<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 JUNE 30, 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: 31,589,478 shares of Common
Stock, par value $1 per share, outstanding as of August 10, 2000.
WWW.VARIAN.COM
(NYSE: VAR)
================================================================================
<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 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 and reported results should not be considered
an indication of future performance 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 other 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 or otherwise
control costs; 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; whether we can satisfy the requirements
of applicable government regulations, including the provisions of the U.S. Food
Drug and Cosmetic Act; 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 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; how changing economic
conditions in our markets and foreign currency exchange rates will affect us;
whether we are able to obtain regulatory approval of and successfully finalize
our pending and any future acquisitions; and how well we can integrate acquired
businesses into our own business operations. 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 NINE MONTHS ENDED
------------------------- -------------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
----------- ----------- ------------ -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................................ $ 170,671 $ 144,511 $ 481,716 $ 398,777
----------- ----------- ------------ -----------
Operating Costs and Expenses
Cost of sales............................................. 108,660 93,227 308,263 265,297
Research and development.................................. 10,049 9,271 31,760 29,800
Selling, general and administrative....................... 28,818 25,196 91,045 82,826
Reorganization............................................ (62) 370 (62) 31,359
----------- ----------- ------------ -----------
Total Operating Costs and Expenses........................... 147,465 128,064 431,006 409,282
----------- ----------- ------------ -----------
Operating Earnings/(Loss).................................... 23,206 16,447 50,710 (10,505)
Interest expense.......................................... (1,101) (1,569) (3,955) (7,621)
Interest income........................................... 357 133 634 3,744
----------- ----------- ------------ -----------
Earnings (Loss) from Continuing Operations Before Taxes..... 22,462 15,011 47,389 (14,382)
Taxes on earnings (loss).................................. 8,420 8,460 17,770 (8,700)
----------- ----------- ------------ -----------
Earnings (Loss) from Continuing Operations................... 14,042 6,551 29,619 (5,682)
Loss from Discontinued Operations--Net of Taxes.............. -- -- -- (31,130)
----------- ----------- ------------ -----------
Net Earnings (Loss).......................................... $ 14,042 $ 6,551 $ 29,619 $ (36,812)
=========== =========== ============ ===========
Average Shares Outstanding--Basic............................ 31,287 30,425 30,940 30,122
=========== =========== ============ ===========
Average Shares Outstanding--Diluted.......................... 32,874 30,567 32,250 30,122
=========== =========== ============ ===========
Net Earnings (Loss) Per Share--Basic
Continuing Operations..................................... $ 0.45 $ 0.22 $ 0.96 $ (0.19)
Discontinued Operations................................... -- -- -- (1.03)
----------- ----------- ------------ -----------
Net Earnings (Loss) Per Share--Basic...................... $ 0.45 $ 0.22 $ 0.96 $ (1.22)
=========== =========== ============ ===========
Net Earnings (Loss) Per Share--Diluted
Continuing Operations..................................... $ 0.43 $ 0.21 $ 0.92 $ (0.19)
Discontinued Operations................................... -- -- -- (1.03)
----------- ----------- ------------ -----------
Net Earnings (Loss) Per Share--Diluted.................... $ 0.43 $ 0.21 $ 0.92 $ (1.22)
=========== =========== ============ ===========
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) JUNE 30, OCTOBER 1,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 29,170 $ 25,126
------------ -----------
Accounts receivable............................................................... 220,610 233,785
------------ -----------
Inventories
Raw materials and parts......................................................... 71,623 61,949
Work in process................................................................. 10,230 7,819
Finished goods.................................................................. 19,150 8,556
------------ -----------
Total inventories............................................................. 101,003 78,324
------------ -----------
Other current assets.............................................................. 45,573 45,011
------------ -----------
Total Current Assets.......................................................... 396,356 382,246
------------ -----------
Property, plant, and equipment....................................................... 203,940 200,386
Accumulated depreciation and amortization......................................... (123,088) (120,138)
------------ -----------
Net property, plant and equipment............................................... 80,852 80,248
------------ -----------
Other Assets......................................................................... 74,506 76,689
------------ -----------
TOTAL ASSETS.................................................................. $ 551,714 $ 539,183
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Notes payable..................................................................... $ 726 $ 35,587
Accounts payable--trade........................................................... 32,774 40,141
Accrued expenses.................................................................. 112,905 121,165
Product warranty.................................................................. 19,389 18,152
Advance payments from customers................................................... 63,972 54,757
------------ -----------
Total Current Liabilities..................................................... 229,766 269,802
Long-Term Accrued Expenses........................................................... 24,667 25,890
Long-Term Debt....................................................................... 58,500 58,500
------------ -----------
Total Liabilities............................................................. 312,933 354,192
------------ -----------
Contingencies
Stockholders' Equity
Preferred stock
Authorized 1,000,000 shares, par value $1, issued and outstanding none.......... -- --
Common stock
Authorized 99,000,000 shares, par value $1, issued and outstanding
31,499,000 shares at June 30, 2000 and 30,563,000 shares at October 1, 1999..... 31,499 30,563
Capital in excess of par value.................................................... 43,344 20,185
Retained earnings................................................................. 163,938 134,243
------------ -----------
Total Stockholders' Equity........................................................... 238,781 184,991
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 551,714 $ 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 NINE MONTHS ENDED
------------------------------
JUNE 30, JULY 2,
2000 1999
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided/(Used) by Operating Activities.................................... $ 31,104 $ (47,099)
-------------- --------------
INVESTING ACTIVITIES
Proceeds from the sale of property, plant, and equipment............................ 699 36,701
Purchase of property, plant, and equipment.......................................... (14,844) (28,808)
Purchase of businesses, net of cash acquired........................................ -- (5,774)
Other, net.......................................................................... (1,118) 618
-------------- --------------
Net Cash (Used)/Provided by Investing Activities.............................. (15,263) 2,737
-------------- --------------
FINANCING ACTIVITIES
Net (repayments)/borrowings on short-term obligations............................... (34,861) 26,528
Principal payments on long-term debt................................................ -- (12,138)
Proceeds from common stock issued to employees...................................... 18,140 18,047
Dividends paid...................................................................... -- (2,991)
Cash distributed in spin-off of businesses.......................................... -- (111,550)
Other, net.......................................................................... -- (637)
-------------- --------------
Net Cash Used by Financing Activities......................................... (16,721) (82,741)
-------------- --------------
Effects of Exchange Rate Changes on Cash............................................. 4,924 3,639
-------------- --------------
Net Increase/(Decrease) in Cash and Cash Equivalents.......................... 4,044 (123,464)
Cash and Cash Equivalents at Beginning of Period.............................. 25,126 149,667
-------------- --------------
Cash and Cash Equivalents at End of Period.................................... $ 29,170 $ 26,203
============== ==============
DETAIL OF NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Earnings/(Loss) ................................................................ $ 29,619 $ (36,812)
Adjustments to reconcile net earnings/(loss) to net cash provided/(used) by
operating activities:
Depreciation.................................................................. 13,088 26,608
Amortization of intangibles................................................... 3,097 5,309
Loss/(gain) from sale of assets............................................... 99 (25,344)
Change in assets and liabilities:
Accounts receivable...................................................... 3,246 17,421
Inventories.............................................................. (22,679) (11,293)
Other current assets..................................................... (562) (43,837)
Accounts payable - trade................................................. (6,254) 338
Accrued expenses......................................................... 568 3,702
Product warranty......................................................... 1,345 (5,506)
Advance payments from customers.......................................... 10,126 18,737
Long-term accrued expenses............................................... (1,223) (1,010)
Other......................................................................... 634 4,588
-------------- --------------
Net Cash Provided/(Used) by Operating Activities.............................. $ 31,104 $ (47,099)
============== ==============
</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 third quarter
and nine months ended June 30, 2000 are not necessarily indicative of
the results to be expected for a full year or for any other period.
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 during fiscal year 1999. Of the $119
million in cash and cash equivalents transferred to VSEA and VI, $112
million was transferred during the first three quarters of fiscal year
1999. 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."
The Company recorded a loss on disposition pertaining to VI and VSEA
of $5.4 million (net of income taxes of $2.9 million) in the fiscal
year 1999 results of operations. The loss on disposition related to
employee relocation, severance, retention, and other payroll costs
directly associated with the disposition of VI and VSEA.
Summarized information for discontinued operations, excluding the
above loss on disposition, is as follows (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
JUNE 30, 2000 JULY 2, 1999 JUNE 30, 2000 JULY 2, 1999
--------------- ------------- --------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.......................................... $0 $0 $0 $375.7
=============== ============= =============== ============
Loss before Taxes................................ $0 $0 $0 $ (39.5)
=============== ============= =============== ============
Net Loss......................................... $0 $0 $0 $ (25.7)
=============== ============= =============== ============
</TABLE>
NOTE 3: For the nine months ended July 2, 1999, the Company recognized net
reorganization charges of $31.4 million, of which $27.7 million was
incurred as a result of the Distribution and $3.7 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 June 30,
2000 (in thousands of dollars):
<TABLE>
<CAPTION>
ACCRUAL AT ACCRUAL AT
OCTOBER 1, CASH RECLASSIFICATIONS/ JUNE 30,
1999 PAYMENTS ADJUSTMENTS 2000
------------- ------------ ------------------ ----------
<S> <C> <C> <C> <C>
Retention bonuses, severance, and executive
compensation........................................... $4,507 $(2,476) $(295) $1,736
Legal, accounting, printing and investment
banking fees........................................... 1,792 (1,914) 262 140
Foreign taxes (excluding income taxes)................. 676 -- -- 676
Other.................................................. 1,368 (1,465) 97 --
------------ ---------- ---------- ---------
$8,343 $(5,855) $64 $2,552
============ ========== ========== =========
</TABLE>
Of the $5.9 million cash payments made in the first three quarters of
fiscal year 2000, $0.5 million was paid in the third quarter. The
Company reversed $62,000 of excess reorganization charges related to
the restructuring of its x-ray tubes and imaging subsystems segment to
the results of operations during the third quarter of fiscal year
2000. Otherwise, the Company did not incur any reorganization charges
in the first three quarters 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 $14.8 million at June 30, 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 June 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------------
NOTIONAL VALUE NOTIONAL VALUE
SOLD PURCHASED
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Australian dollar....................................... $ 2,804 $ --
British pound........................................... 10,738 4,395
Canadian dollar......................................... 15,830 --
Danish krona............................................ -- 2,211
Japanese yen............................................ 14,284 --
Swedish krona........................................... 4,554 --
Swiss franc............................................. 1,264 6,785
Euro.................................................... 53,692 134
---------- --------
Totals.................................................. $ 103,166 $ 13,525
========== ========
</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 NINE MONTHS ENDED
----------------------- -----------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator--Basic and Diluted:
Earnings (Loss) from Continuing Operations..........$ 14,042 $ 6,551 $ 29,619 $ (5,682)
Loss from Discontinued Operations................... -- -- -- (31,130)
----------- ----------- ----------- -----------
Net Earnings (Loss)..............................$ 14,042 $ 6,551 $ 29,619 $ (36,812)
=========== =========== =========== ===========
Denominator--Basic:
Average shares outstanding.......................... 31,287 30,425 30,940 30,122
=========== =========== =========== ===========
Net Earnings (Loss) Per Share--Basic:
Continuing Operations...............................$ 0.45 $ 0.22 $ 0.96 $ (0.19)
Discontinued Operations............................. -- -- -- (1.03)
----------- ----------- ----------- -----------
Net Earnings (Loss) Per Share--Basic.............$ 0.45 $ 0.22 $ 0.96 $ (1.22)
=========== =========== =========== ===========
Denominator--Diluted:
Average shares outstanding.......................... 31,287 30,425 30,940 30,122
Dilutive stock options.............................. 1,587 142 1,310 --
----------- ----------- ----------- -----------
32,874 30,567 32,250 30,122
=========== =========== =========== ===========
Net Earnings (Loss) Per Share--Diluted:
Continuing Operations...............................$ 0.43 $ 0.21 $ 0.92 $ (0.19)
Discontinued Operations............................. -- -- -- (1.03)
----------- ----------- ----------- -----------
Net Earnings (Loss) Per Share--Diluted...........$ 0.43 $ 0.21 $ 0.92 $ (1.22)
=========== =========== =========== ===========
</TABLE>
Options to purchase 3,400 shares at an average exercise price of
$45.11 and options to purchase 30,636 shares at an average exercise
price of $41.41 were outstanding on a weighted average basis during
the three months and nine months ended June 30, 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 2,383,201 shares at an average exercise price of
$23.68 were outstanding on a weighted average basis during the three
months ended July 2, 1999, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the
average market price of the shares. Options to purchase 4,718,000
shares were outstanding on a weighted average basis during the nine
months ended July 2, 1999 but were not included in the computation of
diluted EPS because the Company had a net loss for the period.
NOTE 7: Goodwill, which is the excess of the cost of acquired businesses over
the sum of the amounts assigned to identifiable assets acquired less
liabilities assumed, is amortized on a straight-line basis over
periods ranging from 5 to 40 years. Included in other assets at
June 30, 2000 and October 1, 1999 is goodwill of $54.0 million and
$56.1 million, respectively (net of accumulated amortization of $9.3
million and $7.1 million, respectively).
9
<PAGE>
NOTE 8: The Company's operations are grouped into two reportable segments:
oncology systems and x-ray tubes and imaging subsystems. 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
SALES BEFORE TAXES
--------------------------- ------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------------- ------------------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
------------- ------------ -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Oncology Systems............................. $133 $113 $23 $20
x-ray tubes and imaging subsystems........... 34 30 5 3
Other........................................ 4 2 (2) (2)
------------- ------------ -------------- -------------
Total................................. 171 145 26 21
Corporate.................................... -- -- (3) (5)
Interest Income/(Expense), net............... -- -- (1) (1)
------------- ------------ -------------- -------------
Total Company......................... $171 $145 $22 $15
============= ============ ============== =============
<CAPTION>
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
SALES BEFORE TAXES
--------------------------- ------------------------------
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- ------------------------------
JUNE 30, JULY 2, JUNE 31, JULY 2,
2000 1999 2000 1999
------------- ------------ -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Oncology Systems............................. $370 $303 $57 $ 35
x-ray tubes and imaging subsystems........... 99 90 12 6
Other........................................ 13 6 (5) (6)
------------- ------------ -------------- --------------
Total................................. 482 399 64 35
Corporate.................................... -- -- (13) (46)
Interest Income/(Expense), net............... -- -- (4) (3)
------------- ------------ -------------- --------------
Total Company......................... $482 $399 $47 $(14)
============= ============ ============== ==============
</TABLE>
NOTE 9: In June 1998, the Financial Accounting and Standards Board ("FASB")
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. The Company does
not expect the impact to its consolidated financial statements to be
material.
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 101was amended in June 2000 to delay the
implementation date to
10
<PAGE>
the fourth quarter of fiscal year 2001, however earlier adoption is
permitted. The Company is in the process of determining the impact
that adoption will have on the consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation--an interpretation
of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the definition of
an employee for the purposes of applying Accounting Practice Board
Opinion No. 25, "Accounting for Stock Issued to Employees," the
criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards
in a business combination. This interpretation is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material
impact on the Company's financial position or results of operations.
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 minority 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.
NOTE 11: The Company has been named by the U.S. Environmental Protection Agency
or third parties as a potentially responsible party under the
Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended ("CERCLA"), at eight sites where Varian Associates,
Inc. is alleged to have shipped manufacturing waste for recycling or
disposal. The Company is also involved in various stages of
environmental investigation and/or remediation under the direction of,
or in consultation with, federal, state and/or local agencies at
certain current VMS or former Varian Associates, Inc. facilities
(including facilities disposed of in connection with the Company's
sale of its Electron Devices business during 1995, and the sale of its
Thin Film Systems business during 1997). Under the terms of the
Distribution Agreement, VI and VSEA are each obligated to indemnify
the Company for one-third of these environmental-related investigation
and remediation costs (after adjusting for any insurance proceeds
realized or tax benefits recognized by the Company). Expenditures for
environmental investigation and remediation amounted to $0.5 million
and $0.3 million for the third quarter of fiscal years 2000 and 1999,
respectively, and $1.8 million and $1.1 million for the first nine
months of fiscal years 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 June 30, 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 $11.3 million to $28.7 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 June 30,
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 $11.3 million in
estimated environmental costs as of June 30, 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 June 30, 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 $22.3 million to $38.3 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 June 30,
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 $26.1 million at June 30, 2000. The Company accordingly
accrued $11.3 million, which represents its best estimate of the
future costs discounted at
11
<PAGE>
4%, net of inflation. This accrual is in addition to the $11.3 million
described in the preceding paragraph.
The foregoing amounts are only estimates of anticipated future
environmental-related costs, and the amounts actually spent may be
greater or less than such estimates. The aggregate range of cost
estimates reflects various uncertainties inherent in many
environmental investigation and remediation activities and the large
number of sites and facilities involved. The Company believes that
most of these cost ranges will narrow as investigation and remediation
activities progress. The Company believes that its reserves are
adequate, but as the scope of its obligations becomes more clearly
defined, these reserves (and the associated indemnification
obligations of VI and VSEA) may be modified and related charges
against earnings may be made.
Although any ultimate liability arising from environmental-related
matters described herein could result in significant expenditures
that, if aggregated and assumed to occur within a single fiscal year,
would be material to the Company's financial statements, the
likelihood of such occurrence is considered remote. Based on
information currently available to management and its best assessment
of the ultimate amount and timing of environmental-related events (and
assuming VI and VSEA satisfy their indemnification obligations),
management believes that the costs of these environmental-related
matters are not reasonably likely to have a material adverse effect on
the consolidated financial statements of the Company.
The Company evaluates its liability for environmental-related
investigation and remediation in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies
with respect to which the Company believes that it has rights to
contribution, indemnity and/or reimbursement (in addition to the
obligations of VI and VSEA). Claims for recovery of environmental
investigation and remediation costs already incurred, and to be
incurred in the future, have been asserted against various insurance
companies and other third parties. In 1992, the Company filed a
lawsuit against 36 insurance companies with respect to most of the
above-referenced sites and facilities. The Company received certain
cash settlements during fiscal years 1995, 1996, 1997 and 1998 from
defendants in that lawsuit. The Company has also reached an agreement
with another insurance company under which the insurance company has
agreed to pay a portion of the Company's past and future
environmental-related expenditures, and the Company therefore has a
$3.6 million receivable in Other Assets at June 30, 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.
12
<PAGE>
Following the Distribution, the Company retained the liabilities
related to the medical systems business prior to the Distribution,
including the ISOs Litigation. In addition, under the terms of the
Distribution Agreement, the Company agreed to manage and defend
liabilities related to legal proceedings and environmental matters
arising from corporate or discontinued operations of the Company prior
to the Distribution. Under the terms of the Distribution Agreement, VI
and VSEA generally are each obligated to indemnify the Company for
one-third of these liabilities (after adjusting for any insurance
proceeds realized or tax benefits recognized by the Company),
including certain environmental-related liabilities described above,
and to fully indemnify the Company for liabilities arising from the
operations of the business transferred to each prior to the
Distribution. The availability of such indemnities will depend upon
the future financial strength of VI and VSEA. 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 June 30, 2000, and the related
consolidated statements of earnings for each of the three-month and nine-month
periods ended June 30, 2000 and July 2, 1999 and the consolidated statements of
cash flows for the nine-month periods ended June 30, 2000 and July 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
consolidated statements of earnings, of stockholders' equity and of cash flows
for the year then ended (not presented herein), and in our report dated November
4, 1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of 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
July 20, 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, 1999
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.
On June 6, 2000, we announced an agreement to acquire privately held IMPAC
Medical Systems, Inc. ("IMPAC"), a company with a proprietary family of
integrated software products for managing radiation and medical oncology for
clinical, administrative, outcomes, and decision support purposes. We expect to
issue approximately 3 million shares of our common stock in exchange for all
IMPAC common and preferred stock and to assume IMPAC options that will convert
to options for approximately 300,000 of our shares of common stock. IMPAC will
become one of our wholly owned subsidiaries. We are in the process of fulfilling
requests for information on the transaction from the Department of Justice, with
a goal of closing the transaction before the end of the fiscal year. The
transaction would be reported under a pooling of interests basis.
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. We discuss our continuing results of operations below.
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 was the 52-week period ended October 1, 1999. The third
quarters ended June 30, 2000 and July 2, 1999 were both 13 weeks long. The
nine-month periods ended June 30, 2000 and July 2, 1999 were both 39 weeks long.
15
<PAGE>
THIRD QUARTER OF FISCAL YEAR 2000 COMPARED TO THIRD QUARTER OF FISCAL YEAR
1999
SALES: Our sales of $171 million in the third quarter of fiscal year 2000
were 18% higher than our sales of $145 million in the third quarter of
fiscal year 1999. International sales were $67 million, or 40% of sales, in
the third quarter of fiscal year 2000, compared to $79 million, or 55% of
sales, in the third quarter of fiscal year 1999.
<TABLE>
<CAPTION>
SALES (BY REGION) THIRD QUARTER 2000 THIRD QUARTER 1999
----------------- ------------------ ------------------
<S> <C> <C>
ONCOLOGY:
-- North America $ 89 million $ 58 million
-- Europe 27 million 39 million
-- Asia 8 million 11 million
-- Rest of the world 9 million 5 million
------------ -------------
Total Oncology $133 million $ 113 million
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
-- North America $ 11 million $ 6 million
-- Europe 7 million 11 million
-- Asia 16 million 13 million
------------ ------------
Total X-ray tubes and $ 34 million $ 30 million
imaging subsystems
GTC $ 4 million $ 2 million
</TABLE>
Oncology systems sales: Oncology systems sales increased 17% to
$133 million in the third quarter of fiscal year
2000, compared to $113 million in the third
quarter of fiscal year 1999, representing 78% of
sales in both quarters. Our sales growth reflects
the continued increased U.S. demand for advanced
digital radiotherapy equipment for delivering
state-of-the-art cancer care. Our European third
quarter sales were down $12 million from the
year-ago quarter. This is primarily due to the
weakness of the European market and weak European
currencies that made our products relatively more
expensive in those countries. Our Asian third
quarter sales was down largely due to timing of
shipments, primarily to China. Increased sales in
Latin America accounted for the increase in the
rest of the world sales.
X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales increased
15% between quarters to $34 million (20% of sales)
in the third quarter of fiscal year 2000, compared
to $30 million (21% of sales) in the third quarter
of fiscal year 1999. Our increase in x-ray tube
and imaging subsystem sales between quarters is
primarily attributable to strong demand in Japan
for our high-power CT scanner tubes. The increase
in North American sales and a corresponding
decrease in European sales is largely a result of
the acquisition of one of our major European
customers by another one of our customers who then
consolidated all their purchases from us through
their North American operations.
GTC sales: GTC sales were $4 million for the third quarter of
fiscal year 2000, compared to $2 million for the
same period in fiscal year 1999. GTC sales are
primarily in the brachytherapy business. GTC also
derives revenue from research contracts. The
quarter over quarter increase in sales is split
among our high dose rate brachytherapy products,
the incremental sales attributable to our June
1999 acquisition of Multimedia Medical Systems'
business in treatment planning software for low
dose rate brachytherapy and research contracts.
16
<PAGE>
GROSS PROFIT: We recorded gross profit of $62 million in the third
quarter of fiscal year 2000 and $51 million in the third quarter of
fiscal year 1999. As a percentage of sales, gross profit was 36% for
the third quarter of fiscal year 2000 and the third quarter of fiscal
year 1999. Gross profit as a percentage of sales of oncology systems
was 37% in the third quarter of fiscal year 2000. Although product
margins benefited from increased shipments in North America, which
traditionally have better margins than international sales, weaker
currencies overseas, particularly in Europe, had a negative effect on
gross margin. Gross profit as a percentage of sales of x-ray tubes and
imaging subsystems was 32% in the third quarter of fiscal year 2000
compared to 28% in the same period of fiscal year 1999. The lower
gross margin in the third quarter of fiscal year 1999 was primarily
due to certain costs related to the closing of our Arlington Heights
plant to consolidate manufacturing at our facilities in Salt Lake
City, Utah, and to a lesser extent, a product sales-mix shift and a
reduction in price levels to meet competitive pressures. Gross margin
in the third quarter of fiscal year 2000 included the effect of higher
volume and improving manufacturing yields for our new high-power CT
scanner tubes.
RESEARCH AND DEVELOPMENT: Research and development expenses were $10
million in the third quarter of fiscal year 2000 compared to $9
million in the same period of fiscal year 1999, representing 6% of
sales for both quarters.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expenses were $29 million in the third quarter of
fiscal year 2000 compared to $25 million in the same period of fiscal
year 1999, representing 17% of sales for both quarters. The increase
(in absolute dollars) in selling, general and administrative expenses
in the third quarter of fiscal year 2000 was largely attributable to
increased marketing and selling expenses in oncology systems
consistent with the stronger market conditions in the U.S., higher
employee profit-sharing and management incentive expenses, and
incremental expenses related to the acquisition of Multimedia Medical
Systems in June 1999. The increase in expenses was partially offset by
favorable foreign currency hedging gains and an unusual
insurance-related recovery during the quarter.
REORGANIZATION COSTS: Third quarter fiscal year 1999 expenses included
$0.4 million of net incremental non-recurring reorganization charges
associated with the closure of our Arlington Heights plant as part of
the consolidation of our x-ray manufacturing operations.
INTEREST EXPENSE, NET: Net interest expense was $0.7 million for the
third quarter of fiscal year 2000, compared to $1.4 million for the
same quarter in fiscal year 1999. The quarter-over-quarter change
reflected a combination of a $0.5 million decrease in interest expense
and a $0.2 million increase in interest income. We had lower levels of
debt and higher levels of cash during the third quarter of fiscal year
2000 period compared to the third quarter in fiscal year 1999.
TAXES ON EARNINGS (LOSS): Our estimated effective tax rate was 37.5%
in the third quarter of fiscal year 2000, compared to 56% in the third
quarter of fiscal year 1999. The third quarter fiscal year 1999 rate
was significantly higher principally due to certain reorganization
costs related to the spin-offs that are non-deductible.
17
<PAGE>
FIRST THREE QUARTERS OF FISCAL YEAR 2000 COMPARED TO FIRST THREE QUARTERS OF
FISCAL YEAR 1999
SALES: Our sales of $482 million in the first three quarters of fiscal
year 2000 were 21% higher than our sales of $399 million in the first
three quarters of fiscal year 1999. International sales were $208
million, or 44% of sales, in the first three quarters of fiscal year
2000, compared to $218 million, or 54% of sales, in the first three
quarters of fiscal year 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
SALES (BY REGION) FIRST THREE QUARTERS 2000 FIRST THREE QUARTERS 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
ONCOLOGY:
-- North America $ 233 million $ 151 million
-- Europe 81 million 94 million
-- Asia 30 million 42 million
-- Rest of the world 26 million 16 million
-------------- --------------
Total Oncology $ 370 million $ 303 million
-------------------------------------------------------------------------------------------------
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
-- North America $ 31 million $ 27 million
-- Europe 16 million 23 million
-- Asia 50 million 38 million
-- Rest of the world 2 million 2 million
--------------- ---------------
Total X-ray tubes and
imaging subsystems $ 99 million $ 90 million
-------------------------------------------------------------------------------------------------
GTC $ 13 million $ 6 million
-------------------------------------------------------------------------------------------------
</TABLE>
Oncology systems sales: Oncology systems sales increased 22% to $370
million (77% of sales) in the first three quarters
of fiscal year 2000, compared to $303 million
(76% of sales) in the first three quarters of
fiscal year 1999. Our North American sales growth
of 54% reflects the increased U.S. demand for
advanced digital radiotherapy equipment that
emerged in fiscal year 1999 and continued through
the first three quarters of fiscal year 2000. As
in the quarter, the decrease in international
sales period over period is primarily due to the
weakness of the European market and currencies. \
Asia's shortfall primarily resulted from a
one-time multi-system sale in Japan in the second
quarter of fiscal year 1999. The rest of the world
showed continuing strength, primarily Latin
America.
X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales increased
11% between quarters to $99 million (21% of sales)
in the first three quarters of fiscal year 2000,
compared to $90 million (22% of sales) in the
first three quarters of fiscal year 1999. The
increase is primarily attributable to higher
demand for our new high-end CT scanner tubes in
Japan. Results of the first three quarters of
fiscal year 2000 also reflect the impact of the
ongoing consolidation of some of our European
customers who purchase our x-ray tube products
and the shifting of purchases from Europe to
North America by one of our major European
customers following its business combination
with a U.S. customer.
GTC sales: GTC sales were $13 million for the first three
quarters of fiscal year 2000, compared to
$6 million for the same period in fiscal year
1999. The increase was split among increased
sales of our existing high dose rate brachytherapy
product, new sales attributable to our June 1999
acquisition of Multimedia Medical Systems'
business in treatment planning software for low
dose rate brachytherapy and research contracts.
18
<PAGE>
GROSS PROFIT: We recorded gross profit of $173 million in the first
three quarters of fiscal year 2000 and $133 million in the first three
quarters of fiscal year 1999. As a percentage of sales, gross profit
was 36% in the first three quarters of fiscal year 2000 compared to
33% in the first three quarters of fiscal year 1999. Gross profit as a
percentage of sales of oncology systems amounted to 37% in the first
three quarters of fiscal year 2000 compared to 34% in the first three
quarters of fiscal year 1999. Oncology systems margins improved
primarily because of the higher sales to North America which
traditionally have better margins, although the margin improvement was
somewhat restrained by weaker currencies overseas, particularly in
Europe. Gross profit as a percentage of sales of x-ray tubes and
imaging subsystems increased from 30% in the first three quarters of
fiscal year 1999 to 32% in the first three quarters of fiscal year
2000. The lower gross margin in the first three quarters of fiscal
year 1999 was due to competitive price pressures, previously mentioned
sales-mix shift and certain costs related to the closing of our
Arlington Heights plant. Gross margin in the first three quarters of
fiscal year 2000 included the effect of a higher volume and improving
manufacturing yields of our new high-power CT scanner tubes offset by
expected related start-up costs.
RESEARCH AND DEVELOPMENT: Research and development expenses were $32
million in the first three quarters of fiscal year 2000 compared to
$30 million in the same period of fiscal year 1999, representing 7% of
sales for both periods.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expenses were $91 million (19% of sales) in the first
three quarters of fiscal year 2000, compared to $83 million (21% of
sales) in the first three quarters of fiscal year 1999. The increase
(in absolute dollars) in selling, general and administrative expenses
in the fiscal year 2000 period was primarily driven by higher
marketing and selling expenses and higher expenditures for employee
profit-sharing and management incentives that are consistent with
improving financial performance. In addition, selling, general and
administrative expenses in the first three quarters 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. Excluding the above one-time unallocated
pre-spin off corporate costs, selling, general and administrative
expenses as a percentage of sales were essentially flat between
periods.
REORGANIZATION COSTS: First three quarters fiscal year 1999 expenses
included net reorganization charges of $31.4 million. Of the $31.4
million, $27.7 million related to the spin-offs and $3.7 million
related to the consolidation of our x-ray manufacturing operations.
INTEREST EXPENSE, NET: Our net interest expense was $3.3 million for
the first three quarters of fiscal year 2000 compared to $3.9 million
for the same period in fiscal year 1999. The change in net interest
expense period over period resulted from a $3.1 million decrease in
interest income offset by a $3.7 million decrease in interest expense.
We had lower levels of debt and higher levels of cash during the first
three quarters of fiscal year 2000 compared to the same period in
fiscal year 1999 when we contributed a substantial amount of cash and
debt to VI and VSEA. We also paid down $35 million of short-term debt
in the first three quarters of fiscal year 2000.
TAXES ON EARNINGS (LOSS): Our estimated effective tax rate was 37.5%
in the first three quarters of fiscal year 2000, compared to 61% in
the first three quarters 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.
19
<PAGE>
(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. Of the $119 million transferred to VSEA and VI, $112 million was
transferred during the first three quarters of 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.
At June 30, 2000, we had $59 million of long-term loans and $0.7 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 5.20%. 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 June 30, 2000, we had $29 million in cash and cash equivalents (the
majority of which was held abroad and would be subject to additional taxation if
it was repatriated to the U.S.) compared to $25 million at October 1, 1999.
Our cash and cash equivalents increased by $4 million of cash in the first
three quarters of fiscal year 2000, compared to using $123 million in the same
period of fiscal year 1999. Our cash inflows and outflows for the first three
quarters of fiscal year 2000 and 1999 were as follows:
o We generated cash from operating activities of $31 million during the
first three quarters of fiscal year 2000, compared to using net cash
of $47 million in the first three quarters of fiscal year 1999. The
primary reason for the positive operating cash flow during the first
three quarters of fiscal year 2000 was our net income. We had $30
million in net earnings in the first three quarters of fiscal year
2000, compared to a $37 million loss (including discontinued
operations) in the first three quarters of fiscal year 1999. The
following items also contributed to our operating cash flows in the
first three quarters of fiscal year 2000: $16 million in non-cash
depreciation and amortization charges, $3 million reduction in
accounts receivable net of foreign currency adjustments, $10 million
increase in advance payments from customers, partially offset by
additions to inventory of $23 million to respond to the increased
demand for products and decrease in trade accounts payable of $6
million, both of which are net of foreign currency adjustments.
o Investing activities used $15 million of net cash in the first three
quarters of fiscal year 2000, compared to providing $3 million of net
cash in the same period of fiscal year 1999. Almost all of the $15
million used in the first three quarters of fiscal year 2000 was for
purchases of property, plant and equipment. The $3 million net cash
provided in the first three quarters of fiscal year 1999 included $37
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 $35 million used to purchase property, plant,
equipment, and the Multimedia Medical Systems' business in June 1999.
o Financing activities used net cash of $17 million in the first three
quarters of fiscal year 2000, compared to using net cash of $83
million in the first three quarters of fiscal year 1999. We used $35
million to pay down short-term debt during the first three quarters of
fiscal year 2000. This was offset by $18 million of proceeds from
stock option exercises and employee stock purchases. The $83 million
net cash outlay in the first three quarters of fiscal year 1999 is
primarily attributable to the aggregate of $112 million we
20
<PAGE>
contributed to VI and VSEA immediately before the spin-offs, which was
partially offset by $18 million proceeds from stock option exercises
and employee stock purchase plan purchases and $14 million net debt
borrowings.
Total debt as a percentage of total capital improved from 33.7% at fiscal
year end 1999 to 19.9% at June 30, 2000 largely due to repayments on the
short-term notes payable during the first three quarters of fiscal year 2000.
The ratio of current assets to current liabilities improved from 1.42 to 1 at
fiscal year end 1999 to 1.73 to 1 at June 30, 2000. At June 30, 2000, we had
$70.3 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 June 30, 2000.
We expect that our future capital expenditures will continue to approximate
3% of sales in each fiscal year. We spent $2.6 million in capital expenditures
related to facilities changes required after the spin-offs during the first
three quarters of fiscal year 2000 and anticipate spending an additional $0.1
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 minority 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.
As part of the IMPAC Medical Systems, Inc. acquisition announced during the
third quarter of fiscal year 2000, we now estimate that one-time transaction
costs will be approximately $6 million, of which $137,000 was paid in the third
quarter of fiscal year 2000. The transaction costs are largely made up of legal,
accounting and investment adviser fees. As of June 30, 2000, we have deferred
the recognition of the transaction costs and are recording the amounts paid thus
far as a prepaid asset. We will recognize the transaction costs that we have
incurred in our results of operations when the transaction is consummated. Any
transaction costs subsequent to deal consummation will be charged to our results
of operations as they are spent. If, for some reason, the transaction does not
consummate, our expenses related to this transaction are estimated to be
approximately $1.5 million. This amount represents the above estimated one-time
transaction costs excluding any costs incurred by IMPAC and any investment
adviser fees, as we would not be responsible for costs incurred by IMPAC or
investment adviser fees if the transaction does not consummate.
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
21
<PAGE>
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 ("FASB") 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. We do
not expect the impact to our consolidated financial statements to be material.
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 was amended in June 2000 to delay the
implementation date to the fourth quarter of our fiscal year 2001. We are in the
process of determining the impact that adoption will have on our consolidated
financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the definition of an employee for
the purposes of applying Accounting Practice Board Opinion No. 25, "Accounting
for Stock Issued to Employees," the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. We do not expect the application of FIN 44 to have
a material impact on our financial position or results of operations.
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 of the Distribution Agreement, we are obligated to
pay one-third of certain environmental liabilities caused by operations before
the spin-offs, with
22
<PAGE>
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 $22.6
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 $11.3
million to $28.7 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 $11.3 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 $22.3
million to $38.3 million, our best estimate within that range is $26.1
million. For these projects we have accrued $11.3 million; which is
our best estimate of the $26.1 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 $1.8 million during the first nine months of fiscal year 2000 on
environmental investigation and remedial costs. We spent $1.1 million during the
first nine 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 June 30, 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
We completed a comprehensive assessment of potential Year 2000 problems
with respect to (1) our internal systems, (2) our products, and (3) significant
third parties with which we do business. We have not experienced any significant
Year 2000 problems in our internal systems or with our third party suppliers of
products and services and we are not aware of any material failures with our
previously-sold products. We estimate that we have spent approximately $1.1
million to assess and correct Year 2000 problems through June 30, 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. 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
their Year 2000 problems. However, we do not currently believe these risks are
reasonably likely to have a material adverse effect on our business, results of
operations, or financial condition.
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 continue to evaluate, 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
June 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
NOTIONAL NOTIONAL
VALUE VALUE
SOLD PURCHASED
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Australian dollar....................................... $ 2,804 $ --
British pound........................................... 10,738 4,395
Canadian dollar......................................... 15,830 --
Danish krona............................................ -- 2,211
Japanese yen............................................ 14,284 --
Swedish krona........................................... 4,554 --
Swiss franc............................................. 1,264 6,785
Euro.................................................... 53,692 134
---------- ---------
Totals.................................................. $ 103,166 $ 13,525
========== =========
</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 and notes payable. 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 JUNE 30, -------------------------------------------------------------------
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.... $ 29 $ 29 -- -- -- -- -- $ 29
Average interest rate........ 3.9% 3.9% 3.9%
Liabilities
Notes payable................ $ 0.7 $ 0.7 -- -- -- -- -- $ 0.7
Average interest rate........ 5.2% 5.2% -- -- -- -- -- 5.2%
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 June 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2 Agreement and Plan of Merger by and among Varian Medical Systems,
Inc., Varian Medical Systems New Zealand, Ltd. and IMPAC Medical
Systems, Inc. dated as of June 6, 2000 (exhibits and schedules omitted)*.
15 Letter Regarding Unaudited Interim Financial Information.
27.1 Financial Data Schedule for the nine months ended June 30, 2000.
27.2 Restated Financial Data Schedule for the nine months ended July 2,
1999.
</TABLE>
*The Company will furnish any such exhibit or schedule to the
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
On June 6, 2000, the Company filed a Form 8-K Current Report
describing its plan to acquire IMPAC Medical Systems, Inc.
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: August 11, 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
-------- -----------
2 Agreement and Plan of Merger by and among Varian Medical Systems,
Inc., Varian Medical Systems New Zealand, Ltd. and IMPAC Medical
Systems, Inc. dated as of June 6, 2000 (exhibits and schedules
omitted).
15 Letter Regarding Unaudited Interim Financial Information.
27.1 Financial Data Schedule for the nine months ended June 30, 2000.
27.2 Restated Financial Data Schedule for the nine months ended July 2,
1999.
28
