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SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
------------------------------
FORM 10-Q
(Mark One)
[X](MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 2, 1999FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[_]|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File NumberFOR THE TRANSITION PERIOD FROM -------- TO --------
COMMISSION FILE NUMBER 000-25393
----------------------------------------------------
VARIAN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 77-0501995
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
3120 Hansen Way, Palo Alto, California 94304-1030
(Address of principal executive offices) (Zip Code)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0501995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3120 HANSEN WAY, PALO ALTO, CALIFORNIA 94304-1030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 213-8000
(Registrant's telephone number, including area code)
3050 Hansen Way, Palo Alto, California 94304-1000
(Former Address)(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 ofor 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 [X]|_|
The number of shares of the Registrant's common stock outstanding as of
May
7, 1999April 28, 2000 was 30,422,792 shares of $0.01 par value common stock.
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- -------------------------------------------------------------------------------32,141,527.
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TABLE OF CONTENTS
Part
PART I. Financial Information.......................................... 1FINANCIAL INFORMATION.......................................................................... 3
Item 1. Financial Statements........................................... 1
CombinedStatements........................................................................... 3
Consolidated Statements of Operations.............................. 1
CombinedEarnings............................................................ 3
Consolidated Balance Sheets........................................ 2
CombinedSheets.................................................................... 4
Consolidated Condensed Statements of Cash Flows.................... 3Flows................................................ 5
Notes to the CombinedConsolidated Financial Statements..................... 4Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Item 2. Results of Operations.......................................... 10Operations.......... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 19
PartRisk...................................... 18
PART II. Other Information..............................................OTHER INFORMATION.............................................................................. 20
Item 5. Other Information..............................................4. Submission of Matters to a Vote of Security Holders............................................ 20
Item 6. Exhibits and Reports on Form 8-K...............................8-K............................................................... 20
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which provides a "safe harbor" for these types of statements. These
forward-
lookingforward-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, including
Asia markets; foreign
currency fluctuations; market investment in capital equipment; the ability to realize anticipated cost-savings from the recently-
initiated reorganization and restructuring; increasing operating margins on
higher sales; costs of investigating and remediating environmentally-
contaminated sites; successful implementation by the Company and certain third
parties of corrective action to address the impact of the Year 2000; the risks
detailed in the Company's registration statement on Form 10/A filed with the
Securities and Exchange Commission; and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
The
Company assumes and undertakes no obligation to update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Varian, Inc. and Subsidiary Companies
Combined Statements of OperationsVARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended Six Months Ended
--------------------------- ---------------------------
AprilQUARTER ENDED SIX MONTHS ENDED
----------------------- ----------------------
MAR. 31, APR. 2, MAR. 31, APR. 2,
2000 1999 April 3, 1998 April 2,2000 1999
April 3, 1998
------------- ------------- ------------- ----------------------- --------- --------- ---------
SalesSALES....................................................... $ 148,936 $ 140,965 $ 282,232 $ 281,913177,310 $148,936 $337,262 $282,232
Cost of sales............................................... 109,820 101,712 207,919 182,378
---------- --------- --------- ---------
GROSS PROFIT................................................ 67,490 47,224 129,343 99,854
---------- --------- Operating Costs--------- ---------
OPERATING EXPENSES
Sales and Expenses
Cost of sales 101,712 85,228 182,378 171,660marketing.................................... 31,301 34,180 61,106 64,276
Research and developmentdevelopment............................... 8,549 9,277 7,77515,531 16,440 15,005
Marketing 34,180 28,068 64,276 55,340
General and administrative 10,760 9,246 18,462 19,630
Restructuring chargesadministrative............................. 10,679 10,889 21,016 18,727
Restructuring.......................................... -- 10,974 -- 10,974
------------ --------- --------- ---------
---------
Total Operating Expenses 166,903 130,317 292,530 261,635TOTAL OPERATING EXPENSES............................... 50,529 65,320 97,653 110,417
---------- --------- --------- ---------
---------
Operating Earnings
(Loss) Before Taxes (17,967) 10,648 (10,298) 20,278
Income tax (benefit)OPERATING EARNINGS (LOSS)................................... 16,961 (18,096) 31,690 (10,563)
Interest expense (7,993) 4,248 (4,580) 8,117(income), net.............................. 553 (129) 1,244 (265)
---------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES......................... 16,408 (17,967) 30,446 (10,298)
Income tax expense (benefit)................................ 6,259 (7,993) 11,874 (4,583)
---------- --------- Net Earnings (Loss)--------- ---------
NET EARNINGS (LOSS)......................................... $ 10,149 $ (9,974) $ 6,40018,572 $ (5,718) $ 12,161(5,715)
========== ========= ========= =========
=========
Pro Forma Net Earnings
(Loss) Per Share:
BasicNET EARNINGS (LOSS) PER SHARE:
Basic.................................................. $ 0.32 $ (0.33) $ 0.210.60 $ (0.19)
$ 0.40========== ========= ========= =========
=========
DilutedDiluted................................................ $ 0.30 $ (0.33) $ 0.210.56 $ (0.19)
$ 0.40========== ========= ========= =========
=========
Shares Used in Pro Forma
Per Share Computations:
BasicSHARES USED IN PER SHARE CALCULATIONS:
Basic.................................................. 31,498 30,423 31,154 30,423
30,423 30,423========== ========= ========= =========
=========
Diluted 30,423Diluted................................................ 33,770 30,587 30,42333,232 30,587
=================== ========= ========= =========
See accompanying Notes to the CombinedConsolidated Financial Statements.
13
Varian, Inc. and Subsidiary Companies
Combined Balance SheetsVARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
April 2, October 2,MAR. 31, OCT. 1,
2000 1999
1998
-------------------- ----------
(Unaudited)(UNAUDITED)
ASSETS
Current AssetsCURRENT ASSETS
Cash and cash equivalentsequivalents....................................................... $ 12,09354,528 $ --23,348
Accounts receivable, 142,974 143,836
Inventories 67,482 71,575net........................................................ 152,845 151,437
Inventories..................................................................... 92,401 66,634
Deferred taxes.................................................................. 25,368 25,508
Other current assets 31,834 26,260assets............................................................ 8,437 8,405
--------- ----------
TOTAL CURRENT ASSETS............................................................ 333,579 275,332
PROPERTY, PLANT, AND EQUIPMENT, NET.................................................. 77,246 83,654
OTHER ASSETS......................................................................... 66,321 66,090
--------- Total Current Assets 254,383 241,671
Property, plant and equipment 194,087 219,385
Accumulated depreciation and amortization (108,073) (124,666)
--------- ---------
Net Property, Plant and Equipment 86,014 94,719
Other Assets 66,425 67,709
--------- ---------
Total Assets----------
TOTAL ASSETS......................................................................... $477,146 $ 406,822 $ 404,099425,076
========= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Liabilities
Notes payableportion of long-term debt............................................... $ 11,4286,493 $ --6,717
Accounts payable--trade 28,347 34,320payable................................................................ 56,715 40,442
Accrued expenses 111,243 102,470
Product warranty 7,907 7,608
Advance payments from customers 8,234 5,180liabilities............................................................. 128,753 116,128
--------- ----------
TOTAL CURRENT LIABILITIES....................................................... 191,961 163,287
LONG-TERM DEBT....................................................................... 47,931 51,221
DEFERRED TAXES....................................................................... 8,439 8,453
OTHER LIABILITIES.................................................................... 10,561 7,453
--------- Total Current Liabilities 167,159 149,578
Long-Term Accrued Expenses 7,929 6,862
Deferred Taxes 4,460 4,192
Notes Payable 52,517 ------------
TOTAL LIABILITIES.................................................................... 258,892 230,414
--------- ---------
Total Liabilities 232,065 160,632
--------- ---------
Contingencies (Note 7)
Stockholders' Equity----------
CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred Stock--parstock--par value $.01, authorized --
1,000,000authorized--1,000,000 shares; issued--noneissued--none..... -- --
Common Stock -- parstock--par value $.01, authorized --
99,000,000authorized--99,000,000 shares; issued and
outstanding--30,422,792outstanding--32,148,879 shares at April 2, 1999Mar. 31, 2000 and none historical 30430,563,094 at Oct. 1,
1999.......................................................................... 200,852 181,619
Retained earnings............................................................... 31,615 13,043
Other comprehensive income (loss)............................................... (14,213) --
Capital in excess of par value 174,453 --
Divisional equity -- 243,467
--------- ----------
TOTAL STOCKHOLDERS' EQUITY...................................................... 218,254 194,662
--------- Total Stockholders' Equity 174,757 243,467
--------- ---------
Total Liabilities and Stockholders' Equity----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $477,146 $ 406,822 $ 404,099425,076
========= ===================
See accompanying Notes to the CombinedConsolidated Financial Statements.
24
Varian, Inc. and Subsidiary Companies
Combined Condensed Statements of Cash FlowsVARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
AprilSIX MONTHS ENDED
--------- --- --------
MAR. 31, APR. 2,
2000 1999
April 3, 1998
------------- ---------------------- --------
Net Cash Provided by Operating ActivitiesNET CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 32,513 $ 8,584
$ 19,407--------- --------
--------
Investing ActivitiesINVESTING ACTIVITIES
Purchase of property, plant, and equipmentequipment.......................................... (10,558) (10,546)
(9,710)Proceeds from sale of property, plant, and equipment................................ 286 --
Purchase of businesses.............................................................. (7,095) --
--------- --------
NET CASH USED IN INVESTING ACTIVITIES............................................... (17,367) (10,546)
--------- --------
FINANCING ACTIVITIES
Common stock option exercises....................................................... 21,752 --
Purchase of common stock............................................................ (2,548)
Net Cash Used in Investing Activities (10,546) (9,710)
-------- --------
Financing Activitiesissuance/(payment) of debt...................................................... (3,337) --
Net transfers from (to) Varian Associates, Inc./Varian Medical Systems, Inc.............. 1,095 14,792 (10,139)
-------- --------
Net Cash Provided by (Used in) Financing
ActivitiesNET CASH PROVIDED BY FINANCING ACTIVITIES........................................... 16,962 14,792 (10,139)
-------- --------
Effects of Exchange Rate Changesexchange rate changes on Cashcash............................................ (928) (737) 442
-------- --------
Net increase (decrease) in cash and cash equivalentsequivalents........................................... 31,180 12,093 --
Cash and cash equivalents at beginning of period --period.................................... 23,348 --
-------- --------
Cash and Cash Equivalents at End of PeriodCASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 12,093 $ --54,528 $12,093
========= ========
========
Non-Cash Investing and Financing Activities:NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt assumed/transferred from Varian Associates, Inc.Inc................................ $ 77,100-- $77,100
========= ========
Transfer of property, plant, and equipmentequipment.......................................... $ -- $ 9,900
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid................................................................... $ 2,453 $ 510
========= ========
Interest paid....................................................................... $ 1,928 $ 37
========= ========
See accompanying Notes to the CombinedConsolidated Financial Statements.
35
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note(UNAUDITED)
NOTE 1. Interim Combined Financial StatementsINTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim combinedconsolidated financial statements of Varian, Inc. and its
subsidiary companies (collectively, the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The year ended
October 2, 19981, 1999 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These interim combinedconsolidated financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the registration statement on the
Company's Form 10/A10-K for the year ended October 1, 1999, which has been
filed with the Securities and Exchange Commission. In the opinion of the
Company's management, the interim combinedconsolidated financial statements include all
normal recurring adjustments necessary to present fairly the information
required to be set forth therein. The results of operations for the second
quarter and six months ended April 2, 1999March 31, 2000 are not necessarily indicative of
the results to be expected for a full year or for any other periods.
NoteNOTE 2. BasisDESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Varian, Inc., (the "Company") is a major supplier of Presentationscientific instruments
and consumables, vacuum technology products and services, and electronics
manufacturing services. These businesses primarily serve life science, health
care, semiconductor processing, communications, industrial, and academic
customers.
Until April 2, 1999, the Company's business of the Company was operated as partthe
Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). VAI contributed its Instruments business ("IB") to
the Company, then on April 2, 1999 distributed to the holders of record of VAI
common stock on March 24, 1999 one share of common stock of the Company for
each share of VAI common stock outstanding on April 2, 1999 (the
"Distribution"). At the same time, VAI contributed its Semiconductor Equipment
business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and
distributed to the holders of record of VAI common stock on March 24, 1999 one
share of common stock of VSEA for each share of VAI common stock outstanding
on April 2, 1999. VAI retained its Health Care Systems business and changed
its name to Varian Medical Systems, Inc. ("VMS") effective as of April 3,
1999. These transactions were accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and among the
Company, VAI and VSEA (the "Distribution Agreement"). For purposes of
providing an orderly transition and to define certain ongoing relationships
between and among the Company, VMS and VSEA after the Distribution, the
Company, VMS and VSEA also entered into certain other agreements which include
an Employee Benefits Allocation Agreement, an Intellectual Property Agreement,
a Tax Sharing Agreement and a Transition Services Agreement (collectively, the
"Distribution Related Agreements").
The interim
combinedconsolidated financial statements generally reflect theIB's results of operations
financial position and cash flows for the quarter and six months ended April 2, 1999, and the
Company's results of IB, which was transferred tooperations and cash flows for the Company in connection withquarter and six months
ended March 31, 2000. The interim consolidated financial results for the Distribution. Accordingly, the interim
combined financial statements have beenquarter
and six months ended April 2, 1999 were carved out from the interim financial
statements of VAI using the historical results of operations and historical
bases of the assetsIB and liabilities of IB. The statements include
the accounts of IB after elimination of inter-business balances and transactions. TheThese
interim combinedconsolidated financial statementsresults also include among other things, allocations of certain VAI
corporate assets (including pension assets), liabilities
(including profit sharing and pension benefits), and expenses (including legal, accounting, employee benefits, insurance
services, information technology services, treasury, and other corporate
overhead) to IB.
These
amounts have been allocated to IB on the basis that is considered by
management to reflect most fairly or reasonably the utilization of the
services provided to or the benefit obtained by IB. Typical measures and
activity indicators used for allocation purposes include headcount, sales
revenue and payroll expense. The Company's management believes that the
methods used to allocate these amounts are reasonable. However, these
allocations are not necessarily indicative of the amounts that would have been
or that will be recorded by the Company on a stand-alone basis. The interim
combined financial statements do not reflect any changes that may occur in the
financing and operations of the Company as a result of the Distribution.
The Company's fiscal year isyears reported are the 52- or 53-week period52-week periods ending on the
Friday nearest September 30. Fiscal year 19992000 will comprise the 52-week period
ending October 1, 1999,September 29, 2000, and fiscal year 1998 comprises1999 was comprised of the 53-week
452-week
period ended October 1, 1999. The fiscal quarters ended March 31, 2000 and April
2, 1999 each comprise 13 weeks, and the six-month periods ended March 31, 2000
and April 2, 1999 each comprise 26 weeks.
NOTE 3. 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 FAS 52. Under FAS 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 7). This loss principally
related to translating property, plant, and equipment at current exchange rates
versus the historical exchange rates previously used.
6
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINEDCONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
period ended October 2, 1998. The fiscal quarters ended April 2,(CONTINUED)
NOTE 4. BALANCE SHEET DETAIL
MAR. 31, OCT. 1,
2000 1999
---------- ----------
(IN THOUSANDS)
INVENTORIES
Raw materials and April 3, 1998 each comprise 13 weeks. For purposes of interim reporting, the
six-month period ended April 2, 1999 comprises 26 weeks, and the six-month
period ended April 3, 1998 comprises 27 weeks.
Note 3. Balance Sheet Detail
Inventories
April 2, October 2,
1999 1998
-------- ----------
(Dollars in
millions)
Raw materials and parts............................... $35.9 $32.1
Work in process....................................... 5.6 6.7
Finished goods........................................ 26.0 32.8
----- -----
Total inventories................................... $67.5 $71.6
===== =====
parts.......... $ 46,725 $ 36,149
Work in process.................. 13,985 5,487
Finished goods................... 31,691 24,998
---------- ----------
$ 92,401 $ 66,634
========== ==========
Inventories are valued at the lower of cost or market (net realizable
value) using the last-in, first-out (LIFO) cost for thecertain U.S. inventories.
All other inventories are valued principally at average cost. If the first-in,
first-out (FIFO) method had been used for those operations valuing inventories
on a LIFO basis, inventories would have been higher than reported by $14.2$14.8
million at April 2, 1999March 31, 2000 and $13.7$14.4 million at October 2, 1998.
Other Assets
April 2, October 2,
1999 1998
-------- ----------
(Dollars in
millions)
Net goodwill........................................... $60.2 $59.6
Other.................................................. 6.2 8.1
----- -----
Total other assets................................... $66.4 $67.7
===== =====
Accrued Expenses
April 2, October 2,
1999 1998
-------- ----------
(Dollars in
millions)
Payroll and employee benefits.......................... $ 29.8 $ 33.1
Foreign income taxes payable........................... 6.5 19.2
Deferred income........................................ 16.2 14.7
Group and risk insurance............................... 7.2 7.7
Net amount due to VMS/VSEA............................. 13.2 --
Restructuring.......................................... 7.1 --
Other.................................................. 31.2 27.8
------ ------
$111.2 $102.5
====== ======
Note 4. Forward Exchange Contracts
IB has entered and the Company will enter into1, 1999.
NOTE 5. FORWARD EXCHANGE CONTRACTS
The Company's forward exchange contracts generally range from one to mitigate the balance sheet exposures to fluctuations12
months in foreign currency
exchange rates. When these foreign exchange contracts hedge operational
exposure, the effects of movements in currency exchange rates on these
instruments are recognized in income when the related revenue and expenses are
recognized. When foreign exchange contracts hedge
5
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
balance sheet exposure, such effects are recognized in income when the
exchange rate changes. Because the impact of movements in currency exchange
rates on foreign exchange contracts generally offsets the related impact on
the underlying items being hedged, these instruments do not subject IB or the
Company to risk that would otherwise result from changes in currency exchange
rates. Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments also are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs. Any deferred gains or losses are included in accrued
expenses in the balance sheet. If a hedging instrument is sold or terminated
prior to maturity, gains and losses continue to be deferred until the hedged
item is recognized in income. If a hedging instrument ceases to qualify as a
hedge, any subsequent gains and losses are recognized currently in income.
There were no significant forwardoriginal maturity. Forward exchange contracts outstanding as of April
2, 1999.
Note 5. Pro Forma Net Earnings (Loss) Per Share
IB's pro forma basicMarch
31, 2000 that hedge the balance sheet and certain purchase commitments were
effective March 31, 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 that were
outstanding as of March 31, 2000 are summarized as follows:
(IN THOUSANDS) NOTIONAL NOTIONAL
VALUE SOLD PURCHASED
--------- ---------
Australian Dollar............................. $ -- $ 14,817
Japanese Yen.................................. 14,030 --
British Pound................................. 7,054 15,508
Canadian Dollar............................... 3,985 --
Euro.......................................... -- 3,162
--------- ---------
Total...................................... $ 25,069 $ 33,487
========= =========
NOTE 6. NET EARNINGS PER SHARE
Basic earnings (loss) per share isare calculated based on net earnings (loss) 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 purposes of theperiods prior to April 3, 1999, pro forma calculation,earnings (loss) per share
were calculated assuming that the weighted-
averageweighted-average number of shares outstanding
during the reporting period was assumed
to beequaled the number of shares of common stock outstanding as of
the Distribution on April 2, 1999. Pro forma diluted earnings (loss) per share includes
additional dilution from potential common stock shares such as common stock
issuable pursuant to the exercise of outstanding stock options. For purposes
of theAlso, for computing pro forma diluted
earnings (loss) per share, calculation, 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.
All options to purchase common stock were excluded fromFor the computation of
diluted loss per share for thefiscal quarter and six-month periodsix months ended April 2, 1999, because their effect was anti-dilutive. For the quarter and six-month
period ended April 3, 1998, options to
purchase 3,030,355 potential common stock shares with exercise prices in excess ofgreater
than the market value on April 2, 1999 of such common stock were excluded from
the computation.
Note 6. Debtcalculation of diluted earnings per share.
7
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation follows:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED SIX MONTHS ENDED
------------ --- ----------- ------------- - -----------
MAR. 31, APR. 2, MAR. 31, APR. 2,
2000 1999 2000 1999
------------ ----------- ------------- -----------
BASIC
Net earnings (loss).............................. $ 10,149 $ (9,974) $ 18,572 $ (5,715)
Weighted average shares outstanding.............. 31,498 30,423 31,154 30,423
Net earnings (loss) per share.................... $ 0.32 $ (0.33) $ 0.60 $ (0.19)
============ =========== ============= ===========
DILUTED
Net earnings (loss).............................. $ 10,149 $ (9,974) $ 18,572 $ (5,715)
Weighted average shares outstanding.............. 31,498 30,423 31,154 30,423
Net effect of dilutive stock options............. 2,272 164 2,078 164
------------ ----------- ------------- -----------
Total shares..................................... 33,770 30,587 33,232 30,587
Net earnings (loss) per share.................... $ 0.30 $ (0.33) $ 0.56 $ (0.19)
============ =========== ============= ===========
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income and Credit Facilitiesthe currency
translation adjustment. Comprehensive income (loss) was $4.7 million and ($10.0)
million for the three months ended March 31, 2000 and April 2, 1999,
respectively and $4.4 million and ($5.7) million for the six months ended March
31, 2000 and April 2, 1999, respectively.
NOTE 8. DEBT AND CREDIT FACILITIES
The Distribution Agreement provided for the division among the Company,
VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution
Agreement, the Company was to assume 50% of VAI's term loans and receive an
amount of cash from VAI such that it would have net debt (defined in the
Distribution Agreement as the amount outstanding under the term loans and notes
payable, less cash and cash equivalents) equal to approximately 50% of the net
debt of the Company and VMS, subject to such adjustment as was necessary to
provide VMS with a net worth (as defined in the Distribution Agreement) of
between 40% and 50% of the aggregate net worth of the Company and VMS, and
subject to further adjustment to reflect the Company's approximately 50% share
of the estimated proceeds, if any, to be received by VMS after the Distribution
from the sale of VAI's long-term leasehold interest at certain of its Palo Alto
facilities, together with certain related buildings and other corporate assets,
and the Company's obligation for approximately 50% of any estimated transaction
expenses to be paid by VMS after the Distribution (in each case reduced for
estimated taxes payable or tax benefits received from all sales and transaction
expenses). Since the amounts transferred immediately prior to the Distribution
were based on estimates, these and other adjustments may bewere required within 180 days following the
Distribution. In addition, certain other pre-Distribution transactions may
require
6
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
adjustment within 90 days following the Distribution under the provisions of
the Distribution Agreement. As a result of these final adjustments, the Company may
be required to make cash payments to VMS or may be entitled to receive cash
payments from VMS. The amountrecorded an
increase in stockholders' equity of any such adjustments cannot be estimated.
As part of the Distribution, a total of $63.9$1.1 million in debt was assumed
by or transferred to the Company, which debt consistedsecond quarter of $58.5 million in
term loansfiscal
year 2000. Management believes that no further adjustments are necessary, and
$5.4 million in notes payable. As of April 2, 1999, interest
ratesthat if any are required, they will not have a material effect on the term loans ranged from 6.70% to 7.49%, and the weighted average
interest rate on the term loans was 7.02%. As of April 2, 1999, interest rates
on the notes payable ranged from 1.50% to 4.00%, and the weighted average
interest rate on the notes payable was 2.95%. The term loans contain certain
covenants that limit future borrowings and the payment of cash dividends and
require the maintenance of certain levels of working capital and operating
results.
As of April 2, 1999, the Company entered into $40.0 million in uncommitted
credit facilities for working capital purposes. As of April 2, 1999, none of
these credit facilities were utilized and no amount was outstanding. Following
April 2, 1999, the Company entered into additional uncommitted credit
facilities for $15.0 million for working capital purposes. All of these credit
facilities contain certain conditions and events of default customary for such
facilities.
Future principal payments on notes payable and long-term debt outstanding
on April 2, 1999 will be $8.4 million, $6.0 million, $6.0 million, $6.0
million, $2.5 million, $2.5 million and $32.5 million during the six months
ended October 1, 1999, the fiscal years ended 2000, 2001, 2002, 2003, 2004,
and thereafter, respectively.
Note 7. Contingencies
Environmental MattersCompany's
financial condition.
NOTE 9. CONTINGENCIES
ENVIRONMENTAL MATTERS. In the Distribution Agreement, the Company and VSEA
each agreed to indemnify VMS and VSEA for one-third of certain environmental
investigation and remediation costs (after adjusting for any insurance proceeds
and tax benefits recognized or realized by VMS for such costs), as further
described below.
VAIVMS 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 eightnine sites where
VAI is alleged to have shipped manufacturing waste for recycling, treatment, or
disposal. VAIVMS is also involved in various stages of environmental investigation,
monitoring, and/or remediation
8
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under the direction of, or in consultation with, foreign, federal, state, and/or
local agencies at certain current VMS or former VAI facilities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of April 2,1999,March 31, 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 $21.0$4.5 million to $48.3
million.$10.5 million (without discounting to present value). The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of April 2, 1999.March 31, 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 VAI accrued $21.0$4.5 million in estimated environmental costs as of April 2, 1999. The amount accrued was not discounted to present value.
7
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)March 31, 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 April 2, 1999,March 31, 2000, it was estimated that the Company's share of
the future exposure for environmental relatedenvironmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $39.2$8.1 million
to $73.0 million.$13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of April 2, 1999.March 31, 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 futuresfuture costs were reliably determinable. Together, these amounts
totaled $50.6$9.4 million at April 2, 1999. Accordingly, VAIMarch 31, 2000. The Company therefore accrued $21.9$4.1
million as of April 2, 1999,March 31, 2000, which represents the best estimate of theits share of
these future costs discounted at 4%, net of inflation. This accrual is in
addition to the $21.0$4.5 million described in the preceding paragraph.
Since the Company is obligated to reimburse VMSClaims for one-thirdrecovery of the
foregoing environmental-related costs and expenses (after adjusting for any
insurance proceeds and tax benefits recognized or realized by VMS for such
costs or expenses) that are paid after April 2, 1999, IB recorded $7.7 million
as its portion of these estimated future costs and expenses as of April 2,
1999. The foregoing amounts are only estimates of anticipated future
environmental-related costs, and the amounts actually spent may be greater or
less than such estimates. The aggregate range of cost estimates reflects
various uncertainties inherent in many environmental investigation and remediation activitiescosts
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the large numberCompany. In addition, an insurance company has agreed to pay a portion of
sitesVAI's (now VMS') future environmental-related expenditures for which the Company
has an indemnity obligation, and facilities involved.the Company therefore has a $1.3 million
receivable in Other Assets as of March 31, 2000 for the Company's share of such
recovery. The Company believes that mosthas not reduced any environmental-related liability in
anticipation of these cost ranges will narrow as
investigation and remediation activities progress.recovery with respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified and
related charges or credits against earnings may be made. Although any ultimate
liability arising from environmental-related matters described herein could
result in significant expenditures that, if aggregated and assumed to occur
within a single fiscal year, would be material to the Company's financial
statements, the likelihood of such occurrence is considered remote. Based on
information currently available and its best assessment of the ultimate amount
and timing of environmental-related events, the Company's management believes
that the costs of these environmental-related matters are not reasonably likely
to have a material adverse effect on the Company's financial statements.
Legal Proceedingsposition or results
of operations.
LEGAL PROCEEDINGS. In the Distribution Agreement, the Company agreed to
reimburse VMS for one-
thirdone-third of certain costs and expenses (adjusted(after adjusting for
any insurance proceeds and tax benefits recognized or realized by VMS for such
costs and expenses) that are paid after April 2, 1999 and arise from actual or
potential claims or legal proceedings relating to discontinued, former or
corporate operations of VAI. These shared liabilities willare generally be managed by
VMS, and expenses and losses (adjusted for any insurance proceeds and tax
benefits recognized or realized by VMS for such costs and expenses) willare
generally be borne one-third each by the Company, VMS, and VSEA. Also, from time to
time, the Company is involved in a number of its own legal actions and could
incur an uninsured liability in one or more of them. While the ultimate outcome
of all of the aboveforegoing legal matters is not determinable, management believes
that the resolution of these matters willare not reasonably likely to have a material adverse effect
on the Company's financial condition,position or results of operations or cash flows.
Note 8. Stockholders' Equity
On April 2, 1999, stockholders of record of VAI on March 24, 1999 received
in the Distribution one share of the Company's common stock for each share of
VAI common stock held on April 2, 1999. Immediately following the
Distribution, the Company had 30,422,792 shares of common stock outstanding.
8operations.
9
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE COMBINEDCONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Each stockholder also received one Right for each share of common stock
distributed, entitling the stockholder to purchase one one-thousandth of a
share of Participating Preferred Stock, par value $0.01 per share, for $75.00,
subject to adjustment. The Participating Preferred Stock is designed so that
each one one-thousandth of share has economic and voting terms similar to
those of one share of common stock.
The Company will begin accumulating retained earnings on April 3, 1999, the
date after the Distribution.
In connection with the Distribution, certain holders of options to purchase
shares of VAI common stock received replacement options from the Company to
purchase shares of the Company's common stock. The Company granted such
replacement options to purchase 4,299,639 shares of the Company's common stock
with an average exercise price of $11.16 per share. Such stock options vest
over the same vesting periods as the original VAI stock options, typically
three years. At issuance, options to purchase 3,459,508 shares with an average
exercise price of $10.66 were immediately exercisable.
Note 9. Restructuring Charges(CONTINUED)
NOTE 10. RESTRUCTURING CHARGES
During the second quarter of fiscal year 1999, IB's management approved a
program to consolidate field sales and service organizations in Europe,
Australia and the United States so as to fall within the direct responsibility
of management at IB's principal factories in those countries, in order to reduce
costs, simplify management structure, and benefit from the infrastructure
existing in those factories. This restructuring entailed consolidating certain
sales, service, and support operations. The consolidation resulted in exiting of
a product line, closing or downsizing of sales offices, and termination of
approximately 100 personnel. All restructuring activities are expected to be
completed within one year, except for future lease payments. The following table
sets forth certain details associated with this restructuring during the second quarter
of fiscal year 1999:restructuring:
Cash Accrual at
Restructuring Payments/Other April 2,
Charges ReductionsCASH
ACCRUAL AT PAYMENTS AND ACCRUAL AT
DECEMBER 31, OTHER MARCH 31,
1999 REDUCTIONS 2000
----------- ------------- -------------- ----------
(Dollars in thousands)-----------
(IN THOUSANDS)
Lease payments and other facility expenses............................. $ 2,2051,131 $ 240 $1,96589 $ 1,042
Severance and other related employee benefits............................. 7,171 1,988 5,183
Exited product line................... 1,598 1,598benefits.......................... 1,576 398 1,178
----------- ------------- -----------
Total.................................................................. $ 2,707 $ 487 $ 2,220
=========== ============= ===========
NOTE 11. 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 environment for complex industrial processes and
research. Vacuum Technologies products are used in semiconductor manufacturing
equipment, analytical instruments, industrial manufacturing, and quality
control. Electronics Manufacturing provides contract manufacturing services for
technology companies with low-volume and high-mix requirements.
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.
INDUSTRY SEGMENTS
(IN MILLIONS)
QUARTER ENDED QUARTER ENDED
--------------------------- ------------------------------
MARCH 31, 2000 APR. 2, 1999 MAR. 31, 2000 APR. 2, 1999
------------ ----------- ------------- -------------
PRETAX EARNINGS PRETAX EARNINGS
SALES SALES (LOSS) (LOSS)
------------ ----------- ------------- -------------
Scientific Instruments....................... $ 102.0 $ 97.4 $ 11.2 $ (16.1)
Vacuum Technologies ......................... 34.8 26.6 5.8 (1.5)
Electronics Manufacturing.................... 40.5 24.9 3.0 1.1
------------ ----------- ------------- -------------
Total industry segments...................... 177.3 148.9 20.0 (16.5)
General corporate............................ -- ------- ------ ------
Total............................... $10,974 $3,826 $7,148
======= ====== ======-- (3.1) (1.7)
Interest (exp.)/inc., net ................... -- -- (0.5) 0.2
------------ ----------- ------------- -------------
Total ....................................... $ 177.3 $ 148.9 $ 16.4 $ (18.0)
============ =========== ============= =============
Note 10. Recent Accounting Pronouncements10
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
INDUSTRY SEGMENTS
(IN MILLIONS)
SIX MONTHS ENDED SIX MONTHS ENDED
---------------------------- --------------------------------
MARCH 31, 2000 APR. 2, 1999 MAR. 31, 2000 APR. 2, 1999
------------ ----------- --------------- ---------------
PRETAX EARNINGS PRETAX EARNINGS
SALES SALES (LOSS) (LOSS)
------------ ----------- --------------- ---------------
Scientific Instruments........................ $ 196.3 $ 187.1 $ 22.3 $ (9.3)
Vacuum Technologies........................... 66.7 48.7 10.3 (0.4)
Electronics Manufacturing..................... 74.3 46.4 5.7 2.4
------------ ----------- --------------- ---------------
Total industry segments....................... 337.3 282.2 38.3 (7.3)
General corporate............................. -- -- (6.7) (3.3)
Interest (exp.)/inc., net..................... -- -- (1.2) 0.3
------------ ----------- --------------- ---------------
Total......................................... $ 337.3 $ 282.2 $ 30.4 $ (10.3)
=========== ========== =============== ===============
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.
During the second quarter of fiscal year 2000, the Company repurchased
82,500 shares for an aggregate cost of $3.6 million of which 25,000 shares ($1.1
million) did not settle. As of March 31, 2000, the Company had remaining
authorization for future repurchases of 917,500 shares.
NOTE 13. EMPLOYEE STOCK PURCHASE PLAN
During the second quarter of fiscal year 2000, the Company's Board of
Directors approved an Employee Stock Purchase Plan for which the Company set
aside 1,200,000 shares of common stock for issuance under the Plan. Beginning
with the first enrollment date of April 3, 2000, eligible Company employees may
set aside for purchases under the Plan between 1% and 10% of eligible
compensation through payroll deductions. The participants' purchase price will
be 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.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997,1998, the Financial Accounting and Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
changes standards for the way that public business enterprises identify and
report operating segments in annual and interim financial statements. This
statement requires selected information about an enterprise's operating
segments and related disclosure about products and services, geographic areas
and major customers. The Company expects to report multiple segments when it
adopts SFAS No. 131 at fiscal year-end 1999.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting "SFAS 133 requires derivatives to be
measured at fair value and reporting standards for derivative instruments and requires recognition of all
derivativesto be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in the
statement of financial position
and measurementfair values of those instruments at fair value. This statementderivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for fiscal quarters and years beginning after June 15, 1999.2000. The Company will
adopt SFAS No. 133 in the first quarter of fiscal year 20002001 and is in the process of
determining the impact that adoption will have on itsthe consolidated financial
statements.
9In 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
for the Company's first quarter of fiscal year 2001, beginning September 30,
2000, however earlier adoption is permitted. The Company is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Until April 2, 1999, the Company's business of Varian, Inc. (the "Company") was
operated as partthe Instruments Business ("IB") of Varian Associates, Inc. ("VAI").
IB included the business units that designed, manufactured, sold, and serviced
scientific instruments and vacuum technologies, and a business unit that
provided contract electronics manufacturing. VAI contributed its Instruments business ("IB")IB to the Company,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. IB includes VAI's business units that design, manufacture, sell and
service analytical and research instrumentation and vacuum technologies, and a
business unit that provides contract electronics assembly.
These transactions were
accomplished under the terms of an Amended and Restated Distribution Agreement
dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the
"Distribution Agreement"). For purposes of providing an orderly transition and
to define certain ongoing relationships between and among the Company, VMS, and
VSEA after the Distribution, the Company, VMS, and VSEA also entered into
certain other agreements which include an Employee Benefits Allocation
Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a
Transition Services Agreement (collectively, the
"Distribution Related Agreements").Agreement.
The interim combinedconsolidated financial statements generally reflect theIB's
results of operations financial position and cash flows for the quarter and six months ended April
2, 1999, and the Company's results of IB, which was transferred tooperations and cash flows for the Company in connection withquarter
and six months ended March 31, 2000. The interim consolidated financial results
for the Distribution. Accordingly, the interim
combined financial statements have beenquarter ended April 2, 1999 were carved out from the interim financial
statements of VAI using the historical results of operations and historical
bases of the assetsIB and liabilities of IB. The statements include
the accounts of IB after elimination of inter-business balances and transactions. TheThese
interim combinedconsolidated financial statementsresults also include among other things, allocations of certain VAI
corporate assets (including pension assets), liabilities
(including profit-sharing and pension benefits) and expenses (including legal, accounting, employee benefits, insurance
services, information technology services, treasury, and other corporate
overhead) to IB. These amounts have been allocated to IB usingon the allocation
methodology described in Note 2basis that is
considered by management to reflect most fairly or reasonably the utilization of
the Notesservices provided to or the Company's interim combined
financial statements.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. The interim combined financial
statements doHowever, these allocations are
not reflect any changes that may occur in the financing and
operationsnecessarily indicative of the Company as a result of the Distribution.
This discussion and analysis of financial condition and results of
operations is based upon and shouldamounts that would have been or that will be
read in conjunction with the interim
combined financial statements ofrecorded by the Company and the notes thereto, as well as
the Instruments Business of Varian Associates, Inc. Combined Financial
Statements and notes thereto and the information contained under the headings
"Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's registration
statement on Form 10/A filed with the Securities and Exchange Commission.a stand-alone basis.
The Company's fiscal year isyears reported are the 52- or 53-week period52-week periods ending on the
Friday nearest September 30. Fiscal year 1999 comprises2000 will comprise the 52-week period
ending October 1, 1999,September 29, 2000, and fiscal year 1998 comprises1999 was comprised of the 53-week52-week
period ended October 2, 1998.1, 1999. The fiscal quarters ended March 31, 2000 and April
2, 1999 and April 3, 1998
each comprise 13 weeks. For purposes of interim reporting, the six-month
period ended April 2, 1999 comprises 26 weeks, and the six-month periodperiods ended March 31, 2000
and April 3, 1998 comprises 272, 1999 each comprise 26 weeks.
ResultsRESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL YEAR 2000 COMPARED TO SECOND QUARTER OF FISCAL YEAR
1999
SALES. Sales were $177.3 million in the second quarter of Operations
Second Quarterfiscal year 2000,
an increase of Fiscal Year 1999 Compared to Second Quarter19.1% from sales of Fiscal Year
1998
Sales. IB's sales were $148.9 million in the second quarter of
fiscal year 1999, compared to1999. Sales by the Scientific Instruments, Vacuum Technologies, and
Electronics Manufacturing segments increased by 4.8%, 30.7%, and 62.3%,
respectively.
Geographically, sales in North America of $141.0$103.0 million, Europe of $48.8
million and the rest of the world of $25.5 million in the second quarter of
fiscal year 1998. The primary reasons for this 5.7% increase in sales
10
were higher volume in2000 represented increases of 28%, 0%, and 33%, respectively, as
compared to the Analytical Instruments business (driven in large
part by Chrompack International B.V. ("Chrompack"), which was acquired in the
fourthsecond quarter of fiscal year 1998), and an1999. The significant increase in
sales by IB's
Electronics Manufacturing (formerly Tempe Electronics Center) business. These
increases were partially off-set by lower sales in the Vacuum Technologies
(formerly Vacuum Products) business, which declinedNorth America was largely due to the continuing slow-downstrong sales growth of the Electronics
Manufacturing segment, the sales of which are all in capital spending, particularlyNorth America. The flat
sales in Asian markets,Europe resulted from the strength of the U.S. dollar versus the
European currencies and continuing weaknessthe timing of NMR product sales to European customers.
The significant increase in semiconductor equipment demand. NMR Systems (formerly
NMR Instruments) also experienced lower salesthe rest of the world was primarily due to the
timinggeneral economic recovery of shipmentsthe Asian markets.
12
Orders in the second quarter of NMR Systems products.
Geographically, sales in North America of $80.1fiscal year 2000 were $187.4 million,
and Europe of $49.1compared to $154.2 million in the second quarter of fiscal year 1999 represented increases1999. Both
Vacuum Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
GROSS PROFIT. Gross profit was $67.5 million (representing 38.1% of 2.0% and 29.0%, respectively, from the second quarter of fiscal year 1998,
while sales in Asia of $14.0 millionsales)
in the second quarter of fiscal year 1999
represented a decrease of 18.0% from the second quarter of fiscal year 1998.
The increase in Europe resulted largely from the acquisition of Chrompack in
the fourth quarter of fiscal year 1998, and the decrease in Asia resulted
largely from weak economic conditions in that region.
IB's orders during the second quarter of fiscal year 1999 were $154.2
million,2000, compared to $138.5 million in the first quarter of fiscal year 1999
and $136.4 million in the second quarter of fiscal year 1998. All IB
businesses contributed to the sequential orders growth, with only the Vacuum
Technologies business showing a slight decline compared to the year-ago
quarter (although it showed a 33% sequential increase).
Gross Profit. IB's gross profit was $47.2 million
(representing 31.7% of sales) in the second quarter of fiscal year 1999, compared to $55.7 million
(representing 39.5% of sales)1999. The
lower gross profit percentage in the second quarter of fiscal year 1998. The
decline in gross profit1999 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 organizational changes and a comprehensive product review, which
resulted in a decision to accelerate transition from certain older to newer
products necessitating the writedown of certain excess and obsolete inventories
and the lowering of prices to accelerate the liquidation of older products. The
impact on gross profit of these actions werewas in addition to the restructuring
charges discussed below.
The decline in gross profit was also the result of lower sales of Vacuum
Technologies products.
ResearchSALES AND MARKETING. Sales and Development. IB's research and developmentmarketing expenses were $9.3$31.3 million
(representing 6.2%17.7% of sales) in the second quarter of fiscal year 1999,2000,
compared to research and development expenses of $7.8 million
(representing 5.5% of sales) in the second quarter of fiscal year 1998. This
increase related primarily to the research and development expenses of
Chrompack, which was acquired in the fourth quarter of fiscal year 1998, and
accelerated development costs incurred to complete a new gas chromatograph
product.
Marketing. IB's marketing expenses were $34.2 million (representing 22.9% of sales) in the second quarter of
fiscal year 1999, compared to $28.1 million
(representing 19.9%1999. The higher costs as a percentage of sales)sales in the second
quarter of fiscal year 1998. Some
of the increase was due to marketing expenses of Chrompack, which was acquired
in the fourth quarter of fiscal year 1998. Additionally, the increase in
marketing expenses1999 resulted from actions taken as part of the
above-described reorganization, including costs to move people and equipment to
new consolidated locations, writedown of field demonstration equipment following
the accelerated transition to newer products, and other higher than normal costs
related to the reorganization. These chargeschanges were in addition to the
restructuring charges discussed below. GeneralSales and Administrative. IB's generalmarketing expenses in the
second quarter of fiscal year 2000 benefited from the cost savings from last
year's restructuring and administrativereorganization activities and the overall leverage of
higher sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $10.8$8.5
million (representing 7.2%4.8% of sales) in the second quarter of fiscal year 1999,2000,
compared to $9.2research and development expenses of $9.3 million (representing 6.5%6.2%
of sales) in the second quarter of fiscal year 1998.1999. The primary reasonsecond quarter of
fiscal year 1999 included accelerated development costs to complete a new gas
chromatograph.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $10.7
million (representing 6.0% of sales) in the second quarter of fiscal year 2000,
compared to $10.9 million (representing 7.3% of sales) in the second quarter of
fiscal year 1999. General and administrative expenses for this increase was the additionalsecond quarter of
fiscal year 2000 were actual costs of the Company, whereas general and
administrative costs of Chrompack, which was acquired
in the fourth fiscal quarter of fiscal 1998.
Restructuring Charges. Duringfor the second quarter of fiscal year 1999 IB's
management approved a program to consolidate field sales and service
organizations in Europe, Australia andwere the
United States so as to fall within
the direct responsibilityCompany's allocated share of management at IB's principal factories in those
countries in order to reduce
11
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 in the second quarter of fiscal year 1999:
Cash Accrual at
Restructuring Payments/Other April 2,
Charges Reductions 1999
------------- -------------- ----------
(Dollars in thousands)
Lease payments and other facility
expenses........................ $ 2,205 $ 240 $1,965
Severance and other related
employee benefits............... 7,171 1,988 5,183
Exited product line.............. 1,598 1,598 --
------- ------ ------
Total.......................... $10,974 $3,826 $7,148
======= ====== ======
Taxes on Earnings. IB's effective income tax rate was 44.5% in the second
quarter of fiscal year 1999, compared to 40.0% in the second quarter of fiscal
year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate
because the Company expects to realize a larger proportion of high-tax foreign
country income during fiscal year 1999 than it did during fiscal year 1998.
Net Loss. The net loss of $10.0 million ($0.33 pro forma net loss per
share) in the second quarter of fiscal year 1999 was the result of IB's
overall reorganization described above, which resulted in incremental costs
primarily included in cost of sales, marketing and restructuring charges.
Although some of these costs will continue at significantly reduced levels for
several quarters, management believes that the Company will return to
profitability during the third quarter of fiscal year 1999.
First Half of Fiscal Year 1999 Compared to First Half of Fiscal Year 1998
Sales. IB's sales were $282 million in the first half of fiscal year 1999,
the same as in the first half of fiscal year 1998. Sales by the Analytical
Instruments and the Electronics Manufacturing businesses were higher during
the six-month period relative to the year-ago period, in the case of the
former due in part to Chrompack, which was acquired in the fourth quarter of
fiscal year 1998. These increases were off-set by lower sales in the Vacuum
Technology business, which declined largely due to the continuing slow-down in
capital spending, particularly in Asian markets, and continuing weakness in
semiconductor equipment demand. NMR Systems also experienced lower sales, due
to the timing of shipments of NMR Systems products.
Geographically, sales in North America of $149.3 million and Europe of
$92.0 million in the first half of fiscal year 1999 represented a decline of
4.5% and an increase of 15.3%, respectively, as compared to the first half of
fiscal year 1998, while sales in Asia of $29.0 million in the first half of
fiscal year 1999 declined by 11.7% from the first half of fiscal year 1998,
reflecting the general slow-down in Asian markets. The decline in North
America was predominantly due to the slow-down in the semiconductor equipment
industry.
IB's orders in the first half of fiscal year 1999 were $292.7 million,
compared to $270.3 million in the first half of fiscal year 1998. All IB
businesses except the Vacuum Technologies business contributed to the orders
growth.
Gross Profit. IB's gross profit was $99.9 million (representing 35.4% of
sales) in the first half of fiscal year 1999, compared to $110.3 million
(representing 39.1% of sales) in the first half of fiscal year 1998. The
decline in gross profit 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 organizational changes and a
comprehensive product review, which resulted in a decision to accelerate
transition from certain older to newer products necessitating the writedown of
certain excess and obsolete inventories and the lowering
12
of prices to accelerate the liquidation of older products. The impact on gross
profit of these actions were in addition to the restructuring charges
discussed below. The decline in gross profit was also the result of lower
sales of Vacuum Technologies products.
Research and Development. IB's research and development expenses were $16.4
million (representing 5.8% of sales) in the first half of fiscal year 1999,
compared to research and development expenses of $15.0 million (representing
5.3% of sales) in the first half of fiscal year 1998. The increase related
primarily to the additional research and development expense of Chrompack,
which was acquired in the fourth quarter of fiscal year 1998, and accelerated
development costs incurred to complete a new gas chromatograph product.
Marketing. IB's marketing expenses were $64.3 million (representing 22.8%
of sales) in the first half of fiscal year 1999, compared to $55.3 million
(representing 19.6% of sales) in the first half of fiscal year 1998. Some of
the increase was due to marketing expenses of Chrompack, which was acquired in
the fourth quarter of fiscal year 1998. Additionally, the increase in
marketing expenses resulting from actions taken as part of the above-described
reorganization, including costs to move people and equipment to new
consolidated locations, writedown of field demonstration equipment following
the accelerated transition to newer products, and other higher than normal
costs related to the reorganization. These charges were in addition to the
restructuring charges discussed below.
General and Administrative. IB's general and administrative expenses were
$18.5 million (representing 6.5% of sales) in the first half of fiscal year
1999, compared to $19.6 million (representing 7.0% of sales) in the first half
of fiscal year 1998. The primary reason for this decrease was due to lower
profit-sharing and management incentive compensation costs in the first half
of fiscal year 1999, the additional general and administrative costs of
Chrompack, which was acquired in the fourth quarter of fiscal year 1998.
Restructuring Charges.VAI's costs.
RESTRUCTURING CHARGES. During the second quarter of fiscal year 1999, IB's
management approved a program to consolidate field sales and service
organizations in Europe, Australia, and the United States so as to fall within
the direct responsibility of management at IB's principal factories in those
countries in order to reduce costs, simplify management structure and benefit
from the infrastructure existing in those factories. This restructuring entailed
consolidating certain sales, service and support operations. The consolidation
resulted in exiting of a product line, closing or downsizing of sales offices
and termination of approximately 100 personnel.
The following
table sets forth certain details associated with this restructuring duringNET INTEREST EXPENSE. Net interest expense was $0.5 million (representing
0.3% of sales) for the second quarter of fiscal year 1999:
Cash Accrual at
Restructuring Payments/Other April 2,
Charges Reductions 1999
------------- -------------- ----------
(Dollars in thousands)
Lease payments and other facility
expenses........................ $ 2,205 $ 240 $1,965
Severance and other related
employee benefits............... 7,171 1,988 5,183
Exited product line ............. 1,598 1,598 --
------- ------ ------
Total.......................... $10,974 $3,826 $7,148
======= ====== ======
Taxes2000. Prior to the
Distribution on Earnings. IB'sApril 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% in38.1% for the first
halfsecond
quarter of fiscal year 1999,2000, compared to 40.0% in44.5% for the first halfsecond quarter of fiscal
year 1998.1999. The fiscal year 1999 rate is higher than the fiscal year 1998 rate
because the Company expects to realizerealized a
larger proportion of high-taxhigh tax-rate, foreign country income duringin fiscal year 1999
(due primarily to restructuring and related charges incurred in lower tax-rate
countries) than it did duringanticipates for fiscal year 1998.2000.
NET EARNINGS. Net Loss. Theearnings were $10.1 million ($0.30 diluted net earnings
per share) in the second quarter of fiscal year 2000, compared to the net loss
of $5.7$10.0 million ($0.19 pro forma0.33 diluted net loss per share) in the first halfsecond quarter of
fiscal year 1999. The second quarter of fiscal year 1999 was the result ofincluded IB's overall
reorganization described above,reorganizations, which resulted in incremental costs primarily included in cost
of sales, marketing and restructuring charges.
LiquiditySEGMENTS. Scientific Instruments sales of $102.0 million in the second
quarter of fiscal year 2000 increased 4.8% over the second quarter of fiscal
year 1999 sales of $97.4 million. Sales of analytical products continued to
grow. However, sales of NMR products declined slightly due to a shift in product
mix in recent quarters toward higher priced, high field systems with longer
manufacturing lead times. As a result, NMR backlog has grown to
13
record levels. Earnings from operations in the second quarter of fiscal year
2000 of $11.2 million (11.0% of sales) increased from a loss of $16.1 million
(16.4% of sales) in the second quarter of fiscal year 1999. The second quarter
of fiscal year 1999 was significantly impacted by IB's overall reorganization
discussed above.
Vacuum Technologies sales of $34.8 million in the second quarter of fiscal
year 2000 increased 30.7% above the second quarter of fiscal year 1999 sales of
$26.6 million. The increase in sales was primarily due to the recovery of the
Asian economies and the improved demand from semiconductor equipment
manufacturers and users. Earnings from operations in the second quarter of
fiscal year 2000 of $5.8 million (16.5% of sales) were up from the $1.5 million
loss (5.7% of sales) in the second quarter of fiscal year 1999. The second
quarter of fiscal year 1999 was negatively impacted by IB's overall
reorganization discussed above and by the lower sales volume.
Electronics Manufacturing sales in the second quarter of fiscal year 2000
of $40.5 million increased 62.3% from the second quarter of fiscal year 1999
sales of $24.9 million. The increase in sales was principally due to higher
demand from the communications and medical equipment industries and the general
movement of small to medium size manufacturing companies to outsource their
electronics manufacturing. In addition, in February 2000 the Company acquired an
electronics manufacturing operation in Poway, California, which added $4 million
to revenues in the quarter. Earnings from operations in the second quarter of
$3.0 million (7.6% of sales) increased from $1.1 million (4.5% of sales) in the
second quarter of fiscal year 1999. The increase in earnings from operations was
primarily the result of increased sales.
FIRST HALF OF FISCAL YEAR 2000 COMPARED TO FIRST HALF OF FISCAL YEAR 1999
SALES. Sales were $337.3 million in the first half of fiscal year 2000, an
increase of 19.5% from sales of $282.2 million in the first half of fiscal year
1999. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing segments increased by 4.9%, 36.8%, and 60.0%, respectively.
Geographically, sales in North America of $194.0 million, Europe of $93.1
million and the rest of the world of $50.2 million in the first half of fiscal
year 2000 represented increases of 30%, 1%, and 25%, respectively, as compared
to the first half of fiscal year 1999. The significant increase in North America
was largely due to the strong sales growth of the Electronics Manufacturing
segment, the sales of which are all in North America. The flat sales in Europe
resulted from the strength of the U.S. dollar versus the European currencies and
the timing of NMR product sales to European customers. The significant increase
in the rest of the world was primarily due to the general economic recovery of
the Asian markets.
Orders in the first half of fiscal year 2000 were $359.3 million, compared
to $292.7 million in the first half of fiscal year 1999. Both Vacuum
Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
GROSS PROFIT. Gross profit was $129.3 million (representing 38.4% of sales)
in the first half of fiscal year 2000, compared to $99.9 million (representing
35.4% of sales) in the first half of fiscal year 1999. The lower gross profit
percentage in the first half of 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
organizational changes and a comprehensive product review, which resulted in a
decision to accelerate transition from certain older to newer products
necessitating the writedown of certain excess and obsolete inventories and the
lowering of prices to accelerate the liquidation of older products. The impact
on gross profit of these actions was in addition to the restructuring charges
discussed below.
SALES AND MARKETING. Sales and marketing expenses were $61.1 million
(representing 18.1% of sales) in the first half of fiscal year 2000, compared to
$64.3 million (representing 22.8% of sales) in the first half of fiscal year
1999. The higher costs as a percentage of sales in the first half of fiscal year
1999 resulted from actions taken as part of the above-described reorganization,
including costs to move people and equipment to new consolidated locations,
writedown of field demonstration equipment following the accelerated transition
to newer products, and other higher than normal costs related to the
reorganization. These changes were in addition to the restructuring charges
discussed below. Sales and marketing expenses in the first half of fiscal year
2000 benefited from the cost savings from last year's restructuring and
reorganization activities and the overall leverage of higher sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $15.5
million (representing 4.6% of sales) in the first half of fiscal year 2000,
compared to research and development expenses of $16.4 million (representing
5.8% of sales) in the first half of fiscal year 1999.
14
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $21.0
million (representing 6.2% of sales) in the first half of fiscal year 2000,
compared to $18.7 million (representing 6.6% of sales) in the first half of
fiscal year 1999. General and administrative expenses for the first half of
fiscal year 2000 were actual costs of the Company, whereas general and
administrative costs for the first half of fiscal year 1999 were the Company's
allocated share of VAI's costs.
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.
NET INTEREST EXPENSE. Net interest expense was $1.2 million (representing
0.4% of sales) for the first half of fiscal year 2000. Prior to the Distribution
on April 2, 1999, no debt had been allocated to the Company. See "Liquidity and
Capital ResourcesResources" below.
TAXES ON EARNINGS. The effective income tax rate was 39.0% for the first
half of fiscal year 2000, compared to 44.5% for the first half of fiscal year
1999. The fiscal year 1999 rate is 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) than it anticipates for fiscal year 2000.
NET EARNINGS. Net earnings were $18.6 million ($0.56 diluted net earnings
per share) in the first half of fiscal year 2000, compared to the net loss of
$5.7 million ($0.19 diluted net loss per share) in the first half of fiscal year
1999. The first half of fiscal year 1999 included IB's overall reorganizations,
which resulted in incremental costs primarily included in cost of sales,
marketing and restructuring charges.
SEGMENTS. Scientific Instruments sales of $196.3 million in the first half
of fiscal year 2000 increased 4.9% over the first half of fiscal year 1999 sales
of $187.1 million. Sales of analytical products continued to grow. However,
sales of NMR products declined slightly due to a shift in product mix in recent
quarters toward higher priced, high field systems with longer manufacturing lead
times. As a result, NMR backlog has grown to record levels. Earnings from
operations in the first half of fiscal year 2000 of $22.3 million (11.4% of
sales) increased from a loss of$9.3 million (4.9% of sales) in the first half of
fiscal year 1999. The first half of fiscal year 1999 was significantly impacted
by IB's overall reorganization discussed above.
Vacuum Technologies sales of $66.7 million in the first half of fiscal year
2000 increased 36.8% above the first half of fiscal year 1999 sales of $48.7
million. The increase in sales was primarily due to the recovery of the Asian
economies and the improved demand from semiconductor equipment manufacturers and
users. Earnings from operations in the first half of fiscal year 2000 of $10.3
million (15.4% of sales) were up from the loss of $0.4 million (0.1% of sales)
in the first half of fiscal year 1999. The first half of fiscal year 1999 was
negatively impacted by IB's overall reorganization discussed above and by the
lower sales volume.
Electronics Manufacturing sales in the first half of fiscal year 2000 of
$74.3 million increased 60.0% from the first half of fiscal year 1999 sales of
$46.4 million. The increase in sales was principally due to higher demand from
the communications and medical equipment industries and the general movement of
small to medium size manufacturing companies to outsource their electronics
manufacturing. In addition, in February 2000 the Company acquired an electronics
manufacturing operation in Poway, California, which added $4 million to revenues
in the second quarter. Earnings from operations in the first half of $5.7
million (7.7% of sales) increased from $2.4 million (5.2% of sales) in the first
half of fiscal year 1999. The increase in earnings from operations was primarily
the result of increased sales.
LIQUIDITY AND CAPITAL RESOURCES
VAI Cash and Debt Allocations.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
13
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
15
between 40% and 50% of the aggregate net worth of the Company and VMS, and
subject to further adjustment to reflect the Company's approximately 50% share
of the estimated proceeds, if any, to be received by VMS after the Distribution
from the sale of VAI's long-term leasehold interest at certain of its Palo Alto
facilities, together with certain related buildings and other corporate assets,
and the Company's obligation for approximately 50% of any estimated transaction
expenses to be paid by VMS after the Distribution (in each case reduced for
estimated taxes payable or tax benefits received from all sales and transaction
expenses). Since the amounts transferred immediately prior to the Distribution
were based on estimates, these and other adjustments may bewere required within
180 days following the
Distribution. In addition, certain other pre-
Distribution transactions may require adjustment within 90 days following the
Distribution under the provisions of the Distribution Agreement. As a result of these final adjustments, the Company may be required to make cash payments to VMS
or may be entitled to receive cash payments from VMS. The amountrecorded an
increase in stockholders' equity of any such
adjustments cannot be estimated.
Debt and Credit Facilities. IB's debt was historically incurred or managed
by VAI. In connection with the Distribution, a portion of VAI's debt was
assumed by the Company as of April 2, 1999. In addition, the Company entered
into new debt arrangements as of and after April 2, 1999.
As part of the Distribution, a total of $63.9$1.1 million in debt was assumed
by or transferred to the Company, which debt consistedsecond quarter of $58.5 million in
term loansfiscal
year 2000. Management believes that no further adjustments are necessary, and
$5.4 million in notes payable. As of April 2, 1999, interest
ratesthat if any are required, they will not have a material effect on the term loans ranged from 6.70% to 7.49%, and the weighted average
interest rate on the term loans was 7.02%. As of April 2, 1999, interest rates
on the notes payable ranged from 1.50% to 4.00%, and the weighted average
interest rate on the notes payable was 2.95%.Company's
financial condition.
CASH AND CASH EQUIVALENTS. The term loans contain certain
covenants that limit future borrowings and the payment of cash dividends and
require the maintenance of certain levels of working capital and operating
results.
As of April 2, 1999, the Company entered into $40.0 million in uncommitted
credit facilities for working capital purposes. As of April 2, 1999, none of
these credit facilities were utilized and no amount was outstanding. Following
April 2, 1999, the Company entered into additional uncommitted credit
facilities for $15.0 million for working capital purposes. All of these credit
facilities contain certain conditions and events of default customary for such
facilities.
Future principal payments on notes payable and long-term debt outstanding
on April 2, 1999 will be $8.4 million, $6.0 million, $6.0 million, $6.0
million, $2.5 million, $2.5 million andgenerated $32.5 million during the six months
ended October 1, 1999, the fiscal years ended 2000, 2001, 2002, 2003, 2004,
and thereafter, respectively.
Cash and Cash Equivalents. Pursuant to the Distribution Agreement as
described above, the Company received a cash contribution from VAI in the
amount of $12.1 million as of April 2, 1999.
IB generated $8.6 million of cash from
operations in the first half of fiscal year 1999,2000, which compares to $19.4$8.6 million
in the first half of fiscal year 1998.1999. The primary reason for this decreaseincrease in cash generated was the
lowerfrom operations
resulted from improved net earnings which reflect increased spending from the reorganization
activities. IBand a reduction in working capital
requirements. The Company used $10.5$17.4 million of cash for investingthe acquisition of
capital equipment and an electronics manufacturing operation in Poway,
California in the first half fiscal year 2000, which compares to $10.5 million
for the acquisition of capital equipment in the first half of fiscal year 1999.
The Company generated $17.0 million of cash from financing activities in the
first half of fiscal year 1999, which compares2000 compared to $9.7$14.8 million in the first half of
fiscal year 1998.1999. Proceeds from stock options represented a significant amount
of the financing reduced by a scheduled debt payment and the repurchase of
57,500 shares of the Company's common stock under a recently approved stock
buy-back plan. The primary reason for this increase was capital
equipment expendituresCompany's current business strategy contemplates possible
acquisitions, further stock buy-backs and/or facility expansions. Any of these
possibilities could utilize cash currently being generated by Chrompack.
The cash flow impact of certain actions relating to the above-described
overall reorganization of IB will occur for several more quarters after April
2, 1999. Management believes that the cash flow impact will be approximately
$4.8 million in the remainder of fiscal year 1999 and $2.4 million in fiscal
year 2000.
The Company currently has no plans to materially modify or expand its
facilities or to make other material capital expenditures.
14
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" and "Legal Proceedings" below).
The Company's liquidity is affected by many other factors, some based on
the normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations, together with the
Company's borrowing capability, will be sufficient to satisfy commitments for
capital expenditures and other cash requirements for the
current fiscal year and fiscal year 2000.
Environmental MattersENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, federal, state,
and/or local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. This includes
discharges into soil, water and air, and the generation, handling, storage,
transportation, and disposal of waste and hazardous substances. In addition,
several countries have adopted or are reviewing proposed regulations that would
require manufacturers to dispose of their products at the end of their useful
life. These laws have the effect of increasingcould increase costs and potential liabilities associated with
the conduct of suchthe Company's operations.
In addition, under the Distribution Agreement, the Company and VSEA each
agreed to indemnify VMS and VSEA for one-third of certain environmental investigation and
remediation costs (after adjusting for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs), as further described below.
VAIVMS 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 eightnine sites where
VAI is alleged to have shipped manufacturing waste for recycling, treatment, or
disposal. VAIVMS is also involved in various stages of environmental investigation,
monitoring, and/or remediation under the direction of, or in consultation with,
foreign, federal, state, and/or local agencies at certain current VMS or former
VAI facilities.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of April 2,1999,March 31, 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 $21.0$4.5 million to $48.3
million.$10.5 million (without discounting to present value). The
time frame over which these costs are
16
expected to be incurred varies with each site and facility, ranging up to
approximately 30 years as of April 2, 1999.March 31, 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 VAI accrued $21.0$4.5 million in estimated environmental costs
as of April 2, 1999. The amount accrued was not discounted to present value.March 31, 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 April 2, 1999,March 31, 2000, it was estimated that the Company's share of
the future exposure for environmental relatedenvironmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $39.2$8.1 million
to $73.0 million.$13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of April 2, 1999.March 31, 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 futuresfuture costs were reliably determinable. Together, these amounts
totaled $50.6$9.4 million at April 2, 1999. Accordingly, VAIMarch 31, 2000. The Company therefore accrued $21.9$4.1
million as of April 2, 1999,March 31, 2000, which represents the best estimate of theits share of
these future costs discounted at 4%, net of inflation. This accrual is in
addition to the $21.0$4.5 million described in the preceding paragraph.
15
Since the Company is obligated to reimburse VMSClaims for one-thirdrecovery of the
foregoing environmental-related costs and expenses (after adjusting for any
insurance proceeds and tax benefits recognized or realized by VMS for such
costs or expenses) that are paid after April 2, 1999, IB recorded $7.7 million
as its portion of these estimated future costs for environmental liabilities
of VAI as of April 2, 1999. The foregoing amounts are only estimates of
anticipated future environmental-related costs, and the amounts actually spent
may be greater or less than such estimates. The aggregate range of cost
estimates reflects various uncertainties inherent in many environmental investigation and remediation activitiescosts
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the large numberCompany. In addition, an insurance company has agreed to pay a portion of
sitesVAI's (now VMS') future environmental-related expenditures for which the Company
has an indemnity obligation, and facilities involved. Management believes that mostthe Company therefore has a $1.3 million
receivable in Other Assets as of these cost ranges will
narrow as investigation and remediation activities progress.
ManagementMarch 31, 2000 for the Company's share of such
recovery. The Company has not reduced any environmental-related liability in
anticipation of recovery with respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified, and
related charges or credits against earnings may be made. Although any ultimate
liability arising from environmental-related matters described herein could
result in significant expenditures that, if aggregated and assumed to occur
within a single fiscal year, would be material to the Company's financial
statements, the likelihood of such occurrence is considered remote. Based on
information currently available and its best assessment of the ultimate amount
and timing of environmental-related events, the Company's management believes
that the costs of these environmental-related matters are not reasonably likely
to have a material adverse effect on the Company's financial statements.
Year 2000
General. The "Year 2000" problem refersposition or results
of operations.
LEGAL PROCEEDINGS
In the Distribution Agreement, the Company agreed to computer programsreimburse VMS for
one-third of certain costs and other
equipment with embedded microprocessors ("non-IT systems") which use onlyexpenses (after adjusting for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs and
expenses) that are paid after April 2, 1999 and arise from actual or potential
claims or legal proceedings relating to discontinued, former, or corporate
operations of VAI. These shared liabilities are generally managed by VMS, and
expenses and losses (adjusted for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs and expenses) are generally borne
one-third each by the last two digitsCompany, VMS, and VSEA. Also, from time to refer totime, the
Company is involved in a year,number of its own legal actions and which therefore might not properly
recognize a year that begins with "20" insteadcould incur an
uninsured liability in one or more of them. While the ultimate outcome of all of
the familiar "19." Asforegoing legal matters is not determinable, management believes that these
matters are not reasonably likely to have a result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because the Company relies heavilymaterial adverse effect on computer programs and non-IT
systems, and relies on third parties which themselves rely on computer
programs and non-IT systems, the Year 2000 problem, if not addressed, could
adversely effect the
Company's business,financial position or results of operations and financial
condition.
State of Readiness. VAI and IB previously initiatedoperations.
YEAR 2000
The Company completed a comprehensive assessment of potential Year 2000
problems with respect to (1) IB'sthe Company's internal systems, (2) IB'sthe Company's
products, and (3) significant third parties with which the IBCompany does
business. The Company is continuing that assessment for its
businesses, although under the terms of the Transition Services Agreement
among VMS, VSEA and the Company, VMS is taking certain actions and otherwise
assisting the Company with respect to certain Year 2000 implications with
internal systems.
IB has substantially completed its assessment of potential Year 2000
problems in internal systems, which systems have been categorized as follows,
in order of importance: (a) enterprise information systems; (b) enterprise
networking and telecommunications; (c) factory-specific information systems;
(d) non-IT systems; (e) computers and packaged software; and (f) facilities
systems. With respect to enterprise information systems, VAI initiated in 1994
replacement of its existing systems with a single company-wide system supplied
by SAP America, Inc., which system is designed and tested by SAP for Year 2000
capability. Installation of the SAP enterprise information system has been
staged to replace first those existing systems that are not Year 2000 capable.
Installation of the SAP system is approximately 70% complete, with 90%
completion expected by July 1999 and full completion expected by the end of
1999; upgrade of networking and telecommunications systems is complete;
upgrade of factory-specific information systems is approximately 90% complete,
with 95% completion expected by July 1999 and 100% completion expected by
December 1999; and upgrade of non-IT systems, computers and packaged software,
and facilities systems are approximately 95% complete, with 100% completion
expected by July 1999.
The Company has initiated an assessment of potentialexperienced any significant Year 2000 problems in
its current and previously-sold products. With respect to current products,
that assessment and corrective actions are complete, and the Company believes
that all of its current products are Year 2000 capable; however, that
conclusion is based in
16
part on Year 2000 assurances or warranties from suppliers of computer programs
and non-ITinternal systems, which are integrated into or sold with the Company's
current products. With respect to previously-sold products the Company does
not intend to assess Year 2000 preparedness of every product it has ever sold,
but rather is focusing its assessments on products that will be under written
warranties or are still relatively early in their useful life, are more likely
to be dependent on non-IT systems that are not Year 2000 capable, and/or
cannot be easily upgraded with readily available externally-utilized computers
and packaged software. These assessments are expected to be substantially
completed by July 1999. Where the Company identifies previously-sold products
that are not Year 2000 capable, the Company intends in some cases to develop
and offer to sell upgrades or retrofits, identify corrective measures which
the customer could itself undertake or identify for the customer other
suppliers of upgrades or retrofits. There may be instances where the Company
will be required to repair and/or upgrade such products at its own expense.
Schedules for completing those corrective actions vary considerably among the
Company's businesses and products, but are generally expected to be
substantially completed by July 1999.
The Company is still assessing potential Year 2000 problems ofsignificant third
parties with which the Company has material relationships, which will be
primarily suppliers of products or services. These assessments will identify
and prioritize critical suppliers, review those suppliers' written assurances
on their own assessments and correction of Year 2000 problems and develop
appropriate contingency plans for those suppliers which might not be
adequately prepared for Year 2000 problems. These assessments are expected to
be substantially completed by August 1999.
Costs. The Company estimates that IB had incurred approximately $1,021,000
as of April 2, 1999 to assess and correct Year 2000 problems. Although
difficult to assess, based on its assessment to date, the Company estimates
that it will incur approximately $350,000 in additional costs to assess and
correct Year 2000 problems, which costs are expected to be incurred throughout
fiscal year 1999 and the first half of fiscal year 2000. All of these costs
have been and will continue to be expensed as incurred.
This estimate of future costs has not been reduced by expected recoveries
from certain third parties, which are subject to indemnity, reimbursement or
warranty obligations for Year 2000 problems. In addition, the Company expects
that certain costs will be offset by revenues generated by the sale of
upgrades and retrofits and other customer support services relating to Year
2000 problems.parties. However, there can be no assurance that the Company's actualCompany will not incur
costs with respect to assess and correct Year 2000 problems will not be higher than the
foregoing estimate.
Risks. Failure byyet experienced or reported. If the
Company or its key suppliers to accurately assess and
correctexperiences Year 2000 problems would likely result in interruption of certain ofnot yet experienced, the Company's
normal business operations which could have a material adverse
effect on the Company's business, results of operations and financial
condition. If the Company does not adequately identify and correct Year 2000
problems in its information systems, it could experience an interruption in
its operations, including manufacturing, order processing, receivables
collection, cash management and accounting, such that there would be delays in
product shipments, lost data and a consequential impact on revenues,
expenditures, cashflow and financial reporting. If the Company does not
adequately Risks. Failure by the Company or its key suppliers to accurately
assess and correct Year 2000 problems would likely result in interruption of
certain of the Company's normal business operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. If the Company does not adequately identify and correct
Year 2000 problems in its information systems, it could experience an
interruption in its operations, including manufacturing, order processing,
receivables collection, cash management and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures, cashflow and financial reporting. If the Company does
not adequately identify and correct Year 2000 problems in its non-IT systems,
it could experience an interruption in its manufacturing and related
operations, such that there would be delays in product shipments and a
consequential impact on revenues. If the Company does not adequately identify
and correct Year 2000 problems in previously-sold products, it could
experience warranty or product liability claims by users of products which do
not function correctly. If the Company does not adequately identify and
correct Year 2000 problems of the significant third parties with which it does
business, it could experience an interruption in the supply of key components
or services from those parties, such that there would be delays in product
shipments or services and a consequential
17
impact on revenues. The most difficult risks to assess and prepare for relate
to basic infrastructure services (such as electricity, water, gas,
telecommunications, transportation, distribution and banking) provided by
third parties.
Management believes that the assessments and corrective actions described
above have been or will be accomplished within the cost and time estimates
stated. Although it is not expected that the Company will be 100% Year 2000
compliant by the end of 1999,adversely impacted. However, management does not currently
believe that any
Year 2000 non-compliance in the Company's information systems wouldsuch risks are reasonably likely to have a material adverse effect
on the Company's business, results of operations, or financial condition.
However, given the inherent complexity and implications
of the Year 2000 problem, there can be no assurance that actual costs will not
be higher than currently anticipated or that corrective actions will not take
longer than currently anticipated to complete. Risk factors which might result
in higher costs or delays include the ability to identify and correct in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously-sold products; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including the products they supply to the Company; and the
additional complexity which will likely be caused by undertaking during fiscal
year 1999 and fiscal year 2000 the separation (as a result of the
Distribution) of enterprise information systems which the Company currently
shares with VMS and VSEA.
Because of uncertainties as to the extent of Year 2000 problems with the
Company's previously-sold products and the extent of any legal obligation for
the Company to correct Year 2000 problems in those products, the Company
cannot yet assess risks to the Company with respect to those products. Because
its assessments are not yet complete, the Company also cannot yet conclude
that the failure of critical suppliers to assess and correct Year 2000
problems is not reasonably likely to have a material adverse effect on the
Company's results of operations, and indeed the failure of certain suppliers
to provide essential infrastructure services will likely have a material
adverse effect on the Company's business, results of operations and financial
condition.
Contingency Plans. With respect to the Company's enterprise information
systems, the Company has a contingency plan if the SAP system is not fully
installed before December 31, 1999. That plan primarily involves installation
where necessary of a Year 2000 capable upgrade of existing information systems
pending complete installation of the SAP system. That upgrade is currently in
acceptance testing, and, if functional, will be held for contingency purposes.
With respect to products and significant third parties, the Company
intends, as part of its on-going assessment of potential Year 2000 problems,
to develop contingency plans for the more critical problems that might not be
corrected December 31, 1999. It is currently anticipated that the focus of
these contingency plans will be the possible interruption of supply of key
components or services from third parties.
Recent Accounting Pronouncements17
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997,1998, the Financial Accounting and Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
changes standards for the way that public business enterprises identify and
report operating segments in annual and interim financial statements. This
statement requires selected information about an enterprise's operating
segments and related disclosure about products and services, geographic areas
and major customers. The Company expects to report multiple segments when it
adopts SFAS No. 131 at fiscal year-end 1999.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting "SFAS 133 requires derivatives to be
measured at fair value and reporting standards for derivative instruments and requires recognition of all
derivativesto be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in the
statement of financial position
and measurementfair values of those instruments at fair value. This statementderivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for fiscal quarters and years beginning after June 15, 1999.2000. The Company will
adopt SFAS No. 133 in the first quarter of fiscal year 20002001 and is in the process of
determining the impact that adoption will have on its combinedthe consolidated financial
statements.
18
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
for the Company's first quarter of fiscal year 2001, beginning September 30,
2000, however earlier adoption is permitted. The Company is in the process of
determining the impact that adoption will have on the consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
With global operations and activities, the Company faces exposure to
adverse movements in foreign currency exchange rates. This exposure may change
over time as the Company's business practices evolve and could have a material
adverse impact on the Company's financial results. Historically, IB's primary
exposures have related to non-U.S. dollar denominated sales and purchases
throughout Europe and Asia. The Euro was adopted as a common currency for
members of the European Monetary Union on January 1, 1999.FOREIGN CURRENCY EXCHANGE RISK. The Company is
evaluating, among other issues, the impact of the Euro conversion on its
foreign currency exposure. Based on its evaluation to date, the Company does
not expect the Euro conversion to create any change in its currency exposure
due to the Company's existing hedging practices.
IB historically hedgedtypically hedges its currency
exposures associated with certain assets and liabilities denominated in
non-functional currencies and with anticipated foreign currency cash flows. IB didAs a
result, the effect of an immediate 10% change in exchange rates would not enter intobe
material to the Company's financial condition or results of operations. The
Company's forward exchange contracts for trading purposes. IB's forward exchange contractshave generally ranged from one to three12 months
in original maturity, and no forward exchange contract has had an original
maturity greater than one year. There were
no significant forwardForward exchange contracts outstanding as of
April 2, 1999.
Interest Rate RiskMarch 31, 2000 that hedge the balance sheet and certain purchase commitments
were effective March 31, 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 MARCH 31, 2000
NOTIONAL
NOTIONAL VALUE
VALUE SOLD PURCHASED
---------- ---------
(IN THOUSANDS)
Australian Dollar............................... $ -- $ 14,817
Japanese Yen.................................... 14,030 --
British Pound................................... 7,054 15,508
Canadian Dollar................................. 3,985 --
Euro............................................ -- 3,162
---------- ---------
Total...................................... $ 25,069 $ 33,487
========== =========
INTEREST RATE RISK
The Company'sCompany 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 relates
primarilywould not be material to the Company's investment portfolio, notes payable and long-term
debt obligations. The Company does not use derivative financial
instruments in
its investment portfolio, and the Company's investment portfolio only includes
highly liquid instruments with an original maturity to the Companycondition or results of three
months or less.operations. The Company primarily enters into debt
obligations to support general corporate purposes, including working capital
requirements, capital expenditures, and acquisitions. The Company is subject to fluctuating interest rates that may impact,
adversely or otherwise, its results of operations or cash flows for its
variable rate notes payable and cash and cash equivalents. Fluctuations in
interest rates may also impact, adversely or otherwise, the estimated fair
value ofAt March 31, 2000 the
Company's debt obligations had fixed rate long-term obligations. The Company has no
cash flow exposure due to rate changes for long-term debt obligations.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's cash and cash equivalents
and debt obligations.
Six months Fiscal year
ended Oct. 1, ----------------------------------------------
1999 2000 2001 2002 2003 2004 Thereafter Total
------------- ---- ---- ---- ---- ---- ---------- -----
(Dollars in millions)
Assets
Cash and cash
equivalents(1)....... $12.1 -- -- -- -- -- -- $12.1
Liabilities
Notes payable......... $ 5.4 -- -- -- -- -- -- $ 5.4
Average interest
rate............... 3.0% -- -- -- -- -- -- 3.0%
Long-term debt
(including current
portion)............. $ 3.0 $6.0 $6.0 $6.0 $2.5 $2.5 $32.5 $58.5
Average interest
rate............... 7.3% 7.3% 7.3% 7.3% 7.2% 7.2% 6.8% 7.0%
- --------
(1) Cash and cash equivalents primarily consist of non-interest bearing
operating accounts located throughout the foreign subsidiaries.
The estimated fair value of the Company's cash and cash equivalents
approximates the principal amounts reflected above based on the short
maturities of these financial instruments.rates.
The estimated fair value of the Company's debt obligations approximates the
principal amounts reflected above
basedbelow 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.
18
DEBT OBLIGATIONS
PRINCIPAL AMOUNTS AND RELATED WEIGHTED AVERAGE INTEREST RATES BY YEAR OF
MATURITY
SIX
MONTHS
ENDED FISCAL YEARS
SEP. 29, --------------------------------------------------
(IN THOUSANDS) 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL
------- ------ ------- ------ ------- ------- --------- ---------
Long-term debt
(including current
portion)........... $3,360 $6,397 $6,438 $2,974 $2,755 $2,500 $ 30,000 $ 54,424
Average interest
rate............ 7.0% 6.9% 6.9% 6.3% 6.7% 7.2% 6.8% 6.8%
19
PART II.II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's By-Laws, and in accordance with Securities and
Exchange Commission ("SEC") Rule 14a-5(e), (1) stockholder proposals submitted
pursuant to the requirements of SEC Rule 14a-8 must be received by the
Company's Secretary not later than September 17, 1999 at the Company's address
set forth on the cover page of this Form 10-Q and must otherwise meet the
requirements of SEC Rule 14a-8, and (2) stockholder proposal submitted outside
the processes of SEC Rule 14a-8 must be received by the Company's Secretary
not later than November 16, 1999 and not earlier than October 17, 1999 at the
Company's address set forth on the cover page of this Form 10-Q and must
otherwise meet the requirements set forth in the Company's By-Laws. In
addition, in accordance with SEC Rule 14a-4(c)(1), stockholder proxies
obtained by the Board of Directors of the Company in connection with the
Company's 2000 Annual Meeting of Stockholders will conferheld on the proxy holders
discretionary authority to vote on any matters presented at the meeting,
unless notice of the matter is provided toFebruary 10, 2000,
the Company's Secretary not later
than December 1, 1999stockholders elected Allen J. Lauer as a Class I director for a
three-year term, with 25,617,029 votes for and the Company's address set forth on the cover page of
this Form 10-Q.1,459,147 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------EXHIBIT
NO. DESCRIPTION
-------- ----------------
2.110.1* Varian, Inc. Employee Stock Purchase Plan.
10.2* Amended and Restated Distribution Agreement among Varian
Associates, Inc., Varian Semiconductor Equipment Associates,
Inc. and Varian, Inc. dated as of January 14, 1999.*
3.1 Restated Certificate of Incorporation of Varian, Inc.
3.2 Certificate of Designation and Terms of Participating Preferred
Stock of Varian, Inc.
3.3 By-Laws of Varian, Inc.
10.1 Employee Benefits AllocationChange in Control Agreement, dated as of April 2, 1999
among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc.February 25, 2000, Between
Registrant and Varian, Inc.*
10.2 Intellectual PropertySergio Piras.
10.3* Amended and Restated Change in Control Agreement, dated as of April 2, 1999 among
Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc.February 25, 2000, Between
Registrant and Varian, Inc.*
10.3 Tax Sharing Agreement dated as of April 2, 1999 among Varian
Associates, Inc., Varian Semiconductor Equipment Associates,
Inc. and Varian, Inc.
10.4 Transition Services Agreement dated as of April 2, 1999 among
Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc.*
10.5 Supplemental Retirement Plan of Varian, Inc.
10.6 Varian, Inc. Amended and Restated Note Purchase and Private
Shelf Agreement and Assumption Dated as of April 2, 1999.*C. Wilson Rudd.
27.1 Financial Data Schedule.
- ----------------------
* Certain exhibits and schedules omitted.Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K filed during the quarter ended April 2, 1999:March 31, 2000:
None.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VARIAN, INC.
(Registrant)
By /s/ G. EDWARD MCCLAMMY
-----------------------------------------------
G. Edward McClammy
By __________________________________
G. Edward McClammy
Vice President and Chief Financial
Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date:VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
Dated: May 17, 199910, 2000
21
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------EXHIBIT
NO. DESCRIPTION
-------- ----------------
2.110.1* Varian, Inc. Employee Stock Purchase Plan.
10.2* Amended and Restated Distribution Agreement among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc.
and Varian, Inc. dated as of January 14, 1999.*
3.1 Restated Certificate of Incorporation of Varian, Inc.
3.2 Certificate of Designation and Terms of Participating Preferred
Stock of Varian, Inc.
3.3 By-Laws of Varian, Inc.
10.1 Employee Benefits AllocationChange in Control Agreement, dated as of April 2, 1999
among Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc.February 25, 2000, Between
Registrant and Varian, Inc.*
10.2 Intellectual PropertySergio Piras.
10.3* Amended and Restated Change in Control Agreement, dated as of April 2, 1999 among
Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc.February 25, 2000, Between
Registrant and Varian, Inc.*
10.3 Tax Sharing Agreement dated as of April 2, 1999 among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc.
and Varian, Inc.
10.4 Transition Services Agreement dated as of April 2, 1999 among
Varian Associates, Inc., Varian Semiconductor Equipment
Associates, Inc. and Varian, Inc.*
10.5 Supplemental Retirement Plan of Varian, Inc.
10.6 Varian, Inc. Amended and Restated Note Purchase and Private Shelf
Agreement and Assumption Dated as of April 2, 1999.*C. Wilson Rudd.
27.1 Financial Data Schedule.
- ----------------------
* Certain exhibits and schedules omitted.Management contract or compensatory plan or arrangement.
22