<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7598
VARIAN MEDICAL SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 94-2359345
(State or Other Jurisdiction of Incorporation (IRS Employer
or Organization) Identification Number)
3100 Hansen Way, Palo Alto, California 94304-1030
(Address of principal executive offices) (Zip Code)
(650) 493-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]. No [_].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 30,882,983 shares of
Common Stock, par value $1 per share, outstanding as of February 8, 2000.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I. Financial Information 3
Item 1. Financial Statements (unaudited) 3
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
Part II. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a "safe harbor" for these types of statements. These forward-looking
statements are subject to risks and uncertainties that could cause the actual
results of Varian Medical Systems, Inc. (the "Company") to differ materially
from management's current expectations. These risks and uncertainties include,
without limitation, 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;
reliance on sole source suppliers; the Company's ability to attract and retain
key employees; the Company's ability to increase capacity to meet increasing
demand; the Company's ability to increase operating margins on higher sales; the
impact of managed care initiatives in the U.S. on capital expenditures and
resulting pricing pressures on medical equipment; effectiveness of certain third
parties' corrective actions to address the impact of the Year 2000; the
Company's potential responsibility for liabilities arising out of or relating to
the recent reorganization which were not expressly assumed by the Company; the
possibility that indemnification for certain liabilities arising out of or
relating to the reorganization will not be available to the Company due to the
indemnifying party's insolvency or legal prohibition; increased debt leverage
resulting from the reorganization impacting the Company's ability to obtain
future financing for working capital, capital expenditures, product development,
acquisitions and general corporate purposes; the effect of increased debt
leverage on cash flow, vulnerability to economic downturns and flexibility in
responding to changing business and economic conditions; possible exposure to
fraudulent conveyance allegations arising out of the reorganization; possible
exposure to additional tax obligations in connection with the reorganization;
and other risks detailed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors Affecting the
Company's Business" in the Company's Annual Report on Form 10-K for the fiscal
year ended October 1, 1999 and, from time to time in the Company's other filings
with the Securities and Exchange Commission. The Company assumes and undertakes
no obligation to update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
(Amounts in thousands,
- ---------------------- December 31, January 1,
except per share amounts) 1999 1999
- ------------------------- ---- ----
<S> <C> <C>
SALES $ 141,250 $ 104,964
--------- ---------
Operating Costs and Expenses
Cost of sales 90,852 72,134
Research and development 10,256 9,422
Selling, general and administrative 30,254 23,587
Reorganization - 3,559
--------- ---------
Total Operating Costs and Expenses 131,362 108,702
--------- ---------
OPERATING EARNINGS (LOSS) 9,888 (3,738)
Interest expense (1,586) (2,761)
Interest income 66 1,624
--------- ---------
Earnings (Loss) from Continuing
Operations Before Taxes 8,368 (4,873)
Taxes on earnings (loss) 3,140 (2,790)
--------- ---------
Earnings (Loss) from Continuing
Operations 5,228 (2,083)
Earnings (Loss) from Discontinued
Operations - Net of Taxes - (354)
--------- ---------
Net Earnings (Loss) $ 5,228 $ (2,437)
========= =========
Average Shares Outstanding - Basic 30,625 29,848
========= =========
Average Shares Outstanding - Diluted 31,360 29,848
========= =========
Net Earnings (Loss) Per Share - Basic
Continuing Operations $ 0.17 $ (0.07)
Discontinued Operations - (0.01)
--------- ---------
Net Earnings (Loss) Per Share - Basic $ 0.17 $ (0.08)
========= =========
Net Earnings (Loss) Per Share - Diluted
Continuing Operations $ 0.17 $ (0.07)
Discontinued Operations - (0.01)
--------- ---------
Net Earnings (Loss) Per Share - Diluted $ 0.17 $ (0.08)
========= =========
Dividends Declared Per Share - $ 0.10
</TABLE>
See accompanying notes to the consolidated financial statements
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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, October 1,
(Dollars in thousands, except par values) 1999 1999
- ----------------------------------------- ---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 19,294 $ 25,126
----------- ---------
Accounts receivable 200,117 233,785
----------- ---------
Inventories
Raw materials and parts 71,836 61,949
Work in process 7,809 7,819
Finished goods 13,106 8,556
----------- ---------
Total inventories 92,751 78,324
----------- ---------
Other current assets 48,936 45,011
----------- ---------
Total Current Assets 361,098 382,246
----------- ---------
Property, Plant, and Equipment 200,631 200,386
Accumulated depreciation and amortization (120,893) (120,138)
----------- ---------
Net Property, Plant, and Equipment 79,738 80,248
----------- ---------
Other Assets 76,119 76,689
----------- ---------
TOTAL ASSETS $ 516,955 $ 539,183
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 20,585 $ 35,587
Accounts payable - trade 36,497 40,141
Accrued expenses 113,250 121,165
Product warranty 18,812 18,152
Advance payments from customers 51,615 54,757
----------- ---------
Total Current Liabilities 240,759 269,802
Long-Term Accrued Expenses 25,029 25,890
Long-Term Debt 58,500 58,500
----------- ---------
Total Liabilities 324,288 354,192
----------- ---------
Stockholders' Equity
Preferred stock
Authorized 1,000,000 shares, par value $1, issued none - -
Common stock
Authorized 99,000,000 shares, par value $1, issued and outstanding
30,702,000 shares at December 31, 1999 and 30,563,000 shares at
October 1, 1999 30,702 30,563
Capital in excess of par value 22,494 20,185
Retained earnings 139,471 134,243
----------- ---------
Total Stockholders' Equity 192,667 184,991
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 516,955 $ 539,183
=========== =========
</TABLE>
See accompanying notes to the consolidated financial statements
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<PAGE>
VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
December 31, January 1,
(Dollars in thousands) 1999 1999
- ---------------------- ---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash (Used)/Provided by Operating Activities $ 9,803 ($2,567)
-------- ---------
INVESTING ACTIVITIES
Proceeds from the sale of property, plant, and equipment 18 266
Purchase of property, plant, and equipment (5,231) (7,339)
Purchase of businesses, net of cash acquired - (150)
Other, net 289 (107)
-------- ---------
Net Cash Used by Investing Activities (4,924) (7,330)
-------- ---------
FINANCING ACTIVITIES
Net repayments on short-term obligations (15,002) (394)
Principal payments on long-term debt - (5,894)
Proceeds from common stock issued to employees 1,981 3,699
Other, net - (2,125)
-------- ---------
Net Cash Used by Financing Activities (13,021) (4,714)
-------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 2,310 (3,525)
-------- ---------
Net Decrease in Cash and Cash Equivalents (5,832) (18,136)
Cash and Cash Equivalents at Beginning of Period 25,126 149,667
-------- ---------
Cash and Cash Equivalents at End of Period $ 19,294 $ 131,531
======== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE>
VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: The consolidated financial statements include the accounts of Varian
Medical Systems, Inc. (the "Company" or "VMS") and its subsidiaries
and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The October 1, 1999 balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. It
is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest Form 10-K Annual Report. In the opinion of
management, the interim consolidated financial statements include all
normal recurring adjustments necessary to present fairly the
information required to be set forth therein. The results of
operations for the first quarter ended December 31, 1999 are not
necessarily indicative of the results to be expected for a full year
or for any other periods.
NOTE 2: On April 2, 1999, Varian Associates, Inc. reorganized into three
separate publicly traded companies by spinning off, through a tax-free
distribution, two of its businesses to stockholders (the
"Distribution"). The Distribution resulted in the following three
companies: 1) the Company (renamed from Varian Associates, Inc. to
Varian Medical Systems, Inc. following the Distribution); 2) Varian,
Inc. ("VI"); and 3) Varian Semiconductor Equipment Associates, Inc.
("VSEA"). The Distribution resulted in a non-cash dividend to
stockholders.
The Distribution was accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and
among the Company, VI and VSEA (the "Distribution Agreement"). For
purposes of governing certain of the ongoing relationships between and
among the Company, VI and VSEA after the Distribution, the Company, VI
and VSEA also entered into various agreements (the "Distribution-
Related Agreements") that set forth the principles to be applied in
allocating certain related costs and specified portions of contingent
liabilities to be shared, which, by their nature, could not be
reasonably estimated at the time.
Under the Distribution Agreement, (1) the Company was required, among
other things, to contribute to VSEA cash and cash equivalents such
that VSEA would have $100 million in cash and cash equivalents and
consolidated debt (as defined in the Distribution Agreement) of no
more than $5 million and (2) VI was required to assume 50% of the
outstanding indebtedness under the Company's term loans and have
transferred to it such portion of the indebtedness under the Company's
notes payable and such amount of cash and cash equivalents so that as
of the time of the Distribution, the Company and VI would each have
net debt (defined in the Distribution Agreement as the amount
outstanding under the term loans and the notes payable, less cash and
cash equivalents) equal to approximately 50% of the net debt of the
Company and VI, subject to such adjustment as was necessary to provide
the Company with a net worth of between 40% and 50% of the aggregate
net worth of the Company and VI. As a result, the Company transferred
$119 million in cash and cash equivalents to VSEA and VI, and VSEA and
VI assumed $69 million in debt. However, the amounts allocated to VI
and transferred to VSEA in connection with the Distribution were based
on estimates. Certain future adjustments or payments may be required
under the provisions of the Distribution Agreement or the
Distribution-Related Agreements. The Company may be required to make
cash payments to VI or VSEA, or may be entitled to receive cash
payments from VI or VSEA. The amount of such adjustments, if any, are
not known or estimable at this time.
In fiscal year 1999, the Company reported results of operations
pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Accordingly, the Company reclassified its
fiscal year 1999 consolidated financial statements to reflect the
dispositions of VI and VSEA. The net operating results of VI and VSEA
have been reported, net of applicable income taxes, as "Earnings
(Loss) from Discontinued Operations."
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<PAGE>
Summarized information for discontinued operations is as follows
(dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
December 31, 1999 January 1, 1999
----------------- ---------------
<S> <C> <C>
(unaudited)
Revenue $ 0 $ 177.3
==== ==========
Earnings before Taxes $ 0 $ 1.0
==== ==========
Net Loss $ 0 ($0.4)
==== ==========
</TABLE>
NOTE 3: In fiscal year 1999, the Company incurred net reorganization charges
of $29.7 million, of which $24.9 million was incurred as a result of
the Distribution and $4.8 million was incurred as a result of the
Company's restructuring of its X-ray Products segment by the closing
of a manufacturing facility in Arlington Heights, Illinois to
consolidate manufacturing at the Company's existing facility in Salt
Lake City, Utah. $3.6 million of such charges were recognized in the
first quarter of fiscal year 1999. The Company did not incur any
reorganization charges in the first quarter of fiscal year 2000.
The following table sets forth certain details associated with the net
reorganization charges associated with the Distribution as of December
31, 1999 (in thousands of dollars):
<TABLE>
<CAPTION>
Accrual at Cash Accrual at
October 1, 1999 Payments Reclassifications December 31, 1999
--------------- --------- ------------------ -----------------
<S> <C> <C> <C> <C>
Retention bonuses, severance,
and executive compensation $ 4,507 $ (1,358) $ (243) $ 2,906
Legal, accounting, printing
and investment banking fees 1,792 (1,774) 77 95
Gain on sale of real estate
and corporate assets -- (139) 139 --
Foreign taxes (excluding
income taxes) 676 -- -- 676
Other 1,368 (763) 27 632
---------- --------- ----------- -------------
$ 8,343 $ (4,034) $ -- $ 4,309
========== ========= =========== =============
</TABLE>
NOTE 4: Inventories are valued at the lower of cost or market (realizable
value) using the last-in, first-out (LIFO) cost for the U.S.
inventories of the Company except for x-ray tube products. All other
inventories are valued principally at average cost. If the first-in,
first-out (FIFO) method had been used for those operations valuing
inventories on a LIFO basis, inventories would have been higher than
reported by $14.4 million at December 31, 1999 and $14.2 million at
October 1, 1999.
NOTE 5: 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. When the Company's foreign exchange contracts hedge operational
exposure, the effects of movements in currency exchange rates on these
instruments are recognized in income when the related revenues and
expenses are recognized. All forward exchange contracts hedging
operational exposure are designated and highly effective as hedges.
The critical terms of all forward exchange contracts hedging
operational exposure and of the forecasted transactions being hedged
are substantially identical. Accordingly, the Company expects that
changes in the fair value or cash flows of the hedging instruments and
the hedged transactions (for the risk 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. Because the
impact of movements in currency exchange rates on foreign exchange
contracts generally offsets the related impact on the underlying items
being hedged, these instruments do not subject the Company to risk
that would otherwise result from changes in currency exchange rates.
Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and
are ultimately recognized in income as part of those carrying amounts.
Gains and losses related to qualifying hedges of firm commitments also
are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs. Any deferred
gains or losses are included in Accrued Expenses in the balance sheet.
If a hedging instrument is sold or terminated prior to maturity,
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<PAGE>
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, and no forward exchange
contract has an original maturity greater than one year. Forward
exchange contracts outstanding as of December 31, 1999 are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Notional Value Notional Value
Sold Purchased
---- ---------
(Dollars in thousands)
<S> <C> <C>
Australian dollar $ 762 $ --
British pound 4,402 --
Canadian dollar 8,603 --
Danish krona -- 1,258
Japanese yen 23,582 2,476
Swedish krona 5,706 --
Swiss franc -- 9,875
Thailand baht 1,656 --
Euro 67,483 --
--------- ----------
Totals $ 112,194 $ 13,609
========= ==========
</TABLE>
The notional amounts of forward exchange contracts are not a measure
of the Company's exposure.
NOTE 6: Net earnings per share is computed under two methods, basic and
diluted. Basic net earnings per share is computed by dividing earnings
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
is computed by dividing earnings available to common stockholders by
the sum of the weighted average number of common shares outstanding
and potential common shares (when dilutive). A reconciliation of the
numerator and denominator used in the earnings per share calculations
are presented as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31, January 1,
1999 1999
---- ----
<S> <C> <C>
Numerator--Basic and Diluted:
Earnings (Loss) from Continuing Operations $ 5,228 $ (2,083)
Earnings (Loss) from Discontinued Operations -- (354)
---------- ----------
Net Earnings (Loss) $ 5,228 $ (2,437)
========== ==========
Denominator--Basic:
Average shares outstanding 30,625 29,848
========== ==========
Net Earnings (Loss) Per Share--Basic:
Continuing Operations $ 0.17 $ (0.07)
Discontinued Operations -- (0.01)
---------- ----------
Net Earnings (Loss) Per Share--Basic $ 0.17 $ (0.08)
========== ==========
Denominator--Diluted:
Average shares outstanding 30,625 29,848
Dilutive stock options 735 --
---------- ----------
31,360 29,848
========== ==========
Net Earnings (Loss) Per Share--Diluted:
Continuing Operations $ 0.17 $ (0.07)
Discontinued Operations -- (0.01)
---------- ----------
Net Earnings (Loss) Per Share--Diluted 0.17 $ (0.08)
========== ==========
</TABLE>
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<PAGE>
Options to purchase 803,820 shares at an average exercise price of
$26.68 were outstanding on a weighted average basis during the quarter
ended December 31, 1999 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the
average market price of the shares.
Options to purchase 4,191,685 shares at an average exercise price of
$42.62 were outstanding on a weighted average basis during the quarter
ended January 1, 1999 but were not included in the computation of
diluted EPS because the Company had a net loss for the period.
NOTE 7: Included in other assets at December 31, 1999 and October 1, 1999 is
goodwill of $55.0 million and $56.1 million, respectively, which is
the excess of the cost of acquired businesses over the sum of the
amounts assigned to identifiable assets acquired less liabilities
assumed. Goodwill is amortized on a straight-line basis over periods
ranging from 5 to 40 years.
NOTE 8: The Company's operations are grouped into two reportable segments:
Oncology Systems and X-ray Products. These segments were determined
based on how management views and evaluates the Company's operations.
The Company's Ginzton Technology Center (GTC) including its
brachytherapy business, is reflected in an "other" category. Other
factors included in segment determination were similar economic
characteristics, distribution channels, manufacturing environment,
technology and customers. The Company evaluates performance and
allocates resources based on earnings from continuing operations
before interest and taxes.
<TABLE>
<CAPTION>
Industry Segments
Earnings from
Continuing Operations
Sales Before Taxes
----- ------------
For the first quarter ended For the first quarter ended
December 31, January 1, December 31, January 1,
1999 1999 1999 1999
----------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Oncology Systems $ 106 $ 75 $ 13 $ --
X-ray Products 30 27 3 3
Other 5 3 (1) (1)
-------- ------- -------- -------
Total 141 105 15 2
Corporate -- -- (7) (7)
-------- ------- -------- -------
Total Company $ 141 $ 105 $ 8 $ (5)
======== ======= ======== =======
</TABLE>
NOTE 9: In June 1998, the Financial Accounting and Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
133 requires derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting
for gains or losses resulting from changes in the fair values of those
derivatives would be dependent upon the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective for
the Company's fiscal year 2001. The Company has not yet determined the
impact of its implementation on the Company's consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the Securities and Exchange
Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to
revenue recognition policies. SAB 101 is effective for fiscal year
2001, however earlier adoption is permitted. The Company has not yet
determined when it will adopt SAB 101, and is in the process of
determining the impact, if any, that adoption will have on the
consolidated financial statements.
-9-
<PAGE>
NOTE 10: In May 1999, the Company agreed to invest $5 million over the
following twelve months in a consortium to participate in the
Company's acquisition of a majority interest in an entity that
supplies the Company with amorphous silicon thin-film transistor
arrays for its imaging products, of which $2.5 million was funded in
July 1999 and the remaining $2.5 million will be funded in the fourth
quarter of fiscal year 2000. The Company may recognize a loss in
future fiscal years of up to $5 million on its equity investment.
Management believes that the likelihood of the Company recognizing a
loss on its equity investment in fiscal year 2000 is remote.
NOTE 11: The Company 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 Associates,
Inc. is alleged to have shipped manufacturing waste for recycling or
disposal. The Company 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 VMS or former Varian Associates, Inc. facilities
(including facilities disposed of in connection with the Company's
sale of its Electron Devices business during 1995, and the sale of its
Thin Film Systems business during 1997). Under the terms of the
Distribution Agreement, VI and VSEA are each obligated to indemnify
the Company for one-third of these environmental-related investigation
and remediation costs (after adjusting for any insurance proceeds
realized or tax benefits recognized by the Company). Expenditures for
environmental investigation and remediation amounted to $0.5 million
for the first quarters of both fiscal year 2000 and 1999.
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 December 31, 1999, the
Company nonetheless estimated that the Company's future exposure (net
of VI and VSEA's indemnification obligations) for environmental-
related investigation and remediation costs for these sites ranged in
the aggregate from $12.1 million to $29.4 million. The time frame over
which the Company expects to incur such costs varies with each site,
ranging up to approximately 30 years as of December 31, 1999.
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 accrued $12.1 million in estimated
environmental costs as of December 31, 1999. The amount accrued has
not been discounted to present value.
As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future
environmental activities. As of December 31, 1999, the Company
estimated that the Company's future exposure (net of VI and VSEA's
indemnification obligations) for environmental-related investigation
and remediation costs for these sites and facilities ranged in the
aggregate from $22.8 million to $38.8 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 December 31,
1999. As to each of these sites and facilities, management 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 $23.9 million at December 31, 1999. The Company accordingly
accrued $11.8 million, which represents its best estimate of the
future costs discounted at 4%, net of inflation. This accrual is in
addition to the $12.1 million described in the preceding paragraph.
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. The Company 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 its obligations becomes more clearly
defined, these reserves (and the associated indemnification
obligations of VI and VSEA) 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 (and
assuming VI and VSEA satisfy their indemnification obligations),
management believes that the costs of these environmental-related
matters are not reasonably
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<PAGE>
likely to have a material adverse effect on the consolidated financial
statements of the Company.
The Company evaluates its liability for environmental-related
investigation and remediation in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies
with respect to which the Company believes that it has rights to
contribution, indemnity and/or reimbursement (in addition to the
obligations of VI and VSEA). Claims for recovery of environmental
investigation and remediation costs already incurred, and to be
incurred in the future, have been asserted against various insurance
companies and other third parties. In 1992, the Company filed a
lawsuit against 36 insurance companies with respect to most of the
above-referenced sites and facilities. The Company received certain
cash settlements during fiscal years 1995, 1996, 1997 and 1998 from
defendants in that lawsuit. The Company has also reached an agreement
with another insurance company under which the insurance company has
agreed to pay a portion of the Company's past and future
environmental-related expenditures, and the Company therefore has a
$3.6 million receivable in Other Assets at December 31, 1999. The
Company believes that this receivable is recoverable because it is
based on a binding, written settlement agreement with a solvent and
financially viable insurance company. Although the Company intends to
aggressively pursue additional insurance and other recoveries, the
Company has not reduced any liability in anticipation of recovery with
respect to claims made against third parties.
The Company is a party to three related federal actions involving
claims by independent service organizations ("ISOs") that the
Company's policies and business practices relating to replacement
parts violate the antitrust laws (the "ISOs Litigation"). The ISOs
purchase replacement parts from the Company and compete with it for
the servicing of linear accelerators made by the Company. In response
to several threats of litigation regarding the legality of the
Company's parts policy, the Company filed a declaratory judgment
action in the U. S. District Court for the Northern District of
California in 1996 seeking a determination that its new policies are
legal and enforceable and damages against two of the ISOs for
misappropriation of the Company's trade secrets, unfair competition,
copyright infringement and related claims. Subsequently, four of the
defendants filed separate claims in other jurisdictions raising issues
allegedly related to those in the declaratory relief action and
seeking injunctive relief against the Company and damages against the
Company in the amount of $10 million for each plaintiff. The
defendants' motion for a preliminary injunction in U. S. District
Court in Texas with respect to the Company's policies was defeated.
The ISOs defendants amended the complaint to include class action
allegations, allege a variety of other anti-competitive business
practices and filed a motion for class certification, which was heard
by the U. S. District Court in Texas in July 1999. No decision,
however, has been entered. The Company has filed a motion to
consolidate its claims from the Northern District of California to the
action in the District Court in Texas.
Following the Distribution, the Company retained the liabilities
related to the medical systems business prior to the Distribution,
including the ISOs Litigation. In addition, under the terms of the
Distribution Agreement, the Company agreed to manage and defend
liabilities related to legal proceedings and environmental matters
arising from corporate or discontinued operations of the Company prior
to the Distribution. Under the terms of the Distribution Agreement, VI
and VSEA generally are each obligated to indemnify the Company for
one-third of these liabilities (after adjusting for any insurance
proceeds realized or tax benefits recognized by the Company),
including certain environmental-related liabilities described above,
and to fully indemnify the Company for liabilities arising from the
operations of the business transferred to each prior to the
Distribution. The availability of such indemnities will depend upon
the future financial strength of VI and VSEA. No assurance can be
given that the relevant company will be in a position to fund such
indemnities. It is also possible that a court would disregard this
contractual allocation of indebtedness, liabilities and obligations
among the parties and require the Company 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. 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.
The Company 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 the
Company, management does not believe any pending legal proceeding will
result in a judgment or settlement that will have a material adverse
effect on the Company's financial position, results of operations or
cash flows.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Varian Medical Systems, Inc.:
We have reviewed the accompanying consolidated balance sheet of Varian Medical
Systems, Inc. and its subsidiaries as of December 31, 1999, and the related
consolidated statements of operations for each of the three-month periods ended
December 31, 1999 and January 1, 1999 and the consolidated statements of cash
flows for the three-month periods ended December 31, 1999 and January 1, 1999.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of October 1, 1999, and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
for the year then ended (not presented herein), and in our report dated November
4, 1999 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
January 26, 2000
San Jose, California
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
In August 1998, the Company (then known as Varian Associates, Inc.,
"Varian") announced its intention to spin off its instruments business and its
semiconductor equipment business to its stockholders. The Company subsequently
transferred its instruments business to Varian, Inc. ("VI"), a wholly owned
subsidiary, and transferred its semiconductor equipment business to Varian
Semiconductor Equipment Associates, Inc. ("VSEA"), a wholly owned subsidiary.
On April 2, 1999, the Company distributed to holders of shares of the common
stock of the Company all of the outstanding shares of common stock of VI and
VSEA (the "Distribution").
These transactions were accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and among the
Company, VI and VSEA. In addition, the Company, VI and VSEA also entered into
various other agreements for purposes of governing certain of the ongoing
relationships between and among the Company, VI and VSEA after the Distribution.
The business retained by the Company consists of its medical systems
business, principally the sales and service of oncology systems, and the sales
of x-ray tubes and imaging subsystems. Immediately following the Distribution,
the Company changed its name to Varian Medical Systems, Inc.
The financial statements included in this report present VI and VSEA
as discontinued operations in the fiscal year 1999 financial statements pursuant
to Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
net operating results of VI and VSEA are reported as "Earnings (Loss) from
Discontinued Operations-Net of Taxes" in fiscal year 1999. In determining the
items attributable to these businesses, the Company, among other things,
allocated certain Varian corporate assets (including pension assets),
liabilities (including profit-sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance, information
technology services, treasury and other corporate overhead) to VI and VSEA.
While management believes the methods used to allocate the amount of these items
to VI and VSEA are reasonable, the balances retained by the Company are not
necessarily indicative of the amounts that would have been recorded by the
Company had the Distribution occurred prior to the dates of the financial
statements affected by these allocations, or that have been recorded by the
Company after the Distribution or that will be recorded in the future. The
following discussion and analysis pertains to the continuing operations of the
Company, unless otherwise noted.
Results of Operations
Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the
Friday nearest September 30. Fiscal year 2000 comprises the 52-week period
ending September 29, 2000, and fiscal year 1999 comprises the 52-week period
ended October 1, 1999. The fiscal quarters ended December 31, 1999 and January
1, 1999 each comprise 13 weeks.
First Quarter of Fiscal Year 2000 Compared to First Quarter of Fiscal
Year 1999
Sales. The Company's sales of $141 million in the first quarter of
fiscal year 2000 were 35% higher than its sales of $105 million in the first
quarter of fiscal year 1999. International sales were $70 million, or 50% of
sales, in the first quarter of fiscal year 2000, compared to $59 million, or 56%
of sales, in the first quarter of fiscal year 1999.
Oncology systems sales increased 41% between quarters, amounting to
$106 million, or 75% of the Company's sales, in the first quarter of fiscal year
2000, compared to $75 million, or 72% of sales, in the first quarter of fiscal
year 1999. Oncology systems sales in North America, Europe, Asia and the rest of
the world amounted to $58 million, $30 million, $8 million and $10 million in
the first quarter of fiscal year 2000, and $35 million, $26 million, $9 million
and $5 million in the first quarter of fiscal year 1999, respectively. The North
American sales growth reflects the increased demand in the United States for
advanced radiotherapy equipment. To a lesser extent, the increase in sales
between quarters is also a result of the low shipments in the first quarter of
fiscal year 1999 due to customer requested delivery delays.
X-ray tubes and imaging subsystems sales increased 13% between
quarters, amounting to $30 million, or
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21% of the Company's sales, in the first quarter of fiscal year 2000, compared
to $27 million, or 25% of sales, in the first quarter of fiscal year 1999. Sales
of x-ray tubes and imaging subsystems in North America, Europe, Asia and the
rest of the world amounted to $10 million, $4 million, $15 million and $1
million in the first quarter of fiscal year 2000, and $9 million, $6 million,
$11 million and $1 million in the first quarter of fiscal year 1999,
respectively. The increase in x-ray tube and imaging subsystem sales between
quarters is primarily attributable to demand for the new sub-second CT scanner
tubes and, to a lesser extent, replenishment of inventories by the Company's
original equipment manufacturer customers.
GTC sales were $5 million for the first quarter of fiscal year 2000,
compared to $3 million for the same period in fiscal year 1999. GTC sales are
primarily in the brachytherapy business. The increase is largely attributable to
the acquisition of a product line in June 1999 for treatment planning software
for low dose rate brachytherapy.
Gross Profit. The Company recorded gross profit of $50 million in the
first quarter of fiscal year 2000 and $33 million in the first quarter of fiscal
year 1999. As a percentage of sales, gross profit was 36% in the first quarter
of fiscal year 2000 compared to 31% in the first quarter of fiscal year 1999.
Gross profit as a percentage of sales of oncology systems amounted to 37% in the
first quarter of fiscal year 2000 compared to 30% in the first quarter 1999. The
margin improvement at oncology systems reflects primarily the larger number of
shipments in North America which traditionally have better margins than
international sales. In contrast, gross profit as a percentage of sales of x-ray
tubes and imaging subsystems was 31% in the first quarter of fiscal year 2000,
compared to 33% in the first quarter of fiscal year 1999. The decline in x-ray
and imaging subsystems margin is primarily due to the lower manufacturing yields
with the glass tube products as a result of the consolidation of the
manufacturing facility in Arlington Heights, Illinois to the Company's facility
in Salt Lake City, Utah in the fourth quarter of fiscal year 1999.
Research and Development. The Company's research and development
expenses were $10 million in the first quarter of fiscal year 2000, compared to
$9 million in the first quarter of fiscal year 1999, amounting to 7% of sales
and 9% of sales, respectively. The reduction in the research and development
expenses as a percentage of sales is largely attributable to the increased sales
in the first quarter of fiscal year 2000.
Selling, General and Administrative. The Company's selling, general
and administrative expenses were $30 million, or 21% of sales, in the first
quarter of fiscal year 2000, compared to $24 million, or 22% of sales, in the
first quarter of fiscal year 1999. Of the $6 million increase quarter over
quarter, approximately $2 million is related to increased marketing and selling
activities in the first quarter of fiscal year 2000. Furthermore, selling,
general and administrative expenses in the first quarter of fiscal year 1999
were reduced by approximately $4 million because of unusual insurance-related
recoveries and reclassification of items to discontinued operations.
Reorganization Costs. First quarter fiscal year 1999 expenses included
net reorganization charges of $4 million incurred in connection with the
Distribution. The reorganization charges were primarily comprised of
professional fees.
Interest expense, net. The Company's net interest expense was $1.5
million for the first quarter of fiscal year 2000 compared to $1.1 million for
the same quarter in fiscal year 1999. The change in net interest expense quarter
over quarter is made up of a $1.2 million decrease in interest expense offset by
a $1.6 million decrease in interest income. The decrease in interest expense
between quarters is primarily attributable to the Company having less long-term
debt as a result of the Distribution which occurred in the second quarter of
fiscal year 1999. The decrease in interest income is associated with the
Company's higher cash levels during the first quarter of fiscal year 1999 as
compared to the same period in fiscal year 2000.
Taxes on Earnings (Loss). The Company's estimated effective tax rate
was 37.5% in the first quarter of fiscal year 2000, compared to 50.9% in the
first quarter of fiscal year 1999. The first quarter fiscal year 1999 rate was
significantly higher than the first quarter fiscal year 2000 rate principally
due to the non-deductibility of certain reorganization costs related to the
Distribution.
Liquidity and Capital Resources
Prior to the Distribution, the Company historically incurred or
managed debt at the parent level. Under the Distribution Agreement, (1) the
Company was required to contribute to VSEA such cash and cash equivalents such
that VSEA would have $100 million in cash and cash equivalents, net worth (as
defined in the Distribution Agreement) of at least $150 million and consolidated
debt (as defined in the Distribution Agreement) of no more than $5 million and
(2) VI was required to assume 50% of the outstanding indebtedness under the
Company's term
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loans and have transferred to it such portion of the indebtedness under the
Company's notes payable and such amount of cash and cash equivalents so that as
of the time of the Distribution, the Company and VI would each have net debt
(defined in the Distribution Agreement as the amount outstanding under the term
loans and the notes payable, less cash and cash equivalents) equal to
approximately 50% of the net debt of the Company and VI, subject to such
adjustment as was necessary to provide the Company with a net worth of between
40% and 50% of the aggregate net worth of the Company and VI. As a result, the
Company transferred $119 million in cash and cash equivalents to VSEA and VI,
and VSEA and VI assumed $69 million in debt. However, the amounts allocated to
VI and transferred to VSEA in connection with the Distribution were based on
estimates. Certain future adjustments or payments may be required under the
provisions of the Distribution Agreement or the Distribution Related Agreements.
The Company may be required to make cash payments to VI or VSEA, or may be
entitled to receive cash payments from VI or VSEA. The amount of such
adjustments, if any, are not known or estimable at this time.
At December 31, 1999, debt amounted to $59 million of long-term loans
and $21 million of short-term notes payable. Interest rates on the Company's
outstanding long-term loans on this date ranged from 6.70% to 7.15% and the
weighted average interest rate on these long-term loans was 6.82%. As of
December 31, 1999, the weighted average interest rate on the Company's short-
term notes payable was 6.63%. The long-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.
At December 31, 1999, the Company had $19 million in cash and cash
equivalents, the majority of which was held abroad, compared to $25 million at
October 1, 1999. Operating activities provided cash of $10 million in the first
quarter of fiscal year 2000, compared to using cash of $3 million in the first
quarter of fiscal year 1999. The primary reason for the increase in operating
cash flow was the increase in net income, including discontinued operations,
from a $2 million loss in the first quarter of fiscal year 1999 to $5 million in
earnings in the first quarter of fiscal year 2000. The balance of operating cash
flow in the first quarter of fiscal year 2000 is attributable to $30 million
reduction in accounts receivable net of foreign currency adjustments, partially
offset by $14 million increase in inventory net of foreign currency adjustments,
$3 million increase in other current assets, $3 million decrease in accounts
payable and $5 million of cash payments relating to previously accrued
reorganization costs. Investing activities used $5 million in the first quarter
of fiscal year 2000, largely for purchases of property, plant and equipment.
Investing activities in the first quarter of fiscal year 1999 used $7 million of
cash, also primarily used to purchase property, plant and equipment. Financing
activities used net cash of $13 million in the first quarter of fiscal year
2000, primarily due to $15 million used to pay down short-term debt. Financing
activities used net cash of $5 million in the first quarter of fiscal year 1999
mostly for principal payments of long-term debt.
Total debt as a percentage of total capital decreased to 29.1% at
December 31, 1999 from 33.7% at fiscal year end 1999. The ratio of current
assets to current liabilities was 1.50 to 1 at December 31, 1999 compared to
1.42 to 1 at fiscal year end 1999. The Company had $40.5 million available in
unused uncommitted lines of credit at December 31, 1999. During first quarter of
fiscal year 2000, the Company added an additional $50 million committed
revolving credit facility of which the entire balance is unused and available at
December 31, 1999.
The Company expects that its future capital expenditures will continue
to approximate 2.5% of sales in each fiscal year. The Company spent $1.5 million
in capital expenditures related to changes in facilities required after the
Distribution during the first quarter of fiscal year 2000 and anticipates
spending an additional $1.2 million in the remainder of the fiscal year. The
Company also anticipates spending $0.1 million in fiscal year 2000 related to
split of the information technology infrastructure jointly owned by the Company,
VI and VSEA.
In May 1999, the Company agreed to invest $5 million over the
following twelve months in a consortium to participate in the Company's
acquisition of a majority interest in an entity that supplies the Company with
amorphous silicon thin-film transistor arrays for its imaging products, of which
$2.5 million was funded in July 1999 and the remaining $2.5 million will be
funded in the fourth quarter of fiscal year 2000. The Company may recognize a
loss in future fiscal years of up to $5 million on its equity investment.
Management believes that the likelihood of the Company recognizing a loss on its
equity investment in fiscal year 2000 is remote.
The Company is a party to three related federal actions involving
claims by independent service organizations ("ISOs") that the Company's policies
and business practices relating to replacement parts violate the antitrust laws
(the "ISOs Litigation"). The ISOs purchase replacement parts from the Company
and compete with it for the servicing of linear accelerators made by the
Company. In response to several threats of litigation regarding the legality of
the Company's parts policy, the Company filed a declaratory judgment action in
the U. S. District Court for the Northern District of California in 1996 seeking
a determination that its new policies are legal and enforceable and damages
against two of the ISOs for misappropriation of the Company's trade secrets,
unfair competition, copyright infringement and related claims. Subsequently,
four of the defendants filed separate claims in
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other jurisdictions raising issues allegedly related to those in the declaratory
relief action and seeking injunctive relief against the Company and damages
against the Company in the amount of $10 million for each plaintiff. The
defendants' motion for a preliminary injunction in U. S. District Court in Texas
with respect to the Company's policies was defeated. The ISOs defendants amended
the complaint to include class action allegations, allege a variety of other
anti-competitive business practices and filed a motion for class certification,
which was heard by the U. S. District Court in Texas in July 1999. No decision,
however, has been entered. The Company has filed a motion to consolidate its
claims from the Northern District of California to the action in the District
Court in Texas.
Following the Distribution, the Company retained the liabilities
related to the medical systems business prior to the Distribution, including the
ISOs Litigation. In addition, under the terms of the Distribution Agreement, the
Company agreed to manage and defend liabilities related to legal proceedings and
environmental matters arising from corporate or discontinued operations of the
Company prior to the Distribution. Under the terms of the Distribution
Agreement, VI and VSEA generally are each obligated to indemnify the Company for
one-third of these liabilities (after adjusting for any insurance proceeds
realized or tax benefits recognized by the Company), including certain
environmental-related liabilities described below and to fully indemnify the
Company for liabilities arising from the operations of each of them prior to the
Distribution. The availability of such indemnities will depend upon the future
financial strength of VI and VSEA. No assurance can be given that the relevant
company will be in a position to fund such indemnities. It is also possible that
a court would disregard the contractual allocation of indebtedness, liabilities
and obligations among the parties and require the Company 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. 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.
The Company 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 the Company, management
does not believe any pending legal proceeding will result in a judgment or
settlement that will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
The Company's liquidity is affected by many factors, some related to
the normal ongoing operations of the business and others related to the markets
for its products and conditions in the U.S. and global economies generally.
Although the Company's cash requirements will fluctuate (positively and
negatively) as a result of the shifting influences of these factors, management
believes that existing cash, cash generated from operations and the Company's
borrowing capability will be sufficient to satisfy anticipated commitments for
capital expenditures and other cash requirements for the current fiscal year and
fiscal year 2001.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting and Standards Board (the
"FASB") issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires derivatives to be measured at fair value and to
be recorded as assets or liabilities on the balance sheet. The accounting for
gains or losses resulting from changes in the fair values of those derivatives
would be dependent upon the use of the derivative and whether it qualifies for
hedge accounting. SFAS 133 is effective for the Company's fiscal year 2001. The
Company has not yet determined the impact of its implementation on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for fiscal year 2001, however earlier adoption is permitted. The Company has not
yet determined when it will adopt SAB 101, and is in the process of determining
the impact, if any, that adoption will have on the consolidated financial
statements.
Environmental Matters
The Company's operations are subject to various foreign, federal,
state and/or local laws regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment. This
includes discharges into soil, water and air, and the generation, handling,
storage, transportation and disposal of waste and hazardous substances. In
addition, several countries are reviewing proposed regulations that would
require manufacturers to dispose of their products at the end of a product's
useful life. These laws have the effect of increasing costs and potential
liabilities associated with the conduct of such operations.
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The Company 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 Varian is alleged to have shipped manufacturing waste for
recycling or disposal. The Company 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 VMS
or former Varian facilities (including facilities disposed of in connection with
the Company's sale of its Electron Devices business during 1995, and the sale of
its Thin Film Systems business during 1997). Under the terms of the Distribution
Agreement, VI and VSEA are each obligated to indemnify the Company for one-third
of these environmental-related investigation and remediation costs (after
adjusting for any insurance proceeds realized or tax benefits recognized by the
Company). Expenditures for environmental investigation and remediation amounted
to $0.5 million for the first quarters of both fiscal year 2000 and 1999.
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 December 31, 1999, the Company nonetheless estimated that the
Company's future exposure (net of VI and VSEA's indemnification obligations) for
environmental-related investigation and remediation costs for these sites ranged
in the aggregate from $12.1 million to $29.4 million. The time frame over which
the Company expects to incur such costs varies with each site, ranging up to
approximately 30 years as of December 31, 1999. 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 accrued $12.1
million in estimated environmental costs as of December 31, 1999. The amount
accrued has not been discounted to present value.
As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future
environmental activities. As of December 31, 1999, the Company estimated that
the Company's future exposure (net of VI and VSEA's indemnification obligations)
for environmental-related investigation and remediation costs for these sites
and facilities ranged in the aggregate from $22.8 million to $38.8 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 December 31,1999.
As to each of these sites and facilities, management 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 $23.9 million at December 31, 1999. The Company
accordingly accrued $11.8 million, which represents its best estimate of the
future costs discounted at 4%, net of inflation. This accrual is in addition to
the $12.1 million described in the preceding paragraph.
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. The Company
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 its obligations becomes more clearly defined,
these reserves (and the associated indemnification obligations of VI and VSEA)
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 (and assuming VI and VSEA satisfy their indemnification obligations),
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 the Company.
The Company evaluates its liability for environmental-related
investigation and remediation in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies with
respect to which the Company believes that it has rights to contribution,
indemnity and/or reimbursement (in addition to the obligations of VI and VSEA).
Claims for recovery of environmental investigation and remediation costs already
incurred, and to be incurred in the future, have been asserted against various
insurance companies and other third parties. In 1992, the Company filed a
lawsuit against 36 insurance companies with respect to most of the above-
referenced sites and facilities. The Company received certain cash settlements
during fiscal years 1995, 1996, 1997 and 1998 from defendants in that lawsuit.
The Company has also reached an agreement with another insurance company under
which the insurance company has agreed to pay a portion of the Company's past
and future environmental related expenditures, and the Company therefore has a
$3.6 million receivable in Other Assets at
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December 31, 1999. The Company believes that this receivable is recoverable
because it is based on a binding, written settlement agreement with a solvent
and financially viable insurance company. Although the Company intends to
aggressively pursue additional insurance and other recoveries, the Company has
not reduced any liability in anticipation of recovery with respect to claims
made against third parties.
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."
Prior to December 31, 1999, the Company assessed the potential Year
2000 problems with its internal systems and substantially completed their
upgrade prior to the end of fiscal year 1999. To date, the Company has not
experienced any material Year-2000-related system problems. However, because
year 2000 problems within internal systems may still occur, the Company
continues to monitor its systems carefully.
The Company also initiated an assessment of potential Year 2000
problems in its current and previously-sold products. With respect to
previously-sold products, the Company focused its assessments on products that
were subject to regulatory requirements with respect to Year 2000, including FDA
requirements for medical devices, rather than assessing Year 2000 preparedness
of every product it had ever sold. The Company also focused its assessments on
products that will be under written warranties or are still relatively early in
their useful lives, are more likely to be dependent on non-IT systems that are
not Year 2000 capable and cannot be easily upgraded with readily available
externally-utilized computers and packaged software and/or could pose a safety
hazard. Where these assessments identified previously-sold products that were
not Year 2000 capable, the Company in some cases developed and offered 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. For a few products, the Company decided to perform upgrades at its
own expense. Upgrades were completed before December 31, 1999. No material Year
2000 product failures have been reported to the Company.
The Company also assessed the potential Year 2000 problems of third
parties with which the Company has material relationships, which are primarily
suppliers of products or services. These assessments identified and prioritized
critical suppliers, reviewed those suppliers' written assurances on their own
assessments and correction of Year 2000 problems, and developed appropriate
contingency plans for those suppliers which might not be adequately prepared for
Year 2000 problems. No significant problems have been reported to the Company.
Costs. The Company estimated that through December 31, 1999, it has
incurred approximately $1.1 million to assess and correct Year 2000 problems. At
present, the Company is unaware of any Year 2000 problems that would necessitate
further expenditures, but given the complexity of the Year 2000 problems, it is
possible that further expenditures may be required. All of these costs, except
for approximately $70,000 for computer equipment, have been and will continue to
be expensed as incurred.
Risks. Failure by the Company and its key suppliers to accurately
assess and correct Year 2000 problems, would likely result in interruption of
certain of the Company's normal business operations, which could have a material
adverse effect on the Company's business, results of operations or financial
condition. If the Company has not adequately identified and corrected Year 2000
problems in previously-sold products, it could experience warranty or product
liability claims, or liability for personal injury by users of products which do
not function correctly. If the Company has not adequately identified and
corrected 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.
Although no material problems have arisen, because of uncertainties as
to the extent of Year 2000 problems with the Company's previously-sold products
and the extent of any legal obligation of the Company to correct Year 2000
problems in those products, the Company cannot yet assess risks to the Company
with respect to those products. The Company also cannot yet conclude that its
critical suppliers has successfully assessed and corrected Year 2000 problems
which may have a material adverse effect on the Company's results of operations.
Failure of the Company's customers to pay receivables in a timely manner due to
their own year 2000 problems could result in delays in payments and slower cash
flow.
-18-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange
As a global concern, the Company faces exposure to adverse movements
in foreign currency exchange rates. These exposures may change over time as
business practices evolve and could have a material adverse impact on the
Company's financial results. Historically, the Company's primary exposures have
related to non-U.S. dollar denominated sales and purchases throughout Europe,
Asia and Australia. The Euro was adopted as a common currency for members of the
European Monetary Union on January 1, 1999. The Company is evaluating, among
other issues, the impact of the Euro conversion on its foreign currency
exposure. Based on its evaluation to date, the Company does not expect the Euro
conversion to create any change in its currency exposure due to the Company's
existing hedging practices.
At the present time, the Company hedges those currency exposures
associated with certain assets and liabilities denominated in non-functional
currencies and with anticipated foreign currency cash flows. The Company does
not enter into forward exchange contracts for trading purposes. The hedging
activity undertaken by the Company is intended to offset the impact of currency
fluctuations on certain anticipated foreign currency cash flows and certain non-
functional currency assets and liabilities. The success of this activity depends
upon estimation of balance sheets denominated in various currencies. To the
extent that these forecasts are overstated or understated during periods of
currency volatility, the Company could experience unanticipated currency gains
or losses.
The Company'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
as of December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Notional Value Notional Value
Sold Purchased
---- ---------
(Dollars in thousands)
<S> <C> <C>
Australian dollar $ 762 $ --
British pound 4,402 --
Canadian dollar 8,603 --
Danish krone -- 1,258
Japanese yen 23,582 2,476
Swedish krona 5,706 --
Swiss franc -- 9,875
Thailand baht 1,656 --
Euro 67,483 --
-------- ---------
Totals $112,194 $ 13,609
======== =========
</TABLE>
The notional amounts of forward exchange contracts are not a measure
of the Company's exposure.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio, notes payable and long-
term debt obligations. The Company does not use derivative financial instruments
in its investment portfolio, and the Company's investment portfolio only
includes highly liquid instruments with an original maturity to the Company of
three months or less. The Company primarily enters into debt obligations to
support general corporate purposes, including working capital requirements,
capital expenditures and acquisitions.
The Company is subject to fluctuating interest rates that may impact,
adversely or otherwise, its results of operations or cash flows for its variable
rate notes payable and cash and cash equivalents. Fluctuations in interest rates
may also impact, adversely or otherwise, the estimated fair value of the
Company's fixed rate long-term debt obligations. The Company has no cash flow
exposure due to rate changes for long-term debt obligations. The table below
presents principal amounts and related weighted average interest rates by year
of maturity for the Company's investment portfolio and debt obligations.
-19-
<PAGE>
<TABLE>
<CAPTION>
Balance at Fiscal year
December 31, -----------
1999 2000 2001 2002 2003 2004 Thereafter Total
------ ------ ------ ------ ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Assets
Cash and cash equivalents $ 19 -- -- -- -- -- $ 19
Average interest rate 2.5% 2.5%
Liabilities
Notes payable $ 21 $ 21 -- -- -- -- -- $ 21
Average interest rate 6.6% 6.6% -- -- -- -- -- 6.6%
Long-term debt $ 59 -- -- -- -- -- $ 59 $ 59
Average interest rate 6.8% -- -- -- -- -- 6.8% 6.8%
</TABLE>
The estimated fair value of the Company's cash and cash equivalents
approximates the principal amounts reflected above based on the short maturities
of these financial instruments. The estimated fair value of the Company's debt
obligations approximates the principal amounts reflected above based on rates
currently available to the Company for debt with similar terms and remaining
maturities.
Although payments under certain of the Company's operating leases for
its facilities are tied to market indices, the Company is not exposed to
material interest rate risk associated with its operating leases.
-20-
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
Exhibit
No. Description
--- -----------
15 Letter Regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule for the three months ended December
31, 1999.
27.2 Restated Financial Data Schedule for the three months ended
January 1, 1999.
(b) The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Varian Medical Systems, Inc. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
VARIAN MEDICAL SYSTEMS, INC.
(Registrant)
Dated: February 11, 2000 By: /s/ Elisha W. Finney
-----------------------------------
Elisha W. Finney
Vice President, Finance and
Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
-22-
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
15 Letter Regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule for the three months ended December
31, 1999.
27.2 Restated Financial Data Schedule for the three months ended
January 1, 1999.
-23-
<PAGE>
Exhibit 15
February 11, 2000
Securities and Exchange Commission
450 Fifth Street
N.W. Washington, D.C. 20549
Commissioners:
We are aware that our report dated January 26, 2000 on our review of interim
financial information of Varian Medical Systems, Inc. for the three-month period
ended December 31, 1999 and included in the Company's quarterly report on Form
10-Q for the quarter then ended is incorporated by reference in its Registration
Statement on Form S-8 (No. 333-75531) dated April 1, 1999.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
-24-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,294
<SECURITIES> 0
<RECEIVABLES> 200,117
<ALLOWANCES> 0
<INVENTORY> 92,751
<CURRENT-ASSETS> 361,098
<PP&E> 200,631
<DEPRECIATION> 120,893
<TOTAL-ASSETS> 516,955
<CURRENT-LIABILITIES> 240,759
<BONDS> 0
0
0
<COMMON> 30,702
<OTHER-SE> 161,965
<TOTAL-LIABILITY-AND-EQUITY> 516,955
<SALES> 141,250
<TOTAL-REVENUES> 141,250
<CGS> 90,852
<TOTAL-COSTS> 131,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,520
<INCOME-PRETAX> 8,368
<INCOME-TAX> 3,140
<INCOME-CONTINUING> 5,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,228
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 104,964
<TOTAL-REVENUES> 104,964
<CGS> 72,134
<TOTAL-COSTS> 108,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,137
<INCOME-PRETAX> (4,873)
<INCOME-TAX> (2,790)
<INCOME-CONTINUING> (2,083)
<DISCONTINUED> (354)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,437)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
