Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
--------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
000-25393
(Commission File Number)
--------------
VARIAN, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------
DELAWARE 77-0501995
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3120 HANSEN WAY
PALO ALTO, CALIFORNIA 94304-1030
(Address of principal executive offices) (Zip Code)
(650) 213-8000
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of December 1, 2000 was $1,131,363,380
The number of shares of the registrant's common stock outstanding as of
December 1, 2000 was 32,869,426
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT DESCRIPTION 10-K PART
- --------------------- ---------
Certain sections, identified by caption, of the
Definitive Proxy Statement for the Registrant's
2001 Annual Meeting of Stockholders (the "Proxy Statement") III
================================================================================
An index of exhibits filed with this Form 10-K is located on page 22.
VARIAN, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000
TABLE OF CONTENTS
PAGE
---------
PART I
Item 1. Business.................................................................................. 3
Item 2 Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 11
Item 6. Selected Financial Data................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................. 20
Item 8. Financial Statements and Supplementary Data............................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 20
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 21
Item 11. Executive Compensation.................................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 21
Item 13. Certain Relationships and Related Transactions............................................ 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 22
RISK FACTORS RELATING TO FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results of Varian, Inc. (the "Company") to differ materially
from management's current expectations. Those risks and uncertainties include,
without limitation: new product development and commercialization; demand and
acceptance for the Company's products; competitive products and pricing;
economic conditions in the Company's product and geographic markets; foreign
currency fluctuations if they adversely impact revenue growth and earnings;
market investment in capital equipment; and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
GENERAL
OVERVIEW
Varian, Inc. together with its subsidiaries (collectively, the "Company"
or the "Registrant") is a technology company engaged in the development,
manufacture, sale and service of scientific instruments and vacuum technologies,
and in contract electronics manufacturing. The Company's operations are grouped
into three corresponding segments: Scientific Instruments, Vacuum Technologies,
and Electronics Manufacturing. These segments, their products and the markets
they serve are described below.
Varian, Inc. became a separate, publicly traded company on April 2, 1999.
Until that date, the business of the Company was operated as the Instruments
business of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments
business to the Company; then on April 2, 1999, VAI distributed to the holders
of record of VAI common stock on March 24, 1999 one share of common stock of the
Company for each share of VAI common stock outstanding on April 2, 1999. At the
same time, VAI contributed its Semiconductor Equipment business to Varian
Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders
of record of VAI common stock on March 24, 1999 one share of common stock of
VSEA for each share of VAI common stock outstanding on April 2, 1999. These
transactions (collectively referred to as the "Distribution") were accomplished
under the terms of an Amended and Restated Distribution Agreement dated as of
January 14, 1999 by and among the Company, VAI, and VSEA (the "Distribution
Agreement"). References in this section to the Company's business for periods
prior to April 2, 1999 refer to the historical business and operations of the
Instruments business conducted by VAI prior to the Distribution.
BUSINESS SEGMENTS AND PRODUCTS
The Company's products can be classified into the following three
categories, which correspond to the Company's three business segments:
Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing.
SCIENTIFIC INSTRUMENTS
The Company's Scientific Instruments business designs, manufactures,
sells, and services chromatography, optical spectroscopy, mass spectroscopy, and
nuclear magnetic resonance equipment and consumable laboratory supplies for a
broad range of life science and chemical analysis applications requiring
identification, quantification and analysis of the elemental, molecular,
physical, or biological composition or the structure of liquids, solids, or
gases.
Chromatography is a technique for separating, identifying, and
quantifying the individual chemical components of substances based on the
physical and chemical characteristics specific to each component. The Company's
chromatography instruments include gas chromatographs ("GC"), high performance
liquid chromatographs ("HPLC"), sample automation products, and data analysis
systems. Consumable laboratory supplies include sample preparation products, GC
and HPLC columns, and GC filters.
Optical spectroscopy is a technique for analyzing the individual chemical
components of substances based on the absorption, or emission, by matter of
electromagnetic radiation of a specific wavelength of light. The Company's
optical spectroscopy instruments include atomic absorption spectrometers,
inductively coupled plasma optical emissions spectrometers, fluorescence
spectrometers, ultraviolet-visible ("Uv-Vis") and near-infrared
spectrophotometers, sample automation products, and data analysis systems.
Accessories and consumable laboratory supplies include tablet dissolution
systems, sample preparation products, xenon lamps, cuvettes, and graphite
furnace replacement parts.
Mass spectroscopy is a technique for analyzing the individual chemical
components of substances by breaking molecules into multiple electrically
charged ions which are then sorted for analysis according to their
mass-to-charge ratios. The Company's mass spectroscopy products include gas
chromatograph/mass spectrometers, inductively coupled plasma/mass spectrometers,
and related consumable laboratory supplies.
3
Nuclear magnetic resonance ("NMR") is a non-destructive instrumental
technique that uses electromagnetic fields to interact with the magnetic
property of atomic nuclei in order determine and analyze the molecular content
and structure of liquids and solids. NMR spectroscopy is used in the study of
liquids containing chemical substances including proteins, nucleic acids (DNA
and RNA), carbohydrates, and membranes, and solid materials such as crystals,
plastics, rubbers, ceramics, and polymers. NMR imaging systems are used to
obtain non-invasive images of, primarily, biological materials and to probe the
chemical processes within these materials. The Company's NMR systems include NMR
spectrometers and NMR imaging spectrometers. Accessories and consumables include
applications software and probes.
Scientific Instruments' chromatography, optical spectroscopy, mass
spectroscopy and NMR products can be generally categorized as those used
principally in life science applications and those used principally in chemical
analysis applications.
LIFE SCIENCES: Life science products include HPLCs, HPLC columns,
fluorescence and Uv-Vis spectrophotometers, high-field magnet NMR spectrometers,
NMR imaging spectrometers, sample automation products, data analysis systems,
tablet dissolution systems, and sample preparation products, which are primarily
used by pharmaceutical companies in drug development, manufacturing, and quality
control; by biotechnology and biopharmaceutical companies in studying
biomolecules and the prevention, diagnosis, and treatment of diseases; by
government and private laboratories in drug testing; and by research hospitals
and universities in basic chemistry, biological, biochemistry, and health care
research. Major life sciences customers include American Home Products, Bayer,
Bristol-Myers Squibb, Eli Lilly, Glaxo Wellcome, Merck, Novartis, Pfizer,
Rhone-Poulenc, SmithKline Beecham, Zeneca, various U.S. governmental agencies,
and numerous academic institutions and research hospitals.
CHEMICAL ANALYSIS: Chemical analysis products include GCs, gas
chromatograph/mass spectrometers, atomic absorption spectrometers, near-infrared
spectrophotometers, inductively coupled plasma spectrometers, inductively
coupled plasma/mass spectrometers, lower-field magnet NMR spectrometers, sample
automation products, data analysis systems, and sample preparation products,
which are primarily used by environmental laboratories in testing water, soil,
air, solids and food products; by petroleum and natural gas companies in
refining and quality control; by petrochemical, agribusiness and other chemical
companies in research and quality control; by mining and metallurgy companies in
research and quality control; by food and beverage processing companies in
research and quality control; by semiconductor companies in manufacturing and
quality control; and by other industrial, governmental and academic research
laboratories in forensic analysis, materials science and general research. Major
chemical analysis customers include BASF, British Petroleum, Du Pont, Formosa
Plastics, Huntsman Polymers, Laboratory Corporation of America, Monsanto,
Proctor & Gamble, U.S. and foreign governmental agencies, and numerous academic
and research institutions.
VACUUM TECHNOLOGIES
The Company's Vacuum Technologies business is a worldwide supplier of
high vacuum pumps, leak detection equipment, and related products and services,
all of which are used to create, control, measure, and/or test a vacuum
environment in industrial and scientific applications requiring ultra-clean or
high-vacuum environments. Vacuum Technologies' products include a wide range of
high vacuum pumps (diffusion, turbo-molecular, and ion pumps), rough vacuum
pumps (rotary vane, mechanical, sorption, dry screw, and dry scroll pumps), and
related products (vacuum instruments, flanges, gauges, valves, meters, and other
hardware) and manufacturing solutions such as assistance with the designs and
integration of vacuum systems. Its products also include helium mass
spectrometry leak detection equipment for use in identifying and measuring leaks
in sealed components. In addition to product sales, it provides a pump exchange
and repair program, applications support, and training in basic and advanced
vacuum technology.
Vacuum Technologies' products are used in a broad range of applications,
including in the manufacture of semiconductors; in life sciences and other
analytical research using mass spectrometry; in the manufacture of flat panel
displays, television tubes, decorative coating, architectural glass, optical
lenses, light bulbs, automobile components; in food packaging; in testing of
aircraft components, automobile airbags, refrigeration components, medical
devices, and industrial processing equipment; and in high-energy physics. Major
customers include Abar Ipsen, Agilent Technologies, Brooks Automation, Cameca,
KLA-Tencor, Lawrence Livermore Labs, PE Biosystems, Samsung, Stanford Linear
Accelerator Center, Texas Instruments, Tokyo Electron, Varian Semiconductor
Equipment Associates, and Von Ardenne.
4
ELECTRONICS MANUFACTURING
The Company's Electronics Manufacturing business is a contract
manufacturer of advanced electronic assemblies and subsystems, such as printed
circuit boards, for original equipment manufacturers ("OEMs"). For some
customers, the business provides total manufacturing services including design
support, customized manufacturing (such as just-in-time and inventory
management) and post-manufacturing services (such as direct end-user shipping,
warehousing and repair depots).
The Electronics Manufacturing business serves customers in a wide range
of industries, including communications (e.g., satellite, networking, telephony,
voice and data transfer), medical and semiconductor manufacturing. The business
focuses on customers with high-mix, low-to-medium volume manufacturing needs.
Major customers include GE/OEC Medical Systems, Honeywell Aerospace Electronic
Systems, Inter-Tel, Microtest, Radyne/Comstream, RC Networks, Sensormatic
Electronics, Varian Medical Systems, and Varian Semiconductor Equipment
Associates. The business also supplies components to the Company's Scientific
Instruments and Vacuum Technologies businesses.
For financial information about industry segments and about foreign and
domestic operations and export sales, see Note 19 of the Notes to the
Consolidated Financial Statements.
MARKETING AND SALES
In the United States, the Company markets the largest portion of its
products directly through its own sales and distribution organizations, although
a few products and services are marketed through independent distributors and
sales representatives. Sales to major markets outside the United States are
generally made by the Company's foreign-based sales and service staff, although
some sales are made directly from the United States to foreign customers. In
certain foreign countries, sales are made through various representative and
distributorship arrangements. The Company owns or leases sales and service
offices in strategic regional locations in the United States and in foreign
countries through its foreign sales subsidiaries and distribution operations.
None of the Company's products are distributed through retail outlets.
The markets in which the Company competes are globalized. International
sales accounted for 40%, 45%, and 47% of sales for fiscal years 2000, 1999, and
1998, respectively. As a result, the Company's customers increasingly require
service and support on a worldwide basis. In addition to the United States, the
Company has sales and service offices located throughout Europe, Asia, and Latin
America. The Company has invested substantial financial and management resources
to develop an international infrastructure to meet the needs of its customers
worldwide. The Company intends to continue to expand its presence in the United
States and international markets.
Demand for the Company's products is dependent upon the size of the
markets for its products, the level of capital expenditures of the Company's
customers, the rate of economic growth in the Company's major markets, and
competitive considerations. No single customer accounted for 10% or more of the
Company's sales in fiscal year 2000.
The Company experiences some seasonal patterns in sales of its products.
In particular, the first quarter of the Company's fiscal year typically
experiences lower sales than the preceding fourth quarter, primarily due to the
fewer working days in the first quarter and buying patterns of customers that
are OEMs or governmental agencies with fiscal years that end at the same time or
shortly after the Company's fourth quarter.
The Company differentiates its products from those of its competitors
based on customer requirements and demands, as determined through market
research. Although specific customer requirements can vary depending on
applications, customers in recent years have demanded superior performance, high
quality, and improved levels of automation. The Company has responded to these
customer demands by introducing new products in all its business segments
focused on these emerging requirements in the markets it serves. For example,
customers of Scientific Instruments' products have demanded higher levels of
analytical throughput to support their research programs aimed at drug discovery
and advanced life sciences. The Company has responded to these needs by
introducing products with higher levels of automation and computerized data
analysis routines. The Company believes that by focusing on emerging customer
requirements, it will be able to develop and market new products that will
impart significant competitive advantages in the marketplace.
5
BACKLOG
The Company's recorded backlog was $201 million at September 29, 2000,
$165 million at October 1, 1999, and $125 million at October 2, 1998. It is the
Company's general policy to include in backlog only purchase orders or
production releases that have firm delivery dates within one year. Recorded
backlog in U.S. dollars is impacted by foreign currency fluctuations. In
addition, recorded backlog may not result in sales because of cancellations or
other factors. However, the Company currently believes that over 95% of orders
included in the September 29, 2000 backlog will result in sales before the close
of fiscal year 2001.
COMPETITION
Competition in the Company's markets is based upon the performance
capabilities of products, technical support and after-market service, the
manufacturer's reputation as a technological leader, and the selling price. The
Company believes that performance capabilities are the most important of these
criteria. The markets in which the Company competes are highly competitive and
are characterized by the application of advanced technology. There are numerous
companies that specialize in, and a number of larger companies that devote a
significant portion of their resources to, the development, manufacture, and
sale of products that compete with those manufactured or sold by the Company.
Many of the Company's competitors are well-known manufacturers with a high
degree of technical proficiency. In addition, competition is intensified by the
ever-changing nature of the technologies in the industries in which the Company
is engaged. The markets for the Company's products are characterized by
specialized manufacturers that often have strength in narrow segments of these
markets. While the absence of reliable statistics makes it difficult to
determine the Company's relative market position in its industry segments, the
Company is confident it is one of the principal manufacturers in its primary
fields.
Each of the Company's major business segments competes with many
companies that address the same markets. The Company's Scientific Instruments
business competes with Agilent Technologies, Inc.; PerkinElmer, Inc.; Shimadzu
Corporation; Thermo Instrument Systems, Inc. and its affiliated companies;
Waters Corporation; Bruker Analytik GmbH; JEOL, Ltd.; and other smaller
suppliers. The Company's Vacuum Technologies business competes with BOC Edwards
High Vacuum; Leybold-Balzers; Pfeiffer Vacuum Technology AG; Alcatel; Veeco
Instruments, Inc.; and other smaller suppliers. The Company's Electronics
Manufacturing business competes with numerous other high-mix, low-volume
contract manufacturers, including EFTC Corporation; Xetel Corporation; CMC
Industries; PLEXUS; Sigmatron International; and privately-owned regional
manufacturers.
MANUFACTURING
The Company's principal manufacturing activities consist of precision
assembly, test, calibration, and certain specialized machining activities. The
Company subcontracts a portion of its assembly and machining. All other
assembly, test, and calibration functions are performed by the Company.
The Company believes that the ability to manufacture reliable products in
a cost-effective manner is critical to meeting the "just-in-time" delivery and
other demanding requirements of its original equipment manufacturer ("OEM") and
end-use customers. The Company monitors and analyzes product lead times,
warranty data, process yields, supplier performance, field data on mean time
between failures, inventory turns, repair response time, and other indicators so
that it can continuously improve its manufacturing processes. The Company has
adopted a total quality management process.
The Company operates 14 manufacturing facilities located throughout the
world. Scientific Instruments has manufacturing facilities in Palo Alto,
California; Walnut Creek, California; Harbor City, California; Ft. Collins,
Colorado; Woburn, Massachusetts; Cary, North Carolina; Wakefield, Rhode Island
(which was acquired after September 29, 2000); Melbourne, Australia; and
Middelburg, Netherlands. Vacuum Technologies has manufacturing facilities in
Lexington, Massachusetts; and Torino, Italy. Electronics Manufacturing has
manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin,
California (which was acquired after September 29, 2000).
In 1993, the member states of the European Union ("EU") began
implementation of their plan for a new unified EU market with reduced trade
barriers and harmonized regulations. The EU adopted a significant international
quality standard, the International Organization for Standardization Series 9000
Quality Standards ("ISO 9000"). All of the Company's manufacturing facilities,
other than the recently acquired facility in Wakefield, Rhode Island, have been
certified as complying with the requirements of ISO 9000.
6
RAW MATERIALS
There are no specialized raw materials that are particularly essential to
the operation of the Company's business. The Company's manufacturing operations
require a wide variety of raw materials, electronic and mechanical components,
chemical and biochemical materials, and other supplies, some of which are
occasionally in short supply.
Many components used in the Company's products, including proprietary
analog and digital circuitry, are manufactured by the Company. Other components,
including packaging materials, superconducting magnets, integrated circuits,
microprocessors, microcomputers, and certain detector and data analysis modules,
are purchased from other manufacturers. Most of the raw materials, components,
and supplies purchased by the Company are available from a number of different
suppliers; however, a number of items are purchased from limited or single
sources of supply, and disruption of these sources could have a temporary
adverse effect on shipments and the financial results of the Company. The
Company believes alternative sources could ordinarily be obtained to supply
these materials, but a prolonged inability to obtain certain materials or
components could have a material adverse effect on the Company's financial
condition or results of operations and could result in damage to its
relationships with its customers.
RESEARCH AND DEVELOPMENT
The Company is actively engaged in basic and applied research,
development, and engineering programs designed to develop new products and to
improve existing products. During fiscal years 2000, 1999, and 1998, the Company
spent $31.8 million, $31.6 million, and $29.6 million, respectively (net of
customer funding), on company-sponsored research, development, and engineering
activities. Although the Company intends to continue to conduct extensive
research and development activities, there can be no assurance that it will be
able to develop and market new products on a cost-effective and timely basis,
that such products will compete favorably with products developed by others or
that the Company's existing technology will not be superseded by new discoveries
or developments.
CUSTOMER SUPPORT AND SERVICE
The Company believes that its customer service and support are an
integral part of its competitive strategy. As part of its support services, the
Company's technical support staff provides individual assistance in solving
analysis problems, integrating vacuum components, designing circuit boards,
etc., depending on the business. The Company offers training courses and
periodically sends its customers information on applications development. The
Company's products generally include a 90-day to one-year warranty. Service
contracts may be purchased by customers to cover equipment no longer under
warranty. Service work not performed under warranty or service contract is
performed on a time-and-materials basis. The Company installs and services its
products primarily through its own field service organization.
PATENT AND OTHER PROPRIETARY RIGHTS
As a leader in the manufacture and sale of scientific instruments and
vacuum technologies, the Company has pursued a policy of seeking patent,
copyright, trademark, and trade secret protection in the United States and other
countries for developments, improvements, and inventions originating within its
organization that are incorporated in the Company's products or that fall within
its fields of interest. As of September 29, 2000, the Company owned
approximately 224 patents in the United States and approximately 331 patents
throughout the world, and had numerous patent applications on file with various
patent agencies worldwide. The Company intends to file additional patent
applications as appropriate.
The Company relies on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying, and transferring
title to protect its proprietary rights. The Company has trademarks, both
registered and unregistered, that are maintained and enforced to provide
customer recognition for its products in the marketplace. The Company also has
agreements with third parties that provide for licensing of patented or
proprietary technology. These agreements include royalty-bearing licenses and
technology cross-licenses. While the Company places considerable importance on
its licensed technology, it does not believe that the loss of any license would
have a material adverse effect on the Company's financial condition or results
of operation.
The Company's competitors, like companies in many high-technology
businesses, routinely review the products of others for possible conflict with
their own patent rights. Although the Company has from
7
time to time received notices of claims from others alleging patent
infringement, the Company believes that there are no pending patent infringement
claims that are likely to have a material adverse effect on the Company's
financial condition or results of operation.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Environmental
Matters."
EMPLOYEES
At September 29, 2000, the Company had a total of approximately 4,000
full-time and temporary employees and contract labor worldwide - 2,600 in North
America, 700 in Europe, 200 in Asia, 400 in Australia, and 100 in Latin America.
The Company's employees based in certain foreign countries may, from time to
time, be subject to collective bargaining agreements. Those employees are
subject to a collective bargaining agreement that was recently renewed. The
Company currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited
number of key employees and other members of senior management of the Company.
The loss of the services of one or more of these key employees could have a
material adverse effect on the Company's financial condition or results of
operation. The success of the Company's future operations depends in large part
on the Company's ability to recruit and retain engineers and technicians, as
well as marketing, sales, service, and other key personnel, who in each case are
in great demand. The Company's inability to attract and retain the personnel it
requires could have a material adverse effect on the Company's financial
condition or results of operations.
8
EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's
executive officers, together with positions and offices held within the last
five years by such executive officers.
NAME AGE POSITION (BUSINESS EXPERIENCE) PERIOD
- ------- ----- -------------------------------- -------
Allen J. Lauer 63 President and Chief Executive Officer, Director 1999-Present
Executive Vice President, Varian Associates, Inc. 1990-1999
G. Edward McClammy 51 Vice President and Chief Financial Officer 1999-Present
Vice President, Special Storage Products Group, 1998-1999
Quantum Corporation
Vice President, Finance and Treasurer, Quantum Corporation 1996-1998
Acting Chief Financial Officer, Quantum Corporation 1996
Director of Finance and Treasurer, Quantum Corporation 1994-1996
A. W. Homan 41 Vice President, General Counsel and Secretary 1999-Present
Associate General Counsel, Varian Associates, Inc. 1998-1999
Assistant Secretary, Varian Associates, Inc. 1993-1999
Senior Corporate Counsel, Varian Associates, Inc. 1993-1998
Sergio Piras 51 Vice President, Vacuum Technologies 2000-Present
Vice President and General Manager, Vacuum 1999-2000
Technologies--Torino
Vice President and General Manager, Vacuum 1992-1999
Products--Torino, Varian Associates, Inc.
Garry W. Rogerson 48 Vice President, Analytical Instruments 1999-Present
Vice President and General Manager, Chromatography 1994-1999
Systems, Varian Associates, Inc.
C. Wilson Rudd 48 Vice President, Electronics Manufacturing 2000-Present
Vice President and General Manager, Electronics 1999-2000
Manufacturing
Vice President and General Manager, Tempe Electronics 1990-1999
Center, Varian, Associates, Inc.
Raymond J. Shaw 51 Vice President, NMR Systems 1999-Present
Vice President and General Manager, NMR Instruments, 1989-1999
Varian Associates, Inc.
James L. Colbert 54 Controller 1999-Present
Controller, NMR Instruments, Varian Associates, Inc. 1992-1999
ITEM 2. PROPERTIES
The Company has manufacturing, warehouse, research and development,
sales, service, and administrative facilities which have an aggregate floor
space of approximately 791,000 and 515,000 square feet located in the United
States and abroad, respectively, for a total of approximately 1,306,000 square
feet worldwide. Of these facilities, aggregate floor space of approximately
580,000 square feet is leased, and the remainder is owned by the Company. The
Company does not believe that there is any material long-term excess capacity in
its facilities, although utilization is subject to change based on customer
demand. The Company believes that its facilities and equipment generally are
well maintained, in good operating condition, suitable for the Company's
purposes and adequate for present operations.
The Company owns or leases 14 manufacturing facilities located throughout
the world. Scientific Instruments has manufacturing facilities in Palo Alto,
California; Walnut Creek, California; Harbor City, California; Ft. Collins,
Colorado; Woburn, Massachusetts; Cary, North Carolina; Wakefield, Rhode Island
(which was acquired after September 29, 2000); Melbourne, Australia; and
Middelburg, Netherlands. Vacuum Technologies has manufacturing facilities in
Lexington, Massachusetts; and Torino, Italy. Electronics Manufacturing has
manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin,
California (which was acquired after September 29, 2000). The Company owns or
leases 60 sales and service facilities located throughout the world, 52 of which
are located outside the United States, including in Argentina, Australia,
Austria, Belgium, Brazil, Canada, China, England, France, Germany,
9
Hong Kong, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Spain,
Sweden, Switzerland, Taiwan, and Venezuela.
ITEM 3. LEGAL PROCEEDINGS
In the Distribution Agreement, the Company agreed to defend and indemnify
VSEA and VMS for costs, liabilities, and expenses with respect to legal
proceedings relating to the Instruments Business of VAI, and agreed to reimburse
VMS for one-third of certain costs and expenses (after adjusting for any
insurance proceeds and tax benefits recognized or realized by VMS for such costs
and expenses) that are paid after April 2, 1999 and arise from actual or
potential claims or legal proceedings relating to discontinued, former, or
corporate operations of VAI. From time to time, the Company is involved in a
number of its own legal actions and could incur an uninsured liability in one or
more of them. While the ultimate outcome of all of the foregoing legal matters
is not determinable, management believes that these matters are not reasonably
likely to have a material adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FISCAL YEAR 2000 COMMON STOCK PRICES
--------------------------------------------
FIRST SECOND THIRD FOURTH
COMMON STOCK QUARTER QUARTER QUARTER QUARTER
- --------------- --------- ----------- ---------- ---------
High.............................. $ 24 1/2 $ 50 $ 50 3/8 $ 66 1/8
Low............................... $ 16 1/2 $ 20 1/16 $ 27 1/4 $ 35 5/8
The Company's common stock is traded on the Nasdaq National Market under
the trading symbol VARI.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future.
There were 4,333 holders of record of the Company's common stock on
December 1, 2000.
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- ----------- ----------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Earnings Statement Data
Sales....................................... $ 704.4 $ 598.9 $ 557.8 $ 541.9 $ 504.4
Earnings before taxes....................... $ 70.8 $ 13.7 $ 38.9 $ 27.0 $ 12.7
Income tax expense.......................... $ 28.0 $ 6.1 $ 15.7 $ 12.7 $ 5.7
Net earnings................................ $ 42.8 $ 7.6 $ 23.2 $ 14.3 $ 7.0
Net earnings per share-basic................ $ 1.35 $ 0.25 $ 0.76 $ 0.47 $ 0.23
Net earnings per share-diluted.............. $ 1.26 $ 0.24 $ 0.76 $ 0.47 $ 0.23
FISCAL YEAR END
---------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
Balance Sheet Data
Total assets................................... $ 512.3 $ 434.4 $ 413.2 $ 367.2 $ 310.2
Long-term debt................................. $ 45.5 $ 51.2 $ -- $ -- $ --
o Varian, Inc. was established as a separate company on April 2, 1999.
This selected financial data should be read in conjunction with the
related consolidated financial statements and notes thereto,
including Note 1 which describes Varian, Inc.'s separation from
Varian Associates, Inc.
o The balance sheet data at fiscal year end 1996 is unaudited.
o Certain amounts prior to the third quarter of fiscal year 2000 have
been restated to reflect the Company's change from the LIFO method to
the Average Cost method of accounting for inventories.
o Fiscal year 2000 includes a purchased in-process research and
development charge of $1.0 million. Excluding this charge, net
earnings per share would have been $1.29.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Until April 2, 1999, the business of Varian, Inc. (the "Company") was
operated as the Instruments Business ("IB") of Varian Associates, Inc. ("VAI").
IB included the business units that designed, manufactured, sold, and serviced
scientific instruments and vacuum technologies, and a business unit that
provided contract electronics manufacturing services. VAI contributed IB to the
Company; then on April 2, 1999, VAI distributed to the holders of record of VAI
common stock on March 24, 1999 one share of common stock of the Company for each
share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At
the same time, VAI contributed its Semiconductor Equipment business to Varian
11
Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders
of record of VAI common stock on March 24, 1999 one share of common stock of
VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI
retained its Health Care Systems business and changed its name to Varian Medical
Systems, Inc. ("VMS") effective as of April 3, 1999. These transactions were
accomplished under the terms of an Amended and Restated Distribution Agreement
dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the
"Distribution Agreement"). For purposes of providing an orderly transition and
to define certain ongoing relationships between and among the Company, VMS, and
VSEA after the Distribution, the Company, VMS, and VSEA also entered into
certain other agreements which include an Employee Benefits Allocation
Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a
Transition Services Agreement.
The consolidated financial statements generally reflect the Company's
results of operations and cash flows for the year ended September 29, 2000 and
for the six-month period ended October 1, 1999. The interim consolidated
financial results for the six months ended April 2, 1999 were carved out from
the interim financial statements of VAI using the historical results of
operations of IB and include the accounts of IB after elimination of
inter-business balances and transactions. The consolidated financial statements
also include allocations of certain VAI corporate expenses (including legal,
accounting, employee benefits, insurance services, information technology
services, treasury, and other corporate overhead) to IB. These amounts have been
allocated to IB on the basis that is considered by management to reflect most
fairly or reasonably the utilization of the services provided to or the benefit
obtained by IB. Typical measures and activity indicators used for allocation
purposes include headcount, sales revenue, and payroll expense. The Company's
management believes that the methods used to allocate these amounts are
reasonable. However, these allocations are not necessarily indicative of the
amounts that would have been or that will be recorded by the Company on a
stand-alone basis.
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 2000 comprises the 52-week
period ended on September 29, 2000. Fiscal year 1999 comprises the 52-week
period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
SALES. Sales were $704.4 million in fiscal year 2000, an increase of
17.6% from sales of $598.9 million in fiscal year 1999. Sales by the Scientific
Instruments, Vacuum Technologies, and Electronics Manufacturing segments
increased by 1.4%, 29.8%, and 71.3%, respectively.
Geographically, sales in North America of $420.4 million, Europe of
$179.3 million and the rest of the world of $104.7 million in fiscal year 2000
represented increases (declines) of 26%, (2)%, and 26%, respectively, as
compared to fiscal year 1999. The significant increase in North America was
largely due to the strong sales growth of the Electronics Manufacturing and
Vacuum Technologies segments. The decline in sales in Europe resulted mainly
from the strength of the U.S. dollar versus the European currencies. The
significant increase in the rest of the world was primarily due to the general
economic recovery of the Asian markets.
GROSS PROFIT. Gross profit was $266.3 million (representing 37.8% of
sales) in fiscal year 2000, compared to $224.6 million (representing 37.5% of
sales) in fiscal year 1999. The lower gross profit percentage in fiscal year
1999 resulted primarily from actions taken as part of an overall reorganization
of IB, which included actions to prepare IB to separate from VAI and become a
stand-alone company, other organization changes and a comprehensive product
review, which resulted in a decision to accelerate transition from certain older
to newer products necessitating the write-down of certain excess and obsolete
inventories and the lowering of prices to accelerate the liquidation of older
products. The impact of these actions on gross profit in fiscal year 1999 is in
addition to the impact of the restructuring charges discussed below. The gross
profit margin in fiscal year 2000 reflects the revenue shift from the Scientific
Instruments segment to the Vacuum Technologies and Electronics Manufacturing
segments, which experienced greater sales growth but have lower gross profit
margins than the Scientific Instruments segment. All three segments experienced
higher gross profit margins in fiscal year 2000 compared to fiscal year 1999.
SALES AND MARKETING. Sales and marketing expenses were $123.0 million
(representing 17.5% of sales) in fiscal year 2000, compared to $124.6 million
(representing 20.8% of sales) in fiscal year 1999. The higher costs in fiscal
year 1999 resulted from actions taken as part of the above-described
12
reorganization, including costs to move people and equipment to new consolidated
locations, writedown of field demonstration equipment following the accelerated
transition to newer products, and other higher than normal costs related to the
reorganization. These charges were in addition to the restructuring charges
discussed below. Sales and marketing expenses in the fiscal year 2000 benefited
from the cost savings from the fiscal year 1999 restructuring and reorganization
activities, the overall leverage of higher sales as well as the effect of the
stronger US dollar when translating local currency expenses into US dollars. The
decrease in sales and marketing expenses as a percent of sales also resulted
from the revenue shift between the segments noted above, as the faster growing
Vacuum Technologies and Electronics Manufacturing segments had lower operating
expenses as a percent of sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $31.8
million (representing 4.5% of sales) in fiscal year 2000, compared to research
and development expenses of $31.6 million (representing 5.3% of sales) in fiscal
year 1999. The decrease in research and development expenses as a percent of
sales was the result of the revenue shift between the segments noted above.
Research and development spending within each segment as a percent of sales for
fiscal year 2000 was approximately the same as last year. Fiscal year 1999
includes $1.2 million of centralized corporate research, funded by IB while
still part of VAI.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$37.9 million (representing 5.4% of sales) in fiscal year 2000, compared to
$41.8 million (representing 7.0% of sales) in fiscal year 1999. The improvement
in general and administrative expenses is primarily the result of the Company's
strategy to control these expenses as sales increase. General and administrative
expenses of fiscal year 2000 were actual costs of the Company, whereas general
and administrative costs in fiscal year 1999 comprise six months of actual costs
of the Company and six months of allocated costs of VAI.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition
of VanKel Technology Group, Inc. ("VanKel"), the Company recorded approximately
$22.6 million in goodwill and other intangible assets. In addition, the Company
recorded a one-time charge of $1.0 million for acquired in-process research and
development in the quarter ended September 29, 2000. At the time of the
acquisition, research and development of several dissolution products and
related projects were in process. The percentage of completion for these
products ranged from 50% to 80%. The percentage of completion for each project
was determined using estimates of effort, value added, and degree of difficulty
of the portion of each project completed as of the acquisition date, as compared
to the remaining research and development needed to bring each project to
technical feasibility. An internal appraisal was performed which used the income
approach to determine the fair value of the VanKel business and its identifiable
assets, including the portion of the purchase price attributed to the in-process
research and development. The income approach includes an analysis of the
markets, completion costs, cash flows, other required assets, contributions made
by core technology, and risks associated with achieving such cash flows. A
15-25% risk-adjusted discount rate was applied to the projects' cash flows to
determine the present value of the intangible assets including the in-process
research and development.
RESTRUCTURING CHARGES. During the first half of fiscal year 1999, IB's
management approved a program to consolidate field sales and service
organizations in Europe, Australia, and the United States so as to fall within
the direct responsibility of management at IB's principal factories in those
countries in order to reduce costs, simplify management structure and benefit
from the infrastructure existing in those factories. This restructuring entailed
consolidating certain sales, service, and support operations. The consolidation
resulted in exiting of a product line, closing or downsizing of sales offices
and termination of approximately 100 personnel. The following table sets forth
certain details associated with this restructuring:
ACCRUAL AT CASH PAYMENTS ACCRUAL AT
OCTOBER 1, AND OTHER SEPTEMBER 29,
1999 REDUCTIONS 2000
------------ -------------- --------------
(IN THOUSANDS)
Lease payments and other facility expenses.......... $ 1,244 $ 666 $ 578
Severance and other related employee benefits....... 1,721 1,721 --
------------ -------------- --------------
Total............................................... $ 2,965 $ 2,387 $ 578
============ ============== ==============
NET INTEREST EXPENSE. Net interest expense was $1.8 million (representing
0.3% of sales) for fiscal year 2000, compared to $2.0 million (representing 0.3%
of sales) for fiscal year 1999. See "Liquidity and Capital Resources" below.
13
TAXES ON EARNINGS. The effective income tax rate was 39.5% (39.0% without
the in-process research and development charge) for fiscal year 2000, compared
to 44.5% for fiscal year 1999. The fiscal year 1999 rate was higher because the
Company realized a larger proportion of high tax-rate, foreign country income in
fiscal year 1999, due primarily to restructuring and related charges incurred in
lower tax-rate countries.
NET EARNINGS. Net earnings were $42.8 million ($1.26 diluted net earnings
per share) in fiscal year 2000, compared to the net earnings of $7.6 million
($0.24 diluted net earnings per share) in fiscal year 1999. Fiscal year 1999
included IB's overall reorganization, which resulted in incremental costs
primarily included in costs of sales, marketing, and restructuring charges.
SEGMENTS. Scientific Instruments sales of $401.5 million in fiscal year
2000 increased 1.4% from the fiscal year 1999 sales of $396.1 million. Sales
were adversely impacted by the significant drop in European currencies and from
the transition to higher field magnets with longer lead times for large NMR
systems. Earnings from operations in fiscal year 2000 of $44.0 million (11.0% of
sales) increased from $12.9 million (3.3% of sales) in fiscal year 1999. Fiscal
year 1999 earnings were adversely impacted by the overall IB reorganization
discussed above. Earnings in fiscal year 2000 benefited from the cost saving
measures implemented with the restructuring and reorganizations in fiscal year
1999. Fiscal year 2000 also includes the in-process research and development
charge of $1.0 million resulting from the VanKel acquisition.
Vacuum Technologies sales of $139.1 million in fiscal year 2000 increased
29.8% from fiscal year 1999 sales of $107.2 million. The increase in sales was
primarily due to the recovery of the Asian economies and strong demand across a
broad spectrum of vacuum technology applications. Demand was particularly strong
from life science customers, semiconductor equipment manufacturers, and users of
semiconductor equipment. Earnings from operations in fiscal year 2000 of $24.7
million (17.8% of sales) were up from $7.1 million (6.7% of sales) in fiscal
year 1999, and reflect the sales increase as well as the cost savings from the
fiscal year 1999 IB reorganization. Fiscal year 1999 was negatively impacted by
the overall IB reorganization discussed above.
Electronics Manufacturing sales in fiscal year 2000 of $163.8 million
increased 71.3% from fiscal year 1999 sales of $95.6 million. The increase in
sales was primarily due to strong demand from the communications and medical
equipment customers and the general movement of small-to-medium-size
manufacturing companies to outsource their electronics manufacturing. In
addition, on January 31, 2000 the Company acquired an electronics manufacturing
facility in Poway, California, which added $15.0 million to revenues following
the acquisition. Earnings from operations in fiscal year 2000 of $12.6 million
(7.7% of sales) increased from $6.8 million (7.2% of sales) in fiscal year 1999.
The increase in earnings from operations was primarily the result of the
increased sales.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
SALES. Sales were $598.9 million in fiscal year 1999, an increase of 7.4%
from sales of $557.8 million in fiscal year 1998. Sales by the Scientific
Instruments and Electronics Manufacturing segments increased 9.1% and 14.8%,
respectively. Sales by the Vacuum Technologies segment decreased by 3.8%.
Geographically, sales in North America of $333.0 million, Europe of
$183.0 million and the rest of the world of $82.9 million in fiscal year 1999
represented increases of 6.9%, 12.3%, and 0.4% respectively, as compared to
fiscal year 1998.
GROSS PROFIT. Gross profit was $224.6 million (representing 37.5% of
sales) in fiscal year 1999, compared to $221.1 million (representing 39.6% of
sales) in fiscal year 1998. The decline in gross profit as a percent of sales
resulted primarily from actions taken as part of an overall reorganization that
included actions to prepare the Company to separate from VAI and become a
stand-alone company, other organizational changes and a comprehensive product
review, which resulted in a decision to accelerate transition from certain older
to newer products necessitating the write-down of certain excess and obsolete
inventories and the lowering of prices to accelerate the liquidation of older
products. The impact on gross profit of these actions was in addition to the
restructuring charges discussed below.
SALES AND MARKETING. Sales and marketing expenses were $124.6 million
(representing 20.8% of sales) in fiscal year 1999, compared to $113.9 million
(representing 20.4% of sales) in fiscal year 1998. Some of the increase was due
to marketing expenses of Chrompack International B.V. ("Chrompack"), which was
acquired in the fourth quarter of fiscal year 1998. Additionally, the increase
in the marketing
14
expenses resulted from actions taken as part of the above-described
reorganization, including costs to move people and equipment to new consolidated
locations, write-down of field demonstration equipment following the accelerated
transition to newer products, and other higher than normal costs related to the
reorganization. These charges were in addition to the restructuring charges
discussed below.
RESEARCH AND DEVELOPMENT. Research and development expenses were $31.6
million (representing 5.3% of sales) in fiscal year 1999, compared to research
and development expenses of $29.6 million (representing 5.3% of sales) in fiscal
year 1998. The increase was primarily due to the additional research and
development expenses of Chrompack, which was acquired in the fourth quarter of
fiscal year 1998, and to increased spending on nuclear magnetic resonance
spectrometers and imaging spectrometers.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$41.8 million (representing 7.0% of sales) in fiscal year 1999, compared to
$39.5 million (representing 7.1% of sales) in fiscal year 1998. The primary
reason for this increase was the additional general and administrative costs of
Chrompack, acquired in the fourth quarter of fiscal year 1998, and transition
costs related to the Company's spin-off from VAI.
RESTRUCTURING CHARGES. During the second quarter of fiscal year 1999,
IB's management approved a program to consolidate field sales and service
organizations in Europe, Australia, and the United States so as to fall within
the direct responsibility of management at principal factories in those
countries, in order to reduce costs, simplify management structure, and benefit
from the infrastructure existing in those factories. This restructuring entailed
consolidating certain sales, service, and support operations. The consolidation
resulted in exiting of a product line, closing or downsizing of sales offices,
and termination of approximately 100 personnel. The following table sets forth
certain details associated with this restructuring:
CASH PAYMENTS ACCRUAL AT
RESTRUCTURING AND OTHER OCTOBER 1,
CHARGES REDUCTIONS 1999
-------------- --------------- --------------
(IN THOUSANDS)
Lease payments and other facility expenses................... $ 2,205 $ 961 $ 1,244
Severance and other related employee benefits................ 7,171 5,450 1,721
Exited product line.......................................... 1,598 1,598 --
------------- ------------- --------------
Total..................................................... $ 10,974 $ 8,009 $ 2,965
============= ============= ==============
NET INTEREST EXPENSE. Net interest expense was $2.0 million (representing
0.3% of sales) for fiscal year 1999. Prior to the Distribution on April 2, 1999,
no debt had been allocated to the Company. See "Liquidity and Capital Resources"
below.
TAXES ON EARNINGS. The effective income tax rate was 44.5% for fiscal
year 1999, compared to 40.2% for fiscal year 1998. The fiscal year 1999 rate is
higher than the fiscal year 1998 rate because the Company realized a larger
proportion of high tax-rate, foreign country income during fiscal year 1999 than
it did during fiscal year 1998, due primarily to restructuring and related
charges incurred in lower tax-rate countries.
NET EARNINGS. The decrease in net earnings to $7.6 million ($0.24 diluted
net earnings per share) in fiscal year 1999, compared to net earnings of $23.2
million ($0.76 diluted net earnings per share) in fiscal year 1998, was
primarily the result of the overall reorganization described above, which
resulted in incremental costs primarily included in cost of sales, sales and
marketing, and restructuring charges.
SEGMENTS. Scientific Instruments sales of $396.1 million in fiscal year
1999 increased 9.1% over fiscal year 1998 sales of $363.1 million. The
acquisition of Chrompack in the fourth quarter of fiscal year 1998 had a
significant impact on the overall increase in sales. Earnings from operations of
$12.9 million (3.3% of sales) decreased from $25.1 million (6.9% of sales) in
fiscal year 1998. The reduction in earnings resulted from actions taken as part
of the above-described reorganization which principally affected the Scientific
Instruments segment and included costs to move people and equipment to new
consolidated locations, writedown excess and obsolete inventories and field
demonstration equipment following the accelerated transition to newer products,
and other higher than normal costs related to the reorganization. Also included
in the Scientific Instruments segment earnings were $10.3 million of the
restructuring charges discussed above.
15
Vacuum Technologies sales of $107.2 million in fiscal year 1999 declined
3.8% below fiscal year 1998 sales of $111.4 million primarily due to the slow
down in the Asian markets and the weakness in semiconductor equipment demand.
These impacts resulted in declining sales in the second half of fiscal year 1998
and through the first quarter of fiscal year 1999. In the second quarter of
fiscal year 1999, demand began to strengthen and continued to grow in the third
and fourth quarters of fiscal year 1999. Earnings from operations of $7.1
million (6.7% of sales) were down 38.2% from the $11.5 million (10.4% of sales)
in fiscal year 1998. The decline in earnings from operations resulted primarily
from the decline in sales volume and costs related to the above-described
reorganization including restructuring charges of $0.7 million.
Electronics Manufacturing sales of $95.6 million increased 14.8% from
fiscal year 1998 sales of $83.2 million. The increase in sales was principally
from the increasing demand from customers in the communications and medical
equipment markets. Earnings from operations of $6.8 million (7.2% of sales)
increased 21.4% from $5.6 million (6.8% of sales) in fiscal year 1998. The
increase in earnings from operations was primarily due to the higher sales
volume.
LIQUIDITY AND CAPITAL RESOURCES
VAI CASH AND DEBT ALLOCATIONS. The Distribution Agreement provided for
the division among the Company, VSEA, and VMS of VAI's cash and debt as of April
2, 1999. Under the Distribution Agreement, the Company was to assume 50% of
VAI's term loans and receive an amount of cash from VAI such that it would have
net debt (defined in the Distribution Agreement as the amount outstanding under
the term loans and notes payable, less cash and cash equivalents) equal to
approximately 50% of the net debt of the Company and VMS, subject to such
adjustment as was necessary to provide VMS with a net worth (as defined in the
Distribution Agreement) of between 40% and 50% of the aggregate net worth of the
Company and VMS, and subject to further adjustment to reflect the Company's
approximately 50% share of the estimated proceeds, if any, to be received by VMS
after the Distribution from the sale of VAI's long-term leasehold interest at
certain of its Palo Alto facilities, together with certain related buildings and
other corporate assets, and the Company's obligation for approximately 50% of
any estimated transaction expenses to be paid by VMS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from all
sales and transaction expenses). Since the amounts transferred immediately prior
to the Distribution were based on estimates, these and other adjustments were
required following the Distribution. As a result of these final adjustments, the
Company recorded an increase in stockholders' equity of $1.1 million in the
second quarter of fiscal year 2000. Management believes that no further
adjustments are necessary, and that if any are required, they will not have a
material effect on the Company's financial condition.
As of September 29, 2000, the Company had $60.2 million in uncommitted
credit facilities for working capital purposes. As of September 29, 2000, no
amount was outstanding under these credit facilities. All of these credit
facilities contain certain conditions and events of default customary for such
facilities.
As of September 29, 2000, the Company had $49.5 million compared to $55.5
million in term loans at October 1, 1999. As of September 29, 2000 and October
1, 1999, fixed interest rates on the term loans ranged from 6.7% to 7.5%, and
the weighted average interest rate on the term loans was 7.0%. The term loans
contain certain covenants that limit future borrowings and the payment of cash
dividends and require the maintenance of certain levels of working capital and
operating results. For fiscal year 2000, the Company was in compliance with all
restrictive covenants of the term loan agreements. As of September 29, 2000, the
Company also had other long-term notes payable of $2.4 million with an interest
rate of 1.0% and $2.4 million with an interest rate of 2.3% as of October 1,
1999.
Future principal payments on long-term debt outstanding on September 29,
2000 will be $6.4 million, $6.4 million, $3.4 million, $3.2 million, $2.5
million, and $30.0 million during fiscal years 2001, 2002, 2003, 2004, 2005, and
thereafter, respectively.
Based upon rates currently available to the Company for debt with similar
terms and remaining maturities, the carrying amounts of long-term debt and notes
payable approximate estimated fair value.
CASH AND CASH EQUIVALENTS. The Company generated $61.8 million of cash
from operations in fiscal year 2000, which compares to $22.7 million in fiscal
year 1999. The primary reason for this increase in cash generated was improved
net earnings, tax benefit from deductions for stock option exercises, and a
reduction in working capital requirements. The Company used $53.9 million of
cash for investing activities
16
in fiscal year 2000, which compares to $14.8 million in fiscal year 1999. The
Company used $32.8 million of cash for the acquisitions of VanKel and an
electronics manufacturing operation in Poway, California and $21.6 million for
capital equipment in fiscal year 2000. Investing activity in fiscal year 1999
was for capital equipment. The Company generated $12.0 million of cash from
financing activities in fiscal year 2000 compared to $15.5 million in fiscal
year 1999. Proceeds from stock options represented a significant amount of the
financing reduced by scheduled debt payments and the repurchase of 272,500
shares of the Company's common stock under a stock repurchase plan approved in
fiscal year 2000. The Company's current business strategy contemplates possible
acquisitions, further stock repurchases and/or facility expansions. Any of these
activities could utilize cash currently being generated by the Company.
The Distribution Agreement provides that the Company is responsible for
certain litigation to which VAI was a party, and further provides that the
Company will indemnify VMS and VSEA for one-third of the costs, expenses, and
other liabilities relating to certain discontinued, former, and corporate
operations of VAI, including certain environmental liabilities (see
"Environmental Matters" below).
The Company's liquidity is affected by many other factors, some based on
the normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations, together with the
Company's borrowing capability, will be sufficient to satisfy commitments for
capital expenditures and other cash requirements for fiscal year 2001.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, federal, state,
and local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. These regulations
increase the costs and potential liabilities of the Company's operations.
However, the Company does not currently anticipate that its compliance with
these regulations will have a material effect upon the Company's capital
expenditures, earnings, or competitive position.
Under the Distribution Agreement, the Company and VSEA each agreed to
indemnify VMS for one-third of certain environmental investigation and
remediation costs (after adjusting for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs), as further described below.
VMS has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at eight sites
where VAI is alleged to have shipped manufacturing waste for recycling,
treatment, or disposal. VMS is also involved in various stages of environmental
investigation, monitoring and/or remediation under the direction of, or in
consultation with, foreign, federal, state, and/or local agencies at certain
current VMS or former VAI facilities, or is reimbursing third parties which are
undertaking such investigation, monitoring and/or remediation activities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of September 29, 2000, it was nonetheless estimated that the
Company's share of the future exposure for environmental-related investigation
and remediation costs for these sites and facilities ranged in the aggregate
from $1.9 million to $5.1 million (without discounting to present value). The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of September 29,
2000. No amount in the foregoing range of estimated future costs is believed to
be more probable of being incurred than any other amount in such range, and the
Company therefore accrued $1.9 million as of September 29, 2000.
17
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of September 29, 2000, it was estimated that the Company's share
of the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $18.4 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of September 29, 2000. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $12.7 million at September 29, 2000. The Company therefore
accrued $6.3 million as of September 29, 2000, which represents the best
estimate of its share of these future costs discounted at 4%, net of inflation.
This accrual is in addition to the $1.9 million described in the preceding
paragraph. At September 29, 2000, the Company's reserve for environmental
liabilities, based upon future environmental-related costs estimated by the
Company as of that date, was calculated as follows:
TOTAL
RECURRING NON-RECURRING ANTICIPATED
COSTS COSTS FUTURE COSTS
------------ ----------------- --------------
Fiscal Year (IN MILLIONS)
- -------------
2001........................................................... $ 0.4 $ 0.6 $ 1.0
2002........................................................... 0.4 0.8 1.2
2003........................................................... 0.4 0.2 0.6
2004........................................................... 0.4 0.0 0.4
2005........................................................... 0.4 0.0 0.4
Thereafter..................................................... 10.4 0.6 11.0
------------ ----------------- --------------
Total costs.................................................... $ 12.4 $ 2.2 14.6
============ ================= ==============
Less imputed interest.......................................... (6.4)
--------------
Reserve amount................................................. 8.2
Less current portion........................................... (1.1)
--------------
Long term (included in Other liabilities)...................... $ 7.1
==============
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental-related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The aggregate
range of cost estimates reflects various uncertainties inherent in many
environmental investigation and remediation activities and the large number of
sites where such investigation and remediation activities are being undertaken.
Lawsuits for recovery of environmental investigation and remediation
costs already incurred, and to be incurred in the future, were filed by VAI
against various insurance companies and other third parties. Following
settlements with various insurance companies, VMS is still pursuing lawsuits
against an insurance company and certain other third parties for the benefit of
itself, VSEA, and the Company. In addition, an insurance company has agreed to
pay a portion of VAI's (now VMS') future environmental-related expenditures for
which the Company has an indemnity obligation, and the Company therefore has a
$1.6 million receivable in Other Assets as of September 29, 2000 for the
Company's share of such recovery. The Company has not reduced any
environmental-related liability in anticipation of recovery on claims made
against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified, and
related charges or credits against earnings may be made. Although any ultimate
liability arising from environmental-related matters described herein could
result in significant expenditures that, if aggregated and assumed to occur
within a single fiscal year, would be material to the Company's financial
statements, the likelihood of such occurrence is considered remote. Based on
information currently available and its best assessment of the ultimate amount
and timing of environmental-related events, the Company's management believes
that the costs of these environmental-related matters are not reasonably likely
to have a material adverse effect on the Company's financial position or results
of operations.
18
LEGAL PROCEEDINGS
In the Distribution Agreement, the Company agreed to defend and indemnify
VSEA and VMS for costs, liabilities, and expenses with respect to legal
proceedings relating to the Instruments Business of VAI, and agreed to reimburse
VMS for one-third of certain costs and expenses (after adjusting for any
insurance proceeds and tax benefits recognized or realized by VMS for such costs
and expenses) that are paid after April 2, 1999 and arise from actual or
potential claims or legal proceedings relating to discontinued, former, or
corporate operations of VAI. From time to time, the Company is involved in a
number of its own legal actions and could incur an uninsured liability in one or
more of them. While the ultimate outcome of all of the foregoing legal matters
is not determinable, management believes that these matters are not reasonably
likely to have a material adverse effect on the Company's financial position or
results of operations.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies (legal
currencies) and one new common currency - the euro. The euro then began trading
on currency exchanges and began to be used in certain business transactions. The
transition period for the introduction of the euro occurs through June 2002.
Beginning January 1, 2002, new euro-denominated bills and coins will be issued.
Simultaneously, legacy currencies will begin to be withdrawn from circulation
with the completion of the withdrawal scheduled for no later than July 1, 2002.
Because of the Company's significant sales and operating profits generated in
the European Union, the Company has initiated a program to identify and address
risks arising from the conversion to the euro currency. These risks include, but
are not limited to, converting information technology systems to handle the new
currency, evaluating the competitive impact of one common currency due to, among
other things, increased cross-border price transparency, evaluating the
Company's exposure to currency exchange risks during and following the
transition period to the euro, and determining the impact on the Company's
processes for preparing and maintaining accounting and taxation records.
The Company believes that it is taking appropriate steps to prepare for
the euro conversion and to mitigate its effects on the Company's business, and
that the euro conversion is not likely to have a material adverse effect on the
Company's business or financial condition. However, the Company is still
assessing the risks that might arise from the euro conversion and the costs to
address those risks, and therefore cannot assure that the euro conversion will
not have a material adverse effect on the Company's business or financial
condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and
SFAS 138 require derivatives to be measured at fair value and to be recorded as
assets or liabilities on the balance sheet. The accounting for gains or losses
resulting from changes in the fair values of those derivatives would be
dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 and SFAS 138 are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and
SFAS 138 in the first quarter of fiscal year 2001. The Company does not believe
the implementation of SFAS 133 and SFAS 138 will have a material effect on its
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective no
later than the fourth quarter of fiscal years beginning after December 15, 1999,
and requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation in
accordance with Accounting Principles Board Opinion 20, "Accounting Changes." In
October, 2000 the Securities and Exchange Commission issued SAB 101 Frequently
Asked Questions and Answers which the Company is utilizing to determine the
impact that adoption will have on its consolidated financial statements.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk. The Company typically hedges its currency
exposures associated with certain assets and liabilities denominated in
non-functional currencies and with anticipated foreign currency cash flows. As a
result, the effect of an immediate 10% change in exchange rates would not be
material to the Company's financial condition or results of operations. The
Company's forward exchange contracts have generally ranged from one to 12 months
in original maturity, and no forward exchange contract has had an original
maturity greater than one year. Forward exchange contracts outstanding as of
September 29, 2000, that hedge the balance sheet and certain purchase
commitments were effective on September 29, 2000, and accordingly there were no
unrealized gains or losses associated with such contracts and the fair value of
these contracts approximates their notional values.
FORWARD EXCHANGE CONTRACTS OUTSTANDING AS OF SEPTEMBER 29, 2000
NOTIONAL VALUE NOTIONAL
SOLD VALUE PURCHASED
---------------- ---------------------
(IN THOUSANDS)
Australian Dollar..................... $ -- $ 25,195
Japanese Yen.......................... 19,320 --
Euro.................................. -- 14,498
Canadian Dollar....................... 5,016 --
British Pound......................... 3,313 3,091
------ ------
Total................................. $ 27,649 $ 42,784
====== ======
INTEREST RATE RISK
The Company has no material exposure to market risk for changes in
interest rates. The Company invests primarily in short-term U.S. Treasury
securities, and changes in interest rates would not be material to the Company's
financial condition or results of operations. The Company primarily enters into
debt obligations to support general corporate purposes, including working
capital requirements, capital expenditures, and acquisitions. At September 29,
2000 the Company's debt obligations had fixed interest rates.
The estimated fair value of the Company's debt obligations approximates
the principal amounts reflected below on rates currently available to the
Company for debt with similar terms and remaining maturities.
Although payments under certain of the Company's operating leases for its
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
DEBT OBLIGATIONS
PRINCIPAL AMOUNTS AND RELATED WEIGHTED AVERAGE INTEREST RATES BY YEAR OF MATURITY
FISCAL YEARS
-------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
-------- ---------- --------- ---------- ---------- -------------- ------------
(IN THOUSANDS)
Long-term debt
(including current
portion)............... $ 6,384 $ 6,397 $3,410 $ 3,209 $2,500 $ 30,000 $ 51,900
Average interest rate..... 6.9% 6.9% 5.5% 5.7% 7.2% 6.8% 6.7%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section to this
report. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
contained in Item 1 of Part I of this Report under the caption "Executive
Officers." The information required by this Item with respect to the Company's
directors and nominees for director is incorporated herein by reference from the
information provided under the heading "Election of Directors" of the Company's
Proxy Statement. The information required by Item 405 of Regulation S-K is
incorporated herein by reference from the information provided under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Executive Compensation
Information" of the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Stock Ownership of Certain
Beneficial Owners" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: (see index on page F-1 of
this report)
o Report of Independent Accountants
o Consolidated Statements of Earnings for fiscal years 2000,
1999, and 1998
o Consolidated Balance Sheets at fiscal year-end 2000 and 1999
o Consolidated Statements of Stockholders' Equity for fiscal
years 2000, 1999, and 1998
o Consolidated Statements of Cash Flows for fiscal years 2000,
1999, and 1998
o Notes to the Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule: (see index on
page F-1 of this report) The following financial statement schedule of
the registrant and its subsidiaries for fiscal years 2000, 1999, and 1998
is filed as a part of this Report and should be read in conjunction with
the Consolidated Financial Statements of the registrant and its
subsidiaries.
Schedule
II Valuation and Qualifying Accounts.
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is
given in the consolidated financial statements or the notes thereto.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).**
3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).
3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant's Form 10-Q for the quarter
ended April 2, 1999).
4.1 Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant's Form 10/A filed
on March 8, 1999).
4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as
Rights Agent (incorporated herein by reference to Exhibit 4.2 of the registrant's Form 10/A filed on March 8, 1999).
10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant's Form
10-Q for the quarter ended April 2, 1999).**
10.2 Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.2 of the registrant's Form
10-Q for the quarter ended April 2, 1999).**
10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for
the quarter ended April 2, 1999).**
10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.4 of the registrant's Form
10-Q for the quarter ended April 2, 1999).**
22
10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999
(incorporated herein by reference to Exhibit 10.6 of the registrant's Form 10-Q for the quarter ended
April 2, 1999).**
10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant's Form 10 filed on
February 12, 1999).
10.7* Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant's
Form 10/A filed on February 12, 1999).
10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of
the registrant's Form 10-K for the year ended October 1, 1999).
10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to
Exhibit 10.8 of the registrant's Form 10/A filed on March 8, 1999).
10.10* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer
(incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10-K for the year ended October 1, 1999).
10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan
(incorporated herein by reference to Exhibit 10.11 of the registrant's Form 10-K for the year ended October 1, 1999).
10.12* Form of Amended and Restated Change in Control Agreement between Varian, Inc. and Garry W. Rogerson and
Raymond J. Shaw (incorporated herein by reference to Exhibit 10.7 of the registrant's Form 10/A filed on March 8,
1999).
10.13* Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated
herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
10.14* Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and James L. Colbert (incorporated herein
by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
10.15* Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by
reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
10.16* Description of Certain Compensatory Arrangement Between Registrant and G. Edward McClammy (incorporated herein by
reference to Exhibit 10.16 of the registrant's Form 10-K for the year ended October 1, 1999).
10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors (incorporated herein by
reference to Exhibit 10.17 of the registrant's Form 10-K for the year ended October 1, 1999).
10.18* Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant's Form
10-Q for the quarter ended March 31, 2000).
10.19* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras
(incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended March 31, 2000).
10.20* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and C.
Wilson Rudd (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended
March 31, 2000).
10.21* Description of Certain Compensatory Arrangements Between Varian S.p.A. and Sergio Piras.
18.1 Preferability letter regarding inventory accounting principle change.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended September 29, 2000 (EDGAR filing only).
- --------------
* Management contract or compensatory plan or arrangement.
** Certain exhibits and schedules omitted.
(b) Reports on Form 8-K.
None.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VARIAN, INC.
(Registrant)
Dated: December 6, 2000 By: /s/ G. Edward McClammy
-----------------------
G. Edward McClammy
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Allen J. Lauer President and Chief Executive December 6, 2000
- ------------------------------------- Officer, Director
Allen J. Lauer (Principal Executive Officer)
/s/ G. Edward McClammy Vice President and December 6, 2000
- ------------------------------------- Chief Financial Officer
G. Edward McClammy (Principal Financial Officer)
/s/ James L. Colbert Controller December 6, 2000
- ------------------------------------- (Principal Accounting Officer)
James L. Colbert
/s/ D. E. Mundell Chairman of the Board December 6, 2000
- -------------------------------------
D. E. Mundell
/s/ John G. McDonald Director December 6, 2000
- -------------------------------------
John G. McDonald
/s/ Wayne R. Moon Director December 6, 2000
- -------------------------------------
Wayne R. Moon
/s/ Elizabeth E. Tallett Director December 6, 2000
- -------------------------------------
Elizabeth E. Tallett
24
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or
incorporated by reference into this Report:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).**
3.1 Restated Certificate of Incorporation of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the
registrant's Form 10-Q for the quarter ended April 2, 1999).
3.2 By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant's Form 10-Q for the quarter
ended April 2, 1999).
4.1 Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant's Form 10/A filed
on March 8, 1999).
4.2 Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as
Rights Agent (incorporated herein by reference to Exhibit 4.2 of the registrant's Form 10/A filed on March 8, 1999).
10.1 Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant's Form
10-Q for the quarter ended April 2, 1999).**
10.2 Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.2 of the registrant's Form
10-Q for the quarter ended April 2, 1999).**
10.3 Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for
the quarter ended April 2, 1999).**
10.4 Transition Services Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor
Equipment Associates, Inc. and Varian, Inc. (incorporated herein by reference to Exhibit 10.4 of the registrant's
Form 10-Q for the quarter ended April 2, 1999).**
10.5 Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999
(incorporated herein by reference to Exhibit 10.6 of the registrant's Form 10-Q for the quarter ended April 2,
1999).**
10.6* Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant's Form 10 filed on
February 12, 1999).
10.7* Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant's
Form 10/A filed on February 12, 1999).
10.8* Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of
the registrant's Form 10-K for the year ended October 1, 1999).
10.9 Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to
Exhibit 10.8 of the registrant's Form 10/A filed on March 8, 1999).
10.10* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer
(incorporated herein by reference to Exhibit 10.10 of the registrant's Form 10-K for the year ended October 1, 1999).
10.11* Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan
(incorporated herein by reference to Exhibit 10.11 of the registrant's Form 10-K for the year ended October 1, 1999).
10.12* Form of Amended and Restated Change in Control Agreement between Varian, Inc. and Garry W. Rogerson and Raymond J.
Shaw (incorporated herein by reference to Exhibit 10.7 of the registrant's Form 10/A filed on March 8, 1999).
10.13* Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated
herein by reference to Exhibit 10.1 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
25
10.14* Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and James L. Colbert (incorporated herein
by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
10.15* Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by
reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended July 2, 1999).
10.16* Description of Certain Compensatory Arrangement Between Registrant and G. Edward McClammy (incorporated herein by
reference to Exhibit 10.16 of the registrant's Form 10-K for the year ended October 1, 1999).
10.17* Description of Certain Compensatory Arrangements Between Registrant and Non-Employee Directors (incorporated herein by
reference to Exhibit 10.17 of the registrant's Form 10-K for the year ended October 1, 1999).
10.18* Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant's
Form 10-Q for the quarter ended March 31, 2000).
10.19* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras
(incorporated herein by reference to Exhibit 10.2 of the registrant's Form 10-Q for the quarter ended March 31, 2000).
10.20* Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and
C. Wilson Rudd (incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-Q for the quarter ended
March 31, 2000).
10.21* Description of Certain Compensatory Arrangements Between Varian S.p.A. and Sergio Piras.
18.1 Preferability letter regarding inventory accounting principle change.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27.1 Financial Data Schedule for the fiscal year ended September 29, 2000 (EDGAR filing only).
- --------------
* Management contract or compensatory plan or arrangement.
** Certain exhibits and schedules omitted.
26
VARIAN, INC. AND SUBSIDIARY COMPANIES
ANNUAL REPORT ON FORM 10-K
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements of the registrant and its
subsidiaries are required to be included in Item 8:
Page
----
Report of Independent Accountants......................................................... F-2
Consolidated Statements of Earnings for fiscal years 2000, 1999, and 1998................. F-3
Consolidated Balance Sheets at fiscal year-end 2000 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for fiscal years 2000, 1999, and 1998..... F-5
Consolidated Statements of Cash Flows for fiscal years 2000, 1999, and 1998............... F-6
Notes to the Consolidated Financial Statements............................................ F-7
The following consolidated financial statement schedule of the registrant
and its subsidiaries for fiscal years 2000, 1999, and 1998 is filed as a part of
this Report as required to be included in Item 14(a) and should be read in
conjunction with the Consolidated Financial Statements of the registrant and its
subsidiaries:
Schedule Page
- -------- ----
II Valuation and Qualifying Accounts F-23
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is
given in the consolidated financial statements or the notes thereto.
F-1
VARIAN, INC. AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Varian, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Varian, Inc. and its subsidiaries at September 29, 2000 and October
1, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended September 29, 2000, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for inventory in fiscal 2000.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 26, 2000
F-2
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS
-----------------------------------------
2000 1999 1998
----------- ------------- -------------
RESTATED (1) RESTATED (1)
SALES................................................................ $ 704,440 $ 598,887 $ 557,770
Cost of sales........................................................ 438,164 374,246 336,687
----------- ------------- -------------
GROSS PROFIT......................................................... 266,276 224,641 221,083
----------- ------------- -------------
OPERATING EXPENSES
Sales and marketing.................................................. 123,002 124,597 113,854
Research and development............................................. 31,806 31,554 29,620
General and administrative........................................... 37,934 41,843 39,456
Purchased in-process research and development........................ 980 -- --
Restructuring charges................................................ -- 10,974 --
----------- ------------- -------------
TOTAL OPERATING EXPENSES............................................. 193,722 208,968 182,930
----------- ------------- -------------
OPERATING EARNINGS................................................... 72,554 15,673 38,153
Interest expense (income), net....................................... 1,787 2,018 (711)
----------- ------------- -------------
EARNINGS BEFORE INCOME TAXES......................................... 70,767 13,655 38,864
Income tax expense................................................... 27,982 6,076 15,615
----------- ------------- -------------
NET EARNINGS......................................................... $ 42,785 $ 7,579 $ 23,249
=========== ============= =============
NET EARNINGS PER SHARE:
Basic............................................................. $ 1.35 $ 0.25 $ 0.76
=========== ============= =============
Diluted........................................................... $ 1.26 $ 0.24 $ 0.76
=========== ============= =============
SHARES USED IN PER SHARE CALCULATIONS:
Basic............................................................. 31,742 30,442 30,423
=========== ============= =============
Diluted........................................................... 33,853 31,121 30,587
=========== ============= =============
- --------------
(1) Certain amounts prior to fiscal year 2000 have been restated to reflect
the Company's change from the LIFO method to the Average Cost method of
accounting for inventories. This change had no impact on diluted net
earnings per share for fiscal year 1999 and resulted in a reduction of
$.01 for fiscal year 1998.
See Accompanying Notes to the Consolidated Financial Statements.
F-3
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)
FISCAL YEARS
-----------------------------
2000 1999
-------------- -------------
RESTATED (1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 39,708 $ 23,348
Accounts receivable, net...................................................... 168,513 151,437
Inventories................................................................... 105,450 80,997
Deferred taxes................................................................ 21,044 20,481
Other current assets.......................................................... 10,734 8,405
-------------- -------------
TOTAL CURRENT ASSETS.......................................................... 345,449 284,668
PROPERTY, PLANT AND EQUIPMENT, NET............................................... 80,632 83,654
OTHER ASSETS..................................................................... 86,238 66,090
-------------- -------------
TOTAL ASSETS..................................................................... $ 512,319 $ 434,412
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................................. $ 6,384 $ 6,717
Accounts payable.............................................................. 52,193 40,442
Accrued liabilities........................................................... 133,825 116,128
-------------- -------------
TOTAL CURRENT LIABILITIES..................................................... 192,402 163,287
LONG-TERM DEBT................................................................... 45,516 51,221
DEFERRED TAXES................................................................... 6,669 8,453
OTHER LIABILITIES................................................................ 11,626 7,453
-------------- -------------
TOTAL LIABILITIES................................................................ 256,213 230,414
-------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 13 AND 18)..................................
STOCKHOLDERS' EQUITY
Preferred stock--par value $.01, authorized--1,000,000
shares; issued--none........................................................ -- --
Common stock--par value $.01, authorized--99,000,000
shares; issued and outstanding--32,834,000 shares at
September 29, 2000 and 30,563,094 shares at October 1, 1999................. 222,838 190,839
Retained earnings............................................................. 55,944 13,159
Other comprehensive loss...................................................... (22,676) --
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................... 256,106 203,998
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 512,319 $ 434,412
============== =============
- --------------
(1) Certain amounts prior to fiscal year 2000 have been restated to reflect
the Company's change from the LIFO method to the Average Cost method of
accounting for inventories.
See Accompanying Notes to the Consolidated Financial Statements.
F-4
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK TREASURY OTHER
------------------- RETAINED DIVISIONAL STOCK AT COMPREHENSIVE
SHARES AMOUNT EARNINGS EQUITY COST LOSS TOTAL
-------- ---------- ------------ ------------ --------- ------------- -----------
RESTATED(1) RESTATED RESTATED RESTATED
(1) (1) (1)
BALANCE, FISCAL YEAR-END 1997.. -- $ -- $ -- $212,560 $ -- $ -- $212,560
Net transfers from Varian
Associates, Inc............. -- -- -- 16,743 -- -- 16,743
Net earnings................... -- -- -- 23,249 -- -- 23,249
-------- ---------- ------------ ------------ --------- ------------- -----------
BALANCE, FISCAL YEAR-END 1998.. -- -- -- 252,552 -- -- 252,552
Net transfers to Varian
Associates, Inc. and Varian
Medical Systems, Inc. (VMS). -- -- -- (57,293) -- -- (57,293)
Distribution of Common Stock
to Varian Associates, Inc.
stockholders................ 30,423 189,679 -- (189,679) -- -- --
Issuance of common stock....... 140 1,160 -- -- -- -- 1,160
Net earnings................... -- -- 13,159 (5,580) -- -- 7,579
-------- ---------- ------------ ------------ --------- ------------- -----------
BALANCE, FISCAL YEAR-END 1999.. 30,563 190,839 13,159 -- -- -- 203,998
Net transfers from VMS......... -- 1,095 -- -- -- -- 1,095
Issuance of common stock....... 2,544 28,575 -- -- -- -- 28,575
Tax benefits from stock option
plans....................... -- 12,025 -- -- -- -- 12,025
Purchase of common stock....... -- -- -- -- (9,696) -- (9,696)
Retirement of treasury stock... (273) (9,696) -- -- 9,696 -- --
Currency translation adjustment -- -- -- -- -- (22,676) (22,676)
Net earnings................... -- -- 42,785 -- -- -- 42,785
-------- ---------- ------------ ------------ --------- ------------- -----------
BALANCE, FISCAL YEAR-END 2000.. 32,834 $ 222,838 $ 55,944 $ -- $ -- $ (22,676) $ 256,106
======== ========== ============ ============ ========= ============= ===========
- --------------
(1) Certain amounts prior to fiscal year 2000 have been restated to reflect
the Company's change from the LIFO method to the Average Cost method of
accounting for inventories.
See Accompanying Notes to the Consolidated Financial Statements.
F-5
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS
-----------------------------------------
2000 1999 1998
------------- ------------- -----------
RESTATED (1) RESTATED
(1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings......................................................... $ 42,785 $ 7,579 $ 23,249
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization..................................... 17,709 17,699 17,541
(Gain) loss on disposition of property, plant, and equipment...... (33) 687 --
Purchased in-process research and development..................... 980 -- --
Tax benefit from stock option deductions.......................... 12,025 -- --
Deferred taxes.................................................... (2,347) (1,546) (2,346)
Changes in assets and liabilities
Accounts receivable, net........................................ (23,214) (7,601) 2,063
Inventories..................................................... (20,455) 4,489 (969)
Other current assets............................................ (2,391) (3,666) 564
Accounts payable................................................ 12,712 6,122 (9,012)
Accrued liabilities............................................. 20,572 (870) (2,916)
Other liabilities............................................... 4,766 591 617
Other........................................................... (1,337) (819) 8,531
------------- ------------- -----------
Net cash provided by operating activities............................ 61,772 22,665 37,322
------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant, and equipment................. 479 245 --
Purchase of property, plant, and equipment........................... (21,610) (15,028) (19,358)
Purchase of businesses, net of cash acquired......................... (32,774) -- (34,707)
------------- ------------- -----------
Net cash used in investing activities................................ (53,905) (14,783) (54,065)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payment of short-term and long-term debt......................... (5,682) (13,536) --
Purchase of common stock............................................. (9,696) -- --
Issuance of common stock............................................. 28,575 1,160 --
Net transfers (to) from Varian Associates, Inc. and Varian Medical
Systems, Inc...................................................... (1,191) 27,842 16,743
------------- ------------- -----------
Net cash provided by financing activities............................ 12,006 15,466 16,743
------------- ------------- -----------
Effects of exchange rate changes on cash............................. (3,513) -- --
Net increase in cash and cash equivalents............................ 16,360 23,348 --
Cash and cash equivalents at beginning of period..................... 23,348 -- --
------------- ------------- -----------
Cash and cash equivalents at end of period........................... $ 39,708 $ 23,348 $ --
============= ============= ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt assumed/transferred from Varian Associates, Inc................. $ -- $ 71,465 $ --
Transfer of property, plant, and equipment........................... $ -- $ 9,900 $ --
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid.................................................... $ 10,637 $ 11,210 $ --
Interest paid........................................................ $ 3,714 $ 1,881 $ --
- --------------
(1) Certain amounts prior to fiscal year 2000 have been restated to reflect
the Company's change from the LIFO method to the Average Cost method of
accounting for inventories.
See Accompanying Notes to the Consolidated Financial Statements.
F-6
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Varian, Inc., (the "Company") is a major supplier of scientific
instruments and consumables, vacuum technology products and services, and
contract electronics manufacturing services. These businesses primarily serve
life science, health care, semiconductor processing, communications, industrial,
and academic customers.
Until April 2, 1999, the business of the Company was operated as the
Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). VAI contributed
IB to the Company; then on April 2, 1999, VAI distributed to the holders of
record of VAI common stock on March 24, 1999 one share of common stock of the
Company for each share of VAI common stock outstanding on April 2, 1999 (the
"Distribution"). At the same time, VAI contributed its Semiconductor Equipment
business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and
distributed to the holders of record of VAI common stock on March 24, 1999 one
share of common stock of VSEA for each share of VAI common stock outstanding on
April 2, 1999. VAI retained its Health Care Systems business and changed its
name to Varian Medical Systems, Inc. ("VMS") effective as of April 3, 1999.
These transactions were accomplished under the terms of an Amended and Restated
Distribution Agreement dated as of January 14, 1999 by and among the Company,
VAI, and VSEA (the "Distribution Agreement"). For purposes of providing an
orderly transition and to define certain ongoing relationships between and among
the Company, VMS, and VSEA after the Distribution, the Company, VMS, and VSEA
also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement, and a Transition Services Agreement.
The consolidated financial statements generally reflect the Company's
results of operations and cash flows for the year ended September 29, 2000 and
for the six-month period ended October 1, 1999. The interim consolidated
financial results for the six months ended April 2, 1999 were carved out from
the interim financial statements of VAI using the historical results of
operations of IB and include the accounts of IB after elimination of
inter-business balances and transactions. The consolidated financial statements
also include allocations of certain VAI corporate expenses (including legal,
accounting, employee benefits, insurance services, information technology
services, treasury, and other corporate overhead) to IB. These amounts have been
allocated to IB on the basis that is considered by management to reflect most
fairly or reasonably the utilization of the services provided to or the benefit
obtained by IB. Typical measures and activity indicators used for allocation
purposes include headcount, sales revenue, and payroll expense. The Company's
management believes that the methods used to allocate these amounts are
reasonable. However, these allocations are not necessarily indicative of the
amounts that would have been or that will be recorded by the Company on a
stand-alone basis.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR. The Company's fiscal years reported are the 52- or 53-week
periods, which ended on the Friday nearest September 30. Fiscal year 2000
comprises the 52-week period ended on September 29, 2000. Fiscal year 1999
comprises the 52-week period ended on October 1, 1999. Fiscal year 1998
comprises the 53-week period ended on October 2, 1998.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION. Sales and related costs of sales are recognized when
persuasive evidence of an arrangement exists, delivery has occurred, fee is
fixed or determinable, and collectibility is probable. The Company's products
are generally subject to warranties, and the Company provides for the estimated
future costs of repair, replacement, or customer accommodation in costs of
sales. Service revenue, which is less than 10% of the net sales in fiscal years
2000, 1999, and 1998, is recognized ratably over the period of the related
contract.
FOREIGN CURRENCY TRANSLATION. Effective October 2, 1999, the Company
changed its functional currency to the local currency (see Note 5). The
functional currencies of the Company's operations are
F-7
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primarily the U.S. dollar, and to a lesser extent the Euro, Australian dollar,
Japanese yen, and various other currencies. Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at exchange rates at the end of
the fiscal year and income and expense items are translated at effective rates
of exchange prevailing during the year. Translation gains and losses are
deferred and included in the cumulative translation adjustment component of
other comprehensive income. Gains and losses arising from transactions
denominated in currencies other than a subsidiary's functional currency are
reflected in general and administrative expenses and amounted to $0.6 million
during fiscal year 2000. During fiscal years 1999 and 1998, exchange gains and
losses were $2.4 million, and $2.0 million, respectively, resulting from the
remeasurement of monetary assets and liabilities into the U.S. dollar.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk comprise cash and cash
equivalents, trade accounts receivable, and forward exchange contracts. The
Company invests primarily in short-term U.S. Treasury securities. The Company
sells its products and extends trade credit to a large number of customers, who
are dispersed across many different industries and geographies. The Company
performs ongoing credit evaluations of these customers and generally does not
require collateral from them. Trade accounts receivable include allowances for
doubtful accounts for fiscal years 2000 and 1999 of $1.8 million and $1.8
million, respectively. The Company seeks to minimize credit risk relating to
forward exchange contracts by limiting its counter-parties to major financial
institutions.
CASH AND CASH EQUIVALENTS. The Company considers currency on hand, demand
deposits, and all highly liquid debt securities with an original maturity of
three months or less to be cash and cash equivalents. Fair value of cash, cash
equivalents, and short-term investments approximate cost due to the short period
of time to maturity.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost
is computed on an average cost basis. Provisions are made for potentially excess
or slow moving inventories.
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are stated
at cost. Major improvements are capitalized, while maintenance and repairs are
expensed currently. Plant and equipment are depreciated over their estimated
useful lives using the straight-line method for financial reporting purposes and
accelerated methods for tax purposes. Machinery and equipment lives vary from
three to 10 years, and buildings are depreciated from 20 to 40 years. Leasehold
improvements are amortized using the straight-line method over their estimated
useful lives, or the remaining term of the lease, whichever is less. When assets
are retired or otherwise disposed of, the assets and related accumulated
depreciation are removed from the accounts.
OTHER ASSETS. Goodwill and other identifiable intangible assets are
amortized on a straight-line basis over periods ranging from 5 to 40 years.
RESEARCH AND DEVELOPMENT. Company-sponsored research and development
costs related to both present and future products are expensed currently.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS 133 and SFAS 138 require derivatives to be measured at
fair value and to be recorded as assets or liabilities on the balance sheet. The
accounting for gains or losses resulting from changes in the fair values of
those derivatives would be dependent upon the use of the derivative and whether
it qualifies for hedge accounting. SFAS 133 and SFAS 138 are effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 and SFAS 138 in the first quarter of fiscal year 2001. The
Company does not believe the implementation of SFAS 133 and SFAS 138 will have a
material effect on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures
F-8
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
related to revenue recognition policies. SAB 101 is effective no later than the
fourth quarter of fiscal years beginning after December 15, 1999, and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion 20, "Accounting Changes." In October 2000, the
Securities and Exchange Commission issued SAB 101 Frequently Asked Questions and
Answers, which the Company is utilizing to determine the impact that adoption
will have on its consolidated financial statements.
NOTE 3. BALANCE SHEET DETAIL (IN THOUSANDS)
FISCAL YEARS
---------------------------
2000 1999
------------- ------------
RESTATED
INVENTORIES
Raw materials and parts............................................................ $ 55,649 $ 44,640
Work in process.................................................................... 10,912 5,487
Finished goods..................................................................... 38,889 30,870
------------- ------------
$ 105,450 $ 80,997
============= ============
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements......................................................... $ 4,720 $ 4,942
Buildings.......................................................................... 62,698 63,202
Machinery and equipment............................................................ 123,590 124,620
Construction in progress........................................................... 6,339 3,584
------------- ------------
197,347 196,348
Less: accumulated depreciation..................................................... 116,715 112,694
------------- ------------
Property, plant, and equipment, net................................................ $ 80,632 $ 83,654
============= ============
OTHER ASSETS
Net goodwill....................................................................... $ 80,478 $ 59,653
Other.............................................................................. 5,760 6,437
------------- ------------
$ 86,238 $ 66,090
============= ============
ACCRUED LIABILITIES
Payroll and employee benefits...................................................... $ 34,294 $ 33,394
Income taxes....................................................................... 21,511 14,254
Deferred income.................................................................... 15,862 15,899
Contract advances.................................................................. 17,474 5,082
Insurance.......................................................................... 6,191 7,609
Product warranty................................................................... 8,417 8,961
Other.............................................................................. 30,076 30,929
------------- ------------
$ 133,825 $ 116,128
============= ============
F-9
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. CHANGE IN METHOD OF ACCOUNTING FOR INVENTORY
The Company has accounted for all inventories using the average cost
method beginning July 1, 2000, whereas in all prior years, certain inventories
maintained in the U.S. were valued using the last-in, first-out (LIFO) method.
The new method of accounting for inventory was adopted because the Company
believes the average cost method of accounting for inventory will result in more
consistent matching of product costs with revenues due to expected ongoing
decreases in product costs and ongoing significant technological improvements in
components. The financial statements of prior years have been restated to apply
the new method retroactively, and accordingly, retained earnings as of September
26, 1997 have been increased by $9.3 million to reflect the restatement. The
effect of the accounting change on net income and earnings per share as
previously reported for the fiscal years ended October 1, 1999 and October 2,
1998 is as follows (in thousands, except per share amounts):
1999 1998
---------- -----------
Net income:
As previously reported.............................................................. $ 7,328 $ 23,428
Effect of change in accounting for inventories, net of income taxes................. 251 (179)
---------- -----------
As adjusted......................................................................... $ 7,579 $ 23,249
========== ===========
Basic earnings per share:
As previously reported.............................................................. $ 0.24 $ 0.77
Effect of change in accounting for inventories, net of income taxes................. 0.01 (0.01)
---------- -----------
As adjusted......................................................................... $ 0.25 $ 0.76
========== ===========
Diluted earnings per share:
As previously reported.............................................................. $ 0.24 $ 0.77
Effect of change in accounting for inventories, net of income taxes................. -- (0.01)
---------- -----------
As adjusted......................................................................... $ 0.24 $ 0.76
========== ===========
NOTE 5. CHANGE IN FUNCTIONAL CURRENCY
Statement of Financial Accounting Standards ("SFAS") 52 sets forth
guidelines for determining the functional currency to be used for financial
reporting. Subsequent to becoming independent from VAI, the Company made certain
changes in the way it conducts business internationally. A majority of business
transactions are now conducted in the local currencies of the respective
subsidiaries. Accordingly, effective October 2, 1999, the Company changed its
functional currency from the U.S. dollar to the local currencies of the
respective subsidiaries as prescribed by SFAS 52. Under SFAS 52, when the local
currencies are determined to be the functional currency, assets and liabilities
are translated using current exchange rates at the balance sheet date, and
income and expense accounts are translated at average exchange rates in effect
during the period. Translation of assets and liabilities at a current exchange
rate results in periodic translation gains and losses that are recorded in
stockholders' equity as a component of other comprehensive income. Upon adopting
a local currency functional currency, the Company recorded an initial
translation loss of $6.6 million in the cumulative translation adjustment
component of other comprehensive income (see Note 9). This loss principally
related to translating property, plant, and equipment at current exchange rates
versus the historical exchange rates previously used.
NOTE 6. FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to mitigate the
effects of operational (firm sales order and purchase commitments) and monetary
asset and liability exposures to fluctuations in foreign currency exchange
rates. The Company does not enter into forward exchange contracts for trading
purposes. When the Company's forward exchange contracts hedge operational
exposure, the effects of movements in currency exchange rates on these
instruments are recognized in income when the related revenues and expenses are
recognized. All forward exchange contracts hedging operational exposure are
designated and highly effective as hedges. The critical terms of all forward
exchange contracts hedging operational exposure and of the forecasted
transactions being hedged are substantially identical. Accordingly, the Company
expects that changes in the fair value or cash flows of the hedging instruments
F-10
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and the hedged transactions (for the risk that is being hedged) will completely
offset at the hedge's inception and on an ongoing basis. Gains and losses
related to hedges of operational exposures are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction occurs.
Any deferred gains or losses are included in accrued expenses in the balance
sheet. If a hedging instrument is sold or terminated prior to maturity, gains
and losses continue to be deferred until the hedged item is recognized in
income. If a hedging instrument ceases to qualify as a hedge, any subsequent
gains and losses are recognized in income.
When forward exchange contracts hedge monetary asset and liability
exposures to fluctuations in currency exchange rates, fluctuations in the value
of such contracts are recognized in income each period as the underlying
currency exchange rates change. Because the impact of movements in currency
exchange rates on these forward exchange contracts generally offsets the related
gains and losses arising from translation of the underlying monetary assets and
liabilities being hedged, these instruments do not subject the Company to risk
that would otherwise result from changes in currency exchange rates.
The Company's forward exchange contracts generally range from one to 12
months in original maturity. Forward exchange contracts outstanding as of
September 29, 2000 that hedge the balance sheet and certain purchase commitments
were effective September 29, 2000, and accordingly there were no significant
unrealized gains or losses associated with such contracts and the fair value of
these contracts approximates their notional values. Forward exchange contracts
that were outstanding as of September 29, 2000 are summarized as follows:
NOTIONAL NOTIONAL
VALUE VALUE
SOLD PURCHASED
---------- -----------
(IN THOUSANDS)
Australian Dollar.............................. $ -- $ 25,195
Japanese Yen................................... 19,320 --
Euro........................................... -- 14,498
Canadian Dollar................................ 5,016 --
British Pound.................................. 3,313 3,091
---------- -----------
---------- -----------
Total....................................... $ 27,649 $ 42,784
========== ===========
NOTE 7. ACQUISITIONS
In August 2000, the Company acquired all of the outstanding common stock
of VanKel Technology Group, Inc. ("VanKel") for $25.7 million in cash and the
extinguishment of debt. VanKel is a leading supplier of dissolution testing
equipment and laboratory services for pharmaceutical applications in the United
States. This acquisition has been accounted for under the purchase method;
accordingly, the Company's combined operating results include 100% of the
operating results of VanKel subsequent to the acquisition date. The Company is
amortizing acquired goodwill of $18.6 million over 20 years and other purchased
intangibles of $4.0 million over 5 to 20 years using the straight line method.
In addition, the Company recorded a one-time charge of $1.0 million for acquired
in-process research and development in the quarter ended September 29, 2000. At
the time of the acquisition, research and development of several dissolution
products and related projects were in process. The percentage of completion for
these products ranged from 50% to 80%. The percentage of completion for each
project was determined using estimates of effort, value added, and degree of
difficulty of the portion of each project completed as of the acquisition date,
as compared to the remaining research and development needed to bring each
project to technical feasibility. An internal appraisal was performed which used
the income approach to determine the fair value of the VanKel business and its
identifiable assets, including the portion of the purchase price attributed to
the in-process research and development. The income approach includes an
analysis of the markets, completion costs, cash flows, other required assets,
contributions made by core technology, and risks associated with achieving such
cash flows. A 15-25% risk-adjusted discount rate was applied to the projects'
cash flows to determine the present value of the intangible assets including the
in-process research and development.
In July 1998, the Company acquired all of the outstanding common stock of
Chrompack International B.V ("Chrompack") for approximately $28.9 million in
cash and the extinguishment of debt.
F-11
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Chrompack is a manufacturer of chromatography products and analytical
instruments used by scientific and industrial laboratories. This acquisition has
been accounted for under the purchase method; accordingly, the Company's
combined operating results include 100% of the operating results of Chrompack
subsequent to the acquisition date. The Company is amortizing acquired goodwill
of $20.9 million over 40 years using the straight line method.
In October 1996, the Company acquired the principal assets and properties
of the high performance liquid chromatography and columns business of Rainin
Instrument Company, Inc. ("Rainin") for approximately $24.0 million. This
acquisition has been accounted for under the purchase method; accordingly, the
Company's combined operating results include 100 % of the operating results of
Rainin subsequent to the acquisition date. The Company is amortizing acquired
goodwill of $21.7 million over 40 years using the straight line method.
Pro forma sales, earnings from operations, net earnings, and net earnings
per share have not been presented because the effects of these acquisitions were
not material on either an individual or an aggregated basis.
NOTE 8. NET EARNINGS PER SHARE
Basic earnings per share are calculated based on net earnings and the
weighted-average number of shares outstanding during the reported period.
Diluted earnings per share include dilution from potential common stock shares
issuable pursuant to the exercise of outstanding stock options determined using
the treasury stock method.
For periods prior to April 3, 1999, pro forma earnings per share were
calculated assuming that the weighted-average number of shares outstanding
during the period equaled the number of shares of common stock outstanding as of
the Distribution on April 2, 1999. Also, for computing pro forma diluted
earnings per share, the additional shares issuable upon exercise of stock
options were determined using the treasury stock method based on the number of
replacement stock options issued as of the Distribution on April 2, 1999.
For the fiscal years ended September 29, 2000 and October 1, 1999,
options to purchase 28,392 and 1,150,738, respectively, potential common stock
shares with exercise prices greater than the weighted-average market value of
such common stock were excluded from the calculation of diluted earnings per
share. For the fiscal year ended October 2, 1998, options to purchase 3,030,355
potential common stock shares with exercise prices greater than the market value
on April 2, 1999 of such common stock were excluded from the calculation of
diluted earnings per share.
A reconciliation follows:
2000 1999 1998
------------ ----------- ---------
RESTATED RESTATED
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BASIC
Net earnings........................... $ 42,785 $ 7,579 23,249
Weighted average shares outstanding.... 31,742 30,442 30,423
Basic earnings per share............ $ 1.35 $ 0.25 $ 0.76
============ =========== =========
DILUTED
Net earnings........................... $ 42,785 $ 7,579 $ 23,249
Weighted average shares outstanding.... 31,742 30,442 30,423
Net effect of dilutive stock options... 2,111 679 164
------------ ----------- ---------
Total shares........................... 33,853 31,121 30,587
Diluted earnings per share.......... $ 1.26 $ 0.24 $ 0.76
============ =========== =========
F-12
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and the currency
translation adjustment. Comprehensive income was $20.1 million and $7.6 million
for the fiscal years ended September 29, 2000 and October 1, 1999, respectively.
NOTE 10. DEBT AND CREDIT FACILITIES
The Distribution Agreement provided for the division among the Company,
VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution
Agreement, the Company was to assume 50% of VAI's term loans and receive an
amount of cash from VAI such that it would have net debt (defined in the
Distribution Agreement as the amount outstanding under the term loans and notes
payable, less cash and cash equivalents) equal to approximately 50% of the net
debt of the Company and VMS, subject to such adjustment as was necessary to
provide VMS with a net worth (as defined in the Distribution Agreement) of
between 40% and 50% of the aggregate net worth of the Company and VMS, and
subject to further adjustment to reflect the Company's approximately 50% share
of the estimated proceeds, if any, to be received by VMS after the Distribution
from the sale of VAI's long-term leasehold interest at certain of its Palo Alto
facilities, together with certain related buildings and other corporate assets,
and the Company's obligation for approximately 50% of any estimated transaction
expenses to be paid by VMS after the Distribution (in each case reduced for
estimated taxes payable or tax benefits received from all sales and transaction
expenses). Since the amounts transferred immediately prior to the Distribution
were based on estimates, these and other adjustments were required following the
Distribution. As a result of these final adjustments, the Company recorded an
increase in stockholders' equity of $1.1 million in the second quarter of fiscal
year 2000. Management believes that no further adjustments are necessary, and
that if any are required, they will not have a material effect on the Company's
financial condition.
As of September 29, 2000, the Company had $60.2 million in uncommitted
credit facilities for working capital purposes. As of September 29, 2000, no
amount was outstanding under these credit facilities. All of these credit
facilities contain certain conditions and events of default customary for such
facilities.
The Company had $49.5 million in term loans as of September 29, 2000 and
$55.5 million as of October 1, 1999. As of September 29, 2000 and October 1,
1999, fixed interest rates on the term loans ranged from 6.7% to 7.5%, and the
weighted average interest rate on the term loans was 7.0%. The term loans
contain certain covenants that limit future borrowings and the payment of cash
dividends and require the maintenance of certain levels of working capital and
operating results. For fiscal year 2000, the Company was in compliance with all
restrictive covenants of the term loan agreements. The Company also had other
long-term notes payable of $2.4 million with an interest rate of 1.0% as of
September 29, 2000, and $2.4 million with an interest rate of 2.3% as of October
1, 1999.
Future principal payments on long-term debt outstanding on September 29,
2000 will be $6.4 million, $6.4 million, $3.4 million, $3.2 million, $2.5
million, and $30.0 million during fiscal years 2001, 2002, 2003, 2004, 2005, and
thereafter, respectively.
Based upon rates currently available to the Company for debt with similar
terms and remaining maturities, the carrying amounts of long-term debt and notes
payable approximate estimated fair value.
NOTE 11. STOCK OPTION AND PURCHASE PLANS
Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the
"Plan") under which shares of common stock can be issued to officers, directors,
consultants, and key employees. The maximum number of shares of the Company
common stock available for awards under the Plan is 4,200,000 plus such number
of shares as were granted in substitution for other options in connection with
the Distribution.
The Plan is administered by the Compensation Committee of the Company's
Board of Directors. The exercise price for stock options granted under the Plan
may not be less than 100% of the fair market value at the date of the grant.
Options granted are exercisable at the times and on the terms established by the
Compensation Committee, but not later than 10 years after the date of grant.
Options granted are generally
F-13
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercisable in cumulative installments of one-third each year commencing one
year following the date of grant.
In connection with the Distribution, certain holders of options to
purchase shares of VAI common stock received replacement options from the
Company to purchase shares of the Company's common stock. Effective April 2,
1999, the Company granted such replacement options to purchase 4,299,639 shares
of the Company's common stock with an average exercise price of $11.16 per
share. Subsequent to April 2, 1999, replacement options to purchase an
additional 187,934 shares were granted, of which 175,898 shares were granted
during the fiscal year ended September 29, 2000. This brings the total options
granted in connection with the Distribution to 4,487,573 shares. Such stock
options vest over the same vesting periods as the original VAI stock options,
typically three years, and have the same expiration dates as the original VAI
stock options.
At September 29, 2000, options with respect to 1,785,352 shares were
available for grant under the plan.
OPTION ACTIVITY UNDER THE PLAN
2000 1999
--------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- --------------- ------------ ---------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Outstanding at beginning of fiscal year............. 5,687 $ 10.81 4,300(1) $ 11.16
Granted............................................. 921 $ 22.11 1,571 $ 9.65
Exercised........................................... (2,505) $ 10.50 (140) $ 8.27
Cancelled or expired................................ (33) $ 15.05 (44) $ 13.34
---------- --------------- ------------ ---------------
Outstanding at end of fiscal year................... 4,070 $ 13.51 5,687 $ 10.81
========== =============== ============ ===============
Shares exercisable at end of fiscal year............ 2,175 $ 11.63 3,401 $ 10.72
========== =============== ============ ===============
- ------------
(1) As of April 2, 1999.
OUTSTANDING AND EXERCISABLE OPTIONS AT SEPTEMBER 29, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF REMAINING AVERAGE EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES PRICE
- ----------------------- ---------------- ------------------ ---------------- ---------------- -----------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
$ 4.09-$ 8.77......... 259 1.9 $ 8.24 259 $ 8.24
$ 8.80-$ 9.50......... 1,354 8.5 $ 9.49 447 $ 9.48
$ 9.60-$ 11.84........ 911 5.0 $ 11.77 908 $ 11.77
$11.84-$ 14.61........ 823 6.4 $ 14.09 540 $ 14.07
$14.93-$ 54.94........ 723 9.2 $ 24.48 21 $ 30.79
---------------- ------------------ ---------------- ---------------- -----------
Total................. 4,070 7.0 $ 13.51 2,175 $ 11.63
================ ================== ================ ================ ===========
During the second quarter of fiscal year 2000, the Company's Board of
Directors approved an Employee Stock Purchase Plan (the "ESPP") for which the
Company set aside 1,200,000 shares of common stock for issuance. Beginning with
the first enrollment date of April 3, 2000, eligible Company employees may set
aside for purchases under the ESPP between 1% and 10% of eligible compensation
through payroll deductions. The participants' purchase price is the lower of 85%
of the stock's market value on the enrollment date or 85% of the stock's market
value on the purchase date. Enrollment dates occur every six months and purchase
dates occur each quarter.
During fiscal year 2000, employees purchased 38,965 shares for $1.3
million. As of September 29, 2000, a total of 1,161,035 shares remained
available for issuance under the ESPP.
F-14
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has adopted the pro forma disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company applies Accounting Principles Board
Opinion 25 and related Interpretations in accounting for its stock compensation
plans. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS 123, net
earnings and net earnings per share would have been reduced to the pro forma
amounts shown below:
2000 1999
---------- --------
RESTATED
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net earnings...................................... $ 39,660 $ 6,933
Net earnings per share:
Basic.......................................... $ 1.25 $ 0.23
Diluted........................................ $ 1.17 $ 0.22
The presentation of pro forma net earnings and net earnings per share
does not include the effects of options granted prior to April 2, 1999, and
accordingly, is not representative of future pro forma calculations.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
EMPLOYEE EMPLOYEE
STOCK STOCK
OPTIONS PURCHASE PLAN
------------- --------------
2000 1999 2000
------ ------ --------------
Expected dividend yield..................... 0.0% 0.0% 0.0%
Risk-free interest rate..................... 5.9% 5.8% 6.2%
Expected volatility......................... 40% 30% 40%
Expected life (in years).................... 5.7 5.9 0.5
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted average estimated fair value of employee stock options
granted during the fiscal year ended September 29, 2000 was $11.68 per share and
$3.95 per share during the six-month period ended October 1, 1999.
NOTE 12. STOCK REPURCHASE PROGRAM
The Company repurchases shares of its common stock under a program to
manage the dilution created by shares issued under employee stock plans. During
the second quarter of fiscal year 2000, the Company's Board of Directors
authorized the Company to repurchase up to 1,000,000 shares of its common stock
until September 28, 2001. The stock repurchases are limited by the amount of
cash generated through stock option exercises since October 4, 1999 and sales of
stock under the Company's Employee Stock Purchase Plan, plus the anticipated tax
benefits to the Company from such exercises and sales.
During the fiscal year ended September 29, 2000, the Company repurchased
272,500 shares, for an aggregate cost of $9.7 million. As of September 29, 2000,
the Company had remaining authorization for future repurchases of 727,500
shares.
F-15
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. CONTINGENCIES
ENVIRONMENTAL MATTERS The Company's operations are subject to various
foreign, federal, state, and local laws regulating the discharge of materials
into the environment or otherwise relating to the protection of the environment.
These regulations increase the costs and potential liabilities of the Company's
operations. However, the Company does not currently anticipate that its
compliance with these regulations will have a material effect upon the Company's
capital expenditures, earnings, or competitive position.
Under the Distribution Agreement, the Company and VSEA each agreed to
indemnify VMS for one-third of certain environmental investigation and
remediation costs (after adjusting for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs), as further described below.
VMS has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at eight sites
where VAI is alleged to have shipped manufacturing waste for recycling,
treatment, or disposal. VMS is also involved in various stages of environmental
investigation, monitoring and/or remediation under the direction of, or in
consultation with, foreign, federal, state, and/or local agencies at certain
current VMS or former VAI facilities, or is reimbursing third parties which are
undertaking such investigation, monitoring and/or remediation activities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of September 29, 2000, it was nonetheless estimated that the
Company's share of the future exposure for environmental-related investigation
and remediation costs for these sites and facilities ranged in the aggregate
from $1.9 million to $5.1 million (without discounting to present value). The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of September 29,
2000. No amount in the foregoing range of estimated future costs is believed to
be more probable of being incurred than any other amount in such range, and the
Company therefore accrued $1.9 million as of September 29, 2000.
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of September 29, 2000, it was estimated that the Company's share
of the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $18.4 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of September 29, 2000. As to
each of these sites and facilities, it was determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $12.7 million at September 29, 2000. The Company therefore
accrued $6.3 million as of September 29, 2000, which represents the best
estimate of its share of these future costs discounted at 4%, net of inflation.
This accrual is in addition to the $1.9 million described in the preceding
paragraph. At September 29, 2000, the Company's reserve for environmental
liabilities, based upon future environmental-related costs estimated by the
Company as of that date, was calculated as follows:
TOTAL
RECURRING NON-RECURRING ANTICIPATED
FISCAL YEAR COSTS COSTS FUTURE COSTS
- ------------ ----------- --------------- -----------------
(IN MILLIONS)
2001............................................................ $ 0.4 $ 0.6 $ 1.0
2002............................................................ 0.4 0.8 1.2
2003............................................................ 0.4 0.2 0.6
2004............................................................ 0.4 0.0 0.4
2005............................................................ 0.4 0.0 0.4
Thereafter...................................................... 10.4 0.6 11.0
----------- --------------- -----------------
Total costs..................................................... $ 12.4 $ 2.2 14.6
=========== ===============
Less imputed interest........................................... (6.4)
-----------------
Reserve amount.................................................. 8.2
Less current portion............................................ (1.1)
-----------------
Long term (included in Other liabilities)....................... $ 7.1
=================
F-16
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental-related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The aggregate
range of cost estimates reflects various uncertainties inherent in many
environmental investigation and remediation activities and the large number of
sites where such investigation and remediation activities are being undertaken.
Lawsuits for recovery of environmental investigation and remediation
costs already incurred, and to be incurred in the future, were filed by VAI
against various insurance companies and other third parties. Following
settlements with various insurance companies, VMS is still pursuing lawsuits
against an insurance company and certain other third parties for the benefit of
itself, VSEA, and the Company. In addition, an insurance company has agreed to
pay a portion of VAI's (now VMS') future environmental-related expenditures for
which the Company has an indemnity obligation, and the Company therefore has a
$1.6 million receivable in Other Assets as of September 29, 2000 for the
Company's share of such recovery. The Company has not reduced any
environmental-related liability in anticipation of recovery on claims made
against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified, and
related charges or credits against earnings may be made. Although any ultimate
liability arising from environmental-related matters described herein could
result in significant expenditures that, if aggregated and assumed to occur
within a single fiscal year, would be material to the Company's financial
statements, the likelihood of such occurrence is considered remote. Based on
information currently available and its best assessment of the ultimate amount
and timing of environmental-related events, the Company's management believes
that the costs of these environmental-related matters are not reasonably likely
to have a material adverse effect on the Company's financial position or results
of operations.
LEGAL PROCEEDINGS In the Distribution Agreement, the Company agreed to
defend and indemnify VSEA and VMS for costs, liabilities, and expenses with
respect to legal proceedings related to the Instruments Business of VAI, and
agreed to reimburse VMS for one-third of certain costs and expenses (after
adjusting for any insurance proceeds and tax benefits recognized or realized by
VMS for such costs and expenses) that are paid after April 2, 1999 and arise
from actual or potential claims or legal proceedings relating to discontinued,
former, or corporate operations of VAI. From time to time, the Company is
involved in a number of its own legal actions and could incur an uninsured
liability in one or more of them. While the ultimate outcome of all of the
foregoing legal matters is not determinable, management believes that these
matters are not reasonably likely to have a material adverse effect on the
Company's financial position or results of operations.
NOTE 14. RETIREMENT PLANS
Certain employees of the Company in the United States are eligible to
participate in the Company's sponsored, defined contribution retirement plan.
The Company's obligation is to match the participant's contribution up to 6% of
their eligible compensation. Participants are entitled, upon termination or
retirement, to their account balances, which are held by a third party trustee.
In addition, a number of the Company's foreign subsidiaries have retirement
plans for regular full-time employees. Total expenses for all plans amounted to
$9.4 million, $9.0 million, and $5.9 million for fiscal years 2000, 1999, and
1998, respectively.
At the Distribution, the Company assumed responsibility for pension and
post-retirement benefits for active employees of the Company; the responsibility
for all others, principally retirees of VAI, remained with VMS, although the
Company is obligated to reimburse VMS for certain costs relating to certain VAI
retirees. An allocation of assets and liabilities for foreign defined benefit
pension, post-employment, and post-retirement benefits, which are not material
to the Company's financial statements, has been included in these consolidated
financial statements.
F-17
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. STOCKHOLDERS' EQUITY
On April 2, 1999, stockholders of record of VAI on March 24, 1999
received in the Distribution one share of the Company's common stock for each
share of VAI common stock held on April 2, 1999. Immediately following the
Distribution, the Company had 30,422,792 shares of common stock outstanding.
Each stockholder also received one Right for each share of common stock
distributed, entitling the stockholder to purchase one one-thousandth of a share
of Participating Preferred, par value $0.01 per share, for $75.00 (subject to
adjustment), in the event of certain changes in the Company's ownership. The
Participating Preferred Stock is designed so that each one one-thousandth of a
share has economic and voting terms similar to those of one share of common
stock. The Rights will expire no later than March 2009. As of September 29,
2000, no Rights had been exercised.
The Company began accumulating retained earnings on April 3, 1999, the
date immediately after the Distribution.
NOTE 16. INCOME TAXES
The sources of earnings before income taxes are as follows:
2000 1999 1998
----------- ---------- ----------
RESTATED RESTATED
(IN THOUSANDS)
United States............................... $ 21,048 $ (6,014) 4,664
Foreign..................................... 49,719 19,669 34,200
----------- ---------- ----------
Earnings before income taxes................ $ 70,767 $ 13,655 $ 38,864
=========== ========== ==========
Income tax expense consists of the following:
2000 1999 1998
---------- ---------- ----------
RESTATED RESTATED
(IN THOUSANDS)
CURRENT
U.S. federal................................ $ 7,417 $ (696) $ --
Foreign..................................... 17,911 8,971 16,736
State and local............................. 2,400 (653) 1,500
---------- ---------- ----------
Total current............................... 27,728 7,622 18,236
---------- ---------- ----------
DEFERRED
U.S. federal................................ (238) (14) (2,821)
Foreign..................................... 492 (1,532) 200
---------- ---------- ----------
Total deferred.............................. 254 (1,546) (2,621)
---------- ---------- ----------
Income tax expense.......................... $ 27,982 $ 6,076 $ 15,615
========== ========== ==========
F-18
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities are recognized for the temporary
differences between the tax basis and reported amounts of assets and
liabilities, tax loss and credit carry-forwards, and the remittance of earnings
from foreign subsidiaries. Their significant components are as follows:
2000 1999
---------- ----------
RESTATED
(IN THOUSANDS)
ASSETS
Product warranty.................................... $ 2,513 $ 2,619
Deferred compensation............................... 3,912 3,072
Inventory........................................... 10,768 8,779
Loss and credit carry-forwards...................... 13,518 2,413
Revenue recognition................................. 447 1,132
Other............................................... 2,450 2,466
---------- ----------
Gross deferred tax assets........................... 33,608 20,481
---------- ----------
Valuation allowance................................. (9,964) --
---------- ----------
Total deferred tax assets........................... 23,644 20,481
---------- ----------
LIABILITIES
Depreciation and amortization....................... 6,669 5,853
Unremitted earnings of foreign subsidiaries......... 2,600 2,600
---------- ----------
Total deferred tax liabilities...................... 9,269 8,453
---------- ----------
Net deferred tax assets............................. $ 14,375 $ 12,028
========== ==========
The Company's foreign manufacturing subsidiaries have accumulated
approximately $36 million of earnings that have been reinvested in their
operations. The Company has not provided U.S. tax on these earnings.
For the year ended September 29, 2000, the Company has U.S. loss and tax
credit carry-forwards of approximately $8.8 million and $10.0 million
respectively, and foreign loss carry-forwards of approximately $2.0 million. The
loss carry-forwards expire in 2020 and the credit carry-forwards expire in 2005.
A valuation allowance has been provided against foreign tax credit
carry-forwards. If recognized, the tax benefits of these carry-forwards will be
accounted for as a credit to stockholders' equity.
The difference between the reported income tax rate and the federal
statutory income tax rate is attributable to the following:
2000 1999 1998
------ ------ -----
Federal statutory income tax rate..................... 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit......... 2.2 (3.2) 2.6
Foreign taxes in excess of federal statutory rate..... 2.3 10.8 5.3
Foreign sales corporation............................. -- (0.8) (1.2)
Other................................................. -- 2.7 (1.5)
------ ------ -----
Reported income tax rate.............................. 39.5% 44.5% 40.2%
====== ====== =====
Excluding the in-process research and development charge, the tax rate
for fiscal year 2000 would have been 39%.
The Company's income taxes payable have been reduced, and the deferred
tax assets increased by the tax benefits associated with exercises of employee
stock options. These benefits were credited directly to stockholders' equity and
amounted to $12.0 million.
NOTE 17. RESTRUCTURING CHARGES
During the second quarter of fiscal year 1999, IB's management approved a
program to consolidate field sales and service organizations in Europe,
Australia and the United States so as to fall within the direct
F-19
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
responsibility of management at principal factories in those countries, in order
to reduce costs, simplify management structure, and benefit from the
infrastructure existing in those factories. This restructuring entailed
consolidating certain sales, service, and support operations. The consolidation
resulted in exiting of a product line, closing or downsizing of sales offices,
and termination of approximately 100 personnel. Restructuring activities related
to severance and other related employee benefits is complete. Restructuring
regarding lease payments still includes two facilities; one lease expires in
March 2001 and the other in 2006. The following table sets forth certain details
associated with this restructuring:
CASH
ACCRUAL PAYMENTS ACCRUAL AT
OCTOBER 1, AND OTHER SEPTEMBER 29,
1999 REDUCTIONS 2000
---------- ------------- ------------
(IN THOUSANDS)
Lease payments and other facility expenses................ $ 1,244 $ 666 $ 578
Severance and other related employee benefits............. 1,721 1,721 --
---------- ------------- ------------
Total..................................................... $ 2,965 $ 2,387 $ 578
========== ============= ============
NOTE 18. LEASE COMMITMENTS
At fiscal year-end 2000, the Company was committed to minimum rentals for
certain facilities under non-cancellable operating leases for fiscal years 2001
through 2005 and thereafter, as follows, in thousands: $2,605, $2,660, $2,422,
$1,957, $1,752, and $28,607, respectively. Rental expense for fiscal years 2000,
1999, and 1998, in thousands, was $5,523, $4,738, and $7,600, respectively.
NOTE 19. INDUSTRY AND GEOGRAPHIC SEGMENTS
INDUSTRY SEGMENTS. The Company's operations are grouped into three
business segments: Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing. Scientific Instruments is a supplier of instruments, consumable
laboratory supplies, and after sales support used in studying the chemical
composition and structure of myriad substances and for imaging. These products
are tools for scientists engaged in drug discovery, life sciences, genetic
engineering, health care, environmental analysis, quality control and academic
research. Vacuum Technologies provides products and solutions to create,
maintain, contain, and measure an ultra-clean or high-vacuum environment for
industrial and scientific applications. Vacuum Technologies products are used in
semiconductor manufacturing equipment, life science and other analytical
instruments, industrial manufacturing, and quality control. Electronics
manufacturing provides contract manufacturing services for technology companies
with low-volume and high-mix requirements.
These segments were determined based on how management views and
evaluates the Company's operations. Other factors included in segment
determination were similar economic characteristics, distribution channels,
manufacturing environment, technology, and customers. No single customer
represents 10% or more of the Company's total sales.
Corporate includes shared costs of legal, tax, accounting, human
resources, real estate, information technology, treasury, and other Varian, Inc.
management costs. A portion of the indirect and common costs has been allocated
to the segments through the use of estimates. Also, transactions between
segments are accounted for at cost and are not included in sales. Accordingly,
the following information is provided for purposes of achieving an understanding
of operations, but may not be indicative of the financial results of the
reported segments were they independent organizations. In addition, comparisons
of the Company's operations to similar operations of other companies may not be
meaningful.
The Company operates various manufacturing and marketing operations
outside the United States. In fiscal years 2000, 1999, and 1998, no single
country outside the United States accounted for more than 10% of total sales. In
fiscal years 2000, 1999, and 1998, no single country outside the United States
accounted for more than 10% of total assets. Transactions between geographic
areas are accounted for at cost and are not included in sales.
Included in the total of United States sales are export sales in fiscal
years 2000, 1999, and 1998 of $39 million, $37 million, and $30 million,
respectively.
F-20
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INDUSTRY SEGMENTS
DEPRECIATION AND
SALES PRETAX EARNINGS IDENTIFIABLE ASSETS CAPITAL EXPENDITURES AMORTIZATION
------------------- ------------------------- ----------------------- -------------------- -------------------
2000 1999 1998 2000(1) 1999(2) 1998(2) 2000 1999(2) 1998(2) 2000 1999 1998 2000 1999 1998
------ ------ ----- ------- ------- ------- ----- ------- ------- ------ ------ ------ ------ ----- ------
(IN MILLIONS)
Scientific
Instruments... $ 401 $ 396 $363 $ 44 $ 13 $ 25 $ 287 $240 $ 235 $ 5 $ 5 $ 6 $ 8 $ 8 $ 7
Vacuum
Technologies.. 139 107 112 25 7 11 61 61 59 4 4 5 3 4 4
Electronics
Manufacturing. 164 96 83 13 7 6 85 53 46 10 2 6 3 3 2
------ ------ ----- ----- ------ ------ ------ ----- ------ ------ ------ ------ ------ ----- ------
Total
industry
segments...... 704 599 558 82 27 42 433 354 340 19 11 17 14 15 13
General
corporate..... -- -- -- (9) (11) (4) 79 80 73 3 4 2 4 3 5
Interest, net.... -- -- -- (2) (2) 1 -- -- -- -- -- -- -- -- --
------ ------ ----- ----- ------ ------ ------ ----- ------ ------ ------ ------ ------ ----- ------
Continuing
operations.... $ 704 $ 599 $558 $ 71 $ 14 $ 39 $ 512 $434 $ 413 $ 22 $ 15 $ 19 $ 18 $ 18 $ 18
====== ====== ===== ===== ====== ====== ====== ===== ====== ====== ====== ====== ====== ===== ======
GEOGRAPHIC SEGMENTS
SALES TO INTERGEOGRAPHIC
UNAFFILIATED SALES
CUSTOMERS (3) TO AFFILIATES TOTAL SALES PRETAX EARNINGS IDENTIFIABLE ASSETS
------------------- ------------------- -------------------- ------------------------- -----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000(1) 1999(2) 1998(2) 2000 1999(2) 1998(2)
------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- ------- ---- ------- -------
(IN MILLIONS)
United States.. $ 403 $ 331 $327 $ 170 $ 126 $116 $ 573 $ 457 $ 443 $ 48 $ 14 $ 39 $ 290 $224 $ 214
International.. 301 268 223 106 105 112 407 373 335 50 22 34 143 151 159
------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- -------- ------ ------- -------
Total
geographic
segments.... 704 599 550 276 231 228 980 830 778 98 36 73 433 375 373
Eliminations,
corporate
& other..... -- -- 8 (276) (231) (228) (276) (231) (220) (27) (22) (34) 79 59 40
------ ------ ----- ------ ------ ----- ------ ------ ------ ------- ------- -------- ------ ------- -------
Total company.. $ 704 $ 599 $558 $ -- $ -- $ -- $ 704 $ 599 $ 558 $ 71 $ 14 $ 39 $ 512 $434 $ 413
====== ====== ===== ====== ====== ===== ====== ====== ====== ======= ======= ======== ====== ======= =======
(1) Includes purchased in-process research and development charge of $1.0
million.
(2) Certain amounts have been restated to reflect the Company's change from
the LIFO method to the Average Cost method of accounting for inventories.
(3) Sales are based on the location of the operation furnishing goods and
services. Sales to unaffiliated customers include sales to VAI, VMS, and
VSEA. No single customer accounted for more than 10% of sales.
F-21
VARIAN, INC. AND SUBSIDIARY COMPANIES
QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
2000 (1)
---------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (4)
-------------- ---------------- --------------- ------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Sales.................................... $ 160.0 $ 177.3 $ 182.0 $ 185.1
Gross profit............................. $ 62.1 $ 67.6 $ 67.3 $ 69.3
Net earnings............................. $ 8.5 $ 10.2 $ 11.7 $ 12.4
Net earnings per share
Basic.................................... $ 0.28 $ 0.33 $ 0.36 $ 0.38
Diluted.................................. $ 0.26 $ 0.30 $ 0.34 $ 0.36
============== ================ =============== ==================
1999 (1)
------------------------------------------------------------------------
FIRST QUARTER (3) SECOND QUARTER (2)(3) THIRD QUARTER FOURTH QUARTER
----------------- -------------------- -------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Sales................................. $ 133.3 $ 148.9 $ 149.6 $ 167.1
Gross profit.......................... $ 52.7 $ 47.4 $ 58.5 $ 66.0
Net earnings (loss)................... $ 4.3 $ (9.9) $ 5.6 $ 7.6
Net earnings (loss) per share
Basic................................. $ 0.14 $ (0.32) $ 0.18 $ 0.25
Diluted............................... $ 0.14 $ (0.32) $ 0.18 $ 0.24
================= ==================== ============== ================
- --------------
(1) Certain amounts prior to the third quarter of fiscal year 2000 have been
restated to reflect the Company's change from the LIFO method to the
Average Cost method of accounting for inventories. Amounts for gross
profit, net earnings (loss), earnings (loss) per share-basic, and
earnings (loss) per share-diluted prior to restatement for the four
quarters of fiscal year 1999 were: $52.6, $4.3, $0.14, and $0.14; $47.2,
($10.0), ($0.33), and ($0.33); $58.4, $5.5, $0.18, and $0.18; and $66.0,
$7.5, $0.25, and $0.24, respectively. Amounts for gross profit, net
earnings, earnings per share-basic and earnings per share-diluted prior
to restatement for the first two quarters of fiscal year 2000 were:
$61.9, $8.4, $0.27, and $0.26; $67.5, $10.1, $0.32, and $0.30,
respectively.
(2) The loss resulted from restructuring and reorganization costs associated
with preparing to spin-off from VAI, streamlining IB's worldwide sales
and service network, and exiting certain product lines.
(3) The results for quarters prior to the third quarter of fiscal year 1999
do not include an assumed interest expense for long-term debt taken on by
the Company as part of the spin-off from VAI on April 2, 1999.
(4) Includes purchased in-process research and development charge of $1.0
million. Excluding this charge, diluted net earnings per share would have
been $.039.
F-22
SCHEDULE II
VARIAN, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS 2000, 1999, AND 1998
(IN THOUSANDS)
DEDUCTIONS
--------------------------------------
BALANCE
BALANCE AT CHARGED TO AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIPTION AMOUNT PERIOD
------------ ------------ --------------------------- ---------- -----------
Allowance for Doubtful
Accounts Receivable:
Fiscal year 2000............... $ 1,846 $ 407 Write-offs & adjustments $ 436 $ 1,817
============ ============ ========== ===========
Fiscal year 1999............... $ 713 $ 1,506 Write-offs & adjustments $ 373 $ 1,846
============ ============ ========== ===========
Fiscal year 1998............... $ 321 $ 295 Write-offs & adjustments $ (97) $ 713
============ ============ ========== ===========
Estimated Liability for
Product Warranty:
Fiscal year 2000............... $ 8,961 $ 6,003 Warranty expenditures $ 6,547 $ 8,417
============ ============ ========== ===========
Fiscal year 1999............... $ 7,600 $ 10,016 Warranty expenditures $ 8,655 $ 8,961
============ ============ ========== ===========
Fiscal year 1998............... $ 7,173 $ 9,641 Warranty expenditures $ 9,214 $ 7,600
============ ============ ========== ===========
F-23