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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: August 29, 1998
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: 0-10095
Unit Instruments, Inc.
(Exact name of registrant as specified in its charter)
California 33-0077406
(State or other jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
22600 Savi Ranch Parkway, Yorba Linda, California 92887
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (714) 921-2640
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 xxx No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes Outstanding at September 25, 1998:
------- ----------------------------------
Common Stock $.15 Par Value............... 3,995,118
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<PAGE>
UNIT INSTRUMENTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets........................................ 3-4
August 29, 1998 and May 31, 1998
Condensed Consolidated Statements of Operations.............................. 5
Three months ended August 29, 1998 and August 30, 1997
Condensed Consolidated Statements of Cash Flows.............................. 6
Three months ended August 29, 1998 and August 30, 1997
Notes to Condensed Consolidated Financial Statements......................... 7-8
Management's Discussion and Analysis of...................................... 9-15
Financial Condition and Results of Operations
Part II. Other Information 14-16
Item 6 Exhibits and Reports on Form 8-K................................... 16
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 29, 1998 AND MAY 31, 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
AUGUST 29 MAY 31
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,502 $ 9,942
Accounts and notes receivable 4,073 6,529
Inventories 6,853 7,638
Income taxes refundable 1,221 735
Prepaid expenses and other 305 277
Deferred taxes 1,114 1,114
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Total current assets 23,068 26,235
Property, plant and equipment, at cost:
Buildings and improvements 5,424 5,422
Machinery and equipment 13,765 13,601
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19,189 19,023
Less: accumulated depreciation and amortization 11,269 10,692
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7,920 8,331
Construction-in-progress 614 146
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Net property, plant and equipment 8,534 8,477
Goodwill, net of accumulated amortization of $2,065
and $2,027 respectively 3,996 4,034
Other assets 506 1,357
------- -------
$36,104 $40,103
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 29, 1998 AND MAY 31, 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
AUGUST 29 MAY 31
1998 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,176 $ 1,642
Accrued compensation and benefits 873 994
Current installments on term debt - 1,438
Other current liabilities 1,981 2,439
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Total current liabilities 4,030 6,513
Other long-term liabilities and deferred credits 581 580
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Total Liabilities 4,611 7,093
Shareholders' equity:
Common stock, $.15 par value; authorized shares: 12,000,000,
issued shares: 3,995,118 599 599
Additional paid-in capital 21,972 21,972
Retained earnings 9,444 11,010
Foreign currency translation adjustment (522) (571)
------- -------
Total shareholders' equity 31,493 33,010
------- -------
$36,104 $40,103
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</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
AUGUST 29 AUGUST 30
1998 1997
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<S> <C> <C>
Net Sales $ 6,164 $ 14,596
Operating costs and expenses:
Cost of goods sold 5,211 9,961
Selling and administration 2,461 3,108
Restructuring costs 213 -
Research, development and engineering 939 1,105
---------- ----------
Operating income (loss) (2,660) 422
Interest income 165 199
Interest expense (7) (15)
Other income (expense), net 16 (8)
---------- ----------
Income (loss) before income taxes (2,486) 598
Provision (benefit) for income taxes (920) 239
---------- ----------
Net income (loss) $ (1,566) $ 359
Net income (loss) per common share:
Basic $(0.39) $0.08
Diluted $(0.39) $0.08
Average shares used in computing
earnings per share:
Basic 3,995,000 4,443,000
Diluted 3,995,000 4,540,000
</TABLE>
See accompanying notes to consolidated financial statements
5
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UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
AUGUST 29 AUGUST 30
1998 1997
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<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $(1,566) $ 359
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Depreciation and amortization 628 765
Changes in assets and liabilities:
Accounts receivable 2,456 (1,685)
Inventories 785 (111)
Prepaids and other assets 60 (123)
Accounts payable and accrued liabilities (1,045) 454
Income taxes (486) 258
Other liabilities 1 (39)
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Net cash flows provided from (used in) operating activities 833 (122)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (634) (246)
Proceeds from asset sales - 22
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Net cash used in investing activities (634) (224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Liquidation of note receivable 750 -
Change in short-term borrowings, net (1,438) (41)
Proceeds from exercise of stock options - 682
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Net cash Provided from (used in) financing activities (688) 641
Effect of exchange rate changes on cash and cash equivalents: 49 3
------- -------
Net increase (decrease) in cash and cash equivalents (440) 298
Cash and cash equivalents at beginning of year 9,942 12,203
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Cash and cash equivalents at end of period $ 9,502 $12,501
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 39 $ 15
Net payments or (refunds) of income taxes $ (434) $ 19
</TABLE>
See accompanying notes to consolidated financial statements
6
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UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands)
1. Significant Accounting Policies
The condensed consolidated financial statements included herein are based
in part on estimates and include such adjustments (consisting solely of
normal, recurring adjustments) which management believes are necessary for
a fair presentation of the Company's financial position at August 29, 1998
and May 31, 1998 and the results of its operations for the three month
periods ended August 29, 1998 and August 30, 1997. The consolidated
financial statements and related notes are condensed and have been prepared
in accordance with generally accepted accounting principles applicable to
interim periods; consequently, they do not include all generally accepted
accounting disclosures required for complete annual financial statements.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended May 31, 1998.
The results of operations for the period presented are not necessarily
indicative of results to be expected for the entire fiscal year.
2. Inventories
Inventories at August 29, 1998 and May 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
August 29, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
Raw materials $5,482 $6,029
Work in process 601 839
Finished goods 770 770
------ ------
Total inventories $6,853 $7,638
====== ======
</TABLE>
3. Restructuring Charges
During the first quarter of the current fiscal year, the Company reduced
its workforce by 46 positions in response to the steep downturn in the
semiconductor equipment market. This workforce reduction represented
approximately 15% of the Company's worldwide employment. A restructuring
charge of $213,000 was recorded in the first quarter of fiscal year 1999
for severance and other related costs of these workforce reductions.
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4. Earnings Per Share
Earnings or loss per share is determined in accordance with Financial
Accounting Standards Board Statement on Financial Accounting Standards No.
128, "Earnings per Share." Earnings or loss per share for the three month
periods ended August 29, 1998 and August 30, 1997 is computed as follows:
UNIT INSTRUMENTS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
AUGUST 29 AUGUST 30
1998 1997
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<S> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK HOLDERS $(1,566,000) $ 359,000
- ------------------------------- =========== ==========
BASIC EARNINGS (LOSS) PER SHARE
- -------------------------------
Weighted average number of
shares outstanding 3,995,000 4,443,000
Net income (loss) loss per share $ (0.39) $ 0.08
=========== ==========
EARNINGS (LOSS) PER SHARE ASSUMING FULL DILUTION
- ------------------------------------------------
Weighted average number of
shares outstanding 3,995,000 4,443,000
Common share equivalents,
assuming exercise of stock
options and warrants - 97,000
---------- ----------
Average shares used in
computing earnings per share 3,995,000 4,540,000
=========== ==========
Net income (loss) loss per share $ (0.39) $ 0.08
=========== ==========
</TABLE>
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with Unit
Instruments, Inc.'s condensed consolidated financial statements and related
notes included herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 29, 1998 COMPARED TO THREE MONTHS ENDED AUGUST 30,
1997
Net sales for the first fiscal quarter ended August 29, 1998 decreased 58% to
$6,164,000 from $14,596,000 for the first fiscal quarter of the prior year. The
substantial reduction in sales was primarily the result of a severe worldwide
slump in the semiconductor equipment industry that began to affect the Company
in January 1998. Management believes this industry downturn is one of the most
severe the industry has experienced and is broad based in its impact. The major
causes of this condition are a unique convergence of Asian economic
difficulties, industry overcapacity, and a movement toward sub $1,000 personal
computers.
The Company suffered a 71% drop in its shipments in both semiconductor mass flow
controllers ("MFCs") and fabricated gas systems in the current period, as
compared to the first quarter of fiscal 1998. In response to this downturn, the
Company has increased its efforts to penetrate the industrial and medical
markets with its MFCs and fabricated gas systems. Shipments to these non
semiconductor customers increased to 7% of total sales in the current quarter
from less than 1% of total sales in the comparable prior year period. The
Company's market share in the industrial sector is still very small and
management believes there is substantial opportunity to improve sales in the
industrial and medical markets for MFCs and gas delivery technology.
The semiconductor equipment industry is the major market for the Company's
products and will likely remain a larger share of the Company's business than
the industrial and medical markets. The semiconductor equipment industry is a
cyclical industry and remains depressed. The Company has not noticed any
improvement in order rates but the downward trend in orders appears to have
stabilized, at least currently. Industry analysts have broadly different views
on when the semiconductor equipment industry will recover and what the magnitude
of the evidential recovery will be.
Gross profit margin declined to 16% for the current quarter from 32% for the
first quarter of the last fiscal year. The decrease resulted mainly from
substantially reduced production, which increased overhead costs on a per unit
basis. Labor costs per unit also increased due to reduced efficiency resulting
from lower production levels. In addition, $382,000 was charged to cost of
sales to supplement inventory reserves because of lower activity levels.
Selling, general and administrative ("SG&A") expenses decreased to $2,461,000 in
the first quarter of fiscal 1999 from $3,108,000 for the first fiscal quarter of
the prior year. The reduction resulted mainly from cost savings effected by the
restructuring incurred in the third quarter of fiscal 1998. As a percent of
sales, SG&A expenses increased to 40% in the current quarter from 21% in the
first quarter of the prior fiscal year due to lower sales volume. In addition,
the Company incurred legal fees of
9
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approximately $120,000 for merger related matters and litigation expenses
pertaining to defective fasteners.
Restructuring expense of $213,000 was recorded in the current fiscal quarter. In
response to the downturn in the semiconductor industry that intensified during
the current quarter and the fourth quarter of fiscal 1998, the Company reduced
its workforce by 46 positions, which represented approximately 15% of the
worldwide workforce of the Company at the beginning of this fiscal year. The
majority of the restructuring charge was for employee severance. Of the $213,000
restructuring expense recorded, $161,000 has been paid out and $52,000 is
recorded as a current liability. A restructuring expense of $4,931,000 was
recorded in the third quarter of fiscal 1998. Of the restructuring charge booked
in the third quarter of fiscal 1998, $98,000 is classified as a current
liability.
Research, development and engineering ("RD&E") expenses decreased 15% to
$939,000, or 15% of sales, for the current quarter from $1,105000, or 8% of
sales, in the first quarter of the prior fiscal year. RD&E activity is primarily
directed towards new product development, including the Company's proprietary Z-
Bloc(TM) modular gas system. The Company believes that the continued timely
development of new products and enhancements to its existing products is
essential to maintaining its competitive position within the industry.
Interest income declined to $165,000 in the current quarter from $199,000 in the
prior year period due to lower average cash balances.
A loss before income taxes of $2,486,000 was recorded in the current quarter. A
pretax profit of $598,000 was recorded in the first quarter of the prior year.
The current quarter loss was mainly due to a 58% reduction in sales in the
current quarter, as compared to the prior year period. For the current quarter
an income tax benefit of $920,000 was recorded, which represents a 37% tax rate.
The tax benefit was favorably impacted by foreign earnings subject to a lower
tax rate than the statutory U. S. rate of 34%, offset with a reduction in state
income tax benefits due to potential expiration of some state tax loss benefits
and certain foreign losses for which no tax benefit is available.
A net loss of $1,566,000, which represents a loss of $0.39 per share, was
recorded for the current quarter. Net income of $359,000 was reported for the
first quarter of the prior fiscal year, which resulted in earnings per share of
$0.08.
FINANCIAL CONDITION AND LIQUIDITY
Cash flows from operations were $833,000 for the first quarter of fiscal 1999.
The positive cash flow from operations was materially affected by the conversion
of receivables into cash that provided $2,456,000 and reduction of inventories
which provided $785,000. Depreciation provided $628,000. The positive cash
flows were offset by the $1,566,000 net loss and a usage of $1,045,000 due to
reductions in accounts payable and accrued liabilities. Cash flows used in
investing activities were $634,000, of which $528,000 was used to purchase two
Nakamura lathes used for fabricating components that were previously purchased
from vendors. Net cash flows used in financing activities were $688,000.
Financing activities included payment of a note issued by a Japanese bank in the
amount of $1,438,000 and the receipt of cash in the amount of $750,000 from
Snap-tite, Inc. in payment of a note. The note was issued to the Company's
predecessor in conjunction with the
10
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divestiture of the Erie, Pennsylvania autoclave business. The net cash used by
the Company, including all operations, investing and financing activities, was
$440,000.
Material changes in the Company's balance sheet include a reduction of accounts
receivable to $4,073,000 as of August 29, 1998 from $6,529,000 as of May 31,
1998. The reduction was the result of continued receipts of payments with a
lesser replacement rate due to the reduction in sales during the current period.
Other assets were reduced to $506,000 at the end of the current period from
$1,357,000 as of the end of the last fiscal year due to the receipt of the pay
off of the $750,000 note receivable from Snap-tite, Inc. During this quarter,
current installments on long term debt were eliminated from their year end
fiscal 1998 balance of $1,438,000 due to the repayment of a note.
The Company has no long term or short term debt outstanding and no credit lines.
Management believes the Company has the financial resources to meet its
operating and capital needs for the next twelve months. See "Forward-Looking
Statements."
YEAR 2000 COMPLIANCE
Virtually all business and government organizations use computers and other
electronic systems in their operations. Computer software routinely uses dates
in order to process information or perform calculations correctly. Software is
the set of instructions used to direct the functions of computers and other
electronic devices. A considerable amount of software that is currently in use
today stores dates using only two digits to specify the year instead of four
digits. On January 1, 2000, the computer systems that are using software that
incorporates two digit date fields may not recognize the year 2000 and operate
on the assumption that the year is 1900, or perhaps some other date depending on
what other instructions are in the software. Such an event could cause a great
deal of havoc in an organization's operations. To avoid such problems, an
enterprise must update its software and possibly its equipment so that
information is processed correctly. An enterprise that has corrected its Year
2000 issues is considered to be Year 2000 compliant ("compliant").
The Company uses information technology (IT) for its internal infrastructure,
which consists of the main enterprise resource planning (ERP) system, individual
workstations and the network system that links the individual workstations for
communications purposes. It is important to the Company's operations that these
computer systems be compliant. The Company also has several non IT systems that
use dates electronically that must be reviewed for compliance. These include
employee time clocks, security systems, clean room environmental controls, fire
detection systems, gas detection systems, elevator controls, voice mail and
phone systems, lawn sprinkler systems, electrical systems, numerically
controlled production machinery and computer based production equipment.
The readiness of the Company to meet Year 2000 Compliance varies among the
different systems. A new ERP system was placed in service in November, 1996 for
purposes of improving the Company's managerial, financial and operating
efficiency. The software and data base of this ERP system are compliant.
However, the operating system is not in compliance with respect to some features
that are not currently used by the Company. This will be remedied by installing
a vendor supplied upgrade to the operating system. The other IT systems not
included in the ERP that are usually considered part of an ERP system are the
payroll, human resources and fixed asset systems. The human resources system
and the fixed asset system are compliant. The payroll system requires a
currently available upgrade to be compliant.
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The Company has numerous personal computers ("PCs") that are used as employee
workstations. Some of these PCs are compliant. The Company has a plan to either
upgrade or replace all PCs that are not compliant. The network that links the
PCs for communications purposes is composed of file servers, switches, routers
and hubs. The file servers use an operating system that is not compliant. An
upgrade to the operating system is available to effect compliance, which the
Company plans to purchase. The switches, routers and hubs are either compliant
or do not have a compliance issue.
Compliance issues can also apply to a Company's products. The Company
manufactures analog and digital MFCs. The analog versions have no date
information in their electronics so compliance is not an issue. The digital MFCs
do have date information capability in their software and these products are
compliant. The Z-Bloc(TM) product and gas fabrication products do not
incorporate electronics that could cause a compliance problem.
Of the non IT systems, the computer based production equipment has been upgraded
to be compliant and the numerical controlled machines do not have date
information. The other non IT systems are in the process of being reviewed for
compliance.
The Company has requested compliance information from its bank, benefits
administrator and forty major suppliers. All have responded and the responses
received have indicated that the respondents are in compliance.
The Company's new ERP system, installed in November, 1996, is compliant,
notwithstanding the fact that the primary reasons for acquiring the system were
not related to this compliance issue. The cost of the system was $493,000.
Additional economic costs were incurred due to temporarily lower productivity
because of learning curves and other intangibles. The costs the Company expects
to incur to become fully compliant in all areas are as follows:
<TABLE>
<S> <C>
Upgrade PCs $150,000
Upgrade UNIX system 4,000
Upgrade payroll system 1,000
Upgrade network servers 39,000
Various non IT and other 10,000
--------
Total estimate $204,000
</TABLE>
The source of funds for the estimated Year 2000 remediation will be provided
from the Company's cash balances or cash generated from operations. The Company
intends to charge such costs against earnings or a depreciating capital account,
whichever is appropriate, as the costs are incurred.
The Company solved most of the potential disruption that could be caused by non
compliance by its purchase of the new ERP system. However, if the Company were
not to take any further action to insure compliance where compliance does not
exist such as the PCs, the network server operating system and various non IT
systems, various disruptions could occur. Non compliance at the PC level could
reduce employee productivity by causing incorrect or misleading information.
Non compliance at the network server level could interrupt email communication.
Non compliance of some of the non IT systems could affect employee
communications, safety and comfort. The risk from potential supplier non
compliance has been reduced because the Company has added the capability of
manufacturing most of its finished metal parts in house. Electronic parts are
supplied by compliant vendors and other vendors are available.
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The Company plans to perform the required modifications described in the
previous paragraphs in order to become compliant. The Company's contingency
plan for compliance is to implement the actions indicated in the previous
paragraphs. Management deems the implementation of these actions to be
sufficient for Year 2000 remediation. Contingency plans for the failure to
implement compliance procedures have not been completed because it is the
Company's intent to complete all required modifications and to test such
modifications thoroughly prior to December 31, 1999.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking statements
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. In connection with these
"safe harbor" provisions, the Company identifies important factors that could
cause actual results to differ materially from those contained in any forward-
looking statements made by, or on behalf of, the Company. Any such statements
are qualified by reference to the following cautionary statements.
The Company's businesses operate in a highly competitive market and are subject
to many risks and uncertainties. Such risks and uncertainties include, but are
not limited to, business activity levels in both the domestic and international
semiconductor equipment markets, the magnitude and duration of the current
industry downturn, the pending merger with U.S. Filter Corporation, the
company's dependence on a few large customers, performance and industry
acceptance of the company's products, specifically MultiFlo(TM) and Safe
Delivery Source (SDS(TM)) MFCs, product pricing pressures, performance and
profitability under fixed price contracts, expenses for extended product
warranty, adequacy of cost reduction programs, the successful commercialization
of the Z-Bloc(TM) Modular Gas System, development of a viable industrial sales
base, failure to remediate Year 2000 issues, and other challenges from the
company's competition.
Although the Company believes that the assumptions underlying the forward-
looking statements are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the results contemplated in
forward-looking statements will be realized. In addition, the business and
operations of the Company are within a single industrial segment and are
dependent on a few large customers. This concentration on a single market and
limited customer base subjects the Company to substantial risks, which increases
the uncertainty inherent in such forward-looking statements. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by the Company, or any other person, that the objectives or plans
for the Company will be achieved.
13
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PART II. OTHER INFORMATION
Item 5. Significant Events
On July 2, 1998, United States Filter Corporation ("U.S. Filter"), Kinetics
Acquisition Corp., a California corporation and wholly-owned subsidiary of U.S.
Filter ("Subcorp"), and the Company executed an Agreement and Plan of Merger
whereby Subcorp will be merged with and into the Company (the "Merger") and the
Company will survive the merger and become a wholly-owned subsidiary of U.S.
Filter.
Pursuant to the terms of the Agreement and Plan of Merger, U.S. Filter had a 30-
day period, ending on July 31, 1998, to complete due diligence. On July 31,
1998, U.S. Filter notified the Company that it was dissatisfied with certain
items relating to the Company that resulted from their due diligence review,
including the declining prospects for the Company and its business due to the
deteriorating fundamentals in the semiconductor equipment market, and indicated
that they intended to terminate the Agreement and Plan of Merger unless these
items were cured or resolved to U.S. Filter's satisfaction within 30 days. On
August 5, 1998, U.S. Filter and the Company agreed to amend the terms of the
Agreement and Plan of Merger and executed the First Amendment to the Agreement
and Plan of Merger. With the execution of the First Amendment, U.S. Filter has
agreed that their due diligence condition has been satisfied, except for the
requirement that Needham & Company, Inc. ("Needham") terminate certain
registration rights associated with a warrant held by Needham for 100,000 shares
of the Company's common stock.
On July 7, 1998, the Company filed a Current Report on Form 8-K which summarized
the Agreement and Plan of Merger and included a complete copy of the Agreement
and Plan of Merger. Included with the Company's Annual Report on Form 10-K, for
the period ending May 31, 1998, is Exhibit 10.14, First Amendment to the
Agreement and Plan of Merger, dated August 5, 1998. The below-referenced
summary of the terms of the Merger is qualified in its entirety by reference to
the full text of the Agreement and Plan of Merger and to the First Amendment to
the Agreement and Plan of Merger.
Upon the effectiveness of the Merger, each outstanding share of common stock,
par value $0.15 per share ("Common Stock"), of the Company, with the exception
of shares held by shareholders who properly exercise dissenters' rights under
the Corporations Code of the State of California, will be converted into a
number of shares of U.S. Filter's common stock equal to the Exchange Ratio (as
defined below), collectively, the "Merger Consideration."
The exchange ratio (the "Exchange Ratio") will be calculated as follows: (a) if
the average daily closing price (the "Average Closing Price") on the New York
Stock Exchange of U.S. Filter's common stock during the 20 consecutive trading
days ending five days prior to the Closing Date is above $26.00, the Exchange
Ratio will be equal to $11.03 divided by the Average Closing Price; and (b) if
the Average Closing Price is equal to or less than $26.00, the Exchange Ratio
will be equal to $11.03 divided by $26.00. If the Average Closing Price is less
than $24.00, the Company may terminate the Merger Agreement.
Since the date of the First Amendment, there has been substantial volatility in
U.S. and non-U.S. stock markets, and the U.S. Filter Common Stock has traded
below $24.00 per share on the NYSE. In light of this volatility and the recent
trading prices of the U.S. Filter Common Stock, it is possible that the
14
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Average U.S. Filter Share Price will be less than $24.00. In such event, the
following may occur, in accordance with the Merger Agreement:
(a) Board Does Not Exercise Right to Terminate Merger Agreement. If the Board
------------------------------------------------------------
does not exercise the Company's right under such circumstances to terminate
the Merger Agreement, which would not require any action by the
shareholders, the Merger would proceed (assuming that all other applicable
conditions to closing were satisfied) and the Exchange Ratio would remain
at 0.42423 shares of U.S. Filter Common Stock for each share of Common
Stock.
(b) Board Exercises Right to Terminate Merger Agreement. The Board could,
----------------------------------------------------
under such circumstances, without any action by the shareholders, exercise
the Company's right to terminate the Merger Agreement.
If the Average U.S. Filter Share Price is less than $24.00, the Board would
consult with its financial and legal advisors, and would make a decision as to
whether to terminate the Merger Agreement based on a variety of factors,
including the Average U.S. Filter Share Price, the Board's judgment as to
whether the Merger Consideration would deliver more value to the shareholders
than if the Company were to remain as an independent Company, and whether the
Merger Consideration remains fair to the shareholders from a financial point of
view as of such date. The Board may, based on such factors, determine that it
is in the best interests of the Company and shareholders to proceed with the
Merger, even if the Average U.S. Filter Share Price is below $24.00. The Board
has not yet determined whether it would exercise the Company's right to
terminate the Merger Agreement if the Average U.S. Filter Share Price is at or
near the current price per share of U.S. Filter Common Stock.
Consummation of the Merger is subject to certain conditions, including approval
of the respective agreements and the transactions contemplated thereby by the
affirmative vote of the holders of a majority of the outstanding shares of the
Common Stock entitled to vote at the Special Shareholders Meeting.
The transaction is expected to close in December, 1998. Following the merger,
the Company would become a wholly-owned subsidiary within U.S. Filter's Kinetics
Group ("USF Kinetics").
At the effective time (the "Effective Time") of the Merger, each outstanding
stock option or warrant to purchase the Company's Common Stock would
automatically convert into an option to purchase a number of shares of U.S.
Filter common stock equal to (x) the number of shares of the Company's Common
Stock issuable immediately as of the date of the Merger Agreement upon exercise
of such stock option or warrant multiplied by (y) the Exchange Ratio with an
exercise price equal to the exercise price which existed under the corresponding
Company stock option or warrant divided by the Exchange Ratio, and with such
other terms and conditions, subject to U.S. Filter's approval, as were in effect
under such Unit stock option or warrant as of the date of the Merger Agreement.
Fractional shares will not be issued, but the pro rata portion of the net
proceeds of the sale of all such shares will be paid in cash to the persons
entitled thereto. As a result of the conversion of the Company's Common Stock,
the Company's Common Stock will be de-listed from the Nasdaq National Market
tier of The Nasdaq Stock Market and will not be listed on any national
securities exchange or quoted in any inter-dealer quotation system, and holders
of the Company's Common Stock will become shareholders of U.S. Filter.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (for electronic filing only)
(b) Reports on Form 8-K. A Current Report on form 8-K was filed on
July 7, 1998 regarding a Merger Agreement dated July 2, 1998 with
United States Filter Corporation.
16
<PAGE>
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirement 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.
UNIT INSTRUMENTS, INC.
----------------------
Registrant
Date: October 6, 1998 /s/ Michael J. Doyle
--------------------
Michael J. Doyle, President
and Chief Executive Officer
Date: October 6, 1998 /s/ Gary N. Patten
------------------
Gary N. Patten
Chief Financial Officer
17
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