10-Q 1 0001.txt FORM 10-Q ================================================================================ 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) ================================================================================ 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. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
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) 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
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES) JUNE 30, OCTOBER 1, 2000 1999 ------------ ----------- (UNAUDITED) 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 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 ============ ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4 VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED ------------------------------ JUNE 30, JULY 2, 2000 1999 -------------- -------------- (DOLLARS IN THOUSANDS) 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) ============== ==============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5 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 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):
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ----------------------------- JUNE 30, 2000 JULY 2, 1999 JUNE 30, 2000 JULY 2, 1999 --------------- ------------- --------------- ------------ (UNAUDITED) (UNAUDITED) Revenue.......................................... $0 $0 $0 $375.7 =============== ============= =============== ============ Loss before Taxes................................ $0 $0 $0 $ (39.5) =============== ============= =============== ============ Net Loss......................................... $0 $0 $0 $ (25.7) =============== ============= =============== ============
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):
ACCRUAL AT ACCRUAL AT OCTOBER 1, CASH RECLASSIFICATIONS/ JUNE 30, 1999 PAYMENTS ADJUSTMENTS 2000 ------------- ------------ ------------------ ---------- 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 ============ ========== ========== =========
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 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:
JUNE 30, 2000 ------------------------------- NOTIONAL VALUE NOTIONAL VALUE SOLD PURCHASED -------------- -------------- (DOLLARS IN THOUSANDS) 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 ========== ========
The notional amounts of forward exchange contracts are not a measure of the Company's exposure. 8 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):
THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- ----------------------- JUNE 30, JULY 2, JUNE 30, JULY 2, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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) =========== =========== =========== ===========
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 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
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) 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 ============= ============ ============== ============= 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) 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) ============= ============ ============== ==============
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 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 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 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 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 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 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.
SALES (BY REGION) THIRD QUARTER 2000 THIRD QUARTER 1999 ----------------- ------------------ ------------------ 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
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 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 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.
------------------------------------------------------------------------------------------------- SALES (BY REGION) FIRST THREE QUARTERS 2000 FIRST THREE QUARTERS 1999 ------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------
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 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 (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 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 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 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 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:
JUNE 30, 2000 ------------------------- NOTIONAL NOTIONAL VALUE VALUE SOLD PURCHASED ---------- ---------- (DOLLARS IN THOUSANDS) 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 ========== =========
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 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.
BALANCE FISCAL YEAR AT JUNE 30, ------------------------------------------------------------------- 2000 2000 2001 2002 2003 2004 THEREAFTER TOTAL ---------- -------- ------- -------- -------- -------- ---------- ------- (DOLLARS IN MILLIONS) 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%
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 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:
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.
*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 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 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