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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 June 30, 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 June 30, 1998 which
were held by Eaton Corporation.
<PAGE>
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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>
June 30, December 31,
(Thousands) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,420
Short-term marketable securities 1,104 $ 16,329
Accounts receivable 10,231 17,296
Note receivable from Eaton Corporation 82,620 72,784
Due from Eaton Corporation 12,931 4,269
Inventories 18,737 16,012
Deferred income taxes and other
current assets 4,950 3,391
-------- --------
131,993 130,081
Property, plant and equipment 14,694 14,998
Intangible assets 34,762 37,619
Excess of cost over net assets of
business acquired 49,540 51,351
Deferred income taxes and other assets 6,427 3,750
-------- --------
$237,416 $237,799
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Short-term debt $ 333
Accounts payable and other current
liabilities 14,633 $ 9,943
--------- --------
14,966 9,943
Deferred income taxes 13,691 13,166
Shareholder's equity 208,759 214,690
-------- --------
$237,416 $237,799
======== ========
</TABLE>
See accompanying notes.
<PAGE>
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Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
<TABLE>
Statements of Consolidated Operations
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 27, June 30, June 27,
(Thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 12,351 $ 21,660 $ 25,519 $ 41,089
Costs and expenses
Cost of products sold 8,783 10,393 18,277 19,810
Selling, general & administrative 4,020 4,325 7,658 8,213
Research, development & engineering 5,237 4,474 10,561 8,297
-------- -------- -------- --------
18,040 19,192 36,496 36,320
-------- -------- -------- --------
(Loss) income from operations (5,689) 2,468 (10,977) 4,769
Other income (expense)
Interest income, net 1,238 1,490 2,519 2,982
Other--net (347) 52 (393) (16)
-------- -------- -------- --------
891 1,542 2,126 2,966
(Loss) income before income taxes (4,798) 4,010 (8,851) 7,735
Income taxes (benefit) (1,468) 1,444 (2,746) 2,785
-------- -------- -------- --------
Net (loss) income $ (3,330) $ 2,566 $ (6,105) $ 4,950
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
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Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
<TABLE>
Condensed Statements of Consolidated Cash Flows
<CAPTION> Six Months Ended
--------------------
June 30, June 27,
(Thousands) 1998 1997
---- ----
<S> <C> <C>
Net cash used in operating activities
Net (loss) income $ (6,105) $ 4,950
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 6,583 1,995
Changes in operating assets and liabilities (13,179) (8,857)
-------- -------
(12,701) (1,912)
Net cash provided by investing activities
Expenditures for property, plant and equipment (1,611) (2,015)
Payments related to sale of discontinued operations (1,046)
Sales of short-term investments--net 15,225 3,638
Foreign currency translation adjustment 174 (14)
-------- -------
13,788 563
Net cash provided by financing activities
Borrowings with original maturities of less than
three months--net 333
Proceeds from exercise of stock options and
stock sale--net of income tax benefit 649
-------- -------
333 649
-------- -------
Increase (decrease) in cash and cash equivalents 1,420 (700)
Cash and cash equivalents at beginning of year 38,445
-------- -------
Cash and cash equivalents at end of period $ 1,420 $37,745
======== =======
</TABLE>
See accompanying notes.
<PAGE>
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The following notes are included in accordance with the
requirements 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 adjustments are of a normal recurring nature. These finan-
cial 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
- -----------
June 30, December 31,
1998 1997
---- ----
Raw materials and purchased parts $12,402 $ 5,528
Work-in-process and
finished goods 6,335 10,484
------- -------
Total inventories $18,737 $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
shareholder's equity. For the Company, the principal difference
between net income as historically reported in the statements of
consolidated operations and comprehensive income is foreign
currency translation recorded in shareholder's equity. Comprehen-
sive income is as follows:
Three months ended
--------------------
June 30, June 27,
1998 1997
---- ----
Net (loss) income $(3,330) $ 2,566
Foreign currency translation 154 16
------- -------
Comprehensive (loss) income $(3,176) $ 2,582
======= =======
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Six months ended
---------------------
June 30, June 27,
1998 1997
---- ----
Net (loss) income $(6,105) $ 4,950
Foreign currency translation 174 (14)
------- -------
Comprehensive (loss) income $(5,931) $ 4,936
======= =======
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 1998, SFAS No. 133, 'Accounting for Derivative Instruments
and Hedging Activities', was issued. The Company must adopt the
standard by the beginning of the first quarter of the year 2000.
Because of the Company's minimal use of derivatives, management does
not anticipate that the adoption of SFAS No. 133 will have a signifi-
cant effect on earnings or the financial position of the Company.
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 six months of 1998 and 1997 are as follows:
1998 1997
---- ----
North America $12,351 $22,021
Europe 7,368 8,975
Pacific Region 5,800 10,093
------- -------
Total sales $25,519 $41,089
======= =======
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 six months of 1998 and 1997 is as follows:
1998 1997
---- ----
North America $16,716 $31,647
Europe 8,106 8,656
Pacific Region 697 786
------- -------
Total sales $25,519 $41,089
======= =======
<PAGE>
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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 43% and 38%,
respectively, in the second quarter and the first half of 1998
compared to the same periods in 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 half
of 1998. The Company has made operating adjustments including a
30% reduction in headcount and a 50% reduction in budgeted 1998
capital spending.
The Company's gross profit as a percentage of net sales decreased
to 29% for the second quarter of 1998 and 28% for the first half
of 1998 compared to 52% for the comparable periods in 1997. The
decrease in gross profit was primarily due to amortization expense
of $2,465 in the second quarter of 1998 and $4,668 in the first
half of 1998 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. This decrease also resulted
from lower production volume which reduced the Company's ability
to absorb overhead costs.
Selling, general and administrative expenses decreased 7% in the
second quarter and first half of 1998 compared to the same periods
in 1997. The decrease was primarily due to operating adjustments
made to offset the renewed collapse in the semiconductor equipment
market which included a reduction in headcount.
Research, development and engineering expenses increased 17% and
27%, respectively, in the second quarter and first half of 1998
compared to the same periods in 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. In July 1998, the Company
introduced the new 300mm product suite which includes the PS3
Photostabilizer and the ES3 Enhanced Strip Plasma Asher.
The Company's effective tax rate was 31% for the second quarter
and first half of 1998 compared to 36% for the same periods in
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>
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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.
There were no reports on Form 8-K filed during the three months
ended June 30, 1998.
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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, there-
unto duly authorized.
Fusion Systems Corporation
--------------------------
Registrant
Date: August 6, 1998 /s/ Adrian T. Dillon
--------------------------
Adrian T. Dillon
Vice President and Chief
Financial Officer and Chief
Accounting Officer
<PAGE>
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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
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,420
<SECURITIES> 1,104
<RECEIVABLES> 10,487
<ALLOWANCES> 256
<INVENTORY> 18,737
<CURRENT-ASSETS> 131,993
<PP&E> 17,115
<DEPRECIATION> 2,421
<TOTAL-ASSETS> 237,416
<CURRENT-LIABILITIES> 14,966
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 208,759
<TOTAL-LIABILITY-AND-EQUITY> 237,416
<SALES> 25,519
<TOTAL-REVENUES> 25,519
<CGS> 18,277
<TOTAL-COSTS> 36,496
<OTHER-EXPENSES> 2,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,851)
<INCOME-TAX> (2,746)
<INCOME-CONTINUING> (6,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,105)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
