Page 1
United States
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 period ended March 31, 1998
--------------
Commission file number 0-23628
-------
Fusion Systems Corporation
- -------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0915080
- -------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
7600 Standish Place, Rockville, MD 20855
- -------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 251-0300
- -------------------------------------------------------------
(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 twelve
months and (2) has been subject to such filing requirements for
the past ninety days. Yes X
---
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing
this form with the reduced disclosure format.
There were 10 Common Shares outstanding as of March 31, 1998
which were held by Eaton Corporation.
<PAGE>
Page 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
<TABLE>
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
(Thousands) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,561
Short-term marketable securities 5,209 $16,329
Accounts receivable 11,348 17,296
Note receivable from Eaton Corporation 82,620 72,784
Due from Eaton Corporation 9,190 4,269
Inventories 19,509 16,012
Deferred income taxes and other
current assets 3,303 3,391
-------- --------
132,740 130,081
Property, plant and equipment 14,256 14,998
Intangible assets 36,191 37,619
Excess of cost over net assets of
business acquired 50,576 51,351
Deferred income taxes and other assets 5,160 3,750
-------- --------
$238,923 $237,799
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and other current
liabilities $ 13,297 $ 9,943
------- - --------
13,297 9,943
Deferred income taxes 13,691 13,166
Shareholder's equity 211,935 214,690
-------- --------
$238,923 $237,799
======== ========
</TABLE>
See accompanying notes.
<PAGE>
Page 3
Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
<TABLE>
Statements of Consolidated Operations
<CAPTION>
Three Months Ended
----------------------
March 31, March 28,
(Thousands) 1998 1997
---- ----
<S> <C> <C>
Net sales $13,168 $19,429
Costs and expenses
Cost of products sold 9,494 9,417
Selling, general & administrative 3,638 3,888
Research, development & engineering 5,324 3,823
------- -------
18,456 17,128
------- -------
(Loss) income from operations (5,288) 2,301
Other income (expense)
Interest income, net 1,281 1,492
Other--net (46) (68)
------- -------
1,235 1,424
------- -------
(Loss) income before income taxes (4,053) 3,725
Income taxes (benefit) (1,278) 1,341
------- -------
Net (loss) income $(2,775) $ 2,384
======= =======
</TABLE>
See accompanying notes.
<PAGE>
Page 4
Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION>
Three Months Ended
----------------------
March 31, March 28,
(Thousands) 1998 1997
---- ----
<S> <C> <C>
Net cash (used) provided by operating activities
Net (loss) income $ (2,775) $ 2,384
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 3,209 973
Changes in operating assets and liabilities (9,749) (2,579)
-------- -------
(9,315) 778
Net cash provided by (used in) investing activities
Expenditures for property, plant and equipment (264) (514)
Payments related to sale of discontinued operations (1,046)
Sales (purchases) of short-term investments--net 11,120 (8,003)
Foreign currency translation adjustment 20 (30)
-------- -------
10,876 (9,593)
Net cash provided by financing activities
Proceeds from exercise of stock options and
stock sale--net of income tax benefit 239
-------- -------
0 239
-------- -------
Increase (decrease) in cash and cash equivalents 1,561 (8,576)
Cash and cash equivalents at beginning of year 38,445
-------- -------
Cash and cash equivalents at end of period $ 1,561 $29,869
======== =======
</TABLE>
See accompanying notes.
<PAGE>
Page 5
The following notes are included in accordance with the require-
ments of Regulation S-X and Form 10-Q:
(dollar amounts in thousands)
Preparation of Financial Statements
- -----------------------------------
The condensed consolidated financial statements of Fusion Systems
Corporation (Fusion or the Company) are unaudited. However, in
the opinion of management, all adjustments have been made which
are necessary for a fair presentation of financial position,
results of operations and cash flows for the stated periods.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in
the Company's 1997 Annual Report on Form 10-K. Information
relating to earnings per share is not presented because the
registrant is a wholly-owned subsidiary of Eaton Corporation
(Eaton).
Inventories
- -----------
March 31, December 31,
1998 1997
----- -----
Raw materials and purchased parts $10,043 $ 5,528
Work-in-process and
finished goods 9,466 10,484
------- -------
Total inventories $19,509 $16,012
======= =======
Comprehensive Income
- --------------------
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 130, 'Reporting Comprehensive
Income.' SFAS No. 130 establishes new standards for reporting
comprehensive income and its components; however, the adoption of
SFAS No. 130 has no impact on the Company's net income or share-
holder's equity. For the Company, the principal difference
between net income as historically reported in the statements of
consolidated operations and comprehensive income, are foreign
currency translation adjustments recorded in shareholder's equity.
Comprehensive income is as follows:
Three months ended
March 31
------------------
1998 1997
---- ----
Net (loss) income $(2,775) $2,384
Foreign currency translation 20 (30)
------- ------
Comprehensive (loss) income $(2,755) $2,354
======= ======
<PAGE>
Page 6
Information Concerning Geographic Regions
- -----------------------------------------
Net Sales by Geographic Region
The Company sells its products in several geographic regions.
Net sales by the location of the Company's customers for the
first three months of 1998 and 1997 are as follows:
1998 1997
----- -----
North America $ 7,086 $10,513
Europe 3,754 4,514
Pacific Region 2,328 4,402
------ ------
Total sales $13,168 $19,429
====== ======
Operating Locations
The Company manufactures its products in the United States. The
Company's foreign operations consist primarily of sales and
service activities. A significant portion of the Company's sales
from its sales and service offices in Europe and the Pacific
Region represent equipment sales shipped directly from U.S.
facilities. A summary of net sales by operating location for the
first three months of 1998 and 1997 is as follows:
1998 1997
---- ----
North America $ 8,261 $14,549
Europe 4,695 4,533
Pacific Region 212 347
------ ------
Total sales $13,168 $19,429
====== ======
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
Net sales, consisting of revenues from system sales, spare parts
and service and royalty revenues, decreased 32% to $13,168 in the
first quarter of 1998 from $19,429 in the first quarter of 1997.
The decrease is primarily due to the relapse in the worldwide
semiconductor equipment market which seriously affected the
Company's results in the first quarter of 1998. The Company has
made necessary operating adjustments including a 13% reduction in
headcount and a 30% reduction in budgeted 1998 capital spending.
The Company's gross profit as a percentage of net sales for the
first quarter of 1998 decreased to 28%. The decrease in gross
profit in the first quarter of 1998 was primarily due to $2,203
of amortization expense related to excess cost over the net assets
of business acquired and related intangible assets resulting from
Eaton's acquisition of Fusion in August 1997. Excluding amortization
<PAGE>
Page 7
expense, gross profit as a percentage of net sales decreased from
52% in the first quarter 1997 to 45% in the first quarter of 1998.
This decrease was primarily due to lower production volume which
reduced the Company's ability to absorb overhead costs.
Selling, general and administrative expenses decreased 6% to
$3,638 in the first quarter of 1998 from $3,888 in the first
quarter of 1997. The decrease is primarily due to operating
adjustments made to offset the renewed collapse in the semi-
conductor equipment market which includes a reduction in headcount.
Research, development and engineering expenses increased 39% to
$5,324 in the first quarter of 1998 from $3,823 in the first
quarter 1997. The increase was primarily due to a substantial
increase in the level of effort needed to develop advanced products
including a new 300mm platform, and to support and improve existing
products.
Other income, net of expenses, was $1,235 and $1,424 in the first
three months of 1998 and 1997, respectively. The decrease is
primarily due to a decrease in interest earned on a combined
lower marketable securities balance and notes receivable from Eaton.
The Company's effective tax rate was a benefit of 32% for the first
quarter of 1998 compared to an expense of 36% for the first quarter
of 1997. The change in the rate, when compared to 1997, was
primarily due to non-deductible amortization of excess cost over
net assets of business acquired.
<PAGE>
Page 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index attached.
(b) Reports on Form 8-K.
1. On March 4, 1998, the Company filed a Current Report on
Form 8-K reporting that the Company had changed certifying
accountants.
<PAGE>
Page 9
Signature
Pursuant to the requirements of Section 13 or 15(d) 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
----------------------------
Registrant
Date: May 13, 1998 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Vice President and Chief
Financial Officer and Chief
Accounting Officer
<PAGE>
Page 1
FUSION SYSTEMS CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
- ------------------ -------
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.
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheets and the Statements of Consolidated
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,561
<SECURITIES> 5,209
<RECEIVABLES> 11,620
<ALLOWANCES> 272
<INVENTORY> 19,509
<CURRENT-ASSETS> 132,740
<PP&E> 15,768
<DEPRECIATION> 1,512
<TOTAL-ASSETS> 238,923
<CURRENT-LIABILITIES> 13,297
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 211,935
<TOTAL-LIABILITY-AND-EQUITY> 238,923
<SALES> 13,168
<TOTAL-REVENUES> 13,168
<CGS> 9,494
<TOTAL-COSTS> 18,456
<OTHER-EXPENSES> (1,235)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,053)
<INCOME-TAX> (1,278)
<INCOME-CONTINUING> (2,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,775)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
