<PAGE>
================================================================================
UNITED STATES
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 MARCH 31, 2000
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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3100 HANSEN WAY, PALO ALTO, CALIFORNIA 94304-1030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(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: 31,226,500 shares of Common
Stock, par value $1 per share, outstanding as of May 10, 2000.
================================================================================
<PAGE>
TABLE OF CONTENTS
Part I. Financial Information............................................ 3
Item 1. Financial Statements (unaudited)................................ 3
Consolidated Statements of Earnings............................. 3
Consolidated Balance Sheets..................................... 4
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....................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 24
Part II. Other Information............................................... 26
Item 1. Legal Proceedings............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders............. 26
Item 6. Exhibits and Reports on Form 8-K................................ 26
FORWARD-LOOKING STATEMENTS
This quarterly report contains "forward-looking" statements based on
current expectations that involve risks and uncertainties. Actual results and
the timing of certain events may differ significantly from those projected in
these forward-looking statements due to the factors listed below, under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors Affecting the Company's Business" in our Annual
Report on Form 10-K for the fiscal year ended October 1, 1999, and from time to
time in our filings with the Securities and Exchange Commission. These risks and
uncertainties include: whether the market continues to accept our products and
demand them in existing or increasing amounts; whether we are able to
successfully develop and commercialize new products profitably or at all;
whether competitive products will reduce our sales or force us to cut the prices
of our products to maintain or increase their sales; whether we will be
successful in increasing operating margins when sales increase; whether we can
expand our manufacturing capacity to sufficiently satisfy any increase in
demand; whether our ability to manufacture one or more products will be
interrupted if we are unable to obtain raw materials or components when a sole
supplier is unwilling or unable to supply the materials or components; whether
we are able to attract and retain qualified employees in key positions; whether
managed care initiatives in the U.S. will reduce the amount of capital
expenditures our customers may make thereby reducing the demand for our products
or their prices; how well third parties have addressed the impact of the Year
2000; whether we will be responsible for liabilities relating to the businesses
we recently spun off or the spin-offs themselves that we did not assume, either
because the companies became insolvent, were prohibited from indemnifying us or
for other reasons; whether our higher level of debt after the spin-offs will
reduce our ability to obtain future financing for working capital, capital
expenditures, product development, acquisitions and general corporate purposes;
whether our higher level of debt will reduce our cash flow, increase our
vulnerability to economic downturns or make us less flexible in responding to
changing business or economic conditions; whether we will face allegations of
fraudulent conveyance as a result of the spin-offs; whether we will incur
additional tax obligations as a result of the spin-offs; and how changing
economic conditions in our markets and foreign currency fluctuations will affect
us. By making forward-looking statements, we have not assumed any obligation to,
and you should not expect us to, update or revise those statements because of
new information, future events or otherwise.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
MARCH 31, APRIL 2, MARCH 31, APRIL 2,
2000 1999 2000 1999
---------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SALES........................................................ $169,795 $149,302 $ 311,045 $254,266
---------- ------------ ----------- -----------
Operating Costs and Expenses
Cost of sales............................................. 108,751 99,936 199,603 172,070
Research and development.................................. 11,455 11,107 21,711 20,529
Selling, general and administrative....................... 31,973 34,043 62,227 57,630
Reorganization............................................ -- 27,430 -- 30,989
---------- ------------ ----------- -----------
Total Operating Costs and Expenses........................... 152,179 172,516 283,541 281,218
---------- ------------ ----------- -----------
OPERATING EARNINGS (LOSS).................................... 17,616 (23,214) 27,504 (26,952)
Interest expense.......................................... (1,268) (3,293) (2,854) (6,052)
Interest income........................................... 211 1,987 277 3,611
---------- ------------ ----------- -----------
Earnings (Loss) from Continuing Operations Before Taxes..... 16,559 (24,520) 24,927 (29,393)
Taxes on earnings (loss).................................. 6,210 (14,370) 9,350 (17,160)
---------- ------------ ----------- -----------
Earnings (Loss) from Continuing Operations................... 10,349 (10,150) 15,577 (12,233)
Loss from Discontinued Operations--Net of Taxes.............. -- (30,776) -- (31,130)
---------- ------------ ----------- -----------
Net Earnings (Loss).......................................... $ 10,349 $ (40,926) $ 15,577 $(43,363)
---------- ------------ ----------- -----------
Average Shares Outstanding--Basic............................. 30,899 30,114 30,770 29,991
========== ============ =========== ===========
Average Shares Outstanding--Diluted........................... 32,520 30,114 31,809 29,991
========== ============ =========== ===========
Net Earnings (Loss) Per Share--Basic
Continuing Operations..................................... $ 0.33 $ (0.34) $ 0.51 $ (0.41)
Discontinued Operations................................... -- (1.02) -- (1.04)
---------- ------------ ----------- -----------
Net Earnings (Loss) Per Share--Basic....................... $ 0.33 $ (1.36) $ 0.51 $ (1.45)
========== ============ =========== ===========
Net Earnings (Loss) Per Share--Diluted
Continuing Operations..................................... $ 0.32 $ (0.34) $ 0.49 $ (0.41)
Discontinued Operations................................... -- (1.02) -- (1.04)
---------- ------------ ----------- -----------
Net Earnings (Loss) Per Share--Diluted..................... $ 0.32 $ (1.36) $ 0.49 $ (1.45)
========== ============ =========== ===========
Dividends Declared Per Share................................. $ -- $ -- $ -- $ 0.10
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES) MARCH 31, OCTOBER 1,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 22,487 $ 25,126
------------ -----------
Accounts receivable............................................................... 218,729 233,785
------------ -----------
Inventories
Raw materials and parts......................................................... 69,652 61,949
Work in process................................................................. 9,244 7,819
Finished goods.................................................................. 20,489 8,556
------------ -----------
Total inventories............................................................. 99,385 78,324
------------ -----------
Other current assets.............................................................. 46,208 45,011
------------ -----------
Total Current Assets.......................................................... 386,809 382,246
------------ -----------
Property, Plant, and Equipment....................................................... 203,704 200,386
Accumulated depreciation and amortization......................................... (121,687) (120,138)
------------ -----------
Net Property, Plant, and Equipment.............................................. 82,017 80,248
------------ -----------
Other Assets......................................................................... 75,685 76,689
------------ -----------
TOTAL ASSETS.................................................................. $ 544,511 $ 539,183
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable..................................................................... $ 5,512 $ 35,587
Accounts payable--trade............................................................ 39,448 40,141
Accrued expenses.................................................................. 118,419 121,165
Product warranty.................................................................. 19,296 18,152
Advance payments from customers................................................... 65,278 54,757
------------ -----------
Total Current Liabilities..................................................... 247,953 269,802
Long-Term Accrued Expenses........................................................... 24,556 25,890
Long-Term Debt....................................................................... 58,500 58,500
------------ -----------
Total Liabilities............................................................. 331,009 354,192
------------ -----------
Contingencies
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
31,143,000 shares at March 31, 2000 and 30,563,000 shares at October 1, 1999.... 31,143 30,563
Capital in excess of par value.................................................... 32,539 20,185
Retained earnings................................................................. 149,820 134,243
------------ -----------
Total Stockholders' Equity........................................................... 213,502 184,991
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 544,511 $ 539,183
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------
MARCH 31, APRIL 2,
2000 1999
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided/(Used) by Operating Activities.................................... $ 24,804 $ (60,101)
-------------- --------------
INVESTING ACTIVITIES
Proceeds from the sale of property, plant, and equipment............................ 574 36,218
Purchase of property, plant, and equipment.......................................... (11,434) (21,779)
Purchase of businesses, net of cash acquired........................................ -- (574)
Other, net.......................................................................... (1,081) (950)
-------------- --------------
Net Cash (Used)/Provided by Investing Activities.............................. (11,941) 12,915
-------------- --------------
FINANCING ACTIVITIES
Net (repayments)/borrowings on short-term obligations............................... (30,075) 10,659
Principal payments on long-term debt................................................ -- (12,138)
Proceeds from common stock issued to employees...................................... 10,331 17,921
Dividends paid...................................................................... -- (2,970)
Cash distributed in spin-off of businesses.......................................... -- (111,550)
Other, net.......................................................................... -- (658)
-------------- --------------
Net Cash Used by Financing Activities......................................... (19,744) (98,736)
-------------- --------------
Effects of Exchange Rate Changes on Cash............................................. 4,242 1,257
-------------- --------------
Net Decrease in Cash and Cash Equivalents..................................... (2,639) (144,665)
Cash and Cash Equivalents at Beginning of Period.............................. 25,126 149,667
-------------- --------------
Cash and Cash Equivalents at End of Period.................................... $ 22,487 $ 5,002
============== ==============
DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Earnings/(Loss) ................................................................ $ 15,577 $ (43,363)
Adjustments to reconcile net earnings/(loss) to net cash provided/(used) by
operating activities:
Depreciation.................................................................. 8,715 21,296
Amortization of intangibles................................................... 2,119 4,880
(Gain)/loss from sale of assets............................................... 6 (25,331)
Change in assets and liabilities:
Accounts receivable...................................................... 6,490 9,903
Inventories.............................................................. (21,061) (11,002)
Other current assets..................................................... (1,197) (38,038)
Accounts payable - trade................................................. 331 1,331
Accrued expenses......................................................... 2,481 8,174
Product warranty......................................................... 1,206 (5,855)
Advance payments from customers.......................................... 11,135 14,327
Long-term accrued expenses............................................... (1,334) (1,010)
Other......................................................................... 336 4,587
-------------- --------------
Net Cash Provided/(Used) by Operating Activities.............................. $ 24,804 $ (60,101)
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<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. Certain financial statement items have been
reclassified to conform to the current quarter's format. These
reclassifications had no impact on previously reported net earnings. The
results of operations for the second quarter and six months ended March
31, 2000 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 amounts 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 Company does not
believe that any future payments would be material to the Company's
consolidated financial statements.
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
6
<PAGE>
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."
Summarized information for discontinued operations is as follows
(dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
MARCH 31, 2000 APRIL 2, 1999 MARCH 31, 2000 APRIL 2, 1999
-------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.......................................... $0 $ 198.4 $0 $ 375.7
============== ============= ============== ============
Loss before Taxes................................ $0 $ (40.5) $0 $ (39.5)
============== ============= ============== =============
Net Loss......................................... $0 $ (25.3) $0 $ (25.7)
============== ============= ============== =============
</TABLE>
NOTE 3: For the six months ended April 2, 1999, the Company recognized
net reorganization charges of $31 million, of which $27.4 million was
incurred as a result of the Distribution and $3.6 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.
The following table sets forth certain details associated with the net
reorganization charges associated with the Distribution as of March 31,
2000 (in thousands of dollars):
<TABLE>
<CAPTION>
ACCRUAL AT ACCRUAL AT
OCTOBER 1, CASH RECLASSIFICATIONS/ MARCH 31,
1999 PAYMENTS ADJUSTMENTS 2000
------------- -------- ------------------- -------------
<S> <C> <C> <C> <C>
Retention bonuses, severance, and executive compensation $4,507 $(2,136) $(52) $2,319
Legal, accounting, printing and investment banking fees 1,792 (1,820) 549 521
Foreign taxes (excluding income taxes)................. 676 -- -- 676
Other.................................................. 1,368 (1,372) 69 65
-------------- ------- ------------- ----------
$8,343 $(5,328) $566 $3,581
============= ======= ============= ==========
</TABLE>
Of the $5.3 million cash payments made in the first half of fiscal year
2000, $1.3 million was paid in the second quarter. All $0.5 million in
reclassifications/adjustments were also made in the second quarter of
fiscal year 2000. The Company did not incur any reorganization charges
in the first half of fiscal year 2000.
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 $14.7 million at
March 31, 2000 and $14.2 million at October 1, 1999.
7
<PAGE>
NOTE 5: The Company enters into forward exchange contracts in order to reduce
the risk associated with the possible rise or fall of certain
currencies. For example, the value of the foreign currency against the
U.S. dollar may increase or decrease between the time when the Company
enters into a contract and when the contract is completed. When the
Company's foreign exchange contracts hedge that operational exposure by
locking in a rate of exchange, 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,
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 March 31, 2000 are summarized as
follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------
NOTIONAL VALUE NOTIONAL VALUE
SOLD PURCHASED
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Australian dollar....................................... $ 3,443 $ --
Brazilian Real.......................................... -- 832
British pound........................................... 7,180 5,853
Canadian dollar......................................... 8,272 --
Danish krona............................................ -- 2,677
Japanese yen............................................ 21,950 --
Swedish krona........................................... 6,150 --
Swiss franc............................................. -- 5,808
Thailand baht........................................... 1,654 --
Euro.................................................... 55,516 988
-------------- --------------
Totals.................................................. $ 104,165 $ 16,158
============== ==============
</TABLE>
The notional amounts of forward exchange contracts are not a measure of
the Company's exposure.
8
<PAGE>
NOTE 6: Net earnings per share is computed under two methods, basic and diluted
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share is computed by dividing net earnings 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 SIX MONTHS ENDED
----------------------- -----------------------
MARCH 31, APRIL 2, MARCH 31, APRIL 2,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator--Basic and Diluted:
Earnings (Loss) from Continuing Operations..........$ 10,349 $(10,150) $ 15,577 $(12,233)
Loss from Discontinued Operations................... -- (30,776) -- (31,130)
----------- ----------- ----------- -----------
Net Earnings (Loss)..............................$ 10,349 $(40,926) $ 15,577 $(43,363)
=========== =========== =========== ===========
Denominator--Basic:
Average shares outstanding.......................... 30,899 30,114 30,770 29,991
=========== =========== =========== ===========
Net Earnings (Loss) Per Share--Basic:
Continuing Operations...............................$ 0.33 $ (0.34) $ 0.51 $ (0.41)
Discontinued Operations............................. -- (1.02) -- (1.04)
----------- ----------- ----------- -----------
Net Earnings (Loss) Per Share--Basic.............$ 0.33 $ (1.36) $ 0.51 $ (1.45)
=========== =========== =========== ===========
Denominator--Diluted:
Average shares outstanding.......................... 30,899 30,114 30,770 29,991
Dilutive stock options.............................. 1,621 -- 1,039 --
----------- ----------- ----------- -----------
32,520 30,114 31,809 29,991
=========== =========== =========== ===========
Net Earnings (Loss) Per Share--Diluted:
Continuing Operations...............................$ 0.32 $ (0.34) $ 0.49 $ (0.41)
Discontinued Operations............................. -- (1.02) -- (1.04)
----------- ----------- ----------- -----------
Net Earnings (Loss) Per Share--Diluted...........$ 0.32 $ (1.36) $ 0.49 $ (1.45)
=========== =========== =========== ===========
</TABLE>
Options to purchase 32,423 shares at an average exercise price of $41.25
and options to purchase 17,069 shares at an average exercise price of
$40.79 were outstanding on a weighted average basis during the three
months and six months ended March 31, 2000, respectively, 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 4,015,000 shares and 4,111,000 shares were outstanding on a
weighted average basis during the three months and six months ended
April 2, 1999, respectively, 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 March 31, 2000 and October 1, 1999 is
goodwill of $54.7 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.
9
<PAGE>
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.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
BEFORE TAXES
SALES
--------------------------- ------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------------- ------------------------------
MARCH 31, APRIL 2, MARCH 31, APRIL 2,
2000 1999 2000 1999
------------- ------------ -------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Oncology Systems............................. $131 $115 $21 $15
X-ray Products............................... 35 33 4 --
Other........................................ 4 1 (2) (3)
------------- ------------ -------------- --------------
Total................................. 170 149 23 12
Corporate.................................... -- -- (5) (35)
Interest Income/(Expense), net............... -- -- (1) (2)
------------- ------------ -------------- --------------
Total Company......................... $170 $149 $17 $(25)
============= ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
BEFORE TAXES
SALES
--------------------------- ------------------------------
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ------------------------------
MARCH 31, APRIL 2, MARCH 31, APRIL 2,
2000 1999 2000 1999
------------- ------------ -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Oncology Systems............................. $237 $190 $34 $ 15
X-ray Products............................... 65 60 7 3
Other........................................ 9 4 (3) (4)
------------- ------------ -------------- --------------
Total................................. 311 254 38 14
Corporate.................................... -- -- (10) (41)
Interest Income/(Expense), net............... -- -- (3) (2)
------------- ------------ -------------- --------------
Total Company......................... $311 $254 $25 $(29)
============= ============ ============== ==============
</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. The statement, as amended, is effective for fiscal
years beginning after June 15, 2000. The Company will adopt the standard
in the first quarter of fiscal year 2001 and is in the process of
determining the impact that adoption will have on its consolidated
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") 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 SEC. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB
101 is effective for the first quarter of fiscal year 2001, however
10
<PAGE>
earlier adoption is permitted. The Company is in the process of
determining the impact that adoption will have on the consolidated
financial statements.
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 and for its oncology system's Portal
Vision imagers. The Company funded $2.5 million in July 1999 and the
remaining $2.5 million will be funded in the fourth quarter of fiscal
year 2000. At this time, management believes it is unlikely that the
Company will recognize a loss on this equity investment in fiscal year
2000. However, it is reasonably possible that the Company will
recognize a loss of up to $5 million on this equity investment in
fiscal year 2001.
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 $0.7 million and $0.3 million
for the second quarter of fiscal year 2000 and 1999, respectively, and
$1.2 million and $0.8 million for the first six months of fiscal year
2000 and 1999, respectively.
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 March 31, 2000, 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 $11.6 million to $29.0 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 March 31, 2000. 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 $11.6 million in estimated environmental
costs as of March 31, 2000. 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 March 31, 2000, 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 $22.5 million to $38.6 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 March 31, 2000. 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 $23.1
million at March 31, 2000. The Company accordingly accrued $11.5
million, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the
$11.6 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
11
<PAGE>
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 March 31, 2000. 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
12
<PAGE>
indemnities will depend upon the future financial strength of VI and
VSEA. Given the long-term nature of some of the liabilities, 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.
13
<PAGE>
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 March 31, 2000, and the related
consolidated statements of earnings for each of the three-month and six-month
periods ended March 31, 2000 and April 2, 1999 and the consolidated statements
of cash flows for the six-month periods ended March 31, 2000 and April 2, 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
onsolidated 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 October 1, 1999 is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 24, 2000
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In August 1998, we (then known as Varian Associates, Inc.) announced our
intention to spin off our instruments business and our semiconductor equipment
business to our stockholders. We later transferred our instruments business to
Varian, Inc. ("VI"), a wholly owned subsidiary, and transferred our
semiconductor equipment business to Varian Semiconductor Equipment Associates,
Inc. ("VSEA"), a wholly owned subsidiary. We retained the medical systems
business, principally the sales and service of oncology systems and the sales of
x-ray tubes and imaging subsystems. On April 2, 1999, we spun off VI and VSEA to
our common stockholders. Immediately after the spin-offs, we changed our name to
Varian Medical Systems, Inc.
An Amended and Restated Distribution Agreement dated as of January 14,
and certain other agreements govern our ongoing relationships with VI and VSEA.
The fiscal year 1999 financial statements included in this report present
VI and VSEA as discontinued operations under 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 line item "Loss from Discontinued Operations-Net
of Taxes" in the fiscal year 1999 financial statements reflects the net
operating results of the spun-off businesses, VI and VSEA. In determining the
items belonging to the spun-off businesses, we 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 we believe that the methods we
used to allocate the amounts to VI and VSEA are reasonable, the balances we
retained may not be indicative of the amounts that we would have recorded had
the spin-offs occurred before or after April 2, 1999. We discuss our continuing
results of operations below.
We have reclassified certain financial statement items to conform to the
current quarter's format. These reclassifications had no impact on previously
reported net earnings.
RESULTS OF OPERATIONS
FISCAL YEAR
Our fiscal year is the 52- or 53-week period ending on the Friday nearest
September 30. Fiscal year 2000 is the 52-week period ending September 29, 2000,
and fiscal year 1999 is the 52-week period ended October 1, 1999. The second
quarters ended March 31, 2000 and April 2, 1999 were both 13 weeks long. The
six-month periods ended March 31, 2000 and April 2, 1999 were both 26 weeks
long.
SECOND QUARTER OF FISCAL YEAR 2000 COMPARED TO SECOND QUARTER OF FISCAL
YEAR 1999
SALES: Our sales of $170 million in the second quarter of fiscal year
2000 were 14% higher than our sales of $149 million in the second
quarter of fiscal year 1999. International sales were $70 million, or
41% of sales, in the second quarter of fiscal year 2000, compared to
$80 million, or 54% of sales, in the second quarter of fiscal year
1999.
15
<PAGE>
<TABLE>
<CAPTION>
SALES (BY REGION)
SECOND QUARTER 2000 SECOND QUARTER 1999
------------------- -------------------
<S> <C> <C>
ONCOLOGY:
-- North America $ 86 million $ 57 million
-- Europe 24 million 29 million
-- Asia 14 million 23 million
-- Rest of the world 7 million 6 million
--------------- -------------
Total Oncology $ 131 million $ 115 million
--------------------------------- --------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
<S> <C> <C>
-- North America $ 10 million $ 11 million
-- Europe 5 million 7 million
-- Asia 19 million 14 million
-- Rest of the world 1 million 1 million
-------------- -------------
Total X-ray tubes and imaging $ 35 million $ 33 million
subsystems
--------------------------------- -------------------------- --------------------------
GTC $ 4 million $ 1 million
--------------------------------- -------------------------- --------------------------
</TABLE>
Oncology systems sales: Oncology systems sales increased 14% to
$131 million in the second quarter of fiscal
year 2000, compared to $115 million in the
second quarter of fiscal year 1999, representing
77% of sales in both quarters. Our sales growth
primarily reflects the continued increased U.S.
demand for advanced digital radiotherapy
equipment for delivering state-of-the-art cancer
care. In addition, since the newer systems
deliver care more efficiently, these products
represent cost reduction opportunities to our
customers. We also increased production in the
second quarter of fiscal year 2000 as compared to
the second quarter of fiscal year 1999 and made
some deliveries earlier than scheduled in
response to customer requests. International
second quarter sales were down $13 million
from the year-ago quarter. This is partially due
to the flatness of the European market after our
growth surge in fiscal year 1998, combined with a
large one-time multi-system sale in Japan in the
second quarter of fiscal year 1999. Sales in the
rest of the world increased slightly.
X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales
increased 6% between quarters to $35 million
(21% of sales) in the second quarter of fiscal
year 2000, compared to $33 million (22% of sales)
in the second quarter of fiscal year 1999. Our
increase in x-ray tube and imaging subsystem
sales between quarters is primarily attributable
to higher demand in Japan for our new high-end CT
scanner tubes. A portion of the geographical
shift in sales is attributable to our sales to
original equipment manufacturers who in turn sell
to end user customers; this can result in
regional shifts in sales from period to period.
The decrease in European sales is also partially
related to the ongoing consolidation of customers
who purchase x-ray tube products from us,
including the consolidation of customers into
companies that already manufacture x-ray tubes.
GTC sales: GTC sales were $4 million for the second quarter
of fiscal year 2000, compared to $1 million for
the same period in fiscal year 1999. GTC sales
are primarily in the brachytherapy business.
This increase in sales is split between our
high dose rate brachytherapy products and new
sales attributable to our June 1999 acquisition
of Multimedia Medical Systems' business in
treatment planning software for low dose rate
brachytherapy.
16
<PAGE>
GROSS PROFIT: We recorded gross profit of $61 million in the second quarter
of fiscal year 2000 and $49 million in the second quarter of fiscal year 1999.
As a percentage of sales, gross profit was 36% in the second quarter of fiscal
year 2000 compared to 33% in the second quarter of fiscal year 1999. Gross
profit as a percentage of sales of oncology systems amounted to 37% in the
second quarter of fiscal year 2000 compared to 35% in the second quarter of
fiscal year 1999. The margins improved in oncology systems primarily because of
shipments in North America, which traditionally have better margins than
international sales, represented a higher percentage of total sales. In
contrast, gross profit as a percentage of sales of x-ray tubes and imaging
subsystems remained flat at 32% in the second quarter of both fiscal year 2000
and fiscal year 1999 as higher volume in our new CT scanner tubes was offset by
expected related start-up costs.
RESEARCH AND DEVELOPMENT: Research and development expenses were $11
million in both second quarter of fiscal year 2000 and fiscal year 1999,
amounting to 7% of sales for both periods.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses were $32 million (19% of sales) in the second quarter of fiscal year
2000, compared to $34 million (23% of sales) in the second quarter of fiscal
year 1999. Selling, general and administrative expenses in the second quarter of
fiscal year 1999 included corporate costs incurred before the spin-offs
which we could not allocate to discontinued operations under generally
accepted accounting principles.
REORGANIZATION COSTS: Second quarter fiscal year 1999 expenses included net
non-recurring reorganization charges of $27 million. This amount represents most
of the non-recurring reorganization charges recorded in the first half of fiscal
year 1999 in connection with the spin-offs.
INTEREST EXPENSE, NET: Net interest expense was $1.1 million for the second
quarter of fiscal year 2000, compared to $1.3 million for the same quarter in
fiscal year 1999. The second quarter fiscal year 2000 net interest expense
amount shows decreases in both interest expense and interest income from the
prior year same quarter. We had higher cash levels and debt levels during the
fiscal year 1999 period before the spin-offs compared to the second quarter in
fiscal year 2000, resulting in higher interest income and interest expense. As
part of the spin-offs, we contributed a substantial amount of cash and debt to
the spun-off businesses. To a lesser extent, we paid down $15 million of
short-term debt in the second quarter of fiscal year 2000, resulting in lower
interest expense for the quarter.
TAXES ON EARNINGS (LOSS): Our estimated effective tax rate was 37.5% in the
second quarter of fiscal year 2000, compared to 59% in the second quarter of
fiscal year 1999. The second quarter fiscal year 1999 rate was significantly
higher principally due to certain reorganization costs related to the spin-offs
that are non-deductible.
FIRST HALF OF FISCAL YEAR 2000 COMPARED TO FIRST HALF OF FISCAL YEAR 1999
SALES: Our sales of $311 million in the first half of fiscal year 2000 were
22% higher than our sales of $254 million in the first half of fiscal year 1999.
International sales were $140 million, or 45% of sales, in the first half of
fiscal year 2000, compared to $139 million, or 55% of sales, in the first half
of fiscal year 1999.
17
<PAGE>
<TABLE>
<CAPTION>
SALES (BY REGION) FIRST HALF 2000 FIRST HALF 1999
--------------- ---------------
<S> <C> <C>
ONCOLOGY:
-- North America $ 144 million $ 93 million
-- Europe 54 million 55 million
-- Asia 22 million 31 million
-- Rest of the world 17 million 11 million
--------------- ------------
Total Oncology $ 237 million $190 million
----------------------------------------------------------------------------------------
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
-- North America
-- Europe $ 20 million $ 21 million
-- Asia 9 million 12 million
-- Rest of the world 34 million 25 million
Total X-ray tubes and 2 million 2 million
-------------- -------------
imaging subsystems $ 65 million $ 60 million
----------------------------------------------------------------------------------------
GTC $ 9 million $ 4 million
----------------------------------------------------------------------------------------
</TABLE>
Oncology systems sales: Oncology systems sales increased 24% to $237
million (76% of sales) in the first half of
fiscal year 2000, compared to $190 million (75%
of sales) in the first half of fiscal year 1999.
Our North American sales growth reflects the
continued increased U.S. demand for advanced
digital radiotherapy equipment. First half
results of fiscal year 2000 also reflect the
increase in production and accelerated deliveries
that impacted the second quarter. International
sales were flat period over period due partially
to the flatness of the European market after our
growth surge in fiscal year 1998. Asia's
shortfall resulted from a one-time multi-system
sale in Japan in the second quarter of fiscal
year 1999, while the rest of the world showed
continuing strength, particularly Latin America.
X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales
increased 9% between quarters to $65 million
(21% of sales) in the first half of fiscal
year 2000, compared to $60 million (23% of sales)
in the first half of fiscal year 1999. The
increase is primarily attributable to higher
demand for our new high-end CT scanner tubes in
Japan. First half results of fiscal year 2000
also reflect the impact of the ongoing
consolidation of some of our European customers
who purchase our x-ray products and the
fluctuations in demand from our original
equipment manufacturer customers.
GTC sales: GTC sales were $9 million for the first half of
fiscal year 2000, compared to $4 million for the
same period in fiscal year 1999. The increase was
largely attributable to increased sales of our
high dose rate brachytherapy products and our
June 1999 acquisition of Multimedia Medical
Systems' business in treatment planning software
for low dose rate brachytherapy.
GROSS PROFIT: We recorded gross profit of $111 million in the first half
of fiscal year 2000 and $82 million in the first half of fiscal year 1999. As a
percentage of sales, gross profit was 36% in the first half of fiscal year 2000
compared to 32% in the first half of fiscal year 1999. Gross profit as a
percentage of sales of oncology systems amounted to 37% in the first half of
fiscal year 2000 compared to 33% in the first half 1999. As in the second
quarter, oncology systems margins improved primarily because of the mix of
business between North America and international sales. In contrast, gross
profit as a percentage of sales of x-ray tubes and imaging subsystems decreased
from 33% in the first half of fiscal year 1999 to 32% in the first half of
fiscal year 2000. The decline in x-ray and imaging subsystems margin is
primarily due to the lower manufacturing yields of glass tube products during
the first quarter of fiscal year 2000 as a result of consolidation of our
manufacturing facility in Arlington Heights, Illinois to our facility in Salt
Lake City and the start-up costs of our new CT scanner tubes.
18
<PAGE>
RESEARCH AND DEVELOPMENT: Research and development expenses were $22
million (7% of sales) in the first half of fiscal year 2000, compared to $21
million (8% of sales) in the first half of fiscal year 1999.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses were $62 million (20% of sales) in the first half of fiscal year 2000,
compared to $58 million (23% of sales) in the first half of fiscal year 1999. As
in the quarter, selling, general and administrative expenses in the first half
of fiscal year 1999 included corporate costs incurred before the spin-offs which
we could not allocate to discontinued operations under generally accepted
accounting principles. In absolute dollars, selling, general and administrative
expenses increased in conjunction with the increase in sales.
REORGANIZATION COSTS: First half fiscal year 1999 expenses included net
reorganization charges of $31 million. Of the $31 million, $27 million related
to the spin-offs and $4 million to the consolidation of our X-ray manufacturing
operations.
INTEREST EXPENSE, NET: Our net interest expense was $2.5 million for the
first half of fiscal year 2000 compared to $2.4 million for the same period in
fiscal year 1999. The change in net interest expense period over period results
from a $3.3 million decrease in interest income offset by a $3.2 million
decrease in interest expense. We had higher cash levels and debt levels during
the fiscal year 1999 period before the spin-offs compared to the first half
in fiscal year 2000, resulting in higher interest income and interest expense.
As part of the spin-offs, we contributed a substantial amount of cash and debt
to the spun-off businesses. To a lesser extent, we paid down $30 million of
short-term debt in the first half of fiscal year 2000, resulting in lower
interest expense for the period than during the first half of fiscal year 1999.
TAXES ON EARNINGS (LOSS): Our estimated effective tax rate was 37.5% in
the first half of fiscal year 2000, compared to 58% in the first half of fiscal
year 1999. The fiscal year 1999 rate was significantly higher principally due to
certain reorganization costs related to the spin-offs that are non-deductible.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, purchases of
business assets and funding of continuing operations. Our sources
of cash include sales, net interest income and borrowings under short-term notes
payable and long-term loans. Our liquidity is actively managed on a daily basis
to ensure the maintenance of sufficient funds to meet our needs.
Before the spin-offs, we historically incurred or managed debt at the
parent level. As part of the spin-offs, the parties agreed to the following
terms in the Distribution Agreement:
(1) Varian Associates, Inc. would contribute to VSEA $100 million in cash
and cash equivalents.
(2) Varian Associates, Inc. would provide VSEA with 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.
(3) VI would assume 50% of the remaining outstanding indebtedness under
Varian Associates, Inc.'s term loan.
(4) Varian Associates, Inc. would transfer cash and cash equivalents to VI
such that VI and Varian Associates, Inc., then renamed VMS, would each have
approximately 50% of the net debt of both VMS and VI at the time of the
Distribution.
(5) Subject to necessary adjustments, VMS would have a net worth of between
40% and 50% of the aggregate net worth of VMS and VI.
As a result, we transferred $119 million in cash and cash equivalents to
VSEA and VI, and VSEA and VI assumed $69 million in debt during fiscal year
1999. However, the amounts allocated to VI and transferred to VSEA in connection
with the Distribution were based on estimates. We may be required to make cash
payments to VI or VSEA, or may be entitled to receive cash payments from VI or
VSEA. We do not believe that any future payments would be material to our
consolidated financial statements.
19
<PAGE>
At March 31, 2000, we had $59 million of long-term loans and $6 million
of short-term notes payable. Interest rates on the outstanding long-term loans
on this date ranged from 6.70% to 7.15%. The weighted average interest rate on
these long-term loans was 6.82%. The weighted average interest rate on the
short-term notes payable was 6.30%. The long-term loans currently contain
covenants that limit future borrowings and cash dividends payments. The
covenants also require us to maintain certain levels of working capital and
operating results.
At March 31, 2000, we had $22 million in cash and cash equivalents (the
majority of which was held abroad and would be subject to additional taxation if
it was spent in the U.S.) compared to $25 million at October 1, 1999.
We used cash of $3 million in the first half of fiscal year 2000,
compared to using $145 million in the same period of fiscal year 1999. Our cash
inflows and outflows for the first half of fiscal year 1999 and 2000 were as
follows:
o We generated cash from operating activities of $25 million during the
first half of fiscal year 2000, compared to using net cash of $60
million in the first half of fiscal year 1999. The primary reason for
the positive operating cash flow during the first half of fiscal year
2000 was our net income. We had $16 million in net earnings in the
first half of fiscal year 2000, compared to a $43 million loss
(including discontinued operations) in the first half of fiscal year
1999. The following items also contributed to our operating cash flows
in the first half of fiscal year 2000: $11 million in non-cash
depreciation and amortization charges, $6 million reduction in
accounts receivable net of foreign currency adjustments, $2 million
increase in accrued expenses, $11 million increase in advance payments
from customers, partially offset by $21 million increase in inventory
net of foreign currency adjustments.
o Investing activities used $12 million of net cash in the first half
of fiscal year 2000, compared to providing $13 million of net cash in
the same period of fiscal year 1999. The majority of the $12 million
used in the first half of fiscal year 2000 was for purchases of
property, plant and equipment. The $13 million net cash provided in
the first half of fiscal year 1999 included $36 million of proceeds
from the sale of our long-term leasehold interests in certain of the
Palo Alto facilities and related buildings partially offset by $22
million used to purchase property, plant and equipment.
o Financing activities used net cash of $20 million in the first half of
fiscal year 2000, compared to using net cash of $99 million in the
first half of fiscal year 1999. We used $30 million to pay down
short-term debt during the first half of fiscal year 2000. This was
partially offset by $10 million of proceeds from stock option
exercises and employee stock purchases. The $99 million net cash
outlay in the first half of fiscal year 1999 is primarily attributable
to the aggregate of $112 million we contributed to VI and VSEA
immediately before the spin-offs which was partially offset by $18
million proceeds from stock option and employee stock purchase plan
purchases.
Total debt as a percentage of total capital decreased from 33.7% at
fiscal year end 1999 to 23.1% at March 31, 2000 largely due to repayments on the
short-term notes payable during the first half of fiscal year 2000. The ratio of
current assets to current liabilities improved from 1.42 to 1 at fiscal year end
1999 to 1.56 to 1 at March 31, 2000. At March 31, 2000, we had $65.5 million
available in unused uncommitted lines of credit. During the first quarter of
fiscal year 2000, we added an additional $50 million committed revolving credit
facility of which the entire balance was unused and available at March 31, 2000.
We expect that our future capital expenditures will continue to
approximate 3% of sales in each fiscal year. We spent $2.3 million in capital
expenditures related to facilities changes required after the spin-offs during
the first half of fiscal year 2000 and anticipate spending an additional $0.5
million in the remainder of the fiscal year.
In May 1999, we agreed to invest $5 million over the following twelve
months in a consortium to participate in our acquisition of a majority interest
in an entity that supplies us with amorphous silicon thin-film transistor arrays
for our imaging products and for our oncology system's Portal Vision imagers. We
funded $2.5 million in July 1999 and the remaining $2.5 million will be funded
in the fourth quarter of fiscal year 2000. At this time, management believes it
is unlikely that we will recognize a loss on this equity investment in fiscal
year 2000. However, it is reasonably possible that we will recognize a loss of
up to $5 million on this equity investment in fiscal year 2001.
20
<PAGE>
We are a party to three related federal actions involving claims by
independent service organizations ("ISOs") that our policies and business
practices relating to replacement parts violate the antitrust laws (the "ISOs
Litigation"). ISOs purchase replacement parts from us and compete with us in
servicing the linear accelerators we manufacture. In response to several threats
of litigation regarding the legality of our parts policy, we filed a declaratory
judgment action in the U. S. District Court for the Northern District of
California in 1996 asking for a determination that our new policies are legal
and enforceable and damages against two of the ISOs for misappropriation of our
trade secrets, unfair competition, copyright infringement and related claims.
Later, four defendants filed separate claims in other jurisdictions raising
issues allegedly related to those in the declaratory relief action and seeking
injunctive relief and damages against us for $10 million for each plaintiff. We
defeated the defendants' motion for a preliminary injunction in U. S. District
Court in Texas about our policies. The ISOs defendants amended the complaint to
include class action allegations, alleged a variety of other anti-competitive
business practices and filed a motion for class certification, which the U. S.
District Court in Texas heard in July 1999. No decision, however, has been
entered. We have filed a motion to consolidate our claims from the Northern
District of California to the action in the U.S. District Court in Texas.
After the spin-offs, we retained the liabilities related to the medical
systems business before the spin-offs, including the ISOs Litigation. In
addition, under the Distribution Agreement, we agreed to manage and defend
liabilities related to legal proceedings and environmental matters arising from
corporate or discontinued operations. Under the Distribution Agreement, each of
VI and VSEA must generally indemnify us for one-third of these liabilities
(after adjusting for any insurance proceeds we realize or tax benefits we
receive), including certain environmental-related liabilities described below
and to fully assume and indemnify us for liabilities arising from each of their
operations before the spin-offs. The availability of such indemnities will
depend upon the future financial strength of VI and VSEA. Given the
long-term nature of some of the liabilities, either company may not be in a
position to fund indemnities in the future. A court could also disregard the
contractual allocation of indebtedness, liabilities and obligations among the
parties and require us 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 any of the companies from
satisfying its indemnification obligations, then such indemnification
obligations will be shared equally between the two other companies.
From time to time, we are involved in certain other legal proceedings
arising in the ordinary course of our business. While we cannot be certain about
the ultimate outcome of any litigation, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have a
material adverse effect on our financial position, results of operations or cash
flows.
Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our business and some of which arise from
uncertainties and conditions in the U.S. and global economies. Although our cash
requirements will fluctuate (positively and negatively) as a result of the
shifting influences of these factors, we believe that existing cash, cash
generated from operations and our 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 Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The statement, as amended, is effective for
fiscal years beginning after June 15, 2000. We will adopt the standard in the
first quarter of fiscal year 2001 and are in the process of determining the
impact that adoption will have on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The staff
accounting bulletin outlines the basic criteria that we must meet to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. The staff accounting bulletin is effective for the first quarter of
fiscal year 2001. We are in the process of determining the impact that adoption
will have on our consolidated financial statements.
21
<PAGE>
ENVIRONMENTAL MATTERS
There are a variety of environmental laws around the world regulating the
handling, storage, transport and disposal of hazardous materials that do or may
create increased costs for some of our operations. In addition, several
countries are proposing to require manufacturers to take back and dispose of
products at the end of the equipment's useful life. These laws may or do create
increased costs for our operations.
From the time we began operating, we handled and disposed of hazardous
materials and wastes following procedures that were considered appropriate under
regulations, if any, existing at the time. We also hired companies to dispose of
wastes generated by our operations. Under various laws (such as the federal
"Superfund" law) and under our obligations concerning operations before the
spin-offs, we are overseeing environmental investigation and cleanup projects
from our pre-spun-off operations and reimbursing third parties (such as the U.S.
Environmental Protection Agency or other responsible parties) for such
activities. Under the terms the Distribution Agreement, we are obligated to pay
one-third of certain environmental liabilities caused by operations before the
spin-offs, with VI and VSEA obligated for the balance. The environmental
projects we are overseeing are being conducted under the direction of or in
consultation with relevant regulatory agencies. We estimated these cleanup
activities will take up to 30 years to complete. As described below, we have
accrued a total of $23.1 million to cover our environmental liabilities:
o We have developed a range of potential costs covering a variety of
cleanup activities, including four environmental projects,
reimbursements to third parties, project management costs and legal
costs. There are, however, various uncertainties in these estimates
that make it difficult to develop a best estimate. Our estimate of
future costs to complete these cleanup activities ranges from $11.6
million to $29.0 million. For these estimates, we have not discounted
the costs to present dollars because of the uncertainties that make it
difficult to develop a best estimate and have accrued $11.6 million,
which is the amount at the low end of the range.
o For six environmental projects, we have sufficient knowledge to
develop better estimates of our future costs. While our estimate of
future costs to complete these cleanup activities ranges from $22.5
million to $38.6 million, our best estimate within that range is $23.1
million. For these projects we have accrued $11.5 million; which is
our best estimate of the $23.1 million discounted to present dollars
at 4%, net of inflation.
When we develop these estimates above, we consider the financial strength
of other potentially responsible parties. These amounts are, however, only
estimates and may be revised in the future as we get more information on these
projects. We may also spend more or less than these estimates. Based on current
information, we believe that our reserves are adequate. At this time, management
believes that it is remote that any single environmental event would have a
materially adverse impact on our financial statements in any single fiscal year.
We spent $1.2 million during the first six months of fiscal year 2000 on
environmental investigation and remedial costs. We spent $0.8 million during the
first six months of fiscal year 1999 on similar activities.
In 1992, we filed a lawsuit against 36 insurance companies for recovery
of our environmental investigation and remedial costs. We reached cash
settlements with various insurance companies in 1995, 1996, 1997 and 1998. In
addition, we have an agreement with an insurance company to pay a portion of our
past and future expenditures. As a result of this agreement, we have included a
$3.6 million receivable in Other Assets as of March 31, 2000. We believe that
this receivable is recoverable because it is based on a binding, written
settlement agreement with a financially viable insurance company. Although we
continue to aggressively pursue additional insurance recoveries, we have not
reduced our liability in anticipation of recovery from third parties for claims
that we made.
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."
22
<PAGE>
As part of the Year 2000 assessment, we looked at our internal systems
and substantially completed their upgrade prior to the end of fiscal year 1999.
To date, we have not experienced any material Year-2000-related system problems.
However, because year 2000 problems within internal systems may still occur, we
continue to monitor our systems carefully.
We also assessed our current and previously-sold products. We focused on
products that were subject to regulatory requirements with respect to Year 2000,
including FDA requirements for medical devices. In some cases, we developed and
offered to sell upgrades or retrofits, identified corrective measures which the
customer could itself undertake or identified other upgrades or retrofits
suppliers for the customer. For a few products, we performed upgrades at our own
expense. We completed the upgrades before December 31, 1999. We are not aware of
any material Year 2000 product failures at this time.
In addition, we assessed potential Year 2000 problems of our third party
suppliers of products or services. We have not experienced any significant
problems to date as a result of our suppliers' inability to adequately address
their Year 2000 issues.
COSTS. We estimate that we have spent approximately $1.1 million to
assess and correct Year 2000 problems through March 31, 2000, nearly all of
which was spent by December 31, 1999. At present, we do not know of any Year
2000 problems that would require us to spend more. Given the complexity of the
Year 2000 problems, it is possible that further expenditures may be required. We
have been and will continue to expense as incurred all of these costs, except
for approximately $70,000 for computer equipment.
Although we have not had any material problems, because of uncertainties
as to the extent of Year 2000 problems with our previously-sold products and the
extent of any legal obligation we might have to correct Year 2000 problems in
those products, we cannot yet assess our risks with respect to those products.
We also cannot yet conclude that our critical suppliers have successfully
assessed and corrected Year 2000 problems which may have a material adverse
effect on our results of operations. Our customers' failure to pay us in a
timely manner due to their own Year 2000 problems could result in slower cash
flow.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to two primary types of market risks: foreign currency exchange
rate risk and interest rate risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
As a global concern, we are exposed 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 our financial
results. Historically, our primary exposures 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. We are evaluating, among other issues, the impact of the Euro
conversion on our foreign currency exposure. Based on the evaluation to date, we
do not expect the Euro conversion to create any change in currency exposure due
to our existing hedging practices.
We hedge the currency exposures associated with certain assets and
liabilities denominated in non-functional currencies and with anticipated
foreign currency cash flows. We do not enter into forward exchange contracts for
trading purposes. We intend the hedging activity to offset the impact of
currency fluctuations on certain anticipated foreign currency cash flows and
certain non-functional currency assets and liabilities. Our success depends upon
estimating balance sheets denominated in various currencies. If forecasts are
overstated or understated during periods when currency is volatile, we could
experience unanticipated currency gains or losses.
Our forward exchange contracts generally range from one to three months
in original maturity. We do not have any forward exchange contract with an
original maturity greater than one year. Forward exchange contracts outstanding
as of March 31, 2000 are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
NOTIONAL VALUE NOTIONAL VALUE
SOLD PURCHASED
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Australian dollar....................................... $ 3,443 $ --
Brazilian Real.......................................... -- 832
British pound........................................... 7,180 5,853
Canadian dollar......................................... 8,272 --
Danish krona............................................ -- 2,677
Japanese yen............................................ 21,950 --
Swedish krona........................................... 6,150 --
Swiss franc............................................. -- 5,808
Thailand baht........................................... 1,654 --
Euro.................................................... 55,516 988
-------------- --------------
Totals.................................................. $ 104,165 $ 16,158
============== ==============
</TABLE>
The notional amounts of forward exchange contracts are not a measure of
our exposure.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio, notes payable and long-term debt
obligations. We do not use derivative financial instruments in our investment
portfolio, and the investment portfolio only includes highly liquid instruments
with an original maturity of three months or less. We primarily enter into debt
obligations to support general corporate purposes, including working capital
requirements, capital expenditures and acquisitions.
24
<PAGE>
Though we generally do not have a material exposure to market risk for
changes in interest rates, fluctuations in interest rates may impact, adversely
or otherwise, our variable rate notes payable, cash and cash equivalents, and
the estimated fair value of our fixed rate long-term debt obligations. We do not
have 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 our investment portfolio and debt obligations.
<TABLE>
<CAPTION>
BALANCE FISCAL YEAR
AT MARCH 31, -------------------------------------------------------------------
2000 2000 2001 2002 2003 2004 THEREAFTER TOTAL
---------- -------- ------- -------- -------- -------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents.... $ 22 $ 22 -- -- -- -- -- $ 22
Average interest rate........ 2.7 % 2.7 % 2.7 %
Liabilities
Notes payable................ $ 6 $ 6 -- -- -- -- -- $ 6
Average interest rate........ 6.3 % 6.3 % -- -- -- -- -- 6.3 %
Long-term debt............... $ 59 -- -- -- -- -- $ 59 $ 59
Average interest rate........ 6.8 % -- -- -- -- -- 6.8 % 6.8 %
</TABLE>
The estimated fair value of our cash and cash equivalents (the majority
of which was held abroad at March 31, 2000 and would be subject to additional
taxation if it was spent in the U.S.) approximates the principal amounts
reflected above based on the short maturities of these financial instruments.
The estimated fair value of our debt obligations approximates the principal
amounts reflected above based on rates currently available to us for debt with
similar terms and remaining maturities.
Although payments under certain of our operating leases for our
facilities are tied to market indices, we are not exposed to material interest
rate risk associated with our operating leases.
25
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information related to Item 1 is already disclosed in Part I Item 1 (Note
11 to the interim consolidated financial statements) and in Part I Item 2
(Management's Discussion and Analysis of Financial Condition).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders held on February 17,
2000, the stockholders of Varian Medical Systems, Inc. considered and voted on
the election of two directors to the Board of Directors for three-year terms.
The voting on each such nominee for director was as follows:
<TABLE>
<CAPTION>
BROKER
DIRECTOR VOTES FOR WITHHELD NON-VOTES (1)
-------- --------- -------- -------------
<S> <C> <C> <C>
David W. Martin, Jr................................... 27,647,352 209,906 N/A
Richard W. Vieser..................................... 27,637,860 219,398 N/A
</TABLE>
- --------
(1) Pursuant to the rules of the New York Stock Exchange, this election
of directors constituted a routine matter. Therefore, brokers were
permitted to vote without receipt of instructions from clients.
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 six months ended March 31, 2000.
27.2 Restated Financial Data Schedule for the six months ended
April 2, 1999.
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2000.
26
<PAGE>
SIGNATURES
Pursuant to the requirements 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: May 12, 2000 By: /s/ ELISHA W. FINNEY
-----------------------------
Elisha W. Finney
Vice President, Finance and
Chief Financial Officer
(Duly authorized officer and
Principal Financial Officer)
27
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
-------- -----------
15 Letter Regarding Unaudited Interim Financial Information
27.1 Financial Data Schedule for the six months ended March 31, 2000.
27.2 Restated Financial Data Schedule for the six months ended
April 2, 1999.
28
<PAGE>
EXHIBIT 15
May 12, 2000
Securities and Exchange Commission
450 Fifth Street
N.W. Washington, D.C. 20549
Commissioners:
We are aware that our report dated April 24, 2000 on our review of
interim financial information of Varian Medical Systems, Inc. for the three and
six month periods ended March 31, 2000 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
<TABLE> <S> <C>
<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> 6-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> MAR-31-2000
<CASH> 22,487
<SECURITIES> 0
<RECEIVABLES> 218,729
<ALLOWANCES> 0
<INVENTORY> 99,385
<CURRENT-ASSETS> 386,809
<PP&E> 203,704
<DEPRECIATION> 121,687
<TOTAL-ASSETS> 544,511
<CURRENT-LIABILITIES> 247,953
<BONDS> 0
0
0
<COMMON> 31,143
<OTHER-SE> 182,359
<TOTAL-LIABILITY-AND-EQUITY> 544,511
<SALES> 311,045
<TOTAL-REVENUES> 311,045
<CGS> 199,603
<TOTAL-COSTS> 283,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,577
<INCOME-PRETAX> 24,927
<INCOME-TAX> 9,350
<INCOME-CONTINUING> 15,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,577
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.49
</TABLE>
<TABLE> <S> <C>
<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> 6-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> APR-02-1999
<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> 254,266
<TOTAL-REVENUES> 254,266
<CGS> 172,070
<TOTAL-COSTS> 281,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,441
<INCOME-PRETAX> (29,393)
<INCOME-TAX> (17,160)
<INCOME-CONTINUING> (12,233)
<DISCONTINUED> (31,130)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,363)
<EPS-BASIC> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
