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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10/A
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Varian, Inc.
(Exact Name of Registrant as specified in Its Charter)
77-0501995
Delaware
(I.R.S. Employer
(State or Other Jurisdiction of Identification No.)
Incorporation or Organization)
3050 Hansen Way
Palo Alto, California 94304-1000
(Zip Code)
(Address of Principal Executive Offices)
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Registrant's telephone number, including area code:
(650) 493-4000
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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Item 1. Business.
The information required by this item is contained under the sections
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Risk Factors, and in the Combined Financial Statements
of Instruments Business of Varian Associates, Inc.
Item 2. Financial Information.
The information required by this item is contained under the sections
"Summary - Summary Financial Data," "Risk Factors," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Market Risk" and "Pro Forma Condensed Combined Financial
Statements."
Item 3. Properties.
The information required by this item is contained under the section
"Business - Properties."
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the section "Ownership
of IB Common Stock."
Item 5. Directors and Executive Officers.
The information required by this item is contained under the sections
"Management - Board of Directors" and " - Executive Officers."
Item 6. Executive Compensation.
The information required by this item is contained under the section
"Management - Compensation of Directors," " - Executive Officer Compensation,"
" - Stock Options," and " - Change in Control Agreements."
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections "The
Distribution - Relationship Among VMS, VSEA and IB After the Distribution" and
"Management - Change in Control Agreements."
Item 8. Legal Proceedings.
The information required by this item is contained under the section
"Business - Legal Proceedings."
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder
Matters.
The information required by this item is contained under the sections "Risk
Factors - No Dividends Anticipated," "The Distribution - Listing and Trading of
IB Common Stock," " - Employee Benefits Allocation Agreement" and "Description
of the Capital Stock."
Item 10. Recent Sales of Unregistered Securities.
On January 7, 1999, as part of its original incorporation, the Registrant
issued one share of its common stock, for a total consideration of $1,000, to
Varian Associates, Inc., which is and will be the Registrant's sole stockholder
until the date of the distribution. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, in
that such transaction did not involve a public offering.
Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is contained under the section
"Description of the Capital Stock - General" and " - Common Stock."
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section
"Limitation of Liability and Indemnification Matters."
Item 13. Financial Statements and Supplementary Data.
The information required by this item is identified in the sections "Index to
Financial Statements - Instruments Business of Varian Associates, Inc." and
"Pro Forma Condensed Combined Financial Statements."
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Matters.
None.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
(1) Combined Financial Statements: The information required by this item is
contained in the "Index to Financial Statements and Financial Statement
Schedule."
(2) Combined Financial Statement Schedule: The following financial
statement schedule of the Registrant for fiscal years 1998, 1997, and
1996, and the related Report of Independent Accountants are filed as a
part of this Registration Statement and should be read in conjunction
with the Combined Financial Statements of the Registrant.
Schedule
- Report of Independent Accountants on Financial Statement Schedule
- Valuation and Qualifying Accounts
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or the notes thereto.
(b) Exhibits
The following documents are filed as exhibits hereto:
Exhibit
No. Description
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2.1 Distribution Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of
January 14, 1999.+
3.1 Form of Restated Certificate of Incorporation of Varian, Inc. to be in
effect upon the effectiveness of the Distribution.+
3.2 Form of By-Laws of Varian, Inc. to be in effect upon the effectiveness
of the Distribution.*
4.1 Specimen Common Stock Certificate.*
4.2 Rights Agreement dated February 18, 1999.*
10.1 Form of Employee Benefits Allocation Agreement among Varian Associates,
Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.2 Form of Intellectual Property Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.4 Form of Transition Services Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.5 Form of Change in Control Agreement for CEO.*
Exhibit
No. Description
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10.6 Form of Change in Control Agreement for General Counsel.*
10.7 Form of Change in Control Agreement for Senior Executives.*
10.8 Form of Indemnity Agreement with Directors and Officers.*
10.9 Varian, Inc. Omnibus Stock Plan.+
10.10 Varian, Inc. Management Incentive Plan.+
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule.*
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+ Filed by Registrant with its Form 10 Registration Statement filed on February
12, 1999.
* Filed herewith.
Information Statement
Varian, Inc.
Common Stock
(par value $0.01 per share)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Varian Associates, Inc., a Delaware
corporation ("Varian"), to holders of record of the common stock of Varian, par
value $1 per share ("Varian Common Stock"), at the close of business on March
24, 1999 (the "Distribution Record Date") of one share of common stock, par
value $0.01 per share (the "IB Common Stock"), of Varian, Inc., a Delaware
corporation ("IB"), for each share of Varian Common Stock owned on the
Distribution Record Date. At the same time Varian will distribute to such
holders one share of common stock, par value $0.01 per share ("VSEA Common
Stock"), of Varian Semiconductor Equipment Associates, Inc., a Delaware
corporation ("VSEA"), for each share of Varian Common Stock owned on the
Distribution Record Date. See "The Distribution - Manner of Effecting the
Distribution."
IB and VSEA are wholly-owned subsidiaries of Varian. On or prior to the
Distribution, Varian will effectuate certain transactions (the "Internal
Transfers") intended to allocate assets and liabilities relating to (i) the
manufacture and sale of health care systems, including linear accelerators,
simulators, brachytherapy systems and related data management systems and x-ray
components (the "Health Care Systems Business") to Varian; (ii) the manufacture
and sale of analytical and research instruments and vacuum products (the
"Instruments Business") to IB and (iii) the manufacture and sale of ion
implantation processing systems used in the manufacture of integrated circuits
(the "Semiconductor Equipment Business") to VSEA. As of the Distribution,
Varian will change its name to "Varian Medical Systems, Inc." (Varian after the
Distribution being referred to herein as "VMS").
The Distribution is payable April 2, 1999 (the "Distribution Date"). Stock
distribution statements reflecting ownership of IB Common Stock and VSEA Common
Stock will be mailed as soon as practicable after the Distribution. No
consideration will be paid by Varian's stockholders for shares of IB Common
Stock and VSEA Common Stock received by them in the Distribution, nor will they
be requested to surrender or exchange Varian Common Stock in order to receive
IB Common Stock and VSEA Common Stock.
There is currently no public market for the IB Common Stock, although it is
expected that a "when issued" trading market will develop after the
Distribution Record Date. Application has been made to quote the IB Common
Stock on the Nasdaq National Market under the symbol "VARI." Each share of IB
Common Stock will be accompanied by one right (a "Right") to purchase
participating preferred stock of IB.
No proxies are being solicited in connection with this Information Statement
and you are requested not to send us a proxy.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this information. Any representation to the contrary is
a criminal offense.
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by recipients of IB Common Stock.
This Information Statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
Stockholders of Varian with inquiries related to the Distribution should
contact First Chicago Trust Company of New York, the Distribution Agent for the
Distribution, at 1-800-756-8200 or the Secretary of Varian at 650-493-4000.
The date of this Information Statement is March 8, 1999.
Cautionary Statement for Purposes of "Safe Harbor" Provisions of The Private
Securities Litigation Reform Act of 1995.
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, IB's prospects, developments and business strategies for
its operations, all of which are subject to risks and uncertainties. These
forward-looking statements are identified by their use of such terms and
phrases as "intend," "intends," "intended," "goal," "estimate," "estimates,"
"estimated," "expect," "expects," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipate," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes," "believed" and "scheduled" and in many cases are followed by a
cross reference to "Risk Factors."
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the management of IB cautions
that, while it believes such assumptions or bases to be reasonable and makes
them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-
looking statement, IB or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The actual results of IB may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include (i) the factors discussed under "Risk Factors" and particularly, in
cases where the forward-looking statement is followed by a cross reference to
"Risk Factors," the factors discussed in the section or sections under "Risk
Factors" that are referred to in the cross reference, (ii) the factors
discussed under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Forecasted Capitalization," and "Business" and
(iii) the following factors: product demand and market acceptance risks; the
effect of general economic conditions and foreign currency fluctuations; the
impact of competitive products and pricing; new product development and
commercialization; the continued improvement of the various instruments
markets; the ability to increase operating margins on higher sales; the impact
of economic conditions in Korea and other Asian markets on sales in those
areas; successful implementation by IB and certain third parties of corrective
actions to address the impact of the Year 2000; completion of the Distribution
on the current schedule within current budgets; the ability to sell certain
surplus assets in connection with the Distribution; the ability of IB to
realize anticipated cost savings resulting from the Distribution; and other
risks detailed from time to time in the filings of IB with the Securities and
Exchange Commission (the "Commission"). IB undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
TABLE OF CONTENTS
Page
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Summary.................................................................. 4
Introduction............................................................. 9
Risk Factors............................................................. 10
The Distribution......................................................... 20
Selected Financial Data.................................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Market Risk.............................................................. 37
Forecasted Capitalization................................................ 39
Pro Forma Condensed Combined Financial Statements........................ 40
Business................................................................. 44
Page
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Management................................................................. 50
The IB Omnibus Stock Plan.................................................. 57
The IB Management Incentive Plan........................................... 61
Ownership of IB Common Stock............................................... 63
Financing.................................................................. 65
Description of the Capital Stock........................................... 66
Limitation of Liability and Indemnification Matters........................ 68
Delaware Law and Certain Charter and By-Law Provisions..................... 68
Available Information...................................................... 73
Index to Financial Statements.............................................. F-1
3
SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to "IB" refer to IB and its
subsidiaries after giving effect to the Internal Transfers and the Distribution
and (ii) references in this Information Statement to the "Instruments Business"
refer to the historical business and operations of the Instruments Business
conducted by Varian prior to the Distribution.
IB
IB, a newly-formed, wholly-owned subsidiary of Varian, will own and operate the
Instruments Business after the Distribution. IB develops, manufactures, sells
and services a variety of scientific instruments and equipment. IB is a major
supplier of analytical and research instruments and related equipment for
studying the chemical composition of a myriad of substances, including metals,
inorganic materials, organic compounds, polymers, natural substances and
biochemicals. IB also develops, manufactures, sells and services nuclear
magnetic resonance spectrometers for probing the structural properties of
molecules and for producing non-invasive three-dimensional images of biomedical
materials. IB also develops, manufactures, sells and services high vacuum
products that serve a wide range of industrial and scientific applications,
such as high-energy physics, surface analysis, scientific and industrial
coating processes, analytical instrumentation and semiconductor manufacturing.
IB is also a state-of-the-art contract manufacturer of advanced electronic
assemblies and subsystems such as printed circuit boards. IB operates in 70
countries and at January 1, 1999 had approximately 3,000 employees.
The principal executive offices of IB will be located at 3120 Hansen Way, Palo
Alto, California 94304-1030. Its telephone number at that address will be (650)
213-8000.
THE DISTRIBUTION
Distributing Company...... Varian Associates, Inc., a Delaware corporation.
Concurrently with the Distribution, Varian will
change its name to "Varian Medical Systems, Inc."
(Varian after the Distribution being referred to
herein as "VMS").
Distributed Companies..... Varian, Inc. and Varian Semiconductor Equipment
Associates, Inc., each a Delaware corporation and
each currently a wholly-owned subsidiary of Varian.
Distribution Ratio........ Each stockholder of record of Varian as of the
close of business on the Distribution Record Date
will receive one share of IB Common Stock and one
share of VSEA Common Stock for each share of Varian
Common Stock held on the Distribution Record Date
and will retain the shares of Varian Common Stock
held by such stockholder immediately prior to the
Distribution (Varian Common Stock after the
Distribution being referred to herein as "VMS
Common Stock"). No consideration will be paid by
Varian stockholders for shares of IB Common Stock
and VSEA Common Stock to be received in the
Distribution. See "The Distribution - Manner of
Effecting the Distribution."
Shares to be
Distributed............... Approximately 30 million shares of IB Common Stock
and VSEA Common Stock (based on 29,985,829 shares
of Varian Common Stock outstanding on February 1,
1999). The shares to be distributed will constitute
100% of the outstanding shares of IB Common Stock
and VSEA Common Stock.
Distribution Record
Date...................... Close of business on March 24, 1999
4
Distribution Date......... April 2, 1999. On or prior to the Distribution
Date, the shares of IB Common Stock and VSEA Common
Stock to be distributed in the Distribution will be
delivered to First Chicago Trust Company of New
York, as Distribution Agent (the "Distribution
Agent"). The Distribution Agent will mail stock
distribution statements reflecting ownership of
shares of IB Common Stock and VSEA Common Stock as
soon as practicable after the Distribution. See
"The Distribution - Manner of Effecting the
Distribution."
Reasons for the
Distribution.............. The Distribution is designed to separate three
types of businesses that have different dynamics
and business cycles, serve different markets and
customers, are subject to different competitive
forces and must be managed with different long-term
and short-term strategies and goals. The
Distribution will allow the management of IB to
focus on its own business, organize its capital
structure, evaluate its growth opportunities,
achieve market recognition, rationalize its
organizational structure and design equity-based
compensation programs targeted to its own
performance.
Internal Transfers........ On or prior to the Distribution Date, Varian
intends to consummate certain internal mergers and
stock and asset transfers intended to allocate
assets and liabilities relating to (i) the Health
Care Systems Business to VMS, (ii) the
Semiconductor Equipment Business to VSEA and (iii)
the Instruments Business to IB (the "Internal
Transfers"). See "The Distribution - Internal
Mergers and Transfers" and "Pro Forma Condensed
Combined Financial Statements."
Relationship Among VMS,
IB and VSEA After the
Distribution.............. For purposes of governing certain ongoing
relationships among VMS, VSEA and IB after the
Distribution and to provide mechanisms for an
orderly transition, Varian, IB and VSEA have
entered into a Distribution Agreement dated as of
January 14, 1999 providing for, among other things,
the Internal Transfers, the Distribution and cross-
indemnification provisions. Before the
Distribution, VMS, IB and VSEA will enter into
additional agreements, including (i) the Tax
Sharing Agreement (as defined), (ii) the Employee
Benefits Allocation Agreement (as defined), (iii)
the Transition Services Agreement (as defined) and
(iv) the Intellectual Property Agreement (as
defined) (such agreements other than the
Distribution Agreement are referred to herein
collectively as the "Ancillary Agreements"). See
"The Distribution - Relationship Among VMS, VSEA
and IB After the Distribution."
Financing................. Varian is required to renegotiate the terms of its
outstanding unsecured term loans (the "Term Loans")
to permit 50% of these loans to be assumed by IB in
connection with the Distribution. The Term Loans
contain covenants that limit future borrowings and
the payment of cash dividends and require the
maintenance of certain levels of working capital
and operating results of the borrower. In addition,
certain short-term notes payable of Varian and its
subsidiaries (the "Notes Payable") will, as a
result of the Internal Transfers and debt
allocation provisions of the Distribution
Agreement, remain outstanding as direct and
indirect obligations of IB as of the Distribution
Date. Based on the outstanding indebtedness of
Varian
5
under the Term Loans and Notes Payable as of
January 1, 1999 and Varian's projected operating
results and certain other transactions through the
Distribution Date, it is anticipated that at the
Distribution Date, IB will have between $50 million
and $100 million of outstanding indebtedness under
the Term Loans and Notes Payable. Based on the
assumptions stated in such section, the allocation
of indebtedness to IB at the Distribution Date
should approximate the amounts reflected in
"Forecasted Capitalization." See "The Distribution"
and "Financing."
IB may enter into a credit facility for working
capital and other general corporate purposes. The
credit facility may contain certain representations
and warranties; conditions; affirmative, negative
and financial covenants; and events of default
customary for such facilities. See "Financing."
Tax Consequences.......... Varian has received a private letter ruling from
the Internal Revenue Service to the effect, among
other things, that receipt of shares of IB Common
Stock and VSEA Common Stock by stockholders of
Varian will be tax-free (the "Tax Ruling"). For a
description of the consequences to IB and the
holders of Varian Common Stock if the Distribution
were not to qualify as tax-free, see "Risk
Factors - Federal Income Tax Considerations."
Distribution Agent........ First Chicago Trust Company of New York (the
"Distribution Agent").
6
IB AFTER THE DISTRIBUTION
Board of Directors........ The following five individuals who make up the
current IB Board are expected to be the members of
the Board of Directors of IB as of the close of
business on the Distribution Date: Allen J. Lauer,
John G. McDonald, Wayne R. Moon, D.E. Mundell and
Elizabeth E. Tallett. Certain of the foregoing
currently serve as directors of Varian and will
resign from Varian's Board of Directors effective
as of the Distribution Date. See "Management -
Board of Directors."
Trading Market............ There is currently no public market for the IB
Common Stock although a "when issued" trading
market is expected to develop after the
Distribution Record Date. IB has applied for
quotation of the IB Common Stock on the Nasdaq
National Market under the symbol "VARI." See
"RiskFactors - No Current Public Market for IB
Common Stock" and "The Distribution - Listing and
Trading of IB Common Stock."
Certain Provisions of
Certificate of
Incorporation, By-Laws
and Rights Plan........... Certain provisions of the Certificate of
Incorporation and By-Laws of IB which will be in
effect at the time of the Distribution may have the
effect of making more difficult an acquisition of
control of IB in a transaction not approved by IB's
Board of Directors. In addition, IB has adopted a
stockholder rights plan (the "Rights Plan"), which,
under certain circumstances, would significantly
dilute the interest in IB of persons seeking to
acquire control of IB without the prior approval of
IB's Board of Directors. See "Risk Factors -
Certain Anti-takeover Features," "Description of
the Capital Stock - Rights Plan" and "Delaware Law
and Certain Charter and By-Law Provisions."
RISK FACTORS
Stockholders should consider carefully the specific investment considerations
set forth under "Risk Factors," as well as the other information set forth in
this Information Statement.
7
SUMMARY FINANCIAL DATA
The following table presents summary historical financial data of the
Instruments Business. The information set forth below should be read in
conjunction with "Pro Forma Condensed Combined Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto of the
Instruments Business included elsewhere in this Information Statement. The
unaudited pro forma statement of earnings data for the fiscal year ended
October 2, 1998 and the quarter ended January 1, 1999, set forth below was
prepared to give effect to the Distribution as if it had occurred on September
27, 1997, and the unaudited pro forma balance sheet data was prepared to give
effect to the Distribution as if it had occurred on January 1, 1999, and does
not purport to represent what the Instruments Business' operating results or
financial position would have been or to project its operating results or
financial position for any future date or period. The statement of earnings
data set forth below for the fiscal years ended October 2, 1998, September 26,
1997 and September 27, 1996 and the balance sheet data at October 2, 1998 and
September 26, 1997 are derived from, and are qualified by reference to, the
audited financial statements of the Instruments Business included elsewhere in
this Information Statement. The statement of earnings data for the quarters
ended January 1, 1999 and January 2, 1998 and the balance sheet data at January
1, 1999 are derived from the Instruments Business' unaudited financial data
included elsewhere in this Information Statement. The statement of earnings
data for the fiscal years 1995 and 1994 and the balance sheet data at fiscal
year end 1996, 1995 and 1994 are derived from unaudited financial data of the
Instruments Business not included in this Information Statement.
The historical financial information may not be indicative of the Instruments
Business' future performance and does not necessarily reflect what the
financial position and results of operations of the Instruments Business would
have been had the Instruments Business operated as a separate, stand-alone
entity during the periods presented.
Quarters Ended Fiscal Years
-------------------------------- --------------------------------------------
Pro Forma
January 1, January 1, January 2, Pro Forma
1999 1999 1998 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ------ ------ ------ ------ ------
(Dollars in millions, except per share amounts)
Statement of Earnings
Data
Sales................... $133.3 $133.3 $140.9 $557.8 $557.8 $541.9 $504.4 $459.4 $425.7
Operating Earnings
before Taxes........... $ 6.6 $ 7.7 $ 9.6 $ 34.8 $ 39.2 $ 26.8 $ 11.5 $ 2.7 $ 20.3
Taxes on earnings....... $ 3.0 $ 3.4 $ 3.8 $ 14.1 $ 15.8 $ 12.6 $ 5.3 $ 0.7 $ 10.0
Net Earnings............ $ 3.6 $ 4.3 $ 5.8 $ 20.7 $ 23.4 $ 14.2 $ 6.2 $ 2.0 $ 10.3
Pro Forma Net Earnings
Per Share(/1/)......... $ 0.12 $ 0.14 $ 0.19 $ 0.69 $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30
At January 1, Fiscal Year End
---------------- ----------------------------------
Pro Forma
1999 1999 1998 1997 1996 1995 1994
--------- ------ ------ ------ ------ ------ ------
(Dollars in millions)
Balance Sheet Data
Total assets.............. $415.6 $395.6 $404.1 $357.9 $301.0 $282.0 $272.6
Long-term debt (excluding
current portion)......... $ 52.6 $ -- $ -- $ -- $ -- $ -- $ --
- -------
(1) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the respective periods, reflecting the ratio of one share of IB Common
Stock for each share of Varian Common Stock outstanding at the time of the
Distribution.
8
INTRODUCTION
On February 19, 1999, the Varian Board of Directors declared a dividend payable
to each stockholder of record at the close of business on the Distribution
Record Date of one share of IB Common Stock and one share of VSEA Common Stock
for each share of Varian Common Stock held by such stockholder at the close of
business on the Distribution Record Date. As a result of the Distribution, 100%
of the outstanding shares of IB Common Stock and VSEA Common Stock will be
distributed to Varian stockholders on a pro rata basis. The Distribution will
be made on April 2, 1999.
Stockholders of Varian with questions concerning the Distribution should
contact the Distribution Agent at 1-800-756-8200 or Varian Associates, Inc.,
Corporate Secretary, 3050 Hansen Way, Palo Alto, California 94304, telephone
number (650) 493-4000. After the Distribution Date, stockholders of IB with
inquiries related to their investment in IB should contact Varian, Inc., 3120
Hansen Way, Palo Alto, California 94304, telephone number (650) 213-8000.
No person is authorized by Varian or IB to give any information or to make any
representations other than those contained in this Information Statement and,
if given or made, such information or representations must not be relied upon
as having been authorized.
9
RISK FACTORS
The following factors, in conjunction with the other information included in
this Information Statement, should be carefully considered.
Lack of Recent Operating History as Separate Entities
Upon consummation of the Distribution, IB will own and operate the Instruments
Business, which does not have a recent operating history as a separate entity.
After the Distribution, IB will be a smaller and less diversified company than
Varian was prior to the Distribution. The ability of IB to satisfy its
obligations and maintain profitability will be solely dependent upon its own
future performance, and IB will not be able to rely on the capital resources
and cash flows of the other two businesses. The future performance and cash
flows of IB will be subject to prevailing economic conditions and to financial,
business and other factors affecting its business operations, including factors
beyond its control.
The division of Varian may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of IB, and will also result in the duplication of certain
personnel, administrative and other expenses required for the operation of
independent companies. In addition, although after the Distribution IB will
continue to be managed primarily by its current operating management, the
management of IB has not previously operated its business as a separate public
company. Accordingly, there can be no assurance that the transition will not
alter or disrupt the management and/or operations of IB.
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and the Ancillary Agreements allocate among VMS,
VSEA and IB responsibility for various indebtedness, liabilities and
obligations. See "The Distribution - Relationship Among VMS, VSEA and IB after
the Distribution." It is possible that a court would disregard this contractual
allocation of indebtedness, liabilities and obligations among the parties and
require VMS, VSEA or IB or their respective subsidiaries to assume
responsibility for obligations allocated to another party, particularly if such
other party were to refuse or was unable to pay or perform any of its allocated
obligations.
Potential Indemnification Liabilities
Under the terms of the Distribution Agreement and certain of the Ancillary
Agreements, each of VMS, VSEA and IB has agreed to indemnify the other parties
(and certain related persons) from and after consummation of the Distribution
with respect to certain indebtedness, liabilities and obligations, which
indemnification obligations could be significant. The availability of such
indemnities will depend upon the future financial strength of the companies. No
assurance can be given that the relevant company will be in a position to fund
such indemnities. In addition, the Distribution Agreement generally provides
that if a court prohibits a company from satisfying its indemnification
obligations, then such indemnification obligations will be shared equally
between the two other companies. See "The Distribution - Relationship Among
VMS, VSEA and IB After the Distribution."
Debt Leverage After the Distribution
Immediately following the Distribution, IB will have somewhat greater debt
leverage than Varian had prior to the Distribution. As of January 1, 1999,
Varian had total long and short-term debt of approximately $152 million and
total stockholders' equity of approximately $556 million. Based on Varian's
outstanding indebtedness as of January 1, 1999 and projected operating results
and certain other transactions through the anticipated Distribution Date, on a
pro forma basis giving effect to the Distribution, IB would have total long-
term debt (including current portion) and short-term debt of approximately $76
million and total stockholders' equity of approximately $195 million. The
allocation of indebtedness to IB reflects, in substantial part, its expected
capital requirements and cash flows. See "Forecasted Capitalization."
10
The degree to which IB is leveraged could have important consequences,
including the following: (i) IB's ability to obtain additional financing in the
future for working capital, capital expenditures, product development,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a portion of IB's and its subsidiaries' cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness;
(iii) the Term Loans of IB will contain, and any credit agreement of IB
following the Distribution may contain, certain restrictive financial and
operating covenants, including, among others, requirements that IB satisfy
certain financial ratios; (iv) a portion of IB's borrowings may be at floating
rates of interest, causing IB to be vulnerable to increases in interest rates;
(v) IB's degree of leverage may make it more vulnerable in a downturn in
general economic conditions and (vi) IB's degree of leverage may limit its
flexibility in responding to changing business and economic conditions. In
addition, in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, a court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and to require that the
stockholders return some or all of the shares of VSEA Common Stock and/or IB
Common Stock to VMS or require each of IB, VSEA and VMS to fund certain
liabilities of the other companies for the benefit of creditors. See " -
Fraudulent Transfer Considerations; Legal Dividend Requirements."
Federal Income Tax Considerations
Varian has received the Tax Ruling from the Internal Revenue Service (the
"IRS") to the effect that, among other things, no gain or loss will be
recognized by the holders of Varian Common Stock as a result of the
Distribution and no gain or loss will be recognized by Varian upon the
Distribution. See "The Distribution - Federal Income Tax Aspects of the
Distribution." Such rulings, while generally binding upon the IRS, are subject
to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, such
ruling would be jeopardized. IB is not aware of any facts or circumstances that
would cause such representations and assumptions to be untrue. Varian, IB and
VSEA have agreed to certain restrictions on their future actions to provide
further assurances that the Distribution will qualify as tax-free. See "The
Distribution - Relationship Among VMS, VSEA and IB After the Distribution - Tax
Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986,
as amended (the "Code"), then VMS will recognize gain equal to the difference
between the fair market value of the stock of the nonqualifying company or
companies and Varian's adjusted tax basis in such stock. If VMS were to
recognize gain on one or both of the distributions, such gain and the resulting
tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin-off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of IB Common Stock and VSEA Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the IB Common Stock or VSEA Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) gain from the exchange of Varian Common Stock to the extent
the amount received exceeds both such stockholder's share of earnings and
profits and such stockholder's basis in such common stock.
Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition of 50% or
more, by vote or value, of the capital stock of the company or the subsidiary
that occurs within two years before or after the spin-off is pursuant to a plan
that includes the spin-off. However, the presumption may be rebutted by
establishing that the spin-off and the acquisition are not part of a plan or
series of related transactions. Among the factual representations made by
Varian to the IRS in connection with the Tax Ruling is the representation that
each of the distributions is not part of such a plan or series of related
transactions. If VMS, IB or VSEA were to undergo a 50% Ownership Shift,
particularly if such 50% Ownership
11
Shift occurred within two years after the Distribution Date, there can be no
assurance that the IRS will not assert that such ownership shift occurred
pursuant to a plan or series of related transactions and therefore that the
Distribution is taxable under Section 355(e).
If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the VSEA Common
Stock and the IB Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the Distribution. If VMS were to recognize gain on the distributions,
such gain and the resulting tax liability likely would be very substantial.
The Tax Sharing Agreement will allocate responsibility for the possible
corporate tax burden resulting from the Distribution. Each of VMS, IB and VSEA
will be responsible for any corporate taxes resulting from the Distribution
attributable to action taken or permitted by that entity or its affiliates
after the Distribution. If the Distribution is found to be taxable but none of
VMS, IB and VSEA has done anything to cause the Distribution to be taxable,
each company generally will be liable for one-third of those taxes. See "The
Distribution - Relationship Among VMS, VSEA and IB After the Distribution - Tax
Sharing Agreement."
No Current Public Market for IB Common Stock
There is not currently a public market for the IB Common Stock, although a
"when-issued" trading market is expected to develop after the Distribution
Record Date. There can be no assurance as to the prices at which trading in IB
Common Stock will occur after the Distribution. Until the IB Common Stock is
fully distributed and an orderly market develops, the prices at which trading
in such stock occurs may fluctuate significantly. IB has applied for quotation
of the IB Common Stock on the Nasdaq National Market. See "The Distribution -
Listing and Trading of IB Common Stock."
No Dividends Anticipated
Following the Distribution, IB does not anticipate paying dividends on the IB
Common Stock. The Term Loans of IB will contain, and any credit agreement
entered into by IB may contain, provisions that limit the ability of IB (and/or
its subsidiaries) to pay cash dividends. Any determination to pay cash
dividends in the future will be at the discretion of the Board of Directors of
IB and will be dependent upon IB's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time by IB's
Board of Directors. See "Financing."
Certain Anti-takeover Features
The Certificate of Incorporation and By-Laws of IB that will be in effect at
the time of the Distribution will contain several provisions that may make the
acquisition of control of IB more difficult or expensive. The Certificate of
Incorporation and By-Laws, among other things, will (i) classify the Board of
Directors into three classes, with directors of each class serving for a
staggered three-year period, (ii) provide that directors may be removed only
for cause and only upon the affirmative vote of the holders of at least a
majority of the outstanding shares of IB Common Stock entitled to vote for such
directors, (iii) permit the remaining directors (but not IB's stockholders) to
fill vacancies and newly created directorships on the Board, (iv) eliminate the
ability of stockholders to act by written consent and (v) require the vote of
stockholders holding at least 66 2/3% of the outstanding shares of IB Common
Stock to amend, alter or repeal the By-Laws and certain provisions of the
Certificate of Incorporation, including the provisions described in the
foregoing clauses (i) through (iv) and this clause (v). Such provisions would
make the removal of incumbent directors more difficult and time-consuming and
may have the effect of discouraging a tender offer or other takeover attempt
not previously approved by the Board of Directors. Under the Certificate of
Incorporation which will be in effect at the time of the Distribution, the
Board of Directors of IB also has the authority to issue shares of preferred
stock in one or more series and to fix the powers, preferences and rights of
any such series without stockholder approval. The Board of Directors of IB
could, therefore, issue, without stockholder approval, preferred stock with
voting and other rights that could adversely affect the voting power of the
holders of IB Common Stock and could make it more difficult for a third party
to gain control of IB. In addition, IB has adopted a stockholder rights plan
which, under certain circumstances, would significantly dilute the equity
interest in IB of persons seeking to acquire control of IB without the prior
approval
12
of IB's Board of Directors. See "Description of the Capital Stock - Rights
Plan" and "Delaware Law and Certain Charter and By-Law Provisions."
Certain Consent Requirements
Consummation of the Distribution and related transactions could result in a
violation of Varian's existing debt and other contractual arrangements or
require the consent of a third party to effect the necessary transfers of such
arrangements to IB and its subsidiaries. In a substantial number of situations,
an amendment, consent or waiver from third parties will be required. Although
Varian believes that no single agreement for which an amendment, consent or
waiver is being sought is material, the failure of Varian or IB to receive a
significant number of such amendments, waivers or consents with respect to
contractual arrangements relating to the Instruments Business could have a
material adverse effect on the ability of IB to continue to conduct its
business as currently being conducted.
Fraudulent Transfer Considerations; Legal Dividend Requirements
If a court in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, were to find that at the time Varian effected
the Distribution, Varian, VMS, VSEA or IB, as the case may be, (i) was
insolvent, (ii) was rendered insolvent by reason of the Distribution, (iii) was
engaged in a business or transaction for which Varian's, VMS's, VSEA's or IB's,
as the case may be, remaining assets constituted unreasonably small capital or
(iv) intended to incur, or believed it would incur, debts beyond its ability to
pay such debts as they matured, such court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and require that
the stockholders return some or all of the shares of VSEA Common Stock and IB
Common Stock to VMS, or require VMS, VSEA or IB, as the case may be, to fund
certain liabilities of the other companies for the benefit of creditors. The
measure of insolvency for purposes of the foregoing will vary depending upon
the jurisdiction whose law is being applied. Generally, however, each of
Varian, VMS, VSEA and IB, as the case may be, would be considered insolvent if
the fair value of its assets were less than the amount of its liabilities or if
it incurred debt beyond its ability to repay such debt as it matures. In
addition, under Section 170 of the Delaware General Corporation Law (the
"DGCL") (which is applicable to Varian in the Distribution), a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Varian's Board of Directors and management believe that (i) Varian, and each of
VMS, VSEA and IB, will be solvent before and after the Distribution (in
accordance with the foregoing definitions), will be able to repay its debts as
they mature following the Distribution and will have sufficient capital to
carry on its businesses and (ii) the Distribution will be made entirely out of
surplus, as provided under Section 170 of the DGCL.
Transitioning to New Information Technology Infrastructure
VMS, IB and VSEA currently share a common information technology ("IT")
infrastructure. This IT infrastructure is essential to the daily operation of
the companies' marketing, manufacturing, distribution, billing and collections
and financial reporting processes.
After the Distribution, IB will establish a separate IT infrastructure as
appropriate for its separate business and will transition to this new IT
infrastructure from the currently shared IT infrastructure. During this
transition, certain IT services will be provided by Varian pursuant to the
Transition Services Agreement described herein. This transition is not unlike
transitions carried out previously by Varian in the process of divesting
discontinued operations and/or integrating the operations of newly acquired
companies. Consequently, management of IB believes that Varian possesses the
skills and resources to design and implement and assist IB in transitioning to
the new IT infrastructure. However, these activities are inherently complex and
because of their significance to IB's business, unforeseen problems or errors
in the transition to this new IT infrastructure could adversely affect the
business and results of operations of IB. Assessment and correction of Year
2000 problems could complicate transition to this new infrastructure. See "Risk
Factors - Potential Impact of the Year 2000 Issue."
13
Technological Change and New Products
The markets for IB's products are characterized by changing technology,
evolving industry standards and new product introductions and enhancements.
While many of IB's products are based on more mature technologies, IB's future
success will depend in part upon its ability to enhance its existing products
with new technologies, to develop and introduce new products and technologies
and to successfully expand its aftermarket support services for such new or
enhanced products in order to meet changing customer requirements and serve
broader industry segments. IB has devoted significant resources to the
enhancement of its existing products, the development of new products and
technologies and the expansion of its maintenance and aftermarket support
activities. Due to the risks inherent in transitioning to new products, IB will
be required to accurately forecast demand for new products while managing the
transition from older products. If new products have reliability or quality
problems, reduced orders, higher manufacturing costs, delays in acceptance of
and payment for new products and additional service and warranty expenses may
result. There can be no assurance that IB will successfully develop and
manufacture new products, or that new products introduced by it will be
accepted in the marketplace. If IB does not successfully introduce new
products, IB's results of operations will be materially adversely affected. See
"Business - Competition."
Product Liability
IB's business exposes it to potential product liability claims that are
inherent in the manufacturing, marketing and sale of its products, and IB may
face substantial liability for damages resulting from the faulty design or
manufacture of its products. Varian maintains limited product liability
insurance coverage in an amount it deems sufficient for each of its businesses.
Such insurance is subject to deductibles and self-insured retentions. Product
liability insurance is expensive and in the future may not be available on
acceptable terms or in sufficient amounts or may be unavailable. Although IB
will obtain insurance coverage after the Distribution, the amount of such
insurance coverage has not yet been determined and no assurance can be given
that it will be adequate. A successful claim brought against IB in excess of
its insurance coverage or any material claim for which insurance coverage is
denied or limited and for which indemnification is not available could have a
material adverse effect on IB's business, results of operations and financial
condition. There can be no assurance that IB would have sufficient resources to
satisfy any liability resulting from these claims.
Uncertainty of Market Acceptance of New Products
Certain of IB's products represent alternatives to traditional instruments and
methods and as a result may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of the efficiency and
efficacy of IB's technology. This is particularly true where the purchase of
the product requires a significant capital commitment. While many of IB's
products are based on more mature technologies, most of the enhancements to
such products are based on relatively new, emerging technologies. IB believes
that, to a significant extent, its growth prospects depend on its ability to
gain acceptance by a broader group of customers of the efficiency and efficacy
of IB's innovative technologies. There can be no assurance that IB will be
successful in obtaining such broad acceptance.
Dependence on Capital Spending Policies and Government Funding
IB products are used in environmental laboratories; pharmaceutical and chemical
industries; chemical, life science and academic research; government
laboratories; and specific areas of the health care industry. The capital
spending policies of these companies and institutions can have a significant
effect on the demand for IB's products. Such policies are based on a wide
variety of factors, including the resources available to make such purchases,
the spending priorities among various types of research equipment and the
policies regarding capital expenditures during recessionary periods. Any
decrease in capital spending by these companies or institutions could have a
material adverse effect on IB's business and results of operations.
A portion of IB's sales are to universities, government research laboratories,
private foundations and other institutions where funding is dependent on grants
from governmental agencies. If government funding necessary to purchase IB's
products were to become unavailable to researchers for any extended period of
time, or if overall research funding were
14
to decrease, IB's business and results of operations could be adversely
affected. In addition, a portion of sales of IB's products is made to various
governmental agencies. Any decline in purchases by those governmental agencies,
including, without limitation, declines as the result of budgeting limitations,
could have an adverse effect on IB's business and results of operation See
"Business - Marketing and Sales."
Variability of Operating Results
Certain of IB's products require significant capital expenditures and other
products have short delivery turnaround. The timing of sales of these products
could affect IB's quarterly earnings. A delay in a shipment in any quarter due,
for example, to an unanticipated shipment rescheduling, to cancellations by
customers or to unexpected manufacturing difficulties experienced by IB, may
cause sales in such quarter to fall significantly below IB's expectations and
may thus adversely affect IB's operating results for such quarter. Further,
IB's quarterly operating results may also vary significantly depending on a
number of other factors, including changes in pricing by IB or its competitors,
discount levels, foreign currency exchange rates, the mix of products sold, the
timing of the announcement, introduction and delivery of new product
enhancements by IB and its competitors, and general economic conditions.
Generally IB recognizes product revenues upon shipment of its products. Because
certain operating expenses of IB are based on anticipated capacity levels and a
high percentage of IB's expenses are fixed for the short term, a small
variation in the timing of recognition of revenue can cause significant
variations in operating results from quarter to quarter. There can be no
assurance that any of these factors will not have a material adverse effect on
IB's business or results of operations.
Competition
IB encounters and expects to continue to encounter intense competition in the
sale of its products. Competition in IB's markets is based upon the performance
capabilities of IB's products, technical support and after-market service, the
manufacturer's reputation as a technological leader and the selling price.
Management believes that performance capabilities are the most important of
these criteria. The markets in which IB competes are highly competitive and are
characterized by the application of advanced technology. There are numerous
companies that specialize in, and a number of larger companies that devote a
significant portion of their resources to, the development, manufacture and
sale of products that compete with those manufactured or sold by IB. Many of
IB's competitors are well-known manufacturers with a high degree of technical
proficiency. In addition, competition is intensified by the ever-changing
nature of the technologies in the industries in which IB is engaged. IB's
competitors can be expected to continue to improve the design and performance
of their products and to introduce new products with competitive price and
performance characteristics. An increase in competition could result in price
reductions and loss of market share, which could have a material adverse effect
on IB's business, financial condition or results of operations. Although IB's
management believes that IB enjoys certain technological and other advantages
over its competitors, realizing and maintaining such advantages will require
continued investment by IB in engineering, research and development, marketing
and customer service and support. There can be no assurance that IB will have
sufficient resources to continue to make such investments or that IB will be
successful in maintaining such advantages. See "Business - Competition."
International Sales and Manufacturing
The markets in which IB competes are becoming increasingly globalized.
International sales accounted for approximately 47%, 47% and 50%, respectively,
of IB's sales in fiscal years 1998, 1997 and 1996. In the first quarter of
fiscal year 1999, international sales accounted for 50% of IB's sales as
compared to 48% in the first quarter of fiscal year 1998. As a result, IB's
customers increasingly require service and support on a worldwide basis. IB has
manufacturing operations in Australia, Italy and The Netherlands as well as
sales and service offices located throughout Europe, Asia and Latin America. IB
has invested substantial financial and management resources to develop an
international infrastructure to meet the needs of its customers worldwide. IB
intends to continue to expand its presence in international markets. There can
be no assurance that IB will be able to compete successfully in the
international market or to meet the service and support needs of such
customers. International sales are subject to a number of risks, including the
following: agreements may be difficult to enforce and receivables difficult to
collect
15
through a foreign country's legal system; foreign customers may have longer
payment cycles; foreign countries may impose additional withholding taxes or
otherwise tax IB's foreign income, impose tariffs or adopt other restrictions
on foreign trade; fluctuations in exchange rates may affect product demand and
adversely affect the profitability in U.S. dollars of products and services
provided by IB in foreign markets where payment for IB's products and services
is made in the local currency; U.S. export licenses may be difficult to obtain;
and the protection of intellectual property in foreign countries may be more
difficult to enforce. There can be no assurance that any of these factors will
not have a material adverse impact on IB's business and results of operations.
A portion of IB's revenue is derived from sales in Asia. Asia is experiencing a
severe economic crisis, which has been characterized by sharply reduced
economic activity and liquidity, highly volatile foreign-currency exchange and
interest rates and unstable stock markets. Until the Asian economic uncertainty
is resolved, IB's sales to Asia could be adversely affected by the region's
unstable economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."
On January 1, 1999, the Euro was adopted as the national currency of certain
members of the European Monetary Union. The existing national currencies of the
participating countries will continue to be acceptable until January 1, 2002,
after which the Euro will be the sole legal tender for the participating
countries. Because IB sells its products in Europe, the Euro conversion raises
several economic and operational issues, such as the modification of
information systems to accommodate Euro-denominated transactions, the
recalculation of currency risk, the competitive impact of cross-border price
transparency, the continuity of material contracts and potential tax and
accounting consequences. IB has made changes in its information systems to be
able to conduct Euro-denominated transactions (although full information system
capability for financial reporting in Euro will not be accomplished until
October 2001). IB does not expect any change in currency risk due to its
existing hedging practices. IB is still evaluating the potential impact of
price transparency for its products. Based on its evaluation to date, IB does
not expect the Euro conversion to have a material adverse effect on its
business, results of operations or financial condition.
Foreign Currency Risks
Varian has historically entered into forward exchange contracts in respect of
the Instruments Business to mitigate the effects of operational (sales orders
and purchase commitments) and balance sheet exposures to fluctuations in
foreign currency exchange rates. IB's forward exchange contracts generally
range from one to three months in original maturity, and no forward exchange
contract has an original maturity greater than one year. At October 2, 1998, IB
had forward exchange contracts to sell foreign currencies totaling $31.4
million and to buy foreign currencies totaling $23.5 million. See "Market
Risk."
Uncertain Protection of Patent and Other Proprietary Rights
IB places considerable importance on obtaining and maintaining patent,
copyright and trade secret protection for significant new technologies,
products and processes because of the length of time and expense associated
with bringing new products through the development process and to the
marketplace.
IB intends to continue to file applications as appropriate for patents covering
new products and manufacturing processes. No assurance can be given that
patents now owned or that will issue from any pending or future patent
applications owned by, or licensed to, IB or that the claims allowed under any
issued patents, will be sufficiently broad to protect its technology position
against competitors. In addition, no assurance can be given that any issued
patents owned by, or licensed to, IB will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to it. IB could incur substantial costs and diversion of management
resources in defending itself in suits brought against it or in suits in which
it may assert its patent rights against others. If the outcome of any such
litigation is unfavorable to IB, its business and results of operations could
be materially adversely affected. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws
of the United States.
There may also be pending or issued patents of which IB is not aware held by
parties not affiliated with IB that relate to its products or technologies. In
the event that a claim relating to proprietary technology or information is
asserted
16
against IB, it may need to acquire licenses to, or contest the validity of, a
competitor's proprietary technology. There can be no assurance that any license
required under any such competitor's proprietary technology would be made
available on acceptable terms or that IB would prevail in any such contest. If
the outcome of any such contest is unfavorable to IB, its business and results
of operations could be materially adversely affected. From time to time, IB has
received notices from, and has issued notices to, third parties alleging
infringement of patent or other intellectual property rights relating to its
products. Such claims are often, but not always, settled by mutual agreement on
a satisfactory basis without litigation.
IB relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title,
including confidentiality agreements with its vendors, strategic partners, co-
developers, employees, consultants and other third parties, to protect its
proprietary rights. There can be no assurance that such protections will prove
adequate and that contractual agreements will not be breached, that IB will
have adequate remedies for any such breaches, or that its trade secrets will
not otherwise become known to or independently developed by others. IB has
trademarks, both registered and unregistered, that are maintained and enforced
to provide customer recognition for its products in the marketplace. There can
be no assurance that IB's trademarks will not be used by unauthorized third
parties. IB also have agreements with third parties that provide for licensing
of patented or proprietary technology. These agreements include royalty-bearing
licenses and technology cross-licenses. See "Business - Patent and Other
Proprietary Rights."
Environmental Liabilities
IB's operations are subject to various foreign, federal, state and/or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. This includes discharges into
soil, water and air, and the generation, handling, storage, transportation and
disposal of waste and hazardous substances. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of a product's useful life. These laws have the
effect of increasing costs and potential liabilities associated with the
conduct of such operations.
Varian 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
("CERCLA"), at eight sites where Varian is alleged to have shipped
manufacturing waste for recycling or disposal. Varian is also involved in
various stages of environmental investigation and/or remediation under the
direction of, or in consultation with, foreign, federal, state and/or local
agencies at certain current or former Varian facilities (including facilities
disposed of in connection with Varian's sale of its Electron Devices business
during fiscal year 1995, and the sale of its Thin Film Systems ("TFS") business
during fiscal year 1997). Expenditures by Varian for environmental
investigation and remediation amounted to $5 million in fiscal year 1998,
compared with $2 million in fiscal year 1997 and $5 million in fiscal year
1996.
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 January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $21 million to $48 million. The
time frame over which these costs are expected to be incurred varies with each
site or facility, ranging up to approximately 30 years as of January 1, 1999.
Management of Varian believes that no amount in the foregoing range of
estimated future costs is more probable of being incurred than any other amount
in such range and therefore Varian accrued $21 million in estimated
environmental costs as of January 1, 1999. The amount accrued has not been
discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated that the future exposure for
environmental investigation and remediation costs for these sites and
facilities ranged in the aggregate from $40 million to $74 million. The time
frame over which Varian expects to incur these costs varies with each site and
facility, ranging up to approximately 30 years as of January 1, 1999. As to
each of these sites and facilities, management of Varian determined that a
particular amount within the range of estimated costs was a better estimate of
the future environmental liability
17
than any other amount within the range, and that the amount and timing of these
future costs were reliably determinable. Together, these amounts totaled $51
million at January 1, 1999. Varian accordingly accrued $22 million, which
represents its best estimate of the future costs discounted at 4%, net of
inflation. This reserve is in addition to the $21 million described in the
preceding paragraph.
The Distribution Agreement provides that each of VMS, IB and VSEA will
indemnify the others for one-third of these environmental investigation and
remediation costs, as adjusted for any insurance proceeds and tax benefits
expected to be realized upon payment of these costs. For a discussion of IB's
environmental liabilities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters."
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates reflects various uncertainties
inherent in many environmental investigation and remediation activities and the
large number of sites and facilities involved. IB believes that most of these
cost ranges will narrow as investigation and remediation activities progress.
IB's present and past facilities have been in operation for many years, and
over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and IB has generated and
disposed of wastes which are or might be considered hazardous. Therefore, it is
possible that additional environmental issues may arise in the future that IB
cannot now predict.
Reliance on Suppliers
Certain of the components and subassemblies included in IB's products are
obtained from a limited group of suppliers, or in some cases a single-source
supplier, including packaging materials, superconducting magnets, integrated
circuits, microprocessors, microcomputers and certain detector and data
analysis modules. The loss of any of these suppliers, including any single-
source supplier, would require obtaining one or more replacement suppliers as
well as potentially requiring a significant level of product development to
incorporate new parts into IB's products. IB believes that alternative sources
for such components may generally be obtained when necessary, although the need
to change suppliers or to alternate between suppliers might cause material
delays in delivery or significantly increase its costs. Although Varian has
historically obtained and IB expects to obtain limited insurance to protect
against loss due to business interruption from these and other sources, there
can be no assurance that such coverage will be adequate or that such coverage
will continue to remain available on acceptable terms, if at all. Although IB
seeks to reduce its dependence on these limited source suppliers, disruptions
or loss of certain of these sources, including the ones referenced above, could
have a material adverse effect on IB's business and results of operations and
could result in damage to customer relationships. See "Business - Raw
Materials."
Dependence on Key Personnel
IB's future success depends to a significant extent on the continued service of
certain of its key managerial, technical and engineering personnel, and its
continuing ability to attract, train and retain highly qualified engineering,
technical and managerial personnel. Competition for such personnel is intense,
particularly in the labor markets around the IB facilities in Palo Alto,
California. The available pool of qualified candidates is limited and there can
be no assurance that IB can retain its key engineering, technical and
managerial personnel or that it can attract, train, assimilate or retain other
highly qualified engineering, technical and managerial personnel in the future.
The loss of any of IB's key personnel or the inability of IB to hire, train or
retain qualified personnel could have a material adverse effect on IB's
business, results of operations and financial condition.
Risk of Business Interruption
IB conducts a portion of its activities at facilities located in seismically
active areas that have experienced major earthquakes in the past. Varian
currently maintains limited earthquake insurance on these facilities. After the
Distribution, it is likely that IB will not carry earthquake insurance on its
facilities due to its prohibitive cost and limited available coverage. In the
event of a major earthquake or other disaster affecting IB's facilities, the
operations and operating results of IB could be adversely affected.
18
Potential Impact of the Year 2000 Issue
The "Year 2000" problem refers to computer programs and other equipment with
embedded microprocessors ("non-IT systems") which use only the last two digits
to refer to a year, and which therefore might not properly recognize a year
that begins with "20" instead of the familiar "19." As a result, those computer
programs and non-IT systems might be unable to operate or process accurately
certain date-sensitive data before or after January 1, 2000. Because IB relies
heavily on computer programs and non-IT systems, and on third parties which
themselves rely on computer programs and non-IT systems, the Year 2000 problem
if not addressed could adversely affect IB's business, results of operations
and financial condition.
Failure to accurately assess and correct IB's Year 2000 problems and/or those
of its key suppliers would likely result in interruption of certain of IB's
normal business operations, which could have a material adverse effect on IB's
business, results of operations and financial condition. If IB does not
adequately identify and correct Year 2000 problems in its information systems
it could experience interruptions in its operations, including manufacturing,
order processing, receivables collection and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures and financial reporting. If IB does not adequately
identify and correct Year 2000 problems in its non-IT systems it could
experience interruptions in its manufacturing and related operations, such that
there would be delays in product shipments and a consequential impact on
revenues. If IB does not adequately identify and correct Year 2000 problems in
its previously-sold products it could experience warranty or product liability
claims by users of products which do not function correctly. If IB does not
adequately identify and correct Year 2000 problems of the significant third
parties with which it does business it could experience interruptions in the
supply of key components or services from those parties, such that there would
be delays in product shipments or service and a consequential impact on
revenues. IB does not expect to be 100% Year 2000 compliant by the end of 1999
and given the inherent complexity 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; possible liability for personal injury if a safety hazard
relating to Year 2000 problems is not identified and corrected; 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 IB;
and the additional complexity which will likely be caused by undertaking during
fiscal year 1999 and fiscal year 2000 the separation of currently shared
enterprise information systems as a result of the Distribution.
Because of uncertainties as to the extent of Year 2000 problems with IB's
previously-sold products and the extent of any legal obligation of IB to
correct Year 2000 problems in those products, IB cannot yet assess its risks
with respect to those products. Because its assessments are not yet complete,
IB 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 its results of operations. For a discussion regarding IB's state of
readiness, costs associated with becoming Year 2000 compliant and contingency
plans relating to Year 2000, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000."
19
THE DISTRIBUTION
General
The Board of Directors of Varian declared a special dividend, payable on the
Distribution Date, of one share of IB Common Stock and one share of VSEA Common
Stock for each share of Varian Common Stock held on the Distribution Record
Date. Each holder also would retain the shares of Varian Common Stock held by
such holder immediately prior to the Distribution.
Reasons for the Distribution
The Board of Directors of Varian approved the Distribution for the following
principal reasons:
Management Focus. Varian's three businesses have different dynamics and
business cycles, serve different marketplaces and customer bases, are
subject to different competitive forces and must be managed with different
long-term and short-term strategies and goals. Varian believes that
separating its businesses into independent public companies, each with its
own management team and board of directors, is necessary to address current
and future management issues and considerations that result from operating
these diverse businesses within a single company. The separation will
enable the management of each business to manage that business, and to
adopt and implement strategies for that business, solely with regard to the
needs and objectives of that business. In addition, as a result of the
separation, the management of each business will be able to devote its full
attention to managing that business.
Capital Structure. Varian believes that the Distribution will allow each of
the companies to organize its capital structure and allocate its resources
to support the very different needs and goals of the particular business.
The stock buy-back program can be discontinued, or dividends eliminated,
freeing cash for acquisition and growth opportunities for IB and VMS and
permitting VSEA to conserve cash for use in the cyclical downturns in its
industry. Capital borrowings can be tailored to the specific needs of the
various business units. Each business will be able to allocate its
resources without considering the needs of the other businesses.
Attracting and Retaining Key Employees. Varian's management believes that
the ability to attract and retain key personnel is fundamental to its
ability to further the technology required to maintain a leadership
position in its business. In particular, under the existing corporate
structure, Varian has been unable to offer equity-based compensation linked
specifically to the performance of each separate business. The Distribution
would enable each company to establish focused equity-based compensation
programs that should enable each of them to better attract and retain key
personnel.
Acquisition Activities. Varian believes that growth through acquisition is
an important ingredient of the future success of IB and VMS. Such
acquisitions and growth would be financed in part through the issuance of
capital stock. It is expected that the Distribution will increase the
availability and decrease the cost of raising equity capital. Varian's
management believes that, as a result of the Distribution, each company
will have a more attractive currency, its stock, through which to make
acquisitions.
Investor Understanding. Debt and equity investors and securities analysts
should be able to better evaluate the financial performance of each company
and their respective strategies, thereby enhancing the likelihood that each
will achieve appropriate market recognition. The stock of each of the three
companies will also appeal to investors with differing investment
objectives and risk tolerance, and will allow potential investors to focus
their investments more directly to the areas of their primary interest.
Cost Savings. Each company should be able to rationalize better its
organizational structure after the Distribution. Accordingly, the
administrative and organizational costs of each company, taken together,
should be reduced from the aggregate levels experienced by Varian prior to
the Distribution.
Manner of Effecting the Distribution
The distribution of IB Common Stock and VSEA Common Stock will be made on the
Distribution Date to stockholders of record as of the Distribution Record Date.
20
On or prior to the Distribution Date, all outstanding shares of IB Common Stock
and VSEA Common Stock will be delivered to the Distribution Agent. As soon as
practicable after the IB Common Stock and VSEA Common Stock have been
distributed, stock distribution statements reflecting ownership of shares of IB
Common Stock and VSEA Common Stock will be mailed by the Distribution Agent to
holders of record as of the Distribution Record Date to reflect the
distribution of one share of IB Common Stock and one share of VSEA Common Stock
for each share of Varian Common Stock held on the Distribution Record Date. All
such shares will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. The shares of IB Common Stock and VSEA
Common Stock to be transferred to Varian's stockholders in the Distribution
will be initially issued to Varian as consideration for the transfer of the
Instruments Business and the Semiconductor Equipment Business, respectively.
No holder of Varian Common Stock will be required to pay any cash or other
consideration for the shares of IB Common Stock and VSEA Common Stock received
in the Distribution or to surrender or exchange shares of Varian Common Stock
in order to receive shares of IB Common Stock or VSEA Common Stock.
The Board of Directors of IB has adopted the Rights Plan. Stock distribution
statements evidencing shares of the IB Common Stock issued in the Distribution
will therefore include the same number of Rights issued under the Rights Plan.
See "Description of the Capital Stock - Rights Plan."
Federal Income Tax Aspects of the Distribution
Varian has received a Tax Ruling from the IRS substantially to the following
effect:
(1) No gain or loss will be recognized by (and no amount will otherwise be
included in the income of) any holder of Varian Common Stock as a
result of the Distribution.
(2) The aggregate basis of the Varian Common Stock, IB Common Stock and
VSEA Common Stock in the hands of each holder of Varian Common Stock
will be the same as the basis of Varian Common Stock held by the holder
immediately before the Distribution, allocated in proportion to the
fair market value of each.
(3) The holding period of the VSEA Common Stock and IB Common Stock
received in the Distribution by each holder of Varian Common Stock will
include the period during which such holder held Varian Common Stock
with respect to which the Distribution is made, provided that such
common stock is held as a capital asset by such holder on the
Distribution Date.
(4) No gain or loss will be recognized by Varian upon the Distribution.
The Tax Ruling, while generally binding upon the IRS, is based on certain
factual representations and assumptions. If such factual representations and
assumptions were incorrect in any material respect, the holdings of such ruling
would be jeopardized. Varian is not aware of any facts or circumstances that
would cause such representations and assumptions to be incorrect in any
material respect. Each of Varian, IB and VSEA has agreed to certain
restrictions on their future actions to provide further assurances that Section
355 of the Code will apply to the Distribution. See " - Relationship Among VMS,
VSEA and IB After the Distribution - Tax Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Code, then VMS will recognize
gain equal to the difference between the fair market value of the stock of the
nonqualifying company or companies and Varian's adjusted tax basis in such
stock. If VMS were to recognize gain on one or more of the distributions, such
gain and the resulting tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin-off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of IB Common Stock and VSEA Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the IB Common Stock or VSEA Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of
21
earnings and profits and (iii) gain from the exchange of Varian Common Stock to
the extent the amount received exceeds both such stockholder's share of
earnings and profits and such stockholder's basis in such common stock.
Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether the 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary that occurs within two years before or after the
spin-off is pursuant to a plan that includes the spin-off. However, the
presumption may be rebutted by establishing that the spin-off and the
acquisition are not part of a plan or series of related transactions. Among the
factual representations made by Varian to the IRS in connection with the Tax
Ruling is the representation that each of the distributions is not part of such
a plan or series of related transactions. If VMS, IB or VSEA were to undergo a
50% Ownership Shift, particularly if such 50% Ownership Shift occurred within
two years after the Distribution Date, there can be no assurance that the IRS
will not assert that such ownership shift occurred pursuant to a plan or series
of related transactions and therefore that the Distribution is taxable under
Section 355(e).
If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the VSEA Common
Stock and the IB Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the distributions. If VMS were to recognize gain on the
distributions, such gain and the resulting tax liability likely would be very
substantial.
VMS, IB and VSEA will enter into the Tax Sharing Agreement to allocate
responsibility for the possible corporate tax burden resulting from the
Distribution. Neither VMS, IB, nor VSEA has agreed to indemnify holders of
Varian Common Stock for any taxes or other losses should either or both of the
distributions fail to qualify under Section 355 of the Code. The Tax Sharing
Agreement will provide that each of VMS, IB and VSEA will be responsible for
any such corporate taxes to the extent that such taxes are attributable to
action taken or permitted by that entity or its affiliates after the
Distribution that is inconsistent with the tax treatment contemplated in the
Tax Ruling. Under the Tax Sharing Agreement, if either distribution is found to
be taxable but none of VMS, IB and VSEA has done anything to cause the
distribution to be taxable, each company generally will be liable for one-third
of those taxes. See " - Relationship Among VMS, VSEA and IB After the
Distribution - Tax Sharing Agreement."
Current Treasury regulations require each holder of Varian Common Stock who
receives IB Common Stock or VSEA Common Stock pursuant to the Distribution to
attach to his or her federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the Distribution. Varian will convey the appropriate information to each holder
of record of Varian Common Stock as of the Distribution Record Date.
The foregoing summary of federal income tax consequences does not purport to
cover all federal income tax consequences of the Distribution. The tax
consequences may differ for stockholders that are not U.S. citizens or
residents or that are otherwise subject to special treatment under the Code.
Each stockholder should consult its own tax advisor regarding the federal,
foreign, state and local tax consequences of the Distribution in its particular
circumstances, including the application of state, local and foreign tax laws.
Listing and Trading of IB Common Stock
There is not currently a public market for IB Common Stock. It is presently
anticipated that IB Common Stock may commence trading on a "when-issued" basis
after the Distribution Record Date. The term "when-issued" means that shares
can be traded by Varian stockholders prior to the time that they receive the
shares of IB Common Stock and VSEA Common Stock in the Distribution. Prices at
which IB Common Stock may trade prior to the Distribution on a "when-issued"
basis or after the Distribution cannot be predicted. Until the IB Common Stock
is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The prices at which
IB Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for such stock, investor perception of IB and the industry
22
in which it participates, IB's dividend policy and general economic and market
conditions. Such prices may also be affected by certain provisions of the
Certificate of Incorporation and By-Laws of IB in effect at the time of the
Distribution, which will have an anti-takeover effect. See "Delaware Law and
Certain Charter and By-Law Provisions."
Shares of IB Common Stock distributed to Varian's stockholders will be freely
transferable, except for shares of IB Common Stock received by persons who may
be deemed to be "affiliates" of IB under the Securities Act of 1933 (the
"Securities Act"). Persons who may be deemed to be affiliates of IB after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, IB and may include certain
officers and directors of IB, as well as principal stockholders of IB. Persons
who are affiliates of IB will be permitted to sell their shares of IB Common
Stock only pursuant to an effective registration statement under the Securities
Act or an exemption from the registration requirements of the Securities Act.
IB has applied for quotation of the IB Common Stock on the Nasdaq National
Market. IB initially will have approximately 4,556 stockholders of record based
upon the number of stockholders of record of Varian as of February 1, 1999. For
certain information regarding options to purchase IB Common Stock that will be
outstanding after the Distribution, see "Management," and "The IB Omnibus Stock
Plan."
Future Management
Following the Distribution it is intended that IB will continue to conduct the
Instruments Business in substantially the same manner in which it is currently
operated. Allen J. Lauer, who is currently Executive Vice President of Varian,
will serve as President and Chief Executive Officer of IB following the
Distribution. The other executive officers of IB following the Distribution
will be primarily drawn from the current management of Varian. See
"Management - Executive Officers."
Internal Mergers and Transfers
On or prior to the Distribution Date, Varian will effectuate certain
transactions intended to allocate assets and liabilities relating to the Health
Care Systems Business to VMS, assets and liabilities relating to the
Semiconductor Equipment Business to VSEA and assets and liabilities relating to
the Instruments Business to IB. See " - Distribution Agreement." On the
Distribution Date, following the completion of the foregoing transactions,
Varian will distribute the IB Common Stock and VSEA Common Stock to the holders
of Varian Common Stock on the Distribution Record Date.
Relationship Among VMS, VSEA and IB After the Distribution
For the purpose of governing certain of the ongoing relationships among VMS,
VSEA and IB after the Distribution and to provide mechanisms for an orderly
transition, Varian, IB and VSEA have entered or will enter into various
agreements, and will adopt policies, as described in this section. Varian, IB
and VSEA believe that the agreements are fair to each of the parties. The
services to be provided by each of the companies pursuant to the various
agreements described below will be billed at their fully burdened cost to the
provider and in each case the terms of these agreements have been reviewed by
individuals who will have senior management positions at IB, VMS or VSEA after
the Distribution.
The Distribution Agreement and the forms of the Ancillary Agreements have been
filed as exhibits to the Registration Statement in respect of the registration
of the IB Common Stock under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") of which this Information Statement is a part. See
"Available Information." The following descriptions include a summary of all
material terms of these agreements, but do not purport to be complete and are
qualified by reference to the texts of such agreements, which are incorporated
herein by reference.
Distribution Agreement
The Distribution Agreement provides for the terms and conditions of the
Distribution, the various actions to be taken prior to the Distribution (see "
- - Internal Mergers and Transfers") and the relationships among the parties
subsequent to
23
the Distribution. The Distribution Agreement provides that, from and after the
Distribution Date, (i) IB shall assume, pay, perform and discharge all
Instruments Liabilities (as defined in the Distribution Agreement) in
accordance with their terms, (ii) VMS shall assume, pay, perform and discharge
all Health Care Systems Liabilities (as defined in the Distribution Agreement)
in accordance with their terms and (iii) VSEA shall assume, pay, perform and
discharge all Semiconductor Equipment Liabilities (as defined in the
Distribution Agreement) in accordance with their terms.
In addition, the Distribution Agreement provides for cross-indemnities that
require (i) IB to indemnify VMS and VSEA (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with Instruments Liabilities
or the breach of the Distribution Agreement or any Ancillary Agreement by IB,
(ii) VMS to indemnify IB and VSEA (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with the Health Care Systems
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by VMS and (iii) VSEA to indemnify IB and VMS (and their respective
subsidiaries, directors, officers, employees and agents and certain other
related parties) against all losses arising out of or in connection with the
Semiconductor Equipment Liabilities or the breach of the Distribution Agreement
or any Ancillary Agreement by VSEA, and, in each case, for contribution in
certain circumstances. Each of IB, VMS and VSEA also agrees to indemnify each
other for one-third of the costs and expenses associated with liabilities that
are unrelated to their businesses, including certain discontinued operations
and environmental liabilities associated with Varian's Palo Alto facilities.
Pursuant to the Distribution Agreement, each of the parties has agreed to use
commercially reasonable efforts to take or cause to be taken all action, and do
or cause to be done all things, reasonably necessary or appropriate to
consummate the transactions contemplated by the Distribution Agreement. As
such, the Distribution Agreement provides that if any contemplated pre-
Distribution transfers have not been effected on or prior to the Distribution
Date, the parties will cooperate to effect such transfers as promptly
thereafter as practicable. The entity retaining any asset or liability which
should have been transferred prior to the Distribution Date will continue to
hold that asset for the benefit of the party entitled thereto or that liability
for the account of the party required to assume it, and must take such other
action as may be reasonably requested by the party to whom such asset was to be
transferred or by whom such liability was to be assumed in order to place such
party, insofar as reasonably possible, in the same position as would have
existed had such asset or liability been transferred or assumed as contemplated
by the Distribution Agreement.
The Distribution Agreement (i) requires that Varian renegotiate the Term Loans,
(ii) requires that Varian contribute cash to VSEA so that at the time of the
Distribution VSEA will have $100 million in cash and cash equivalents and a Net
Worth (as defined in the Distribution Agreement) of at least $150 million, and
its Consolidated Debt (as defined in the Distribution Agreement) will not
exceed $5 million, (iii) requires that IB assume 50% of the outstanding
indebtedness under the Term Loans and have transferred to it such portion of
the indebtedness under the Notes Payable and such amount of cash and cash
equivalents, so that as of the time of the Distribution IB and VMS will each
have Net Debt (as defined in the Distribution Agreement) equal to approximately
50% of the aggregate Net Debt of IB and VMS, subject to such adjustments as may
be necessary to provide VMS with a Net Worth of between 40% and 50% of the
aggregate Net Worth of VMS and IB, (iv) governs the conduct of the post-
Distribution audit to be undertaken to ascertain the Net Worth of VMS, IB and
VSEA upon consummation of the Distribution, (v) requires that post-Distribution
payments be made between the parties if, and to the extent that, as of the time
of the Distribution (a) VMS has a Net Worth that is less than 40% or more than
50% of the aggregate Net Worth of VMS and IB, (b) VSEA has Consolidated Debt
exceeding $5 million, or less than $100 million of cash and cash equivalents or
a Net Worth of less than $150 million or (c) VSEA has more than $100 million of
cash and cash equivalents and a Net Worth of at least $150 million or VSEA has
a Net Worth in excess of $225 million and (vi) entitles IB to receive
approximately 50% of the estimated proceeds, if any, to be received by VMS
after the Distribution from the sale of Varian's long-term leasehold interest
at certain of its Palo Alto facilities, together with certain related buildings
and other corporate assets and requires IB to pay 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).
The Distribution Agreement also provides for the execution and delivery of
certain other agreements governing the relationship among IB, VMS and VSEA at
and following the Distribution. See " - Employee Benefits Allocation
Agreement," " - Tax Sharing Agreement," " - Transition Services Agreement," and
" - Intellectual Property Agreement."
24
Employee Benefits Allocation Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into an
employee benefits allocation agreement (the "Employee Benefits Allocation
Agreement") providing for the allocation of certain liabilities and
responsibilities with respect to employee compensation, benefits and labor
matters. The allocation of responsibility and adjustments to be made pursuant
to the Employee Benefits Allocation Agreement are substantially consistent with
the existing rights of Varian's employees under Varian's various compensation
plans, with the understanding that each party will have sole responsibility for
determining the benefits it will provide its employees following the
Distribution. The Employee Benefits Allocation Agreement will generally provide
that, effective as of the Distribution Date, each of IB and VSEA will, or will
cause one or more of its subsidiaries to, assume or retain, as the case may be,
all liabilities of Varian, to the extent unpaid as of the Distribution Date,
under Varian's employee benefit plans, policies, arrangements, contracts and
agreements, including collective bargaining agreements, with respect to
employees who on or after the Distribution Date will be employees of IB or its
subsidiaries or VSEA or its subsidiaries. The Employee Benefits Allocation
Agreement will also provide that VMS generally will, or will cause one of its
subsidiaries to, assume or retain, as the case may be, all liabilities under
Varian's employee benefit plans, policies, arrangements, contracts and
agreements, including collective bargaining agreements, with respect to
employees who on or after the Distribution Date will be employees of VMS or its
subsidiaries. The Employee Benefits Allocation Agreement will also provide that
each of IB, VSEA and VMS will generally indemnify the others for one-third of
the administrative costs associated with liabilities to individuals who were
former Varian employees as of the Distribution Date.
Defined Contribution Plans
Active participation in the Varian Associates, Inc. Retirement and Profit-
Sharing Program (the "Varian Profit-Sharing Plan") by IB and VSEA employees
will terminate on the Distribution Date.
Effective as of the Distribution Date, IB will establish a defined contribution
plan for the benefit of its employees. As promptly as practicable after the
Distribution, VMS will cause to be transferred to the IB defined contribution
plan the account balances in, and the liabilities of, the Varian Profit-Sharing
Plan to each employee of IB who elects to so transfer. IB will assume the
administrative costs associated with the Varian Profit-Sharing Plan accounts of
IB employees who do not elect a transfer. IB, VSEA and VMS will also each
indemnify the others for one-third of the administrative costs associated with
the accounts of individuals who were former Varian employees as of the
Distribution Date or whose employment will terminate pursuant to severance
agreements in connection with the Distribution.
Non-U.S. Employee Benefits
Non-U.S. employee benefits will be subject to the general principles of the
Employee Benefits Allocation Agreement. To the extent practicable, IB or its
subsidiaries will each assume or retain, as the case may be, any and all
pension liabilities and attendant plans and their assets related to the
employees of IB or its subsidiaries post-Distribution. If a person is employed
by a non-U.S. subsidiary of IB but the associated liabilities are held by VMS
or VSEA, IB will indemnify the entity holding the liabilities. IB, VSEA and VMS
will also each indemnify the others for one-third of the employee benefit
liabilities associated with former employees of non-U.S. subsidiaries.
Stock Options and Other Awards
Stock options and restricted stock awards (collectively, "stock awards") of
Varian are currently outstanding under Varian's 1982 Non-Qualified Stock Option
Plan and the Varian Omnibus Stock Plan (collectively, the "Plans"). The
treatment after the Distribution of stock awards that are outstanding prior to
the Distribution is designed to preserve, as a general matter, the economic
value of each stock award. In addition, the treatment of outstanding stock
awards of individuals who will continue their employment with IB is designed to
provide an incentive for such employees to remain employed with IB and to
benefit by their efforts to increase the market value of the IB Common Stock.
25
Treatment of Awards Held by Employees of IB
It is expected that the Varian stock options held by those individuals who will
become employees of IB will be replaced with substitute stock options to
purchase IB Common Stock under the IB Omnibus Stock Plan discussed below under
"The IB Omnibus Stock Plan." Although such individuals are not contractually
required to surrender their Varian stock options, it is expected that such
individuals will do so in order to have their stock options relate to shares of
the company with which they are employed after the Distribution, to preserve
unvested options and to maintain the ability to exercise stock options that
would otherwise expire due to termination of their employment with Varian. The
surrender of such stock options will be encouraged by Varian and IB because
Varian's and IB's management believe the efforts of key employees should be
directed toward enhancing the value of their employer's stock.
Such substitute options will be designed to preserve the economic value of the
related Varian stock options, and the vesting and expiration dates and other
terms of the related awards will remain in effect under the IB substitute stock
options. In order to obtain such substitute stock options, the employees will
be required to surrender their unexercised Varian stock options. Replacement of
surrendered Varian stock options is believed to be beneficial to IB and its
stockholders because it will allow IB to provide meaningful compensation
incentives to its key employees. Since, except for option price and number of
shares, all terms and conditions of Varian stock options will apply to the
substitute stock options, the vesting provisions of the substitute options are
expected to provide a continuing incentive for key employees to remain in the
employ of IB after the Distribution. If an IB employee does not elect to
receive a substitute option, the unvested portion of the employee's Varian
option will expire upon the Distribution Date and the employee will generally
have three months to exercise the vested portion for VMS Common Stock.
The option exercise price of substitute IB stock options will be determined by
multiplying the exercise price of the Varian stock option by a fraction, the
numerator of which will be the closing price of IB Common Stock on the
Distribution Date and the denominator of which will be the closing price of
Varian Common Stock on the Distribution Date. The number of shares of IB Common
Stock subject to substitute options will be determined by multiplying the
number of shares of Varian Common Stock covered by the Varian stock option by a
fraction, the numerator of which will be the closing price of Varian Common
Stock on the Distribution Date and the denominator of which will be the closing
price of IB Common Stock on the Distribution Date. If the Distribution Date is
not a trading day for the New York Stock Exchange or the Nasdaq National
Market, the foregoing prices will be calculated based on the closing price for
the trading day immediately preceding the Distribution Date.
Unvested Varian restricted stock held by continuing employees of IB will vest
prior to the Distribution.
As of February 1, 1999, there were approximately 1,215,656 shares of Varian
Common Stock subject to outstanding stock options held by individuals who will
be employees of IB. It is impossible to predict with certainty how many shares
of IB Common Stock will be subject to substitute IB stock options after the
Distribution Date, since it is expected that some Varian stock options held by
individuals who will become employees of IB will be exercised prior to the
Distribution Date. The balance of unexercised Varian stock options will be
adjusted according to the formula described above, but the stock prices upon
which the adjustment will be based will not be known until the Distribution
Date. Stockholders of IB are, however, likely to experience some dilutive
impact from the above-described adjustments.
Treatment of Awards Held by Employees Whose Employment will Terminate in
Connection with the Distribution
Employees of Varian whose employment will terminate in connection with the
Distribution (other than seven employees whose employment will terminate
pursuant to severance agreements) will be permitted to elect to exchange their
Varian stock options for stock options with respect to VMS Common Stock, VSEA
Common Stock and IB Common Stock. Individuals who so elect will have one-third
of the unexercised portion of their Varian stock options exchanged for each of
VMS stock options, VSEA stock options and IB stock options. The seven employees
whose employment will terminate pursuant to severance agreements will receive
this exchange on a mandatory basis. Employees whose options are exchanged in
this manner will have the unvested portion of their Varian options as of the
Distribution Date vested immediately prior to the Distribution or, if later,
immediately prior to termination of the employment of such employees.
26
As of February 1, 1999, there were approximately 570,596 shares of Varian
Common Stock subject to outstanding stock options held by employees whose
employment will terminate in connection with the Distribution (excluding stock
options held by Mr. O'Rourke, a current director of Varian who is expected to
serve as a director of VSEA following the Distribution). It is impossible to
predict with certainty how many shares of IB Common Stock will be subject to
these stock options after the Distribution Date, since it is expected that some
Varian stock options held by these individuals will be exercised prior to the
Distribution Date. In addition, the balance of unexercised Varian stock options
will be adjusted according to the formula described above, but the stock prices
upon which the adjustment will be based will not be known until the
Distribution Date. Stockholders of IB are, however, likely to experience some
dilutive impact from the above-described adjustments.
Treatment of Awards Held by Directors
Varian stock options held by directors of Varian will be adjusted in the same
manner as Varian stock options held by employees whose employment will
terminate in connection with the Distribution; provided that the unvested
portion of their Varian options will not vest immediately prior to the
Distribution. Accordingly, these individuals will exchange their Varian stock
options for stock options with respect to VMS Common Stock, VSEA Common Stock
and IB Common Stock.
As of February 1, 1999, there were approximately 791,000 shares of Varian
Common Stock subject to outstanding stock options held by current directors
(including Mr. O'Rourke). It is impossible to predict with certainty how many
shares of IB Common Stock will be subject to these stock options after the
Distribution Date, since it is expected that some Varian stock options held by
these individuals will be exercised prior to the Distribution Date. In
addition, the balance of unexercised Varian stock options will be adjusted
pursuant to the formula described above, but the stock prices upon which the
adjustment will be based will not be known until the Distribution Date.
Stockholders of IB are, however, likely to experience some dilutive impact from
the above-described adjustments.
Tax Sharing Agreement
Varian, IB and VSEA will enter into a tax sharing agreement (the "Tax Sharing
Agreement") that defines the parties' rights and obligations with respect to
federal, state, foreign and other income or franchise taxes relating to
Varian's businesses for tax periods prior to, including and following the
Distribution and with respect to certain other tax matters. In general, VMS
will be responsible for consolidated federal income taxes, consolidated or
combined state income taxes and separate state income taxes of Varian and its
subsidiaries through the Distribution Date. Liability through the Distribution
Date will be determined based on a closing of the books. Liability for foreign
income taxes and non-income taxes will generally be allocated to the legal
entity on which such taxes are imposed, except for taxes transferred on the
closing balance sheets. Adjustments to the reported tax liability for tax
periods through the Distribution Date will be shared equally by the three
companies.
In general, and except as provided below, taxes resulting from the Distribution
will be the responsibility of the legal entity on which such taxes are imposed.
However, each of VSEA and IB will be responsible for any such taxes resulting
from income or gain from the Distribution to the extent that such taxes are
attributable to action taken or permitted by that entity or its affiliates
after the Distribution that is inconsistent with the tax treatment contemplated
in the Tax Ruling requested from the IRS. Each of VMS, IB and VSEA will
covenant and agree not to take or permit certain actions inconsistent or
potentially inconsistent with the Tax Ruling before January 1, 2002, unless
such action has been consented to by the other companies or approved by a
supplemental ruling from the IRS or an unqualified opinion of independent
nationally recognized tax counsel acceptable to each of the companies. These
agreements could restrict the ability of VMS, IB or VSEA to engage in certain
corporate transactions, redeem stock, dispose of assets except in the ordinary
course of business, or be the target of an acquisition transaction, during that
period. Adjustments to the anticipated income taxes resulting from the
Distribution that are not attributable to action inconsistent with the Tax
Ruling will be shared equally by the three companies. Furthermore, if with
respect to VMS, IB or VSEA, the aggregate taxes shown on the initial tax
returns filed after the Distribution (or the amounts paid with respect to such
taxes) relating to periods prior to the Distribution Date exceed the aggregate
amounts accrued with respect thereto on the closing
27
balance sheets, by more than $1,000,000, the company with the unanticipated tax
burden may propose a sharing of such amounts among the three companies. If the
three companies cannot agree to a fair and equitable sharing of the excess
taxes, the matter will be submitted to a mutually acceptable nationally
recognized accounting firm for resolution. See " - Federal Income Tax Aspects
of the Distribution."
Transition Services Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into a
Transition Services Agreement providing for (i) the sharing of facilities and
equipment for a temporary period not to exceed one year, (ii) the provision of
employees and sharing of certain third-party services to provide treasury, tax,
accounting, payroll, human resources and similar and related functions for a
temporary period not to exceed one year and (iii) the provision of information
services personnel for a period extending until June 30, 2000. Compensation for
all services and facilities provided under the Transition Services Agreement
will be on a fully burdened cost reimbursement basis. The management of each of
VMS, VSEA and IB presently expects that its company will be able to provide
these services for itself after the applicable transition period without
additional material expense, although no assurance can be given that this will
be the case. Each party has the right to terminate certain transition services
arrangements upon a material breach by the other party thereto.
Intellectual Property Agreement
On or prior to the Distribution Date, Varian, IB and VSEA will enter into an
Intellectual Property Agreement providing for allocation among these companies
and their respective subsidiaries and associated companies of rights in the
Intellectual Property (as defined in the Distribution Agreement), including
patents, copyrights, trademarks, software and trade secrets, owned by Varian
prior to the Distribution and for the licensing of certain of such Intellectual
Property thereafter. The Intellectual Property Agreement is to provide VMS, IB
and VSEA, and their respective subsidiaries and associated companies, with
those continuing rights and licenses in such Intellectual Property following
the Distribution Date necessary for the continued conduct of their respective
businesses.
Under the terms of the Intellectual Property Agreement, the Intellectual
Property that relates primarily to the Instruments Business and the
Semiconductor Equipment Business will be transferred to IB and VSEA,
respectively, with VMS retaining the Intellectual Property that relates
primarily to the Health Care Systems Business. Each company will grant a non-
exclusive, perpetual, royalty-free license under the Intellectual Property that
it owns to the other two companies for use in their respective fields. More
specifically, as of the Distribution Date, each of VMS, IB and VSEA will hold
certain rights in the mark "VARIAN," the "VA" logo and other rights to various
trademarks, service marks, and trade names containing the word "VARIAN."
28
SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Instruments Business. The information set forth below should be read in
conjunction with "Pro Forma Condensed Combined Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto of the
Instruments Business included elsewhere in this Information Statement. The
statement of earnings data set forth below for the fiscal years ended October
2, 1998, September 26, 1997 and September 27, 1996 and the balance sheet data
at October 2, 1998 and September 26, 1997 are derived from, and are qualified
by reference to, the audited financial statements of the Instruments Business
included elsewhere in this Information Statement. The statement of earnings
data for the quarters ended January 1, 1999 and January 2, 1998 and the balance
sheet data at January 1, 1999 are derived from the Instruments Business'
unaudited financial data included elsewhere in this Information Statement. The
statement of earnings data for the fiscal years 1995 and 1994 and the balance
sheet data at fiscal year end 1996, 1995 and 1994 are derived from unaudited
financial data of the Instruments Business not included in this Information
Statement.
The historical financial information may not be indicative of the Instruments
Business' future performance and does not necessarily reflect what the
financial position and results of operations of the Instruments Business would
have been had the Instruments Business operated as a separate, stand-alone
entity during the periods presented.
Fiscal
Quarters Ended Years
--------------- ----------------------------------
January January
1, 2,
1999 1998 1998 1997 1996 1995 1994
------- ------- ------ ------ ------ ------ ------
(Dollars in millions, except per share amounts)
Statement of Earnings Data
Sales...................... $133.3 $140.9 $557.8 $541.9 $504.4 $459.4 $425.7
Operating Earnings before
Taxes..................... $ 7.7 $ 9.6 $ 39.2 $ 26.8 $ 11.5 $ 2.7 $ 20.3
Taxes on earnings.......... $ 3.4 $ 3.8 $ 15.8 $ 12.6 $ 5.3 $ 0.7 $ 10.0
Net Earnings............... $ 4.3 $ 5.8 $ 23.4 $ 14.2 $ 6.2 $ 2.0 $ 10.3
Pro Forma Net Earnings Per
Share(/1/)................ $ 0.14 $ 0.19 $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30
Fiscal Year End
At January 1, ----------------------------------
1999 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
(Dollars in millions)
Balance Sheet Data
Total assets................... $395.6 $404.1 $357.9 $301.0 $282.0 $272.6
Long-term debt................. $ -- $ -- $ -- $ -- $ -- $ --
- -------
(1) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the respective periods, reflecting the ratio of one share of IB Common
Stock for each share of Varian Common Stock outstanding at the time of the
Distribution.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations
is based upon and should be read in conjunction with the combined financial
statements of the Instruments Business and notes thereto included elsewhere in
this Information Statement, as well as the information contained under
"Business" and "Risk Factors." The combined financial statements of the
Instruments Business generally reflect the results of operations, financial
position and cash flows of the operations expected to be transferred to IB in
connection with the Internal Transfers and Distribution. Accordingly, the
Instruments Business' combined financial statements have been carved out from
the consolidated financial statements of Varian using the historical results of
operations and historical basis of the assets and liabilities of the
Instruments Business. The combined financial statements include, among other
things, allocations of certain Varian 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 Varian corporate overhead)
to the Instruments Business using the allocation methodology described in Note
1 of the Notes to the Instruments Business Combined Financial Statements. The
combined financial statements do not reflect any changes that may occur in the
financing and operations of IB as a result of the Distribution.
Results Of Operations
Fiscal Year
IB's fiscal years reported are the 52- or 53-week periods which ended on the
Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.
First Quarter Fiscal Year 1999 Compared to First Quarter Fiscal Year 1998
Sales. IB's sales of $133 million in the first quarter of fiscal year 1999 were
6% lower than its sales of $141 million in the first quarter of fiscal year
1998. The lower first quarter sales were due primarily to lower shipments in
the Vacuum Products and NMR Instruments lines. Lower Vacuum Product sales
reflected the slowdown in the semiconductor industry, while lower NMR
Instruments sales resulted from a supplier's delay that limited first quarter
shipments. Geographically, sales in North America of $69 million and Europe of
$43 million in the first quarter of fiscal year 1999 represented a decrease of
10% and an increase of 3%, respectively, as compared to the first quarter of
fiscal year 1998, while sales in Asia of $15 million in the first quarter of
fiscal year 1999 declined 5% as compared to the first quarter of fiscal year
1998.
Gross Profit. IB's gross profit of $53 million in the first quarter of fiscal
year 1999 was 40% of sales, compared to $55 million, or 38% of sales, in the
first quarter of fiscal year 1998.
Research and Development. Research and development expenses were $7 million,
representing 5% of sales, in both the first quarter of fiscal year 1998 and
1999.
Marketing. IB's marketing expenses of $30 million in the first quarter of
fiscal year 1999 and $27 million in the first quarter of fiscal year 1998, were
23% of sales in the first quarter of fiscal year 1999 and 19% of sales in the
first quarter of fiscal year 1998. The primary reason for the increase was the
acquisition of Chrompack International B.V. in July 1998.
General and Administrative. General and administrative expenses of $8 million,
or 6% of sales, in the first quarter of fiscal year 1999, were lower than the
$10 million, or 7% of sales, in the first quarter of fiscal year 1998. The
decrease in general and administrative expenses in the first quarter of fiscal
year 1999 was due to lower profit-sharing and management incentive compensation
costs in the first quarter of fiscal year 1999 than in the first quarter of
fiscal year 1998.
30
Taxes on Earnings. IB's effective income tax rate was 44.5% in the first
quarter of fiscal year 1999, compared to 40.2% in the first quarter of fiscal
year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998 rate
because IB expects to realize a larger proportion of high-tax foreign country
income during fiscal year 1999 than it did during fiscal year 1998.
Net Earnings. Net earnings of $4 million ($0.14 pro forma per share) in the
first quarter of fiscal year 1999 decreased from the $6 million ($0.19 pro
forma per share) earned in the first quarter of fiscal year 1998. The decrease
in net earnings is primarily due to the lower level of sales and increased
marketing expenses described above.
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales. IB's sales of $558 million in fiscal year 1998 were 3% higher than its
sales of $542 million in fiscal year 1997. Fiscal year 1998 sales were driven
largely by IB's Analytical Instruments and NMR Instruments lines. The effect of
the stronger U.S. dollar and a softening Asian market slowed sales growth
during fiscal year 1998. Geographically, sales in North America of $312 million
and Europe of $163 million in fiscal year 1998 represented increases of 3% and
15%, respectively, as compared to fiscal year 1997, while sales in Asia of $57
million in fiscal year 1998 declined 18% as compared to fiscal year 1997. IB
expects its sales in the United States and Europe to continue to grow but is
uncertain as to the timing of any economic recovery, or increased sales, in
Asia.
Gross Profit. IB's gross profit of $221 million in fiscal year 1998 was 40% of
sales, compared to $211 million, or 39% of sales, in fiscal year 1997. The
increase in gross profit as a percentage of sales from fiscal year 1997 to
fiscal year 1998 was primarily attributable to improved operating efficiencies.
Research and Development. Research and development expenses of $30 million in
fiscal year 1998 were 5% of sales compared to $32 million, or 6% of sales, in
fiscal year 1997. This decrease reflected the shift away from outside
consultants and the Ginzton Research Center to in-house employees.
Marketing. Marketing expenses of $114 million in fiscal year 1998 and $110
million in fiscal year 1997, were 20% of sales in fiscal years 1998 and 1997,
as increases in expenses in the United States in fiscal year 1998 were offset
by lower foreign marketing expenses due to the strengthening U.S. dollar.
General and Administrative. General and administrative expenses of $39 million,
or 7% of sales, in fiscal year 1998, decreased from $42 million, or 8% of
sales, in fiscal year 1997. The decrease in general and administrative expenses
in fiscal year 1998 was due primarily to improved employee productivity and the
effect of the stronger U.S. dollar on IB's expenses outside the United States.
Taxes on Earnings. IB's effective income tax rate was 40.2% in fiscal year
1998, compared to 47.0% in fiscal year 1997. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings in high-tax
foreign countries. The fiscal year 1997 rate was greater than the fiscal year
1998 rate due to the larger portion of high-taxed foreign earnings in fiscal
year 1997. Future tax rates may vary from the historic rates depending on the
worldwide allocation of earnings and tax planning strategies.
Net Earnings. Net earnings of $23 million ($0.78 pro forma per share) in fiscal
year 1998 increased from the $14 million ($0.47 pro forma per share) earned in
fiscal year 1997. The increase in net earnings was due primarily to revenue
growth in excess of marketing and general and administrative expenses and the
other factors described above.
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales. IB's sales of $542 million in fiscal year 1997 were 7% higher than its
sales of $504 million in fiscal year 1996. All of IB's product lines
contributed to the higher sales in fiscal year 1997. Geographically, sales in
fiscal year 1997 in North America of $302 million and Asia of $70 million both
increased 11% from fiscal year 1996, while sales in Europe of $142 million
declined 3% in fiscal year 1997.
31
Gross Profit. IB's gross profit of $211 million in fiscal year 1997 was 39% of
sales, compared to $194 million, or 38% of sales, in fiscal year 1996. The
increase in gross profit was attributable primarily to improved sales volume
and relatively constant fixed costs.
Research and Development. Research and development expenses of $32 million in
fiscal year 1997 were 6% of sales compared to $30 million, or 6% of sales, in
fiscal year 1996. The increase in research and development expenses, in
absolute terms, was primarily due to increased consultancy costs.
Marketing. Marketing expenses of $110 million in fiscal year 1997 were 20% of
sales compared to $107 million, or 21% of sales in fiscal year 1996. The
increase in marketing expenses, in absolute terms, was primarily due to
increased new product introductions and new sales offices in Latin America.
General and Administrative. General and administrative expenses of $42 million
were 8% of sales in fiscal year 1997, compared to $45 million, or 9% of sales,
in fiscal year 1996. The decrease in general and administrative expenses was
due primarily to a reduction in corporate overhead expenses.
Taxes on Earnings. IB's effective income tax rate was 47.0% in fiscal year
1997, compared to 46.1% in fiscal year 1996. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings in high-tax
foreign countries.
Net Earnings. Net earnings of $14 million ($0.47 pro forma per share) in fiscal
year 1997 increased from the $6 million ($0.20 pro forma per share) earned in
fiscal year 1996. The increase in net earnings was due primarily to revenue
growth in excess of marketing and general and administrative expenses and the
other factors described above.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for IB's 1999 fiscal year.
The impact of the implementation of SFAS No. 131 on the reporting of IB's
segment information has not yet been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for IB's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
combined financial statements of IB has not yet been determined.
Liquidity and Capital Resources
IB's debt has historically been incurred or managed at the parent level. In
connection with the Distribution, a portion of Varian's debt will be assumed by
IB. IB will not be able to rely on the earnings, assets or cash flows of VMS or
VSEA after the Distribution to service this debt nor, however, will its
earnings, assets or cash flows be used to contribute to the capital
requirements of those entities.
The debt to be assumed by or transferred to IB at the time of the Distribution
will consist of between $50 and $100 million of Term Loans and Notes Payable,
based on Varian's outstanding indebtedness as of January 1, 1999 and projected
operating results and certain other transactions through the Distribution Date.
See "Forecasted Capitalization." As of January 1, 1999, interest rates on
Varian's outstanding Term Loans ranged from 6.70% to 7.29%, and the weighted
average interest rate on these Term Loans was 7.02%. As of January 1, 1999,
interest rates on Varian's outstanding Notes Payable ranged from 1.50% to
9.75%, and the weighted average interest rate on these Notes Payable was 1.93%.
While IB will assume 50% of the Term Loans, the specific Term Loans and Notes
Payable that IB will assume in connection with the Distribution will be
determined in accordance with the Distribution Agreement. See
32
"The Distribution - Distribution Agreement." The Term Loans currently contain
covenants that limit future borrowings and the payment of cash dividends and
require the maintenance of certain levels of working capital and operating
results. In connection with the assumption of the Term Loans by IB, the lender
may revise existing or impose additional restrictive covenants. IB may enter
into one or more credit facilities for working capital and other general
corporate purposes after the Distribution. Any such credit facility may contain
certain representations and warranties, conditions, affirmative, negative and
financial covenants and events of default customary for such facilities.
Varian has used a centralized cash management system to finance its operations.
Cash deposits from the businesses are transferred to Varian on a daily basis,
and Varian funds Varian's required disbursements. As a result, IB reported no
cash and cash equivalents, at January 1, 1999, January 2, 1998, October 2, 1998
and September 26, 1997, respectively. Pursuant to the Distribution Agreement,
IB will be entitled to receive a cash contribution from Varian in such amount
so that as of the time of the Distribution, IB will have Net Debt equal to
approximately 50% of the aggregate Net Debt of IB and VMS, subject to such
adjustments as may be necessary to provide VMS with a Net Worth of between 40%
and 50% of the aggregate Net Worth of IB and VMS and subject to further
adjustment to reflect IB's approximately 50% share of the estimated proceeds,
if any, to be received by VMS after the Distribution from the sale of Varian's
long-term leasehold interest at certain of its Palo Alto facilities, together
with certain related buildings and other corporate assets and IB'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). See "The
Distribution - Distribution Agreement."
During the first quarter of fiscal year 1999, IB generated $1 million of cash
from operations, compared to $10 million in the first quarter of fiscal year
1998. Increased inventories and lower earnings accounted for substantially all
of the change between quarters.
IB generated $37 million of cash from operations in fiscal year 1998, compared
to $17 million in fiscal year 1997 and $23 million in fiscal year 1996. Fiscal
year 1998 net earnings plus non-cash charges for depreciation totaling $41
million, which was offset by a decrease of $7 million in liabilities and a $5
million decrease in customer advances, respectively, between fiscal year 1997
and fiscal year 1998, accounted for most of the cash generated.
During the first quarter of fiscal year 1999, IB used $5 million of cash for
investing activities, compared to $10 million during the first quarter of
fiscal year 1998, reflecting reduced purchases of property, plant and
equipment.
IB used $54 million of cash for investing activities in fiscal year 1998,
primarily for the acquisition of Chrompack International B. V., the remaining
minority interest in Varian Iberica, S. L., as well as the replacement of
machinery and equipment. This compares to $52 million used for investing
activities in fiscal year 1997, primarily for the acquisitions of a product
line from each of Rainin Instruments Company, Inc. and Otsuka Electronics (USA)
Inc., as well as the replacement of machinery and equipment. IB used $22
million for investing activities in fiscal year 1996, primarily for capital
expenditures.
IB currently has no plans to materially modify or expand its facilities or to
make other material capital expenditures. Restructuring plans are currently
being developed and are expected to result in additional costs and
expenditures, the timing and amount of which have not yet been determined. In
addition, the Distribution Agreement provides that IB is responsible for
certain litigation described under "Business - Legal Proceedings" and further
provides that IB will indemnify VSEA and VMS for one-third of the costs,
expenses and other liabilities of Varian relating to certain discontinued
operations of Varian, including certain environmental liabilities. See " -
Environmental Matters."
IB's liquidity is affected by many factors, some based on the normal ongoing
operations of the business and others related to the uncertainties of the
industry and global economies. Although IB's cash requirements will fluctuate
based on the timing and extent of these factors, IB's management believes that
cash generated from operations, together with IB'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.
33
Environmental Matters
IB's operations are subject to various foreign, federal, state and/or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. This includes discharges into
soil, water and air, and the generation, handling, storage, transportation and
disposal of waste and hazardous substances. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of their useful life. These laws have the effect of
increasing costs and potential liabilities associated with the conduct of such
operations.
Varian has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under CERCLA at eight sites where
Varian is alleged to have shipped manufacturing waste for recycling or
disposal. Varian is also involved in various stages of environmental
investigation and/or remediation under the direction of, or in consultation
with, foreign, federal, state and/or local agencies at certain current or
former Varian facilities (including facilities disposed of in connection with
Varian's sale of its Electron Devices business during fiscal year l995 and the
sale of its TFS business during fiscal year 1997). Expenditures by Varian for
environmental investigation and remediation amounted to $5 million in fiscal
year 1998, compared with $2 million in fiscal year 1997 and $5 million in
fiscal year 1996.
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 January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental-related investigation and remediation costs for
these sites and facilities ranged in the aggregate from $21 million to $48
million. The time frame over which these costs are expected to be incurred
varies with each site and facility, ranging up to approximately 30 years as of
January 1, 1999. Management of Varian believes that no amount in the foregoing
range of estimated future costs is more probable of being incurred than any
other amount in such range and therefore Varian had accrued $21 million in
estimated environmental costs as of January 1, 1999. The amount accrued has not
been discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated that the future exposure for
environmental related investigation and remediation costs for these sites and
facilities ranged in the aggregate from $40 million to $74 million. The time
frame over which these costs are expected to be incurred varies with each site
and facility, ranging up to approximately 30 years as of January 1, 1999. As to
each of these sites and facilities, management of Varian determined that a
particular amount within the range of estimated costs was a better estimate of
the future environmental liability than any other amount within the range, and
that the amount and timing of these futures costs were reliably determinable.
Together, these amounts totaled $51 million at January 1, 1999. Accordingly,
Varian had accrued $22 million as of January 1, 1999, which represents its best
estimate of the future costs discounted at 4%, net of inflation. This accrual
is in addition to the $21 million described in the preceding paragraph.
Under the Distribution Agreement, IB has agreed to indemnify VMS and VSEA for
one-third of these environmental investigation and remediation costs, as
adjusted for any insurance proceeds and tax benefits expected to be realized
upon the payment of these costs. Accordingly, IB had recorded $8 million as its
portion of these estimated future costs for environmental liabilities as of
January 1, 1999.
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates reflects various uncertainties
inherent in many environmental investigation and remediation activities and the
large number of sites and facilities involved. IB believes that most of these
cost ranges will narrow as investigation and remediation activities progress.
IB believes that its reserves are adequate, but as the scope of its obligation
becomes more clearly defined, these reserves may be modified and related
charges against earnings may be made. Although any ultimate liability arising
from environmental related matters described herein could result in significant
expenditures that, if aggregated and assumed to occur within a single fiscal
year, would be material to IB's financial statements, the likelihood of such
occurrence is considered remote. Based on information currently available to
IB's management and its best assessment of the ultimate amount and timing of
environmental related events, IB's management believes that the costs of these
environmental related matters are not reasonably likely to have a material
adverse effect on the consolidated financial statements of IB.
34
Year 2000
General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which therefore might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because IB relies heavily on computer programs and non-IT systems, and
relies on third parties which themselves rely on computer programs and non-IT
systems, the Year 2000 problem, if not addressed, could adversely effect IB's
business, results of operations and financial condition.
State of Readiness. IB has initiated a comprehensive assessment of potential
Year 2000 problems with respect to (1) internal systems, (2) products and (3)
significant third parties with which IB does business.
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, Varian in 1994 initiated 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 that system has been staged to replace first those
existing systems that are not Year 2000 capable. Installation of the new SAP
system is approximately 70% complete, with 90% completion expected by July 1999
and full completion expected by the end of 1999. Upgrade of enterprise
information systems is approximately 67% complete, with 80% completion expected
by July 1999 and 100% completion expected by December 1999; upgrade of
networking and telecommunications systems is complete, with 100%; upgrade of
factory-specific information systems is approximately 70% complete, with 91%
completion expected by July 1999 and 93% completion expected by December 1999;
and upgrade of non-IT systems, computers and packaged software, and facilities
systems are approximately 80% complete, with 100% completion expected by July
1999. IB has initiated an assessment of potential Year 2000 problems in its
current and previously-sold products. With respect to current products, that
assessment and corrective actions are complete, and IB believes that all of its
current products are Year 2000 capable; however, that conclusion is based in
part on Year 2000 assurances or warranties from suppliers of computer programs
and non-IT systems which are integrated into or sold with IB's current
products.
With respect to previously-sold products, IB 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 IB identifies previously-sold products that are not Year 2000 capable, IB
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 IB will be required to repair and/or upgrade such products
at its own expense. Schedules for completing those corrective actions vary
considerably among IB's businesses and products, but are generally expected to
be substantially completed by July 1999.
IB is still assessing potential Year 2000 problems of third parties with which
IB 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 April 1999.
Costs. As of January 1, 1999, IB estimates that it had incurred approximately
$785,000 to assess and correct Year 2000 problems. Although difficult to
assess, based on its assessment to date, IB estimates that it will incur
approximately $465,000 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.
35
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, IB expects that
certain costs will be offset by revenues generated by the sale of upgrades and
retrofits and other customer support services relating to Year 2000 problems.
However, there can be no assurance that IB's actual costs to assess and correct
Year 2000 problems will not be higher than the foregoing estimate.
Risks. Failure of IB or its key suppliers to accurately assess and correct Year
2000 problems would likely result in interruption of certain of IB's normal
business operations, which could have a material adverse effect on IB's
business, results of operations and financial condition. If IB 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 and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures and financial reporting. If IB 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 IB 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 IB does not
adequately identify and correct Year 2000 problems of the significant third
parties with which it does business, it could experience an interruption in the
supply of key components or services from those parties, such that there would
be delays in product shipments or services and a consequential impact on
revenues.
Management of IB believes that appropriate corrective actions have been or will
be accomplished within the cost and time estimates stated above. Although IB
does not expect to be 100% Year 2000 compliant by the end of 1999, IB does not
currently believe that any Year 2000 non-compliance in IB's information systems
would have a material adverse effect on IB's business, results of operations or
financial condition. However, given the inherent complexity 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 IB; and the additional
complexity which will likely be caused by undertaking during fiscal year 1999
and fiscal year 2000 the separation of currently shared enterprise information
systems as a result of the Distribution. See "Risk Factors - Transitioning to
New Information Technology Infrastructure."
Because of uncertainties as to the extent of Year 2000 problems with IB's
previously-sold products and the extent of any legal obligation of IB to
correct Year 2000 problems in those products, IB cannot yet assess risks to IB
with respect to those products. Because its assessments are not yet complete,
IB 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 IB's results of operations.
Contingency Plans. With respect to IB's enterprise information systems, IB 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, IB 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.
36
MARKET RISK
Foreign Currency Exchange Risk
As a global concern, IB faces exposure to adverse movements in foreign currency
exchange rates. This exposure may change over time as IB's business practices
evolve and could have a material adverse impact on IB'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. IB is evaluating, among other issues, the impact of the Euro
conversion on its foreign currency exposure. Based on its evaluation to date,
IB does not expect the Euro conversion to create any change in its currency
exposure due to IB's existing hedging practices.
At the present time, Varian hedges its currency exposures in respect of the
Instruments Business that are associated with certain assets and liabilities
denominated in non-functional currencies and with anticipated foreign currency
cash flows. Varian does not enter into forward exchange contracts for trading
purposes. IB's forward exchange contracts generally range from one to three
months in original maturity, and no forward exchange contract has an original
maturity greater than one year.
Forward exchange contracts outstanding and their unrealized gains and losses as
of October 2, 1998 are summarized as follows:
Notional
Value Notional Unrealized
Purchased Value Sold Gain/(Loss) Fair Value
--------- ---------- ---------- ----------
(Dollars in thousands)
Japanese yen....................... $ -- $ 1,637 $ 5 $ 31
French francs...................... -- 11,550 -- (467)
Canadian dollars................... -- 7,042 206 260
British pounds..................... 12,044 4,050 537 515
Italian lira....................... -- 4,196 -- (217)
German marks....................... -- 1,955 -- (100)
Spanish pesetas.................... -- 691 -- (38)
Korean won......................... -- 283 -- 1
Australian dollars................. 6,396 -- -- 23
Swiss francs....................... 246 -- -- 10
Swedish kronor..................... 4,789 -- -- (5)
------- ------- ---- -----
Total............................ $23,475 $31,404 $748 $ 13
======= ======= ==== =====
The fair value of forward exchange contracts generally reflects the estimated
amounts that IB would receive or pay to terminate the contracts at the
reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional amounts
of forward exchange contracts are not a measure of IB's exposure.
Interest Rate Risk
Although payments under certain of the operating leases for IB's facilities are
tied to market indices, IB is not exposed to material interest rate risk
associated with its operating leases.
There have been no material changes in the Market Risk information reported
above as of January 1, 1999.
37
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The following financial forecast of the capitalization of IB is based on
forecasts and assumptions by Varian's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 2, 1999 (the Distribution
Date), including future results of operations and other events. For purposes of
the forecasted capitalization at April 2, 1999, net earnings in the second
quarter of fiscal year 1999 are assumed to be the same as the net earnings in
the second quarter of fiscal year 1998. In addition, restructuring plans are
currently being developed and may result in additional charges to IB's equity.
Assumptions with respect to events that will occur between January 2, 1999 and
April 2, 1999 include the following:
. Receipt of a cash contribution from Varian of $20 million and the assumption
of long-term debt (including current portion) of $58.5 million from Varian
and the transfer of $17 million of Notes Payable from Varian.
. Amendment of IB's Certificate of Incorporation to give IB authorized capital
stock of (i) 99,000,000 shares of IB Common Stock of which approximately
30,344,000 shares will be issued and outstanding upon the Distribution
(based upon the number of shares of Varian Common Stock outstanding as of
January 1, 1999, increased by shares issued pursuant to Varian's Employee
Stock Purchase Plan and anticipated stock option exercises from January 2,
1999 through April 2, 1999) and (ii) 1,000,000 shares of preferred stock,
$.01 par value per share, none of which will be issued and outstanding upon
the Distribution.
In Varian's management's judgment, the listed assumptions and forecasts reflect
those material events or transactions that occurred since January 2, 1999 or
are expected to occur prior to the Distribution Date, other than the potential
restructuring charge discussed in the first paragraph above. There have been no
changes in accounting principles anticipated in this capitalization forecast
nor are any such changes currently contemplated.
Limitations On Projections And Forecasts
The assumptions and estimates underlying the projected and forecasted data and
information in this Information Statement are inherently uncertain and,
although considered reasonable by management of Varian, are subject to
significant business, economic and competitive uncertainties, many of which are
beyond the control of Varian and its subsidiaries. Accordingly, there can be no
assurance that the projected and forecasted financial results will be realized.
In fact, actual results in the future usually will differ from the forecasted
financial results and the differences may be material.
Neither IB nor any of its subsidiaries intends after the date of this
Information Statement to update any forecasted or projected financial data or
information contained in this Information Statement and the absence of such an
update should not be construed as any indication regarding the views or beliefs
of management of Varian (or of IB after the Distribution) concerning the
forecasted or projected data or information contained in this Information
Statement.
38
FORECASTED CAPITALIZATION
The following table sets forth the combined capitalization of IB as of January
1, 1999 on a historical basis, forecasted at April 2, 1999 (the Distribution
Date), and as adjusted to give effect to the Distribution and the other
transactions contemplated by the Distribution Agreement. The significant
assumptions used below have been described in "Summary of Significant
Capitalization Forecast Assumptions" on the preceding page. The following data
is qualified in its entirety by the financial statements of the Instruments
Business and other information contained elsewhere in this Information
Statement.
Forecasted
January 1, At April
1999 2, Pro Forma After
Historical 1999(/1/) Distribution(/1/)
---------- ---------- -----------------
(Dollars in millions)
Cash and cash equivalents.............. $ -- $ -- $ 20.0
====== ====== ======
Notes payable.......................... $ -- $ -- $ 17.0
====== ====== ======
Long-term Debt, including current
portion............................... $ -- $ -- $ 58.5
------ ------ ------
Equity:
Divisional Equity.................... $245.8 $ -- $ --
Common stock, par value $.01 per
share:
authorized - 99,000,000 shares
issued and outstanding - none
historical and 30,344,000
pro forma........................... -- 0.3 0.3
Preferred stock, par value $.01 per
share:
authorized - 1,000,000 shares
issued and outstanding - none
historical or pro forma.............
Capital in Excess of Par Value....... 250.5 195.0
------ ------ ------
Total Equity....................... 245.8 250.8 195.3
------ ------ ------
Total Capitalization............. $245.8 $250.8 $253.8
====== ====== ======
- -------
(1) See "Summary of Significant Capitalization Forecast Assumptions" on the
preceding page.
39
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of the
Instruments Business, which will become Varian, Inc. following the
Distribution, set forth below consist of a pro forma balance sheet as of
January 1, 1999 and a pro forma statement of earnings for the year ended
October 2, 1998 and for the quarter ended January 1, 1999. The pro forma
balance sheet was prepared to give effect to the Distribution as if it had
occurred on January 1, 1999 and the pro forma statement of earnings was
prepared to give effect to the Distribution as if it had occurred on September
27, 1997. The unaudited pro forma balance sheet set forth below does not
purport to represent what the Instruments Business' financial position actually
would have been had the Distribution occurred on the date indicated or to
project the Instruments Business' financial position for any future date. The
unaudited pro forma statement of earnings set forth below does not purport to
represent what the Instruments Business' operations actually would have been or
to project the Instruments Business' operating results for any future period.
The unaudited pro forma adjustments are based upon currently available
information and certain assumptions that the Instruments Business' management
believes are reasonable. The unaudited pro forma statements should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements of the
Instruments Business and the notes thereto appearing elsewhere in this
Information Statement.
40
Unaudited Pro Forma Condensed Combined Balance Sheet
January 1, 1999
IB Pro Forma IB Pro
Historical Adjustments(/1/) Forma
---------- ---------------- ------
(Dollars in millions)
Assets
Current Assets
Cash and cash equivalents................. $ -- $ 20.0 $ 20.0
Other current assets...................... 243.3 -- 243.3
------ ------ ------
Total current assets...................... 243.3 20.0 263.3
Property, Plant and Equipment, net........ 87.8 -- 87.8
Other Assets.............................. 64.5 -- 64.5
------ ------ ------
Total Assets.............................. $395.6 $ 20.0 $415.6
====== ====== ======
Liabilities And Stockholders' Equity
Current Liabilities
Notes payable and current portion of long-
term debt................................ $ -- $ 22.9 $ 22.9
Other current liabilities................. 138.8 -- 138.8
------ ------ ------
Total Current Liabilities................. 138.8 22.9 161.7
Long-term Debt............................ -- 52.6 52.6
Other liabilities......................... 11.1 -- 11.1
------ ------ ------
Total Liabilities......................... 149.9 75.5 225.4
Equity.................................... 245.7 (55.5) 190.2
------ ------ ------
Total Liabilities and Equity.............. $395.6 $ 20.0 $415.6
====== ====== ======
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(1) Assumes a cash contribution by Varian to IB of $20.0 million, the transfer
to IB of $17.0 million in Notes Payable from Varian, and the assumption by
IB of $58.5 million in long-term debt, including current portion, from
Varian in connection with the Distribution.
41
Unaudited Pro Forma Condensed Combined Statement of Earnings
Quarter Ended January 1, 1999
IB Pro Forma IB Pro
Historical Adjustments(/1/) Forma
---------- ---------------- ------
(Dollars in millions,
except per share amounts)
Sales..................................... $133.3 $ -- $133.3
------ ----- ------
Operating Costs and Expenses
Cost of sales............................. 80.7 -- 80.7
Research and development.................. 7.2 -- 7.2
Marketing................................. 30.0 -- 30.0
General and administrative................ 7.7 -- 7.7
------ ----- ------
Total operating costs and expenses........ 125.6 -- 125.6
------ ----- ------
Operating Earnings........................ 7.7 -- 7.7
Interest expense.......................... -- (1.1) (1.1)
------ ----- ------
Operating Earnings before Taxes........... 7.7 (1.1) 6.6
Taxes on earnings......................... 3.4 (0.4) 3.0
------ ----- ------
Net Earnings.............................. $ 4.3 $(0.7) $ 3.6
====== ===== ======
Pro Forma Net Earnings Per Share(/2/)..... $ 0.14 $ 0.12
====== ======
Notes to Unaudited Pro Forma Condensed Combined Statement of Earnings
(1) Reflects pro forma adjustment for interest expense on $58.5 million of
long-term debt at an estimated annual rate of interest of 7.02% and on
$17.0 million of Notes Payable at an estimated annual rate of interest of
1.93%. A change of 25 basis points in this estimated annual rate of
interest would impact pro forma interest expense by $47,000. The pro forma
adjustment for income taxes is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the quarter ended January 1, 1999, reflecting the ratio of one share of IB
Common Stock for each share of Varian Common Stock outstanding at the time
of the Distribution.
42
Unaudited Pro Forma Condensed Combined Statement of Earnings
Fiscal Year 1998
IB Pro Forma IB Pro
Historical Adjustments(/1/) Forma
---------- ---------------- ------
(Dollars in millions,
except per share amounts)
Sales..................................... $557.8 $ -- $557.8
------ ----- ------
Operating Costs and Expenses
Cost of sales............................. 336.4 -- 336.4
Research and development.................. 29.6 -- 29.6
Marketing................................. 113.9 -- 113.9
General and administrative................ 38.7 -- 38.7
------ ----- ------
Total operating costs and expenses........ 518.6 -- 518.6
------ ----- ------
Operating Earnings........................ 39.2 -- 39.2
Interest expense.......................... -- (4.4) (4.4)
------ ----- ------
Operating Earnings before Taxes........... 39.2 (4.4) 34.8
Taxes on earnings......................... 15.8 (1.7) 14.1
------ ----- ------
Net Earnings.............................. $ 23.4 $(2.7) $ 20.7
====== ===== ======
Pro Forma Net Earnings Per Share(/2/)..... $ 0.78 $ 0.69
====== ======
Notes to Unaudited Pro Forma Condensed Combined Statement of Earnings
(1) Reflects pro forma adjustment for interest expense on $58.5 million of
long-term debt at an estimated annual rate of interest of 7.02% and on
$17.0 million of Notes Payable at an estimated annual rate of interest of
1.93%. A change of 25 basis points in this estimated annual rate of
interest would impact pro forma interest expense by $189,000. The pro forma
adjustment for income taxes is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
fiscal year 1998, reflecting the ratio of one share of IB Common Stock for
each share of Varian Common Stock outstanding at the time of the
Distribution.
43
BUSINESS
General
IB, a newly-formed, wholly-owned subsidiary of Varian, will own and operate the
Instruments Business after the Distribution. References in this section to "IB"
refer to IB and its subsidiaries after giving effect to the Internal Transfers
and the Distribution. References in this section to the "Instruments Business"
refer to the historical business and operations of the Instruments Business
conducted by Varian prior to the Distribution.
Overview
IB develops, manufactures, sells and services a variety of scientific
instruments and equipment. IB is a major supplier of analytical and research
instruments and related equipment for studying the chemical composition of a
myriad of substances, including metals, inorganic materials, organic compounds,
polymers, natural substances and biochemicals. IB also develops, manufactures,
sells and services nuclear magnetic resonance spectrometers for probing the
structural properties of molecules and for producing non-invasive three-
dimensional images of biomedical materials. IB also develops, manufactures,
sells and services high vacuum products that serve a wide range of industrial
and scientific applications, such as high-energy physics, surface analysis,
scientific and industrial coating processes, analytical instrumentation and
semiconductor manufacturing. IB is also a state-of-the-art contract
manufacturer of advanced electronic assemblies and subsystems such as printed
circuit boards. IB operates in 70 countries and at February 1, 1999 had
approximately 3,183 employees.
Products
IB's products can be broadly classified into the following categories:
analytical instruments, nuclear magnetic resonance instruments, vacuum products
and electronic components assembly.
Analytical Instruments
Analytical Instruments includes Chromatography Systems and Optical Spectroscopy
Instruments operations, which manufacture liquid and gas chromatographs, gas
chromatograph/mass spectrometers, ultraviolet/visible/near-infrared
spectrometers, atomic absorption spectrometers, inductively coupled plasma
spectrometers, inductively coupled plasma/mass spectrometers, data management
systems and small disposable tools used to prepare chemical samples for
analysis. These products are used in environmental monitoring and analysis,
biological and biochemical research, and quality control and research in such
industries as pharmaceuticals, foods, metals, chemicals and petroleum as well
as in independent test laboratories. They are employed in analyzing chemical
substances including metals, inorganic materials, organic compounds, polymers,
natural substances and biochemicals.
The Chromatography Systems operation ("CS") is a major international supplier
of gas and liquid chromatographs, data management systems and gas
chromatograph/mass spectrometer systems, as well as sample preparation products
and other consumable supplies. Chromatography is a technique that separates a
mixture of substances by taking advantage of the characteristics specific to
each component. CS's systems are used for chemical analysis, industrial
hygiene, pollution monitoring, pharmaceutical analysis and drug discovery and
monitoring applications. CS supplies a complete line of products to provide all
analytical and preparative requirements. CS's manufacturing facilities are
located in Walnut Creek, California, Woburn, Massachusetts, Middelburg, The
Netherlands and Harbor City, California.
The Optical Spectroscopy Instruments operation ("OSI") is a leading worldwide
supplier of atomic absorption, inductively coupled plasma, inductively coupled
plasma/mass spectrometers and ultraviolet/visible/near-infrared
spectrophotometers - instruments that are used to measure compounds and some 66
different metals in various substances. Optical spectroscopy is a method of
chemical analysis based on the absorption, or emission, by matter of
electromagnetic radiation of a specific wavelength or frequency. OSI's
manufacturing facility is located in Melbourne, Australia.
44
Nuclear Magnetic Resonance Instruments
Nuclear Magnetic Resonance Instruments ("NMRI") is a leading worldwide supplier
of nuclear magnetic resonance ("NMR") spectrometers for advanced biomolecular,
chemical and material science research, as well as for the more routine
analytical work typically performed in industrial and academic environments.
NMRI's manufacturing facilities are located in Palo Alto, California, and Fort
Collins, Colorado.
NMR spectroscopy gives researchers the ability to determine the structure of
many biomolecules including proteins, nucleic acids (DNA and RNA) and
carbohydrates. NMRI's systems are used in a variety of laboratories, including
those conducting basic research and larger facilities that are creating new
pharmaceuticals. NMRI's systems can be found in all major pharmaceutical
companies worldwide, where they are key tools in developing new drugs to fight
disease.
Approximately 80% of NMRI's systems are used for analysis on liquids, 15% on
solids and 5% on imaging (producing pictures). The imaging capability of NMR
allows researchers to non-invasively capture a cross-sectional view of an
object, for example the brain, to map and understand its various parts. Solid
sample NMR research allows researchers to determine the microstructure of
crystals, plastics, rubbers, ceramics, polymers and other solids.
Vacuum Products
Vacuum Products is a worldwide supplier of products used to create, maintain
and contain a vacuum environment. These include vacuum pumps, helium leak
detectors and related instruments and gauges, which are used in many commercial
and scientific applications, including industrial processes, semiconductor
manufacturing, high-energy physics, surface analysis and space research. Vacuum
Products' manufacturing facilities are located in Lexington, Massachusetts, and
Torino, Italy.
Vacuum Products offers four types of vacuum pumps: primary, diffusion, turbo-
molecular and ion. Primary pumps include rotary vane and dry diaphragm
mechanical pumps, sorption pumps and dry scroll pumps. Diffusion pumps include
the Very High Speed-Series products. Turbo-molecular pumps provide a high
speed/compression ratio in a compact package. Ion pumps, used to achieve ultra-
high vacuum environments, are used primarily to create ultra-high vacuum in a
variety of applications, from electron microscopes to linear accelerators.
Vacuum Products also has been a worldwide leader in helium mass spectrometer
leak detectors since the 1960s. These products are used in many commercial and
scientific applications, including industrial processes, analytical instruments
and high-energy physics.
Vacuum Products also produces an extensive line of vacuum instruments and
gauges. Its gauge controllers and gauge tubes are designed for industrial use,
where simplicity of operation and rugged design are important, as well as for
research applications.
Electronic Components Assembly
The Electronics Center ("EC") is a contract electronic manufacturer of printed
wiring assemblies. It supplies components to each of Varian's businesses;
however, 80% of its sales are to customers other than Varian. Services range
from design layout to total system integration, shipping to end customers and
repair depot facilities. EC has expertise in high-mix manufacturing, producing
up to 1,800 different products each month. In addition to printed wiring
assemblies, EC performs electronic subassembly contract manufacturing and
integrates complete systems. EC serves a wide range of industries, including
telecommunications, medical, network products, gaming, industrial controls,
avionics and satellite communications. EC's manufacturing facilities are
located in Tempe, Arizona.
Marketing and Sales
In the United States, IB markets the largest portion of its products directly
through its own sales and distribution organizations, although certain products
are marketed through independent distributors and sales representatives. Sales
45
to major markets outside the United States are generally made by IB's foreign-
based sales and service staff, although some sales are made directly from the
United States to foreign customers. In certain foreign countries, sales are
made through various representative and distributorship arrangements. IB owns
or leases sales and service offices in strategic regional locations in the
United States and in foreign countries through its foreign sales subsidiaries
and distribution operations. None of IB's products are distributed through
retail outlets.
The markets in which IB competes are globalized. International sales accounted
for 47%, 47% and 50% of sales for fiscal years 1998, 1997 and 1996,
respectively. As a result, IB's customers increasingly require service and
support on a worldwide basis. In addition to the United States, IB has
manufacturing operations in Australia, Italy and The Netherlands as well as
sales and service offices located throughout Europe, Asia and Latin America. IB
has invested substantial financial and management resources to develop an
international infrastructure to meet the needs of its customers worldwide. IB
intends to continue to expand its presence in international markets.
Demand for IB's products is dependent upon the size of the markets for its
products, the level of capital expenditures of IB's customers, the rate of
economic growth in IB's major markets and competitive considerations. IB
believes that demand for its products does not exhibit any significant seasonal
pattern. No single customer accounted for 10% or more of IB's sales in fiscal
year 1998.
Virtually all new analytical methods and tests originate in academic research
in universities and medical schools. If the utility of a new method or test is
demonstrated by fundamental research, it often will then be used by
pharmaceutical investigators, biotechnology companies, teaching hospitals or
specialized clinical laboratories in an investigatory mode. In some cases,
these new techniques eventually emerge in routine, high-volume clinical testing
at hospitals and research labs. Generally, devices used at each stage from
research to routine clinical applications employ the same fundamental processes
but may differ in operating features such as number of tests performed per hour
and degree of automation. By serving several customer groups with differing
needs related through common science and technology, IB has the opportunity to
broadly apply and leverage its expertise. IB's customers are continually
searching for processes and systems that can perform tests faster, more
efficiently and at lower costs. IB believes that its focus on automated and
high throughput systems positions it to capitalize on this need.
Backlog
IB's recorded backlog was $130 million at January 1, 1999, $125 million at
October 2, 1998 and $132 million at September 26, 1997. It is IB's general
policy to include in backlog only purchase orders or production releases that
have firm delivery dates within one year. Recorded backlog may not result in
sales because of cancellations or other factors. It is anticipated that all
orders included in the October 2, 1998 backlog will be delivered before the
close of fiscal year 1999.
Competition
Competition in IB's markets is based upon the performance capabilities of IB's
products, technical support and after-market service, the manufacturer's
reputation as a technological leader and the selling price. Management believes
that performance capabilities are the most important of these criteria. The
markets in which IB competes are highly competitive and are characterized by
the application of mature but advanced technology. There are numerous companies
that specialize in, and a number of larger companies that devote a significant
portion of their resources to, the development, manufacture and sale of
products that compete with those manufactured or sold by IB. Many of IB's
competitors are well-known manufacturers with a high degree of technical
proficiency. In addition, competition is intensified by the ever-changing
nature of the technologies in the industries in which IB is engaged. The
markets for IB's products are characterized by specialized manufacturers that
often have strength in narrow segments of these markets. While the absence of
reliable statistics makes it difficult to determine IB's relative market
position in its industry segments, IB is confident it is one of the principal
manufacturers in its primary fields. See "Risk Factors - Technological Change
and New Products."
Each of IB's major businesses competes with many companies that address the
same markets. In Analytical Instruments, IB competes with Hewlett-Packard,
Waters Corporation, Perkin-Elmer, Thermo Electron, Shimadzu Corporation and
46
numerous local suppliers. NMRI has two major competitors: Bruker and JEOL. In
Vacuum Products, the primary competitors are Edwards High Vacuum, Pfeiffer,
Leybold-Balzers and Alcatel. High-mix contract manufacturers that compete with
the Tempe Electronics Center include EFTCX Corporation, Xetel Corporation, CMC
Industries, Sigmatron International and Smartflex Systems. See "Risk Factors -
Competition."
Manufacturing
IB's principal manufacturing activities consist of precision assembly, test,
calibration and machining activities. IB subcontracts a portion of its
assembly, machining and printed circuit board assembly and testing. All other
assembly, test and calibration functions are performed by IB. Some critical
assembly activities are performed in clean-room environments at IB's
facilities.
IB believes that the ability to manufacture reliable products in a cost-
effective manner is critical to meeting the "just-in-time" delivery and other
demanding requirements of its original equipment manufacturer ("OEM") and end-
use customers. IB monitors and analyzes product lead times, warranty data,
process yields, supplier performance, field data on mean time between failures,
inventory turns, repair response time and other indicators so that it can
continuously improve its manufacturing processes. IB has adopted a total
quality management process.
IB has ten manufacturing facilities located throughout the world. Analytical
Instruments has manufacturing facilities in Walnut Creek, California, Woburn,
Massachusetts, Middelburg, The Netherlands, Harbor City, California, and
Melbourne, Australia. NMRI has manufacturing facilities in Palo Alto,
California, and Fort Collins, Colorado. Vacuum Products has manufacturing
facilities in Lexington, Massachusetts, and Torino, Italy. Tempe Electronics
Center has manufacturing facilities in Tempe, Arizona.
In 1993, the member states of the European Union ("EU") began implementation of
their plan for a new unified EU market with reduced trade barriers and
harmonized regulations. The EU adopted a significant international quality
standard, the International Organization for Standardization Series 9000
Quality Standards ("ISO 9000"). All of IB's manufacturing facilities have been
certified as complying with the requirements of ISO 9000.
Raw Materials
There are no specialized raw materials that are particularly essential to the
operation of IB's business. IB's manufacturing operations require a wide
variety of raw materials, electronic and mechanical components, chemical and
biochemical materials and other supplies, some of which are occasionally found
to be in short supply.
Many components used in IB's products, including proprietary analog and digital
circuitry, are manufactured by IB. Other components, including packaging
materials, superconducting magnets, integrated circuits, microprocessors,
microcomputers and certain detector and data analysis modules, are acquired
from other manufacturers. Most of the raw materials, components and supplies
purchased by IB are available from a number of different suppliers; however, a
number of items are purchased from limited or single sources of supply, and
disruption of these sources could have a temporary adverse effect on shipments
and the financial results of IB. IB believes alternative sources could
ordinarily be obtained to supply these materials, but a prolonged inability to
obtain certain materials or components could have an adverse effect on IB's
financial condition and results of operations and could result in damage to its
relationships with its customers. See "Risk Factors - Reliance on Suppliers."
Research and Development
IB is actively engaged in basic and applied research, development and
engineering programs designed to develop new products and to improve existing
products. During fiscal years 1998, 1997 and 1996, IB spent $29.6 million,
$32.0 million and $29.9 million, respectively (net of customer funding), on
company-sponsored research, development and engineering activities.
47
Although IB intends to continue to conduct extensive research and development
activities, there can be no assurance that it will be able to develop and
market new products on a cost-effective and timely basis, that such products
will compete favorably with products developed by others or that IB's existing
technology will not be superseded by new discoveries or developments. See "Risk
Factors - Uncertainty of Market Acceptance of New Products."
Customer Support and Service
IB believes that its customer service and support are an integral part of its
competitive strategy. As part of its support services, IB's technical support
staff provides, typically at no additional cost, individual assistance in
solving analysis problems, integrating vacuum components, designing circuit
boards, etc., depending on the business. IB offers training courses and
periodically sends its customers information on applications development. IB's
products generally include a 90-day to one-year warranty, installation and
certain user training, all at no additional cost. Service contracts may be
purchased by customers to cover equipment no longer under warranty. Service
work not performed under warranty or service contract is performed on a time
and materials basis. IB installs and services its products primarily through
its own field service organization.
Patent and Other Proprietary Rights
As a leader in the manufacture and sale of analytical and research instruments
and vacuum products, IB has pursued a policy of seeking patent, copyright,
trademark and trade secret protection in the United States and other countries
for developments, improvements and inventions originating within its
organization that are incorporated in IB's products or that fall within its
fields of interest. As of February 1, 1999, IB owned approximately 205 patents
in the United States and approximately 260 patents throughout the world, and
had approximately 272 patent applications on file with various patent agencies
worldwide. IB intends to file additional patent applications as appropriate.
IB relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title, to
protect its proprietary rights. IB has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. IB also has agreements with third parties
that provide for licensing of patented or proprietary technology. These
agreements include royalty-bearing licenses and technology cross-licenses.
While IB places considerable importance on its licensed technology, IB does not
believe that the loss of any license would have a material adverse effect on
IB's business.
IB's competitors, like companies in many high-technology businesses, routinely
review the products of others for possible conflict with their own patent
rights. Although IB has from time to time received notices of claims from
others alleging patent infringement, IB believes that there are no pending
patent infringement claims that might have a material adverse effect on the
business of IB. See "Risk Factors - Uncertain Protection of Patent and Other
Proprietory Rights."
Environmental Matters
For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Environmental
Matters."
Employees
At February 1, 1999, IB had a total of approximately 3,183 full-time and
temporary employees worldwide - 1,978 in North America, 602 in Western Europe,
128 in Asia, 377 in Australia and 98 in Latin America. IB's employees based in
certain foreign countries may, from time to time, be subject to collective
bargaining agreements. IB's OSI employees based in Australia conducted a strike
in 1997, which was quickly resolved. Those employees are subject to a
collective bargaining agreement that is up for renewal and is currently being
negotiated. IB currently considers its employee relations to be good.
IB's success depends to a significant extent upon a limited number of key
employees and other members of senior management of IB. The loss of the service
of one or more of these key employees could have a material adverse effect on
IB. The success of IB's future operations depends in large part on IB's ability
to recruit and retain engineers and
48
technicians, as well as marketing, sales, service and other key personnel, who
in each case are in great demand. IB's inability to attract and retain the
personnel it requires could have a material adverse effect on IB's results of
operations.
Properties
IB has manufacturing, warehouse, research and development, sales, service and
administrative facilities which have an aggregate floor space of 661,000 and
506,500 square feet located in the United States and abroad, respectively, for
a total of 1,167,500 square feet worldwide. Of these facilities, aggregate
floor space of approximately 332,750 square feet is leased, and the remainder
is owned by IB. The management of IB does not believe that there is any
material long-term excess capacity in its facilities, although utilization is
subject to change based on customer demand. The management of IB believes that
the Instruments Business' facilities and equipment generally are well
maintained, in good operating condition and suitable for IB's purposes and
adequate for present operations.
IB has ten manufacturing facilities located throughout the world. IB's
facilities are located in Palo Alto, California, Walnut Creek, California,
Harbor City, California, Woburn, Massachusetts, Lexington, Massachusetts, Fort
Collins, Colorado, Tempe, Arizona, Melbourne, Australia, Middelburg, The
Netherlands, and Torino, Italy.
IB has 70 sales and service facilities located throughout the world, sixty-one
of which are located outside the United States, including facilities located in
Argentina, Australia, Austria, Belgium, Brazil, Canada, France, Japan, Korea,
Mexico, The Netherlands, Spain, Sweden, Switzerland, Taiwan, the United Kingdom
and Venezuela.
Legal Proceedings
Pursuant to the Distribution Agreement, IB has agreed to indemnify VSEA and VMS
for any costs, liabilities or expenses with respect to any legal proceedings
relating to the Instruments Business. In addition, IB has agreed to pay for
one-third of the costs, liabilities and expenses of VSEA and VMS with respect
to certain legal proceedings relating to discontinued operations of Varian. See
"The Distribution - Distribution Agreement."
IB is also involved in certain other legal proceedings arising in the ordinary
course of its business. While there can be no assurances as to the ultimate
outcome of any litigation involving IB, IB's management does not believe any
pending legal proceeding will result in a judgment or settlement that will have
a material adverse effect on IB's financial position, results of operations or
cash flow.
49
MANAGEMENT
Board Of Directors
The five persons identified below constitute the board of directors of IB (the
"IB Board"). Each individual listed below (other than Allen J. Lauer) is
currently a director of Varian and will resign from the Board of Directors of
Varian effective as of the Distribution Date. The IB Board will be divided into
three classes. Directors for each class will be elected at the annual meeting
of stockholders held in the year in which the term for such class expires and
will serve thereafter for three years.
The following table sets forth names, in alphabetical order, and information
about the IB Board:
Initial
Name, Age and Current Term
Principal Occupation Expires Information
--------------------- --------- -----------
Allen J. Lauer, 61.................. 2000 Mr. Lauer is the Executive
Executive Vice President of Varian Vice President of Varian
responsible for the
Instruments Business. In more
than 30 years with Varian, Mr.
Lauer has served in numerous
key management roles. He was
named a corporate Vice
President of Varian in 1981,
was elevated to Senior Vice
President of Varian in 1989,
and became Executive Vice
President of Varian in 1990.
John G. McDonald, 61................ 2001 Professor McDonald is The
The Industrial Bank of Japan Industrial Bank of Japan
Professor of Finance at Stanford Professor of Finance at
University's Graduate School of Stanford University's Graduate
Business School of Business, where he
has served on the faculty
since 1968. He is a director
of Golden State Vintners,
Inc., Scholastic Corporation
and TriNet Corporate Realty
Trust, Inc., and is an
independent trustee of eight
mutual funds managed by
Capital Research & Management
Co. and its affiliates.
Professor McDonald has been a
director of Varian since 1988.
Wayne R. Moon, 59 .................. 2001 Mr. Moon is Chairman of the
Chairman of the Board and Chief Board and Chief Executive
Executive Officer of Blue Shield of Officer of Blue Shield of
California California (a health care
company), positions he has
held since 1993. From 1990 to
1993, he served as President
and Chief Operating Officer of
Kaiser Foundation Health Plan,
Inc. and Kaiser Foundation
Hospitals (health maintenance
organizations). Mr. Moon has
been a director of Varian
since 1995.
D.E. Mundell, 67.................... 2002 Mr. Mundell is Chairman of the
Chairman of the Board of ORIX USA Board of ORIX USA Corporation
Corporation and Advisor (a board-level
position) to ORIX Corporation
(both financial services
companies), positions he has
held since 1991. He is
director of Beazer Homes USA,
Inc. and Stockton Holdings,
Ltd. Mr. Mundell has been a
director of Varian since 1992.
Elizabeth E. Tallett, 49............ 2002 Ms. Tallett is President and
President and Chief Executive Chief Executive Officer of
Officer of Dioscor, Inc., and of Dioscor, Inc. (a
Ellard Pharmaceuticals Inc. biopharmaceutical company),
positions she has held since
1996. Ms. Tallett is also
President and Chief Executive
Officer of Ellard
Pharmaceuticals Inc. (a
pharmaceutical company),
positions she has held since
1998. From 1992 to 1996, Ms.
Tallett served as President
and Chief Executive Officer of
Transcell Technologies, Inc.
(a biotechnology company). Ms.
Tallett is a director of The
Principal Mutual Life
Insurance Company, Coventry
Health Care Inc. and
Integrated America Inc., and
is Chairman of the Board of
Huma Scan, Inc. She has been a
director of Varian since 1996.
50
Compensation Of Directors
Each director who is not an IB employee will receive an annual retainer fee of
$20,000, plus $1,000 for each IB Board and committee meeting attended. The non-
employee Chairman of the IB Board will receive a retainer fee of $90,000 (in
lieu of any other annual retainer or committee chair fee), and directors
chairing standing committees of the IB Board will each receive a retainer fee
of $5,000. Under the IB Omnibus Stock Plan, each director who is not an IB
employee will also receive, upon initial appointment or election to the IB
Board, a non-qualified stock option to acquire 10,000 shares of IB Common
Stock, and will receive annually thereafter a non-qualified stock option to
acquire 5,000 shares of IB Common Stock. In lieu of these grants, any non-
employee Chairman will receive upon initial appointment a non-qualified stock
option to acquire 50,000 shares of IB Common Stock. Such stock options will be
granted with an exercise price equal to the fair market value of IB Common
Stock on the date of grant, becoming exercisable immediately on the date of
grant and having a ten-year term. Directors who are IB employees will receive
no compensation for their services as directors.
Committees of the IB Board Of Directors
The business of IB will be managed under the direction of the IB Board. The IB
Board will have Audit and Compensation Committees. Members of the Audit and
Compensation Committees will not be employees of IB.
Audit Committee
The Audit Committee's principal functions will be to review the scope of the
annual audit of IB by its independent auditors, review the annual financial
statements of IB and the related audit report as prepared by the independent
auditors, recommend to the IB Board selection of the independent auditors each
year and review any non-audit fees paid to the independent auditors. The
members of the Audit Committee are the following non-employee directors:
John G. McDonald (Chairman), Wayne R. Moon, D.E. Mundell and Elizabeth E.
Tallett.
Compensation Committee
The Compensation Committee will administer the stock and cash incentive plans
of IB and in this capacity it will make option grants or awards under these
plans. In addition, the Compensation Committee will determine the compensation
of the President and Chief Executive Officer and the other senior executives.
The Compensation Committee will also recommend the establishment of policies
dealing with various compensation and employee benefit plans for IB. The
members of the Compensation Committee are the following non-employee directors:
John G. McDonald, Wayne R. Moon, D.E. Mundell (Chairman) and Elizabeth E.
Tallett.
51
Executive Officers
Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of IB immediately following the
Distribution. Those persons listed below who are currently officers of Varian
will relinquish their positions with Varian effective as of the Distribution
Date.
Business Experience Prior
to
Becoming an Executive
Name and Title Age Officer of IB
-------------- --- -------------------------
Allen J. Lauer................................ 61 Mr. Lauer is the Executive
President and Chief Executive Officer Vice President of Varian
responsible for the
Instruments Business. In
more than 30 years with
Varian, Mr. Lauer has
served in numerous key
management roles. He was
named a corporate Vice
President of Varian in
1981, was elevated to
Senior Vice President of
Varian in 1989, and became
Executive Vice President of
Varian in 1990.
Garry W. Rogerson............................. 46 Mr. Rogerson is Vice
Vice President, Analytical Instruments President of Varian's
Analytical Instruments
business, which includes
the Chromatography Systems
business and Optical
Spectroscopy Instruments
business, a position he has
held since 1998. Mr.
Rogerson has been Vice
President and General
Manager of Varian's
Chromatography Systems
business (which is expected
to be a continuing
responsibility) since 1994.
Prior to this, Mr. Rogerson
served as Sales and
Marketing Manager for
Varian's NMR Instruments
business. Mr. Rogerson has
held various other
positions in the
Instruments Business during
his 19 years with Varian.
Raymond J. Shaw............................... 49 Mr. Shaw is Vice President
Vice President, NMR Instruments and General Manager of
Varian's NMR Instruments
business, positions he has
held since 1989. Mr. Shaw
has held various other
positions in the
Instruments Business during
his 20 years with Varian.
Arthur W. Homan............................... 39 Mr. Homan is Associate
Vice President, General Counsel and Secretary General Counsel and
Assistant Secretary of
Varian, positions he has
held since 1998 and 1993,
respectively. From 1993 to
1998, he served as Senior
Corporate Counsel. Mr.
Homan has held various
positions in the legal
department during his 10
years with Varian.
James L. Colbert.............................. 52 Mr. Colbert is Controller
Controller of Varian's NMR Instruments
business, a position he has
held since 1992. Mr.
Colbert has held various
other positions during his
26 years with Varian.
52
Executive Officer Compensation
Summary of Compensation
Table I below sets forth a summary of the compensation paid by Varian for the
last three fiscal years to the chief executive officer of IB, and the four
additional most highly compensated individuals (based on their fiscal year 1998
compensation from Varian) who are expected to be executive officers of IB
immediately after the Distribution.
Table I
Summary Compensation Table
Long-Term
Compensation
------------------------------------
Awards Payouts
--------------------------- --------
Annual Compensation Securities
---------------------------------- Underlying
Other Annual Options/ LTIP All Other
Name and Salary Bonus Compensation Restricted Stock SARs Payouts Compensation
Principal Position Year ($) ($)(/1/) ($)(/2/) Award(s)($)(/2/) (#)(/4/) ($)(/5/) ($)(/6/)
- ------------------ ---- ------ -------- ------------ ---------------- ---------- -------- ------------
Allen J. Lauer 1998 338,910 232,936 33,050 0 36,000 347,454 101,096
President and Chief 1997 323,148 359,300 22,594 244,388 36,000 461,552 117,958
Executive Officer 1996 310,990 532,363 35,458 204,225 36,000 628,056 93,274
Garry W. Rogerson 1998 166,388 62,566 7,791 0 8,500 98,969 20,516
Vice President, 1997 156,024 89,372 8,796 52,369 7,200 88,644 15,487
Analytical Instruments 1996 148,564 108,864 9,307 43,763 5,500 83,344 17,419
Raymond J. Shaw 1998 164,731 63,210 5,232 0 7,500 87,125 22,853
Vice President, 1997 156,494 104,812 6,309 52,369 7,200 88,586 25,149
NMR Instruments 1996 150,522 124,416 6,164 43,763 6,000 152,048 23,438
Arthur W. Homan 1998 150,836 29,221 4,476 20,366 8,000 0 16,669
Vice President, General 1997 122,770 62,273 4,764 14,588 6,000 0 15,857
Counsel and Secretary 1996 117,233 66,372 3,057 37,125 5,000 0 12,872
James L. Colbert 1998 120,330 28,802 0 0 1,050 0 13,280
Controller 1997 115,703 33,386 0 0 1,050 0 14,655
1996 112,211 27,111 0 0 1,000 0 12,374
- -------
(1) Consists of Varian Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.
(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.
(3) Consists of restricted shares of Varian Common Stock (valued at the closing
market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Mr. Lauer, 8,400
shares, $288,750; Mr. Rogerson, 1,800 shares, $61,875; Mr. Shaw, 1,800
shares, $61,875; Mr. Homan, 800 shares, $27,500; and Mr. Colbert, 0 shares,
$0. Shares of restricted stock awarded for fiscal years 1998, 1997 and
1996, respectively, which partially vest in under three years were as
follows: Mr. Lauer, 0 shares, 4,200 shares and 4,200 shares; Mr. Rogerson 0
shares, 900 shares and 900 shares; Mr. Shaw, 0 shares, 900 shares and 900
shares; Mr. Homan, 350 shares, 300 shares and 750 shares; and Mr. Colbert,
0 shares, 0 shares and 0 shares.
(4) Consists of shares of Varian Common Stock that may be acquired under stock
options granted pursuant to the Varian Omnibus Stock Plan (no stock
appreciation rights have been granted).
(5) Consists of cash payouts in fiscal years 1999, 1998 and 1997 under the
long-term incentive feature of the Varian Omnibus Stock Plan for three-year
cycles ended with fiscal years 1998, 1997 and 1996, respectively.
(6) Consists of (a) Varian contributions (including interest) to Retirement and
Profit-Sharing Program and Supplemental Retirement Plan (or similar plan in
Australia for Mr. Shaw) accounts for fiscal years 1998, 1997 and 1996,
respectively (Mr. Lauer, $98,941, $116,157 and $91,816; Mr. Rogerson,
$19,389, $14,604 and $16,718; Mr. Shaw, $22,836, $25,134 and $23,424; Mr.
Homan, $16,184, $15,603 and $12,677; and Mr. Colbert, $12,516, $14,020 and
$11,861); and (b) Varian-paid premiums for group term life insurance in
fiscal years 1998, 1997 and 1996, respectively (Mr. Lauer, $2,155, $1,801
and $1,458; Mr. Rogerson, $1,127, $883 and $701; Mr. Shaw, $17, $15 and
$14; Mr. Homan, $485, $254 and $195; and Mr. Colbert, $764, $635 and $513).
53
Stock Options
Grant of Options
Table II below sets forth information with respect to grants of options to
purchase Varian Common Stock during the fiscal year ended October 2, 1998 to
the individuals listed in Table I. These grants were made pursuant to the
Varian Omnibus Stock Plan and are reflected in Table I.
Table II
Option/SAR Grants In Last Fiscal Year
Individual Grants
---------------------------------------------------
Potential Realizable
Percent of Value at Assumed
Number of Total Options/ Annual Rates of Stock
Securities SARs Granted Exercise Price Appreciation for
Underlying to or Base Option Term(2)
Options/SARs Employees in Price Expiration -----------------------
Name Granted (#)(/1/) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ---------------- -------------- -------- ---------- ----------- -----------
Allen J. Lauer.......... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Garry W. Rogerson....... 8,500 0.84 58.1563 11/20/07 310,881 787,832
Raymond J. Shaw......... 7,500 0.74 58.1563 11/20/07 274,306 695,146
Arthur W. Homan......... 8,000 0.79 58.1563 11/20/07 292,593 741,489
James L. Colbert........ 1,050 0.10 58.1563 11/20/07 38,403 97,330
- -------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.
(2) The 5% and 10% assumed annual rates of stock price appreciation would
result from per share prices of $94.73 and $150.84, respectively. Such
assumed rates are not intended to represent a forecast of possible future
appreciation of Varian Common Stock or total stockholder return.
Aggregated Option Exercises and Year-End Values
Table III sets forth as of October 2, 1998, for each of the individuals listed
in Table I (i) the total number of shares of Varian Common Stock received upon
exercise of options during fiscal year 1998, (ii) the value realized upon such
exercise (based on the fair market value of the underlying shares of Varian
Common Stock on the exercise date), (iii) the total number of unexercised
options to purchase Varian Common Stock (exercisable and unexercisable) and
(iv) the value of such options which were in-the-money at October 2, 1998
(based on the closing price of Varian Common Stock at October 2, 1998,
$34.375).
54
Table III
Aggregated Option/SAR Exercises In Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Options/SARs at Fiscal Options/SARs
on Value Year-End(#) at Fiscal Year-End ($)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Allen J. Lauer.......... 0 0 126,000 72,000 717,150 0
Garry W. Rogerson....... 0 0 6,284 15,134 0 0
Raymond J. Shaw......... 0 0 19,600 14,300 65,016 0
Arthur W. Homan......... 1,000 27,875 6,333 13,667 0 0
James L. Colbert........ 1,000 19,500 1,566 2,084 0 0
Long-Term Incentive Plans--Awards In Last Fiscal Year(/1/)
Number of Estimated Future Payouts under
Shares, Performance or Non-Stock Price-Based Plans
Units or Other Period --------------------------------------
Other Until Maturation Threshold Target Maximum
Name Rights (#) or Payout ($)(/2/) ($)(/2/) ($)(/4/)
- ---- ---------- ---------------- ----------- ----------- ---------
Allen J. Lauer.......... N/A 1998-2000 25,604 67,423 --
Garry W. Rogerson....... N/A 1998-2000 5,717 22,582 --
Raymond J. Shaw......... N/A 1998-2000 5,033 19,880 --
Arthur W. Homan......... N/A N/A N/A N/A --
James L. Colbert........ N/A N/A N/A N/A --
- -------
(1) Determinations by Varian's Organization and Compensation Committee (the
"Varian Committee") that a named executive officer may participate in the
long-term incentive feature of the Varian Omnibus Stock Plan ("LTI") and
might receive a payout for a specified period is an award for purposes of
this table. Awards (i.e., the determination of participation in the LTI)
for the 1998-2000 cycle were made in fiscal year 1998. Under the LTI, each
named executive officer is eligible to receive compensation payable in cash
or in Varian Common Stock, or a combination thereof, based upon Varian's
achievement of objectives for average annual return on net assets ("RONA")
and revenue growth ("RG") over a three-year cycle. No estimate or
assumption made in connection with this table is intended to represent a
forecast of possible future performance of Varian.
(2) If the minimum level of RONA or RG established by the Varian Committee at
the beginning of the three-year cycle is achieved, the minimum amount
payable ranges from 3% to 7.5% of annual base salary as of the end of the
last fiscal year of the cycle. If neither RONA nor RG for the three-year
cycle equals the applicable minimum level, no amount will be paid. The
minimum amount payable, if any amount is paid at all, depends on each named
executive's base salary in the last year of the cycle, and the amounts set
forth above assume that each named executive officer's annual base salary
at the end of fiscal year 2000 will be identical to the executive officer's
calendar year 1999 annual base salary.
(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that the RONA
and revenues for the remaining years of the cycle are the same as RONA and
revenues for fiscal year 1998 and (b) that each named executive officer's
annual base salary at the end of fiscal year 2000 will be identical to his
calendar year 1999 annual base salary. The actual payment for the three-
year cycle may be greater or less than the estimates shown in this column,
depending upon the actual RONA and revenues for fiscal years 1998, 1999 and
2000, the actual base salary of the named executive officer at the end of
fiscal year 2000, and the aggregate payout to all participants (see
footnote 4 below).
(4) The maximum amount payable is not determinable or estimable prior to the
end of the three-year cycle for the following reason: If the maximum levels
of RONA and RG established by the Varian Committee at the beginning of the
three-year cycle are achieved or exceeded, the maximum amount payable
ranges from 100% to 200% of annual base salary as of the end of the last
fiscal year of the cycle. The maximum amount payable is reduced, however,
if the aggregate LTI payout to all participants (including the named
executive officers) would exceed 5% (before such payouts) of Varian's pre-
tax operating earnings in the last fiscal year of the three-year cycle.
This variable makes the maximum amount not determinable or estimable.
55
Change In Control Agreements
Certain IB executive officers are already parties to change in control
agreements with Varian which provide for the payment of specified compensation
and benefits upon certain terminations of their employment following a change
in control of Varian. These change in control agreements, which are required to
be assumed by IB pursuant to the terms of such agreements, will be amended and
restated as of the Distribution Date (the "Agreements") to reflect the
executive officers' new and increased responsibilities with IB. In addition, IB
executive officers not already parties to change in control agreements with
Varian will be offered similar change in control agreements with IB effective
as of the Distribution Date.
Under the Agreements, a change in control will be defined to occur (a) if any
individual or group becomes the beneficial owner of 30% or more of the combined
voting power of IB's outstanding securities, (b) if "continuing directors"
(defined as the directors of IB as of the date of the Agreement and any
successor to any such director who was nominated or selected by a majority of
the directors in office at the time of his nomination or selection and who is
not affiliated or associated in any way with an individual or group who is a
beneficial owner of more than 10% of the combined voting power of IB's
outstanding securities) cease to constitute at least a majority of the board of
directors, or (c) if there occurs a reorganization, merger, consolidation or
other corporate transaction involving IB in which the stockholders of IB do not
own more than 50% of the combined voting power of IB or other corporation
resulting from such transaction, or (d) if all or substantially all of IB's
assets are sold, liquidated or distributed. In the Agreements, the affected
executive officers will agree not to voluntarily leave IB's employ during a
tender or exchange offer, proxy solicitation in opposition to the board of
directors or other effort by any party to effect a change in control of IB.
This is intended to assure that management will continue to act in the interest
of the stockholders rather than be affected by personal uncertainties during
any attempts to effect a change in control of IB, and to enhance IB's ability
to attract and to retain executives.
Each Agreement will provide that if within 18 months of a change in control (i)
IB terminates the employee's employment other than by reason of his death,
disability, retirement or for cause (as defined in the Agreement) or (ii) the
employee terminates his employment for "good reason," the employee will receive
a lump sum severance payment equal to 2.99 (in the case of the Chief Executive
Officer) or 2.50 (in the case of the other senior executives) times the sum of
the employee's annual base salary plus the highest annual and multi-year
bonuses paid to the employee in any of the three years ending prior to the date
of termination. "Good reason" is defined as the following after a change in
control of IB: certain material changes in assignment of duties; certain
reductions in compensation; certain material changes in employee benefits and
perquisites; a change in the site of employment; IB's failure to obtain the
written assumption by its successor of the obligations contained in the
Agreement; attempted termination of employment for cause on grounds
insufficient to constitute a basis of termination for cause under the terms of
the Agreement; or IB's failure to promptly make any payment required under the
terms of the Agreement in the event of a dispute relating to employment
termination. In addition, in the case of the Chief Executive Officer, "good
reason" is defined to exist if he is not made the chief executive officer of
the combined or acquiring entity; and in the case of the General Counsel, "good
reason" is defined to exist if he is not given an "equivalent position" as
defined in this Agreement.
Each Agreement will provide that upon termination or resignation occurring
under the circumstances described above, the employee will receive a
continuation of all insurance and other benefits on the same terms as if he
remained an employee or equivalent benefits will be provided until the earlier
to occur of commencement of substantially equivalent full-time employment with
a new employer or 24 months after the date of termination of employment with
the company. Each Agreement will also provide that all stock options granted
will become exercisable in full according to their terms, and that any
unreleased restricted stock will be released from restrictions. Each Agreement
will further provide that in the event that any payments and benefits received
by the employee from the company would subject that person to the excise tax
contained in Section 280G of the Code the employee will be entitled to receive
an additional payment that will place the employee in the same after-tax
economic position that the employee would have enjoyed if such excise tax had
not applied.
56
THE IB OMNIBUS STOCK PLAN
The IB Omnibus Stock Plan has been adopted by the IB Board effective as of the
Distribution.
Purpose of the IB Omnibus Stock Plan
The IB Omnibus Stock Plan is intended to promote the success of IB by providing
a vehicle under which a variety of stock-based incentive and other awards can
be granted to employees and consultants and to directors of IB who are not
employees of IB or any affiliate ("non-employee directors").
Description of the IB Omnibus Stock Plan
The following paragraphs provide a summary of the principal features of the IB
Omnibus Stock Plan and its operation. The IB Omnibus Stock Plan has been filed
as an exhibit to the Registration Statement of which this Information Statement
is a part. See "Available Information."
General
The IB Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "IB Awards") to eligible IB Omnibus Stock
Plan participants. The maximum number of shares of IB Common Stock available
for IB Awards under the IB Omnibus Stock Plan will be 4,200,000, plus such
number of shares as may be granted in substitution for other options in
connection with the Distribution.
Administration of the IB Omnibus Stock Plan
The IB Omnibus Stock Plan will be administered by the Compensation Committee of
the IB Board. The members of the Compensation Committee must qualify as "non-
employee directors" under Rule 16b-3 under the Exchange Act, and as "outside
directors" under Section 162(m) of the Code ("Section 162(m)") (for purposes of
qualifying the IB Omnibus Stock Plan as performance-based compensation under
Section 162(m)).
Subject to the terms of the IB Omnibus Stock Plan, the Compensation Committee
has the sole discretion to determine the employees and consultants who will be
granted IB Awards, the size and types of such IB Awards, and the terms and
conditions of such IB Awards. The Compensation Committee may delegate its
authority to grant and administer awards to one or more officers or directors
appointed by the Compensation Committee, but only the Compensation Committee
can make awards to participants who are subject to Section 16 of the Exchange
Act.
Eligibility to Receive Awards
Employees and consultants of IB and its affiliates are eligible to be selected
to receive one or more IB Awards. The actual number of individuals who will
receive IB Awards under the IB Omnibus Stock Plan cannot be determined because
eligibility for participation in the IB Omnibus Stock Plan is in the discretion
of the Compensation Committee. The IB Omnibus Stock Plan also provides for the
grant of non-qualified stock options to IB's non-employee directors. Such
options will be granted pursuant to an automatic, non-discretionary formula.
Options
The Compensation Committee may grant non-qualified stock options, incentive
stock options (which are entitled to favorable tax treatment), or a combination
thereof. The number of shares covered by each option will be determined by the
Compensation Committee, but during any fiscal year of IB, no participant may be
granted options for more than 1,000,000 shares.
The price of the shares of IB Common Stock subject to each stock option is set
by the Compensation Committee but cannot be less than 100% of the fair market
value (on the date of grant) of the shares covered by the option. In addition,
the exercise price of an incentive stock option must be at least 110% of fair
market value if (on the grant date) the participant owns stock possessing more
than 10% of the total combined voting power of all classes of stock of IB or
any
57
of its subsidiaries. Nevertheless, substitute options may be granted at less
than fair market value to employees or consultants who receive such options in
connection with a corporate reorganization. Also, the aggregate fair market
value of the shares (determined on the grant date) covered by incentive stock
options which first become exercisable by any participant during any calendar
year may not exceed $100,000.
The exercise price of each option must be paid in full at the time of exercise.
The Compensation Committee also may permit payment through the tender of shares
of IB Common Stock that are already owned by the participant, or by any other
means which the Compensation Committee determines to be consistent with the IB
Omnibus Stock Plan's purpose. Any taxes required to be withheld must be paid by
the participant at the time of exercise.
Options become exercisable at the times and on the terms established by the
Compensation Committee. Options expire at the times established by the
Compensation Committee but not later than 10 years after the date of grant
(except in certain cases involving the death of the optionee). The Compensation
Committee may extend the maximum term of any option granted under the IB
Omnibus Stock Plan, subject to the preceding limits.
Non-Employee Director Options
Under the IB Omnibus Stock Plan, each non-employee director automatically will
receive, as of the later of (a) the non-employee director's appointment or
election to the IB Board, or (b) ten business days after the effective date of
the IB Omnibus Stock Plan, a non-qualified stock option to purchase 10,000
shares. Each non-employee director will also automatically receive a non-
qualified stock option to purchase 5,000 shares coincident with each subsequent
annual meeting of IB, provided the non-employee director serves continuously as
a director through the next grant date. In lieu of the above grants, any non-
employee Chairman of the IB Board automatically will receive, as of the later
of (a) the date he or she becomes Chairman or (b) ten business days after the
effective date of the IB Omnibus Stock Plan, a non-qualified stock option to
purchase 50,000 shares.
The exercise price of each non-employee director and Chairman option will be
100% of the fair market value (on the date of grant) of the shares covered by
the option. Nevertheless, substitute options may be granted at less than fair
market value to non-employee directors who receive such options in connection
with a corporate reorganization. Each option will become exercisable on the
grant date. All options granted to non-employee directors generally will have a
term of ten years from the date of grant. If a director terminates service on
the IB Board prior to an option's normal expiration date, the period of
exercisability of the option may be shorter, depending upon the reason for the
termination.
In addition, non-employee directors may elect to receive shares of IB Common
Stock under the IB Omnibus Stock Plan in lieu of cash compensation.
Stock Appreciation Rights
The Compensation Committee determines the terms and conditions of each SAR.
SARs may be granted in conjunction with an option, or may be granted on an
independent basis. The number of shares covered by each SAR will be determined
by the Compensation Committee, but during any fiscal year of IB, no participant
may be granted SARs for more than 1,000,000 shares. Upon exercise of an SAR,
the participant will receive payment from IB in an amount determined by
multiplying: (1) the difference between the fair market value of a share on the
date of exercise over the grant price (fair market value of a share on the
grant date), times (2) the number of shares with respect to which the SAR is
exercised. SARs may be paid in cash or shares of IB Common Stock, as determined
by the Compensation Committee. SARs are exercisable at the times and on the
terms established by the Compensation Committee.
Restricted Stock Awards
Restricted stock awards are shares of IB Common Stock that vest in accordance
with terms and conditions established by the Compensation Committee. The number
of shares of restricted stock granted to a participant (if any) will be
determined by the Compensation Committee, but during any fiscal year of IB, no
participant may be granted more than 100,000 shares.
58
In determining whether an award of restricted stock should be made and/or the
vesting schedule for an award, the Compensation Committee may impose whatever
conditions to vesting it determines to be appropriate. For example, the
Compensation Committee may determine to grant restricted stock only if
performance goals established by the Compensation Committee are satisfied. Any
performance goals may be applied on a company-wide or an individual business
unit basis, as determined by the Compensation Committee. See discussion below
of " - Performance Goals."
Performance Units And Performance Shares
Performance Units and Performance Shares are IB Awards which will result in a
payment to a participant only if performance goals established by the
Compensation Committee are satisfied. The initial value of each Performance
Unit and each Performance Share shall not exceed the fair market value (on the
date of grant) of a share of IB Common Stock. The applicable performance goals
will be determined by the Compensation Committee, and may be applied on a
company-wide or an individual business unit basis, as deemed appropriate in
light of the participant's specific responsibilities. See " - Performance
Goals."
In addition to the performance requirements discussed above, Performance Units
and Performance Shares are subject to additional limits set forth in the IB
Omnibus Stock Plan. During any fiscal year of IB, no participant shall receive
more than 100,000 Performance Units or Performance Shares.
Performance Goals
The Compensation Committee in its discretion may make performance goals
applicable to a participant with respect to an IB Award. At the Compensation
Committee's discretion, one or more of the following performance goals may
apply: EBIT, EBITDA, earnings per share, net income, operating cash flow,
return on assets, return on equity, return on sales, revenue and stockholder
return. The Compensation Committee may also use other performance goals.
EBIT means IB's or a business unit's income before reductions for interest and
taxes. EBITDA means IB's or a business unit's income before reductions for
interest, taxes, depreciation and amortization. Earnings per share means IB's
or a business unit's net income, divided by a weighted average number of common
shares outstanding and dilutive common equivalent shares deemed outstanding.
Net income means IB's or a business unit's income after taxes. Operating cash
flow means IB's or a business unit's sum of net income plus depreciation and
amortization less capital expenditures plus certain specified changes in
working capital. Return on assets means the percentage equal to IB's or a
business unit's EBIT (but before incentive compensation), divided by IB's or a
business unit's, as applicable, average net assets. Return on equity means the
percentage equal to IB's net income, divided by average stockholders' equity.
Return on sales means the percentage equal to IB's or a business unit's EBIT
(but before incentive compensation), divided by IB's or the business unit's, as
applicable, revenue. Revenue means IB's or a business unit's sales. Stockholder
return means the total return (change in share price plus reinvestment of any
dividends) of a share of the IB Common Stock.
Nontransferability of IB Awards
IB Awards granted under the IB Omnibus Stock Plan may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than by will
or by the applicable laws of descent and distribution.
Tax Aspects
A recipient of a stock option or SAR will not have taxable income upon the
grant of the option. For options and SARs other than incentive stock options,
the participant will recognize ordinary income upon exercise in an amount equal
to the excess of the fair market value of the shares over the exercise price
(the "appreciation value") on the date of exercise. Any gain or loss recognized
upon any later disposition of the shares generally will be capital gain or
loss.
Purchase of shares upon exercise of an incentive stock option will not result
in any taxable income to the participant, except for purposes of the
alternative minimum tax. Gain or loss recognized by the participant on a later
sale or other disposition will either be long-term capital gain or loss or
ordinary income depending upon whether the participant
59
holds the shares transferred upon the exercise for a specified period. Any
ordinary income recognized will be in the amount, if any, by which the lesser
of the fair market value of such shares on the date of exercise or the amount
realized from the sale exceeds the option price.
Unless the participant elects to be taxed at the time of receipt of restricted
stock, Performance Units or Performance Shares, the participant will not have
taxable income upon the receipt of the IB Award, but upon vesting will
recognize ordinary income equal to the fair market value of the shares or cash
at the time of vesting.
At the discretion of the Compensation Committee, the IB Omnibus Stock Plan
allows a participant to satisfy tax withholding requirements under federal and
state tax laws in connection with the exercise or receipt of an IB Award by
electing to have shares of IB Common Stock withheld, or by delivering to IB
already-owned shares, having a value equal to the amount required to be
withheld.
IB generally will be entitled to a tax deduction in connection with an IB Award
under the IB Omnibus Stock Plan only in an amount equal to the ordinary income
realized by the participant and at the time the participant recognizes such
income. However, IB may not be entitled to a deduction in connection with
certain substitute stock options issued in connection with the Distribution. In
addition, Section 162(m) contains special rules regarding the federal income
tax deductibility of compensation paid to IB's Chief Executive Officer and to
each of the other four most highly compensated executive officers. The general
rule is that annual compensation paid to any of these specified executives will
be deductible only to the extent that it does not exceed $1 million. However,
IB can preserve the deductibility of certain compensation in excess of $1
million if it complies with conditions imposed by Section 162(m), including the
establishment of a maximum number of shares with respect to which IB Awards may
be granted to any one employee during one year, and for IB Awards other than
options and SARs, the IB Omnibus Stock Plan sets forth performance goals which
must be achieved prior to payment of the IB Awards. The IB Omnibus Stock Plan
has been designed to permit the Compensation Committee to grant IB Awards which
satisfy the requirements of Section 162(m), thereby permitting IB to continue
to receive a federal income tax deduction in connection with such IB Awards.
Amendment and Termination of the IB Omnibus Stock Plan
The IB Board generally may amend or terminate the IB Omnibus Stock Plan at any
time and for any reason.
60
THE IB MANAGEMENT INCENTIVE PLAN
The IB Management Incentive Plan has been adopted by the IB Board effective as
of the Distribution.
Background and Reasons for Adoption
Under Section 162(m), the federal income tax deductibility of compensation paid
to IB's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds $1
million in any one year. IB can deduct compensation in excess of that amount if
it qualifies as "performance-based compensation" under Section 162(m). The IB
Management Incentive Plan is intended to permit IB to pay incentive
compensation which qualifies as performance-based compensation, thereby
permitting IB to receive a federal income tax deduction for the payment of such
incentive compensation.
Description of the IB Management Incentive Plan
The following paragraphs provide a summary of the principal features of the IB
Management Incentive Plan and its operation. The IB Management Incentive Plan
has been filed as an exhibit to the Registration Statement of which this
Information Statement is a part.
Purpose of the IB Management Incentive Plan
The IB Management Incentive Plan is intended to motivate IB's key employees to
increase stockholder value by (1) linking a portion of their cash compensation
to IB's financial performance, (2) providing rewards for improving IB's
financial performance and (3) helping to attract and retain key employees.
Administration of the IB Management Incentive Plan
The IB Management Incentive Plan will be administered by the Compensation
Committee. The members of the Compensation Committee must qualify as "outside
directors" under Section 162(m) (for purposes of qualifying the IB Management
Incentive Plan as performance-based compensation under such section). Subject
to the terms of the IB Management Incentive Plan, the Compensation Committee
has the sole discretion to determine the key employees who will be granted
awards, and the amounts, terms and conditions of each award. The Compensation
Committee may delegate its authority to grant and administer awards to one or
more officers or directors appointed by the Compensation Committee, but only
with respect to awards that are not intended to qualify as performance-based
compensation under Section 162(m).
Eligibility to Receive Awards
Eligibility for the IB Management Incentive Plan is determined in the
discretion of the Compensation Committee. In selecting participants for the IB
Management Incentive Plan, the Compensation Committee will choose key employees
of IB and its affiliates who are likely to have a significant impact on IB
performance.
Awards and Performance Goals
Under the IB Management Incentive Plan, the Compensation Committee will
establish (1) the performance goals which must be achieved in order for the
participant to actually be paid an award and (2) a formula or table for
calculating a participant's award, depending upon how actual performance
compares to the preestablished performance goals. A participant's award will
increase or decrease as actual performance increases or decreases. The
Compensation Committee also will determine the periods for measuring actual
performance (the "performance period"). Performance periods may last as long as
three fiscal years of IB.
The Compensation Committee may set performance periods and performance goals
which differ from participant to participant. For example, the Compensation
Committee may choose performance goals based on either company-wide or business
unit results, as deemed appropriate in light of the participant's specific
responsibilities. For purposes of qualifying awards as performance-based
compensation under Section 162(m), the Compensation Committee will specify
performance goals from the following list: EBIT, EBITDA, earnings per share,
net income, operating cash flow, return on assets, return on equity, return on
sales, revenue and stockholder return.
61
EBIT means IB's or a business unit's income before reductions for interest and
taxes. EBITDA means IB's or a business unit's income before reductions for
interest, taxes, depreciation and amortization. Earnings per share means IB's
or a business unit's net income, divided by a weighted average number of common
shares outstanding and dilutive common equivalent shares deemed outstanding.
Net income means IB's or a business unit's income after taxes. Operating cash
flow means IB's or a business unit's sum of net income plus depreciation and
amortization less capital expenditures plus certain specified changes in
working capital. Return on assets means the percentage equal to IB's or a
business unit's EBIT (but before incentive compensation), divided by IB's or a
business unit's, as applicable, average net assets. Return on equity means the
percentage equal to IB's net income, divided by average stockholders' equity.
Return on sales means the percentage equal to IB's or a business unit's EBIT
(but before incentive compensation), divided by IB's or the business unit's, as
applicable, revenue. Revenue means IB's or a business unit's sales. Stockholder
return means the total return (change in share price plus reinvestment of any
dividends) of a share of IB Common Stock.
For any performance period, no participant may receive an award of more than
the lesser of (1) 200% of the participant's annualized salary rate on the last
day of the performance period or (2) $2 million. Also, the total of all awards
for any performance period cannot exceed 8% of IB's EBIT before incentive
compensation for the most recent completed fiscal year of IB. Awards which
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.
Determination of Actual Awards
After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance which was
achieved. However, the Compensation Committee retains discretion to eliminate
or reduce the actual award payable to any participant below that which
otherwise would be payable under the applicable formula. Awards under the IB
Management Incentive Plan generally will be payable in cash or IB Common Stock
within 120 days after the performance period during which the award was earned.
Amendment and Termination of the IB Management Incentive Plan
The IB Board may amend or terminate the IB Management Incentive Plan at any
time and for any reason.
62
OWNERSHIP OF IB COMMON STOCK
IB is currently a wholly owned subsidiary of Varian. Table IV sets forth
information as to the beneficial ownership of IB Common Stock as of the
Distribution Date (and following the Distribution) as if the Distribution took
place on February 1, 1999, by (a) each officer named in Table I, (b) each
director of IB, (c) all directors and executive officers of IB as a group and
(d) each person who, to IB's knowledge, beneficially owned more than 5% of the
outstanding shares. The information in Table IV is based on the ownership of
Varian Common Stock as of February 1, 1999 and the number of shares of IB
Common Stock expected to be distributed to each existing stockholder of Varian
in the Distribution.
Table IV
Percent of
Shares of IB Common Stock Outstanding Shares
Expected to be Expected to be
Directors and Officers Beneficially Owned(/1/)(/2/) Beneficially Owned(/1/)
- ---------------------- ---------------------------- -----------------------
Name
- ----
John G. McDonald........ 19,800(/8/) *
Wayne R. Moon........... 6,836(/4/) *
D.E. Mundell............ 16,400(/5/) *
Elizabeth F. Tallett.... 5,100(/6/) *
Allen J. Lauer.......... 233,510(/7/) *
Garry W. Rogerson....... 16,051(/8/) *
Raymond J. Shaw......... 34,626(/9/) *
Arthur W. Homan......... 14,998(/10/) *
James L. Colbert........ 4,000(/11/) *
All Directors and
Executive Officers of
IB
as a Group (9
persons)............... 351,321(/12/) 1.2
Principal Stockholders
Name and Address of
Beneficial Owner
- -------------------
FMR Corp./Edward C.
Johnson 3d/Abigail P.
Johnson................ 3,305,860(/13/) 11.0
82 Devonshire Street
Boston, Massachusetts
02109
State Treasurer......... 2,075,760(/14/) 6.9
State of Michigan
c/o Director of
Investments
P.O. Box 1128
Lansing, Michigan 48901
Merrill Lynch & Co.,
Inc. (Merrill Lynch
Asset Management
Group)................. 1,756,000(/15/) 5.9
Merrill Lynch Capital
Fund, Inc.............. 1,750,000(/15/) 5.8
800 Scudders Mill Road
Plainsboro, New Jersey
08536
Sound Shore Management,
Inc.................... 1,506,500(/16/) 5.0
8 Sound Shore Drive
Greenwich, Connecticut
06836
- -------
* The percentage of shares of IB Common Stock expected to be beneficially
owned does not exceed one percent of the shares of IB Common Stock expected
to be outstanding.
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of IB Common Stock which such
person has the right to acquire within 60 days following February 1,
1999. For purposes of computing the percentage of outstanding shares of
IB Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days following February 1, 1999 is deemed to be outstanding,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Fractional shares are rounded
down to the nearest whole share.
63
(2) To IB's knowledge, unless otherwise indicated, the person named in the
table has sole voting and investment power with respect to the shares or
shares such voting and investment power with such person's spouse or
children.
(3) Includes 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(4) Includes 6,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(5) Includes (a) 12,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan and (b) 3,400
shares held in a trust of which Mr. Mundell is co-trustee with his wife.
(6) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(7) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan, (b) 162,000 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant
to the Varian Omnibus Stock Plan and (c) 63,110 shares held in a trust of
which Mr. Lauer is co-trustee with his wife.
(8) Includes (a) 900 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan and (b) 13,351 shares which may be acquired on
or within 60 days of February 1, 1999 under stock options granted
pursuant to the Varian Omnibus Stock Plan.
(9) Includes (a) 900 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan and (b) 26,500 shares which may be acquired on
or within 60 days of February 1, 1999 under stock options granted
pursuant to the Varian Omnibus Stock Plan.
(10) Includes (a) 584 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan and (b) 11,666 shares which may be acquired on
or within 60 days of February 1, 1999 under stock options granted
pursuant to the Varian Omnibus Stock Plan.
(11) Includes 2,600 shares which may be acquired on or within 60 days of
February 1, 1999 under stock options granted pursuant to the Varian
Omnibus Stock Plan.
(12) Includes (a) 6,584 shares of restricted stock granted to executive
officers pursuant to the Varian Omnibus Stock Plan, (b) 254,117 shares
which may be acquired on or within 60 days of February 1, 1999 by
executive officers and directors under stock options granted pursuant to
the Varian Omnibus Stock Plan and (c) 66,510 shares as to which voting
and/or investment power is shared (see certain of the foregoing
footnotes). To IB's knowledge, unless otherwise indicated, the person
named in the table has sole voting and investment power with respect to
the shares.
(13) According to an amendment to a Schedule 13G dated February 1, 1999, FMR
Corp. has sole voting power over 113,900 of these shares and sole
dispositive power over all 3,305,860 shares. Fidelity Management &
Research, a wholly owned subsidiary of FMR, is the beneficial owner of
3,143,860 of these shares as a result of acting as investment adviser to
certain investment companies. Edward C. Johnson 3d and Abigail P. Johnson
own 12.0% and 24.5%, respectively, of the voting stock of FMR Corp. and
therefore may be deemed to have beneficial ownership of the shares
referenced.
(14) Based on a Schedule 13D dated August 12, 1997.
(15) According to an amendment to a Schedule 13G dated January 29, 1999,
Merrill Lynch & Co., Inc (through Merrill Lynch Asset Management, L.P.)
has shared voting power and shared dispositive power over all 1,756,000
shares. Also according to that Schedule 13G, Merrill Lynch Capital Fund,
Inc. has shared voting power and shared dispositive power over 1,750,000
of such shares.
(16) According to an amendment to a Schedule 13G dated January 22, 1999, Sound
Shore Management, Inc. has sole voting power over 1,378,800 of such
shares, shared voting power over 24,200 of such shares and sole
dispositive power over all 1,506,500 shares.
64
FINANCING
On an historical basis, Varian incurred or managed indebtedness at the parent
level, and IB was not allocated any of Varian's debt as Varian used a
centralized approach to cash management and the financing of its operations.
The amount of debt to be retained by VMS and assumed by or transferred to IB
and VSEA and the determination of the initial capital structures of IB, VSEA
and VMS as of the Distribution Date are based upon the goals of maximizing
combined stockholder value for Varian's present stockholders while enabling
VSEA to maintain sufficient cash flow to cover anticipated operating deficits
caused by the current downturn in the semiconductor equipment market.
Varian is required to renegotiate the terms of the Term Loans to permit 50% of
the outstanding indebtedness under the Term Loans to be assumed by IB in
connection with the Distribution. The Term Loans contain covenants that limit
future borrowings and the payment of cash dividends and require the maintenance
of certain levels of working capital and operating results of the borrower. In
addition, it is expected that certain Notes Payable will, as a result of the
Internal Transfers and debt allocation provisions of the Distribution
Agreement, remain outstanding as direct and indirect obligations of IB as of
the Distribution Date.
Based on the outstanding indebtedness of Varian under the Term Loans and Notes
Payable as of January 1, 1999 and Varian's projected operating results and
certain other transactions through the Distribution Date, it is anticipated
that at the Distribution Date, IB will have between $50 million and $100
million of outstanding indebtedness under the Term Loans and Notes Payable. In
connection with the Distribution, IB will be entitled to a cash contribution
from Varian so that IB would have Net Debt equal to approximately 50% of the
aggregate Net Debt of IB and VMS, subject to such adjustments as may be
necessary to provide VMS with a Net Worth of between 40% and 50% of the
aggregate Net Worth of IB and VMS. To the extent that Varian does not sell its
long-term leasehold interest in its Palo Alto facilities, together with the
related buildings and the corporate assets (from which it expects to receive
proceeds of $55 million) or pay all the net expenses of the Distribution
(estimated at approximately $50 million) before the Distribution, the amount of
cash paid and Notes Payable transferred to IB at the time of the Distribution
also will assume that IB receives 50% of any post-Distribution proceeds and
pays for 50% of post-Distribution expenses (in each case reduced for estimated
taxes payable or tax benefits received from all sales and transaction
expenses).
Based on the assumptions stated under "Forecasted Capitalization," the
allocation of indebtedness to IB at the Distribution Date should approximate
the amounts reflected in such section. Management of IB believes that there is
sufficient financing capability in respect of IB to accomplish the contemplated
allocation of indebtedness. See "Forecasted Capitalization."
IB may enter into a credit facility for working capital and other general
corporate purposes. The credit facility may contain certain customary financial
and operating covenants, including restrictions upon incurring indebtedness and
liens, making certain fundamental changes, selling assets and paying dividends.
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DESCRIPTION OF THE CAPITAL STOCK
General
Pursuant to IB's Certificate of Incorporation which will be in effect at the
time of the Distribution, the authorized capital stock of IB will consist of
(i) 99,000,000 shares of IB Common Stock of which approximately 29,985,829
million shares will be issued and outstanding upon consummation of the
Distribution (based on the number of shares of Varian Common Stock outstanding
as of February 1, 1999) and (ii) 1,000,000 shares of preferred stock, $.01 par
value per share ("Preferred Stock"), none of which will be issued and
outstanding upon consummation of the Distribution.
All outstanding shares of IB Common Stock are, and the shares to be issued in
the Distribution will be, validly issued, fully paid and nonassessable.
Common Stock
Each holder of IB Common Stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
voting for the election of directors can elect all the directors if they choose
to do so, subject to any voting rights of holders of Preferred Stock to elect
directors. Subject to the preferential rights of any outstanding series of
Preferred Stock, and to the restrictions on payment of dividends imposed by the
Term Loans and any credit facilities that may be entered into by IB, the
holders of IB Common Stock will be entitled to such dividends as may be
declared from time to time by the IB Board from funds legally available
therefor, and will be entitled, after payment of all prior claims, to receive
pro rata all assets of IB upon the liquidation, dissolution or winding up of
IB. Holders of IB Common Stock have no redemption or conversion rights or
preemptive rights to purchase or subscribe for securities of IB. Certain
provisions of the Certificate of Incorporation and By-Laws of IB that will be
in effect at the time of the Distribution may have the effect of making more
difficult an acquisition of control of IB in a transaction not approved by the
IB Board. See "Delaware Law and Certain Charter and By-Law Provisions."
IB has applied for quotation of the IB Common Stock on the Nasdaq National
Market under the symbol "VARI."
Preferred Stock
The authorized capital stock of IB includes shares of Preferred Stock, none of
which are currently issued or outstanding. The IB Board is authorized to divide
the Preferred Stock into series and, with respect to each series, to determine
the preferences and rights and the qualifications, limitations or restrictions
thereof, including the dividend rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund provisions,
the number of shares constituting the series and the designation of such
series. The IB Board could, without stockholder approval, issue Preferred Stock
with voting and other rights that could adversely affect the voting power of
the holders of IB Common Stock and which could have certain anti-takeover
effects.
In connection with the Rights Plan, the IB Board has authorized 50,000 shares
of Participating Preferred (the "Participating Preferred"). For a description
of the rights, powers and preferences of the Participating Preferred for IB,
see " - Rights Plan."
Rights Plan
The IB Board has adopted the Rights Plan, pursuant to which one right (a
"Right") to purchase one one-thousandth of a share of Participating Preferred
at a purchase price of $75 (substantially above the expected current trading
value for IB) to be determined, subject to adjustment, will be distributed with
the IB Common Stock in the Distribution. The Rights will be issuable on the
terms and subject to the conditions set forth in the Rights Plan. The Rights
will expire no later than April 2, 2009. The Rights will be exercisable on the
earlier to occur of (i) the first date of public announcement (or such earlier
or later date as the IB Board may determine) that a person or "group" has
acquired beneficial ownership of 15% or more of the outstanding IB Common Stock
(an "Acquiring Person") and (ii) ten business days (or such later date as the
IB Board may determine) following the commencement of a tender or exchange
offer the consummation of which would result in a person or group becoming an
Acquiring Person.
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If any person or group becomes an Acquiring Person or commences a tender or
exchange offer upon consummation of which such person or group would become an
Acquiring Person, each Right not owned by such Acquiring Person or certain
related parties would entitle its holder to purchase, at the Right's then
current exercise price, shares of IB Common Stock, or, in the discretion of the
IB Board, shares of Participating Preferred, having a value equal to twice the
Right's then current exercise price. The effect would be to significantly
dilute the equity interest of the Acquiring Person. In addition, if, after a
person or group becomes an Acquiring Person, IB is involved in a merger or
other business combination transaction in which (i) the holders of all of the
outstanding IB Common Stock immediately prior to the consummation of the
transaction are not the holders of the surviving corporation's voting power or
(ii) more than 50% of IB's assets or earning power is sold or transferred, each
Right will entitle its holder to purchase, at the Right's then current exercise
price, common shares of the acquiring company having a value equal to twice the
Right's then current exercise price.
The purchase price payable, and the shares issuable, upon exercise of the
Rights will be subject to adjustment from time to time as specified in the
Rights Plan. IB will generally be entitled to redeem the Rights in whole, but
not in part, at $0.001 per Right at any time prior to the earlier to occur of
(i) a person becoming an Acquiring Person or (ii) expiration of the Rights.
Shares of Participating Preferred purchasable upon exercise of the Rights will
not be redeemable and will be designed so that each one one-thousandth of a
share has economic and voting terms similar to one share of IB Common Stock.
Each share of Participating Preferred will be entitled to a minimum
preferential quarterly dividend payment of $2.50 per share but, if greater,
will be entitled to an aggregate dividend per share of 1,000 times the dividend
declared per share of IB Common Stock. In the event of liquidation of IB, the
holders of Participating Preferred will be entitled to a minimum preferential
liquidation payment of $100.00, provided that they will be entitled to an
aggregate payment per share of at least 1,000 times the aggregate payment made
per share of IB Common Stock. Each share of Participating Preferred will have
one thousand votes, voting together with the IB Common Stock. These rights are
protected by customary anti-dilution provisions.
Transfer Agent and Rights Agent
The transfer agent for the IB Common Stock is First Chicago Trust Company of
New York. First Chicago Trust Company of New York will also be the Rights Agent
under the Rights Plan.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation of IB that will be in effect at the time of
the Distribution (the "IB Charter") will provide that a director will not be
personally liable to IB or its stockholders for monetary damages for any breach
of fiduciary duty as a director, except in certain cases where liability is
mandated by the Delaware General Corporation Law (the "DGCL"). The IB Charter
and/or By-Laws of IB that will be in effect as of the Distribution also provide
for indemnification, to the fullest extent permitted by law, of any person who
is or was involved in any manner in any pending, threatened or completed
investigation, claim or other proceeding by reason of the fact that such person
is or was a director, officer, employee or agent of IB, or, at the request of
IB, is or was serving as a director, officer, employee or agent of another
entity, against all expenses, liabilities, losses and claims incurred or
suffered by such person in connection with the investigation, claim or other
proceeding. IB has entered into, or intends to enter into, agreements to
provide indemnification for directors and officers in addition to the
indemnification provided for in the IB Charter and By-Laws. These agreements,
among other things, will indemnify directors and officers to the fullest extent
permitted by law for certain expenses (including attorneys' fees) and all
losses, claims, liabilities, judgments, fines and settlement amounts incurred
by such person arising out of or in connection with such person's service as a
director or officer of IB or another entity for which such person was serving
as an officer or director at the request of IB and will provide for advancement
of such expenses to such persons. Other than as described herein, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of IB or any other entity as to which indemnification is being
sought under these provisions from IB, and IB is not aware of any pending or
threatened litigation that may result in claims for indemnification under these
provisions by a director, officer, employee or other agent.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Delaware Law
IB is subject to the provisions of Section 203 of the DGCL ("Section 203"). In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, in certain cases, within three years
prior, did own) 15% or more of the corporation's voting stock. Under Section
203, a business combination between the corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
(i) the board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; or (ii) on consummation of the transaction that
resulted in the stockholders becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation,
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by (a) persons who
are directors and also officers and (b) employee stock plans, in certain
instances); or (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Certain Charter and By-Law Provisions
The IB Charter contains provisions that will make more difficult the
acquisition of control of IB by means of a tender offer, open market purchases,
a proxy fight or otherwise that are not approved by the IB Board. The IB By-
Laws also contain provisions that could have an anti-takeover effect.
The purposes of such provisions of the IB Charter and By-Laws are to discourage
certain types of transactions, described below, which may involve an actual or
threatened change of control of IB and to encourage persons seeking to acquire
control of IB to negotiate the terms of any proposed business combination or
offer with the IB Board. The provisions are designed to reduce the
vulnerability of IB to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all outstanding shares or is otherwise unfair to
stockholders of IB, or an unsolicited proposal for the restructuring or sale of
all or part of IB. IB believes that, as a general rule, such proposals would
not be in the best
68
interests of IB or its stockholders. These provisions will help ensure that the
IB Board, if confronted by a surprise proposal from a third party which has
acquired a block of stock, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what it believes to be
the best interests of the stockholders.
There has been a marked increase in hostile takeover activity during the last
several years. IB believes that the provisions discussed herein may provide
some measure of protection for stockholders against certain potentially
coercive takeover tactics. Such takeover tactics include the accumulation of
substantial stock positions in public companies by third parties as a prelude
to proposing a takeover, a restructuring or sale of all or part of the company
or another similar extraordinary corporate action. Such actions are often
undertaken by a third party without advance notice to, or consultation with,
the management or board of directors of a company. In many cases, the purchaser
seeks representation on a company's board of directors in order to increase the
likelihood that its proposal will be implemented by a company. If a company
resists the efforts of the purchaser to obtain representation on the company's
board, a purchaser may commence a proxy contest to have its nominees elected to
the board of directors in place of certain directors or in place of the entire
board of directors. In some cases, a purchaser may not truly be interested in
taking over a company, but may use the threat of a proxy fight and/or a bid to
take over a company as a means of forcing the company to repurchase its equity
position at a substantial premium over market price.
IB believes that the threat of imminent removal of the IB management or IB
Board in such situations would severely curtail the ability of management or
the IB Board to negotiate effectively with such purchasers. Management or the
IB Board would be deprived of the time and information necessary to evaluate
the takeover proposal, to study alternative proposals and to help ensure that
the best price is obtained in any transaction involving IB that may ultimately
be undertaken. If the real purpose of a takeover bid were to force IB to
repurchase an accumulated stock interest at a premium price, management or the
IB Board would face the risk that, if it did not repurchase the purchaser's
stock interest, IB's business and management would be disrupted, perhaps
irreparably.
These provisions, individually and collectively, may impede or discourage a
merger, tender offer or proxy fight, even if such transaction or occurrence may
be favorable to the interests of the stockholders, and may delay or frustrate
the assumption of control by a holder of a large block of IB Common Stock and
the removal of incumbent management, even if such removal might be beneficial
to stockholders. Furthermore, these provisions may deter or could be used to
frustrate a future takeover attempt which is not approved by the incumbent
board of directors, but which the holders of a majority of the shares may deem
to be in their best interests or in which stockholders may receive a
substantial premium for their stock over prevailing market prices of such
stock. By discouraging takeover attempts these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual and rumored takeover attempts.
Set forth below is a description of such provisions in the IB Charter and By-
Laws. Such description is intended as a summary only and is qualified in its
entirety by reference to the IB Charter and By-Laws, which have been filed as
exhibits to the Registration Statement. Capitalized terms used and not defined
herein are defined in the IB Charter or By-Laws.
Classified Boards of Directors
The IB Charter provides for the IB Board to be divided into three classes
serving staggered terms. The classification of directors will have the effect
of making it more difficult for stockholders to change the composition of the
board of directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board of directors. Such a delay may help ensure
that the IB Board, if confronted by a stockholder's attempt to force a stock
repurchase at a premium above market price, a proxy contest or an extraordinary
corporate transaction, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what they believe are
the best interests of the stockholders. IB also believes that a classified
board of directors will help to assure the continuity and stability of the IB
Board and the business strategies and policies of IB as determined by the IB
Board, because generally a majority of the directors at any given time will
have had prior experience as directors of IB.
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The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
IB as the case may be, even though such an attempt might be beneficial to IB
and its stockholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies
The IB Charter provides that the specific number of directors (which must be at
least three) shall be fixed by resolution of the IB Board. In addition, the IB
Charter provides that, subject to any rights of the holders of preferred stock,
only a majority of the IB Board then in office shall have the authority to fill
any vacancies on the IB Board. Accordingly, the existing board members could
prevent any stockholder from obtaining majority representation on the
respective IB Board by enlarging the IB Board and filling the new directorships
with its own nominees.
Moreover, the IB Charter provides that directors may be removed only for cause
by the affirmative vote of holders of at least a majority of the voting power
of all of the then-outstanding shares of IB Common Stock. This provision, when
coupled with the provisions of the IB Charter authorizing only the IB Board to
fill vacant directorships, would preclude stockholders from removing incumbent
directors without cause and filling the vacancies created by such removal with
their own nominees. These provisions reflect existing Delaware law absent a
contrary provision in a company's charter.
Limitations on Stockholder Action by Written Consent; Special Meetings
Under the DGCL, unless otherwise provided in the certificate of incorporation,
any action required or permitted to be taken by the stockholders of a Delaware
corporation may be taken without a meeting, without prior notice and without a
stockholder vote if a written consent setting forth the action to be taken is
signed by the holders of outstanding stock having the requisite number of
shares that would be necessary to authorize such action at a meeting at which
all shares entitled to vote thereon were present and voted. The IB Charter
provides that stockholder action can be taken only at an annual or special
meeting of stockholders, and prohibit stockholder action by written consent in
lieu of a meeting. The IB By-Laws provide that, subject to the rights of
holders of any series of Preferred Stock, special meetings of stockholders can
be called only by the Chairman of the Board, the Chief Executive Officer, the
Vice Chairman of the Board (if any), the President or the IB Board.
Stockholders are not permitted to call a special meeting or to require that the
IB Board call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders will be
limited to the purpose or purposes of the meeting as stated in the notice of
the meeting.
The provisions of the IB Charter restricting stockholder action by written
consent may have the effect of delaying consideration of a stockholder proposal
until the next annual meeting unless a special meeting is called by the
Chairman of the Board, the Chief Executive Officer, the Vice Chairman of the
Board (if any), the President or pursuant to a board resolution. These
provisions would also prevent the holders of a majority of the voting power of
IB Common Stock from using the written consent procedure to take stockholder
action and from taking action by consent without giving all the stockholders
entitled to vote on a proposed action the opportunity to participate in
determining such proposed action. Moreover, a stockholder could not force
stockholder consideration of a proposal over the opposition of the IB Board by
calling a special meeting of stockholders prior to the time the IB Board
believed such consideration to be appropriate.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
The IB By-Laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the IB Board, of candidates
for election as directors (the "Nomination Procedure") and with regard to
certain matters to be brought before an annual meeting of stockholders (the
"Business Procedure").
Pursuant to the IB By-Laws, the Nomination Procedure provides that only persons
who are nominated by, or at the direction of, the IB Board or by a stockholder
of record who has given timely prior written notice to the Secretary prior to
the meeting at which directors are to be elected will be eligible for election
as directors. The Business Procedure provides that at an annual meeting only
such business can be conducted as has been brought before the meeting pursuant
to the notice of the meeting, by, or at the direction of, the IB Board or by a
stockholder of record who has
70
given timely prior written notice to the Secretary of such stockholder's
intention to bring such business before the meeting. To be timely, notice must
generally be received by not less than 60 days nor more than 90 days prior to
the first anniversary of the mailing of the proxy statement in connection with
the previous year's annual meeting. For notice of a stockholder nomination to
be made at a special meeting at which directors are to be elected to be timely,
such notice must be received not earlier than the 90th day before such meeting
and not later than the later of (1) the 60th day prior to such meeting and (2)
the tenth day after public announcement of the date of such meeting is first
made.
Under the Nomination Procedure, notice from a stockholder who proposes to
nominate a person at a meeting for election as director must contain certain
information about that person, including such person's consent to be nominated
and such information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the stockholder proposing to nominate that person or the
beneficial owner, if any, on whose behalf the nomination is made. Under the
Business Procedure, notice relating to the conduct of business must contain
certain information about such business and about the stockholder who proposes
to bring the business before the meeting including a brief description of the
business the stockholder proposes to bring before the meeting, the reasons for
conducting such business at such meeting, the class and number of shares of
stock beneficially owned by such stockholder, and by the beneficial owner, if
any, on whose behalf the proposal is made, and any material interest of such
stockholder, and such beneficial owner in the business so proposed. If the
Chairman or other officer presiding at a meeting determines that a person was
not nominated in accordance with the Nomination Procedure, such person will not
be eligible for election as a director, or if he or she determines that other
business was not properly brought before such meeting in accordance with the
Business Procedure, such business will not be conducted at such meeting.
The purpose of the Nomination Procedure is, by requiring advance notice of
nominations by stockholders, to afford the IB Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the IB Board, to inform stockholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of proposed business, to provide a more orderly procedure for conducting
annual meetings of stockholders and, to the extent deemed necessary or
desirable by the IB Board to provide the IB Board with a meaningful opportunity
to inform stockholders, prior to such meeting, of any business proposed to be
conducted at such meetings, together with any recommendation as to the IB
Board's position or belief as to action to be taken with respect to such
business, so as to enable stockholders better to determine whether they desire
to attend such meeting or grant a proxy to the IB Board as to the disposition
of any such business. Although the IB By-Laws will not give the IB Board any
power to approve or disapprove stockholder nominations for the election of
directors or of any other business desired by a stockholder to be conducted at
an annual meeting, the By-Laws may have the effect of precluding a nomination
for the election of directors or precluding the conducting of business at a
particular annual meeting if the proper procedures are not followed, and may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
IB, even if the conduct of such solicitation or such attempt might be
beneficial to IB and its stockholders.
Amendment of Certain Charter and By-Law Provisions
The IB Charter contains provisions requiring the affirmative vote of the
holders of at least 66 2/3% of the outstanding IB Common Stock to amend the
provisions of such charter pertaining to classification of the IB Board,
filling vacancies in the IB Board, removal of directors and the requirement
that stockholders can act only at annual or special meetings and not by written
consent. The IB Charter and By-Laws also require the vote of at least 66 2/3%
of the outstanding IB Common Stock for stockholders to adopt, amend or repeal
any provision of the IB By-Laws. These provisions will make it more difficult
for stockholders to change the IB Charter and By-Laws, including changes
designed to facilitate the exercise of control over IB. In addition, the
requirement for approval by at least a 66 2/3% stockholder vote will enable the
holders of a minority of IB's capital stock to prevent holders of a less than
66 2/3% majority from amending the indicated provisions of the IB Charter and
By-Laws.
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Preferred Stock
The IB Charter authorizes the IB Board to establish series of Preferred Stock
and to determine, with respect to any series of Preferred Stock, the voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are stated in the
board resolutions providing for such series. The number of authorized shares of
Preferred Stock will be 1,000,000.
IB believes that the availability of such Preferred Stock will provide IB with
increased flexibility in structuring possible future financing and
acquisitions, and in meeting other corporate needs which might arise. Having
such authorized shares available for issuance will allow IB to issue shares of
Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of IB
Common Stock, will be available for issuance without further action by
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which the securities may be listed. Although the IB Board
does not have any intention at the present time of doing so, it could issue a
series of Preferred Stock that could, subject to certain limitations imposed by
the securities laws and stock exchange rules, depending on the terms of such
series, impede the completion of a merger, tender offer or other takeover
attempt. For instance, such series of Preferred Stock might impede a business
combination by including class-voting rights that would enable the holder to
block such a transaction. The IB Board will make any determination to issue
such shares based on its judgment as to the best interests of IB and its then
existing stockholders. The board, in so acting, could issue Preferred Stock
having terms which could discourage an acquisition attempt or other transaction
that some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then-market price of such stock. The authorized and unissued Preferred
Stock of IB as well as the authorized and unissued IB Common Stock would be
available, and the IB Charter explicitly authorizes use of capital stock, for
the above purposes.
In connection with the Rights Plan, the IB Board has authorized 50,000 shares
of Participating Preferred. No such shares of Participating Preferred are
currently outstanding. For a description of the rights, powers and preferences
of the Participating Preferred, see "Description of the Capital Stock - Rights
Plan."
Common Stock
The IB Charter will authorize the IB Board to issue up to 99,000,000 shares of
IB Common Stock.
The authorized but unissued IB Common Stock will provide IB with the ability to
meet future capital needs and to provide shares for possible acquisitions and
stock dividends or stock splits. The IB Board would have the ability, in the
event of a proposed merger, tender offer or other attempt to gain control of IB
that was not approved by such board, to issue additional common stock that
would dilute the stock ownership of the acquiror.
Rights Plan
IB has entered into the Rights Plan. The Rights to be distributed in accordance
with the Rights Plan will have certain anti-takeover effects. Each of the
Rights will cause substantial dilution to a person or group that attempts to
acquire IB and thereby effect a change in the composition of the IB Board on
terms not approved by the IB Board, including by means of a tender offer at a
premium to the market price. The Rights should not interfere with any merger or
business combination approved by the IB Board, since the Rights may be redeemed
by IB, at the applicable redemption price, prior to the time that a person or
group has become an Acquiring Person. See "Description of the Capital Stock -
Rights Plan."
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AVAILABLE INFORMATION
IB has filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement under the Exchange Act with respect to the IB Common
Stock being received by the stockholders of Varian Common Stock in the
Distribution. This Information Statement does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
to which reference is hereby made.
Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto filed by IB with the Commission
may be inspected at the public reference facilities of the Commission listed
below.
After the Distribution, IB will be subject to the information requirement of
the Exchange Act, and in accordance therewith will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material maybe obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
IB intends to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal year 1999) audited by
independent accountants.
No person is authorized by Varian or IB to give any information or to make any
representations other than those contained in this Information Statement and,
if given or made, such information or representations must not be relied upon
as having been authorized.
73
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Instruments Business of Varian Associates, Inc.
- -----------------------------------------------
Report of Independent Accountants........................................ F-2
Combined Statements of Earnings for the first quarters ended January 1,
1999 (unaudited) and January 2, 1998 (unaudited) and for the three
fiscal years ended October 2, 1998...................................... F-3
Combined Balance Sheets at January 1, 1999 (unaudited) and at October 2,
1998 and September 26, 1997............................................. F-4
Combined Statements of Divisional Equity for the first quarter ended
January 1, 1999 (unaudited) and for the three fiscal years ended October
2, 1998................................................................. F-5
Combined Statements of Cash Flows for the first quarters ended January 1,
1999 (unaudited) and January 2, 1998 (unaudited) and for the three
fiscal years ended October 2, 1998...................................... F-6
Notes to Combined Financial Statements................................... F-7
Report of Independent Accountants on Financial Statement Schedule........ S-I
Schedule II - Valuation and Qualifying Accounts.......................... S-II
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Varian Associates, Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, divisional equity, and cash flows present
fairly, in all material respects, the financial position of the Instruments
Business of Varian Associates, Inc. (the "Company") at October 2, 1998 and
September 26, 1997, and the results of its operations and its cash flows for
each of the three years in the period ended October 2, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998
F-2
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Statements of Earnings
Quarter Ended Fiscal Years
----------------------- --------------------------
January 1, January 2,
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(unaudited) (unaudited)
(In thousands, except per share amounts)
Sales....................... $133,296 $140,948 $557,770 $541,946 $504,394
-------- -------- -------- -------- --------
Operating Costs and Expenses
Cost of sales............... 80,666 86,432 336,387 330,845 310,753
Research and development.... 7,163 7,230 29,620 31,987 29,897
Marketing................... 30,096 27,272 113,854 110,009 107,244
General and administrative.. 7,702 10,384 38,745 42,303 45,053
-------- -------- -------- -------- --------
Total operating costs and
expenses................... 125,627 131,318 518,606 515,144 492,947
-------- -------- -------- -------- --------
Operating Earnings before
Taxes...................... 7,669 9,630 39,164 26,802 11,447
Taxes on earnings........... 3,413 3,869 15,736 12,597 5,277
-------- -------- -------- -------- --------
Net Earnings................ $ 4,256 $ 5,761 $ 23,428 $ 14,205 $ 6,170
======== ======== ======== ======== ========
Pro Forma Net Earnings Per
Share...................... $ 0.14 $ 0.19 $ 0.78 $ 0.47 $ 0.20
======== ======== ======== ======== ========
Shares used in pro forma per
share computations......... 29,848 30,086 29,910 30,451 31,024
======== ======== ======== ======== ========
See accompanying Notes to the Combined Financial Statements.
F-3
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Balance Sheets
Fiscal Year-End
--------------------
January 1,
1999 1998 1997
----------- --------- ---------
(unaudited)
(Dollars in thousands)
ASSETS
Current Assets
Accounts receivable......................... $ 140,096 $ 143,836 $ 131,641
Inventories................................. 75,822 71,575 64,797
Other current assets........................ 27,363 26,260 24,723
--------- --------- ---------
Total Current Assets........................ 243,281 241,671 221,161
--------- --------- ---------
Property, Plant, and Equipment.............. 208,789 219,385 201,373
Accumulated depreciation and amortization... (121,030) (124,666) (114,448)
--------- --------- ---------
Net Property, Plant, and Equipment.......... 87,759 94,719 86,925
--------- --------- ---------
Other Assets................................ 64,584 67,709 49,820
--------- --------- ---------
Total Assets................................ $ 395,624 $ 404,099 $ 357,906
========= ========= =========
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities
Accounts payable - trade.................... $ 20,874 $ 34,320 $ 34,968
Accrued expenses............................ 100,971 102,470 92,704
Product warranty............................ 7,397 7,608 7,173
Advance payments from customers............. 9,606 5,180 9,214
--------- --------- ---------
Total Current Liabilities................... 138,848 149,578 144,059
Long-Term Accrued Expenses.................. 6,828 6,862 6,245
Deferred Taxes.............................. 4,192 4,192 4,306
--------- --------- ---------
Total Liabilities........................... 149,868 160,632 154,610
--------- --------- ---------
Commitments and Contingencies (Notes 9 and
10)
Divisional Equity........................... 245,756 243,467 203,296
--------- --------- ---------
Total Liabilities and Divisional Equity..... $ 395,624 $ 404,099 $ 357,906
========= ========= =========
See accompanying Notes to the Combined Financial Statements.
F-4
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Statements of Divisional Equity
(Dollars
in
thousands)
Balance, Fiscal Year-End, 1995...................................... $150,813
Net earnings for the year........................................... 6,170
Net transfers (to) from Varian Associates, Inc...................... (2,090)
--------
Balance, Fiscal Year-End, 1996...................................... 154,893
Net earnings for the year........................................... 14,205
Net transfers (to) from Varian Associates, Inc...................... 34,198
--------
Balance, Fiscal Year-End, 1997...................................... 203,296
Net earnings for the year........................................... 23,428
Net transfers (to) from Varian Associates, Inc...................... 16,743
--------
Balance, Fiscal Year-End, 1998...................................... 243,467
Net earnings for the period......................................... 4,256
Net transfers (to) from Varian Associates, Inc...................... (1,967)
--------
Balance, January 1, 1999 (unaudited)................................ $245,756
========
See accompanying Notes to the Combined Financial Statements.
F-5
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Statements of Cash Flows
Quarter Ended Fiscal Years
------------------------ ----------------------------
January 1, January 2,
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(unaudited) (unaudited)
(Dollars in thousands)
Operating Activities
Net Cash Provided by
Operating Activities... $ 952 $ 9,645 $ 36,856 $ 16,627 $ 22,779
-------- ------- -------- -------- --------
Investing Activities
Purchase of property,
plant, and equipment... (5,122) (9,670) (19,358) (20,803) (17,915)
Purchase of businesses,
net of cash acquired... -- -- (34,707) (30,998) (4,396)
-------- ------- -------- -------- --------
Net Cash Used in
Investing Activities... (5,122) (9,670) (54,065) (51,801) (22,311)
-------- ------- -------- -------- --------
Financing Activities
Net transfers (to) from
Varian Associates,
Inc. .................. 5,445 129 16,743 34,198 (2,090)
-------- ------- -------- -------- --------
Net Cash Provided by
(Used in) Financing
Activities............. 5,445 129 16,743 34,198 (2,090)
-------- ------- -------- -------- --------
Effects of Exchange Rate
Changes on Cash........ (1,275) (104) 466 976 1,622
-------- ------- -------- -------- --------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ -- -- -- -- --
Cash and Cash
Equivalents at
Beginning of Period.... -- -- -- -- --
-------- ------- -------- -------- --------
Cash and Cash
Equivalents at End of
Period................. $ -- $ -- $ -- $ -- $ --
======== ======= ======== ======== ========
Detail of Net Cash
Provided by Operating
Activities
Net Earnings............ $ 4,256 $ 5,761 $ 23,428 $ 14,205 $ 6,170
Adjustments to reconcile
net earnings to net
cash provided by
operating activities
Depreciation............ 4,670 4,682 17,541 19,449 15,975
Deferred taxes.......... -- -- (2,225) (811) (458)
Changes in assets and
liabilities
Accounts receivable..... 5,755 6,570 2,063 (15,201) (12,997)
Inventories............. (4,247) 2,534 (1,269) (6,172) (3,942)
Other current assets.... (1,046) (1,088) 98 (125) 1,689
Accounts payable--
trade.................. (13,731) (7,217) (9,012) 7,531 2,884
Accrued expenses........ (1,928) (7,762) 958 3,893 (750)
Product warranty........ (285) 535 637 1,578 714
Advance payments from
customers.............. 4,417 (115) (4,511) (3,384) 6,425
Long-term accrued
expenses............... (34) (42) 617 284 5,961
Other................... 3,125 5,787 8,531 (4,620) 1,108
-------- ------- -------- -------- --------
Net Cash Provided by
Operating Activities... $ 952 $ 9,645 $ 36,856 $ 16,627 $ 22,779
======== ======= ======== ======== ========
See accompanying Notes to the Combined Financial Statements.
F-6
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements
Note 1. Basis of Presentation
On August 21, 1998, the Board of Directors of Varian Associates, Inc. ("VAI")
announced a plan to reorganize into three publicly traded independent companies
by spinning off two of its businesses to stockholders in a tax-free
distribution (the "Distribution"). The Distribution is subject to final
approval by VAI's Board of Directors. Among other things, this approval is
conditioned upon the receipt of a ruling from the Internal Revenue Service that
the spin-off of the two businesses will be a tax free transaction for VAI
stockholders, VAI, the Semiconductor Equipment Business of VAI ("VSEA"), and
the Instruments Business of VAI (the "Company") and upon the approval of the
plan for the Distribution by VAI stockholders.
Under the plan for the Distribution, the Company and VSEA will be incorporated
as Varian, Inc. and Varian Semiconductor Equipment Associates, Inc.,
respectively, and will become publicly traded companies. Also under the plan
for the Distribution, each of VAI and the Company will have between $50 and
$100 million of outstanding indebtedness under VAI's term loans and notes
payable, and VAI will contribute cash to VSEA so that at the Distribution, VSEA
will have approximately $100 million in cash and cash equivalents and
consolidated debt not exceeding $5 million. The Company will include VAI's
business units that manufacture and sell analytical and research
instrumentation and related equipment for studying the chemical composition of
substances. Significant products of the VAI business units that will comprise
the Company include nuclear magnetic resonance instruments, chromatography
systems, optical spectroscopy instruments, vacuum products, and printed wiring
assemblies. The Company will be incorporated in Delaware in December 1998, with
99,000,000 shares of common stock and 1,000,000 shares of preferred stock
authorized. Upon incorporation, all outstanding shares of the Company's common
stock will be owned by VAI. For purposes of these financial statements and
notes to these financial statements, the Company includes the assets,
liabilities, operating results and cash flows of the VAI business units
described above that will comprise the Company under the plan for the
Distribution.
The combined financial statements of the Company have been prepared using VAI's
historical bases in the assets and liabilities and historical results of
operations of the Company's businesses, except for the accounting for income
taxes (see Note 2).
The combined financial statements of the Company include the accounts of the
Company's businesses after elimination of inter-business balances and
transactions.
The Company's fiscal years reported are the 52- or 53-week period ended on the
Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.
The combined financial statements generally reflect the financial position,
operating results, and cash flows of the Company as if it were a separate
entity for all periods presented. Where it was practicable to identify
specifically VAI corporate amounts with the activities of the Company, such
amounts have been included in the accounts of the Company. The combined
financial statements also include 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 VAI
corporate overhead) to the Company. These amounts have been allocated to the
Company 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 the Company. Typical measures and activity indicators used for allocation
purposes include headcount, sales revenue, and payroll expense. 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.
For purposes of governing certain of the ongoing relationships between the
Company, VAI, and VSEA after the Distribution and to provide for an orderly
transition, the Company, VAI, and VSEA have entered or will enter
F-7
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
into various agreements including a distribution agreement, tax sharing
agreement, employee benefits allocation agreement, intellectual property
agreement, and transition services agreement (collectively, the "Distribution
Related Agreements").
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Foreign Currency Translation
For non-U.S. operations, the U.S. dollar is the functional currency. Monetary
assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at current exchange rates. Nonmonetary assets such as inventories and property,
plant, and equipment are translated at historical rates. Income and expense
items are translated at effective rates of exchange prevailing during each
year, except that inventories and depreciation charged to operations are
translated at historical rates. The aggregate exchange loss included in general
and administrative expenses for fiscal years 1998, 1997, and 1996 was $2.0
million, $2.6 million, and $.3 million, respectively.
Revenue Recognition
Sales and related costs of sales are recognized upon shipment of products.The
Company's products are generally subject to warranty, and the Company provides
for the estimated future costs of repair, replacement, or customer
accommodation in costs of sales. Sales and related costs of sales under long-
term contracts to commercial customers and the U.S. Government are recognized
as units are delivered. Service revenue is recognized ratably over the period
of the related contract.
Legal Expenses
The Company accrues estimated amounts for legal fees expected to be incurred in
connection with loss contingencies.
Financial Instruments
The Company considers currency on hand, demand deposits, and all highly liquid
debt securities with an original maturity of three months or less to be cash
and cash equivalents.
Financial instruments that potentially subject the Company to concentrations of
credit risk comprise trade accounts receivable and forward exchange contracts.
The Company sells its products and extends trade credit to a large number of
customers, who are dispersed across many different industries and geographies.
The Company performs ongoing credit evaluations of these customers and
generally does not require collateral from them. Trade accounts receivable are
stated net of allowances for doubtful accounts of $713,000 at the end of fiscal
year 1998 and $321,000 at the end of fiscal year 1997.
The Company enters into forward exchange contracts to mitigate the effects of
operational (sales orders and purchase commitments) and balance sheet exposures
to fluctuations in foreign currency exchange rates. The Company does not enter
into forward exchange contracts for trading purposes. When the Company's
foreign exchange contracts hedge operational exposure, the effects of movements
in currency exchange rates on these instruments are recognized in
F-8
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
income when the related revenues and expenses are recognized. All forward
exchange contracts hedging operational exposure are designated and highly
effective as hedges. The critical terms of all forward exchange contracts
hedging operational exposure and of the forecasted transactions being hedged
are substantially identical. Accordingly, the Company expects that changes in
the fair value or cash flows of the hedging instruments and the hedged
transactions (for the risk that is being hedged) will completely offset at the
hedge's inception and on an ongoing basis. When foreign exchange contracts
hedge balance sheet exposure, such effects are recognized in income when the
exchange rate changes in accordance with the requirements for other foreign
currency transactions. 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. The Company's forward exchange contracts generally range from one to
three months in original maturity.
Because the impact of movements in currency exchange rates on foreign exchange
contracts generally offsets the related impact on the underlying items being
hedged, forward exchange contracts do not subject the Company to risk that
would otherwise result from changes in currency exchange rates. The Company's
forward exchange contracts contain credit risk in that its banking counter-
parties may be unable to meet the terms of the agreements. The Company seeks to
minimize such risk by limiting its counter-parties to major financial
institutions. Also, the potential risk of loss with any one party resulting
from this type of credit risk is monitored by management of the Company. The
fair value of forward exchange contracts generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional amounts
of forward exchange contracts are not a measure of the Company's exposure.
Pro Forma Net Earnings per Share
The computation of pro forma net earnings per share for fiscal years 1998,
1997, and 1996 is based on the weighted average number of shares of VAI common
stock outstanding during the respective periods, reflecting the anticipated
ratio of one share of Company common stock for each share of VAI common stock
at the time of Distribution.
Divisional Equity
Divisional equity includes historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due from affiliates related to sales, amounts due
to/from VAI for services and other charges, and current period net earnings of
the Company.
Interim Financial Statements (Unaudited)
The unaudited condensed combined interim financial statements and information
reflect all adjustments, which consist of only normal, recurring adjustments,
necessary to present fairly the financial position of the Company at January 1,
1999, the results of its operations for each quarter during fiscal years 1998
and 1997, and its cash flows for the quarters ended January 1, 1999 and January
2, 1998.
Inventories
Inventories are valued at the lower of cost or market (realizable value) using
last-in, first-out (LIFO) cost for the U.S. inventories. All other inventories
are valued principally at average cost. If the first-in, first-out (FIFO)
method had been used for those operations valuing inventories on a LIFO basis,
inventories would have been higher than reported by $13.7 million in fiscal
1998, $14.0 million in fiscal 1997, and $12.7 million in fiscal 1996.
F-9
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the straight-
line method for financial reporting purposes and accelerated methods for tax
purposes. Machinery and equipment lives vary from 1 to 40 years, and buildings
are depreciated from 3 to 40 years. Leasehold improvements are amortized using
the straight-line method over their estimated useful lives, or the remaining
term of the lease, whichever is less. When assets are retired or otherwise
disposed of, the assets and related accumulated depreciation are removed from
the accounts. Gains or losses resulting from retirements or disposals are
included in earnings from operations.
Other Assets
Goodwill, which is the excess of the cost of acquired businesses over the sum
of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 3 to
40 years. Investments in affiliated companies over whose operations the Company
has significant influence but not control are accounted for under the equity
method.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying amounts
of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.
Research and Development
Company-sponsored research and development costs related to both present and
future products are expensed currently. Costs related to research and
development contracts are included in inventory and charged to cost of sales
upon recognition of related revenue. Total expenditures on research and
development for fiscal years 1998, 1997, and 1996, were $31.2 million, $33.1
million, and $31.2 million, respectively, of which $1.6 million, $1.1 million,
and $1.3 million, respectively, were funded by customers.
Taxes on Earnings
The Company's operating results historically have been included in VAI's
consolidated U.S. and state income tax returns and in tax returns of certain
VAI foreign subsidiaries. Except for the utilization of foreign tax credits,
the provision for income taxes in the Company's combined financial statements
has been determined on a separate-return basis, under which the Company's
provision for income taxes comprises its estimated tax liability and the change
in its deferred income taxes. Foreign tax credits are benefited to the extent
they were utilized in VAI's consolidated tax returns. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts. Income taxes paid on behalf of the Company by VAI are included in
divisional equity.
Effective after the Distribution, the Company will file separate income tax
returns.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for the Company's fiscal year
1999. The impact of the implementation of SFAS No. 130 on the combined
financial statements of the Company has not yet been determined.
F-10
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for the Company's fiscal year
1999. The Company has not determined the impact of its implementation on the
reporting of the Company's segment information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for the
Company's fiscal year 2000. The impact of the implementation of SFAS No. 133 on
the combined financial statements of the Company has not yet been determined.
Note 3. Balance Sheet Detail
Inventories
1998 1997
------ ------
(Dollars in
millions)
Raw materials and parts.......................................... $ 42.6 $ 54.3
Work in process.................................................. 8.9 6.4
Finished goods................................................... 20.1 4.1
------ ------
Total Inventories.............................................. $ 71.6 $ 64.8
====== ======
Property, Plant, and Equipment
1998 1997
------ ------
(Dollars in
millions)
Land and land improvements....................................... $ 5.3 $ 5.1
Buildings........................................................ 76.8 65.0
Machinery and equipment.......................................... 135.4 127.3
Construction in progress......................................... 1.9 4.0
------ ------
Total Property, Plant, and Equipment........................... $219.4 $201.4
====== ======
Other Assets
1998 1997
------ ------
(Dollars in
millions)
Goodwill......................................................... $ 66.1 $ 44.7
Less accumulated amortization.................................... 6.5 5.1
------ ------
Net goodwill..................................................... 59.6 39.6
------ ------
Other............................................................ 8.1 10.2
------ ------
Total Other Assets............................................. $ 67.7 $ 49.8
====== ======
Amortization expense for goodwill was $1.4 million, $1.0 million, and $0.5
million for fiscal years 1998, 1997, and 1996, respectively.
F-11
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Accrued Expenses
1998 1997
------ -----
(Dollars in
millions)
Payroll and employee benefits..................................... $ 33.1 $35.1
Foreign income taxes payable...................................... 19.2 13.6
Deferred income................................................... 14.7 13.1
Group and risk insurance.......................................... 7.7 7.8
Other............................................................. 27.8 23.1
------ -----
Total Accrued Expenses.......................................... $102.5 $92.7
====== =====
Note 4. Acquisitions
In July 1998, the Company acquired all of the outstanding common stock of
Chrompack International B.V. ("Chrompack") for approximately $28.9 million in
cash and the extinguishment of debt. Chrompack is a manufacturer of
chromatography products and analytical instruments used by scientific and
industrial laboratories. This acquisition has been accounted for under the
purchase method; accordingly, the Company's combined operating results include
100% of the operating results of Chrompack subsequent to the acquisition date.
The Company is amortizing acquired goodwill of $20.9 million over 40 years.
In June 1998, the Company acquired the outstanding minority ownership interest
of Varian Iberica, S.L. ("Iberica") for approximately $6.7 million in cash.
Iberica is engaged in the business of buying and selling scientific
apparatuses, products for laboratories, and chemical and medical products in
general. The acquisition of the minority ownership interest has been accounted
for using the purchase method; accordingly, the Company's combined operating
results include the operating results of Iberica subsequent to the acquisition
date. The Company is amortizing acquired goodwill of $0.8 million over 13
years.
In October 1996, the Company acquired the principal assets and properties of
the high pressure liquid chromatography and columns business of Rainin
Instrument Company, Inc. ("Rainin") for approximately $24.0 million in cash and
the extinguishment of debt. This acquisition has been accounted for under the
purchase method; accordingly, the Company's combined operating results include
100% of the operating results of Rainin subsequent to the acquisition date. The
Company is amortizing acquired goodwill of $21.7 million over 40 years.
Pro forma sales, earnings from operations, net earnings, and net earnings per
share have not been presented because the effects of these acquisitions were
not material on either an individual or an aggregated basis.
F-12
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Note 5. Forward Exchange Contracts
Forward exchange contracts outstanding and their unrealized gains and losses as
of fiscal year-end 1998 are summarized as follows:
Notional Notional
Value Value Unrealized Fair
Purchased Sold Gain/(Loss) Value
--------- -------- ---------- -----
(Dollars in thousands)
Japanese yen............................. $ - $ 1,637 $ 5 $ 31
French francs............................ - 11,550 - (467)
Canadian dollars......................... - 7,042 206 260
British pounds........................... 12,044 4,050 537 515
Italian lira............................. - 4,196 - (217)
German marks............................. - 1,955 - (100)
Spanish pesetas.......................... - 691 - (38)
Korean won............................... - 283 - 1
Australian dollars....................... 6,396 - - 23
Swiss francs............................. 246 - - 10
Swedish kronor........................... 4,789 - - (5)
------- ------- ---- -----
Total.................................. $23,475 $31,404 $748 $ 13
======= ======= ==== =====
Note 6. Employee Stock Plans
Under VAI's Omnibus Stock and Employee Stock Purchase Plans, certain employees
of the Company are eligible for the grant of stock options and restricted stock
and are eligible to purchase VAI common stock. The exercise price for incentive
and non-qualified stock options granted under the Omnibus Stock Plan may not be
less than 100% of the fair market value of VAI common stock at the date of
grant. Options granted are exercisable at such times and are subject to such
restrictions and conditions as determined by the Organization and Compensation
Committee of the Board of Directors of VAI, but no option shall be exercisable
later than ten years from the date of grant. Options granted are generally
exercisable in cumulative installments of one-third each year, commencing one
year following the date of grant, and expire if not exercised within seven or
ten years from the date of grant. Restricted stock grants may be awarded at
prices ranging from 0% to 50% of the fair market value of VAI common stock and
may be subject to restrictions on transferability and continued employment as
determined by the Organization and Compensation Committee. Participants in the
Employee Stock Purchase Plan are eligible to purchase VAI common stock at the
lower of 85% of the closing market price of VAI common stock on the first
trading day of the VAI fiscal quarter of the first trading day of the next VAI
fiscal quarter. This discount is treated as equivalent to the cost of issuing
common stock for financial reporting purposes. VAI intends to suspend the
Employee Stock Purchase Plan prior to the Distribution.
At fiscal year-end 1998, outstanding options for VAI common stock held by
Company employees totaled approximately 958,000, of which approximately 506,000
had vested and were exercisable. At fiscal year-end 1998, the exercise prices
of outstanding options range from $10.91 to $61.31.
At fiscal year-end 1997, outstanding options for VAI common stock held by
Company employees totaled approximately 740,000, of which approximately 332,000
had vested and were exercisable. At fiscal year-end 1997, the exercise prices
of outstanding options range from $10.91 to $61.31.
At fiscal year-end 1996, outstanding options for VAI common stock held by
Company employees totaled approximately 748,000, of which approximately 327,000
had vested and were exercisable. At fiscal year-end 1996, the exercise prices
of outstanding options range from $10.60 to $61.31.
F-13
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Immediately following the Distribution, it is anticipated that the majority of
outstanding awards under the VAI Omnibus Stock Plan held by Company employees
will be replaced by substitute awards under the IB Omnibus Stock Plan. The
substitute awards will have the same ratio of the exercise price per share to
the market value per share, the same aggregate difference between market value
and exercise price, and the same vesting provisions, option periods, and other
terms and conditions as the awards they replace.
The Company will comply with the pro forma disclosure requirements set forth in
SFAS No. 123, "Accounting for Stock-Based Compensation," once the number of
shares and related exercise prices under substitute awards are determined.
These determinations cannot be made until subsequent to the Distribution.
Note 7. Retirement Plans
Certain employees of the Company in the United States and Canada are eligible
to participate in the VAI-sponsored defined contribution plan. The Company's
major obligation is to contribute an amount based on a percentage of each
participant's base pay. The Company also contributes 5% of its combined
operating earnings, as adjusted for discretionary items, as retirement plan
profit sharing. Participants are entitled, upon termination or retirement, to
their portion of the retirement fund assets, which are held by a third-party
trustee. Included in the accompanying combined statements of earnings is an
allocation of total pension expense for Company employees under the VAI-
sponsored defined contribution plan of $5.9 million, $5.6 million, and
$6.6 million, for fiscal years 1998, 1997, and 1996, respectively.
At the Distribution, the Company will assume responsibility for pension and
postretirement benefits for active employees of the Company; the responsibility
for all others, principally retirees of VAI, will remain with VAI. An
allocation of assets and liabilities for foreign defined benefit pension,
postemployment, and postretirement benefits, which are not material to the
Company's financial statements, has been included in these combined financial
statements.
Note 8. Taxes on Earnings
Taxes on earnings from operations are as follows:
1998 1997 1996
----- ----- -----
(Dollars in
millions)
Current
U.S. federal............................................ $ -- $ 0.4 $ --
Non-U.S................................................. 16.7 11.4 9.8
State and local......................................... 1.5 1.6 0.5
----- ----- -----
Total current......................................... 18.2 13.4 10.3
----- ----- -----
Deferred
U.S. federal............................................ (2.7) (1.1) (4.6)
Non-U.S................................................. 0.2 0.3 (0.4)
----- ----- -----
Total deferred........................................ (2.5) (0.8) (5.0)
----- ----- -----
Taxes on Earnings......................................... $15.7 $12.6 $ 5.3
===== ===== =====
F-14
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Significant items making up deferred tax assets and liabilities are as follows:
1998 1997
----- -----
(Dollars in
millions)
Assets:
Product warranty................................................. $ 1.9 $ 1.5
Deferred compensation............................................ 1.3 2.5
Inventory adjustments............................................ 8.6 5.2
Deferred income.................................................. 3.7 3.6
Other............................................................ 4.0 5.2
----- -----
19.5 18.0
----- -----
Liabilities:
Accelerated depreciation......................................... 3.1 3.2
Other............................................................ 1.1 1.1
----- -----
4.2 4.3
----- -----
Net deferred tax asset......................................... $15.3 $13.7
===== =====
The classification of the net deferred tax asset on the combined balance sheets
is as follows:
1998 1997
----- -----
(Dollars in
millions)
Net current deferred tax asset (included in other current
assets)......................................................... $19.5 $18.0
Net long-term deferred tax liability............................. (4.2) (4.3)
----- -----
Net deferred tax asset......................................... $15.3 $13.7
===== =====
Operating earnings before taxes consist of the following:
1998 1997 1996
---------------------
(Dollars in millions)
U.S..................................................... $ 5.0 $ 7.9 $(14.2)
Foreign................................................. 34.2 18.9 25.6
------ ------ -------
$39.2 $26.8 $ 11.4
====== ====== =======
The effective tax rate on earnings from operations differs from the U.S.
federal statutory tax rate as a result of the following:
1998 1997 1996
---- ---- ----
Federal statutory income tax rate............................. 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit............. 2.6 3.9 2.7
Foreign taxes in excess of U.S. statutory rate, net........... 5.3 13.9 7.8
Foreign sales corporation..................................... (1.2) (2.4) (3.6)
Other......................................................... (1.5) (3.4) 4.2
---- ---- ----
Effective tax rate.......................................... 40.2% 47.0% 46.1%
==== ==== ====
F-15
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Note 9. Lease Commitments
At fiscal year-end 1998, the Company was committed to minimum rentals under
non-cancellable operating leases for fiscal years 1999 through 2003 and
thereafter, as follows, in millions: $4.7, $3.7, $2.6, $2.1, $1.6, and $10.1,
respectively. Rental expense for fiscal years 1998, 1997, and 1996, in
millions, was $7.6, $8.6, and $8.4, respectively.
Prior to the Distribution, the Company will enter into certain lease or
sublease agreements with VAI, an affiliate, or third parties for certain lease
facilities and other equipment, which agreements principally are a continuation
of existing lease commitments at market rates. These commitments are included
in the amounts above.
Note 10. Contingencies
Environmental Remediation
VAI has been named by the U.S. Environmental Protection Agency or third parties
as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at eight sites
where the Company is alleged to have shipped manufacturing waste for recycling
or disposal. VAI is also involved in various stages of environmental
investigation and/or remediation under the direction of, or in consultation
with, federal, state, and/or local agencies at certain current or former VAI
facilities (including facilities disposed of in connection with VAI's sale of
its Electron Devices Business during fiscal 1995, and the sale of the Thin Film
Systems business of VSEA during fiscal 1997). VAI's expenditures for
environmental investigation and remediation amounted to $4.9 million in fiscal
1998, compared with $2.3 million in fiscal 1997 and with $5.2 million in fiscal
1996.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 2, 1998, VAI nonetheless estimated that the future
exposure for environmental related investigation and remediation costs for
these sites ranged in the aggregate from $21.6 million to $48.9 million. The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of October 2, 1998.
VAI management believes that no amount in the foregoing range of estimated
future costs is more probable of being incurred than any other amount in such
range, and therefore, VAI has accrued $21.6 million in estimated environmental
costs as of October 2, 1998. This amount accrued by VAI has not been discounted
to present value.
As to other sites and facilities, VAI has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of October 2, 1998, VAI estimated that the future exposure for environmental
related investigation and remediation costs for these sites ranged in the
aggregate from $39.7 million to $73.7 million. The time frame over which these
costs are expected to be incurred varies with each site, ranging up to
approximately 30 years as of October 2, 1998. As to each of these sites and
facilities, VAI management has determined that a particular amount within the
range of estimated costs was a better estimate of the future environmental
liability than any other amount within the range and that the amount and timing
of these future costs were reliably determinable. Together, these amounts
totaled $51.1 million at October 2, 1998. VAI accordingly has accrued $22.3
million, which represents this best estimate of the future costs discounted at
4%, net of inflation. This VAI reserve is in addition to the $21.6 million
described above.
Under the Distribution Related Agreements, the Company has agreed to indemnify
VAI and VSEA for one-third of these environmental investigation and remediation
costs, as adjusted for insurance proceeds in respect of these environmental
costs and for the tax benefits expected to be realized by VAI upon the payment
of the Company's portion of these environmental costs (Note 11). As of October
2, 1998, the Company's reserve for
F-16
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
its portion of environmental liabilities, based upon future environmental
related costs estimated by VAI as of that date and included in long-term and
current accrued expenses, is calculated as follows:
Total
Recurring Non-recurring Anticipated
Year Costs Costs Future Costs
- ---- --------- ------------- ------------
(Dollars in millions)
1999..................................... $ 0.4 $0.7 $ 1.1
2000..................................... 0.5 0.2 0.7
2001..................................... 0.5 0.1 0.6
2002..................................... 0.5 0.0 0.5
2003..................................... 0.5 0.0 0.5
Thereafter............................... 9.6 0.8 10.4
----- ---- -----
Total costs............................ $12.0 $1.8 13.8
===== ==== -----
Imputed interest......................... (6.0)
-----
Total reserve.......................... $ 7.8
=====
The amounts set forth in the foregoing table are only estimates of anticipated
future environmental related costs, and the amounts actually spent in the years
indicated may be greater or less than such estimates. The aggregate range of
cost estimates reflects various uncertainties inherent in many environmental
investigation and remediation activities and the large number of sites where
VAI is undertaking such investigation and remediation activities. VAI believes
that most of these cost ranges will narrow as investigation and remediation
activities progress. The Company believes that its reserves are adequate, but
as the scope of the obligations becomes more clearly defined, these reserves
may be modified and related charges against earnings may be made.
Although any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if aggregated
and assumed to occur within a single fiscal year, would be material to the
Company's financial statements, the likelihood of such occurrence is considered
remote. Based on information currently available to management 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
combined financial statements of the Company.
Legal Proceedings
Under the Distribution Related Agreements, the Company has agreed to reimburse
VAI for one-third of the costs and expenses, adjusted for any tax benefits
recognized or realized by VAI from the incurrence or payment of these amounts,
with respect to certain legal proceedings relating to discontinued operations
of VAI (Note 11).
Also, from time to time, the Company is involved in a number of legal actions
and could incur an uninsured liability in one or more of them. While the
ultimate outcome of all of the above legal matters is not determinable,
management believes the resolution of these matters will not have a material
adverse effect on the financial condition, results of operations, or cash flows
of the Company.
Note 11. Other Transactions with Affiliates
Sales to VAI and VSEA for fiscal years 1998, 1997, and 1996 totaled $14.6
million, $14.8 million, and $23.3 million, respectively.
F-17
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
VAI uses a centralized cash management system to finance its operations. Cash
deposits from most of the Company's businesses are transferred to VAI on a
daily basis, and VAI funds the Company's required disbursements. No interest
has been charged or credited to the Company for these transactions.
VAI provided certain centralized services (see Note 1 to the combined financial
statements) to the Company. Cost allocations relating to these centralized
services were $26.5 million, $27.1 million, and $25.9 million in fiscal years
1998, 1997, and 1996, respectively, and are included in operating costs in the
combined statements of earnings. Amounts due to VAI for these expenses are
included in Divisional Equity.
Net transfers to or from VAI, included in Divisional Equity, include advances
and loans from affiliates, net cash transfers to or from VAI, third party
liabilities paid on behalf of the Company by VAI, amounts due from affiliates
related to sales, amounts due to or from VAI for services and other charges,
and income taxes paid on behalf of the Company by VAI. The weighted average
balance due to VAI was $213 million, $200 million, and $140 million for fiscal
years 1998, 1997 and 1996, respectively.
The activity in net transfers (to) from VAI for fiscal years 1998, 1997, and
1996 included in divisional equity in the combined statements of divisional
equity is summarized as follows:
1998 1997 1996
----- ----- ------
(Dollars in
millions)
VAI services and other charges............................ $26.5 $27.1 $ 25.9
Cash transfers, net....................................... (9.8) 7.1 (28.0)
----- ----- ------
Net transfers (to) from VAI............................. $16.7 $34.2 $ (2.1)
===== ===== ======
The Distribution Related Agreements provide that, from, and after the
Distribution, VAI, VSEA, and the Company will indemnify each and their
respective subsidiaries, directors, officers, employees and agents against all
losses arising in connection with shared liabilities (including certain
environmental and legal liabilities). All shared liabilities will be managed
and administered by VAI and expenses and losses, net of proceeds and other
receivables, will be borne one-third each by VAI, VSEA, and the Company; the
Distribution Related Agreements also provide that the Company shall assume all
Company liabilities, other than shared liabilities (including accounts payable,
accrued payroll, and pension liabilities) in accordance with their terms.
Note 12. Industry and Geographic Segments
The Company operates in one industry segment: instrumentation, equipment and
accessories for analytical, research, industrial, and scientific applications.
Company products are used in biological and biochemical research; in
independent test labs; in quality control and research in industries such as
pharmaceuticals, foods, metals, chemicals, and petroleum; for environmental
monitoring and analysis; in semiconductor and automotive manufacturing; in
high-energy physics; in surface analysis, space research and petrochemical
refining.
The Company operates various manufacturing and marketing operations outside the
United States. Inter-business sales between geographic areas are accounted for
at cost plus prevailing markups arrived at through negotiations between
otherwise independent profit centers (Note 1).
No customer accounted for more than 10% of total sales in fiscal years 1998,
1997, and 1996.
F-18
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Included in the total of United States sales are export sales of $30 million in
fiscal 1998, $36 million in fiscal 1997, and $32 million in fiscal 1996. Sales
under prime contracts from the U.S. Government were approximately $7 million in
fiscal 1998, $9 million in fiscal 1997, and $8 million in fiscal 1996.
Sales to Intergeographic
Unaffiliated Sales to Pre-tax Identifiable
Customers(/1/) Affiliates Total Sales Earnings Assets
-------------- ------------------- ------------------- ---------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(Dollars in millions)
United States.......... $327 $325 $284 $ 116 $ 114 $ 109 $ 443 $ 439 $ 393 $ 39 $ 43 $ 32 $214 $193 $140
International.......... 223 216 219 112 97 98 335 313 317 34 23 25 159 130 144
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total geographic
segments............. 550 541 503 228 211 207 778 752 710 73 66 57 373 323 284
Eliminations, corporate
& other............... 8 1 1 (228) (211) (207) (220) (210) (206) (34) (39) (46) 31 35 17
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total Company......... $558 $542 $504 $ - $ - $ - $ 558 $ 542 $ 504 $ 39 $ 27 $ 11 $404 $358 $301
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
- -------
(1) Includes sales to VAI and VSEA (Note 11).
Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$261 million in fiscal 1998, $253 million in fiscal 1997, and $250 million in
fiscal 1996.
Note 13. Quarterly Financial Data (Unaudited)
1998 1997
------------------------------- -------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in millions, except per share amounts)
Sales................... $141.0 $141.0 $129.9 $145.9 $124.9 $134.9 $137.5 $144.6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 54.5 55.8 53.9 57.2 49.8 52.0 53.7 55.6
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings............ 5.8 6.4 5.2 6.0 3.5 3.5 3.7 3.5
====== ====== ====== ====== ====== ====== ====== ======
Pro forma net earnings
per share.............. $ 0.19 $ 0.22 $ 0.17 $ 0.20 $ 0.12 $ 0.11 $ 0.13 $ 0.11
====== ====== ====== ====== ====== ====== ====== ======
F-19
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Varian Associates, Inc.:
Our report on the combined financial statements of the Instruments Business
of Varian Associates, Inc. is included on page F-2 of this Form 10. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page F-1 of
this Form 10.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic combined financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ PricewaterhouseCoopers LLP
---------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998
S-I
SCHEDULE II
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
for the fiscal years 1998, 1997, and 1996
(Dollars in Thousands)
Balance at Charged to Deductions Balance at
Beginning Costs and ------------------------------------- End of
Description of Period Expenses Description Amount Period
- ----------- ---------- ---------- ----------- ------ ----------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE:
Fiscal Year Ended 1998.. $ 321 $ 295 Write-offs & Adjustments...... $ (97) $ 713
====== ====== ====== ======
Fiscal Year Ended 1997.. $ 642 $ 151 Write-offs & Adjustments...... $ 472 $ 321
====== ====== ====== ======
Fiscal Year Ended 1996.. $ 652 $ 601 Write-offs & Adjustments...... $ 611 $ 642
====== ====== ====== ======
ESTIMATED LIABILITY FOR
PRODUCT WARRANTY:
Fiscal Year Ended 1998.. $7,173 $9,641 Actual Warranty Expenditures.. $9,206 $7,608
====== ====== ====== ======
Fiscal Year Ended 1997.. $5,688 $9,764 Actual Warranty Expenditures.. $8,279 $7,173
====== ====== ====== ======
Fiscal Year Ended 1996.. $4,919 $9,077 Actual Warranty Expenditures.. $8,308 $5,688
====== ====== ====== ======
S-II
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Varian, Inc.
/s/ Arthur W. Homan
By______________________________________
Name: Arthur W. Homan
Title: Secretary
Date: March 8, 1999
EXHIBIT INDEX
Exhibit
No. Description
------------------
2.1 Distribution Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of
January 14, 1999.+
3.1 Form of Restated Certificate of Incorporation of Varian, Inc. to be in
effect upon the effectiveness of the Distribution.+
3.2 Form of By-Laws of Varian, Inc. to be in effect upon the effectiveness
of the Distribution.*
4.1 Specimen Common Stock Certificate.*
4.2 Rights Agreement dated February 18, 1999.*
10.1 Form of Employee Benefits Allocation Agreement among Varian Associates,
Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.2 Form of Intellectual Property Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.4 Form of Transition Services Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.5 Form of Change in Control Agreement for CEO.*
10.6 Form of Change in Control Agreement for General Counsel.*
10.7 Form of Change in Control Agreement for Senior Executives.*
10.8 Form of Indemnity Agreement with Directors and Officers.*
10.9 Varian, Inc. Omnibus Stock Plan.+
10.10 Varian, Inc. Management Incentive Plan.+
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule.*
- -------
+Filed by Registrant with its Form 10 Registration Statement filed on February
12, 1999.
*Filed herewith.