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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1997
Commission File Number 0-23628
FUSION SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-0915080
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7600 Standish Place, Rockville, MD 20855
----------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (301) 251-0300
--------------
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
------- --------
As of August 6, 1997, 1 share of registrant's Common Stock, par value $.01
per share, was outstanding.
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FUSION SYSTEMS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 27, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3
Consolidated Balance Sheets at June 27, 1997
and December 31, 1996 3
Consolidated Statements of Income for the
three-months and six-months ended June 27, 1997
and June 28, 1996 4
Consolidated Statements of Cash Flows for the
six-months ended June 27, 1997 and
June 28, 1996 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Items 1-3 - Not applicable -
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Not applicable -
Item 6 - Exhibits and Reports on Form 8-K 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUSION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 27, December 31,
1997 1996
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 37,745 $ 38,445
Short-term marketable securities 70,829 74,467
Accounts receivable, net of allowance for doubtful
accounts 18,793 14,487
Inventories 16,985 14,905
Prepaid expenses and other current assets 824 526
Receivable from related party 156 241
----------------- ------------------
Total current assets 145,332 143,071
Fixed Assets, net of accumulated depreciation and amortization 15,272 15,243
Deferred Income Taxes 3,103 3,026
Other Assets 677 374
----------------- ------------------
Total assets $164,384 $161,714
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,816 $ 2,974
Accrued expenses 6,937 8,575
Income taxes 1,272 3,391
----------------- ------------------
Total current liabilities 12,025 14,940
----------------- ------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.01 par value; 40,000,000 shares authorized,
7,931,855 shares issued as of June 27, 1997 and December 31, 1996 79 79
Additional paid-in capital 41,607 41,486
Retained earnings 118,432 113,482
Accumulated translation adjustment (55) (41)
Treasury stock at cost: 438,920 and 469,000 shares, respectively (7,704) (8,232)
----------------- ------------------
Total stockholders' equity 152,359 146,774
----------------- ------------------
Total liabilities and stockholders' equity $164,384 $161,714
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
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FUSION SYSYTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ----------------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues $21,660 $25,252 $41,089 $50,020
Cost of Sales 10,393 10,714 19,810 21,795
------------ -------------- ------------ ------------
Gross Profit 11,267 14,538 21,279 28,225
------------ -------------- ------------ ------------
Operating Expenses:
Selling, general and administrative 4,325 4,968 8,213 10,262
Research, development and engineering 4,474 4,262 8,297 7,740
------------ -------------- ------------ ------------
Total operating expenses 8,799 9,230 16,510 18,002
------------ -------------- ------------ ------------
Operating Income 2,468 5,308 4,769 10,223
------------ -------------- ------------ ------------
Other Income (Expense):
Interest income, net 1,490 324 2,982 838
Foreign exchange (loss) gain, net 54 59 (11) 99
Other, net (2) (10) (5) (4)
------------ -------------- ------------ ------------
Total other income, net 1,542 373 2,966 933
------------ -------------- ------------ ------------
Income from continuing operations
before income taxes 4,010 5,681 7,735 11,156
Provision for Income Taxes
on Continuing Operations 1,444 2,130 2,785 4,183
------------ -------------- ------------ ------------
Income from continuing operations 2,566 3,551 4,950 6,973
Discontinued Operations, net of tax of $979 and $1,817 - 1,631 - 3,026
------------ -------------- ------------ ------------
Net Income $ 2,566 $ 5,182 $ 4,950 $ 9,999
============ ============== ============ ============
Primary Earnings Per Share:
Continuing operations $ 0.33 $ 0.44 $ 0.64 $ 0.86
Discontinued operations - 0.20 - 0.38
------------ -------------- ------------ ------------
Total $ 0.33 $ 0.64 $ 0.64 $ 1.24
============ ============== ============ ============
Fully Diluted Earnings Per Share:
Continuing operations $ 0.32 $ 0.44 $ 0.63 $ 0.86
Discontinued operations - 0.20 - 0.38
------------ -------------- ------------ ------------
Total $ 0.32 $ 0.64 $ 0.63 $ 1.24
============ ============== ============ ============
Weighted-Average Shares Outstanding:
Primary 7,794 8,119 7,770 8,089
============ ============== ============ ============
Fully diluted 7,931 8,119 7,915 8,089
============ ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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FUSION SYSYTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
June 27, June 28,
1997 1996
---------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 4,950 $ 9,999
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,995 1,521
Loss on disposal of fixed assets 8 21
Cash provided by (used in) changes in assets
and liabilities:
Accounts receivable (4,306) (7,152)
Receivable from related party, net 85 1
Inventories (2,080) (5,899)
Prepaid expenses and other assets (618) (395)
Deferred income taxes (77) (956)
Accounts payable 842 (1,203)
Accrued expenses and other liabilities (592) 1,957
Income taxes accrued (2,119) (851)
Cash provided by changes in assets of
discontinued operations - (2,407)
---------------- ------------------
Net Cash (Used in) Operating Activities (1,912) (5,364)
---------------- ------------------
Cash Flows from Investing Activities:
Purchases of fixed assets (2,015) (6,232)
Payment of expenses related to sale of discontinued operations (1,046) -
Net sales of marketable securities 3,638 8,572
Foreign currency translation adjustments (14) (322)
---------------- ------------------
Net Cash Provided by Investing Activities 563 2,018
---------------- ------------------
Cash Flows from Financing Activities:
Cash proceeds from exercise of stock options and stock sale, net 521 807
Income tax benefit from exercise of stock options 128 -
---------------- ------------------
Net Cash Provided by Financing Activities 649 807
---------------- ------------------
Net Decrease in Cash and Cash Equivalents (700) (2,539)
Cash and Cash Equivalents, beginning of period 38,445 10,825
---------------- ------------------
Cash and Cash Equivalents, end of period $ 37,745 $ 8,286
================ ==================
Supplemental Disclosure of Cash Flow Information-
Cash paid during the period for:
Interest $ - $ 2
Income taxes $ 4,780 $ 7,572
================ ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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FUSION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
Fusion Systems Corporation, together with its subsidiaries (the "Company"),
designs, manufactures, markets and services photostabilizers and ashers used to
make advanced semiconductor devices.
The accompanying consolidated financial statements include the accounts of the
Company and all of its subsidiaries, after elimination of significant
intercompany transactions and balances.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K. The
accompanying financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three and six-month periods ended June 27,
1997 are not necessarily indicative of the results to be expected for the full
fiscal year.
2. ACQUISITION BY EATON CORPORATION:
On June 30, 1997, the Company and Eaton Corporation, an Ohio corporation
("Eaton"), entered into a definitive merger agreement under which Eaton agreed
to acquire the Company. Under the terms of the agreement, on July 7, 1997,
Eaton initiated a cash tender offer for all outstanding shares of the Company
at $39 per share. The tender offer was subject to a majority of the outstanding
shares of the Company, on a fully diluted basis, being tendered, and other
customary conditions. Eaton agreed to acquire any remaining Company shares not
acquired in the tender offer in a merger at the same $39 per share price.
In addition, the Company declared a dividend of one contingent payment right on
each Company share outstanding on July 25, 1997. The contingent payment right
entitles shareholders of the Company to receive on March 31, 1999 an additional
cash payment if the Company's 1998 revenues exceed $122 million, with a maximum
$5.00 per right payment made if the Company's 1998 revenues are $149 million or
more.
On August 4, 1997, Eaton completed the tender offer and announced that,
according to a preliminary count by the depositary for the offer, there were
tendered and not withdrawn 7,173,785 shares, representing approximately 95.6
percent of the outstanding shares of the Company. On August 5, 1997 ETN
Acquisition Corp., a wholly owned subsidiary of Eaton, merged into the Company,
resulting in each share of the Company not acquired in the tender offer being
canceled and converted into the right to receive $39 cash.
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3. SALE OF UV CURING BUSINESS:
On September 6, 1996, the Company sold the operations constituting its
ultraviolet curing business for $121 million in cash plus the assumption of
certain liabilities to the Fairey Group, plc, a United Kingdom based company.
The assets sold included all of the assets relating to the UV curing business
of Fusion UV Curing Systems Corporation and Fusion Europe Limited and all of
the capital stock of three of the Company's subsidiaries -- Fusion Aetek UV
Systems, Inc., Fusion Japan KK, and Fusion VuS GmbH. The Company has reported
these operations as discontinued operations in the financial statements and, as
a result, has reclassified the prior year presentation to conform with this
treatment.
4. SHORT-TERM MARKETABLE SECURITIES:
At June 27, 1997, short-term marketable securities consisted of investment
grade commercial paper, U.S. government agency discount notes and Treasury
bills, and are considered by management to be held to maturity. These
investments mature at various dates from October 1997 to June 1998.
5. INVENTORIES:
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 27, December 31,
1997 1996
--------------------- -------------------
<S> <C> <C>
Raw materials and purchased parts $ 5,126 $ 4,372
Work in process and finished subassemblies 10,906 9,812
Finished goods 953 721
--------------------- -------------------
Total inventories $16,985 $14,905
===================== ===================
</TABLE>
6. EARNINGS PER SHARE:
Earnings per common and equivalent share are based on the weighted-average
number of common equivalent shares outstanding during the periods. Common
equivalent shares include the dilutive effect of all options outstanding.
Primary earnings per share is calculated using the average closing price for
the period. Fully diluted earnings per share is calculated using the closing
price at the end of the period.
On March 3, 1997 the Financial Accounting Standards Board released Statement
No. 128, "Earnings Per Share". Statement 128 requires dual presentation of
basic and diluted earnings per share on the face of the income statement for
all periods presented. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Accounting Principles Bulletin
No. 15. Statement 128 is effective for reporting periods ending after December
15, 1997 and, when adopted, will require restatement of prior years' earnings
per share.
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The Company anticipates that, upon implementing Statement 128, diluted earnings
per share will not differ materially from amounts reported and that basic
earnings per share from continuing operations would have been $0.34 and $0.46
for the quarters ended June 27, 1997 and June 28, 1996, respectively and $0.66
and $0.90 for the six-month periods ended June 27, 1997 and June 28, 1996,
respectively.
7. INFORMATION CONCERNING GEOGRAPHIC REGIONS:
Net Revenues by Geographic Region
The Company sells its products in several geographic regions. Net revenues
relating to each region are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------
June 27, June 28,
1997 1996
----------------- ---------------
<S> <C> <C>
North America $22,021 29,244
Europe 8,975 10,323
Pacific Rim 6,530 7,633
Japan 2,447 2,717
Other 1,116 103
----------------- ---------------
Total net revenues $41,089 $50,020
================= ===============
</TABLE>
Operating Locations
The Company manufactures its products domestically. The foreign operations
consist primarily of sales and service activities. A significant portion of
the Company's revenues from its sales and service offices in Europe, South
Korea and Japan represent equipment sales shipped directly from U.S.
facilities. A summary of net revenues by operating location is as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
June 27, June 28,
1997 1996
------------------ -------------
<S> <C> <C>
Domestic $31,647 $38,799
Europe 8,656 10,179
South Korea 691 1,042
Japan 95 -
------------------ -------------
Total net revenues $41,089 $50,020
================== =============
</TABLE>
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes. Further
reference should be made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
RESULTS OF CONTINUING OPERATIONS
Fusion Systems Corporation, together with its subsidiaries (the "Company"),
designs, manufactures, markets and services photostabilizers and ashers used to
make advanced semiconductor devices.
NET REVENUES. Net revenues, consisting of revenues from system sales, spare
parts and service revenues, decreased to $21.7 million in the quarter ended
June 27, 1997 from $25.3 million in the quarter ended June 28, 1996, a decrease
of 14%. For the first six months of 1997, net revenues decreased 18% to $41.1
million compared to $50.0 million for 1996. The decreases were primarily a
result of the general industry slowdown which began in the third quarter of
1996.
GROSS PROFIT. The Company's gross profit as a percentage of net revenues
decreased from 57.6% for the quarter ended June 28, 1996 to 52.0% for the
quarter ended June 27, 1997. Gross profit as a percentage of net revenues for
the six-month periods ended June 27, 1997 and June 28, 1996 were 51.8% and
56.4%, respectively. The decrease in gross profit for both the three and six
month periods of 1997 was primarily due to a lower production volume which
reduced the Company's ability to absorb its overhead costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased by 13%, to $4.3 million, in the quarter ended June 27, 1997
from $5.0 million in the quarter ended June 28, 1996 and were 20.0% and 19.7%
of net revenues in the two periods, respectively. For the six-month period
ended June 27,1997, selling, general and administrative expenses decreased 20%,
to $8.2 million from $10.3 million in the first six months of 1996 and were
20.0% and 20.5% of net revenues, respectively. The decreases were primarily due
to lower product shipment levels, which resulted in lower commission cost, and
to the implementation of significant cost control measures in response to the
general indusry slowdown.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering
expenses increased 5%, to $4.5 million in the quarter ended June 27, 1997 from
$4.3 million in the quarter ended June 28, 1996, and to 20.7% from 16.9% of net
revenues, respectively. Research, development and engineering expenses
increased 7%, to $8.3 million in the six-month period ended June 27, 1997 from
$7.7 million in the six-month period ended June 28, 1996 and to 20.2% from
15.5% of net revenues, respectively. For both the quarter and the six-month
period, the increases were primarily due to a substantial increase in the level
of effort needed to develop advanced products, and to support and improve
existing products.
OTHER INCOME, NET. Other income, net of expenses, was $1.5 million and
$373,000 in the quarters ended June 27, 1997 and June 28, 1996, respectively,
and $3.0 million and $933,000 in the six- month periods ended June 27, 1997 and
June 28, 1996 respectively. The increase in
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interest income during 1997 was due to the additional interest earned on the
net proceeds of the sale of the UV curing business.
PROVISION FOR INCOME TAXES. The Company's effective tax rate decreased to
approximately 36.0% for the quarter and six-month periods ended June 27, 1997
from 37.5% for the quarter and six-month periods ended June 28, 1996. The rate
decrease, when compared to 1996, was primarily due to an increase in the level
of benefit provided by the utilization of a foreign sales corporation and an
increase in the research and development credit.
NET INCOME. As a result of the foregoing, the Company reported a net income
from continuing operations of $2.6 million in the quarter ended June 27, 1997,
as compared to $3.6 million in the quarter ended June 28, 1996. Primary
Earnings per share from continuing operations were $0.33 per share in the
quarter ended June 27, 1997, as compared to $0.44 per share in the quarter
ended June 28,1996. Net income from continuing operations was $5.0 million in
the six-month period ended June 27, 1997, as compared to $7.0 million in the
six-month period ended June 28, 1996. Primary Earnings per share from
continuing operations was $0.64 per share in the six-month period ended June
27, 1997, as compared to $0.86 for the six-month period ended June 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities were $108.6 million as of June 27,
1997, approximately $4.3 million lower than the $112.9 million available at
December 31, 1996. The cash decrease was a result of a high volume of shipments
at the end of the second quarter for which payment will not be received until
later in the third quarter.
The Company's operating cash needs are primarily for working capital and to
fund its capital expenditure program. The Company's capital requirements
typically consist of manufacturing equipment, research and development
equipment, office equipment, leasehold improvements, computers, furniture and
fixtures. Capital expenditures were $2.0 million in the six-month period ended
June 27, 1997 compared to $6.2 million during the same period in 1996. The
decrease in 1997 when compared to 1996, was due to the build out of the
Rockville manufacturing facility which was completed early in the first quarter
of 1997. The Company expects to spend approximately $6 million for capital
expenditures during 1997.
Management expects that existing working capital and cash flow from operations
will be sufficient to meet its working capital and other operating expenditure
requirements for the foreseeable future.
ACQUISITION BY EATON CORPORATION
On August 5, 1997, Eaton Corporation completed a merger with the Company. See
paragraph 2. under Fusion Systems Corporation and Subsidiaries Notes to
Consolidated Financial Statements in this Form 10-Q for discussion of the
transaction.
OUTLOOK
The semiconductor capital equipment market has recently been experiencing a
slowdown in the rate of new orders, as well as some order cancellations and
shipment delays from customers, due to market conditions. The Company is not
immune to these conditions. Although shipments in
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the second quarter of 1997 were sequentially up from the first quarter of 1997,
they were substantially lower than the second quarter of 1996. If sales were to
remain substantially lower than in 1996 or to decrease sequentially, it could
have a negative effect on future revenues and put pressure on operating
margins. Management believes the business is well positioned with its new
product lines and currently believes that general market conditions in the
industry are improving.
CAUTIONARY STATEMENTS
In addition to the other information in this Quarterly Report on Form
10-Q, the following cautionary statements should be considered carefully in
evaluating the Company and its business. Information provided by the Company
from time to time may contain certain "forward-looking" information, as that
term is defined by (i) the Private Securities Litigation Reform Act of 1995
(the "Act") and (ii) in releases made by the Securities and Exchange
Commission (the "SEC"). The factors discussed in these cautionary statements,
among other factors, could cause actual results to differ materially from those
contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. These cautionary statements are
being made pursuant to the provisions of the Act and with the intention of
obtaining the benefits of the "safe harbor" provisions of the Act. Reference
is also made to the "Risk Factors" described in the Company's Prospectus dated
October 5, 1994.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's quarterly operating
results may vary significantly from quarter to quarter, depending upon factors
such as the timing of product sales and the receipt of orders from major
customers, production difficulties causing delayed shipments, the proportion of
international sales, specific economic conditions in the semiconductor
industry, the mix of products sold by the Company and competitive pricing
pressures. Because a high percentage of the Company's expenses are relatively
fixed in the near term, minor variations in the timing of shipments can cause
significant variations in quarterly operating results. All orders are subject
to cancellation or rescheduling by the customer with limited or no penalties,
and the Company's ability to accurately forecast future revenues and income for
any period is necessarily limited. Industry trends in the semiconductor markets
can sometimes cause sudden and significant order cancellations or pushouts of
orders. Any forward-looking information provided from time to time by the
Company represents only management's then current estimate of future results or
trends, and actual results may differ materially from those contained in the
Company's estimates.
DEPENDENCE ON KEY CUSTOMERS. Because of the relative concentration of
semiconductor device manufacturing, the Company typically sells a significant
percentage of its systems to a limited number of customers. Sales to three of
the Company's customers each represented between 10% and 15% of net revenues in
1996. The loss of business or the delay of orders from any of these three
customers or from other key accounts of the Company due to business conditions
affecting a particular customer, industry-wide slowdowns impacting multiple
customers, pricing pressures or the impact of competitive products, could
materially adversely affect the Company's business and financial results. As
is typical in the semiconductor industry, none of the Company's customers has
entered into a long-term agreement requiring it to purchase the Company's
products, and all orders are subject to cancellation or rescheduling by the
customer.
CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY. The Company's business depends in
large part upon the capital equipment expenditures of semiconductor
manufacturers, which in turn depend
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on the current and anticipated market demand for integrated circuits and
products utilizing integrated circuits. The semiconductor industry is highly
cyclical and has historically experienced periodic downturns, which often have
had a severe adverse effect on capital equipment expenditures by semiconductor
manufacturers. Semiconductor industry downturns have adversely affected the
sales, gross profit, and operating results of semiconductor equipment
suppliers, including the Company. The Company anticipates that a significant
portion of new orders will depend upon demand from semiconductor manufacturers
building or expanding large fabrication facilities, and there can be no
assurance that such demand will exist in any given period of time. Moreover,
the Company's net sales and operating results will be materially and adversely
affected if unanticipated downturns or slowdowns in the semiconductor market
occur in the future.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Sales outside North America
accounted for 46% of the Company's total net revenues from continuing
operations in the first six months of 1997, 50% of the Company's total net
revenues from continuing operations in fiscal 1996, 60% of the Company's total
net revenues from continuing operations in fiscal 1995, and 54% of the
Company's total net revenues from continuing operations in fiscal 1994, and may
continue to represent a significant portion of the Company's revenues. Any
decrease in sales outside North America may have a material adverse effect on
the Company's operating results. The Company's international sales and
operations are subject to customary risks of international operations including
risks associated with fluctuations in interest and currency exchange rates,
changes in foreign economic conditions, trade restrictions, longer payment
cycles often associated with international sales, changes in tariffs and other
taxes, difficulties in accounts receivable collections, difficulties in
managing distributors or representatives, difficulties in staffing and managing
foreign subsidiary operations, and potentially adverse tax consequences. The
Company's international business and financial performance may be adversely
affected by such factors.
RAPID TECHNOLOGICAL CHANGE; COMPETITION. Equipment and processes used in
semiconductor manufacturing are subject to rapid technological development and
product innovation. The Company, to remain successful, must be responsive to
new developments in photostabilization and asher technology, "white space"
product technology and enhanced process capabilities. The Company will continue
to face competition from its competitors who will continue to develop new
products or enhancements that may offer improved performance. The Company's
financial results may be negatively impacted by the failure of new or existing
products to be favorably received by customers due to price, availability,
features, other product choices or the level and quality of support for the
Company's products.
FUTURE ACQUISITIONS OR CONSOLIDATIONS. The Company believes that consolidation
among companies in the semiconductor equipment industry is likely for business
and technical reasons. The Company has stated that, with its relatively strong
cash position, in the future it may pursue acquisitions or mergers of
businesses in the semiconductor equipment industry. Any such transactions may
result in potentially dilutive issuances of equity securities, the incurrence
of debt and amortization expenses related to goodwill and other intangible
assets, and other costs and expenses, all of which could materially adversely
affect the Company's financial results following such a transaction. In
addition, such transactions involve numerous business risks, including
difficulties in the assimilation of the operations, technologies and products
of the acquired companies, the diversion of management's attention from other
business concerns, and the potential loss of key employees of the combined
company. In the event any such
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transaction does occur, there can be no assurance as to the beneficial effect
on the Company's business and financial results.
SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies to a substantial extent
on outside suppliers to manufacture many of its components. Certain of these
are obtained from a sole supplier or a limited group of suppliers. One
component used in two of the Company's three product families has been
continuously obtained by the Company for over 20 years from a single source.
The supplier is a leading, worldwide electronics manufacturer which
historically has provided timely delivery without any significant delay or
interruptions. The Company's reliance on outside suppliers involves several
risks, including a potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of components.
Because the manufacture of certain of these components is a complex process and
requires long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur. Any inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply or to manufacture such components internally,
could delay the Company's ability to ship its systems and could have a material
adverse affect on the Company.
INTELLECTUAL PROPERTY RIGHTS. Although the Company seeks to protect its
proprietary technology, proprietary rights relating to the Company's technology
will be protected from unauthorized use by others only to the extent that they
are covered by enforceable patents or are maintained in confidence as trade
secrets. There can be no assurance that patents will issue from current patent
applications or that any patent issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection or competitive advantages to the Company. Moreover, even
with patent protection, the Company's business may be adversely affected by
competitors that independently develop functionally equivalent technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents, there can be no assurance that third
parties will not assert infringement claims in the future. If any such claims
are asserted against the Company, the Company could seek to obtain a license
from third parties or challenge the claim in litigation. Failure to obtain
licenses or adverse determinations in any litigation could materially adversely
affect the Company's business, financial condition and results of operations.
RELIANCE ON ATTRACTING AND RETAINING KEY EMPLOYEES. The Company's continued
success will depend in large part on its ability to attract and retain
highly-qualified technical, managerial, sales and marketing, and other
personnel. Competition for such personnel in the Company's industry is
intense. There can be no assurance that the Company will be able to continue to
attract or retain such personnel.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEMS 1 - 3 NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on June 19, 1997. Two proposals
were submitted to stockholders as described in the Company's proxy statement
dated May 15, 1997. The following is a brief description of the matters voted
upon, the number of votes cast for and against each proposal, and the number of
abstentions.
1. To fix the number of Directors of the Company at five and to elect two
Class I Directors to serve for three-year terms or until their
successors are elected and qualified.
<TABLE>
<S> <C> <C>
Nominee: Leslie S. Levine - Class I Director
Votes for the Nominee: 5,944,928
Votes Withheld from the Nominee: 212,110
Nominee: Daniel Tessler - Class I Director
Votes for the Nominee: 5,945,459
Votes Withheld from the Nominee: 211,579
</TABLE>
2. To ratify the selection of Arthur Andersen LLP as independent auditors
for the fiscal year ending December 31, 1997.
<TABLE>
<S> <C>
Votes for: 6,131,188
Votes against: 12,459
Abstain: 13,391
</TABLE>
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
B. Reports on Form 8-K
1. On July 1, 1997, the Company filed a Current Report on Form 8-K,
reporting that the Company had issued a press release regarding an agreement of
merger with Eaton Corporation.
2. On July 8, 1997, the Company filed a Current Report on Form 8-K
regarding its Contingent Rights Agreement and an amendment to its Rights Plan.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FUSION SYSTEMS CORPORATION
August 6, 1997 By: /s/Adrian T. Dillon
-------------------
Adrian T. Dillon
Vice President and Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description Page
- ---------------- --------------------------------------------------------------- --------------------
<S> <C> <C>
10 Material Contracts
The Agreement and Plan of Merger, together with the Exhibits
thereto, dated June 30, 1997 included as Exhibit I to the
Company's Schedule 14d-9 Statement filed on July 7, 1997 is
incorporated herein by reference to such Schedule 14d-9.
11 Statement Regarding Computation of Per Share Earnings 17
</TABLE>
16
<PAGE> 1
EXHIBIT 11
FUSION SYSTEMS CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE
CALCULATION OF WEIGHTED-AVERAGE SHARES OUTSTANDING
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -------------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Primary Shares:
Weighted average number of common shares outstanding 7,486 7,769 7,478 7,765
Assuming conversion of options issued and outstanding 308 350 292 324
--------- -------- --------- ---------
Weighted-Average Shares Outstanding 7,794 8,119 7,770 8,089
========= ======== ========= =========
Fully Diluted Shares:
Weighted average number of common shares outstanding 7,486 7,769 7,478 7,765
Assuming conversion of options issued and outstanding 445 350 436 324
--------- -------- --------- ---------
Weighted-Average Shares Outstanding 7,931 8,119 7,914 8,089
========= ======== ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at June 27, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-27-1997
<CASH> 37,745
<SECURITIES> 70,829
<RECEIVABLES> 19,000
<ALLOWANCES> 207
<INVENTORY> 16,985
<CURRENT-ASSETS> 145,332
<PP&E> 26,305
<DEPRECIATION> 11,033
<TOTAL-ASSETS> 164,384
<CURRENT-LIABILITIES> 12,025
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 152,280
<TOTAL-LIABILITY-AND-EQUITY> 164,384
<SALES> 41,089
<TOTAL-REVENUES> 41,089
<CGS> 19,810
<TOTAL-COSTS> 19,810
<OTHER-EXPENSES> 16,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,735
<INCOME-TAX> 2,785
<INCOME-CONTINUING> 4,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,950
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
</TABLE>
