<PAGE>
================================================================================
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: November 28, 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.
<TABLE>
<CAPTION>
Classes Outstanding at January 15, 1999:
------- --------------------------------
<S> <C>
Common Stock $.15 Par Value............... 4,003,718
</TABLE>
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<PAGE>
UNIT INSTRUMENTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets........................................ 3-4
November 28, 1998 and May 31, 1998
Condensed Consolidated Statements of Operations.............................. 5
Three months and six months ended November 28, 1998
and November 29, 1997
Condensed Consolidated Statements of Cash Flows.............................. 6
Three months and six months ended November 28, 1998
and November 29, 1997
Notes to Condensed Consolidated Financial Statements......................... 7-9
Management's Discussion and Analysis of...................................... 9-15
Financial Condition and Results of Operations
Part II. Other Information 15-16
Item 5 Other Events..................................................... 15-16
Item 6 Exhibits and Reports on Form 8-K................................. 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of November 28, 1998 and May 31, 1998
(amounts in thousands)
(unaudited)
November 28, May 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,336 $ 9,942
Accounts and notes receivable 4,068 6,529
Inventories 6,253 7,638
Income taxes refundable -- 735
Prepaid expenses and other 420 277
Deferred taxes 2,515 1,114
-------- --------
Total current assets 22,592 26,235
Property, plant and equipment, at cost:
Buildings and improvements 5,378 5,422
Machinery and equipment 14,297 13,601
-------- --------
19,675 19,023
Less: accumulated depreciation and amortization 11,774 10,692
-------- --------
7,901 8,331
Construction-in-progress 18 146
-------- --------
Net property, plant and equipment 7,919 8,477
Goodwill, net of accumulated amortization of $2,103
and $2,027 respectively 3,958 4,034
Other assets 605 1,357
-------- --------
$ 35,074 $ 40,103
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of November 28, 1998 and May 31, 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
November 28, May 31,
1998 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,404 $ 1,642
Accrued compensation and benefits 885 994
Current installments on term debt - 1,438
Other current liabilities 1,835 2,439
Accrued income taxes 250 --
-------- --------
Total current liabilities 4,374 6,513
Other long-term liabilities and deferred credits 586 580
-------- --------
Total Liabilities 4,960 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 8,180 11,010
Foreign currency translation adjustment (637) (571)
-------- --------
Total shareholders' equity 30,114 33,010
-------- --------
$ 35,074 $ 40,103
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
11/28/98 11/29/97 11/28/98 11/29/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 6,069 $ 14,925 $ 12,233 $ 29,521
Operating costs and expenses:
Cost of goods sold 5,319 9,868 10,530 19,829
Selling, general and administrative 2,438 3,032 4,899 6,140
Restructuring costs -- -- 213 --
Research, development and engineering 866 1,220 1,805 2,325
---------- ---------- ---------- ----------
Operating income (loss) (2,554) 805 (5,214) 1,227
Interest income 122 220 287 419
Interest expense (4) (13) (11) (28)
Other income (expense), net 430 (72) 446 (80)
---------- ---------- ---------- ----------
Income (loss) before income taxes (2,006) 940 (4,492) 1,538
Provision (benefit) for income taxes (742) 376 (1,662) 615
---------- ---------- ---------- ----------
Net income (loss) $ (1,264) $ 564 $ (2,830) $ 923
========== ========== ========== ==========
Net income (loss) per common share:
Basic $ (0.32) $ 0.13 $ (0.71) $ 0.21
========== ========== ========== ==========
Diluted $ (0.32) $ 0.12 $ (0.71) $ 0.20
========== ========== ========== ==========
Average shares used in computing
earnings per share:
Basic 3,995,000 4,509,000 3,995,000 4,476,000
Diluted 3,995,000 4,621,000 3,995,000 4,581,000
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
( amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
November 28, November 29,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (2,830) $ 923
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Depreciation and amortization 1,348 1,471
Loss (gain) on disposal of assets 147 (1)
Deferred income taxes (1,401) --
Changes in assets and liabilities:
Accounts receivable 2,461 (1,249)
Inventories 1,385 (423)
Prepaids and other assets (168) (222)
Accounts payable and accrued liabilities (951) 1,010
Income taxes 985 2,660
Other liabilities 6 (89)
-------- --------
Net cash flows provided from operating activities 982 4,080
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (834) (801)
Proceeds from asset sales - 53
-------- --------
Net cash used in investing activities (834) (748)
CASH FLOWS FROM FINANCING ACTIVITIES:
Liquidation of note receivable 750 -
Change in short-term borrowings, net (1,438) (150)
Proceeds from exercise of stock options - 810
-------- --------
Net cash provided from (used in) financing activities (688) 660
Effect of exchange rate changes on cash and cash equivalents: (66) (98)
-------- --------
Net increase (decrease) in cash and cash equivalents (606) 3,894
Cash and cash equivalents at beginning of year 9,942 12,203
-------- --------
Cash and cash equivalents at end of period $ 9,336 $ 16,097
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 32 $ 13
Net refunds of income taxes $ (1,244) $ (2,045)
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data)
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 November 28,
1998 and May 31, 1998 and the results of its operations for the three month
and six month periods ended November 28, 1998 and November 29, 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 November 28, 1998 and May 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
November 28, 1998 May 31, 1998
----------------- ------------
<S> <C> <C>
Raw materials $4,912 $6,029
Work in process 783 839
Finished goods 558 770
------ ------
Total inventories $6,253 $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 significant downturn in
the semiconductor equipment market. This workforce reduction represented
approximately 15% of the Company's worldwide employment. A restructuring
charge of $213 was recorded in the first quarter of fiscal year 1999 for
severance and other related costs of these workforce reductions.
7
<PAGE>
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 and six month periods ended November 28, 1998 and November 29, 1997
is computed as follows:
<TABLE>
<CAPTION>
UNIT INSTRUMENTS, INC.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended
------------------ ----------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK HOLDERS $ (1,264) $ 564 $ (2,830) $ 923
=========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE
- -------------------------------
Weighted average number of
shares outstanding 3,995,000 4,509,000 3,995,000 4,476,000
Net income (loss) loss per share $ (0.32) $ 0.13 $ (0.71) $ 0.21
=========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE ASSUMING FULL DILUTION
- ------------------------------------------------
Weighted average number of
shares outstanding 3,995,000 4,509,000 3,995,000 4,476,000
Common share equivalents,
assuming exercise of stock
options and warrants - 112,000 - 105,000
----------- ---------- ---------- ----------
Average shares used in
computing earnings per share 3,995,000 4,621,000 3,995,000 4,581,000
----------- ---------- ---------- ----------
Net income (loss) loss per share $ (0.32) $ 0.12 $ (0.71) $ 0.20
========== ========== ========== ==========
</TABLE>
8
<PAGE>
5. Comprehensive Income
The Company has adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income." The statement requires the reporting of
comprehensive income in addition to net income. Comprehensive income is a
more inclusive financial reporting methodology than net income.
Comprehensive income includes disclosures of certain financial information
that affects the Company's equity but is not recognized in the calculation
of net income.
UNIT INSTRUMENTS, INC.
STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,264) $ 564 $ (2,830) $ 923
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments (115) (1) (66) 2
-------- ------ -------- ------
Comprehensive income (loss) $ (1,379) $ 563 $ (2,896) $ 925
======== ====== ======== ======
</TABLE>
Item 2. 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 NOVEMBER 28, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER 29,
1997
Net sales for the second fiscal quarter ended November 28, 1998 decreased 59% to
$6,069,000 from $14,925,000 for the second fiscal quarter of the prior year.
The substantial reduction in sales was primarily the result of a significant
downturn in the semiconductor equipment industry generally, and the resulting
reduction in market demand for the Company's products and services, that began
to affect the Company's business volume in January 1998.
The Company experienced a 78% drop in its shipments of semiconductor mass flow
controllers ("MFCs") and a 54% reduction in its shipments of fabricated gas
systems in the current period, as compared to the second quarter of fiscal 1998.
In response to the downturn, the Company has increased its efforts to penetrate
non-semiconductor industrial markets with its MFCs and fabricated gas systems by
establishing a Process Flow Division that is aggressively pursuing these non-
9
<PAGE>
semiconductor markets. Sales to the non-semiconductor markets for the second
quarter of fiscal 1999 increased 312% over the second quarter of the prior
fiscal year. Sales to these markets have increased to 8% of total sales for the
current quarter, as compared to less than 1% of sales for the prior year
quarter.
The second quarter of fiscal 1999 is the third consecutive quarter that the
Company has experienced sharply reduced sales volumes due to the current
semiconductor equipment downturn. The Company has experienced an increase in
orders for MFCs since October, but it is too soon to determine if this increase
of orders constitutes a trend.
Gross profit margin declined to 12% for the current quarter from 34% for the
second quarter of last fiscal year. The decrease resulted mainly from the
substantially reduced sales, which increased overhead costs on a per unit basis.
Labor costs per unit also increased due to lower efficiency resulting from the
lower sales levels.
Selling, general and administrative ("S,G&A") expenses decreased to $2,438,000
in the second quarter of fiscal 1999 from $3,032,000 in the comparable prior
year period. The reduction resulted mainly from cost savings effected by the
restructuring undertaken in the third quarter of fiscal 1998. As a percentage
of sales, S,G&A expenses increased to 40% in the current quarter, from 20% in
the second quarter of the prior fiscal year, due to the lower sales volume. In
the second quarter of the current fiscal year, the Company incurred merger
expenses of $219,000.
Research, development and engineering ("RD&E") expenses decreased 29% to
$866,000, or 14% of sales, for the current quarter from $1,220,000, or 8% of
sales, in the second quarter of the prior fiscal year. RD&E activity is
primarily directed towards new product development, including the Company's
proprietary Z-Bloc modular gas system. The RD&E expenses were higher in the
prior period because of non-recurring costs for the establishment of a document
control system for the Z-Bloc product line, non-recurring initial development
costs for the Z-Bloc product line and costs incurred to develop digitally
controlled MFCs. 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 $122,000 in the current quarter from $220,000 in the
prior year period due to lower average cash balances and lower interest rates.
The Company recorded other income of $430,000 for the second quarter of fiscal
1999 as compared with other expense of $72,000 in the prior period. Of this
amount, $412,000 represents a foreign currency transaction gain recognized by
the Company's Japanese subsidiary with respect to its dollar denominated
accounts payable.
A loss before income taxes of $2,006,000 was recorded in the current quarter. A
pretax profit of $940,000 was recorded in the second quarter of the prior year.
The current quarter loss was mainly due to a 59% reduction in sales in the
current quarter, as compared to the prior year period. For the current quarter
an income tax benefit of $742,000 was recorded, which represents a 37% tax rate.
The tax benefit was favorably impacted by foreign earnings which are subject to
a lower tax rate than the statutory U. S. tax rate.
10
<PAGE>
A net loss of $1,264,000, which represents a loss of $0.32 per share, was
recorded for the current quarter. Net income of $564,000 was reported for the
second quarter of the prior fiscal year which resulted in diluted earnings per
share of $0.12.
SIX MONTHS ENDED NOVEMBER 28, 1998 COMPARED TO SIX MONTHS ENDED NOVEMBER 29,
1997
Net sales for the six month period ended November 28, 1998 decreased 59% to
$12,223,000 from $29,521,000 for the prior year period. The substantial
reduction in sales was primarily the result of a significant downturn in the
semiconductor equipment industry.
The Company experienced a 75% reduction in its shipments of semiconductor mass
flow controllers ("MFCs") and a 64% drop in its shipments of fabricated gas
systems in the current six month period, as compared to the prior year period.
In response to the downturn, the Company has increased its efforts to penetrate
non-semiconductor industrial markets with its MFCs and fabricated gas systems by
establishing a Process Flow Division that is aggressively pursuing these non-
semiconductor markets. Sales to the non-semiconductor markets for the current
six month period increased 489% over the prior year six month period. These
products have increased to 8% of total sales for the current half fiscal yea, as
compared to less than 1% of sales for the comparable prior year period.
Gross profit margin declined to 14% for the current period from 33% for the six
month period of last fiscal year. The decrease resulted mainly from the
substantially reduced sales which increased overhead costs on a per unit basis.
Labor costs per unit also increased due to lower efficiency resulting from the
lower sales levels.
Selling, general and administrative ("S,G&A") expenses decreased to $4,899,000
in the current six month period from $6,140,000 in the comparable prior year
period. The reduction resulted mainly from cost savings effected by the
restructuring undertaken in the third quarter of fiscal 1998. As a percentage
of sales, S,G&A expenses increased to 40% in the current six month period, from
21% in the first half of the prior fiscal year, due to the lower sales volume.
Merger related expenses of $286,000 were recorded for the current six month
period.
A restructuring expense of $213,000 was recorded in the first fiscal quarter for
the reduction of 46 positions to the Company's workforce. This action was taken
in response to the continued downturn in the semiconductor industry. The
majority of the restructuring charge was for employee severance. Of the
$213,000 restructuring expense recorded, $192,000 has been paid out and $21,000
is recorded as a current liability. The expected future benefit from the
$213,000 restructuring expense recorded in the current fiscal quarter is a
reduction in expense of approximately $1.9 million annually.
Research, development and engineering ("RD&E") expenses decreased 23% to
$1,805,000, or 15% of sales, for the period from $2,325,000 or 8% of sales, in
the prior period. RD&E activity is primarily directed towards new product
development, including the Company's proprietary Z-Bloc modular gas system. The
RD&E expenses were higher in the prior period because of non-recurring costs for
the establishment of a document control system for the Z-Bloc product line, non-
recurring initial development costs for the Z-Bloc product line and costs
incurred to develop digitally controlled MFCs. The Company believes that the
continued timely development of new products and
11
<PAGE>
enhancements to its existing products is essential to maintaining its
competitive position within the industry.
Interest income declined to $287,000 in the current period from $419,000 in the
prior year period due to lower average cash balances and lower interest rates.
The Company recorded other income of $446,000 for the first half of fiscal 1999
as compared with other expense of $80,000 in the prior year period. Of this
amount, $366,000 represents a foreign currency transaction gain recognized by
the Company's Japanese subsidiary with respect to its dollar denominated
accounts payable.
A loss before income taxes of $4,492,000 was recorded in the current period. A
pretax profit of $1,538,000 was recorded in the first half of the prior fiscal
year. The current period loss was mainly due to a 59% reduction in sales in the
current six month period, as compared to the prior year period. For the current
period, an income tax benefit of $1,662,000 was recorded, which represents a 37%
tax rate. The tax benefit was favorably impacted by foreign earnings that are
subject to a lower tax rate than the statutory U. S. rate.
A net loss of $2,830,000, which represents a loss of $0.71 per share, was
recorded for the current period. Net income of $923,000 was reported for the
prior fiscal year period, which resulted in diluted earnings per share of $0.20.
FINANCIAL CONDITION AND LIQUIDITY
Cash flows from operations were $982,000 for the first half of fiscal 1999. The
positive cash flow from operations was materially affected by the conversion of
receivables into cash that provided $2,461,000 and reduction of inventories
which provided $1,385,000. The positive cash flows were offset by the
$2,830,000 net loss and a usage of $951,000 due to reductions in accounts
payable and accrued liabilities. Cash used in investing activities was
$834,000, of which $528,000 was used to purchase two lathes used for fabricating
components that were previously purchased from vendors. Net cash used in
financing activities were $688,000. Financing activities included paying down
the entire outstanding balance 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 full payment of a note receivable. The note receivable related to the
Company's divestiture of its Autoclave division in 1995. The net cash used by
the Company, including all operations, investing and financing activities, was
$606,000.
Material changes in the Company's balance sheet include a reduction of accounts
receivable to $4,068,000 as of November 29, 1998 from $6,529,000 as of May 31,
1998. The reduction was the result of lower sales during the current period.
Other assets were reduced to $605,000 at the end of the current period from
$1,357,000 as of the end of last fiscal year mainly due to the receipt of the
pay-off of the $750,000 note receivable from Snap-tite, Inc. During the first
quarter of the current fiscal year, 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 at least the next twelve months. Beyond that
time, if the Company's cash generated from operations is insufficient
12
<PAGE>
to meet the Company's financing needs, the Company will be required to obtain
additional financing. There can be no assurance that such financing will be
available on satisfactory terms or at all.
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. 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 disruption to 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.
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 install. 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 product and gas fabrication products do not
incorporate electronics that could cause a compliance problem.
13
<PAGE>
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. There can be no assurance, however, that such entities will not
experience Year 2000-related problems, which could have a material adverse
effect on the Company.
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. There can be no
assurance, however, that such entities will not experience Year 2000-related
problems, which could have a material adverse effect on the Company.
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>
<CAPTION>
<S> <C>
Upgrade PCs $150,000
Upgrade UNIX system 0
Upgrade payroll system 1,000
Upgrade network servers 39,000
Various non-IT and other 20,000
--------
Total estimate $210,000
</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 under GAAP, 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.
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 the Company
believes that it will be able to complete all required modifications and to test
such modifications thoroughly prior to December 31, 1999.
14
<PAGE>
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 U.S. 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 a subsidiary of U.S. Filter
Corporation, the company's dependence on a few large customers, performance and
industry acceptance of the company's products, specifically MultiFlo and Safe
Delivery Source (SDS) 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 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.
PART II. OTHER INFORMATION
Item 5. Other Events
On December 17, 1998, the Company commenced the mailing of a Proxy
Statement/Prospectus dated December 17, 1998 (the "Proxy
Statement/Prospectus") to the Company's shareholders in connection
with the proposed merger (the "Merger") of Kinetics Acquisition Corp.
("Subcorp") with and into the Company. Subcorp is a wholly-owned
subsidiary of United States Filter Corporation ("U.S. Filter"). As
disclosed in the Proxy Statement/Prospectus, a meeting of the
Company's shareholders to vote upon the Merger is to be held on
January 22, 1999. Subject to the terms and conditions of the Agreement
and Plan of Merger among the Company, Subcorp and U.S. Filter dated
July 2, 1998, as amended August 5, 1998 and November 10, 1998 (the
15
<PAGE>
"Merger Agreement"), the Merger is expected to be consummated as soon
as practicable after the approval of the Merger by the Company's
shareholders. Detailed information regarding the Merger and the
Merger Agreement is set forth in the Proxy Statement/Prospectus.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1 - Second Amendment to Agreement and Plan of
Merger dated November 10, 1998, incorporated by reference to
Exhibit 3.1 to Current Report on Form 8-K dated November 10,
1998.
(b) Exhibit 27 - Financial Data Schedule (for electronic filing
only)
(c) Reports on Form 8-K. A Current Report on Form 8-K was filed on
November 10, 1998 regarding a Second Amendment to a Merger
Agreement of July 2, 1998 between United States Filter
Corporation, Kinetics Acquisition Corp., and the Company.
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: January 15, 1999 /s/ Michael J. Doyle
--------------------
Michael J. Doyle, President
and Chief Executive Officer
Date: January 15, 1999 /s/ Gary N. Patten
------------------
Gary N. Patten
Chief Financial Officer
17
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