1999 to assess and correct Year 2000 problems.
Although difficult to assess, based on its assessment to date, the Company
estimates that it will incur approximately $300,000 in additional costs to
assess and correct Year 2000 problems, which costs are expected to be incurred
in the first quarter of fiscal year 2000. All of these costs have been and
will continue to be expensed as incurred. This estimate of future costs has
not been reduced by expected recoveries from certain third parties, which are
subject to indemnity, reimbursement, or warranty obligations for Year 2000
problems. In addition, the Company expects that certain costs will be offset
by revenues generated by the sale of upgrades and retrofits and other customer
support services relating to Year 2000 problems. However, there can be no
assurance that the Company's actual costs to assess and correct Year 2000
problems will not be higher than the foregoing estimate.
Risks. Failure by the company or its key suppliers to accurately assess and
correct Year 2000 problems would likely result in interruption of certain of
the Company's normal business operations, which could have a material adverse
effect on the Company's business, results of operations, and financial
condition. If the Company does not adequately identify and correct Year 2000
problems in its information systems, it could experience an interruption in
its operations, including manufacturing, order processing, receivables
collection, cash management, and accounting, such that there would be delays
in product shipments, lost data, and a consequential impact on revenues,
expenditures, cash flow, and financial reporting. If the Company does not
adequately identify and correct Year 2000 problems in its non-IT systems, it
could experience an interruption in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential
impact on results of operations. If the Company does not adequately identify
and correct Year 2000 problems in previously sold products, it could
experience warranty or similar claims by users of products which do not
function correctly and could incur higher warranty and service costs. If the
Company does not adequately
17
identify and correct Year 2000 problems of the significant third parties with
which it does business, it could experience an interruption in the supply of
key components or services from those parties, such that there would be delays
in product shipments or services and a consequential impact on results of
operations.
Because of uncertainties as to the extent of Year 2000 problems with the
Company's previously sold products and the extent of any legal obligation for
the Company to correct Year 2000 problems in those products, the Company
cannot fully assess the risks to the Company with respect to those products.
The Company also cannot yet conclude that the failure of critical suppliers to
assess and correct Year 2000 problems is not reasonably likely to have a
material adverse effect on the Company's results of operations, and indeed the
failure of certain suppliers to provide essential infrastructure services will
likely have a material adverse effect on the Company's business, results of
operations, and financial condition. The most difficult risks for the Company
to assess and prepare for relate to basic infrastructure services (such as
electricity, water, gas, telecommunications, transportation, distribution, and
banking) provided by third parties, in particular those outside the United
States.
Management believes that the assessments and corrective actions described
above have been or will be accomplished within the cost and time estimates
stated. Although it is not expected that the Company will be 100% Year 2000
prepared by December 31, 1999, management does not currently believe that any
Year 2000 non-compliance in the Company's information systems would have a
material adverse effect on the Company's business, results of operations, or
financial condition. However, given the inherent complexity and implications
of the Year 2000 problem, there can be no assurance that actual costs will not
be higher than currently anticipated or that corrective actions will not take
longer than currently anticipated to complete. Risk factors which might result
in higher costs or delays include the ability to identify and correct in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously sold products; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including the products they supply to the Company; and the
additional complexity which will likely be caused by undertaking during fiscal
year 2000 the separation (as a result of the Distribution) of enterprise
information systems which the Company currently shares with VMS and VSEA.
Contingency Plans. With respect to the Company's enterprise information
systems, the Company has fully installed and tested the SAP system for Year
2000 compliance and therefore does not have a contingency plan for Year 2000.
With respect to products and significant third parties, the Company is, as
part of its near-complete assessment of potential Year 2000 problems,
developing contingency plans for the more critical problems that might not be
corrected before December 31, 1999. The focus of these contingency plans is
the possible interruption of supply of key components or services from third
parties.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting and Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires 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 is
effective for fiscal quarters and years beginning after June 15, 2000. The
Company will adopt SFAS 133 in the fourth quarter of fiscal year 2000 and is
in the process of determining the impact that adoption will have on the
consolidated financial statements.
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
18
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 October 1, 1999 that hedge the balance
sheet were effective on October 1, 1999, 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 October 1, 1999
Notional Notional
Value Value
Sold Purchased
-------- ---------
(In thousands)
British Pound............................................. $ 4,115 $9,862
Japanese Yen.............................................. 8,473 --
Euro...................................................... 7,577 --
Canadian Dollar........................................... 2,250 --
------- ------
Total................................................... $22,415 $9,862
======= ======
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 October 1, 1999 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
----------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
(In thousands)
Long-term debt
(including current
portion)............... $6,716 $6,437 $6,482 $3,022 $2,781 $32,500 $57,938
Average interest rate... 7.0% 6.9% 6.9% 6.2% 6.6% 6.8% 6.8%
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.
19
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 nominee for director is incorporated herein by reference from
the information provided under the heading "Election of Director" 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
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Certain Relationships and
Related Transactions" of the Company's Proxy Statement.
20
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)
-- Report of Independent Accountants
-- Consolidated Statements of Earnings for fiscal years 1999, 1998, and
1997
-- Consolidated Balance Sheets at fiscal year-end 1999 and 1998
-- Consolidated Statements of Stockholders' Equity for fiscal years
1999, 1998, and 1997
-- Consolidated Statements of Cash Flows for fiscal years 1999, 1998,
and 1997
-- 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 1999, 1998, and 1997 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).**
21
Exhibit
No. Description
- ------- -----------
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.
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.
10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc.
and Arthur W. Homan.
10.12* Form of Change in Control Agreement between Varian, Inc. and Certain Executive Officers
(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.
10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors.
21 Subsidiaries of the registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended October 1, 1999 (EDGAR filing only).
- --------
* Management contract or compensatory plan or arrangement.
** Certain exhibits and schedules omitted.
(b) Reports on Form 8-K.
None.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VARIAN, INC.
(Registrant)
Dated: December 21, 1999
/s/ G. Edward McClammy
By: _________________________________
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 December 21, 1999
____________________________________ Executive Officer
Allen J. Lauer (Principal Executive
Officer)
/s/ G. Edward McClammy Vice President and Chief December 21, 1999
____________________________________ Financial Officer
G. Edward McClammy (Principal Financial
Officer)
/s/ James L. Colbert Controller (Principal December 21, 1999
____________________________________ Accounting Officer)
James L. Colbert
/s/ D.E. Mundell Chairman of the Board December 21, 1999
____________________________________
D.E. Mundell
/s/ John G. McDonald Director December 21, 1999
____________________________________
John G. McDonald
/s/ Wayne R. Moon Director December 21, 1999
____________________________________
Wayne R. Moon
/s/ Elizabeth E. Tallett Director December 21, 1999
____________________________________
Elizabeth E. Tallett
23
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated
by reference into this Report:
Exhibit
Number 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.
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.
10.11* Amended and Restated Change in Control Agreement, dated as of April 2,
1999, between Varian, Inc. and Arthur W. Homan.
24
Exhibit
Number Description
------- -----------
10.12* Form of Change in Control Agreement between Varian, Inc. and Certain
Executive Officers (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.
10.17* Description of Certain Compensatory Arrangements Between Registrant
and Non-Employee Directors.
21 Subsidiaries of the registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended October 1, 1999
(EDGAR filing only).
- --------
* Management contract or compensatory plan or arrangement.
**Certain exhibits and schedules omitted.
25
VARIAN, INC. AND SUBSIDIARY COMPANIES
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 1999, 1998, and
1997.................................................................... F-3
Consolidated Balance Sheets at fiscal year-end 1999 and 1998............. F-4
Consolidated Statements of Stockholders' Equity for fiscal years 1999,
1998, and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for fiscal years 1999, 1998, and
1997.................................................................... 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 1999, 1998, and 1997 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-22
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 accompanying consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of Varian, Inc. and its subsidiaries at October 1, 1999 and
October 2, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended October 1, 1999, in conformity
with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -----------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 28, 1999
F-2
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal Years
---------------------------
1999 1998 1997
-------- -------- --------
(In thousands, except per
share amounts)
Sales.............................................. $598,887 $557,770 $541,946
Cost of sales...................................... 374,698 336,387 330,845
-------- -------- --------
Gross profit....................................... 224,189 221,383 211,101
-------- -------- --------
Operating expenses
Sales and marketing.............................. 124,597 113,854 110,009
Research and development......................... 31,554 29,620 31,987
General and administrative....................... 41,843 39,456 42,303
Restructuring charges............................ 10,974 -- --
-------- -------- --------
Total operating expenses......................... 208,968 182,930 184,299
-------- -------- --------
Operating earnings................................. 15,221 38,453 26,802
Interest expense (income), net..................... 2,018 (711) --
-------- -------- --------
Earnings before income taxes....................... 13,203 39,164 26,802
Income tax expense................................. 5,875 15,736 12,597
-------- -------- --------
Net earnings....................................... $ 7,328 $ 23,428 $ 14,205
======== ======== ========
Net earnings per share:
Basic............................................ $ 0.24 $ 0.77 $ 0.47
======== ======== ========
Diluted.......................................... $ 0.24 $ 0.77 $ 0.46
======== ======== ========
Shares used in per share calculations:
Basic............................................ 30,442 30,423 30,423
======== ======== ========
Diluted.......................................... 31,121 30,587 30,587
======== ======== ========
See accompanying Notes to the Consolidated Financial Statements.
F-3
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
Fiscal Years
---------------------------
1999 1998
------------- -------------
(In thousands, except share
and par value amounts)
ASSETS
Current assets
Cash and cash equivalents........................ $ 23,348 $ --
Accounts receivable, net......................... 151,437 143,836
Inventories...................................... 66,634 71,575
Deferred taxes................................... 25,508 19,500
Other current assets............................. 8,405 6,760
------------- -------------
Total current assets............................. 275,332 241,671
Property, plant and equipment, net................. 83,654 94,719
Other assets....................................... 66,090 67,709
------------- -------------
Total assets....................................... $ 425,076 $ 404,099
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt................ $ 6,717 $ --
Accounts payable................................. 40,442 34,320
Accrued liabilities.............................. 116,128 115,258
------------- -------------
Total current liabilities........................ 163,287 149,578
Long-term debt..................................... 51,221 --
Deferred taxes..................................... 8,453 4,192
Other liabilities.................................. 7,453 6,862
------------- -------------
Total liabilities.................................. 230,414 160,632
------------- -------------
Commitments and contingencies (notes 9 and 14)
Stockholders' equity
Preferred stock--par value $.01, authorized--
1,000,000 shares; issued--none.................. -- --
Common stock--par value $.01, authorized--
99,000,000 shares; issued and outstanding-
30,563,094 shares at October 1, 1999 and none at
October 2, 1998................................. 181,619 --
Retained earnings................................ 13,043 --
Divisional equity................................ -- 243,467
------------- -------------
Total stockholders' equity....................... 194,662 243,467
------------- -------------
Total liabilities and stockholders' equity......... $ 425,076 $ 404,099
============= =============
See accompanying Notes to the Consolidated Financial Statements.
F-4
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
--------------- Retained Divisional
Shares Amount Earnings Equity Total
------ -------- -------- ---------- --------
(In thousands)
Balance, fiscal year-end 1996.. -- $ -- $ -- $ 154,893 $154,893
Net transfers from Varian
Associates, Inc............... -- -- -- 34,198 34,198
Net earnings................... -- -- -- 14,205 14,205
------ -------- ------- --------- --------
Balance, fiscal year-end 1997.. -- -- -- 203,296 203,296
Net transfers from Varian
Associates, Inc............... -- -- -- 16,743 16,743
Net earnings................... -- -- -- 23,428 23,428
------ -------- ------- --------- --------
Balance, fiscal year-end 1998.. -- -- -- 243,467 243,467
Net transfers to Varian
Associates, Inc. ............. -- -- -- (57,293) (57,293)
Distribution of Common Stock to
Varian Associates, Inc.
stockholders.................. 30,423 180,459 -- (180,459) --
Stock options exercised........ 140 1,160 -- -- 1,160
Net earnings................... -- -- 13,043 (5,715) 7,328
------ -------- ------- --------- --------
Balance, fiscal year-end 1999.. 30,563 $181,619 $13,043 $ -- $194,662
====== ======== ======= ========= ========
See accompanying Notes to the Consolidated Financial Statements.
F-5
VARIAN INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Cash Flows From Operating Activities
Net earnings.................................... $ 7,328 $ 23,428 $ 14,205
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization................. 17,699 17,541 19,449
Loss on disposition of property, plant and
equipment.................................... 687 -- --
Deferred taxes................................ (1,747) (2,225) (811)
Changes in assets and liabilities
Accounts receivable, net.................... (7,601) 2,063 (15,201)
Inventories................................. 4,941 (1,269) (6,172)
Other current assets........................ (3,666) 564 851
Accounts payable............................ 6,122 (9,012) 7,531
Accrued liabilities......................... (870) (2,916) 2,087
Other liabilities........................... 591 617 284
Other....................................... (819) 8,531 (4,620)
-------- -------- --------
Net cash provided by operating activities....... 22,665 37,322 17,603
-------- -------- --------
Cash Flows From Investing Activities
Proceeds from sale of property, plant, and
equipment...................................... 245 -- --
Purchase of property, plant, and equipment...... (15,028) (19,358) (20,803)
Purchase of businesses, net of cash acquired.... -- (34,707) (30,998)
-------- -------- --------
Net cash used in investing activities........... (14,783) (54,065) (51,801)
-------- -------- --------
Cash Flows from Financing Activities
Net issuance (payment) of short-term debt....... (12,240) -- --
Repayment of long-term debt..................... (1,296) -- --
Option exercises................................ 1,160 -- --
Net transfers from Varian Associates, Inc. and
Varian Medical Systems, Inc. .................. 27,842 16,743 34,198
-------- -------- --------
Net cash provided by financing activities....... 15,466 16,743 34,198
-------- -------- --------
Net increase in cash and cash equivalents....... 23,348 -- --
Cash and cash equivalents at beginning of
period......................................... -- -- --
-------- -------- --------
Cash and cash equivalents at end of period...... $ 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............................... $ 11,210
Interest paid................................... $ 1,881
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 IB's results of
operations, financial position and cash flows through April 2, 1999, the date
of the Distribution, and the Company's results of operations, financial
position, and cash flows from April 3, 1999 to October 1, 1999. Significant
intercompany balances, transactions, and stock holdings have been eliminated
in consolidation. The financial results for periods prior to April 3, 1999
included in these consolidated financial statements have been carved out from
the financial statements of VAI using the historical results of operations and
historical bases of the assets and liabilities of IB. The consolidated
financial statements include the accounts of IB after elimination of inter-
business balances and transactions. The consolidated financial statements also
include, among other things, allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit sharing and pension
benefits), and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other
corporate overhead) to IB. These amounts have been allocated to IB on the
basis that is considered by management to reflect most fairly or reasonably
the utilization of the services provided to or the benefit obtained by IB.
Typical measures and activity indicators used for allocation purposes include
headcount, sales revenue, and payroll expense. The Company's management
believes that the methods used to allocate these amounts are reasonable.
However, these allocations are not necessarily indicative of the amounts that
would have been or that will be recorded by the Company on a stand-alone
basis.
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 1999
comprises the 52-week period ended on October 1, 1999. Fiscal year 1998
comprises the 53-week period ended on October 2, 1998. Fiscal year 1997
comprises the 52-week period ended on September 26, 1997.
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.
F-7
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition. Sales and related costs of sales are recognized upon
shipment of products. The Company's products are generally subject to
warranty, and the Company provides for the estimated future costs of repair,
replacement, or customer accommodation in costs of sales. Service revenue,
which is less than 10% of the net sales in fiscal years 1999, 1998, and 1997,
is recognized ratably over the period of the related contract.
Foreign Currency Translation. For non-U.S. operations, the U.S. dollar is
the functional currency. Monetary assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at exchange rates at the end of
the fiscal year. Non-monetary assets such as inventories and property, plant,
and equipment are translated at historical rates. Income and expense items are
translated at effective rates of exchange prevailing during each year, except
that inventories and depreciation charged to operations are translated at
historical rates. The aggregate exchange loss included in general and
administrative expenses for fiscal years 1999, 1998, and 1997 was $2.4
million, $2.0 million, and $2.6 million, respectively.
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 1999 and 1998 of $1.8
million and $0.7 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 valued at the lower of cost or market (net
realizable value) using the last-in, first-out (LIFO) cost for certain U.S.
inventories. All other inventories are valued principally at average cost. If
the first-in, first-out (FIFO) method had been used for those operations
valuing inventories on a LIFO basis, inventories would have been higher than
reported for fiscal years ended 1999 and 1998 by $14.4 million and $13.7
million, respectively.
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, which is the excess of the cost of acquired
businesses over the sum of the amounts assigned to identifiable assets
acquired, less liabilities assumed, is amortized on a straight-line basis over
periods ranging from 10 to 40 years.
Research and Development. Company-sponsored research and development costs
related to both present and future products are expensed currently.
Reclassification. Certain amounts in prior years' financial statements have
been reclassified to conform to the current presentation of the financial
statements.
F-8
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
and Standards Board issued Statement of Financial Accounting Standards
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires 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 is effective for fiscal quarters and years beginning
after June 15, 2000. The Company will adopt SFAS 133 in the fourth quarter of
fiscal year 2000 and is in the process of determining the impact that adoption
will have on the consolidated financial statements.
NOTE 3--Balance Sheet Detail
1999 1998
-------- --------
(In thousands)
INVENTORIES
Raw materials and parts...................................... $ 36,149 $ 32,100
Work in process.............................................. 5,487 6,700
Finished goods............................................... 24,998 32,775
-------- --------
$ 66,634 $ 71,575
======== ========
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements................................... $ 4,942 $ 5,300
Buildings.................................................... 63,202 76,800
Machinery and equipment...................................... 124,620 135,385
Construction in progress..................................... 3,584 1,900
-------- --------
196,348 219,385
Less: accumulated depreciation............................... 112,694 124,666
-------- --------
Property, plant, and equipment, net.......................... $ 83,654 $ 94,719
======== ========
OTHER ASSETS
Net goodwill................................................. $ 59,653 $ 60,078
Other........................................................ 6,437 7,631
-------- --------
$ 66,090 $ 67,709
======== ========
ACCRUED LIABILITIES
Payroll and employee benefits................................ $ 33,394 $ 33,100
Income taxes................................................. 14,254 19,200
Deferred income.............................................. 15,899 14,700
Insurance.................................................... 7,609 7,700
Product warranty............................................. 8,961 7,600
Other........................................................ 36,011 32,958
-------- --------
$116,128 $115,258
======== ========
NOTE 4--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
F-9
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
hedges. The critical terms of all forward exchange contracts hedging
operational exposure and of the forecasted transactions being hedged are
substantially identical. Accordingly, the Company expects that changes in the
fair value or cash flows of the hedging instruments and the hedged
transactions (for the risk that is being hedged) will completely offset at the
hedge's inception and on an ongoing basis. 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 quality as a hedge, any subsequent
gains and losses are recognized currently 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
October 1, 1999 that hedge the balance sheet were effective October 1, 1999,
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 that were outstanding as of October 1, 1999
are summarized as follows:
Notional Value Notional Value
Sold Purchased
-------------- --------------
(In thousands)
British Pound.................................. $ 4,115 $9,862
Japanese Yen................................... 8,473 --
Euro........................................... 7,577 --
Canadian Dollar................................ 2,250 --
------- ------
Total........................................ $22,415 $9,862
======= ======
NOTE 5--Acquisitions
In July 1998, the Company acquired all of the outstanding common stock of
Chrompack International B.V ("Chrompack") for approximately $28.9 million in
cash and the extinguishment of debt. Chrompack is a manufacturer of
chromatography products and analytical instruments used by scientific and
industrial laboratories. This acquisition has been accounted for under the
purchase method; accordingly, the Company's combined operating results include
100% of the operating results of Chrompack subsequent to the acquisition date.
The Company is amortizing acquired goodwill of $20.9 million over 40 years
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.
F-10
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 6--Net Earnings Per Share
Basic earnings per share are calculated based on net earnings and the
weighted-average number of shares outstanding during the reported period.
Diluted earnings per share include dilution from potential 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 year ended October 1, 1999, options to purchase 1,150,738
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 years ended October 2, 1998 and
September 26, 1997, 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:
1999 1998 1997
------- ------- -------
(In thousands except
per share amounts)
Basic
Net earnings........................................ $ 7,328 $23,428 $14,205
Weighted average shares outstanding................. 30,442 30,423 30,423
Net earnings per share.............................. $ 0.24 $ 0.77 $ 0.47
======= ======= =======
Diluted
Net earnings........................................ $ 7,328 $23,428 $14,205
Weighted average shares outstanding................. 30,442 30,423 30,423
Net effect of dilutive stock options................ 679 164 164
------- ------- -------
Total shares........................................ 31,121 30,587 30,587
Net earnings per share.............................. $ 0.24 $ 0.77 $ 0.46
======= ======= =======
NOTE 7--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
F-11
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated transaction expenses to be paid by VMS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from
all sales and transaction expenses). Since the amounts transferred immediately
prior to the Distribution were based on estimates, these and other adjustments
may be required following the Distribution. As a result of these adjustments,
the Company may be required to make cash payments to VMS and/or may be
entitled to receive cash payments from VMS. Adjustments through October 1,
1999 resulted in net cash payments from VMS and an increase in stockholders'
equity. The amount of any other required adjustment cannot be estimated, but
management believes that any further adjustments will not have a material
effect on the Company's financial condition.
As of October 1, 1999, the Company has $71.0 million in uncommitted credit
facilities for working capital purposes. As of October 1, 1999, 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 October 1, 1999, the Company had $55.5 million in term loans. As of
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 1999, the Company was
in compliance with all restrictive covenants of the term loan agreements. As
of October 1, 1999, the Company also had other long-term notes payable of $2.4
million with an interest rate of 2.3%.
Future principal payments on long-term debt outstanding on October 1, 1999
will be $6.7 million, $6.4 million, $6.5 million, $3.0 million, $2.8 million,
and $32.5 million during the fiscal years ended 2000, 2001, 2002, 2003, 2004
and thereafter, respectively.
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 8--Employee Stock 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 are 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 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. For
the six months ended October 1, 1999, replacement options to purchase an
additional 12,036 shares were granted, which brings the total options granted
in connection with the Distribution to 4,311,675 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.
F-12
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At October 1, 1999, Options with respect to 2,672,809 shares were available
for grant.
Option Activity Under the Plan
Weighted Average
Shares Exercise Price
------ ----------------
(In thousands except
per share amounts)
Outstanding at April 2, 1999........................ 4,300 $11.16
Granted............................................. 1,571 $ 9.65
Exercised........................................... (140) $ 8.27
Cancelled or expired................................ (44) $13.34
-----
Outstanding at October 1, 1999...................... 5,687 $10.81
=====
Shares exercisable at October 1, 1999............... 3,401 $10.72
===== ======
Outstanding and Exercisable Options at October 1, 1999
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Shares Contractual Average Shares Average
Range of Outstanding Life Exercise Outstanding Exercise
Exercise Prices (in thousands) (in years) Price (in thousands) Price
--------------- -------------- ----------- -------- -------------- --------
$3.69-$8.25..... 520 1.7 $ 6.00 485 $ 5.84
$8.77-$9.29..... 650 2.7 $ 8.80 644 $ 8.77
$9.50-$11.71.... 1,547 9.4 $ 9.60 141 $10.30
$11.77-$13.88... 1,883 6.2 $11.94 1,579 $11.83
$14.16-$16.31... 1,087 7.3 $14.26 552 $14.21
----- -----
Total......... 5,687 6.5 $10.81 3,401 $10.72
===== === ====== ===== ======
The Company has adopted the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
APB 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:
1999
--------------
(In thousands
except per
share amounts)
Net earnings.................................................. $6,682
Net earnings per share
Basic....................................................... $ 0.22
Diluted..................................................... $ 0.21
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:
1999
----
Expected dividend yield................................................ 0.0%
Risk-free interest rate................................................ 5.8%
Expected volatility.................................................... 30%
Expected life (in years)............................................... 5.9
F-13
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average estimated fair value of employee stock options granted
during the six-month period ended October 1, 1999 was $3.95 per share.
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.
NOTE 9--Contingencies
Environmental Matters. In 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
nine 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.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 1, 1999, 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 $4.6 million to $10.5 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 October 1, 1999.
No amount in the foregoing range of estimated future costs is believed to be
more probable of being incurred than any other amount in such range, and the
Company therefore accrued $4.6 million as of October 1, 1999.
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 October 1, 1999, 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 $13.7 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 October 1, 1999. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $9.4 million at October 1, 1999. The Company therefore
accrued $4.2 million as of October 1, 1999, 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 $4.6 million described in the preceding
paragraph.
F-14
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At October 1, 1999, 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
Non- Anticipated
Recurring Recurring Future
Fiscal Year Costs Costs Costs
----------- --------- --------- -----------
(In millions)
2000........................................ $ 0.4 $1.0 $1.4
2001........................................ 0.6 0.4 1.0
2002........................................ 0.5 0.0 0.5
2003........................................ 0.5 0.0 0.5
2004........................................ 0.5 0.0 0.5
Thereafter.................................. 9.6 0.5 10.1
----- ---- ----
Total costs................................. $12.1 $1.9 14.0
===== ====
Less imputed interest....................... (5.2)
----
Reserve amount.............................. 8.8
Less current portion........................ (1.4)
----
Long term (included in other liabilities)... $7.4
====
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.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. VMS is now pursuing such
recovery claims for the benefit of itself, VSEA, and the Company. 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 $1.3 million receivable in Other Assets as of
October 1, 1999 for the Company's share of such recovery. The Company has not
reduced any environmental-related liability in anticipation of recovery with
respect to 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
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. These shared liabilities are
F-15
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
generally managed by VMS, and expenses and losses (adjusted for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs and
expenses) are generally borne one-third each by the Company, VMS, and VSEA.
Also, 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 10--Retirement Plans
Certain employees of the Company in the United States are eligible to
participate in the Varian, Inc. 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 $9.0 million, $5.9 million, and $5.6
million for fiscal years 1999, 1998, and 1997, respectively.
At the Distribution, the Company assumed responsibility for pension and
postretirement benefits for active employees of the Company; the
responsibility for all others, principally retirees of VAI, remained with VMS.
An allocation of assets and liabilities for foreign defined benefit pension,
postemployment, and postretirement benefits, which are not material to the
Company's financial statements, has been included in these consolidated
financial statements.
NOTE 11--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
October 1, 1999, no Rights had been exercised.
The Company began accumulating retained earnings on April 3, 1999, the date
immediately after the Distribution.
F-16
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--Income Tax
Income tax expense consists of the following:
1999 1998 1997
------- ------- -------
(In thousands)
Current
U.S. federal...................................... $ (696) $ -- $ 397
Foreign........................................... 8,971 16,736 11,400
State and local................................... (653) 1,500 1,600
------- ------- -------
Total current..................................... 7,622 18,236 13,397
------- ------- -------
Deferred
U.S. federal...................................... (215) (2,700) (1,100)
Foreign........................................... (1,532) 200 300
------- ------- -------
Total deferred.................................... (1,747) (2,500) (800)
------- ------- -------
Income tax expense................................ $ 5,875 $15,736 $12,597
======= ======= =======
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and reported
amounts of assets and liabilities, tax loss and credit carryforwards, and the
remittance of earnings from foreign subsidiaries. Their significant components
are as follows:
1999 1998
------- -------
(In thousands)
Assets
Product warranty............................................ $ 2,619 $ 1,900
Deferred compensation....................................... 3,072 1,300
Inventory valuation......................................... 13,806 8,600
Loss carryforwards.......................................... 2,413 --
Revenue recognition......................................... 1,132 3,700
Other....................................................... 2,466 4,000
------- -------
Total deferred tax assets................................... 25,508 19,500
------- -------
Liabilities
Accelerated depreciation.................................... 5,853 3,092
Unremitted earnings of foreign subsidiaries................. 2,600 --
Other....................................................... -- 1,100
------- -------
Total deferred tax liabilities.............................. 8,453 4,192
------- -------
Net deferred tax assets..................................... $17,055 $15,308
======= =======
The sources of earnings before income taxes are as follows:
1999 1998 1997
------- ------- -------
(In thousands)
United States...................................... $(6,466) $ 4,964 $ 7,902
Foreign............................................ 19,669 34,200 18,900
------- ------- -------
Earnings before income taxes....................... $13,203 $39,164 $26,802
======= ======= =======
F-17
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's foreign manufacturing subsidiaries have accumulated
approximately $30 million of earnings that are reinvested in their operations.
The Company has not provided U.S. taxes on these earnings.
For the tax year ended October 1, 1999, the Company has federal loss and
tax credit carryforwards of approximately $4.7 million and $0.1 million
respectively, and foreign loss carryforwards of approximately $2.0 million.
These losses have been recognized as deferred tax assets for financial
reporting.
The difference between the reported income tax rate and the federal
statutory income tax rate is attributable to the following:
1999 1998 1997
---- ---- ----
Federal statutory income tax rate.......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit.......... (3.2) 2.6 3.9
Foreign taxes in excess of federal statutory rate.......... 10.8 5.3 13.9
Foreign sales corporation.................................. (0.8) (1.2) (2.4)
Other...................................................... 2.7 (1.5) (3.4)
---- ---- ----
Reported income tax rate................................... 44.5% 40.2% 47.0%
==== ==== ====
NOTE 13--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. All restructuring activities are expected to be
completed within one year, except for future lease payments. The following
table sets forth certain details associated with this restructuring:
Cash
Payments
Restructuring and Other Accrual at
Charges Reductions October 1, 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
======= ====== ======
NOTE 14--Lease Commitments
At fiscal year-end 1999, the Company was committed to minimum rentals for
certain facilities under non-cancellable operating leases for fiscal years
2000 through 2004 and thereafter, as follows, in thousands: $4,492, $3,040,
$2,102, $1,599, $1,591 and $30,580, respectively. Rental expense for fiscal
years 1999, 1998, and 1997, in thousands, was $4,738, $7,600, and $8,600,
respectively.
NOTE 15--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
F-18
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
environment for complex industrial processes and research. Vacuum Technologies
products are used in semiconductor manufacturing equipment, 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 1999, 1998, and 1997, no single country
outside the United States accounted for more than 10% of total sales. In
fiscal years 1999, 1998, and 1997, 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 1999, 1998, and 1997 of $37 million, $30 million, and $36 million,
respectively.
F-19
VARIAN INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Industry Segments
Depreciation
Identifiable Capital and
Sales Pretax Earnings Assets Expenditures Amortization
-------------- ------------------- ------------------- ---------------- --------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(In millions)
Scientific
Instruments........... $396 $363 $345 $ 12 $ 25 $ 19 $ 240 $ 235 $ 184 $ 5 $ 6 $ 8 $ 8 $ 7 $ 7
Vacuum Technologies.... 107 112 108 7 11 12 61 59 60 4 5 5 4 4 3
Electronics
Manufacturing......... 96 83 89 7 6 5 53 46 43 2 6 4 3 2 2
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total industry
segments.............. 599 558 542 26 42 36 354 340 287 11 17 17 15 13 12
General corporate...... -- -- -- (11) (4) (9) 71 64 71 4 2 4 3 5 7
Interest, net.......... -- -- -- (2) 1 -- -- -- -- -- -- -- -- -- --
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Continuing operations.. $599 $558 $542 $ 13 $ 39 $ 27 $ 425 $ 404 $ 358 $ 15 $ 19 $ 21 $ 18 $ 18 $ 19
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
Geographic Segments
Sales to Intergeographic
Unaffiliated Sales to Pretax Identifiable
Customers Affiliates Total Sales Earnings Assets
-------------- ------------------- ------------------- ---------------- --------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(In millions)
United States.......... $331 $327 $325 $ 126 $ 116 $ 114 $ 457 $ 443 $ 439 $ 13 $ 39 $ 43 $224 $214 $193
International.......... 268 223 216 105 112 97 373 335 313 22 34 23 151 159 130
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total geographic
segments.............. 599 550 541 231 228 211 830 778 752 35 73 66 375 373 323
Eliminations, corporate
& other............... -- 8 1 (231) (228) (211) (231) (220) (210) (22) (34) (39) 50 31 35
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total company.......... $599 $558 $542 $ -- $ -- $ -- $ 599 $ 558 $ 542 $ 13 $ 39 $ 27 $425 $404 $358
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
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-20
VARIAN INC. AND SUBSIDIARY COMPANIES
Quarterly Consolidated Financial Data (Unaudited)
1999
----------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(1)(2) Quarter Quarter
---------- ------------- ---------- ----------
(In thousands, except per share amounts)
Sales........................... $133.3 $148.9 $149.6 $167.1
Gross profit.................... $ 52.6 $ 47.2 $ 58.4 $ 66.0
Net earnings (loss)............. $ 4.3 $(10.0) $ 5.5 $ 7.5
Net earnings (loss) per share
Basic......................... $ 0.14 $(0.33) $ 0.18 $ 0.25
Diluted....................... $ 0.14 $(0.33) $ 0.18 $ 0.24
1998
----------------------------------------------
First Second Third Fourth
Quarter(2) Quarter(2) Quarter(2) Quarter(2)
---------- ------------- ---------- ----------
(In thousands, except per share amounts)
Sales........................... $141.0 $141.0 $129.9 $145.9
Gross profit.................... $ 54.5 $ 55.8 $ 53.9 $ 57.2
Net earnings.................... $ 5.8 $ 6.4 $ 5.2 $ 6.0
Net earnings per share
Basic......................... $ 0.19 $ 0.21 $ 0.17 $ 0.20
Diluted....................... $ 0.19 $ 0.21 $ 0.17 $ 0.20
- --------
(1) The loss resulted from restructuring and reorganization costs associated
with preparing to spin-off from Varian Associates, Inc., streamlining IB's
worldwide sales and service network, and exiting certain product lines.
(2) 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.
F-21
SCHEDULE II
VARIAN, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
for the fiscal years 1999, 1998, and 1997
(In thousands)
Balance at Charged to Deductions Balance at
Beginning Costs and ------------------------------- End of
Description of Period Expenses Description Amount Period
----------- ---------- ---------- ------------------------ ------ ----------
Allowance for Doubtful
Accounts Receivable:
Fiscal year 1999........ $ 713 $ 1,506 Write-offs & adjustments $ 373 $1,846
====== ======= ====== ======
Fiscal year 1998........ $ 321 $ 295 Write-offs & adjustments $ (97) $ 713
====== ======= ====== ======
Fiscal year 1997........ $ 642 $ 151 Write-offs & adjustments $ 472 $ 321
====== ======= ====== ======
Estimated Liability for
Product Warranty:
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
====== ======= ====== ======
Fiscal year 1997........ $5,688 $ 9,764 Warranty expenditures $8,279 $7,173
====== ======= ====== ======
F-22