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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 September 26, 1997
------------------
Commission file number 0-23628
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Fusion Systems Corporation
- - -------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0915080
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(State of incorporation) (I.R.S. Employer
Identification No.)
7600 Standish Place, Rockville, MD 20855
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(Address of principal executive offices) (Zip Code)
(301) 251-0300
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(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
---
There were 7,503,000 Common Shares outstanding as of
September 26, 1997 which were held by Eaton Corporation.
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
Condensed Consolidated Balance Sheets
September 26, December 31,
(Thousands) 1997 1996
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 0 $ 38,445
Short-term marketable securities 21,901 74,467
Accounts receivable 19,339 14,487
Notes receivable from Eaton Corporation 72,049 0
Inventories 16,149 14,573
Other current assets 1,195 767
-------- --------
130,633 142,739
Property, plant and equipment 13,912 12,813
Excess of cost over net assets of
business acquired 75,977 0
Deferred income taxes and other assets 6,998 6,162
-------- --------
$227,520 $161,714
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and other current
liabilities $ 7,960 $ 14,940
Due to Eaton Corporation 2,543 0
-------- --------
10,503 14,940
Shareholder's equity 217,017 146,774
-------- --------
$227,520 $161,714
======== ========
See accompanying notes.
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Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
Statements of Consolidated Operations
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
(Thousands) 1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 23,670 $ 16,184 $ 64,759 $ 66,204
Costs and expenses
Cost of products sold 13,384 9,129 33,194 30,924
Selling, general &
administrative 8,423 4,088 16,636 14,350
Research, development &
engineering 5,674 4,091 13,971 11,831
Liquidation of stock options 13,748 13,748
Purchased in-process research &
development 85,000 85,000
---------- -------- --------- --------
126,229 17,308 162,549 57,105
---------- -------- --------- --------
(Loss) income from operations (102,559) (1,124) (97,790) 9,099
Other income (expense)
Interest income, net 1,088 784 4,070 1,621
Other--net 57 (133) 41 (37)
---------- -------- --------- --------
1,145 651 4,111 1,584
---------- -------- --------- --------
(Loss) income from continuing
operations before income taxes (101,414) (473) (93,679) 10,683
Income taxes (benefit) (4,383) (177) (1,598) 4,006
---------- -------- --------- --------
(Loss) income from continuing
operations (97,031) (296) (92,081) 6,677
Discontinued operations
Operations, net of income taxes 610 3,636
Gain on disposal, net of
income taxes 53,572 53,572
---------- -------- --------- --------
Net (loss) income $ (97,031) $ 53,886 $ (92,081) $ 63,885
========== ======== ========= ========
See accompanying notes.
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Fusion Systems Corporation and Subsidiaries
(wholly-owned subsidiaries of Eaton Corporation)
Condensed Statements of Consolidated Cash Flows
Nine Months Ended
--------------------------
Sept. 26 Sept. 27,
(Thousands) 1997 1996
---- ----
Net cash (used) provided by operating activities
Net (loss) income $(92,081) $ 63,885
Adjustments to reconcile to net cash
provided by operating activities
Depreciation and amortization 4,308 2,343
Gain on disposal of discontinued operations (53,572)
Write-off of purchased in-process research
and development 85,000
Changes in operating assets and liabilities (83,148) (9,237)
Other--net 149 314
-------- --------
(85,772) 3,733
Net cash provided by investing activities
Expenditures for property, plant and equipment (3,666) (8,746)
Proceeds from sale of discontinued operations--net 117,665
Payments related to sale of discontinued operations (1,047)
Sales (purchases) of short-term investments--net 52,566 (27,456)
Other--net (1,077) (629)
-------- --------
46,776 80,834
Net cash provided by financing activities
Proceeds from exercise of stock options and
stock sale--net 551 485
-------- --------
551 485
-------- --------
(Decrease) increase in cash and cash equivalents (38,445) 85,052
Cash and cash equivalents at beginning of year 38,445 10,825
-------- --------
Cash and cash equivalents at end of period $ 0 $ 95,877
======== ========
See accompanying notes.
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The following notes are included in accordance with the requirements
of Regulation S-X and Form 10-Q:
Acquisition by Eaton Corporation
- - ---------------------------------
On June 30, 1997, Fusion Systems Corporation (Fusion or the Company)
and Eaton Corporation (Eaton), an Ohio corporation, 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
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's wholly-owned subsidiary, ETN Acquisition
Corporation, completed the tender offer for all of the outstanding
shares of common stock, and the associated preferred share purchase
rights, of the Company. 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. ETN Acquisition Corporation
accepted for payment all such shares validly tendered according to
the terms of the tender offer. On August 5, 1997, ETN Acquisition
Corp. 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.
The acquisition was accounted for by the purchase method of
accounting. The excess cost of Eaton's investment in Fusion over the
net assets of Fusion acquired by Eaton was $76 million and has been
included in the condensed financial statements of Fusion in the third
quarter of 1997.
The purchase price allocation included $85 million for purchased in-
process research and development which was determined through an
independent valuation. This amount was expensed at the date of
acquisition because technological feasibility had not been
established and no alternative commercial use had been identified.
Therefore, the third quarter includes the write-off of $85 million
for purchased in-process research and development, with no income tax
benefit.
A special charge of $13.7 million ($8.9 million, net of income tax
benefit) for the liquidation of Fusion's outstanding stock options
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and other charges related to the purchase of the Company by Eaton
were recorded in operations in the third quarter of 1997.
Preparation of Financial Statements
- - -----------------------------------
The condensed consolidated financial statements of Fusion 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 1996 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.
Financial Presentation Changes
- - ------------------------------
Certain amounts for prior years have been reclassified to conform to
the current year presentation.
Future Accounting Pronouncements
- - --------------------------------
In June 1997, SFAS No. 130, 'Reporting Comprehensive Income', was
issued. SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company must adopt SFAS
No. 130 in the first quarter of 1998. The Company expects that
comprehensive income will not differ materially from net income,
except for foreign currency translation adjustments included in
comprehensive income, the effect of which could be material depending
on future changes in foreign exchange rates.
Sale of UV Curing Business
- - --------------------------
On September 6, 1996, the Company sold 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 in the financial statements.
Cash
- - ----
After the purchase by Eaton, Fusion began participating in Eaton's
centralized cash management system. Under this system, cash receipts
are transferred to Eaton and cash disbursements are funded by Eaton.
Accordingly, the cash balances presented in the accompanying
consolidated balance sheet does not represent cash balances required
or generated by operations.
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Notes Receivable
- - ----------------
The notes receivable from Eaton Corporation bear interest at an
annual rate of 5.625% and are due on September 30, 1997 and October
31, 1997. Subsequent to the third quarter 1997, the maturity dates on
the notes receivable were extended to December 1, 1997 and January
30, 1998, respectively. Interest income on the notes was $271,000 in
the third quarter of 1997.
Inventories
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September 26, December 31,
(Thousands) 1997 1996
----- -----
Raw materials and purchased parts $ 5,896 $ 4,372
Work-in-process and
finished goods 10,253 10,201
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Total inventories $16,149 $14,573
======= =======
Excess Cost of Eaton's Investment in Fusion Over Net Assets Acquired
- - --------------------------------------------------------------------
The excess cost of Eaton's investment in Fusion over the net assets
of Fusion acquired of $76 million, which includes developed
technology, is being amortized over an average life of ten years.
Amortization expense was $1.7 million in the third quarter of 1997.
Interest Expense
- - ----------------
The consolidated statements of operations since Eaton's acquisition
of Fusion do not include an allocation of Eaton's interest expense
related to its debt obligations as none of Eaton's debt obligations
specifically relate to Fusion.
Income Taxes
- - ------------
Since Eaton's acquisition of Fusion, Fusion's taxable income related
to its United States operations is included in Eaton's consolidated
income tax returns. Eaton accounts and pays for all related income
taxes. Fusion's consolidated statements of operations include an
allocation of Eaton's United States income tax expense in amounts
generally equivalent to the provisions which would have resulted had
Fusion filed separate income tax returns. The Company's foreign
operations account and pay for income taxes related to their
operations.
Information Concerning Geographic Regions
- - -----------------------------------------
Net Revenues 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 nine
months of 1997 and 1996 are as follows(in thousands):
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1997 1996
----- -----
North America $37,706 $35,066
Europe 12,825 17,396
Pacific Rim 14,228 13,742
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Total sales $64,759 $66,204
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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, South Korea and Japan represent
equipment sales shipped directly from U.S. facilities. A summary of
net sales by operating location for the first nine months of 1997 and
1996 is as follows(in thousands):
1997 1996
----- -----
North America $49,553 $46,633
Europe 12,685 17,358
Pacific Rim 2,521 2,213
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Total sales $64,759 $66,204
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Acquisition by Eaton Corporation
- - --------------------------------
On June 30, 1997, the Company and Eaton, entered into a definitive
merger agreement under which Eaton agreed to acquire the Company.
See notes to condensed consolidated financial statements in this
Form 10-Q for discussion of the transaction.
Results of Operations
- - ---------------------
Net sales, consisting of revenues from system sales, spare parts and
service revenues, increased to $24 million in the third quarter of
1997 from $16 million in the third quarter of 1996, an increase of
46%. For the first nine months of 1997, net sales decreased 2% to $65
million compared to $66 million for 1996. The increase in the third
quarter reflects higher demand in North America where prior year
third quarter sales were adversely affected by the industry slowdown.
The decrease in the nine month period was primarily a result of the
general industry slowdown which began in the third quarter of 1996.
The Company's gross profit as a percentage of net sales for the third
quarter of 1997 and 1996 remained constant at 44%. Gross profit as a
percentage of net sales for the first nine months of 1997 was 49% and
53% for the first nine months of 1996. The gross profit percentage
remained constant in the third quarter of 1997 as sales increased but
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was offset by two months of amortization of the excess cost of
Eaton's investment in Fusion over the net assets of Fusion acquired
recorded in the third quarter. The decrease in gross profit for the
nine month period was due to the two months of amortization and lower
production volume which reduced the Company's ability to absorb its
overhead costs, and increased customer costs.
Selling, general and administrative expenses increased to $8 million,
in the third quarter of 1997 from $4 million in the third quarter of
1996. For the first nine months of 1997, selling, general and
administrative expenses increased to $17 million from $14 million in
the first nine months of 1996. The increase in the third quarter and
the first nine months of 1997 was primarily due to miscellaneous
charges of $4 million incurred as part of the acquisition of the
Company by Eaton. The increase in the third quarter of 1997 is also
attributed to higher product shipment levels, which resulted in
higher commission costs, and higher costs associated with the
commencement of direct sales and service support in Taiwan. The
increase for the nine month period was slightly offset by lower
product shipment levels, which resulted in lower commission costs,
and to the implementation of significant cost control measures in
response to the general industry slowdown.
Research, development and engineering expenses increased to $6
million in the third quarter of 1997 from $4 million in the third
quarter of 1996. Research, development and engineering expenses
increased to $14 million in the first nine months of 1997 from $12
million in the first nine months of 1996. For both the third
quarter and the first nine months of 1997, 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.
The Company took a one-time charge of $85 million, with no income tax
benefit, against third quarter 1997 earnings to write-off the
purchased in-process research and development associated with the
acquisition of the Company by Eaton. The Company also liquidated
certain outstanding stock options resulting in a charge of $14
million in the third quarter 1997.
Other income, net of expenses, was $4.1 million and $1.6 million in
the first nine months of 1997 and 1996, respectively. The increase in
interest income during 1997 was due to the additional interest earned
on the net proceeds of the sale of the UV curing business in 1996.
The Company's effective tax rate was 4% and 2%, respectively, for the
third quarter and first nine months of 1997 compared to 37% for the
third quarter and first nine months of 1996. The change in the rate,
when compared to 1996, was primarily due to the $85 million non-
deductible write-off of purchased in-process research and
development.
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Changes in Financial Condition
- - ------------------------------
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, and leasehold
improvements. As a result of the acquisition of the Company by Eaton,
the Company now relies on Eaton to finance its cash requirements.
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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.
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 Right Plan.
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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,
thereunto duly authorized.
Fusion Systems Corporation
----------------------------
Registrant
Date: November 14, 1997 /s/ Billie K. Rawot
----------------------------
Billie K. Rawot
Vice President and Controller
Eaton Corporation
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FUSION SYSTEMS CORPORATION
EXHIBIT INDEX
Regulation S-K,
Item 601 - Exhibit
Reference Number Exhibit
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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