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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MFRI, INC.
- - - - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
BOWNE OF CHICAGO, INC.
- - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
<PAGE> 2
PRELIMINARY COPY
[LOGO]
MFRI, INC.
7720 LEHIGH AVENUE
NILES, ILLINOIS 60714
___________________, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of MFRI, Inc. ("MFRI") to be held at The Standard Club, 320 South Plymouth
Court, Chicago, Illinois on December _____, 1996, at 10:00 a.m., Chicago time.
MFRI is proposing to acquire the Thermal Care Division (the "Thermal
Care Business" or "Thermal Care") and certain other specified assets and
liabilities of Midwesco, Inc. ("Midwesco") by the merger of Midwesco with and
into MFRI (the "Merger"). Thermal Care engineers, designs and manufactures
industrial water cooling equipment.
Thermal Care's products include (i) chillers; (ii) cooling towers;
(iii) pump and tank assemblies; (iv) temperature controllers; and (v) water
treatment equipment. Thermal Care's cooling products are used to optimize
manufacturing productivity by quickly removing heat from manufacturing
processes. The principal market for Thermal Care's cooling products is the
plastics processing industry. Thermal Care also sells its products to original
equipment manufacturers, other cooling manufacturers on a private branded basis
and to manufacturers in the laser, metallizing, and reaction injection molding
industries.
MFRI believes that the Merger will enable MFRI to increase trading
liquidity in its common stock by increasing the number of shares of the common
stock owned by persons who are not affiliates of MFRI. In addition, MFRI
believes that the combination of the business of Thermal Care with MFRI will
enable MFRI to: (1) increase the size and total sales of MFRI, thus gaining
greater exposure and access to capital markets; (2) decrease dependence on
markets affected by governmental regulations; and (3) benefit from diversifying
into additional products that utilize technology that is compatible with
technology used in many of MFRI's existing products. MFRI also believes that
the Merger will benefit MFRI by increasing the earnings per share of MFRI, as
reflected in the Unaudited Pro Forma Combined Financial Statements contained in
the accompanying Proxy Statement.
It is proposed that immediately prior to the effectiveness of the
Merger, Midwesco will contribute all of its assets and liabilities to a new
subsidiary ("New Midwesco"); except the following assets: the inventory,
equipment, building and office leases and leasehold improvements, intellectual
property, prepaid expenses, accounts receivable, causes of action, claims for
refund, goodwill, certain books and records and all other assets of Midwesco
relating
<PAGE> 3
to the Thermal Care Business, as well as the deferred tax assets and deferred
tax liabilities of Midwesco and the shares of common stock of MFRI owned by
Midwesco; and the following liabilities of Midwesco: all liabilities relating
to the Thermal Care Business, all liabilities relating to three lawsuits
arising from Midwesco's former Perma-Pipe business (which business is now owned
by MFRI), indebtedness for borrowed funds aggregating $5 million, and all
obligations under Midwesco's building and office leases and leases for all
automobiles and equipment used in the Thermal Care Business. Following such
contribution to New Midwesco, Midwesco will distribute all of the capital stock
of New Midwesco to the shareholders of Midwesco. Upon consummation of the
Merger, an aggregate of 2,124,307 shares of common stock of MFRI will be issued
in the Merger to the shareholders of Midwesco, or 406,641 shares in excess of
the 1,717,666 shares of MFRI common stock currently owned by the shareholders
of Midwesco through the ownership of Midwesco. Such shares are expected to
constitute approximately 43% of the shares of MFRI common stock outstanding
immediately after the effective time of the Merger. The shareholders of
Midwesco will place an aggregate of 300,000 shares of MFRI common stock
received by them in the Merger in an escrow account to support Midwesco's
indemnification obligations under the merger agreement between MFRI and
Midwesco and up to 66,890 additional shares in a special escrow related to the
litigation liabilities assumed by MFRI.
After a review of certain matters by a special committee of the Board
of Directors and receipt by MFRI of a fairness opinion from Duff & Phelps, LLC,
and a tax opinion from Deloitte & Touche LLP, your Board of Directors
unanimously approved the Merger.
Midwesco, which owns approximately 38% of the outstanding shares of
MFRI common stock, has advised MFRI that it will vote the shares owned by it in
favor of the Merger, only if a majority of those shares of MFRI not owned by
Midwesco, which are voted at the Special Meeting, are voted in favor of the
Merger.
Your Board of Directors, believes the Merger is in the best interests
of MFRI and its stockholders and recommends that all stockholders vote FOR
approval of the proposals.
Whether or not you plan to attend the Special Meeting, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. You may revoke your Proxy in the manner described
in the accompanying Proxy Statement at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated.
Sincerely,
DAVID UNGER
Chairman of the Board and
Chief Executive Officer
2
<PAGE> 4
PROXY STATEMENT
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Recommendations of the MFRI Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management After the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Interests of Certain Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Summary Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Date, Place and Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Voting and Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
CERTAIN CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Competition; Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Lack of Arm's-Length Negotiations; Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Contingent Liabilities to be Assumed by MFRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Certain Liabilities of Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Benefits of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Background of the Merger and Recommendation of the MFRI Board of Directors . . . . . . . . . . . . . . . . . . . . 18
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Business Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Shares Available for Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Prior Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Management Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Dissenters' Rights 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 40
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Results of Operations of Thermal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Liquidity and Capital Resources of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
BUSINESS OF THERMAL CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Raw Materials and Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
INDEX TO MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Appendix A. Agreement for Merger, dated as of October 25, 1996
Appendix B. Opinion of Duff & Phelps, LLC
Appendix C. MFRI Annual Report on Form 10-K for the Fiscal Year ended January 31, 1996
Appendix D. MFRI Quarterly Report on Form 10-Q for the Quarter ended April 30, 1996
Appendix E. MFRI Quarterly Report on Form 10-Q for the Quarter ended July 31, 1996
</TABLE>
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MFRI, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of MFRI, Inc. ("MFRI") will be held at The Standard Club,
320 South Plymouth Court, Chicago, Illinois on December __, 1996, at 10:00
a.m., Chicago time, for the following purpose:
To consider and vote on the adoption of an agreement of merger
providing for the merger of Midwesco, Inc. ("Midwesco"), an Illinois
corporation, into MFRI, a Delaware corporation.
Only stockholders of record at the close of business on November ___,
1996 will be entitled to notice of and to vote at the Special Meeting.
By order of the Board of Directors,
MICHAEL D. BENNETT
Secretary
Niles, Illinois
November ___, 1996
__________
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of MFRI for use at the Special
Meeting of Stockholders to be held on December ___, 1996 and at any adjournment
thereof. See "The Meeting."
This Proxy Statement and the form of proxy are first being mailed to
stockholders of MFRI on or about November __, 1996.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER ___, 1996.
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement. Certain capitalized terms used in this summary are
defined elsewhere in this Proxy Statement. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information and
financial statements contained in this Proxy Statement and in the Appendices
hereto. As used herein, unless the context requires otherwise, the term
"Company" means MFRI, Perma-Pipe, Inc. ("Perma-Pipe"), Midwesco Filter, Inc.
("Midwesco Filter") and Thermal Care after consummation of the Merger.
Information contained in this Proxy Statement contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "except," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The matters set forth under the caption "Certain
Considerations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Proxy Statement constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements.
THE MERGER
MFRI is proposing to acquire the Thermal Care business (the "Thermal
Care Business" or "Thermal Care") and certain other specified assets and
liabilities of Midwesco, Inc. ("Midwesco") by the Merger of Midwesco with and
into MFRI (the "Merger").
Thermal Care's products include (i) chillers; (ii) cooling towers;
(iii) pump and tank assemblies; (iv) temperature controllers; and (v) water
treatment equipment. Thermal Care's cooling products are used to optimize
manufacturing productivity by quickly removing heat from manufacturing
processes. The principal market for Thermal Care's cooling products is the
plastics processing industry. Thermal Care also sells its products to original
equipment manufacturers ("OEM's"), other cooling manufacturers on a private
branded basis and to manufacturers in the laser, metallizing, and reaction
injection molding industries.
MFRI believes that the Merger will enable MFRI to increase trading
liquidity in its common stock by increasing the number of shares of the common
stock owned by persons who are not affiliates of MFRI. In addition, MFRI
believes that the combination of the business of Thermal Care with MFRI will
enable MFRI to: (1) increase the size and total sales of MFRI, thus gaining
greater exposure and access to capital markets; (2) decrease dependence on
markets affected by governmental regulations; and (3) benefit from diversifying
into additional products that utilize technology that is compatible with
technology used in many of MFRI's existing products. MFRI also believes that
the Merger will benefit MFRI by increasing the earnings per
2
<PAGE> 8
share of MFRI, as reflected in the Unaudited Pro Forma Combined Financial
Statements contained in this Proxy Statement.
Immediately prior to the effectiveness of the Merger, Midwesco will
contribute all of its assets and liabilities to a new subsidiary ("New
Midwesco"), except certain specified assets (collectively, the "Residual
Assets") and liabilities (collectively, the "Residual Liabilities"), and then
distribute the capital stock of New Midwesco to the shareholders of Midwesco.
Through the Merger, MFRI will acquire the Residual Assets, namely, the
inventory, equipment, intellectual property, prepaid expenses, accounts
receivable, causes of action, claims for refund, goodwill, certain books and
records and all other assets of Midwesco relating to the Thermal Care Business;
Midwesco's rights under its lease (the "Niles Lease") for the Niles, Illinois
office and manufacturing facility (the "Niles Facility") that serves as the
principal offices of MFRI and Midwesco and related leasehold improvements;
Midwesco's rights under leases for warehouse and office space located
respectively in Niles, Illinois and Riverside, California, and related
leasehold improvements; the deferred tax assets of Midwesco (the "Deferred Tax
Assets"); and 1,717,666 shares of MFRI common stock owned by Midwesco. To the
extent the Deferred Tax Assets as of the effective time of the Merger (the
"Effective Time") do not include an aggregate of at least $157,000 of realized
tax credits, the Residual Assets will include cash in an amount equal to
$157,000, less the aggregate amount of realizable tax credits as of the
Effective Time. MFRI will acquire the Residual Assets subject to the Residual
Liabilities, namely, all liabilities relating to the Thermal Care Business, all
liabilities relating to three lawsuits arising from Perma-Pipe warranty
obligations (the "Pending Suits"), indebtedness for borrowed funds aggregating
$5 million, and all obligations under the Niles Lease and leases for the Niles
and Riverside warehouse and office facilities, and all automobiles and
equipment used in the Thermal Care Business. The number of shares of common
stock of MFRI ("MFRI Common Stock") to be issued to Midwesco's shareholders is
2,124,307. The Merger constitutes a "merger" under the laws of Delaware and
Illinois.
The Merger will be effected pursuant to the terms and subject to the
conditions of the Agreement and Plan of Merger dated as of October 25, 1996
between MFRI and Midwesco (the "Plan") and the Agreement for Merger of even
date therewith between MFRI and Midwesco (the "Merger Agreement"). The Merger
Agreement and the Plan, which is an exhibit to the Merger Agreement, are
attached hereto as Appendix A and are incorporated herein by reference. The
Plan constitutes the "agreement of merger" under Delaware law and the "plan of
merger" under Illinois law.
At the Effective Time, each outstanding share of capital stock of
Midwesco ("Midwesco Stock") will be converted into 183.7 shares of MFRI Common
Stock (the "Merger Ratio"). Each share of MFRI Common Stock owned by Midwesco
immediately prior to the Effective Time will be cancelled. As a consequence of
the foregoing, the shareholders of Midwesco will become stockholders of MFRI in
accordance with the terms summarized above. Following the consummation of the
Merger, the MFRI Common Stock issued to Midwesco's shareholders in the Merger
will be registered under the Securities Act of 1933, as amended (the
"Securities
3
<PAGE> 9
Act") pursuant to a registration rights agreement (the "Registration Rights
Agreement"). The shareholders of Midwesco will place an aggregate of 300,000
shares of MFRI Common Stock received by them in the Merger in an escrow account
to support Midwesco's indemnification obligations under the Merger Agreement.
Such shareholders will also place up to 66,890 shares of MFRI Common Stock in a
special escrow related to the Pending Suits. See "The Merger -- Terms of the
Merger" and "-- Litigation."
Based upon the number of shares of MFRI Common Stock outstanding as of
the date hereof, and giving effect to the shares of MFRI Common Stock issued to
Midwesco's shareholders in the Merger (the "Merger Consideration"), the Merger
Consideration will constitute, immediately after the Effective Time,
approximately 43% of the outstanding shares of MFRI Common Stock. As a result
of the Merger, the percentage of shares of MFRI Common Stock held by affiliates
of MFRI will be reduced from approximately 42% to 29%. After the Effective
Time, MFRI will perform certain services for New Midwesco and New Midwesco will
perform certain services for MFRI pursuant to a Management Services Agreement.
See "The Merger -- Management Services Agreement."
MIDWESCO
Midwesco, Inc. was founded as Midwest Heat Service in 1931 by Paul
Unger and Erwin Mautner. Midwest Heat Service was engaged in designing and
installing oil-burning systems for commercial and industrial enterprises in
Chicago and throughout the Midwest. During World War II, Midwesco was also
engaged in manufacturing prefabricated oil pumping and heating sets for the
U.S. Maritime Commission's Victory Ship Program. After World War II, Midwesco
expanded its contracting operations to include the growing market for air
conditioning systems for commercial, industrial and institutional buildings.
In addition to the design and installation of heating and air conditioning
systems, Midwesco designs and constructs cogeneration and standby power
generation systems. Along with the installation of systems, Midwesco supplied
aftermarket maintenance and service of systems through a separate service
division until 1982. At that time a company, now known as Midwesco Services,
Inc., was formed and a 50% interest was sold to a subsidiary of the Paris-based
Lyonnaise des Eaux-Dumez. Midwesco Services, Inc. specializes in providing
planned maintenance, emergency service and repair, electronic monitoring, and
retrofit of heating, cooling, refrigeration, and building automation systems
for commercial, industrial and institutional facilities. Midwesco acquired
Simtech, Inc. in 1991. Simtech is a marketing company that is the United
States distributor for industrial grade thermoplastic pipe, valves, fittings
and joining equipment. These products are used primarily in the semiconductor
and chemical processing industries. The inventory of products are imported
from various vendors that manufacture their products in Germany, Italy and
Taiwan. These products are sold through stocking and non-stocking wholesalers
throughout the United States.
In the early 1960's, Midwesco began its first manufacturing operations
by constructing underground conduit for use in supplying oil and steam as part
of one of its mechanical
4
<PAGE> 10
contracting projects. This activity evolved into Midwesco's Perma-Pipe
Division and was moved from Chicago to a factory in Lebanon, Tennessee in 1968.
Midwesco formed the Thermal Care Business in the mid-1960's to
manufacture and install water chilling and water conservation equipment for
plastic molding plants. In 1983, Midwesco acquired the Mayer Refrigeration
Company, a manufacturer of refrigeration equipment for plastics and other
industrial applications. Thermal Care's product line expanded in 1984 through
the importation of fiberglass reinforced polyester ("FRP") cooling towers from
Taiwan for sale in the U.S., principally for the plastics industry, and to a
lesser extent for heating ventilation and air conditioning ("HVAC")
applications. Midwesco marketed these products in conjunction with the
products of Perma-Pipe. Mold temperature controllers were added to Thermal
Care's product line in 1985 through the sale of products bearing the Thermal
Care name, but manufactured by another company. In 1987, Midwesco began
manufacturing mold temperature controllers of its own design. In 1992, Thermal
Care began selling its newly-designed, 150-200 ton capacity FRP cooling tower,
as well as a new hot water circulating unit that incorporated advanced
electronics, capable of computer communications. The FRP tower line was
expanded in 1994 to include smaller towers with capacities ranging from 80 to
120 tons, while Thermal Care's non-plastics market share grew through the
increase of OEM and name branding business.
THE COMPANY
Midwesco Filter was incorporated in Delaware in October 1989 as a
wholly-owned subsidiary of Midwesco. On December 13, 1989, Midwesco Filter
exchanged shares of its common stock for the net assets of the Midwesco Filter
Resources division ("Filter Division") of Midwesco. The Filter Division was
formed from certain assets of the Filter Media division of the Kennecott
Corporation, acquired by Midwesco in June 1982, and certain assets of the
Filter Resources Corporation, acquired by Midwesco in December 1983. On
January 28, 1994 pursuant to a merger transaction between MFRI, a subsidiary of
MFRI and Midwesco Filter, MFRI acquired the Perma-Pipe Business from Midwesco
for cash and 278,666 shares of MFRI Common Stock. Pursuant to such
transaction, each share of common stock of Midwesco Filter was exchanged for
one share of MFRI Common Stock. Immediately prior to the consummation of such
transaction, a public offering of shares of common stock of Midwesco Filter was
consummated, the net proceeds of which were used to repay bank debt related to
Perma-Pipe. As of September 30, 1994 MFRI and an indirect wholly-owned
subsidiary of MFRI acquired substantially all of the assets of Ricwil Piping
Systems Limited Partnership ("Ricwil LP") for cash, the assumption of certain
liabilities and 55,710 shares of MFRI Common Stock. Ricwil LP was a
manufacturer of insulated piping systems for district heating and cooling
systems. On December 6, 1995, Perma-Pipe acquired for cash the net assets and
leak detection business of Hagenuk GmbH of Germany.
The Company's principal executive offices are located at 7720 Lehigh
Avenue, Niles, Illinois 60714 and its telephone number is (847) 966-1000.
5
<PAGE> 11
THE MEETING
The Special Meeting will be held on December ___, 1996 at 10:00 a.m.,
Chicago time, at The Standard Club, 320 South Plymouth Court, Chicago,
Illinois. Only holders of record of MFRI Common Stock at the close of business
on November __, 1996 will be entitled to vote at the Special Meeting. At such
date, there were outstanding and entitled to vote 4,554,947 shares of MFRI
Common Stock. Each issued and outstanding share of MFRI Common Stock is
entitled to one vote on each matter to be considered at the Special Meeting.
See "The Meeting."
VOTE REQUIRED
Approval and adoption of the Plan by the stockholders of MFRI require
the affirmative vote of a majority of the votes entitled to be cast by the
holders of record of outstanding shares of MFRI Common Stock. Midwesco has
advised MFRI that it will not vote the shares owned by it for adoption of the
Plan, unless the majority of those shares of MFRI not owned by Midwesco, which
are voted at the Special Meeting, are voted for the adoption of the Plan. See
"The Meeting -- Votes Required" and "The Merger -- Conditions to the Merger."
RECOMMENDATIONS OF THE MFRI BOARD OF DIRECTORS
After a review of certain aspects of the proposed Merger by a Special
Committee (the "Special Committee") of the Board of Directors of MFRI (the
"Board of Directors") composed of MFRI's Independent Directors, the Board of
Directors unanimously approved the Plan and unanimously recommends a vote FOR
the Plan. The Board of Directors believes the Plan and the Merger Agreement
are fair to and in the best interests of the stockholders of MFRI. The
conclusions of the Board of Directors to approve the Plan and to recommend a
vote for the adoption of the Plan are based on a number of factors, including
the benefits to the stockholders of MFRI expected to result from the Merger
discussed herein, the opinion of Duff & Phelps, LLC to the effect that the
Merger is fair, from a financial point of view, to the stockholders of MFRI,
and the opinion of Deloitte & Touche LLP to the effect that the Merger should
not be currently taxable to MFRI or its stockholders. See "The Merger --
Recommendation of the Board of Directors."
OPINION OF FINANCIAL ADVISOR
Duff & Phelps, LLC ("Duff & Phelps") has rendered its opinion to the
Special Committee that the Merger is fair from a financial point of view to the
holders of MFRI Common Stock. A copy of such opinion is set forth as Appendix
B and should be read carefully by stockholders in its entirety with respect to
the assumptions made, other matters considered, and the scope of the review
undertaken in arriving at such opinion. See "The Merger -- Opinion of
Financial Advisor."
6
<PAGE> 12
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Plan with the
Secretary of State of Delaware pursuant to the Delaware General Corporation
Law. It is currently anticipated that the Merger will be effective on or about
January 31, 1997. See "The Merger -- Effective Time of the Merger."
CONDITIONS TO THE MERGER
The obligations of MFRI to consummate the Merger are subject to
certain conditions, including: (i) the Merger Agreement shall have been
approved and adopted by the affirmative vote of the holders of a majority of
the outstanding shares of MFRI Common Stock (See "The Meeting -- Voting and
Revocation of Proxies" for a description of the voting procedures at the
Special Meeting); (ii) the parties shall have received an opinion to the effect
that the Merger should be not currently taxable to them or their respective
shareholders; (iii) all material authorizations, consents and approvals of
third parties shall have been obtained; (iv) no injunction or other restraint
preventing the consummation of the transactions contemplated by the Merger
Agreement shall be in effect; (v) the shares of MFRI Common Stock constituting
Merger Consideration shall have been approved for trading on the Nasdaq
National Market; (vi) the average market price of the 10 trading days
immediately preceding the date of consummation of the Merger shall be less than
$11.48 per share and more than $3.48 per share; and (vii) certain other
conditions customary in transactions of this nature, including the receipt of
other necessary regulatory approvals and that the performance by the parties of
their respective obligations under the Merger Agreement shall have been waived
or satisfied. Any waiver of a condition to closing by MFRI of one of
Midwesco's obligations must be approved by the Special Committee. See "The
Merger -- Conditions to the Merger."
TERMINATION
The Merger Agreement provides that it may be terminated at any time
prior to the Effective Time, whether before or after approval of the Plan by
the stockholders of MFRI, if certain specified events occur. Either Midwesco
or MFRI may terminate the Merger Agreement if the Effective Time has not
occurred on or before March 31, 1997, unless the failure to consummate the
Merger by such time is due to the breach of the Merger Agreement by the party
seeking to terminate the Merger Agreement.
MANAGEMENT AFTER THE MERGER
Management of MFRI will not change upon the consummation of the
Merger, except that Bradley E. Mautner, Director of MFRI and President of
Midwesco, will join MFRI as Vice President and Don Gruenberg, general manager
of the Thermal Care Business, will join MFRI as Vice President and Director.
7
<PAGE> 13
ACCOUNTING TREATMENT
The Merger will be treated as a purchase by MFRI of Midwesco. See
"The Merger -- Accounting Treatment" and "Unaudited Pro Forma Combined
Financial Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
MFRI has received the opinion of Deloitte & Touche LLP that the Merger
should constitute a tax-free reorganization within the meaning of the Internal
Revenue Code. Thus, no gain or loss for federal income tax purposes should be
recognized by the shareholders of Midwesco and the stockholders of MFRI. See
"The Merger -- Certain Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS
Midwesco, the shareholders of Midwesco, some of whom are officers and
directors of MFRI, and certain of their associates will receive the following
material interests in connection with the Merger:
o Midwesco's shareholders will be paid the Merger Consideration
and will own approximately 43% of the outstanding shares of
MFRI Common Stock (excluding those shares of MFRI Common Stock
owned by such persons prior to the Effective Time).
o The shares of MFRI Common Stock representing Merger
Consideration will be more liquid than the capital stock
currently held by Midwesco's shareholders.
o Executive officers and directors of MFRI owned, as of October
31, 1996, 52.2% of the outstanding capital stock of Midwesco
and will thus indirectly benefit from the Merger.
o Members of the Board of Directors affiliated with Midwesco
(Messrs. Unger, Ogilvie, Elgendy, and Henry and Bradley
Mautner) will have a conflict of interest with respect to
their obligations as directors and officers of MFRI, and
enforcing the terms of the Merger Agreement and the Plan
against Midwesco, if necessary.
o The Niles Facility is owned by David Unger and Henry Mautner.
A consequence of the Merger that will be beneficial to Messrs.
Unger and Mautner is that Midwesco will be replaced under the
Niles Lease with a tenant (MFRI) that has greater financial
resources than Midwesco.
8
<PAGE> 14
o Certain tax objectives of the shareholders of Midwesco,
including David Unger, Henry Mautner, Bradley Mautner, Gene
Ogilvie and Fati Elgendy, will be facilitated by the Merger.
DISSENTERS' RIGHTS
Holders of MFRI Common Stock do not have dissenters' rights under
Delaware law.
9
<PAGE> 15
SUMMARY FINANCIAL INFORMATION
The following is a summary of certain consolidated condensed financial
information of MFRI. The summary has been derived in part from, and should be
read in conjunction with, the consolidated financial statements of MFRI and the
related notes thereto. Results of interim periods, which include all
adjustments that management considers necessary for a fair presentation
thereof, are not necessarily indicative of results to be expected for the year.
See "Index to Midwesco, Inc. and Subsidiaries Consolidated Financial
Statements."
The unaudited pro forma combined financial information illustrates the
effect of certain adjustments to MFRI's historical financial statements that
would result from the Merger. The unaudited pro forma combined statement of
operations data illustrates the effect of certain adjustments to MFRI's
historical consolidated financial statements that would result from reflecting
the Merger as though such transaction had occurred at the beginning of the
periods presented. The unaudited pro forma combined balance sheet data
illustrates the effect of certain adjustments to MFRI's historical consolidated
financial statements that would result from the Merger as though such
transaction had occurred on July 31, 1996. The unaudited pro forma combined
financial information is not necessarily indicative of future operations or
actual results had such transaction occurred. See "Unaudited Pro Forma
Combined Financial Information."
10
<PAGE> 16
MFRI, INC. AND SUBSIDIARIES
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- - - - --------------------------------------------------------------------------------
The summary financial data set forth below are derived from the financial
statements appearing in or incorporated by reference elsewhere in this proxy
statement.
Such information should be read in conjunction with such financial statements,
including the notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
-------------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1996 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $21,659 $25,262 $29,866 $75,495 $85,838 $ 39,879 $ 44,955
Income from operations 1,040 1,755 2,459 2,384 4,738 2,178 3,080
Interest expense (income)-net (62) (44) (20) 496 925 390 525
Net income 695 1,149 1,534 1,203 2,373 1,081 1,526
Net income per common share 0.25 0.41 0.54 0.27 0.52 0.24 0.33
Weighted average number of
shares outstanding(2) 2,810 2,810 2,826 4,493 4,543 4,529 4,561
</TABLE>
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
JANUARY 31, JULY 31,
1996 1996
(UNAUDITED)
<S> <C> <C>
PROFORMA STATEMENT OF OPERATIONS DATA(1):
Net sales $ 105,613 $ 54,815
Income from operations 5,908 3,847
Interest expense 1,592 857
Net income (2) 2,676 1,824
Net income per common share 0.54 0.37
Weighted average number of shares outstanding(2) 4,949 4,967
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JULY 31, 1996
-------------------------------------------------------------- ----------------------------
1992 1993 1994 1995 1996 HISTORICAL PROFORMA (3)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $8,012 $8,549 $14,206 $17,290 $19,677 $ 20,391 $ 20,273
Total assets 11,750 12,472 36,898 47,917 58,985 63,249 75,774
Long-term debt, less current portion 57 20 3,247 6,902 14,267 14,161 17,344
Stockholders' equity 9,245 10,394 21,154 23,940 26,223 27,749 30,786
Book value per common share 3.29 3.70 7.49 5.33 5.77 6.08 6.20
</TABLE>
(1) The proforma statement of operations data gives effect to the Acquisition
as if the transaction had occurred at the beginning of the periods
presented. See "Unaudited Proforma Combined Financial Information."
(2) On a proforma basis there would be no difference between primary and
fully-diluted earnings per share.
(3) Gives effect to Acquisition as if it had occurred on July 31,
1996. See "Unaudited Proforma Combined Financial Information."
11
<PAGE> 17
THE MEETING
GENERAL
This Proxy Statement is being furnished to holders of MFRI Common
Stock in connection with the solicitation of proxies by the Board of Directors
of MFRI for the Special Meeting to consider and vote upon the adoption of the
Plan. Each copy of this Proxy Statement mailed to holders of MFRI Common Stock
is accompanied by a form of proxy for use at the Special Meeting.
DATE, PLACE AND TIME
The Special Meeting will be held at The Standard Club, 320 South
Plymouth Court, Chicago, Illinois on December ___, 1996, at 10:00 a.m., Chicago
time.
RECORD DATE
The Board of Directors of MFRI has fixed the close of business on
November ___, 1996 as the record date for the determination of the holders of
MFRI Common Stock entitled to receive notice of and to vote at the Special
Meeting.
VOTING AND REVOCATION OF PROXIES
As of the record date for the Special Meeting, there were 4,554,947
shares of MFRI Common Stock outstanding (1,717,666 of which were owned by
Midwesco), each of which is entitled to one vote on the matter submitted at the
Special Meeting. The presence at the Special Meeting, in person or by proxy,
of the holders of a majority of the outstanding shares of MFRI Common Stock is
necessary to constitute a quorum. Adoption of the Plan by the stockholders of
MFRI requires the affirmative vote of a majority of the votes entitled to be
cast by the holders of record of MFRI Common Stock. Midwesco has advised MFRI
that it will not vote the shares owned by it for the adoption of the Plan,
unless the majority of the shares of MFRI not owned by Midwesco, which are
voted at the Special Meeting, are voted for adoption of the Plan. Votes cast
by proxy or in person at the meeting will be tabulated by the election
inspectors appointed for the meeting and will determine whether or not a quorum
is present. The election inspectors will treat abstentions as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but as unvoted for purposes of determining the approval of other
proposals. If a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on any proposal, those
shares will not be considered as present and entitled to vote. Consideration
and adoption of the Plan by MFRI stockholders constitutes consideration and
adoption of the "agreement of merger" as required under Delaware law.
Shares of MFRI Common Stock represented by a proxy properly signed and
received at or prior to the Special Meeting, unless subsequently revoked, will
be voted in accordance with
12
<PAGE> 18
the instructions thereon. If a proxy is signed and returned without indicating
any voting instructions, shares of MFRI Common Stock represented by the proxy
will be voted FOR the proposal. Any proxy given pursuant to this solicitation
may be revoked by the person giving it any time before the proxy is voted by
the filing of an instrument revoking it or of a duly executed proxy bearing a
later date with the Secretary of MFRI prior to or at the Special Meeting.
Attendance at the Special Meeting will not in and of itself constitute a
revocation of a proxy.
As of October 15, 1996, directors and executive officers of MFRI were
entitled to vote an aggregate of 34,875 shares of MFRI Common Stock (other than
the shares owned by Midwesco), or approximately 0.8% of the shares of MFRI
Common Stock outstanding on such date.
Pursuant to MFRI's Bylaws, the business that may be conducted at the
Special Meeting is confined to that referenced in the Notice of Special Meeting
of Stockholders that accompanies this Proxy Statement.
SOLICITATION OF PROXIES
In addition to the use of the mails, proxies may be solicited by
directors, officers, or regular employees of MFRI in person, by telegraph, by
telephone or by other means. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in doing
so.
13
<PAGE> 19
CERTAIN CONSIDERATIONS
COMPETITION; BUSINESS
The business in which Thermal Care is engaged is highly competitive.
See "Business of Thermal Care -- Competition." In addition, the business of
Thermal Care is dependant on the plastics industry. Any adverse trends in the
plastics industry may have a material adverse effect on the business of Thermal
Care. Thermal Care relies upon a single source for key components of several
of its products. Although the Company believes that there are alternate
sources available for such components, there can be no assurance that the
interruption of supplies of such components would not have an adverse effect on
the financial condition of the Company, and that the Company, if required to do
so, would be able to negotiate agreements with alternative sources on
acceptable terms.
LACK OF ARM'S-LENGTH NEGOTIATIONS; CONFLICTS OF INTEREST
Midwesco is an affiliate of MFRI. As a result, the Merger Agreement
and the Plan were not negotiated on an arm's-length basis. However, MFRI
believes the Merger Consideration, representations, warranties and covenants in
such agreements are fair to MFRI even though they may not provide the same
level of protection as similar representations, warranties and covenants
contained in comparable agreements with persons that are not affiliates of
MFRI. Members of the Board of Directors affiliated with Midwesco (Messrs.
Unger, Ogilvie, Elgendy, and Henry and Bradley Mautner) will have a conflict of
interest with respect to their obligations as directors and officers of the
Company, and enforcing the terms of the Merger Agreement and the Plan against
Midwesco, if necessary. See "Summary -- Interests of Certain Persons."
CONTINGENT LIABILITIES TO BE ASSUMED BY MFRI
Pursuant to the Merger Agreement, all liabilities of Midwesco, except
those related to the Thermal Care Business and enumerated specific excluded
liabilities, are assumed by New Midwesco and are indemnified by (i) New
Midwesco; and (ii) the shareholders of Midwesco, provided that such
shareholders' indemnification obligations are limited to an aggregate of the
300,000 shares placed in escrow by the shareholders. In addition, an aggregate
of up to 66,890 will be placed in a special escrow (the "Special Escrow") to
indemnify MFRI for obligations assumed relating to the Pending Suits. Although
Midwesco has represented there are no material contingent liabilities that have
not been disclosed to MFRI, there is no assurance that any such contingent
liabilities do not exist or if they exist the net worth of New Midwesco and the
shares in the escrow will be sufficient to discharge any such liabilities.
Furthermore, except for those obligations relating to the Special Escrow, the
obligations of the shareholders of Midwesco and New Midwesco with respect to
indemnification will terminate three years after the Effective Time. To the
extent any such liabilities become known after such time, except for the shares
held in the Special Escrow, if any, the shares owned by the shareholders of
Midwesco will not be available to satisfy such liabilities.
14
<PAGE> 20
CERTAIN LIABILITIES OF MIDWESCO
Pursuant to the Merger Agreement, the Pending Lawsuits arising from
the Perma-Pipe Business and the warranty obligations relating to the business
of Perma-Pipe are remaining with Midwesco and will become obligations of MFRI
upon the consummation of the Merger. While Midwesco and MFRI have taken into
account such potential liabilities in negotiating the exchange ratio of the
Merger and in the establishment of the Special Escrow, and Duff & Phelps has
considered potential liabilities in rendering its fairness opinion, there is no
assurance that such liabilities will not exceed the amount determined as part
of the purchase price with respect to such liabilities together with the value
of the shares held in the Special Escrow. In the event there are no shares of
MFRI Common Stock in the Special Escrow, the responsibility for the Pending
Suits will be solely that of MFRI. See "The Merger -- Terms of the Merger."
15
<PAGE> 21
THE MERGER
The description of the Merger contained in this Proxy Statement is
qualified in its entirety by reference to the Plan and the Merger Agreement,
the full text of each of which is attached as Appendix A and incorporated
herein by reference.
BENEFITS OF THE MERGER
MFRI believes that the Merger enable MFRI to increase trading
liquidity in its common stock by increasing the number of shares of the common
stock owned by persons who are not affiliates of MFRI. In addition, MFRI
believes that the combination of the business of Thermal Care with MFRI will
enable MFRI to: (1) increase the size and total sales of MFRI, thus gaining
greater exposure and access to capital markets; (2) decrease dependence on
markets affected by governmental regulations; and (3) benefit from diversifying
into additional products that utilize technology that is compatible with
technology used in many of MFRI's existing products. MFRI also believes that
the Merger will benefit MFRI by increasing the earnings per share of MFRI, as
reflected in the Unaudited Pro Forma Combined Financial Statements contained in
this Proxy Statement.
After a review by the Special Committee of the procedures used by Duff
& Phelps, the form of Duff & Phelps's opinion and of the terms of the Merger
Agreement, the MFRI Board unanimously approved the Merger. The Special
Committee engaged independent counsel and Duff & Phelps, an independent
investment banking firm, to advise it. Duff & Phelps has rendered its opinion
to the MFRI Board that the terms of the Merger are fair to the stockholders of
MFRI from a financial point of view.
TERMS OF THE MERGER
The Merger will be effected pursuant to the terms and subject to the
conditions of the Plan and Merger Agreement. At the Effective Time, Midwesco
will merge with and into MFRI. Immediately prior to the Effective Time,
Midwesco will contribute all of its assets and liabilities to New Midwesco,
except for the Residual Assets and the Residual Liabilities, and then
distribute capital stock of New Midwesco to the shareholders of Midwesco. At
the Effective Time, each outstanding share of Midwesco Stock, will be converted
into 183.7 shares of MFRI Common Stock. Holders of MFRI Common Stock
immediately prior to the Effective Time will continue to be holders of MFRI
Common Stock immediately after the Effective Time. Each share of MFRI Common
Stock owned by Midwesco immediately prior to the Effective Time will be
cancelled. As a consequence of the foregoing the shareholders of Midwesco will
become stockholders of MFRI. The MFRI Common Stock issued in the Merger will
be registered under the Securities Act pursuant to the Registration Rights
Agreement and will be traded on the Nasdaq National Market under the symbol
"MFRI."
16
<PAGE> 22
The shareholders of Midwesco will place an aggregate of 300,000 shares
of MFRI Common Stock received by them in the Merger in an escrow account to
support Midwesco's indemnification obligations under the Merger Agreement (the
"Indemnification Escrow"). The Indemnification Escrow shall terminate three
years after the Effective Time. The shareholders of Midwesco will also place
up to 66,890 shares of MFRI Common Stock in the Special Escrow. The Special
Escrow will terminate at termination of all of the Pending Suits. See "--
Litigation." From and after the Effective Time, MFRI will bear all costs and
expenses of the pending suits, including, but not limited to, any judgments or
settlement costs (the "Expenses"); provided, however, after MFRI has spent an
aggregate of $400,000 in Expenses, all such Expenses of the Pending Suits will
be paid from the Special Escrow of up to 66,890. See "-- Opinion of Financial
Advisor -- Perma-Pipe Lawsuits" with respect to the effect of the Pending Suits
on the Merger Ratio. In the event there are no shares of MFRI Common Stock in
the Special Escrow, the responsibility for the Pending Suits will be solely
that of MFRI. Upon the disposition or termination of all of the Pending Suits,
any shares in the Special Escrow will be distributed to the shareholders of
Midwesco as of the Effective Time prorata to their interests in Midwesco at the
Effective Time. In the event that any of the Pending Suits have ended and are
no longer pending at the Effective Time, the number of shares placed in the
Special Escrow at the Closing will be reduced based generally upon the
aggregate claims made in the Pending Suit compared to the aggregate claims made
in all of the Pending Suits as a percentage of the purchase price adjustment
and the maximum value of the Special Escrow. Although there accordingly could
be no shares placed in the Special Escrow, and the number of shares held in the
Special Escrow could be reduced to zero after the Effective Time, in no event
shall the number of shares held in the Special Escrow be reduced to less than
zero. Any shares of MFRI Common Stock withdrawn from the Special Escrow will
be valued at the average of the closing prices for MFRI Common Stock on the
Nasdaq National Market on the 10 trading days prior to the third business day
prior to the date of distribution from the Special Escrow.
The Merger will be accounted for as a purchase of Midwesco by MFRI.
Midwesco will receive the opinion of Deloitte & Touche LLP, that the Merger,
for federal income tax purposes, should constitute a tax-free reorganization
under the Internal Revenue Code.
Based upon the number of shares of MFRI Common Stock outstanding as of
the date hereof, and giving effect to the issuance of shares of MFRI Common
Stock to Midwesco's shareholders as payment of the Merger Consideration, the
MFRI Common Stock representing Merger Consideration will constitute
approximately 43% of the outstanding shares of MFRI Common Stock immediately
after the Effective Time. As a result of the Merger, the percentage of shares
of MFRI Common Stock held by affiliates of MFRI will be reduced from
approximately 42% to 29%.
17
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BACKGROUND OF THE MERGER AND RECOMMENDATION OF THE MFRI BOARD OF DIRECTORS
Due to the relationship between MFRI and Midwesco, it was determined
that arm's-length negotiations between representatives of the two companies
were not viable but that a transaction would be structured with the help of the
financial and legal advisors to the two companies. The proposed transaction
would then be reviewed by a committee of independent directors of MFRI with
respect to acceptability of the agreement and the procedures used by and the
form of the opinion of an independent financial advisor selected by the Special
Committee to review the fairness of the Merger from a financial point of view.
A Special Committee of the Board of Directors consisting of Arnold F.
Brookstone, Eugene Miller and Stephen B. Schwartz was formed in early August,
1996, which formation was confirmed by the Board on September 4, 1996. Shortly
after its formation, the Special Committee made a determination to retain
independent legal counsel with respect to its review of the Merger and retained
the firm of Katten Muchin & Zavis to serve as such counsel. Thereafter, Katten
Muchin & Zavis participated in certain of the Special Committee's meetings,
reviewed materials provided to the Special Committee, and advised the Special
Committee regarding its responsibilities.
The Special Committee also made the decision to retain an independent
financial advisor and, on August 9, 1996, after reviewing the qualifications of
several candidates, the Special Committee retained Duff & Phelps. The Special
Committee selected Duff & Phelps on the basis of several factors, including (i)
its experience in the valuation of businesses and their securities in
transactions comparable to the Merger; (ii) its familiarity with the industry
in which MFRI and Midwesco operate; and (iii) its independence from the parties
to the Merger.
At meetings held on August 9, September 4, September 19, and October
21, 1996, and on several occasions by conference telephone, the Special
Committee met and reviewed and discussed a variety of matters relevant to the
Merger. These included, among other things, (i) presentations by management
regarding the background of discussions culminating in the proposal of the
Merger and management's explanation of the anticipated benefits of the Merger
to MFRI; (ii) historical financial data for MFRI, Midwesco and the Thermal Care
Business; (iii) projected results of operations for each of MFRI, Midwesco and
the Thermal Care Business for the fiscal year ending January 31, 1997 and
succeeding years (including the assumptions used therein); (iv) pro forma and
projected financial information reflecting the effects of the Merger, including
combined income statements for the fiscal years ending January 31, 1995 through
1997 and combined balance sheets at July 31, 1996 and at July 31 of each year
thereafter through 2000; (v) the terms of the Merger Agreement and related
agreements; and (vi) reports from MFRI's tax advisors regarding the structure
of the Merger. In addition, on a number of occasions, members of the Special
Committee presented written and oral questions to its financial and legal
advisors, MFRI management and MFRI legal counsel concerning the matters listed
above, and received written and oral responses to these questions. Certain of
these questions were presented by Katten Muchin & Zavis at meetings with Duff &
Phelps, MFRI
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management and MFRI legal counsel. During the foregoing process, the Special
Committee raised certain issues concerning the terms and structure of the
Merger which resulted in MFRI and Midwesco revising certain of the terms of the
Merger.
At the September 4, 1996 meeting, representatives of Duff & Phelps and
Katten Muchin & Zavis met with the Special Committee and discussed their
respective roles, timing and the fairness opinion process and reviewed the
proposed terms of the Merger. At the September 19, 1996 meeting,
representatives of Duff & Phelps orally advised the Special Committee of the
results of its preliminary review of the Merger and of certain questions and
concerns with respect to the proposed terms of the Merger as of that date.
During the September 19, 1996 meeting and subsequent discussions with
representatives of Duff & Phelps and Katten Muchin & Zavis, members of the
Special Committee asked questions of, and received answers from, the
representatives of Duff & Phelps regarding the scope of Duff & Phelps's
investigation, the information received and reviewed by Duff & Phelps and the
methodology used by Duff & Phelps in reaching its opinion. At the October 21,
1996 meeting, the Special Committee met by teleconference with representatives
of Duff & Phelps to review the revised terms of the Merger, certain additional
information provided in response to requests by the Special Committee and its
advisors and Duff & Phelps's fairness opinion. At that meeting,
representatives of Duff & Phelps advised the Special Committee of the measures
that Duff & Phelps had taken subsequent to September 19, 1996 to update their
review of Midwesco and the Merger. Following discussions with the Special
Committee, Duff & Phelps indicated that it was prepared to deliver to the Board
of Directors its final written opinion to the effect that the Merger is fair,
from a financial point of view, to the stockholders of MFRI. At that meeting,
the Special Committee determined and adopted resolutions to the effect that the
procedures and form of the fairness opinion and the Merger Agreement were
acceptable and that it would report its determination to the Board of
Directors.
In making its determination, the Special Committee considered a number
of factors in addition to the factors enumerated above, including the
following:
(i) MFRI's familiarity with the Thermal Care Business and
its long relationship with Midwesco's management;
(ii) the fact that, as a result of the Merger, MFRI is
projected to have larger revenues and a larger market capitalization,
which may make MFRI more attractive to the investment community;
(iii) a significant portion of the assets to be acquired by
MFRI as a result of the Merger is MFRI Common Stock;
(iv) the presentation of MFRI management and Duff & Phelps
as to the projected effect on stockholder value of MFRI continuing as
an independent entity compared to the projected effect of its
combining with Midwesco;
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(v) certain financial and other information concerning
the business and operations of the Thermal Care Business; and
(vi) the terms, other than the financial terms, and
structure of the Merger.
The Board of Directors of MFRI believes that the terms of the Merger
are fair to, and in the best interests of, MFRI stockholders. The members of
the MFRI Board of Directors have unanimously approved the Plan and unanimously
recommend that holders of MFRI Common Stock vote FOR adoption of the Plan.
OPINION OF FINANCIAL ADVISOR
Duff & Phelps has acted as financial advisor to MFRI in connection
with the Merger, and has assisted the Special Committee in its examination of
the fairness, from a financial point of view, of the Merger Ratio to the MFRI
stockholders.
On October 21, 1996, Duff & Phelps rendered its written opinion (the
"Opinion") to the Special Committee of the MFRI Board to the effect that, as of
the date of such Opinion, the number of shares of MFRI Common Stock to be
issued by MFRI to the shareholders of Midwesco for all of the Midwesco Stock,
was fair, from a financial point of view. The full text of the written
Opinion, which sets forth the assumptions made, procedures followed, matters
considered, and limitations on and scope of review by Duff & Phelps in
rendering its Opinion, is attached as Appendix B to this Proxy Statement. MFRI
stockholders are urged to read the Opinion in its entirety.
In connection with its Opinion, Duff & Phelps reviewed, among other
things, certain financial and other information of Midwesco and its principal
operating division, Thermal Care, that was furnished to Duff & Phelps by
Midwesco, including certain internal financial analyses, financial forecasts,
reports and other information prepared by management and Midwesco
representatives. Duff & Phelps discussed with senior management of Midwesco
the past and current operations, financial condition and future outlook for
Midwesco and its principal operating division, Thermal Care.
In preparing its Opinion to the Special Committee, Duff & Phelps
performed a variety of financial and comparative analyses in order to ascertain
the fairness of the purchase price and Merger Ratio. A discussion of some of
the methodologies related to the valuation of Midwesco and its Thermal Care
division follows. In addition a discussion of other assets acquired and
liabilities assumed in the Merger follows. Finally, Duff & Phelps also
conducted other studies, analyses and investigations as it deemed appropriate
for purposes of its Opinion. Duff & Phelps also reviewed the publicly traded
stock price and trading volume of MFRI Common Stock to check for unusual
activity.
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The valuation standard which Duff & Phelps used to determine the
purchase price of the common stock of Midwesco and Merger Ratio range was
change of control. The Special Committee of the MFRI Board has agreed to
recommend a merger and plans to pursue such a transaction.
THERMAL CARE
Duff & Phelps valued Thermal Care on a change of control basis using
valuation methodologies described below. Duff & Phelps performed a variety of
analyses to value Thermal Care including: (i) a discounted cash flow analysis
of the projected free cash flow of Thermal Care; (ii) a comparison of financial
performance and market valuation ratios of Thermal Care with those of publicly
traded companies Duff & Phelps deemed relevant for purposes of its Opinion; and
(iii) a review of recent control transactions deemed relevant in the plastics
and equipment manufacturing industries.
DISCOUNTED CASH FLOW ANALYSIS. Duff & Phelps performed a
discounted cash flow ("DCF") analysis of the projected free cash flows
of Thermal Care. Free cash flow is defined as cash that is available
to either reinvest in new businesses or to distribute to investors in
the form of dividends, stock buybacks, or debt service. The projected
free cash flows are discounted to the present at a rate which reflects
the relative risk associated with these flows as well as the rates of
return which both equity and debt investors could expect to realize on
alternative investment opportunities.
Thermal Care's future free cash flows were based on projected
revenues, net income, depreciation and amortization, working capital
and capital expenditure requirements for the ten fiscal years ending
January 31, 1997 to January 31, 2006. Duff & Phelps's projections
were prepared from the perspective of a hypothetical buyer of a
controlling interest in the Company. Duff & Phelps discounted the
resulting free cash flows at rates which ranged between 13.0% and
15.0%, which reflects, among other things, industry risks, the
relatively small market capitalization of Thermal Care, and current
rates of return required by investors in debt and equity instruments
in general. The discounted cash flow analysis resulted in a control
price, or a reasonable estimate of the price that a fully informed
buyer would pay for all of the common stock of Thermal Care. This set
of projections is not intended to represent the expectations of a
minority interest investor who has no access to nonpublic information
about Thermal Care. The discounted cash flow analysis, inclusive of
identified tax credits, yielded a control price range of $7.2 million
to $9.2 million. This compares favorably with the $7.6 million
proposed price in the merger agreement.
COMPARATIVE COMPANY ANALYSIS. In the comparative company
analysis, Duff & Phelps selected a set of publicly traded companies
based on their comparability to Thermal Care. Although no single
company chosen is exactly similar to Thermal Care,
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these companies share many of the same operating characteristics and
are affected by many of the same economic forces as Thermal Care. The
proposed value of Thermal Care was checked for reasonableness by
comparing the rate at which the chosen comparable companies are
capitalized in the market with the capitalization rate implied by the
proposed value, after adjusting for differences in operations and
performance.
Using publicly available information, Duff & Phelps analyzed
the historical financial performance, stock prices and resulting
valuation multiples for the following firms (collectively, the
"Thermal Care Comparable Companies"):
Primary Group - Cincinnati Milacron Inc., Crompton & Knowles
Corp., Farrel Corp., Graham Corp., Tower
Tech Inc.
Secondary Group - Calnetics Corp., Eagle Pacific Industries
Inc., PVC Container Corp., Rotonics
Manufacturing Inc., Sun Coast Industries
Inc., Geon Company, Hanna (M.A.) Co.,
Schulman (A.) Inc., Spartech Corp.
The first five ("Primary Group") are companies that are
equipment suppliers to the plastics industry or manufacture heat
transfer equipment and are deemed the most comparable to Thermal Care.
The Secondary Group comprises plastics manufacturers of which the
first five companies are small plastics manufacturers with less than
$100 million in revenues; the next four are plastics manufacturers
significantly larger in size (median revenues $1.0 billion) than
Thermal Care.
Duff & Phelps compared the financial performance of Thermal
Care with the financial performance of the Primary Group Companies,
adjusting for any identified nonrecurring items. Comparative
statistics reveal the following: (i) five-year compounded annual
growth in revenue for Thermal Care was 13.8%, versus a range of -8.7%
to 14.5% (median 3.0%) for the Primary Group Companies; (ii) five-year
average and latest twelve months' operating cash flow margins for
Thermal Care were 5.3% and 7.2%, respectively, versus medians of 6.3%
and 9.9%, respectively, for the Primary Group; and (iii) latest
twelve months' proforma net income margin for Thermal Care was 3.4%
versus a median margin of 4.3% for the Primary Group. Five-year
averages for Thermal Care are based on fiscal years ended on January
31, 1991 to 1996, while the latest twelve months are for the period
ended July 31, 1996.
Duff & Phelps analyzed the capitalized value of the Thermal
Care Comparable Companies as a multiple of latest twelve months'
operating cash flow ("OCF"), defined as operating income plus
depreciation and amortization available as of the date of the Opinion.
These median multiples were 5.9x and 7.6x for the Primary and
Secondary Group, respectively. In comparison, the latest twelve
months' ended July 31, 1996 OCF, multiple for Thermal Care was 6.4x.
Thermal Care's multiple based on estimated OCF
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for the year ending January 31, 1997 is 4.8x. Duff & Phelps also
analyzed the capitalized values for the Thermal Care Comparable
Companies as multiples of latest twelve months' revenues. This median
multiple was 0.7x and 0.6x for the Primary and Secondary Group
respectively. In comparison, the latest twelve months' and estimated
January 31, 1997 revenue multiples for Thermal Care were 0.46x and
0.44x, respectively. Finally, Duff & Phelps analyzed the equity
values for the Thermal Care Comparable Companies as a multiple of
latest twelve months' and projected earnings ("P/E"). The median
latest twelve months' and projected P/E multiples were 13.6x and 12.1x
for the Primary Group, and 17.8x and 13.1x for the Secondary Group,
respectively. In comparison, the proforma latest twelve months' and
projected (1998) P/E multiples for Thermal Care are 11.5x and 8.4x,
respectively. All Thermal Care Comparable Companies multiples were
based upon closing stock prices as of September 17, 1996.
CONTROL TRANSACTIONS ANALYSIS. Duff & Phelps reviewed recent
control transactions involving firms in the plastic equipment, heat
transfer, and plastics manufacturing industries as targets. Duff &
Phelps identified fifteen transactions that it deemed as providing
important information in assessing the valuation of Thermal Care (the
"Thermal Care Control Transaction Companies"). Duff & Phelps believes
that these transactions provide a meaningful comparison to Thermal
Care due to the fact that they are representative of the market for
control of companies facing similar risks and opportunities. Duff &
Phelps analyzed the capitalized values for the Thermal Care Control
Transaction Companies as a multiple of latest twelve months' OCF, as a
multiple of earnings, and as a multiple of revenues available as of
the date of the Opinion. These median multiples were 5.5x, 10.3x, and
0.6x, respectively. In comparison, the latest twelve months' OCF,
proforma earnings, and revenue multiples for Thermal Care using the
$7.6 million valuation were 6.4x, 11.5x and 0.46x respectively. The
projected OCF, proforma earnings, and revenue multiples for the fiscal
year ending January 31, 1997, for Thermal Care were 4.8x, 8.6x and
0.44x, respectively.
MFRI COMMON STOCK HELD BY MIDWESCO
The 1.7 million shares of MFRI Common Stock held by Midwesco were
valued on a one for one basis. Based on the average price per share of $7.475
(for the 10 trading days ended October 10, 1996) the shares of MFRI Common
Stock held by Midwesco are valued at $12.8 million.
SPECIAL RIGHT OF LESSEE
Thermal Care shares the Niles Facility with all other operating
businesses of Midwesco (the "Former Midwesco Businesses") and MFRI. Upon the
separation of the Former Midwesco Businesses from Midwesco prior to the Merger,
Thermal Care will retain the rights as lessee
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of the property. One of the financial impacts of these events that was not
accounted for in the valuation of Thermal Care is its right to be reimbursed by
all other tenants for all prior leasehold improvements. Duff & Phelps reviewed
the value ascribed to this right by projecting the cash receipts and
discounting them at rates between 8.25% and 10.0%.
DEBT
Debt of $5.0 million is valued at face.
PERMA-PIPE LAWSUITS
Duff & Phelps reviewed the status of each of three Pending Suits
related to work performed by Midwesco's former piping business, and assumed in
the Merger, with Midwesco management and Midwesco legal counsel. Duff & Phelps
analyzed several possible outcomes and their respective probabilities to
determine an overall expected probability-weighted outcome. Duff & Phelps
reviewed the value ascribed to these lawsuits and determined that a reduction
in purchase price plus an additional escrow of MFRI Common Stock were
reasonably sufficient to protect MFRI against all but the most unlikely worst
case outcomes of these lawsuits.
REVIEW OF MFRI COMMON STOCK PRICE AND TRADING ACTIVITY
Duff & Phelps performed an analysis of MFRI's recent stock price and
trading volume to confirm that the stock was not impacted by unusual trading
activity or trends. Duff & Phelps noted, however, that the market for the
common stock of MFRI was thin. On reviewing the historical price movements of
the MFRI Common Stock over the period September 18, 1995 to September 17, 1996,
Duff & Phelps notes that MFRI Common Stock traded within a range of $8.00
(7/1/96) to $5.69 (10/26/95) per share. The stock has exhibited a modest
upward drift over this period reflecting the growth in earnings. The average
stock price over this period was $6.71 with average weekly volume of 40,430
shares. The announcement of record results for the July quarter boosted MFRI's
stock price to $7.88 on August 29, 1996 with volume of 60,100 shares. No
unusual volatility in price or trading volume was observed since the
announcement of results for the July quarter. As of September 17, 1996 the
stock traded at $7.50 with volume of 2,500 shares, which compares to the
$7.475 10-day historical price used as a basis for determining the Merger
Ratio. From this analysis Duff & Phelps concludes that the MFRI Common Stock
was trading free of any unusual activity.
CONCLUSIONS
The DCF analysis, the comparable company analysis and the control
transactions analysis all support the $7.6 million value of Thermal Care.
Additional analyses confirm the fairness of the $8.3 million aggregate purchase
price for the other assets and liabilities of Midwesco. Therefore, Duff &
Phelps concluded that a total valuation of $15.9 million equivalent to 2.122
million shares of MFRI at the MFRI price of $7.475 per share, or approximately
183.7 shares
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of MFRI Common Stock for each share of Midwesco, would be fair to the
stockholders of MFRI from a financial point of view.
In rendering its Opinion, Duff & Phelps relied, without independent
verification, on the accuracy and completeness of all financial and other
information publicly available or furnished to Duff & Phelps by or on behalf of
Midwesco. Duff & Phelps did not make an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of Midwesco. Duff &
Phelps's Opinion is based on all economic, market and business and financial
conditions relevant to Midwesco existing on the date of such Opinion. Midwesco
did not place any limitation upon Duff & Phelps with respect to the procedures
followed or factors considered by Duff & Phelps in rendering its Opinion.
Duff & Phelps was selected as MFRI's financial advisor because Duff &
Phelps is a nationally recognized financial advisory firm with substantial
experience in transactions similar to the Merger. As part of its financial
advisory business, Duff & Phelps is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
leveraged buyouts, restructurings, employee benefit plans, private placements
and valuations for estate, corporate and other purposes. Duff & Phelps has not
previously provided financial advisory services to MFRI and is not under
contract or in specific discussions to provide future financial advisory
services to MFRI.
As compensation for its services as financial advisor to MFRI in
connection with the Purchase and Merger, MFRI agreed to pay Duff & Phelps a
retainer fee of $15,000 at the commencement of its engagement and will pay Duff
& Phelps a fee of $25,000 upon rendering its final Opinion to the Special
Committee of the MFRI Board of Directors. No portion of the fee paid to Duff &
Phelps is contingent upon the conclusion reached in its final Opinion. In
addition, MFRI has agreed to reimburse Duff & Phelps for reasonable
out-of-pocket expenses, including the fees and expenses of its legal counsel,
and to indemnify Duff & Phelps against certain liabilities, including
liabilities under the federal securities laws, relating to, arising out of or
in connection with this engagement.
Duff & Phelps's fee for its opinion is $40,000 plus expenses. Duff &
Phelps had not performed any services for MFRI or Midwesco during the period of
three fiscal years and six months ended July 31, 1996.
THE FULL TEXT OF DUFF & PHELPS'S OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND SCOPE OF THE REVIEW UNDERTAKEN, IS
ATTACHED HERETO AS APPENDIX B. MFRI STOCKHOLDERS ARE URGED TO READ THIS
OPINION IN ITS ENTIRETY. MFRI'S OPINION DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF DUFF & PHELPS SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
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EFFECTIVE TIME OF THE MERGER
It is presently anticipated that if the Plan is approved by the
stockholders of MFRI the Merger will be effective on or about January 31, 1997,
and that the Effective Time will occur at midnight on such date, although there
can be no assurance as to whether or when the Merger will occur. See "--
Conditions to the Merger."
EXCHANGE OF CERTIFICATES
Holders of MFRI Common Stock immediately prior to the Effective Time
will continue to hold such stock immediately after the Effective Time. Holders
of MFRI Common Stock will NOT be required to exchange MFRI certificates.
CONDITIONS TO THE MERGER
The obligation of Midwesco and MFRI to perform their obligations under
the Merger Agreement are subject to the following conditions: (i) the Merger
Agreement shall have been approved and adopted by the affirmative vote of the
holders of a majority of the outstanding shares of MFRI Common Stock entitled
to vote thereon; (ii) the parties shall have received an opinion to the effect
that the Merger should not be currently taxable to them or their respective
shareholders; (iii) the shares of MFRI Common Stock constituting Merger
Consideration shall have been approved for trading on the Nasdaq NMS; (iv)
immediately prior to the Effective Time, there shall be no action or proceeding
initiated by any governmental agency or third party that seeks to restrain,
prohibit or invalidate the Merger or to recover substantial damages or other
substantial relief with respect thereto, and no injunction or restraining order
shall have been issued by any court restraining, prohibiting or invalidating
the Merger; and (v) the average market price of the 10 trading days immediately
preceding the date of consummation of the Merger shall be less than $11.48 per
share and more than $3.48 per share. Any waiver of a condition to closing by
MFRI of one of Midwesco's obligations must be approved by the Special
Committee.
The obligation of MFRI to perform its obligations under the Merger
Agreement is subject to the following conditions: (i) the representations and
warranties of Midwesco, set forth in the Merger Agreement were true at the date
of the Merger Agreement and will be true at the Effective Time; (ii) Midwesco
shall have performed their obligations required to be performed by them under
the Merger Agreement prior to the Closing Date; (iii) MFRI shall have received
the opinion of counsel to Midwesco, with respect to certain matters; (iv)
Midwesco shall have received all required consents, approvals and waivers of
third parties; (v) MFRI shall have received a fairness opinion with respect to
the Merger from an investment banking firm acceptable to MFRI; (vi) the
consummation of the Merger shall have been approved by the Special Committee;
and (vii) not more than the record holders of 1% of the outstanding shares of
Midwesco Stock shall have exercised their right to dissent from the Merger
pursuant to the Illinois Business Corporation Act of 1983.
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The obligation of Midwesco to consummate the transactions contemplated
by the Merger Agreement are subject to certain additional conditions, including
the following: (i) the representations of MFRI set forth in the Merger
Agreement were true at the date of the Merger Agreement and will be true at the
Effective Time; (ii) MFRI shall have performed its obligations required to be
performed by it under the Merger Agreement prior to the Closing Date; (iii)
Midwesco shall have received the opinion of counsel to MFRI with respect to
certain matters; and (iv) MFRI shall have executed and delivered the
Registration Rights Agreement.
BUSINESS PENDING THE MERGER
The Merger Agreement provides that, during the period from the date of
the Merger Agreement to the Effective Time, Midwesco will conduct the Thermal
Care Business in the usual and ordinary course consistent with past practices
and shall use its best efforts to preserve the goodwill of the employees,
representatives, customers and suppliers of Thermal Care.
Under the Merger Agreement, Midwesco shall not: (i) authorize or
effect any change in its charter or by-laws; (ii) grant any options or other
rights to purchase any of its capital stock, or issue or otherwise dispose of
any of its capital stock (except upon the conversion of exercise of options
presently outstanding and in accordance with the respective terms thereof);
(iii) declare, set aside or pay any dividend or distribution with respect to
its capital stock, or redeem, repurchase or otherwise acquire any of its
capital stock, except for the distribution of shares of New Midwesco to the
shareholders of Midwesco; (iv) create, incur, assume or guaranty any
indebtedness for borrowed money, provided, however, draws under Midwesco's
Credit Agreement with Harris Trust and Savings Bank shall not be prohibited;
(v) grant any lien, pledge, security interest or other encumbrance upon any of
its assets, except in the ordinary course of business, or the conversion of
intercompany loans to Simtech to equity; (vi) make any loan to or investment
in, or acquire any securities or assets of any other person or entity, other
than purchases of inventory and supplies in the ordinary course of business;
(vii) increase the rate of compensation or materially increase the benefits
payable or to become payable to any of its directors, officers or employees
(other than raises in the ordinary course of business not to exceed 5% to
employees who are not officers or directors) or make any material change in any
of the terms of employment of any of its directors, officers or employees;
(viii) change any accounting policies, procedures or practices employed by it;
(ix) sell any of its assets other than sales of inventory in the ordinary
course of business, and sales of equipment made in the ordinary course of
business due to the replacement or abandonment thereof; (x) enter into any
material agreement, or make any change in any existing agreements other than in
the ordinary course of business; or (xi) modify, amend or alter leases of real
property.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective
Time, Midwesco and MFRI may waive the requirement that the other party perform
all of its agreements under the Merger Agreement in whole or in part to the
extent permitted by applicable law.
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The Merger Agreement may be amended at any time prior to the filing of
the Plan without the approval of MFRI's stockholders.
TERMINATION
The Merger Agreement provides that it may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger
Agreement by the stockholders of MFRI (i) by mutual written consent of Midwesco
and MFRI; (ii) by either Midwesco or MFRI if the Effective Time has not
occurred on or before March 31, 1997; (iii) by MFRI if any of its conditions of
closing cannot be satisfied by the Closing Date; or (iv) by Midwesco if any of
its conditions of closing cannot be satisfied by its Closing Date.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase by MFRI of Midwesco. See
"Unaudited Pro Forma Combined Financial Statements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income
tax consequences of the Merger to MFRI and its stockholders. This summary is
not a complete description of all the consequences of the Merger. Each
stockholder's individual circumstances may affect the tax consequences of the
Merger to him or her. In addition, no information is provided herein with
respect to the tax consequences of the Merger under applicable foreign, state
or local laws.
In the opinion of Deloitte & Touche LLP, tax advisor to MFRI, the
Merger should constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code. The Merger will be consummated in reliance among
other things, upon such opinion. MFRI has not requested, nor will it receive,
an advance ruling from the Internal Revenue Service as to the federal income
tax consequences of the Merger. Therefore, there can be no assurance that the
Merger should constitute a tax-free reorganization, or that other favorable tax
treatment will be made available to MFRI or to the stockholders of MFRI. This
opinion, will be based, in part, on certain customary representations made by
the management of Midwesco and MFRI. The material federal income tax
consequences of the Merger, under currently applicable law, explicitly as set
forth in the aforesaid opinion or following from the conclusions therein, are
as follows:
(vii) The merger of Midwesco with and into MFRI, with MFRI
surviving, should qualify as a reorganization under Section
368(a)(1)(A) of the Code. Midwesco and MFRI should each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code;
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(viii) Midwesco should recognize no gain or loss upon the
transfer of its assets to MFRI in exchange for the MFRI Common Stock,
and the assumption of Midwesco's liabilities by MFRI by reason of the
application of Sections 361(a) and 357(a) of the Code.
(ix) No gain or loss should be recognized by Midwesco upon
the distribution of the MFRI Common Stock to the Midwesco shareholders
by reason of the application of Section 361(c)(1) of the Code.
(x) No gain or loss should be recognized by MFRI on the
receipt of Midwesco's assets in exchange for MFRI Common Stock and the
assumption by MFRI of Midwesco's liabilities, by reason of the
application of Section 1032(a) of the Code.
(xi) The basis of the assets of Midwesco in the hands of
MFRI should be the same as the basis of such assets in the hands of
Midwesco immediately prior to the reorganization by reason of the
application of Section 362(b) of the Code.
(xii) The holding period of the property acquired by MFRI
from Midwesco should include the holding period of such property in
the hands of Midwesco immediately prior to the reorganization by
reason of the application of Section 1223(2) of the Code.
(xiii) No gain or loss should be recognized by the former
Midwesco shareholders upon the receipt of their Midwesco common stock
to MFRI in exchange for the MFRI Common Stock (including fractional
share interests which they would otherwise be entitled to receive) by
reason of the application of Section 354(a) of the Code.
(xiv) No gain or loss should be recognized by the MFRI
shareholders.
(xv) The basis of all the MFRI Common Stock received by
the shareholders of Midwesco (including fractional share interests
which they would otherwise be entitled to receive) in the exchange
should be the same as the basis of the Midwesco stock exchanged by
reason of the application of Section 358(a)(1) of the Code.
(xvi) The holding period of the MFRI Common Stock
(including fractional share interests which they would otherwise be
entitled to receive) to be received by Midwesco shareholders should,
in each instance, include the holding period of the Midwesco shares
surrendered in the exchange, provided Midwesco stock was held as a
capital asset on the date of the exchange by reason of the application
of Section 1223(1) of the Code.
(xvii) Pursuant to Section 381(a) of the Code and Section
1.381(a)-1 of the Income Tax Regulations ("Regulations"), MFRI should
succeed to and take into account the items of Midwesco described in
Section 381(c). These items will be taken into
29
<PAGE> 35
account by MFRI subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 and the regulations thereunder.
(xviii) As provided in Section 381(c)(2) of the Code and
Section 1.381(c)(2)-1 of the Regulations, MFRI should succeed to and
take into account the earnings and profits, or deficit in earnings and
profits, of Midwesco as of the date or dates of transfer. Any deficit
in earnings and profits of either Midwesco or MFRI should be used only
to offset earnings and profits accumulated after the date or dates of
transfer.
(xix) The payment of cash in lieu of fractional-share
interests of MFRI Common Stock will be treated as if the fractional
shares had been distributed as part of the exchange and then redeemed
by MFRI. These cash payments will be treated as having been received
as distributions in full payment in exchange for the stock redeemed,
as provided in Sec. 302(a) of the Code (Rev. Rul. 66-365, 1966-2 C.B.
116, and Rev. Proc. 77-41, 1972-2 C.B. 574).
(xx) Where cash is received by a dissenting Midwesco
shareholder in complete redemption of all of the stock of Midwesco
owned by the shareholder, such cash should be treated as received by
the Midwesco shareholder as a distribution in redemption of his stock
subject to the provisions and limitations of Section 302 of the Code.
SHARES AVAILABLE FOR RESALE
The shares of MFRI Common Stock issued to shareholders of Midwesco
upon consummation of the Merger will be issued pursuant to an exemption under
the Securities Act. Upon the effectiveness of the registration statement to be
filed by MFRI pursuant to the Registration Rights Agreement, which registration
statement will cover resales of such MFRI Common Stock, provided that MFRI
maintains the effectiveness of such registration statement, such shares
generally may be traded freely and without restriction by the shareholders of
Midwesco.
PRIOR REGISTRATION RIGHTS
Pursuant to the agreement under which Midwesco subscribed for its
shares of MFRI Common Stock in 1989, MFRI is obligated, at its expense, to file
a registration statement under the Securities Act on no more than two occasions
with respect to all or a portion of such shares upon the request of Midwesco
and include all or a portion of said shares, in the event of the filing of a
registration statement under the Securities Act with respect to other shares of
MFRI Common Stock. Such agreement will be terminated upon the consummation of
the Merger.
30
<PAGE> 36
LITIGATION
Midwesco, or one of its affiliates, PermAlert ESP, Inc. ("PermAlert")
or Perma-Pipe, Inc. ("PPI"), is a party to the three Pending Suits, each of
which, upon consummation of the Merger, will become the obligations of MFRI.
IHP Industrial v. Perm Alert ESP, Case No. 96 CV 068(b), was filed in
May 1996, in the Circuit Court of Lauderdale County, Mississippi. It involves
a contract which PermAlert entered into with IHP Industrial, Inc. to supply a
contained piping system for underground transport of jet fuel at the Air
National Guard field in Meridian, Mississippi. The original purchase order for
the project was $723,680 and subsequent change orders increased the contract
price to $749,207. The plaintiff is seeking damages in excess of $832,537.74,
based on claims for breach of warranty, misrepresentation and negligence.
PermAlert has filed a counter-claim for $193,884.21, for amounts due under the
original contract, including change orders, and for extras involved in the
repair of the contained piping system.
State Farm Mutual Automobile Ins. Co. v. George Hyman Constr. Co, et
al., Case No. 95 L 310, is pending in the Circuit Court of the Eleventh
Judicial Circuit, McLean County, Illinois. In July 1996, defendant J.A. House,
Inc. ("J.A. House") sued Perma-Pipe in a Third Party Complaint in that
litigation. The claim against Perma-Pipe relates to a sub-contract which
Perma-Pipe entered with J.A. House, pursuant to which Perma-Pipe agreed to
supply a hot water supply and return piping system with leak detection
capabilities, for the construction of the State Farm Mutual Automobile
Insurance Company complex in Bloomington, Illinois. J.A. House seeks
unspecified damages, in an amount in excess of $150,000.00, for breach of
contract, breach of warranty, indemnification and negligence, based its alleged
costs in locating and repairing leaks in the return piping system and in its
attempt to dry out the system after the leaks were repaired.
In May 1993, Midwesco and PermAlert filed a complaint against PPG
Industries, Inc. ("PPG") and Crain Brothers, Inc. ("Crain") which remains
pending in the United States District Court for the Western District of
Louisiana entitled, Midwesco, Inc. et al. v. PPG Industries, Inc., et al., Case
No. 93 C 1271. This case involves an agreement between PermAlert and PPG for
the manufacture and delivery, by PermAlert, of a chlorine pipeline and related
services. In turn, PermAlert entered into sub-contracts with Crain and Thermon
Manufacturing Co. ("Thermon") for some of the work under its contract with PPG.
PermAlert's original contract was for $1,009,683.00. In August 1992, the
parties entered into a change order, which increased the contract price by an
additional $240,764.00. During the course of PermAlert's work, PPG and
PermAlert agreed to additional change orders in the amount of $125,887.05. PPG
has failed to pay $236,024.78 due under the contract, the change orders.
In its amended complaint in the lawsuit, PermAlert seeks: (1)
$236,024.78 in compensatory damages from PPG for breach of contract; and (2)
punitive damages in excess of
31
<PAGE> 37
$250,000.00 from PPG for fraud. In turn, PPG has filed a counter-claim against
PermAlert, alleging that the heat-trace system failed, and seeking damages in
the amount of $449,222.00, its alleged costs of repair for the system. In
response, PermAlert has also asserted claims in the lawsuit against Thermon,
Crain and Keystone Pipeline Services, Inc. ("Keystone"), seeking: (1) a
declaration that PermAlert is not obligated to pay Crain the $118,690.61 which
Crain has demanded in connection with work it performed for the project; (2)
damages in an unspecified amount against Crain and Thermon for negligence; (3)
indemnification and contribution from Crain and Thermon, if PermAlert is
required to pay any damages to PPG; and (4) damages for negligence and
contribution from Keystone, PPG's project supervisor, if PermAlert is required
to pay any damages to PPG.
Midwesco and MFRI have taken into account potential liabilities
arising out of the pending Suits in negotiating the exchange ratio of the
Merger and in the establishment of the Special Escrow. In addition, Duff &
Phelps has considered such potential liabilities in rendering its fairness
opinion. There is no assurance, however, that such liabilities will not exceed
the amount determined as part of the purchase price with respect to such
liabilities. From and after the Effective Time, MFRI will bear all costs and
expenses of the pending suits, including, but not limited to, any judgments or
settlement costs (the "Expenses"); provided, however, after MFRI has spent an
aggregate of $400,000 in Expenses, all such Expenses of the Pending Suits will
be paid from the Special Escrow of up to 66,890. See "-- Opinion of Financial
Advisor -- Perma-Pipe Lawsuits" with respect to the effect of the Pending Suits
on the Merger Ratio. In the event there are no shares of MFRI Common Stock in
the Special Escrow, the responsibility for the Pending Suits will be solely
that of MFRI. Upon the disposition or termination of all of the Pending Suits,
any shares in the Special Escrow will be distributed to the shareholders of
Midwesco as of the Effective Time prorata to their interests in Midwesco at the
Effective Time. In the event that any of the Pending Suits have ended and are
no longer pending at the Effective Time, the number of shares placed in the
Special Escrow at the Closing will be reduced based generally upon the
aggregate claims made in the Pending Suit compared to the aggregate claims made
in all of the Pending Suits as a percentage of the purchase price adjustment
and the maximum value of the Special Escrow. Although there accordingly could
be no shares placed in the Special Escrow, and the number of shares held in the
Special Escrow could be reduced to zero after the Effective Time, in no event
shall the number of shares held in the Special Escrow be reduced to less than
zero. Any shares of MFRI Common Stock withdrawn from the Special Escrow will
be valued at the average of the closing prices for MFRI Common Stock on the
Nasdaq National Market on the 10 trading days prior to the third business day
prior to the date of distribution from the Special Escrow.
32
<PAGE> 38
MANAGEMENT SERVICES AGREEMENT
Pursuant to the Amended and Restated Management Services Agreement
dated as of January 28, 1994 ("Services Agreement"), MFRI provides certain
services to Midwesco and Midwesco provides certain facilities and services to
MFRI. The Services Agreement provides for the allocation of costs of the
shared employees, services and facilities (including the Niles, Facility, which
is owned by Henry Mautner and David Unger and has been leased to Midwesco since
1977) between MFRI and Midwesco based upon the cost accounting method utilized
by MFRI and Midwesco A limited number of persons, including Michael D.
Bennett, are employed by both Midwesco and MFRI; the respective compensation
expense for such employees are divided between the companies based upon the
level of services performed by such employees for each company. Independent
auditors will review the appropriateness of the annual allocation of the costs
of the shared employees, services and facilities. Any material change to the
terms of the Services Agreement must be approved by a majority of the
directors, including a majority of Independent Directors. Pursuant to the
Services Agreement, MFRI reimbursed Midwesco $564,000 (including occupancy
costs of $360,000) during fiscal 1996.
Upon consummation of the Merger, MFRI and New Midwesco will enter into
a services agreement containing substantially the same terms as those of the
Services Agreement, except for those changes necessitated by the change of
ownership of the leasehold and certain assets.
EXPENSES
The Merger Agreement provides that all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such expenses.
DISSENTERS' RIGHTS
Under Delaware law, stockholders of MFRI will not be entitled to
dissenters' rights in connection with the Merger.
33
<PAGE> 39
CAPITALIZATION
The following table sets forth the capitalization of MFRI at July 31,
1996 and as adjusted to reflect the Merger.
<TABLE>
<CAPTION>
As Adjusted for the
Actual Merger(1)
------ ------
<S> <C> <C>
Current portion of long-term debt . . . . . . . . . . . . . . . $2,191,000 $5,619,000
========== ==========
Long-term debt, less current portion . . . . . . . . . . . . . 14,161,000 17,344,000
Stockholders' equity:
Common stock ($.01 par value)(2) . . . . . . . . . . . 45,000 49,000
Additional paid-in capital . . . . . . . . . . . . . . 17,967,000 21,000,000
Retained earnings . . . . . . . . . . . . . . . . . . 9,737,000 9,737,000
---------- ----------
Total stockholders' equity . . . . . . . . . . 27,749,000 30,786,000
---------- ----------
Total capitalization . . . . . . . . . . . . . $44,101,000 $53,749,000
=========== ===========
</TABLE>
- - - - ------------------------
(1) See "Notes to Unaudited Pro Forma Combined Balance Sheet" for a
description of the adjustments.
(2) Authorized shares are 15,000,000 shares of MFRI Common Stock. The
number of shares of Common Stock issued and outstanding is 4,524,376
at July 31, 1996; 4,931,017 as adjusted for the Merger. Authorized
shares include an aggregate of 691,787 shares reserved for issuance
pursuant to stock options and 15,000 shares reserved for issuance upon
exercise of a warrant owned by The Chicago Corporation.
34
<PAGE> 40
COMPARATIVE PER SHARE DATA
The following table of certain comparative per share data is based
upon the data used in compiling the Unaudited Pro Forma Combined Financial
Statements and upon the respective consolidated financial statements of
Midwesco included herein and the consolidated financial statements of MFRI
incorporated by reference herein, and should be read in conjunction with those
financial statements and the related notes. Historical per share data of
Midwesco is presented although only certain assets, liabilities and businesses
of Midwesco will ultimately be acquired by MFRI.
<TABLE>
<CAPTION>
Year Ended
Six Months Ended January 31,
MFRI, INC. July 31, 1996 1996
------------- ----
<S> <C> <C>
Pro Forma:
Net income per common share -- primary $0.37 $0.54
Net income per common share -- fully diluted $0.37 $0.54
Dividends per common share -- --
Book value per common share (at end of period) $6.20
</TABLE>
<TABLE>
<CAPTION>
Year Ended
Six Months Ended January 31,
MFRI, INC. July 31, 1996 1996
------------- ----
<S> <C> <C>
Historical:
Net income per common share -- primary $0.33 $0.52
Net income per common share -- fully diluted $0.33 $0.52
Dividends per common share -- --
Book value per common share (at end of period) $6.08
</TABLE>
<TABLE>
<CAPTION>
Year Ended
Six Months Ended January 31,
MIDWESCO, INC. July 31, 1996 1996
------------- ----
<S> <C> <C>
Historical:
Net income per share $60.36 $9.69
Dividends per share -- --
Book value per share (at end of period) $844.69
Number of shares outstanding 11,564 11,564
</TABLE>
35
<PAGE> 41
SELECTED FINANCIAL DATA
The following is a summary of certain condensed financial information
of MFRI, Midwesco and the Thermal Care Business of Midwesco. The selected
financial information for MFRI has been derived in part from, and should be
read in conjunction with, the audited consolidated financial statements of MFRI
and the related notes thereto incorporated by reference in this proxy
statement. The selected financial information of Midwesco has been derived in
part from, and should be read in conjunction with, the audited consolidated
financial statements of Midwesco and the related notes thereto, included as
part of this proxy statement. The proforma financial information of the
Thermal Care Business of Midwesco is derived from the unaudited financial
statements of Thermal Care. In the opinion of management, the unaudited
proforma financial information of Thermal Care has been prepared on the same
basis as the audited consolidated financial statements of Midwesco, and
includes all such adjustments necessary for the fair presentation of financial
position and results of operations for the periods noted, which adjustments are
only of a normal recurring nature. See "Unaudited ProForma Combined Financial
Information." Results of interim periods, which include all adjustments that
management considers necessary for a fair presentation thereof, are not
necessarily indicative of results to be expected for the full fiscal year.
36
<PAGE> 42
MFRI, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales (1), (2) $21,659 $25,262 $29,866 $75,495 $85,838
Cost of sales 16,784 19,414 23,062 62,898 68,958
------- ------- ------- ------- -------
Gross profit 4,875 5,848 6,804 12,597 16,880
Selling expense 2,136 2,238 2,177 3,832 4,585
General and administrative expense 1,470 1,603 1,886 6,025 6,993
Management services agreement - net 229 252 282 356 564
------- ------- ------- ------- -------
Total operating expense 3,835 4,093 4,345 10,213 12,142
------- ------- ------- ------- -------
Income from operations 1,040 1,755 2,459 2,384 4,738
Interest expense (income) - net (62) (44) (20) 496 925
------- ------- ------- ------- -------
Income before income taxes 1,102 1,799 2,479 1,888 3,813
Income tax expense 407 650 945 685 1,440
------- ------- ------- ------- -------
NET INCOME $695 $1,149 $1,534 $1,203 $2,373
======= ======= ======= ======= ======
NET INCOME PER COMMON SHARE $0.25 $0.41 $0.54 $0.27 $0.52
======= ======= ======= ======= ======
<CAPTION>
JANUARY 31,
-------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 8,012 $ 8,549 $14,206 $17,290 $19,677
Total assets 11,750 12,472 36,898 47,917 58,985
Long-term debt, less current portion 57 20 3,247 6,902 14,267
Stockholders' equity (3) 9,245 10,394 21,154 23,940 26,223
<CAPTION>
SIX MONTHS ENDED
JULY 31,
---------------------------------
1995 1996
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales (1), (2) $39,879 $44,955
Cost of sales 31,923 34,809
------- -------
Gross profit 7,956 10,146
Selling expense 2,181 2,714
General and administrative expense 3,323 4,041
Management services agreement - net 274 311
------- -------
Total operating expense 5,778 7,066
------- -------
Income from operations 2,178 3,080
Interest expense (income) - net 390 525
------- -------
Income before income taxes 1,788 2,555
Income tax expense 707 1,029
------- -------
NET INCOME $1,081 $1,526
======= =======
NET INCOME PER COMMON SHARE $0.24 $0.33
======= =======
<CAPTION>
JULY 31,
1996
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital $20,391
Total assets 63,249
Long-term debt, less current portion 14,161
Stockholders' equity (3) 27,749
</TABLE>
1. On January 28, 1994, MFRI, Inc. completed the acquisition of the net
assets of the Perma Pipe division of Midwesco, Inc.
2. On September 30, 1994, MFRI, Inc. and a subsidiary acquired substantially
all of the assets net of specified assumed liabilities of Ricwil LP.
3. The Company does not have a history of paying dividends. Additionally, in
connection with the line of credit agreement, there are covenants
restricting payment of dividends.
37
<PAGE> 43
MIDWESCO, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share data)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
Year Ended January 31, July 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net sales $45,726 $43,037 $20,519 $29,579 $29,210 $13,603 $17,553
Cost of sales 36,653 33,740 16,282 23,314 23,012 10,357 14,161
------- ------- ------- ------- ------- ------- -------
Gross profit 9,073 9,297 4,237 6,265 6,198 3,246 3,392
Selling expense 3,064 3,371 1,594 1,550 1,876 884 833
General and administrative expense 5,004 4,833 2,821 3,729 3,796 1,881 2,020
------- ------- ------- ------- ------- ------- -------
Total operating expense 8,068 8,204 4,415 5,279 5,672 2,765 2,853
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations 1,005 1,093 (178) 986 526 481 539
Interest expense (income) - net 449 627 963 806 1,112 479 491
Other income (loss) - net 500 (2,235) (277) 720 989 500 1,097
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes 1,056 (1,769) (1,418) 900 403 502 1,145
Income tax expense (benefit) from
continuing operations (87) (521) (614) 358 291 210 447
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations $1,143 ($1,248) ($804) $542 $112 $292 $698
======= ======= ======= ======= ======= ======= =======
Net income (loss) ($120) ($1,477) $1,753 $542 $112 $292 $698
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share $ 99 $ (129) $ 152 $ 47 $ 10 $ 25 $ 60
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
January 31,
----------------------------------------------- July 31,
1992 1993 1994 1995 1996 1996
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital $5,437 $4,632 $2,647 $3,518 $4,312 $1,224
Total Assets 25,014 30,056 22,408 23,446 25,411 25,797
Long-term debt, less current portion 5,840 3,521 5,368 6,721 8,194 4,875
Shareholders' equity 7,667 6,145 8,332 8,958 9,070 9,768
</TABLE>
(1) On January 28, 1994 Midwesco completed the sale of the net assets of its
Perma-Pipe division to MFRI. The 1992, 1993 and 1994 statement of operations
data reflects the operations of Perma-Pipe as discontinued operations.
38
<PAGE> 44
MIDWESCO, INC. AND SUBSIDIARIES
PROFORMA SELECTED FINANCIAL DATA
(IN THOUSANDS)
- - - - --------------------------------------------------------------------------------
THERMAL CARE BUSINESS OF MIDWESCO, INC. (1)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
--------------------------------------------------- ----------------------
1993 1994 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $11,640 $13,127 $18,528 $19,775 $10,202 $9,860
Cost of sales 9,264 9,958 13,751 15,247 7,683 7,403
------- ------- ------- ------- ------ ------
Gross profit 2,376 3,169 4,777 4,528 2,519 2,457
Selling expense 639 779 819 1,206 550 555
General and administrative expense 1,800 2,479 2,335 2,004 1,069 1,061
------- ------- ------- ------- ------ ------
Total operating expense 2,439 3,258 3,154 3,210 1,619 1,616
------- ------- ------- ------- ------ ------
Income (loss) from operations (63) (89) 1,623 1,318 900 841
Interest expense 626 487 671 848 339 390
Other (income) (786) (583) (995) (506) (626)
------- ------- ------- ------- ------ ------
Income (loss) before income taxes (689) 210 1,535 1,465 1,067 1,077
Income tax expense (benefit) (269) 82 599 571 416 423
------- ------- ------- ------- ------ ------
NET INCOME (LOSS) $ (420) $ 128 $ 936 $ 894 $ 651 $ 654
======= ======= ======= ======= ====== ======
<CAPTION>
JANUARY 31, JULY 31,
------------------------------------------------------- 1996
1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 1,721 $ 3,705 $ 3,690 $ 3,374 $ 372
Total assets 6,503 13,829 15,994 17,768 18,325
Long-term debt, less current portion 6,685 5,019 6,666 6,609 3,183
Business unit equity 5,509 5,637 6,573 7,467 8,121
</TABLE>
(1) Since Thermal Care has only existed as a business unit of Midwesco, Inc.,
per share data is not available.
39
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following is a discussion of the financial condition of operations
and results of the Thermal Care Business and the liquidity and capital
resources of the Company. Once the Merger is approved by the stockholders of
MFRI and the shareholders of Midwesco, Midwesco will create New Midwesco and
contribute to it certain assets and liabilities. Midwesco, which will consist
principally of the Thermal Care Business, will then be acquired by and merged
into MFRI. The historical Midwesco financial statements included herein
includes the financial position and results of operations of all of Midwesco's
businesses, including those to be contributed to New Midwesco. A discussion of
the financial condition and results of operations of Midwesco would include a
discussion of businesses that will not be acquired by MFRI. Accordingly, the
following discussion will only address the financial condition of operations
and results of the Thermal Care Business and the liquidity and capital
resources of the Company. For a discussion of MFRI's financial condition and
results of operations during the two most recent fiscal years and for the six
months ended July 31, 1996, see the discussions entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
MFRI's Annual Report on Form 10-K for the fiscal year ended January 31, 1996,
and its Quarterly Reports on Form 10-Q for the quarters ended April 30, 1996
and July 31, 1996 that are attached as Appendices C, D and E, respectively, and
incorporated in this Proxy Statement by reference.
RESULTS OF OPERATIONS OF THERMAL CARE
Thermal Care's business is characterized by a large number of
relatively small orders and a limited number of large orders. In fiscal 1996,
the average order amount was approximately $4,700. Generally, Thermal Care's
OEM sales have lower profit margins than its sales for the domestic and
international plastics industries and other markets. Large orders generally
are highly competitive and result in lower profit margins. In fiscal 1996,
1995 and 1994 and the six months ended July 31, 1996, no customer accounted for
10% or more of Thermal Care's net sales. In fiscal years 1996, 1995 and 1994
and the six months ended July 31, 1996, the impact of inflation and changing
prices on Thermal Care's net sales and income from operations was not material.
Borrowings by Midwesco to finance the operating and investment needs
of Thermal Care and the related interest expense were allocated to Thermal Care
in the preparation of the proforma summary financial statements of Thermal Care
included herein. The borrowings will be assumed by MFRI in connection with the
Merger.
40
<PAGE> 46
Six months ended July 31, 1996 Compared with Six Months ended July 31, 1995
Net sales decreased 3% from $10,202,000 to $9,860,000 due primarily to
lower unit sales in the international and plastic markets, partially offset by
higher unit sales of portable chillers to domestic OEM customers.
Gross profit as a percent of net sales increased from 24.7% to 24.9%
due primarily to a favorable product mix and greater efficiencies in the
factory.
Selling expenses increased from $550,000 to $555,000; selling expense
as a percent of net sales increased from 5.4% to 5.6%. The dollar increase is
due to the full six month effect of opening the California sales
office/warehouse in April 1995, partially offset by lower advertising expenses.
General and administrative expenses decreased from $1,069,000 to
$1,061,000; general and administrative expenses as a percent of net sales
increased from 10.5% to 10.8%. The expenses remained constant but the percent
increased because of a lower sales base.
Interest expense increased from $339,000 to $390,000, reflecting
increased borrowing.
Fiscal Year 1996 Compared with Fiscal Year 1995
Net sales increased 6.7% from $18,528,000 to $19,776,000. The
increase is due primarily to sales for new large plants being built in the
People's Republic of China producing PET (Polyethylene - Terephthalate)
beverage bottles.
Gross profit as a percent of net sales decreased from 25.8% to 22.9%
primarily due to non-recurring costs associated with a reorganization of the
factory work flow and an unfavorable product mix.
Selling expenses increased from $819,000 to $1,206,000; selling
expenses as a percent of net sales increased from 4.4% to 6.1%. The dollar
increase is due primarily to the addition of the California sales
office/warehouse, related personnel and advertising promoting the
office/warehouse.
General and administrative expenses decreased from $2,335,000 to
$2,004,000 and from 12.6% of sales to 10.1% of sales, due primarily to a shift
in corporate administrative resources from Thermal Care to MFRI during fiscal
1996.
Interest expense increased from $671,000 to $848,000, due to increased
borrowing and an increase in interest rates.
41
<PAGE> 47
Fiscal Year 1995 Compared with Fiscal Year 1994
Net sales increased 41% from $13,127,000 to $18,528,000. The increase
was due to domestic OEM sales, international sales, and sales in the domestic
plastics industry.
Gross profit percent increased from 24.1% to 25.8% primarily due to
spreading the fixed portion of manufacturing costs over a higher production
volume, partially offset by costs of training new factory personnel for the
higher production volume.
Selling expenses increased from $779,000 to $819,000; selling expenses
as a percent of net sales decreased from 5.9% to 4.4%. The 5% increase in
selling expenses is due to an increase in advertising costs. The decrease in
expense as a percent of net sales is due to the increased sales volume.
General and administrative expenses decreased from $2,479,000 to
$2,335,000; general and administrative expenses as a percent of net sales
decreased from 18.9% to 12.6%. The decrease is due to lower corporate
administrative expenses resulting from a shift in corporate administrative
resources from Thermal Care to MFRI during fiscal 1995, partially offset by
increased Thermal Care administrative expenses due to additional personnel to
accommodate higher sales volume.
Interest expense increased from $487,000 to $671,000, due to increased
borrowing.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Prior to the Merger, working capital and capital expenditure
requirements of Thermal Care have been funded through operations and borrowings
by Midwesco. Working capital and investment needs of MFRI have historically
been funded through MFRI operations and MFRI's $7,000,000 revolving line of
credit. The amount outstanding under the MFRI line of credit as of July 31,
1996 was $6,250,000.
To finance a September 1994 acquisition, MFRI borrowed $4,000,000 from
a bank under a term loan which is repayable in 16 consecutive quarterly
installments which commenced January 31, 1995.
The Midwesco long-term debt assumed in the Acquisition will
approximate $6,611,000, $5,000,000 of which represents assumed bank debt with
the remainder representing assumed lease obligations. The Midwesco bank debt
assumed in the Acquisition will bear interest pursuant to MFRI's existing bank
loan agreement. The interest rate under MFRI's loan agreement is lower than
the stated interest rate on the assumed Midwesco bank debt.
42
<PAGE> 48
On September 14, 1995 and October 18, 1995, respectively, Midwesco
Filter and PPI received the proceeds of Industrial Revenue Bonds. Such
proceeds are available for capital expenditures related to manufacturing
capacity expansions and efficiency improvements during a three-year period
commencing in the fourth quarter of 1994 in the Filtration Products Business in
Winchester, Virginia ($3,150,000) and the Piping System Products Business in
Lebanon, Tennessee ($3,150,000). The bonds mature approximately 12 years from
the date of issuance, but the Company's agreement with the bank whose letter of
credit secures payment of the bonds requires equal annual principal reductions
sufficient to amortize the bonds in full beginning approximately four years
after issuance. The bonds bear interest at a variable rate, which initially
approximated 5% per annum, including letter of credit and remarketing fees.
Each bond indenture establishes a trusteed project fund for deposit of the bond
proceeds. The trustee is authorized to make disbursements from the project
fund upon requisition from the Company to pay costs of capital expenditures
which comply with the requirements of the loan agreement for each bond.
Pending such disbursements, the trustee invests the balance of the project fund
in investments defined by the indenture and limited by applicable law. Such
invested funds totaled $4,130,000 at July 31, 1996. The bonds are secured by
bank letters of credit which expire approximately two years from the date of
issuance; the Company expects to arrange for renewal, reissuance or extension
of the letter of credit prior to each expiration date during the term of the
bonds.
On May 8, 1996, the Company purchased for approximately $1.1 million a
10.3-acre parcel of land with a 67,000-square foot building adjacent to its
Filtration Products property in Winchester, Virginia to accommodate the
Company's growing activities. The purchase was financed 80% by a seven-year
mortgage bearing interest at 8.38% and 20% by the aforementioned revenue bonds.
Based on the unaudited pro forma combined balance sheet, the Company
will have positive working capital in excess of $20 million and a current ratio
of 1.76 to 1. Management does not expect Thermal Care to have a material
adverse effect on the Company's liquidity and cash flow.
The Company believes, subsequent to the Acquisition, its working
capital and investment needs will require financing in excess of that available
through its $7,000,000 revolving line of credit and, accordingly, is seeking to
replace that facility, the assumed Midwesco debt and the unpaid portion of the
$4,000,000 September 1994 term loan with $15 million of fixed rate senior
unsecured notes due 2006 (the "Notes") and a new $5 million floating rate
unsecured revolving line of credit (the "Credit Line"). The Company has
engaged a private placement agent and financial advisor in connection with the
private offering of the Notes and expects to have the new financing in place
prior to January 31, 1997. The Notes will require principal payment beginning
at the end of the fourth year and continuing annually thereafter, resulting in
a seven-year average life. There can be no assurance that the foregoing
transactions involving the Notes and the Credit Line will occur, and if
consummated, that they will be consummated under the foregoing terms.
43
<PAGE> 49
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined MFRI financial
statements set forth the Unaudited Pro Forma Combined Balance Sheet of MFRI as
of July 31, 1996, and the Unaudited Pro Forma Combined Statements of Operations
for the year ended January 31, 1996, and the six months ended July 31, 1996.
These unaudited pro forma combined financial statements are presented to
illustrate the effect of certain adjustments to the historical consolidated
financial statements that result from the Merger between MFRI and Midwesco.
MFRI will account for the Merger as a purchase by MFRI of Midwesco.
The accompanying MFRI unaudited pro forma combined financial
statements should be read in conjunction with the respective companies'
historical consolidated financial statements and notes thereto. The unaudited
pro forma combined financial statements are presented for informational
purposes only and are not necessarily indicative of actual results had the
foregoing transactions occurred as described in the preceding paragraphs, nor
do they purport to represent results of future operations of the merged
companies.
44
<PAGE> 50
MFRI, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JULY 31, 1996
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
ASSETS MFRI MIDWESCO
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 264,000 $ 103,000
Accounts receivable, less allowance for doubtful accounts 19,596,000 4,970,000
Cost and estimated earnings in excess of billings on uncompleted contracts 4,004,000 213,000
Inventories 13,721,000 5,226,000
Other current assets 2,816,000 840,000
----------- -----------
Total current assets 40,401,000 11,352,000
RESTRICTED CASH FROM BOND PROCEEDS 4,130,000
PROPERTY, PLANT AND EQUIPMENT - Net 11,625,000 3,501,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,041,000
Investment in Midwesco Services, Inc. 1,188,000
Investment in and amounts due from joint ventures 512,000
Patents 1,186,000
Goodwill 4,644,000
Other assets 1,263,000 203,000
----------- -----------
Total other assets 7,093,000 10,944,000
----------- -----------
TOTAL ASSETS $63,249,000 $25,797,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $16,049,000 $ 5,438,000
Current maturities of long-term debt 2,191,000 3,909,000
Billings in excess of costs on uncompleted contracts 1,770,000 781,000
----------- -----------
Total current liabilities 20,010,000 10,128,000
Long-term debt less current maturities 14,161,000 4,875,000
Deferred income taxes and other 1,329,000 1,026,000
----------- -----------
Total long-term liabilities 15,490,000 5,901,000
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital 18,012,000 3,547,000
Retained earnings and other 9,737,000 6,221,000
----------- -----------
Total stockholders' equity 27,749,000 9,768,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,249,000 $25,797,000
=========== ===========
<CAPTION>
MIDWESCO PROFORMA
BUSINESSES ACQUIRED PURCHASE ADJUSTED
ASSETS SPUN-OFF MIDWESCO ADJUSTMENTS BALANCE
(A) (A) (B)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 103,000 $ 264,000
Accounts receivable, less allowance for doubtful accounts 3,278,000 $ 1,692,000 21,288,000
Cost and estimated earnings in excess of billings on uncompleted contracts 213,000 4,004,000
Inventories 1,059,000 4,167,000 17,888,000
Other current assets 305,000 535,000 3,351,000
---------- ----------- ------------ -----------
Total current assets 4,958,000 6,394,000 46,795,000
RESTRICTED CASH FROM BOND PROCEEDS 4,130,000
PROPERTY, PLANT AND EQUIPMENT - Net 695,000 2,806,000 $ 306,000 (d) 14,737,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,041,000 (9,041,000) (c)
Investment in Midwesco Services, Inc. 1,188,000
Investment in and amounts due from joint ventures 512,000
Patents 1,186,000
Goodwill 2,935,000 (d) 7,579,000
Other assets 119,000 84,000 1,347,000
---------- ----------- ------------ -----------
Total other assets 1,819,000 9,125,000 (6,106,000) 10,112,000
---------- ----------- ------------ -----------
TOTAL ASSETS $7,472,000 $18,325,000 $ (5,800,000) $75,774,000
========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $2,844,000 $ 2,594,000 $ 390,000 (e) $19,133,000
100,000 (i)
Current maturities of long-term debt 481,000 3,428,000 5,619,000
Billings in excess of costs on uncompleted contracts 781,000 1,770,000
---------- ----------- ------------ -----------
Total current liabilities 4,106,000 6,022,000 490,000 26,522,000
Long-term debt less current maturities 1,692,000 3,183,000 17,344,000
Deferred income taxes and other 27,000 999,000 (1,325,000) (f) 1,122,000
119,000 (h)
---------- ----------- ------------ -----------
Total long-term liabilities 1,719,000 4,182,000 (1,206,000) 18,466,000
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital 3,547,000 (3,547,000) (g) 21,049,000
15,888,000 (d)
(12,851,000) (d)
Retained earnings and other 1,647,000 4,574,000 (4,574,000) (g) 9,737,000
---------- ----------- ------------ -----------
Total stockholders' equity 1,647,000 8,121,000 (5,084,000) 30,786,000
---------- ----------- ------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,472,000 $18,325,000 $ (5,800,000) $75,774,000
========== =========== ============ ===========
</TABLE>
See notes to unaudited proforma combined financial statements.
45
<PAGE> 51
MFRI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JULY 31, 1996
- - - - -------------------------------------------------------------------------------
The unaudited proforma combined balance sheet as of July 31, 1996 reflects the
adjustments necessary to record the proposed acquisition as though it had
occurred on July 31, 1996.
Based upon the terms of the proposed acquisition, the transaction for financial
reporting and accounting purposes will be accounted for as a purchase of
Midwesco by MFRI. Accordingly, MFRI will revalue the basis of Midwesco's
assets and liabilities to fair value. The purchase price of Midwesco will be
calculated as the fair value of the consideration paid, common stock plus
MFRI's transaction costs. The difference between the purchase price and the
fair value of the identifiable tangible and intangible assets and liabilities
will be recorded as goodwill and will be amortized over a period of 25 years as
more fully discussed in Note (d).
(a) Pursuant to the terms of the Agreement of Merger ("Agreement")
immediately prior to the effectiveness of the Merger, Midwesco will
contribute certain assets and liabilities to New Midwesco. The
contributed assets and liabilities relate to the other businesses of
Midwesco which will not be acquired by MFRI. The historical balance sheet
information of Midwesco has been adjusted to reflect the assets and
liabilities that will be contributed to New Midwesco. The column
"Acquired Midwesco" represents the historical book value of the assets and
liabilities that will be acquired by MFRI.
(b) The Proforma Adjusted Balance represents the sum of the amounts included
in the following columns: MFRI, Acquired Midwesco and Purchase
Adjustments.
(c) Represents the elimination of Midwesco's investment in MFRI. The MFRI
stock owned by Midwesco will be retired and canceled through the issuance
of new shares of MFRI stock to the shareholders of Midwesco.
(d) Pursuant to the Agreement, MFRI will issue approximately 2,124,000 shares
of MFRI Common Stock ("Stock") for the stock of Midwesco, or approximately
406,000 shares in excess of the approximate 1,718,000 shares of Stock
currently owned by the shareholders of Midwesco through their ownership of
Midwesco. Pursuant to the terms of the Agreement two escrows will be
established, both of which will be funded with Stock to be received by the
Midwesco shareholders, on a pro rata basis: 1) 300,000 shares of stock
will be placed in an escrow to be available for any other liabilities that
may arise which have not been assumed by MFRI and which New Midwesco will
be unable to pay, this escrow will terminate three years after the closing
date, and 2) approximately 67,000 shares of Stock shall be placed in
escrow to be available to MFRI should the settlement costs relating to
three known contingencies, which will be assumed by MFRI, exceed an
established threshold.
The fair value of the consideration paid will be determined based upon
the closing market price of the Stock on the business day immediately
following the approval of the Merger by MFRI's shareholders. The shares
of Stock placed in the escrows will be included in the purchase price and
will be reflected as outstanding in the earnings per share calculation as
the resolution of the contingencies to which the escrows relate are deemed
to be determinable beyond a reasonable doubt.
For purposes of preparing the proforma financial statements, the fair
value of the Stock has been estimated to be $7.48, which approximates the
current fair value of the Stock. The purchase price of
46
<PAGE> 52
$16,278,000 was allocated to the MFRI stock owned by Midwesco and to the
acquired assets and assumed liabilities based on their estimated fair value
as follows:
<TABLE>
<S> <C>
Purchase price:
Common stock issued (total shares issued of 2,124,000) $15,888,000
Transaction costs 390,000
------------
16,278,000
Purchase price allocated as follows:
Fair value of MFRI stock repurchased and retired (12,851,000)
Fair value of net assets acquired and liabilities assumed (492,000)
Goodwill (2,935,000)
</TABLE>
The goodwill will be amortized over a period of 25 years. The Company
considered the following factors in establishing a 25-year amortization
period for goodwill:
- The Thermal Care products designed in 1981 and a product line
acquired in 1983 continue to be technologically and
economically acceptable, with periodic design improvements and
evolutionary product line expansions.
- Some recently introduced Thermal Care products have experienced
steady sales growth and, in the Company's opinion, should
experience a long product life.
- The plastics industry, which is the largest market served by
Thermal Care, is expected to fill important needs in the United
States and elsewhere for many years.
- Nonplastic industrial processes requiring specialized heat
transfer equipment of the type supplied by Thermal Care have
continued to develop and, in the Company's opinion, should
continue to develop in the future. Thermal Care's products and
reputation should enable it to compete effectively for business in
such industries.
It is the Company's policy to regularly assess goodwill for
recoverability based on estimated future cash flows.
(e) Represents an estimate of the costs to be incurred by MFRI in connection
with the Merger. Such costs include legal, audit, financial advisor and
printing fees.
(f) Represents the elimination of the deferred income taxes on the equity
income in MFRI recorded by Midwesco due to the elimination of Midwesco's
investment in MFRI as discussed in Note (c). The Merger will constitute a
tax-free reorganization within the meaning of the Internal Revenue Code,
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
(g) Represents the elimination of the purchased net worth of Midwesco.
(h) Represents the deferred tax liability relating to the difference between
the assigned value and tax basis of the acquired property and equipment.
(i) Represents the establishment of a reserve for warranty and product claims
which will be assumed by MFRI upon consummation of the Acquisition.
47
<PAGE> 53
MFRI, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1996
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MIDWESCO
HISTORICAL BUSINESSES ACQUIRED
MFRI MIDWESCO SPUN-OFF MIDWESCO
(a) (a)
<S> <C> <C> <C> <C>
SALES AND EARNED REVENUES $ 85,838,000 $ 29,210,000 $ 9,435,000 $ 19,775,000
COST OF SALES AND EARNED REVENUES 68,958,000 23,012,000 7,765,000 15,247,000
------------ ------------ ------------ -------------
Gross profit 16,880,000 6,198,000 1,670,000 4,528,000
SELLING EXPENSE 4,585,000 1,876,000 670,000 1,206,000
GENERAL AND ADMINISTRATIVE EXPENSE 7,557,000 3,796,000 1,792,000 2,004,000
------------ ------------ ------------ -------------
Income (loss) from operations 4,738,000 526,000 (792,000) 1,318,000
OTHER INCOME (EXPENSE):
Interest expense - net (925,000) (1,112,000) (264,000) (848,000)
Equity in income of MFRI, Inc. 900,000 900,000
Equity in loss of Midwesco Services Inc. (36,000) (36,000)
Equity in income of joint ventures 30,000 30,000
Amortized gain on sale of Perma-Pipe 95,000 95,000
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE TAXES 3,813,000 403,000 (1,062,000) 1,465,000
INCOME TAX EXPENSE (BENEFIT) 1,440,000 291,000 (280,000) 571,000
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ 2,373,000 $ 112,000 $ (782,000) $ 894,000
============ ============ ============ =============
EARNINGS PER COMMON SHARE $ 0.52
============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,543,000
============
<CAPTION>
PROFORMA
PURCHASE ADJUSTED
ADJUSTMENTS BALANCE
(b)
<S> <C> <C>
SALES AND EARNED REVENUES $ 105,613,000
COST OF SALES AND EARNED REVENUES $ 31,000 (c) 84,236,000
------------ -------------
Gross profit (31,000) 21,377,000
SELLING EXPENSE 5,791,000
GENERAL AND ADMINISTRATIVE 117,000 (c)(h) 9,678,000
------------ -------------
Income (loss) from operations (148,000) 5,908,000
OTHER INCOME (EXPENSE):
Interest expense - net 181,000 (f) (1,592,000)
Equity in income of MFRI, Inc. (900,000) (g)
Equity in loss of Mid/Res, Inc.
Equity in income of joint ventures
Amortized gain on sale of Perma-Pipe (95,000) (g)
------------ -------------
INCOME (LOSS) BEFORE TAXES (962,000) 4,316,000
INCOME TAX EXPENSE (BENEFIT) (371,000) 1,640,000 (d)
------------ -------------
NET INCOME (LOSS) $ (591,000) $ 2,676,000
============ =============
EARNINGS PER COMMON SHARE 0.54 (e)
=============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,949,000 (e)
=============
</TABLE>
See notes to unaudited proforma combined financial statements.
48
<PAGE> 54
MFRI, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 1996
- - - - ------------------------------
<TABLE>
<CAPTION>
MIDWESCO
HISTORICAL BUSINESSES ACQUIRED
MFRI MIDWESCO SPUN-OFF MIDWESCO
(A) (A)
<S> <C> <C> <C> <C>
SALES AND EARNED REVENUES $44,955,000 $17,553,000 $7,693,000 $9,860,000
COST OF SALES AND EARNED REVENUES 34,809,000 14,161,000 6,758,000 7,403,000
----------- ---------- ---------- ----------
Gross profit 10,146,000 3,392,000 935,000 2,457,000
SELLING EXPENSE 2,714,000 833,000 278,000 555,000
GENERAL AND ADMINISTRATIVE EXPENSE 4,352,000 2,020,000 959,000 1,061,000
----------- ---------- ---------- ----------
Income (loss) from operations 3,080,000 539,000 (302,000) 841,000
OTHER INCOME (EXPENSE):
Interest expense - net (525,000) (491,000) (101,000) (390,000)
Equity in income of MFRI, Inc. 578,000 578,000
Equity in income of Midwesco Services Inc. 6,000 6,000
Equity in income of joint ventures 465,000 465,000
Amortized gain on sale of Perma-Pipe 48,000 48,000
------------ ---------- ----------- ----------
INCOME (LOSS) BEFORE TAXES 2,555,000 1,145,000 68,000 1,077,000
INCOME TAX EXPENSE (BENEFIT) 1,029,000 447,000 24,000 423,000
----------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,526,000 $ 698,000 $ 44,000 $ 654,000
=========== ========== ========== ==========
EARNINGS PER COMMON SHARE $ 0.33
===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,561,000
===========
<CAPTION>
PROFORMA
PURCHASE ADJUSTED
ADJUSTMENTS BALANCE
(B)
<S> <C> <C>
SALES AND EARNED REVENUES $54,815,000
COST OF SALES AND EARNED REVENUES $ 15,000 (c) 42,227,000
--------- -----------
Gross profit (15,000) 12,588,000
SELLING EXPENSE 3,269,000
GENERAL AND ADMINISTRATIVE EXPENSE 59,000 (c)(h) 5,472,000
--------- -----------
Income (loss) from operations (74,000) 3,847,000
OTHER INCOME (EXPENSE):
Interest expense - net 58,000 (f) (857,000)
Equity in income of MFRI, Inc. (578,000) (g)
Equity in income of Midwesco Services, Inc.
Equity in income of joint ventures
Amortized gain on sale of Perma-Pipe (48,000) (g)
--------- -----------
INCOME (LOSS) BEFORE TAXES (642,000) 2,990,000
INCOME TAX EXPENSE (BENEFIT) (286,000) (b) 1,166,000 (d)
--------- -----------
NET INCOME (LOSS) $(356,000) $ 1,824,000
========= ===========
EARNINGS PER COMMON SHARE $ 0.37 (e)
===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,967,000 (e)
===========
</TABLE>
See notes to unaudited proforma combined financial statements.
49
<PAGE> 55
MFRI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1996 AND THE
SIX MONTHS ENDED JULY 31, 1996
The unaudited proforma combined statements of operations for the twelve months
ended January 31, 1996 and the six months ended July 31, 1996 have been
prepared assuming the proposed acquisition had occurred at the beginning of the
periods presented and reflect the effects of certain adjustments to the
historical financial statements that result from the proposed acquisition
between MFRI and Midwesco.
(a) Pursuant to the terms of the Agreement of Merger immediately prior to the
effectiveness of the Merger, Midwesco will contribute certain assets and
liabilities to New Midwesco. The contributed assets and liabilities
relate to the other businesses of Midwesco which will not be acquired by
MFRI. The historical statement of operations information of Midwesco has
been adjusted to reflect the operating results of the businesses that will
be contributed to New Midwesco. The column "Acquired Midwesco" represents
the historical operating results of the business that will be acquired by
MFRI.
(b) The proforma adjusted balance represents the sum of the amounts included
in the following columns: MFRI, Acquired Midwesco and Purchase
Adjustments.
(c) As a result of the step-up in basis of certain property and equipment and
the recording of goodwill, depreciation and amortization expense is
increased for the periods shown as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JANUARY 31, JULY 31,
ASSETS AMOUNT LIFE METHOD 1996 1996
<S> <C> <C> <C> <C> <C>
Machinery and equipment $ 306,000 10 years S-L $ 31,000 $15,000
Goodwill 2,935,000 25 years S-L 117,000 59,000
</TABLE>
(d) Represents the estimated income tax expense for MFRI of 38% for the year
ended January 31, 1996, and 39% for the six months ended July 31, 1996,
based upon the statutory federal tax rate and an estimated state and local
tax rate.
50
<PAGE> 56
(e) The earnings per share calculation assumes 4,949,000 and 4,967,000
weighted average number of shares outstanding for the year ended January
31, 1996 and the six months ended July 31, 1996, respectively, computed as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JANUARY 31, JULY 31,
1996 1996
<S> <C> <C>
Historical weighted average number of shares outstanding 4,543,000 4,561,000
Incremental shares issued in connection with acquisition 406,000 406,000
----------- ----------
Proforma weighted average number of shares outstanding 4,949,000 4,967,000
=========== ==========
</TABLE>
On a proforma basis there would be no difference between primary and
fully-diluted weighted average number of shares outstanding
(f) The Midwesco bank debt assumed in the transaction will bear an interest
rate pursuant to MFRI's existing loan agreement. The interest rate under
MFRI's loan agreement is lower than the stated interest rate on the
assumed Midwesco bank debt. Accordingly, the proforma financial
information has been prepared assuming that the Midwesco bank debt bears
interest at MFRI's effective interest rate. The new debt is expected to
bear interest at approximately 8.25%, a one percentage point reduction
from the debt's current interest rate. The reduction in the interest rate
reduced the proforma interest expense by $181,000 and $58,000 for the year
ended January 31, 1996 and the six months ended July 31, 1996,
respectively.
(g) Represents the elimination of the equity income of MFRI due to the
elimination of Midwesco's investment in MFRI and the elimination of the
amortization of the gain on the sale of the Perma-Pipe business to MFRI,
which occurred in 1994.
(h) Included in general and administrative expense are amounts paid by MFRI
to Midwesco pursuant to a Management Services Agreement of $564,000 and
$311,000 for the year ended January 31, 1996 and the six-months ended July
31, 1996, respectively. Subsequent to the acquisition of Midwesco, MFRI
and New Midwesco will enter into a New Management Services Agreement which
will provide for the allocation of costs for any shared employees,
services and facilities between MFRI and New Midwesco. MFRI management
believes that the new agreement will not result in any net change to the
historical general and administrative expenses included in the proforma
combined financial statements.
******
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<PAGE> 57
BUSINESS OF THERMAL CARE
INTRODUCTION
The following is a discussion of the Thermal Care Business of
Midwesco, which, at the Effective Time, Midwesco will consist primarily of.
Prior to the consummation of the Merger, Midwesco will contribute to New
Midwesco certain assets and liabilities (the "Spin-Off"). A discussion of the
business of Midwesco in existence prior to the Spin-Off would include a
discussion of businesses that will not be acquired by MFRI. Accordingly, the
following discussion will only address the Thermal Care Business.
PRODUCTS
Thermal Care engineers, designs and manufactures coolers for
industrial purposes. Thermal Care's products include (i) chillers (portable
and central); (ii) cooling towers; (iii) pump/tank assemblies; (iv) water, hot
oil, and negative pressure temperature controllers; (v) water treatment
equipment and various other accessories; and (vi) replacement parts and
accessories relating to the foregoing products. Thermal Care's cooling
products are used to optimize manufacturing productivity by quickly removing
heat from manufacturing processes. The principal market for Thermal Care's
cooling products is the plastics processing industry. Thermal Care also sells
its products to OEM's, other cooling manufacturers on a private branded basis
and to manufacturers in the laser, metallizing, and reaction injection molding
industries.
Thermal Care combines chillers or cooling towers with pump tanks to
create plant-wide systems that account for a large portion of its business.
Thermal Care specializes in customizing cooling systems according to customer
orders. Midwesco believes that Thermal Care's success is largely attributable
to the quality of its personnel and the design work that is reflected in its
products.
CHILLERS. Chillers are refrigeration units designed to provide cool
water to a process for the purpose of removing heat from the process and
transferring that heat to an area where it can be dissipated. This heat either
is dissipated using air (air cooled chillers) or water (water cooled chillers).
Water cooled chillers use a cooling tower to transfer the heat from the chiller
using water and then releasing the heat to the atmosphere with the cooling
tower.
Midwesco believes that Thermal Care manufactures the most complete
line of chillers available in its primary market (plastics processing).
Thermal Care's line of portable chillers are available from 1/2 horsepower to
40 horsepower and incorporate a new microprocessor that is capable of computer
communications. While portable chillers are considered to be a commodity
product by many customers, Midwesco believes that Thermal Care's new unit
enables it to provide the customer with quality, features, and benefits at a
competitive price.
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<PAGE> 58
Central chillers are used for plant wide cooling, and while some
models incorporate their own pump and tank, most are sold with a separate
pumping system. Thermal Care is currently the only manufacturer that offers
several types of central water cooled chillers. These chillers are
distinguished by the manner in which the compressor (refrigerant pump) and the
evaporator (heat exchanger water to refrigerant) is utilized in the chiller.
Midwesco believes that its ability to offer these three units provides it with
a unique concept sales advantage. Thermal Care's central chillers are
available from 10 horsepower to 125 horsepower per refrigeration section.
COOLING TOWERS. A cooling tower is essentially a cabinet with heat
transfer fill media that has water flow down across the fill while air is
pulled up through the fill. Cooling takes place by evaporation. Cooling
towers are located outdoors and are designed to provide approximately 85 F of
water to remove heat from water cooled chillers, air compressors, hydraulic
motors and other processes that can effectively be cooled with such water.
Thermal Care markets two lines of cooling towers. The FT series
towers were introduced in 1984 and at the time were the first fiberglass
cooling towers to be sold in the U.S. The cabinets for these towers are
imported from Taiwan and are available in sizes ranging from three to 850 tons.
Fiberglass cooling towers have achieved high popularity and are available from
most suppliers. The FC fiberglass tower line, which is designed and engineered
by Thermal Care and which Midwesco believes is the highest quality tower in the
market today, is available from 80 to 200 tons. (One ton of refrigeration
equals 12,000 BTU's of heat removal).
PUMP/TANK ASSEMBLIES. Thermal Care manufactures and markets a variety
of tanks in various sizes, piping arrangements that utilize alarms and other
electrical options. Thus, each tank is unique and customized to meet
customers' individual needs. Tanks are used as an integral part of central
tower and chiller systems. This product line was expanded with the
introduction of FRP tanks.
TEMPERATURE CONTROL UNITS. Most temperature control units are used by
injection molders of plastic parts to remove heat from the molds at an elevated
temperature for the purpose of improving part quality. The recent introduction
of Thermal Care's totally redesigned unit, the RA series, has resulted in a
doubling of temperature control unit sales. Over 90% of the temperature
control units sold in the industry are water units. The remaining units use
oil as the heat transfer medium. Thermal Care sells an oil temperature control
unit manufactured in Denmark pursuant to an exclusive marketing agreement for
North America.
WATER TREATMENT EQUIPMENT AND ACCESSORIES. Sold as an accessory to
cooling tower systems, water treatment equipment must be used to protect the
equipment that is being cooled. Thermal Care sells units manufactured to its
specifications by a supplier that provides all the equipment needed to properly
treat the water. While a relatively small part of Thermal Care's business,
this arrangement allows Thermal Care to offer a complete system to its
customers.
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In addition, Thermal Care provides other items to complement a system that is
purchased from a supplier and usually drop shipped directly to a customer;
principally, heat exchangers, special valves, and "radiator type" coolers.
PARTS. Thermal Care strives to fill parts orders within 24 hours and
sells parts at competitive margins in order to enhance new equipment sales.
MARKETING
In general, Thermal Care sells its products to five different markets.
1. The domestic plastics market is the largest market served by
Thermal Care, representing the core of its business. There are approximately
8,000 companies processing plastic products in the United States, primarily
using injection molding, extrusion, and blow molding machinery. Thermal Care
believes that the total market for water cooling equipment in the plastics
industry is $101 million annually, and that Thermal Care is the third largest
supplier of heat transfer equipment to the plastics industry with a market
share of 14% to 16%. Midwesco believes that the plastics industry is a mature
industry with growth generally consistent with that of the national economy.
Due to the high plastics content in many major consumer items, such as cars and
appliances, this industry experiences economic cyclical activity. Thermal Care
believes that it is recognized in the domestic plastics market as a quality
equipment manufacturer and that Thermal Care will be able to maintain its
market share with opportunities for increased share through product
development. Thermal Care's products are sold through independent
manufacturers' representatives on an exclusive territory basis. Seventeen
agencies are responsible for covering the United States and are supported by
four Thermal Care regional managers.
2. The primary emphasis for the sale of Thermal Care products
outside the United States has been in Latin America and through system design
consultants' assembly of complete world wide PET (plastic bottle) plants,
significant numbers of which are being built by large companies. This activity
is currently recovering from a decline in recent years due to the devaluation
of the Mexican peso. Midwesco believes that Thermal Care has a significant
opportunity for growth due to the high quality of its equipment and the fact
that it offers complete system design. Many United States competitors do not
provide equipment outside of the U.S., and while there are European competitors
selling equipment in Latin America, Midwesco believes that they lack system
design capabilities and have a significant freight disadvantage. Thermal Care
markets its products through a combination of manufacturers' representatives,
distributors, and consultants, some of which are recognized as the leaders in
the distribution of plastics machinery throughout Latin America.
3. A relatively small percentage of Thermal Care's products are
sold to smaller competitors on a private branded basis. The margins on this
equipment are lower; however, such sales are primarily in product lines where
the incremental volume is of significant benefit
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<PAGE> 60
in Thermal Care's manufacturing process. Midwesco believes that there are a
number of companies that could participate in this type of name branding
enterprise with Thermal Care.
4. Thermal Care sells cooling towers to the HVAC industry,
primarily to contractors or commercial/governmental facilities, for cooling the
condensers of chillers used to provide air conditioning. Thermal Care believes
that the size of this market exceeds $300 million annually, but Thermal Care's
market share is low due to the relatively high pricing of Thermal Care's high
quality products. Thermal Care's cooling towers are sold through either
manufacturers' representatives or distributors.
5. An increasing share of Thermal Care's sales is to non-plastics
industries that require specialized heat transfer equipment, usually sold to
end-users as a package by the supplier of the primary equipment. Thermal
Care's sales in the laser industry, metallizing industry, and reaction
injection molding industry have been particularly strong. Thermal Care
believes that the size of this market is over $200 million annually. Thermal
Care expects growth in this market due to its ability to work with OEM
customers that perceive Thermal Care to be a quality supplier. Distribution of
products in this market is generally handled by the OEM. Thermal Care is
establishing a manufacturers' network to cover approximately one half the U.S.
TRADEMARKS
Midwesco has registered the trademark "Midwesco" with the U.S. Patent
and Trademark Office (the "Trademark Office"). In addition, Midwesco has
applied for registration of the trademark "Thermal Care" with the Trademark
Office.
BACKLOG
As of July 31, 1996, the dollar amount of backlog (uncompleted firm
orders) was approximately $4,034,000. As of July 31, 1995, the amount of
backlog was approximately $3,199,000. Approximately $500,000 of the backlog as
of July 31, 1996 will not be completed before January 31, 1997.
RAW MATERIALS AND MANUFACTURING
Thermal Care's production facility utilizes approximately 35,000
square feet with an additional 15,000 square feet of inventory storage space.
The plant layout is designed to facilitate movement through multiple work
centers. Thermal Care's Manufacturing Accounting Production Inventory Control
System supports its manufacturing operations. The status of the customer order
at any given moment can be determined through the MAPICS System.
Thermal Care utilizes prefabricated sheet metal and sub-assemblies
manufactured by both Thermal Care and outside vendors for temperature
controller fabrication. This reduces the labor
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to complete finish goods. The production line is self-contained allowing
Thermal Care to assemble, wire, test, and crate the units for shipment with
minimal handling.
FT towers up to 100 tons in capacity are assembled to finished goods
inventory, which allows Thermal Care to meet quick delivery requirements.
Towers over 100 tons in capacity are shipped for field assembly. Thermal Care
employs field technicians that can assist the customer with assembly. FT
cooling towers are manufactured using fiberglass and hardware components
purchased from a Taiwanese manufacturer, which is Midwesco's sole source for
such products. The wet deck is cut from bulk fill material and installed
inside the tower. Customer-specified options can be added at any time.
The FC towers are rectangular in design and are engineered by Thermal
Care. Two different cabinet sizes of the FC tower account for 16 different
model variations. Some of these models are certified by the Cooling Tower
Institute with stringent capacity guarantees. All FC cooling towers are
assembled at the Niles Facility.
Thermal Care assembles all tank systems by fabricating the steel to
meet the size requirements and adding purchased components to meet the customer
specifications. Electrical control boxes assembled in the electrical panel
shop are then added to the tank and hardwired to all electrical components.
The interior of the tank is coated with an immersion service epoxy and the
exterior is painted in a spray booth. In 1995, Thermal Care developed a
fiberglass tank in order to meet the need for nonferrous applications.
Portable chillers are assembled utilizing components manufactured by
Thermal Care and supplied by outside vendors. Portable chillers are assembled
using a condensing unit, a non-corrosive tank, hose, and prepainted sheet
metal. Many of the components utilized in these chillers are fabricated as
sub-assemblies and held in inventory. Once the water and refrigeration
components have been assembled, the unit is moved to the electrical department
for the addition of control sub-assemblies and hardwiring. The chillers are
then evacuated, charged with refrigerant and tested under fully loaded
conditions. The final production step is to clean, insulate, label, and crate
the chiller for shipment.
Central chillers are manufactured to customer specifications. Many of
the components are purchased to the job requirements and production is planned
so that sub-assemblies are completed to coincide with the work center
movements. The welding department will fabricate the steel frame just prior to
delivery of the compressors, evaporators, and condensers. The electrical
department completes the sub-panels before the chiller reaches the electrical
work center for hardwiring. After mechanical and electrical assembly, the
chiller is evacuated, charged with refrigerant and tested at full and partial
load conditions. The equipment is then insulated and prepared for painting in
the Thermal Care spray booth. The final production step prepares the unit for
shipment and completes the quality control inspection process.
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COMPETITION
Thermal Care believes that there are approximately 13 competitors
selling cooling equipment in the plastics-domestic market. Three
manufacturers, including Thermal Care, collectively share approximately 75% of
the plastics market. Many potential foreign customers with relatively small
cooling needs are able to purchase small refrigeration units (portable
chillers) that suit their needs and are manufactured in their respective local
markets at prices below that which Thermal Care can offer competing products.
However, such local manufacturers often lack the technology and products needed
for plant-wide cooling. Thermal Care believes that its positive reputation for
producing quality plant-wide cooling product results in a significant portion
of the business in this area.
The Company believes that price, quality, service and a comprehensive
product line are the key competitive factors in Thermal Care's business. The
Company believes that Thermal Care has a more comprehensive line of cooling
products than any of its competitors. Certain competitors of Thermal Care have
cost advantages as a result of manufacturing in non-union shops and of offering
a limited range of products. Some of Thermal Care's competitors have greater
financial resources than the Company.
GOVERNMENT REGULATION
The Company does not expect compliance with Federal, State and local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment to have a material
effect upon the capital expenditures, earning or competitive position of
Thermal Care, nor is management aware of the need for any material capital
expenditures for environmental control facilities for the remainder of the
current fiscal year or for the foreseeable future. Although regulations
recently promulgated under the Federal Clean Air Act prohibit the manufacture
and sale of certain refrigerants, none of these refrigerants are used by
Thermal Care in its products. Although there can be no assurance as to the
ultimate effect on Thermal Care of the Clean Air Act and related laws, the
Company expects that suitable refrigerants conforming to Federal, State and
local laws and regulations will continue to be available to Thermal Care.
PROPERTIES
Thermal Care leases its principal executive offices and manufacturing
facility located at 7720 Lehigh Avenue, Niles, Illinois 60714. Thermal Care
also leases a 89,200-square foot warehouse facility located in Niles, Illinois
and a 2,600-square foot office and warehouse facility located in Riverside,
California.
Thermal Care believes its properties and equipment are well
maintained, in good operating condition and that their productive capacities
are generally adequate for its present and currently anticipated needs.
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EMPLOYEES
As of July 31, 1996, Thermal Care had 94 full-time employees, 19 of
whom were engaged in sales and marketing, 27 of whom were engaged in management
and administration, and the remainder were engaged in production, excluding
those employees who will be employed by New Midwesco. Most of Thermal Care's
production employees are represented by two unions, the Pipefitters and the
International Brotherhood of Electrical Workers unions pursuant to collective
bargaining agreements that both expire on June 1, 1997. Thermal Care believes
that its relationship with its employees is satisfactory.
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MANAGEMENT
Management of MFRI will not change upon the consummation of the
Merger, except that Bradley E. Mautner, Director of MFRI and President of
Midwesco will join MFRI as Vice President and Don Gruenberg, general manager of
the Thermal Care Business since 1980 and president since 1988, will join MFRI
as Vice President and Director. Messrs. Mautner and Gruenberg have agreed to
serve in such capacities if elected.
BRADLEY E. MAUTNER, age 40, has served as the President of Midwesco
since April 1994. and has been a member of the MFRI Board since 1995. In
addition, since February 1996, he has served as the Chief Executive Officer of
Mid Res, Inc., a 50% owned affiliate of Midwesco. From February 1988 to
January 1996, he served as the President of Midwesco Services, Inc. (formerly
known as Mid Res, Inc.). Bradley E. Mautner is the son of Henry M. Mautner,
Chairman of the Board of Midwesco and Vice Chairman of the MFRI Board.
DON GRUENBERG, age 54, was employed by Airtemp division of Chrysler
Corporation in various positions from 1968 to 1969. From 1970 to 1974, he was
employed in various positions by Dunham-Bush Inc. Prior to rejoining Thermal
Care in 1980, he was employed by Thermal Care/Mayer, a division of Midwesco
from 1974 to 1979. During the intervening period, Mr. Gruenberg served as an
independent manufacturer's representative for several product lines in the
Midwest region. Mr. Gruenberg is a member of the National Board, Society of
the Plastics Industry.
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PRINCIPAL STOCKHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, with respect to each director, certain
executive officers, proposed executive officer and director, all directors and
officers as a group, and any person who is known to MFRI to be the beneficial
owner of more than 5% of the outstanding shares of common stock of MFRI, the
name of such owner, the number of shares of common stock beneficially owned,
the nature of such ownership, the percentage such ownership is of the
outstanding shares of MFRI Common Stock, in the case of each 5% stockholder,
the address of such owner.
<TABLE>
<CAPTION>
Amount and Nature of Amount and Nature of
Beneficial Ownership as of Beneficial Ownership After
Name and Address of Beneficial Owner August 31, 1996(1)(2) the Merger(1)
------------------------------------ -------------------------- --------------------------
Shares Percent Shares Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Midwesco, Inc. 1,717,666(3) 37.7% -- --
7720 Lehigh Avenue
Niles, IL 60714
Ryback Management Corporation 375,000(4) 8.2% 375,000 7.6%
Adviser to the Lindner Funds
7711 Carondelet Avenue
P.O. Box 16900
St. Louis, MO 63105
Heartland Advisors, Inc. 300,000(5) 6.6% 300,000 6.0%
790 North Milwaukee Street
Milwaukee, WI 53202
David Unger 43,250(6) * 970,935 19.6%
7720 Lehigh Avenue
Niles, IL 60714
Henry M. Mautner 29,250(6) * 449,188 9.1%
7720 Lehigh Avenue
Niles, IL 60714
Gene K. Ogilvie 30,750 * 41,772 *
Fati A. Elgendy 12,575 * 22,495 *
Don Gruenberg 2,500 * 4,337 *
Bradley E. Mautner 2,300(6) * 172,774 3.5%
Arnold F. Brookstone 10,500 * 10,500 *
</TABLE>
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<TABLE>
<CAPTION>
Amount and Nature of Amount and Nature of
Beneficial Ownership as of Beneficial Ownership After
Name and Address of Beneficial Owner August 31, 1996(1)(2) the Merger(1)
------------------------------------ -------------------------- --------------------------
Shares Percent Shares Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Eugene Miller 9,500 * 9,500 *
Stephen B. Schwartz 2,700 * 2,700 *
Joel Tyler Headley III 21,250 * 21,250 *
All directors and executive officers as a 189,000 4.1% 1,736,673 35.0%
group (15 persons)
</TABLE>
__________________________
* Less than 1%.
(1) Includes shares, if any, held by spouse; held in joint tenancy with
spouse; held by or for the benefit of the named person or one or more
members of his immediate family; with respect to which the named
person has or shares voting or investment powers; or in which the
named person otherwise has a beneficial interest.
(2) All directors and officers as a group beneficially own an aggregate of
189,000 shares (4.1%), of which 153,125 shares (including 26,250
shares for each of Messrs. Unger, Ogilvie and Henry M. Mautner, 21,250
shares for Mr. Headley, 10,875 shares for Mr. Elgendy, 1,500 shares
for Mr. Gruenberg, 2,000 shares for Bradley E. Mautner, 7,500 shares
for each of Messrs. Brookstone and Miller and 2,500 shares for Mr.
Schwartz) are subject to stock options granted by the Company which
were exercisable on August 31, 1996 or which have or will become
exercisable within 60 days thereafter. None of the named persons owns
beneficially more than 1% of the outstanding shares of stock of
Midwesco except Mr. Unger, who beneficially owns 43.7% (5,050 shares),
Henry M. Mautner, who beneficially owns 19.8% (2,286 shares), and
Bradley E. Mautner who beneficially owns 8.0% (928 shares). In
addition, none of the other named persons owns shares of Midwesco
Stock except Messrs. Ogilvie, Elgendy and Gruenberg, who own 60, 54
and 10 shares of Midwesco Stock, respectively. All directors and
executive officers of the Company as a group beneficially own an
aggregate of 8,425 shares Midwesco Stock (72.9%).
(3) Midwesco has sole investment and voting power with respect to all of
the shares shown as beneficially owned by it. 850,000 of the shares
owned by Midwesco (18.8%) have been pledged to Harris Trust and
Savings Bank as collateral for a revolving credit facility.
(4) According to a Schedule 13G dated January 25, 1996, Ryback Management
Corporation is the beneficial owner of the shares as a result of
acting as investment adviser to several investment
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companies which directly own such shares, including Lindner Fund,
Inc., which owns 341,000 shares.
(5) According to a Schedule 13G dated February 9, 1996, Heartland
Advisors, Inc. ("Heartland") has sole voting and dispositive power
with respect to the shares shown as beneficially owned by it. All of
such shares are held in investment advisory accounts of Heartland. As
a result, various persons have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale
of, the securities. The interests of one such account, Heartland
Value fund, a series of Heartland Group, Inc., a registered investment
company, relates to more than 5% of the class.
(6) Does not include the 1,717,666 shares of MFRI Common Stock owned by
Midwesco.
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Representatives of Deloitte & Touche LLP, the auditors of both MFRI
and Midwesco, are expected to be present at the meeting and will be available
to respond to questions and may make a statement if they so desire.
OTHER MATTERS
Pursuant to MFRI's Bylaws, the business that may be conducted at the
Special Meeting is confined to that referenced in the Notice of Special Meeting
of Stockholders that accompanies this Proxy Statement.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder intends to present at the annual
meeting of stockholders in 1997 must be received by the Company by February
6, 1997 in order to be eligible for inclusion in the proxy statement and proxy
form relating to such meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"), are incorporated by reference and made a part of
this Proxy Statement: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996; (ii) all other reports filed pursuant to
Section 13(a), or 15(d) of the Exchange Act since December 31, 1996,
specifically including the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1996 and the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement
and prior to the date of the Special Meeting shall be deemed to be incorporated
by reference in this Proxy statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document or information
incorporated or deemed to be incorporated herein by reference shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any subsequently filed document that
also is, or is deemed to be, incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT THAT
ARE NOT INCLUDED HEREIN OR DELIVERED HEREWITH RELATING TO MFRI ARE AVAILABLE
WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO MICHAEL D. BENNETT, MFRI, INC.,
7720 LEHIGH AVENUE, NILES, ILLINOIS 60714, TELEPHONE (847) 966-1000. SUCH
DOCUMENTS WILL BE DELIVERED BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS
WITHIN ONE DAY OF RECEIPT OF THE REQUEST THEREFOR. TELEPHONE REQUESTS MAY BE
DIRECTED TO MICHAEL D. BENNETT AT (847) 966-1000 (EXT. 2002). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
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ANY REQUESTS SHOULD BE MADE PROMPTLY UPON RECEIPT OF THIS PROXY STATEMENT.
64
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INDEX TO MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at January 31, 1996 and 1995 and July 31, 1996
(unaudited) F-3
Consolidated Statements of Operations for each of the three years ended
January 31, 1996 and the six months ended July 31, 1996 and 1995 (unaudited) F-4
Consolidated Statements of Shareholders' Equity for each of the three years
ended January 31, 1996 and the six months ended July 31, 1996 (unaudited) F-5
Consolidated Statements of Cash Flows for each of the three years ended
January 31, 1996 and the six months ended July 31, 1996 and 1995 (unaudited) F-6
Notes to Consolidated Financial Statements F-8
Quarterly Financial Information (unaudited) F-20
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Midwesco, Inc.:
We have audited the accompanying consolidated balance sheets of Midwesco, Inc.
and subsidiaries (the "Company") as of January 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended January 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Midwesco, Inc. and subsidiaries as
of January 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 28, 1996
(August 14, 1996 as to the second paragraph of Note 6)
F-2
<PAGE> 72
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - - - ---------------------------
<TABLE>
<CAPTION>
JULY 31, JANUARY 31
1996 ---------------------------------
ASSETS (UNAUDITED) 1996 1995
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 103,000 $ 111,000 $ 86,000
Trade accounts receivable, less allowance for
doubtful accounts of $42,000 in 1996 and
$43,000 in 1995 4,970,000 3,993,000 4,669,000
Due from affiliates 38,000 1,102,000
Income tax receivable 363,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 213,000 796,000 213,000
Deferred income taxes 536,000 428,000 473,000
Inventories, less reserve of $49,000 in
1996 and $130,000 in 1995 5,226,000 5,522,000 4,216,000
Prepaid expenses and other current assets 304,000 508,000 462,000
----------- ----------- -----------
Total current assets 11,352,000 11,759,000 11,221,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,041,000 8,414,000 7,419,000
Investment in Midwesco Services, Inc. 1,188,000 1,182,000 1,218,000
Investment in and amounts due from joint
ventures 512,000 297,000 110,000
Other assets 203,000 154,000 141,000
----------- ----------- -----------
Total other assets 10,944,000 10,047,000 8,888,000
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 4,875,000 4,865,000 4,498,000
Machinery and equipment 945,000 923,000 1,185,000
Furniture and office equipment 2,056,000 2,449,000 2,243,000
Transportation equipment 965,000 895,000 841,000
----------- ----------- -----------
8,841,000 9,132,000 8,767,000
Less accumulated depreciation 5,340,000 5,527,000 5,430,000
----------- ----------- -----------
Property, plant and equipment - net 3,501,000 3,605,000 3,337,000
----------- ----------- -----------
TOTAL ASSETS $25,797,000 $25,411,000 $23,446,000
=========== =========== ===========
<CAPTION>
LIABILITIES AND JULY 31, JANUARY 31
SHAREHOLDERS' EQUITY 1996 -------------------------------
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
CURRENT LIABILITIES:
Drafts payable $ 1,200,000 $ 649,000
Accounts payable 3,339,000 4,086,000 $ 4,168,000
Commissions payable 424,000 494,000 712,000
Other accrued expenses 425,000 659,000 1,056,000
Income taxes payable 50,000 173,000
Due to affiliates 708,000 855,000
Billings in excess of related costs and estimated
earnings on uncompleted contracts 781,000 276,000 204,000
Current portion of long-term debt 3,909,000 575,000 535,000
----------- ----------- -----------
Total current liabilities 10,128,000 7,447,000 7,703,000
LONG-TERM LIABILITIES:
Long-term debt, less current portion 4,875,000 8,194,000 6,721,000
Deferred income taxes 1,026,000 700,000 64,000
----------- ----------- -----------
Total long-term liabilities 5,901,000 8,894,000 6,785,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized -
50,000 shares; issued - 11,564 shares 115,000 115,000 115,000
Capital in excess of par value 3,432,000 3,432,000 3,432,000
Retained earnings 6,221,000 5,523,000 5,411,000
----------- ----------- -----------
Total shareholders' equity 9,768,000 9,070,000 8,958,000
----------- ----------- -----------
TOTAL LIABILITIES AND $25,797,000 $25,411,000 $23,446,000
SHAREHOLDERS' EQUITY =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 73
MIDWESCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994 AND
SIX-MONTH PERIODS ENDED JULY 31, 1996 AND 1995
- - - - -------------------------------------------------------------------------------------------------
JULY 31
-----------------------------
1996 1995
(UNAUDITED)
<S> <C> <C>
SALES AND EARNED REVENUES $17,553,000 $13,603,000
COST OF SALES AND EARNED REVENUES 14,161,000 10,357,000
----------- -----------
Gross profit 3,392,000 3,246,000
SELLING EXPENSE 833,000 884,000
GENERAL AND ADMINISTRATIVE EXPENSE 2,020,000 1,881,000
----------- -----------
Income (loss) from operations 539,000 481,000
OTHER INCOME (EXPENSE):
Interest expense - net (491,000) (479,000)
Equity in income of MFRI, Inc. 578,000 458,000
Equity in loss of Simtech, Inc.
Equity in income (loss) of Midwesco Services, Inc. 6,000 (6,000)
Equity in income (loss) from joint ventures 465,000
Amortized gain on sale of Perma-Pipe 48,000 48,000
----------- -----------
Other income (expense) 606,000 21,000
----------- -----------
Income (loss) before income taxes 1,145,000 502,000
INCOME TAX EXPENSE (BENEFIT) 447,000 210,000
----------- -----------
Income (loss) from continuing operations 698,000 292,000
DISCONTINUED OPERATIONS:
Income from discontinued operations of Perma Pipe division less
applicable income taxes of $495,000 in 1994
Recognized gain on sale of Perma-Pipe Division
less applicable income taxes of $1,107,000 in 1994
----------- -----------
NET INCOME $ 698,000 $ 292,000
=========== ===========
<CAPTION>
JANUARY 31
----------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
SALES AND EARNED REVENUES $29,210,000 $29,579,000 $20,519,000
COST OF SALES AND EARNED REVENUES 23,012,000 23,314,000 16,282,000
----------- ----------- -----------
Gross profit 6,198,000 6,265,000 4,237,000
SELLING EXPENSE 1,876,000 1,550,000 1,594,000
GENERAL AND ADMINISTRATIVE EXPENSE 3,796,000 3,729,000 2,821,000
----------- ----------- -----------
Income (loss) from operations 526,000 986,000 (178,000)
OTHER INCOME (EXPENSE):
Interest expense - net (1,112,000) (806,000) (963,000)
Equity in income of MFRI, Inc. 900,000 463,000 786,000
Equity in loss of Simtech, Inc. (4,000)
Equity in income (loss) of Midwesco Services, Inc. (36,000) 101,000 (7,000)
Equity in income (loss) from joint ventures 30,000 36,000 (1,052,000)
Amortized gain on sale of Perma-Pipe 95,000 120,000
----------- ----------- -----------
Other income (expense) (123,000) (86,000) (1,240,000)
----------- ----------- -----------
Income (loss) before income taxes 403,000 900,000 (1,418,000)
INCOME TAX EXPENSE (BENEFIT) 291,000 358,000 (614,000)
----------- ----------- -----------
Income (loss) from continuing operations 112,000 542,000 (804,000)
DISCONTINUED OPERATIONS:
Income from discontinued operations of Perma Pipe division less
applicable income taxes of $495,000 in 1994 825,000
Recognized gain on sale of Perma-Pipe Division
less applicable income taxes of $1,107,000 in 1994 1,732,000
NET INCOME $ 112,000 $ 542,000 $ 1,753,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 74
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994 AND
SIX-MONTH PERIOD ENDED JULY 31, 1996
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL IN
NUMBER NUMBER EXCESS OF
OF SHARES AMOUNT OF SHARES AMOUNT PAR VALUE
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1993 200 $ 60,000 11,457 $ 114,000 $ 2,991,000
Net income
Stock sale, redemption and elimination of cumulative foreign
currency transactions relating to Perma-Pipe (200) (60,000) 107 1,000 57,000
Equity in transactions of affiliates:
Stock offering of MFRI, Inc. (net of income taxes of $184,000) 300,000
--------- --------- --------- --------- -----------
BALANCE, JANUARY 31, 1994 11,564 115,000 3,348,000
Net income
Equity in transactions of affiliate:
Stock offering of MFRI, Inc. (net of income taxes of $37,000) 61,000
Issuance of MFRI, Inc. stock for the acquisition of
Ricwil, Inc. (net of income taxes of $14,000) 23,000
--------- --------- --------- --------- -----------
BALANCE, JANUARY 31, 1995 11,564 115,000 3,432,000
Net income
--------- --------- --------- --------- -----------
BALANCE, JANUARY 31, 1996 11,564 115,000 3,432,000
Net income (Unaudited)
--------- --------- --------- --------- -----------
BALANCE, JULY 31, 1996 (Unaudited) - $ - 11,564 $ 115,000 $ 3,432,000
========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
RETAINED TRANSLATION
EARNINGS ADJUSTMENT TOTAL
<S> <C> <C> <C>
BALANCE, FEBRUARY 1, 1993 $ 3,116,000 $(136,000) $ 6,145,000
Net income 1,753,000 1,753,000
Stock sale, redemption and elimination of cumulative foreign
currency transactions relating to Perma-Pipe 136,000 134,000
Equity in transactions of affiliates:
Stock offering of MFRI, Inc. (net of income taxes of $184,000) 300,000
------------ --------- -----------
BALANCE, JANUARY 31, 1994 4,869,000 8,332,000
Net income 542,000 542,000
Equity in transactions of affiliate:
Stock offering of MFRI, Inc. (net of income taxes of $37,000) 61,000
Issuance of MFRI, Inc. stock for the acquisition of
Ricwil, Inc. (net of income taxes of $14,000) 23,000
------------ --------- -----------
BALANCE, JANUARY 31, 1995 5,411,000 8,958,000
Net income 112,000 112,000
----------- --------- -----------
BALANCE, JANUARY 31, 1996 5,523,000 9,070,000
Net income (Unaudited) 698,000 698,000
------------ --------- -----------
BALANCE, JULY 31, 1996 (Unaudited) $ 6,221,000 $ - $ 9,768,000
============ ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 75
<TABLE>
<CAPTION>
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
- - - - ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 112,000 $ 542,000 $ 1,753,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Undistributed income of unconsolidated affiliates and joint ventures (894,000) (600,000) (1,072,000)
Amortized gain on sale of Perma-Pipe (95,000) (120,000)
Provision for depreciation and amortization 575,000 485,000 603,000
Provision for bad debts 16,000 (2,000) (97,000)
Deferred income taxes 681,000 116,000 1,543,000
Change in operating assets and liabilities:
Trade accounts receivable 660,000 745,000 (672,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts (583,000) (34,000) 26,000
Inventories (1,306,000) (854,000) (295,000)
Prepaid expenses and other assets (59,000) 154,000 136,000
Accounts and commissions payable (300,000) 1,156,000 (2,948,000)
Income taxes receivable (536,000) 173,000
Due from affiliates 917,000 (275,000) (368,000)
Drafts payable 649,000 (577,000) 577,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 72,000 (571,000) 352,000
Accrued expenses and other current liabilities (397,000) (1,189,000) 201,000
Cash flows from discontinued operations (331,000)
--------------- ---------------- ----------------
Net cash flows from operating activities (488,000) (851,000) (592,000)
INVESTING ACTIVITIES:
Investment in joint ventures (157,000) (79,000) (293,000)
Purchase of property, plant and equipment (662,000) (800,000) (134,000)
-------------- --------------- ----------------
Net cash flows from investing activities (819,000) (879,000) (427,000)
FINANCING ACTIVITIES:
Payments under capital lease obligations (251,000) (222,000) (315,000)
Proceeds from revolving line of credit 4,890,000 8,400,000 11,476,000
Payments on revolving line of credit (3,100,000) (6,400,000) (10,469,000)
Proceeds from subordinated debt and other 1,207,000
Payments on subordinated debt and other (207,000) (100,000) (909,000)
-------------- --------------- ----------------
Net cash flows from financing activities 1,332,000 1,678,000 990,000
-------------- --------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,000 (52,000) (29,000)
CASH AND CASH EQUIVALENTS - Beginning of year 86,000 138,000 167,000
-------------- --------------- ----------------
CASH AND CASH EQUIVALENTS - End of year $ 111,000 $ 86,000 $ 138,000
============== =============== ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 181,000 $ 235,000 $ 177,000
============== =============== ================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 76
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
- - - - -----------------------------------------------------------------------------------------------------
1996 1995
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 698,000 $ 292,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Undistributed income of unconsolidated affiliates and joint ventures (1,049,000) (451,000)
Amortized gain on sale of Perma-Pipe (48,000) (48,000)
Provision for depreciation and amortization 305,000 150,000
Provision for bad debts (7,000) (9,000)
Deferred income taxes 218,000 (164,000)
Change in operating assets and liabilities:
Trade accounts receivable (970,000) 1,239,000
Costs and estimated earnings in excess of billings
on uncompleted contracts 583,000 (81,000)
Inventories 296,000 (43,000)
Prepaid expenses and other assets 154,000 (403,000)
Accounts and commissions payable (817,000) (2,534,000)
Income taxes receivable 413,000 262,000
Due from affiliates (670,000) (255,000)
Drafts payable 551,000 1,300,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 505,000 48,000
Accrued expenses and other current liabilities (234,000) (646,000)
----------- -----------
Net cash flows from operating activities (72,000) (1,343,000)
INVESTING ACTIVITIES:
(Investment in) due from joint ventures 250,000 (63,000)
Purchase of property, plant and equipment (51,000) (379,000)
----------- -----------
Net cash flows from investing activities 199,000 (442,000)
FINANCING ACTIVITIES:
Payments under capital lease obligations (135,000) (125,000)
Proceeds from revolving line of credit 3,700,000 2,600,000
Payments on revolving line of credit (4,200,000) (600,000)
Proceeds from subordinated debt 500,000
Payments on subordinated debt and other (88,000)
----------- -----------
Net cash flows from financing activities (135,000) 1,787,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,000) 2,000
CASH AND CASH EQUIVALENTS - Beginning of period 111,000 86,000
----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 103,000 $ 88,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 150,000 $ 100,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 77
MIDWESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994 AND
SIX-MONTH PERIODS ENDED JULY 31, 1996 AND 1995
- - - - -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
Midwesco, Inc. (the "Company") include the accounts of the Company and its
majority-owned subsidiary, Simtech. All significant intercompany accounts
and transactions have been eliminated in consolidation. Midwesco's
investments in companies as of January 31, 1996, 1995 and 1994 consist of
the following: Investment in Simtech, 80.6%; MFRI, Inc., 38.0%, 37.9% and
40.1%, respectively; and Midwesco Services, Inc. (formally known as Mid/Res,
Inc.), 50.0%. The Company also has investments in joint ventures (see Note
2).
NATURE OF BUSINESS - Midwesco, Inc. is engaged in the following business:
through its Thermal Care Division, it manufactures heat transfer equipment.
Its products include chillers, temperature controllers, cooling towers and
water treatment systems. Its Midwesco Mechanical and Energy Division
designs and installs energy-efficient commercial and industrial HVAC systems
and on-site industrial power generation systems. Midwesco's Simtech
subsidiary is a distributor of polypropylene and PVDF pipe and fittings.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION - In the opinion of management, the unaudited
information presented as of July 31, 1996 and for the periods ended July 31,
1996 and 1995 reflect all adjustments, which consist of normal, recurring
adjustments necessary for a fair presentation of the interim periods.
Operating results for interim periods are not necessarily indicative of the
results that may be expected for a full year.
REVENUE RECOGNITION - Revenues of construction contracts are recognized
under the "percentage of completion" method. The percentage of completion
is determined by the relationship of costs incurred to the estimated total
costs.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance; job
conditions; estimated profitability, including those arising from contract
penalty provisions; and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenues when their
realization is reasonably assured. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable
and the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings
on uncompleted contracts," represents billings in excess of revenues
recognized.
F-8
<PAGE> 78
USE OF ESTIMATES - The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (average cost
which approximates actual cost on a first-in, first-out basis) or market.
Inventories consisted of the following:
<TABLE>
<CAPTION>
JULY 31, JANUARY 31
1996 --------------------------
(UNAUDITED) 1996 1995
<S> <C> <C> <C>
Raw materials (net of inventory reserves) $ 3,533,000 $ 4,056,000 $ 3,130,000
Work in process 995,000 834,000 695,000
Finished goods 698,000 632,000 391,000
------------ ------------ ------------
Total $ 5,226,000 $ 5,522,000 $ 4,216,000
============ ============ ============
</TABLE>
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to 30 years.
Amortization of assets under capital leases is included in depreciation and
amortization. The carrying amounts of property, plant and equipment are
evaluated annually to determine if adjustment to the depreciation and
amortization period is warranted based upon projections of future earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash and cash
equivalents, accounts receivable and accounts payable are reasonable
estimates of their fair value. The carrying values of long-term obligations
are a reasonable estimate of their fair values as the interest rates
approximate rates currently available to the Company for debt with similar
terms and remaining maturities.
INVESTMENT IN JOINT VENTURES AND UNCONSOLIDATED AFFILIATES - The Company's
investments in joint ventures and unconsolidated affiliates are carried at
initial cost plus equity in net income/loss since date of inception, reduced
by cash distributions and increased by cash contributions.
RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform with the current period presentation.
F-9
<PAGE> 79
3. INVESTMENT IN JOINT VENTURES
MIDWESCO-PASCHEN JOINT VENTURE ("MPJV") - In fiscal 1987, the Company
entered into a joint venture agreement to construct three electrical
generating plants having an adjusted combined contract amount of
approximately $53 million. The joint venture agreement provides that 55% of
the profits or losses from joint venture activities be allocated to the
Company. However, such agreements provide for the modification of
allocation of profits (not losses) based on the respective proportions in
which each partner has contributed capital to the joint venture. The joint
venture partner has not made its proportionate share of capital
contributions and it is uncertain as to how the joint venture partner will
satisfy its obligations under the joint venture agreement.
The three projects covered by the joint venture agreement were substantially
completed in fiscal 1989. However, there continues to be open issues with
regard to a vendor claim against the joint venture and a joint venture claim
against the same vendor for completion date delay and performance shortfall
damages.
The following is condensed financial information for MPJV at January 31,
1996 and 1995 and for the three years ended January 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Assets:
Accounts receivable $ 123,000
Claim receivable $ 2,134,000 1,950,000
------------ -------------
Total assets $ 2,134,000 $ 2,073,000
============ =============
Liabilities and venture equity:
Amounts due bonding company $ 1,760,000 $ 1,760,000
Other liabilities 174,000 117,000
------------ -------------
1,934,000 1,877,000
Venture equity 200,000 196,000
------------ -------------
Total liabilities and venture equity $ 2,134,000 $ 2,073,000
============ =============
Net profit $ - $ - $ -
============ ============= ============
</TABLE>
The following issues remain unresolved relative to the joint venture:
Claims Against and by Turbine Generator Supplier - The Company's management
believes that the completion date delay and performance shortfall matters
which resulted in charges of almost $3,400,000 are the fault of the turbine
generator supplier. Contracts with the turbine generator supplier provide
for liquidating damages for delays and productivity shortfalls.
F-10
<PAGE> 80
MPJV has filed a suit against the turbine generator supplier and its surety
bond issuer seeking aggregate damages in excess of $9 million for the above
and other issues. The turbine generator supplier has filed a counterclaim
against the joint venture for damages in excess of $2 million. The January
31, 1996 and 1995 financial statements of the joint venture include a net
claim receivable and, based on advice of counsel, management believes that
the claim has substantial merit and that recovery of the receivable is
probable.
F. H. PASCHEN-MIDWESCO JOINT VENTURE - In the fiscal year ended January 31,
1996, the Company entered into a joint venture to retrofit the HVAC systems
of the Social Security Building in Chicago, Illinois. The contract amount
is approximately $17 million. The joint venture agreement provides that 50%
of the profit or losses from the joint venture activities be allocated to
the Company.
The following represents the unaudited condensed financial information for
the joint venture as of January 31, 1996 and for the period then ended:
<TABLE>
<S> <C>
Assets:
Cash $ 223,000
Contract receivable 687,000
Other assets 16,000
----------
Total assets $ 926,000
==========
Liabilities:
Billings in excess of costs and estimated earnings on
uncompleted contracts $ 336,000
Accounts payable and accrued expenses 494,000
----------
830,000
Venture equity 96,000
----------
Total liabilities and venture equity $ 926,000
==========
Contract revenues $1,103,000
Contract costs 1,007,000
----------
Net profit $ 96,000
==========
</TABLE>
F-11
<PAGE> 81
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES
MIDWESCO SERVICES, INC. - The Company has a 50% investment in Midwesco
Services, Inc., which is accounted for on the equity method. The following
is condensed financial information of Midwesco Services, Inc. at January 31,
1996 and 1995 and July 31, 1996 and for each of the three years in the
period ended January 31, 1996 and for the six-month periods ended July 31,
1996 and 1995:
<TABLE>
<CAPTION>
JANUARY 31
JULY 31, ----------------------------
1996 1996 1995
(UNAUDITED)
<S> <C> <C> <C>
Current assets $4,275,000 $4,461,000 $5,799,000
Other 923,000 940,000 971,000
---------- ---------- ----------
Total assets $5,198,000 $5,401,000 $6,770,000
========== ========== ==========
Current liabilities $2,571,000 $2,793,000 $4,144,000
Other 251,000 245,000 191,000
---------- ---------- ----------
Total liabilities 2,822,000 3,038,000 4,335,000
Shareholders' equity 2,376,000 2,363,000 2,435,000
---------- ---------- ----------
Total liabilities and shareholders' equity $5,198,000 $5,401,000 $6,770,000
========== ========== ==========
<CAPTION>
SIX MONTHS ENDED JULY 31 FISCAL YEAR ENDED JANUARY 31
------------------------ --------------------------------------------
1996 1995 1996 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $6,979,000 $7,834,000 $14,137,000 $15,424,000 $12,470,000
Cost of services 5,134,000 6,075,000 11,166,000 12,064,000 9,674,000
Selling, general and
administrative expenses 1,816,000 1,778,000 2,916,000 2,929,000 2,733,000
---------- ---------- ----------- ----------- -----------
Operating profit 29,000 (19,000) 55,000 431,000 63,000
Taxes and other expenses 16,000 (6,000) 127,000 225,000 78,000
---------- ---------- ----------- ----------- -----------
Net profit (loss) $ 13,000 $ (13,000) $ (72,000) $ 206,000 $ (15,000)
========== ========== =========== =========== ===========
</TABLE>
F-12
<PAGE> 82
MFRI, INC. - The Company's investment in MFRI, Inc. ("MFRI"), successor by
merger to Midwesco Filter Resources, Inc. ("Filter"), at January 31, 1996,
1995 and 1994 was 39.0%, 37.9% and 40.1%, respectively. The Company's
investment in MFRI is accounted for on the equity method. Following is
condensed balance sheet information of MFRI at January 31, 1996 and 1995 and
July 31, 1996 and condensed statement of operations information for each of
the three years in the period ended January 31, 1996, and condensed
statement of operations information for the six-month periods ended July 31,
1996 and 1995:
<TABLE>
<CAPTION>
JANUARY 31
JULY 31, ----------------------------
1996 1996 1995
(UNAUDITED)
<S> <C> <C> <C>
Current assets $40,401,000 $36,865,000 $33,587,000
Other 22,848,000 22,120,000 14,330,000
------------- ------------- -------------
Total assets $63,249,000 $58,985,000 $47,917,000
============= ============= =============
Current liabilities $20,010,000 $17,188,000 $16,297,000
Other 15,490,000 15,574,000 7,680,000
------------- ------------- -------------
Total liabilities 35,500,000 32,762,000 23,977,000
Shareholders' equity 27,749,000 26,223,000 23,940,000
------------- ------------- -------------
Total liabilities and shareholders' equity $63,249,000 $58,985,000 $47,917,000
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31 FISCAL YEAR ENDED JANUARY 31
-------------------------------- -------------------------------------------------
1996 1995 1996 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $ 44,955,000 $ 39,879,000 $ 85,838,000 $ 75,495,000 $ 29,866,000
Cost of sales 34,809,000 31,923,000 68,958,000 62,898,000 23,062,000
Selling, general and
administrative expenses 7,066,000 5,778,000 12,142,000 10,213,000 4,345,000
--------------- --------------- --------------- --------------- ---------------
Income from operations 3,080,000 2,178,000 4,738,000 2,384,000 2,459,000
Taxes and other expenses 1,554,000 1,097,000 2,365,000 1,181,000 925,000
--------------- --------------- --------------- --------------- ---------------
Net income $ 1,526,000 $ 1,081,000 $ 2,373,000 $ 1,203,000 $ 1,534,000
=============== =============== =============== =============== ===============
</TABLE>
As of January 31, 1996, based upon MFRI's stock price and the Company's
ownership percentage of MFRI's outstanding common stock, the market value of the
investment in MFRI is approximately $10,500,000.
F-13
<PAGE> 83
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts are as follows for the
years ended January 31, 1996 and 1995 and July 31, 1996:
<TABLE>
<CAPTION>
JANUARY 31
JULY 31, ---------------------------
1996 1996 1995
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts $20,084,000 $14,101,000 $8,309,000
Estimated earnings 1,374,000 1,652,000 965,000
----------- ----------- ----------
Current revenue 21,458,000 15,753,000 9,274,000
Less billings to date 22,026,000 15,233,000 9,265,000
----------- ----------- ----------
Total $ (568,000) $ 520,000 $ 9,000
=========== =========== ==========
Included in the accompanying consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 213,000 $ 796,000 $ 213,000
Billings in excess of related costs and
estimated earnings on uncompleted contracts (781,000) (276,000) (204,000)
----------- ----------- ----------
Total $ (568,000) $ 520,000 $ 9,000
=========== =========== ==========
</TABLE>
6. DEBT ARRANGEMENTS
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31
JULY 31, ------------------------
1996 1996 1995
(UNAUDITED)
<S> <C> <C> <C>
Revolving loan $3,290,000 $3,790,000 $2,000,000
Subordinated note payable 1,210,000 1,180,000 1,124,000
Subordinated notes payable to
officers/shareholders 1,500,000 1,000,000 1,000,000
Capitalized lease obligations 1,872,000 1,887,000 1,945,000
Former joint venture partner
subordinated note payable 912,000 912,000 1,187,000
---------- ---------- ----------
8,784,000 8,769,000 7,256,000
Less current maturities 3,909,000 575,000 535,000
---------- ---------- ----------
Total $4,875,000 $8,194,000 $6,721,000
========== ========== ==========
</TABLE>
The classification of long-term debt in the accompanying balance sheet
reflects the terms of the 1996 amendments to the Revolving Loan and to the
Subordinated Note Payable. Pertinent details of such amendments are
reflected below.
F-14
<PAGE> 84
REVOLVING LOAN - At January 31, 1996, the Company had a loan agreement with
a bank, which provided for a $4 million revolving line of credit, maturing
on September 30, 1996 (extended to March 31, 1997, see below). The
agreement includes certain financial covenants and is collateralized by
certain accounts receivable, equipment and inventories with a book value of
approximately $8,500,000 and 850,000 of the shares of MFRI stock owned by
the Company. At January 31, 1996, the Company was not in compliance with
certain financial covenants of the agreement.
On August 8, 1996, the Third Amendment to the loan agreement was signed.
This amendment, among other things, changed the maturity date on the
revolving line of credit to March 31, 1997, modified certain financial
covenants, increased the interest rate on the line of credit by 2%, and
effectively brought the Company into compliance with all financial covenants
of the agreement, as amended.
SUBORDINATED NOTE PAYABLE - Subordinated note payable represents a note with
a principal amount of $1,225,000, due November 1, 1996 (extended to November
1, 1997, see below). Such note was recorded at a discount of $315,000,
based on an imputed interest rate of 12% and had a remaining unamortized
balance of $45,000 at January 31, 1996. On August 14, 1996, terms of the
subordinated note were amended to extend the maturity date to November 1,
1997, and increase the interest rate from 6-1/4 % to 10% subsequent to
November 1, 1996.
Interest expense for 1996, 1995 and 1994 includes $76,000, $54,000 and
$43,000, respectively, relating to the amortization of this discount.
SUBORDINATED NOTES PAYABLE TO OFFICERS/SHAREHOLDERS - Subordinated notes
payable to officers/shareholders have a principal balance of $1,000,000.
The notes bear interest at the prime rate plus 1-3/4%. The notes are
subordinated to the above bank borrowing.
FORMER JOINT VENTURE PARTNER SUBORDINATED NOTE PAYABLE - Former joint
venture partner subordinated note payable has a principal balance of
$912,000. The note bears interest at the prime rate plus 2%.
OTHER INFORMATION - Interest paid on all debt arrangements amounted to
$802,000, $686,000 and $957,000 for fiscal years 1996, 1995 and 1994,
respectively; and $184,000 and $228,000 for the six-month periods ended July
31, 1996 and 1995, respectively.
Annual maturities of long-term debt, exclusive of capitalized leases, at
January 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 345,000
1998 6,405,000
1999 132,000
</TABLE>
F-15
<PAGE> 85
7. LEASE INFORMATION
The following is an analysis of property under capitalized leases:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Furniture, fixture and office equipment $ 36,000 $ 36,000
Building and improvements 1,594,000 1,594,000
Machinery and equipment 381,000 381,000
Transportation equipment 838,000 784,000
-------------- --------------
2,849,000 2,795,000
Less accumulated amortization (1,555,000) (1,415,000)
-------------- --------------
Total $ 1,294,000 $ 1,380,000
============== ==============
</TABLE>
The lease for the building and equipment, which is beneficially owned by
certain shareholders of the Company, expires in December 2007.
Future minimum lease payments under the capitalized leases at January 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 482,000
1998 420,000
1999 332,000
2000 283,000
2001 283,000
Thereafter 1,693,000
-------------
3,493,000
Less amount representing interest 1,606,000
-------------
Present value of future minimum lease payments $ 1,887,000
=============
</TABLE>
8. INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ (371,500) $ 197,230 $ (1,396,000)
State and other (18,500) 44,770 (231,000)
----------- ---------- -------------
(390,000) 242,000 (1,627,000)
Deferred 681,000 116,000 1,013,000
----------- ---------- -------------
Total $ 291,000 $ 358,000 $ (614,000)
=========== ========== =============
</TABLE>
F-16
<PAGE> 86
The difference between the provision (benefit) for income taxes and the
amount computed by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31 1996 1995 1994
<S> <C> <C> <C>
Tax at federal statutory rate $137,000 $306,000 $(482,000)
State taxes - net of federal benefit 42,000 66,000 (127,000)
Other - net 112,000 (14,000) (5,000)
-------- -------- ---------
Total $291,000 $358,000 $(614,000)
======== ======== =========
</TABLE>
The deferred income tax provision (benefit) reflects the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. These differences relate principally to
depreciation, contract gross profit recognition, undistributed earnings of
affiliates and various accruals and reserves.
Components of the deferred tax asset and liability balances as of January
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 16,000 $ 16,000
Sales reserves 50,000 2,000
Vacation accruals 48,000 34,000
Deferred profits on contract 218,000 219,000
Inventory valuation allowance 68,000 93,000
Warranty accruals 26,000 21,000
Insurance accruals (53,000) 47,000
Other 55,000 41,000
--------- ---------
Total $ 428,000 $ 473,000
========= =========
Long-term:
Capital lease $ 265,000 $ 220,000
Operating loss carry-forwards 30,000 320,000
Tax credit carry-forwards 157,000 157,000
Depreciation (53,000) (87,000)
Deferred gain on sale of Perma-Pipe 3,000 41,000
MFRI stock issuance (237,000) (237,000)
Equity in MFRI income (865,000) (478,000)
--------- ---------
Total $(700,000) $ (64,000)
========= =========
</TABLE>
F-17
<PAGE> 87
At January 31, 1996, the Company had, for income tax purposes, net operating
loss carry-forwards of approximately $78,000, which will expire in 2011.
The Company also has investment and AMT tax credit carry-forwards for
approximately $157,000 available to reduce future federal income taxes.
Income taxes paid amounted to $172,000, $164,000, and $14,000 for fiscal
years 1996, 1995 and 1994, respectively; and $30,000 and $128,000 for the
six-month periods ended July 31, 1996 and 1995, respectively.
9. EMPLOYEE RETIREMENT PLANS
The Company makes contributions to a union-sponsored multi-employer defined
benefit plan in accordance with negotiated labor contracts. Contributions
charged to expense approximated $39,000 in 1996, $55,000 in 1995 and $20,000
in 1994.
401(k) PLAN - The employees of the Company participate in a 401(k) Employee
Savings and Protection Plan that is applicable to all employees not covered
by a collective bargaining agreement. The Plan allows employees to make
pretax payroll contributions up to 16% of total compensation. Prior to
February 1, 1995, the Company made contributions to the 401(k) Plan in an
amount equal to 25% of each participant's contribution, up to a maximum of
1% of their salaries. Beginning February 1, 1995, the Company contribution
was increased to 50% of each participant's contribution, up to a maximum of
2% of their salaries.
PROFIT-SHARING PLAN - The employees of the Company participate in a
Profit-Sharing Plan that is applicable to all employees not covered by
collective bargaining agreements, who are at least 21 years of age and have
completed one year of employment, and certain employees who are covered by
collective bargaining agreements. The Profit-Sharing Plan is funded solely
by contributions of such portion of profits as determined by the Board of
Directors.
401(k) Plan and Profit-Sharing Plan costs of the Company for the years ended
January 31, 1996, 1995 and 1994 were $102,000, $81,000 and $43,000,
respectively.
F-18
<PAGE> 88
10. BUSINESS SEGMENT DATA
Midwesco, Inc. operates in three business segments: (1) heat transfer
equipment, (2) HVAC systems, and (3) plastic pipe distribution. The
following is information relevant to the Company's business segments:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales:
Heat transfer equipment $19,775,000 $18,528,000 $13,127,000
HVAC systems 6,927,000 8,579,000 5,988,000
Plastic pipe distribution 2,508,000 2,472,000 1,404,000
----------- ----------- -----------
Total sales $29,210,000 $29,579,000 $20,519,000
=========== =========== ===========
Income from operations:
Heat transfer equipment $ 2,231,000 $ 2,694,000 $ 1,599,000
HVAC systems 408,000 469,000 (1,097,000)
Plastic pipe distribution 67,000 (346,000) (170,000)
Corporate and other (2,180,000) (1,831,000) (510,000)
----------- ----------- -----------
Total income from operations $ 526,000 $ 986,000 $ (178,000)
=========== =========== ===========
Identifiable assets:
Heat transfer equipment $ 6,869,000 $ 6,834,000 $ 5,006,000
HVAC systems 2,804,000 1,891,000 3,140,000
Plastic pipe distribution 1,779,000 1,818,000 1,538,000
Corporate and other 13,959,000 12,903,000 12,724,000
----------- ----------- -----------
Total identifiable assets $25,411,000 $23,446,000 $22,408,000
=========== =========== ===========
Capital expenditures:
Heat transfer equipment $ 139,000 $ 79,000 $ 43,000
Plastic pipe distribution 42,000 11,000 46,000
Corporate and other 481,000 710,000 45,000
----------- ----------- -----------
Total capital expenditures $ 662,000 $ 800,000 $ 134,000
=========== =========== ===========
Depreciation and amortization:
Heat transfer equipment $ 91,000 $ 67,000 $ 74,000
HVAC systems 59,000 62,000 62,000
Plastic pipe distribution 24,000 14,000 5,000
Corporate and other 401,000 342,000 462,000
----------- ----------- -----------
Total depreciation and amortization $ 575,000 $ 485,000 $ 603,000
=========== =========== ===========
</TABLE>
Income from operations - corporate and other includes interest expense on
corporate debt, corporate employee salaries and related expenses.
Identifiable assets - corporate and other includes the corporate building
and related improvements, furniture and fixtures, and other corporate
assets. Depreciation and amortization amounts exclude the amortization of
the gain on the sale of Perma-Pipe.
F-19
<PAGE> 89
11. RELATED PARTY TRANSACTIONS
MFRI, Inc. provides certain services to the Company and the Company
provides certain facilities and services to MFRI, Inc. pursuant to an
agreement, dated February 1, 1994 (superseding the previous agreement dated
October 27, 1989). The Company reimbursed MFRI, Inc. $25,000 in 1995, and
MFRI, Inc. reimbursed the Company $564,000 in 1996, $381,000 in 1995 and
$282,000 in 1994. In addition, the Company paid an affiliate approximately
$119,000 in 1996, $124,000 in 1995 and $68,000 in 1994 for installation
services. Also, the Company was paid by the affiliate approximately
$1,042,000 in 1996, $1,106,000 in 1995 and $1,146,000 in 1994 for
reimbursement for expenses incurred on behalf of the affiliate. Finally,
the Company derived sales revenue of approximately $249,000 in 1996 and
$1,300,000 in 1995 from an affiliated company.
12. DISCONTINUED OPERATIONS
On January 28, 1994, the Company completed the sale of the net assets of
its Perma-Pipe Division ("Perma-Pipe") to MFRI, Inc., successor by merger
to Midwesco Filter Resources, Inc., which, prior to the transaction, was a
51.2% owned subsidiary of the Company.
The Company received proceeds of $4,950,000, consisting of $3,069,000 in
cash and 279,000 shares of MFRI stock valued at $1,881,000. The Company
recognized 61% of the gain on the sale of the Perma-Pipe assets of
$1,732,000, net of applicable income taxes of $1,107,000. In addition, 39%
of the gain was deferred ($1,781,000) and is being amortized into income
over periods of 7 to 40 years. The 1994 consolidated financial statements
report the operations of Perma-Pipe as discontinued operations. Revenues
of Perma-Pipe were $32,524,000 for fiscal 1994.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended January 31, 1996 and 1995:
<TABLE>
<CAPTION>
FISCAL 1996 THREE MONTHS ENDED
------------------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
<S> <C> <C> <C> <C>
Net sales $6,131,000 $7,473,000 $7,870,000 $7,736,000
Gross profit 1,422,000 1,801,000 1,475,000 1,500,000
Net income (loss) 22,000 271,000 54,000 (235,000)
<CAPTION>
FISCAL 1995 THREE MONTHS ENDED
------------------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
<S> <C> <C> <C> <C>
Net sales $6,507,000 $7,998,000 $7,720,000 $7,354,000
Gross profit 1,452,000 1,671,000 1,567,000 1,575,000
Net income 120,000 321,000 26,000 75,000
</TABLE>
******
F-20
<PAGE> 90
APPENDIX A
AGREEMENT FOR MERGER
Dated as of October 25, 1996
A-1
<PAGE> 91
AGREEMENT FOR MERGER
BETWEEN
MIDWESCO, INC.,
an Illinois corporation, and
MFRI, INC.,
a Delaware corporation
Dated as of October 25, 1996
<PAGE> 92
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- - - - ------- ----
<S> <C> <C>
1 BASIC TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Approval by Stockholders of Midwesco and MFRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2 REPRESENTATIONS AND WARRANTIES OF MIDWESCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Organization, Qualification and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Capitalization of Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.6 Rights in MFRI Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.7 Corporate Records and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.9 Events Since January 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.11 Assets Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.12 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 Condition of the Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.14 Condition and Adequacy of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.15 Accounts Receivable of Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.16 Owned Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.17 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.18 Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.19 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.20 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.21 Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.23 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.24 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.25 Specific Environmental Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.26 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.27 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.28 Employee Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.29 Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.30 Supplies and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.31 Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.32 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
i
<PAGE> 93
<TABLE>
<CAPTION>
ARTICLE PAGE
- - - - ------- ----
<S> <C> <C>
2.33 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.34 Brokerage Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.35 Product Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.36 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.37 Definition of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.38 Definition of "Material" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.39 Shareholders of Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3 REPRESENTATIONS AND WARRANTIES OF MFRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.1 Organization and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4 TRANSFER AND DISTRIBUTION OF NEW MIDWESCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1 Assets of New Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 Liabilities of New Midwesco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Warranty Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.4 New Midwesco's Covenant Not to Compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.5 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.7 Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5 COVENANTS PENDING CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.1 Conduct of Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.2 Forebearances by Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6 ADDITIONAL COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.1 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.2 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.3 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.4 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.7 Additional Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.9 Certain Securities Law Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.10 Distribution of Shares of New Midwesco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE PAGE
- - - - ------- ----
<S> <C>
7 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.1 Mutual Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.2 Conditions to Obligations of MFRI to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.3 Conditions to Obligations of Midwesco to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . . 27
8 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.2 Survival Limitation Not Applicable to Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.1 Indemnification of MFRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.2 Procedure for Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.3 Minimum Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.4 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11 SPECIAL ESCROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.1 Establishment of Special Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.2 Reduction of Shares in Special Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.3 Remedies for Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.4 Notices and Other Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.6 Law to Govern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.7 Waiver of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.8 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.9 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.10 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.11 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS
Exhibit "A" - Plan of Merger
</TABLE>
iii
<PAGE> 95
AGREEMENT FOR MERGER
THIS AGREEMENT (this "Agreement"), dated as of October 25, 1996 is by
and between MFRI, INC., a Delaware corporation ("MFRI") and MIDWESCO, INC., an
Illinois corporation ("Midwesco").
R E C I T A L S:
A. Midwesco, among other things, is engaged in the business of
designing, manufacturing and selling cooling systems through its Thermal Care
Division (the "Business").
B. MFRI is approximately 37.8%-owned by Midwesco with the balance
of its shares owned by others. The common stock of MFRI is registered pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended, and traded
on the automated quotation system of the National Association of Securities
Dealers ("NASDAQ").
C. The parties desire to effect the merger of Midwesco with and
into MFRI in accordance with the terms and conditions of this Agreement and the
Plan of Merger (defined herein), with MFRI as the surviving corporation (the
"Merger").
D. It is intended that the merger qualify as a reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended
(the "Code").
E. The Merger will require the vote of the stockholders of MFRI
and Midwesco. Due to the relationship of Midwesco and MFRI, it is proposed
that Midwesco vote the shares of stock of MFRI owned by Midwesco to approve the
Merger only if a majority of the stockholders of MFRI voting on the Merger,
other than Midwesco, approve the Merger.
F. The vote by the shareholders of MFRI will be required to be
conducted through the use of a proxy statement of MFRI relating to the Merger
(the "Proxy Statement")
G. The shares of MFRI to be issued to the existing stockholders
of Midwesco in the Merger will be registered under the Securities Act of 1933,
as amended (the "33 Act") pursuant to a registration rights agreement (the
"Registration Rights Agreement");
H. On the Closing Date, prior to the Closing (as defined herein),
Midwesco shall transfer all of its assets and certain liabilities, except for
the assets and liabilities related to the operation of the Business, 1,717,666
shares of the issued and outstanding shares of common stock of MFRI (the "MFRI
Shares") and certain other assets and liabilities as set forth herein, to
Midwesco - Illinois, Inc. ("New Midwesco"), and Midwesco shall immediately
distribute the stock of New Midwesco to the shareholders of Midwesco (the
"Distribution").
<PAGE> 96
I. Midwesco and MFRI each agrees to make certain representations,
warranties, covenants and agreements in connection with the Merger.
AGREEMENTS
In consideration of the premises and the mutual representations,
warranties, covenants and agreements hereinafter set forth, the parties agree
as follows:
ARTICLE 1
BASIC TRANSACTION
1.1 THE MERGER. Subject to the terms and conditions hereof, and
in accordance with the Delaware General Corporate Law ("DGCL"), Midwesco will
be merged with and into MFRI. The terms and conditions of the Merger shall be
in accordance with the Agreement and Plan of Merger attached hereto as Exhibit
"A" (the "Plan of Merger"), which MFRI and Midwesco have executed concurrently
with the execution and delivery of this Agreement. Subject to the terms and
conditions of this Agreement, Midwesco and MFRI shall cause the Plan of Merger
to be filed with the Secretary of State of Delaware and the Secretary of State
of Illinois on the Closing Date (as defined in Section 1.3). The Merger shall
become effective at the time set forth in the Plan of Merger (the "Effective
Time"). MFRI shall be the corporation surviving the Merger.
1.2 EFFECT OF MERGER. At the Effective Time, and as more fully
described in the Plan of Merger, by virtue of the Merger and without any action
on the part of the holder of any shares of capital stock of Midwesco, each
outstanding share of capital stock of Midwesco will be converted into 183.7
shares of common stock of MFRI, and each share of common stock of MFRI will
remain unchanged. Other terms and conditions of the Merger shall be as set
forth in the Plan of Merger.
1.3 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Rudnick & Wolfe,
203 North LaSalle Street, Chicago, Illinois as soon as reasonably practicable
after the conditions to the obligations of the parties to consummate the
transactions contemplated hereby have been satisfied or waived (the "Closing
Date").
1.4 APPROVAL BY STOCKHOLDERS OF MIDWESCO AND MFRI. Midwesco and
MFRI have taken or shall take all action necessary in accordance with their
respective Certificate of Incorporation, By-Laws, Illinois law, the DGCL and
any other applicable law, including applicable securities laws, to cause this
Agreement and the Plan of Merger to be approved by
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their respective stockholders. The Boards of Directors of MFRI and Midwesco
have or shall each recommend to their respective stockholders that they vote in
favor of the Merger.
ARTICLE 2
REPRESENTATIONS AND
WARRANTIES OF MIDWESCO
Midwesco hereby represents and warrants to MFRI, as of the date hereof
and as of the Effective Time, as follows:
2.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. Midwesco is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Illinois. Midwesco is duly authorized to conduct business
and is in good standing under the laws of each jurisdiction in which the nature
of its business or the ownership or leasing of its properties requires such
qualification except where the failure to be so qualified would not have a
Material Adverse Effect (as hereinafter defined). As used herein, "Material
Adverse Effect" means a material (as defined in Section 2.38 hereof) adverse
effect on the assets, liabilities, financial condition or results of operations
of MFRI.
2.2 AUTHORIZATION. Midwesco has full corporate power and
authority to execute and deliver this Agreement and the Plan of Merger and to
perform its obligations hereunder and thereunder. The execution and delivery
of this Agreement and the Plan of Merger by Midwesco and the performance of its
obligations hereunder have been duly authorized by resolutions duly adopted by
its board of directors and shareholders and a copy of such resolutions,
certified by the Secretary of Midwesco shall be provided to MFRI prior to the
Closing Date, and Midwesco agrees, prior to the Closing Date to take such
additional action as may be necessary to authorize its performance of this
Agreement and the Plan of Merger or the transactions contemplated hereby.
2.3 BINDING EFFECT. This Agreement and the Plan of Merger have
been duly executed and delivered by Midwesco and constitute the legal, valid
and binding obligations of Midwesco, enforceable in accordance with their
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general equitable
principles.
2.4 NONCONTRAVENTION. Except as set forth in writing and
delivered by Midwesco to MFRI prior to the date hereof, neither the execution
and delivery of this Agreement by Midwesco, the execution and filing of the
Plan of Merger by Midwesco nor the consummation of the transactions
contemplated under this Agreement and the Plan of Merger will: (i) violate any
statute, regulation, rule, judgment, order, decree, stipulation or injunction
to which
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<PAGE> 98
Midwesco is subject; (ii) conflict with or result in a breach of the provisions
of the Certificate or Articles of Incorporation or By-laws of Midwesco as of
the date hereof and as of the Closing Date; or (iii) conflict with, result in
the breach of, constitute a default under, result in the acceleration of,
create in any person or entity the right to accelerate, terminate, modify or
cancel, or require any notice under, any material contract, lease, license,
indenture, agreement, mortgage, instrument of indebtedness or other instrument
to which Midwesco is a party or by which it or any of its property is bound, or
result in the creation or imposition of any lien or encumbrance on any of such
property.
2.5 CAPITALIZATION OF MIDWESCO. All of the issued and outstanding
shares of common stock of Midwesco are duly authorized and validly issued,
fully paid and nonassessable. The entire authorized capital stock of Midwesco
consists of 50,000 shares of common stock, par value $0.01 per share, of which
11,564 shares are presently issued and outstanding and 1,500 shares of
Preferred Stock, $300.00 par value per share, no shares of which are issued or
outstanding.
(a) There are no authorized or outstanding options,
warrants, rights, contracts, calls, puts, rights to subscribe,
conversion rights or other agreements or instruments to which Midwesco
is a party or which are binding on Midwesco providing for the
issuance, disposition or acquisition of any of its capital stock,
except pursuant to that certain Midwesco, Inc. Amended Stock Purchase
and Redemption Plan dated May 1, 1987 (the "Stock Plan"). There are
no authorized or outstanding stock appreciation, phantom stock or
similar rights with respect to Midwesco or to which Midwesco is a
party, except for the Stock Plan.
(b) Midwesco does not own any shares or equity interest
in any corporation, partnership, joint venture, association or other
entity, except as identified in writing to MFRI prior to the date
hereof.
2.6 RIGHTS IN MFRI STOCK. There are no options, warrants, rights,
contracts, calls, puts or other rights, agreements or commitments to which
Midwesco is a party or which are binding on Midwesco with respect to the MFRI
stock owned by Midwesco.
2.7 CORPORATE RECORDS AND ACTION. Midwesco has furnished to MFRI,
prior to the date hereof, a copy of its Articles of Incorporation and all
amendments thereto of Midwesco. Midwesco has furnished to MFRI a complete copy
of its By-laws and all amendments thereto certified by its secretary. Midwesco
has previously made available to MFRI its complete minute books for the period
prior to the date hereof and minutes for all meetings and relating to any
action taken subsequent to that date and prior to the Closing will be provided
to MFRI on the Closing Date. All corporate action which has been taken by the
shareholders, Board of Directors or any committee of such Board of Midwesco is
fairly and accurately summarized in all material respects in the minute books
of Midwesco. Midwesco has previously made available
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<PAGE> 99
to MFRI the stock ledger books of Midwesco. All issuances, cancellations,
transfers and exchanges of capital stock of Midwesco is reflected in its stock
ledger books.
2.8 FINANCIAL STATEMENTS. Midwesco has furnished to MFRI, prior
to the date hereof, copies of its audited consolidated financial statements for
the years ended January 31, 1996 and January 31, 1995, including the
consolidated balance sheets as of said dates and the consolidated statements of
operations, statements of shareholders' equity and statements of cash flows,
and the unaudited interim financial statements of Midwesco for the six months
ended July 31, 1996 (collectively, the "Financial Statements"). The Financial
Statements: (a) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis; (b) fairly present the
consolidated financial position of Midwesco as at the dates of each financial
statement; and (c) fairly present the results of operations, changes in equity
and cash flows for the respective periods covered by the Financial Statements.
2.9 EVENTS SINCE JANUARY 31, 1996. Since January 31, 1996, except
as set forth in writing and delivered by Midwesco to MFRI prior to the date
hereof, there has not been:
(a) any material casualty affecting any material property
or asset of the Business;
(b) any material increase in the rate of compensation or
any material increase in the benefits payable or to become payable to
any of the officers or employees of Midwesco or any other material
change in the terms of the employment of the officers or employees of
Midwesco;
(c) any indebtedness for borrowed money incurred by
Midwesco or any lien or security interest granted on any assets of
Midwesco, except for subordinated loans in the aggregate amount of
$500,000 from certain shareholders and borrowings and repayments under
the Credit Agreement (as defined below);
(d) any sale of any of the assets of Midwesco, except
sales of inventory in the ordinary course of business and sales of
equipment made in the ordinary course of business due to the
replacement or abandonment thereof;
(e) any acceleration, termination, cancellation or
material adverse modification of any material agreement, contract,
lease or license of Midwesco or by which Midwesco is bound;
(f) any dividend, payment or other distribution with
respect to any of the capital stock of Midwesco, except the
Distribution;
(g) any redemption or purchase, or agreement to redeem or
purchase, any of the capital stock of Midwesco; or
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<PAGE> 100
(h) other than the Merger, and the transactions
contemplated under this Agreement, any other material transaction
other than in the ordinary course of business consistent with past
practices.
2.10 TAXES.
(a) Except as set forth in writing and delivered by
Midwesco to MFRI prior to the date hereof, Midwesco has filed all
returns relating to Taxes (as hereinafter defined) which were required
to be filed prior to the Closing Date (collectively the "Tax
Returns"). All Taxes owed by Midwesco which are reflected on the Tax
Returns as being due, have been paid. As used herein, "Taxes" mean
any federal, state, local or foreign income, gross receipts,
franchise, payroll, employment, excise, unemployment, personal
property, sales, use, value added, alternative, estimated or other tax
of any kind whatsoever, including any interest, penalty or addition
thereto.
(b) To the knowledge of Midwesco, proper and accurate
amounts have been withheld by or on behalf of Midwesco with respect to
all compensation paid to employees of Midwesco for all periods ending
on or before the Closing Date. All deposits required with respect to
compensation paid to employees of Midwesco have been made in
compliance with applicable laws.
(c) Midwesco has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a
Tax assessment or deficiency.
(d) Except as set forth in writing and delivered by
Midwesco to MFRI prior to the date hereof, none of the Tax Returns has
been audited or is currently the subject of an audit by a governmental
agency.
2.11 ASSETS GENERALLY. Except as set forth in writing and
delivered by Midwesco and as contemplated by this Agreement, Midwesco owns all
of the assets shown on the consolidated balance sheet of Midwesco as of January
31, 1996 included in the Financial Statements (the "Year-End Balance Sheet")
(other than inventory which has been sold in the ordinary course of business,
prepaid expenses which have expired in the ordinary course of business,
accounts receivable which have been collected in the ordinary course of
business and equipment which has been replaced, exhausted or abandoned in the
ordinary course of business), free and clear of any mortgage, pledge, lien,
encumbrance or other security interest which, in the aggregate, is material,
other than liens for real estate taxes not yet due or payable and liens
described in writing and delivered by Midwesco to MFRI prior to the date
hereof.
2.12 INVENTORIES. The Inventory (as defined herein) consists of
items of a quantity and quality which, based on Seller's past sales experience,
are usable or saleable in the ordinary course of the Business. The finished
goods included in Inventory comply in all material respects
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<PAGE> 101
with Midwesco's specifications therefor. All raw materials and work in process
included in Inventory are items which are used in making the finished goods of
the Business. Inventory consists of not more than six months' requirements for
any inventory category based on the past sales experience of the Business and
required and customary spare parts.
2.13 CONDITION OF THE PROPERTIES. The only land and buildings used
by Midwesco in connection with the operation of the Business (collectively, the
"Properties") are (i) the property leased by Midwesco in Niles, Illinois
pursuant to a lease between Midwesco and American National Bank and Trust
Company of Chicago, not personally but solely as Trustee under the Trust
Agreement dated September 15, 1976, and known as Trust No. 39340 dated as of
November 18, 1976, amended on March 1, 1992; (ii) a leased warehouse on Mulford
Drive in Niles, Illinois; and (iii) a small leased office facility in Southern
California (such leases shall collectively be referred to herein as the
"Leases"). All material components of all buildings, structures and other
components of the Properties are in working order and repair, including the
roofs, heating, ventilation, air conditioning, plumbing electrical, mechanical,
sewer systems and facilities.
2.14 CONDITION AND ADEQUACY OF ASSETS. The machinery, equipment,
furniture, fixtures and other tangible personal property not included in the
Transferred Assets (as defined herein) are in all material respects in good
operating condition and repair and are available for their intended use. There
has been no material interruption of the operations of the Business due to
inadequate maintenance of such machinery, equipment or other tangible personal
property for a period in excess of twenty-four (24) hours. Upon the
consummation of the Merger, MFRI will have all of the assets and rights
necessary in order for it to conduct the Business as previously conducted by
Midwesco.
2.15 ACCOUNTS RECEIVABLE OF MIDWESCO. The Accounts Receivable (as
defined in Section 4.1 hereof) of Midwesco represent amounts payable to
Midwesco for the sale of goods or services or other charges arising in the
ordinary course of business of the Business on or before the date hereof. No
obligor with respect to any Account Receivable has made any written or oral
claim against any Account Receivable or any portion of the Accounts Receivable
except as disclosed in writing to MFRI. Midwesco has taken any and all
affirmative steps required in order to preserve, secure or perfect Midwesco's
rights in the Accounts Receivable in the ordinary course of its business.
Midwesco believes that its reserve for doubtful accounts included in its
financial statements is adequate in accordance with generally accepted
accounting principles.
2.16 OWNED REAL PROPERTY. Midwesco owns no real property.
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<PAGE> 102
2.17 INTELLECTUAL PROPERTY.
(a) A list of all patents, patent applications,
trademarks, service marks, trade names, copyrights and applications
therefor owned by or licensed to Midwesco relating to the Business
(collectively, the "Intellectual Property") has been delivered to MFRI
prior to the date hereof, and such list sets forth the Intellectual
Property owned by Midwesco ("Owned Intellectual Property"), as well as
the Intellectual Property licensed by third parties (the "Licensed
Intellectual Property"). A copy of each such registration, or pending
application for registration, of the Owned Intellectual Property has
been provided to MFRI. Except as set forth in writing and delivered
by Midwesco to MFRI prior to the date hereof, there are no
interference, opposition or cancellation proceedings or infringement
suits pending or, to the knowledge of Midwesco threatened with respect
to any of the Intellectual Property. Except as set forth in writing
and delivered by Midwesco to MFRI prior to the date hereof, to the
knowledge of Midwesco, no person or entity is interfering with or
infringing any of the Intellectual Property. Except as set forth in
writing and delivered by Midwesco to MFRI prior to the date hereof,
Midwesco is not subject to any commitment to pay royalties or other
fees for the use of the Intellectual Property.
(b) To the knowledge of Midwesco, during the past six
years Midwesco has not interfered with, infringed upon,
misappropriated or otherwise come into conflict with any patent,
trademark, service mark, trade name, copyright, trade dress or other
proprietary right of any third party which could reasonably be
expected to have a Material Adverse Effect, and during the past six
years, Midwesco has never received any claim alleging such
interference, infringement, misappropriation or conflict.
2.18 SOFTWARE. Midwesco owns or is licensed to use all computer
software (including data-bases and related documentation) which is material to
the conduct of the Business ("Software"). To the knowledge of Midwesco, no
person or entity is interfering with or infringing, and no person or entity has
misappropriated any of the software owned by Midwesco ("Owned Software"). To
the knowledge of Midwesco, none of the Owned Software infringes upon, is a
misappropriation of, or otherwise conflicts with, any patent, copyright, trade
secret or other proprietary right of any third party. Except as set forth in
writing and delivered by Midwesco to MFRI prior to the date hereof, to the
knowledge of Midwesco, Midwesco has not disclosed to any other person or entity
any information relating to any of the Software (whether in flow chart,
documentation, program listing or source code form) used in, or necessary for,
the conduct of the Business.
2.19 MATERIAL CONTRACTS. Midwesco has provided to MFRI prior to
the date hereof, a list (the "Document List") of the following contracts,
leases and agreements in effect to which Midwesco is a party or is bound:
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(a) any agreement (or group of related agreements) for
the lease of personal property to or from any person or entity
providing for rent in excess of $25,000 during any twelve (12) month
period;
(b) any agreement for the lease of real property;
(c) contracts with customers (except for purchase orders
placed by customers in the ordinary course of business);
(d) contracts for the purchase of raw material, inventory
or supplies (except for supply orders placed in the ordinary course of
business);
(e) any agreement regarding liability for any
indebtedness for borrowed money (whether primarily or secondarily as
guarantor), or any capitalized lease or purchase money obligation;
(f) any agreement regarding any lien, pledge, security
interest or other encumbrance upon any assets of Midwesco;
(g) any agreement to indemnify a director, officer or
employee or an obligation to indemnify a person or entity with respect
to any representation, warranty or covenant made by Midwesco (other
than product warranties);
(h) any agreement concerning confidentiality or
noncompetition;
(i) any agreement for the employment of any individual on
a full-time, part-time, consulting or other basis other than oral
retainers of professionals terminable at will;
(j) any other plans, contracts or arrangements, whether
formal or informal, which involve direct or indirect compensation
(including bonus, stock option, severance, golden parachute, deferred
compensation, special retirement, consulting and similar agreements)
for the benefit of one or more of the current or former directors,
officers or employees of Midwesco (other than employee benefit plans
and employee welfare plans described on the Document List);
(k) guaranty or suretyship, performance bond or
contribution agreements;
(l) distribution, marketing, sales representative or
dealership agreements;
(m) any agreement with any stockholder, director or
officer of Midwesco (other than this Agreement and the Plan of
Merger); and
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(n) any other material contracts or commitments not made
in the ordinary course of business.
Midwesco shall deliver to MFRI, prior to the date hereof, a copy of each
written agreement described on the Document List, as well as a written summary
setting forth the terms and conditions of each oral agreement described on such
list. With respect to each such agreement and each license of the Licensed
Intellectual Property, except as otherwise set forth in writing and delivered
by Midwesco to MFRI prior to the date hereof: (i) such agreement is in full
force and effect and constitutes the legal, valid and binding obligation of
Midwesco, enforceable in accordance with its terms; (ii) such agreement will
not be terminated as a result of the Merger; (iii) to the knowledge of
Midwesco, Midwesco is not in default in any material respect under such
agreement and no event has occurred which, with the passage of time, would
constitute such a default; and (iv) to the knowledge of Midwesco, no other
party is in default in any material respect under such agreement. No bonus or
severance will become due and payable under any existing agreement to any of
its employees as a result of the Merger and the change of control effected
thereby.
2.20 LITIGATION. Except as set forth in writing and delivered by
Midwesco to MFRI prior to the date hereof, Midwesco: (a) is not subject to any
outstanding injunction, judgment, order, decree or ruling; or (b) is not a
party or, to the knowledge of Midwesco, is threatened to be made a party to,
any action, suit, proceeding, hearing or investigation, of or before any court,
quasi-judicial agency, administrative agency or arbitrator. The matters
captioned IHP Industrial, Inc. v. Perm Alert, ESP, a/k/a/ Environmental
Specialty Products, Inc., Circuit Court of Lauderdale County, Mississippi, Case
No. 96-CV-068(b) ("IHP Suit"), Midwesco, Inc. and Permalert ESP, Inc. v. PPG
Industries, Inc., et al., United States District Court for the Western District
of Louisiana, Case No. 93 C 1271 ("PPG Suit") and State Farm Mutual Automobile
Insurance Co. v. George Hyman Construction Co., et al. (Egan Mechanical
Contractors, Inc. and J.A. House, Inc., third party plaintiffs, v. Perma-Pipe,
Inc., third party defendant), Circuit Court of the Eleventh Judicial Circuit,
McLean County, Illinois, Case No. 95 L 310 ("State Farm Suit") are referred to
herein as the "Pending Suits."
2.21 PRODUCT LIABILITY. Except as set forth in writing and
delivered by Midwesco to MFRI prior to the date hereof, no claims or demands
have been made against Midwesco alleging injury to individuals or property as a
result of the ownership, possession or use of any product manufactured or sold
by Midwesco.
2.22 INSURANCE. Midwesco has provided MFRI, prior to the date
hereof, a list of each insurance policy (including policies providing casualty,
liability and workers compensation coverage) currently maintained by Midwesco.
With respect to each such insurance policy: (i) to the knowledge of Midwesco,
the policy is legal, valid, binding and in full force and effect, enforceable
in accordance with its terms; and (ii) Midwesco is not in breach or default
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thereunder, including any default with respect to the payment of premiums and
the giving of notices.
2.23 COMPLIANCE WITH LAWS. Midwesco has complied with all
applicable laws, rules, regulations, ordinances and codes, whether federal,
state, local or foreign where the failure to so comply could reasonably be
expected to have a Material Adverse Effect, and no notice has been received by
Midwesco, alleging such non-compliance which remains uncured as of the Closing
Date.
2.24 LICENSES AND PERMITS. Midwesco has obtained all licenses and
permits and other governmental authorizations where the failure to obtain could
reasonably be expected to have a Material Adverse Effect. All of such licenses
and permits are in full force and effect and will remain in full force and
effect from and after the Effective Time. No material violation exists in
respect of any such license or permit. No proceeding is pending, or to the
knowledge of Midwesco, threatened, to revoke or limit any such license or
permit.
2.25 SPECIFIC ENVIRONMENTAL WARRANTIES.
(a) Midwesco has provided to MFRI prior to the date
hereof: (i) all environmental audits, assessments or occupational
health studies and all analyses of any groundwater, soil, air or
asbestos samples taken from any facility owned or occupied by Midwesco
undertaken by, or at the direction of, Midwesco or any of its
employees or counsel or, to the knowledge of Midwesco, any
governmental agency (collectively, the "Environmental Audits"); (ii)
all written communications between Midwesco and any environmental
agencies regarding property owned or used by Midwesco; and (iii) all
Occupational Safety and Health Administration claims made against
Midwesco.
(b) All action, work and other steps recommended to be
taken pursuant to the Environmental Audits have been taken. Midwesco
has provided MFRI with copies of all certificates and other documents
necessary to verify that all such action, work and steps recommended
to be taken under the Environmental Audits have been taken.
(c) Except as provided in writing and delivered by
Midwesco to MFRI prior to the date hereof, no Hazardous Materials (as
hereinafter defined), friable asbestos or friable asbestos containing
materials ("ACMs") are, or to the knowledge of Midwesco, have been,
located in or about any real properties owned or leased by Midwesco,
into the environment, or discharged, treated, managed, recycled,
placed or disposed of by Midwesco, or anyone else, at, on or under any
real properties owned or leased by Midwesco, and no Hazardous
Materials or ACMs formerly located on the real properties owned or
leased by Midwesco have been disposed of at any off-site waste
disposal.
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(d) Except as provided in writing and delivered by
Midwesco to MFRI prior to the date hereof, no portion of any real
properties owned or leased at any time by Midwesco is being used, or
to the knowledge of Midwesco, has been used, for the disposal,
storage, recycling, treatment, processing or other handling of
Hazardous Materials.
(e) Except as provided in writing and delivered by
Midwesco to MFRI prior to the date hereof, to the knowledge of
Midwesco, no above the ground or underground storage tanks are located
on or under any real properties currently or previously owned or
leased by Midwesco.
(f) To the knowledge of Midwesco, Midwesco has not
disposed of any substance (other than human sewage) into any plumbing
or septic tank.
(g) To the knowledge of Midwesco, Midwesco is operating
in compliance in all material respects with all applicable
Environmental Laws (as hereinafter defined).
(h) To the knowledge of Midwesco, no investigation,
administrative order or notice, consent, order and agreement,
litigation, settlement or environmental claim or lien with respect to
Hazardous Materials or ACMs is proposed, threatened or in existence
with respect to any real properties now or previously owned or leased
by Midwesco or with respect to any off-site waste disposal to which
waste relating to the operations of Midwesco has been taken.
(i) Midwesco has not received any summons, citation or
written notice from any person, entity or governmental agency
whatsoever concerning any violation or alleged violation of
Environmental Laws or the storage, dumping or discharge of any
Hazardous Materials or ACMs arising out of or with respect to any real
properties now or previously owned or leased by Midwesco.
The following terms shall have the following meanings for purposes of
this Section 2.22:
(i) The term "Environmental Laws" shall mean the Federal
Clean Air Act, Federal Water Pollution Control Act,
Resource Conservation and Recovery Act, Solid Waste
Disposal Act, Toxic Substance Control Act and
Comprehensive Environmental Response, Compensation
and Liability Act, and any other Federal, state or
local laws, regulations or other requirements
regulating or otherwise concerning Hazardous
Substance or the environment.
(ii) The term "Hazardous Material(s)" shall mean any
hazardous, toxic or dangerous substance, pollutant,
contaminant, waste or other material regulated under
Environmental Laws; ACMs; oil and petroleum products
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and natural gas, natural gas liquids, liquified natural gas,
and synthetic gas usable for fuel; chemicals subject to the
OSHA Hazard Communication Standard; and industrial process and
pollution control wastes whether or not hazardous within the
meaning of the Federal Resource Conservation and Recovery Act.
2.26 LABOR RELATIONS. Midwesco is not a party to or bound by any
collective bargaining agreement, except as described in writing to MFRI prior
to the date hereof. Except as set forth in writing and delivered by Midwesco
to MFRI prior to the date hereof, there have been no negotiations, demands or
proposals pending or, to the knowledge of Midwesco, threatened, which would be
covered by a collective bargaining agreement. There have been no strikes or
lockouts affecting Midwesco during the three (3) year period immediately
preceding the Closing Date. No allegation, charge or complaint of age,
disability, sex or race discrimination or similar charge has been made or, to
the knowledge of Midwesco, threatened, against Midwesco.
2.27 EMPLOYEE BENEFIT PLANS. Midwesco has provided to MFRI, prior
to the date hereof, a written description of each "employee welfare benefit
plan" and each "employee pension benefit plan" (the "Descriptions") as such
terms are defined, respectively, in Sections 3(1) and 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") that Midwesco
maintains or to which it contributes, or to which it has maintained or
contributed. A description of the employee welfare benefit plans and the
employee pension benefit plans provided by Midwesco to MFRI are referred to in
this Section 2.27 as the "Welfare Plans" and the "Pension Plans", respectively,
and as the "Benefit Plans", collectively. The Pension Plans that are intended
to qualify under Section 401(a) of the Code, are referred to in this Section
2.27 as "Qualified Plans" and are identified as such in the descriptions
provided by Midwesco to MFRI, as noted above. A copy of each Benefit Plan, any
trust agreement and any insurance contract with respect to each Benefit Plan,
the latest summary plan description, annual report, actuarial report, and
financial report, if any, with respect to each Benefit Plan, and the latest
determination letter issued by the Internal Revenue Service with respect to
each Qualified Plan has been delivered to MFRI prior to the date hereof. Each
Benefit Plan, if any, that is not written is identified as such and is
comprehensively set forth in the Descriptions. Except as disclosed in the
Descriptions:
(a) ERISA AND CODE COMPLIANCE. Each Benefit Plan is and
has been, at all times, administered in all material respects in
compliance with the applicable requirements of ERISA and the Code.
All tax returns, information returns, and reports required to be filed
with respect to each Benefit Plan pursuant to ERISA or the Code have
been accurately, timely, and properly filed as required under ERISA or
the Code. All notices, statements, reports and other disclosure
required to be given or made to participants and beneficiaries under
each Benefit Plan pursuant to ERISA or the Code
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have been accurately, timely and properly given or made as required under ERISA
or the Code.
(b) QUALIFIED PLANS. Each Qualified Plan has met the
requirements of Section 401(a) and, if applicable, Sections 401(k) and
(m) of the Code, as in effect on and after the initial effective date
of such plan. Each Qualified Plan is and has been, at all times,
administered in compliance with the requirements of section 401(a)
and, if applicable, Sections 401(k) and (m) of the Code. Midwesco
does not have any, nor expects to have any, liability, directly or
indirectly, for any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA or Section 412 of the Code), whether
or not waived, with respect to any Qualified Plan or any other
employee pension benefit plan. No Qualified Plan is a defined benefit
plan as defined in Section 414 of the Code.
(c) WELFARE PLANS. Each Welfare Plan that is intended to
meet the requirements for tax-favored treatment under Subchapter B of
Chapter 1 of the Code meets and has, at all times, met those
requirements. No Welfare Plan has provided a disqualified benefit
within the meaning of Section 4976 of the Code. Each Welfare Plan
that is subject to the health benefit continuation requirements of
Section 601 et seq. of ERISA or Section 4980B of the Code ("COBRA
Requirements") satisfies and, at all times, has satisfied the COBRA
Requirements. No Welfare Plan provides that Midwesco has any
liability for any post-retirement medical or life insurance benefits,
except pursuant to the COBRA Requirements.
(d) PROHIBITED TRANSACTIONS. No person has engaged in
any transaction with respect to any Benefit Plan that is prohibited
under Sections 406 or 407 of ERISA or Section 4975 of the Code and
that could subject Midwesco or any employee or member of the Board of
Directors of Midwesco or any person indemnified by Midwesco to any
civil penalty under Section 502(i) of ERISA or excise tax under
Section 4975 of the Code.
(e) PBGC LIABILITY. Midwesco does not have any, or does
not expect to have any, liability under Title IV of ERISA, directly or
indirectly, to the Pension Benefit Guaranty Corporation or any other
person with respect to any Pension Plan.
(f) MULTIEMPLOYER PLANS. Midwesco does not have any
withdrawal liability, directly or indirectly, demanded or yet to be
demanded, pursuant to Section 4202 et. seq of ERISA with respect to
any "multiemployer plan" as such term is defined in Section 3(37) of
ERISA or Section 4001(a)(3) of ERISA (a "Multiemployer Plan").
Midwesco does not contribute to nor has any obligation to contribute
to any Multiemployer Plan, except pursuant to the collective
bargaining agreements described in response to Section 2.25 hereof.
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(g) OTHER CLAIMS. Except for routine claims for benefits
arising in the ordinary course of the administration of the Benefit
Plans, there are no pending or, to the knowledge of Midwesco,
threatened, claims, investigations or audits for benefits under a
Benefit Plan, or of violations of the requirements of ERISA or the
Code.
(h) RIGHT TO AMEND. Except as specifically precluded by
applicable law, each Benefit Plan may be amended or terminated at any
time and in any manner without liability to MFRI and participants and
beneficiaries have been notified of such amendment and termination
rights.
2.28 EMPLOYEE POLICIES. Midwesco has provided, prior to the date
hereof, copies of its employee handbooks, each of which is currently in effect.
Except as set forth in writing and delivered by Midwesco to MFRI prior to the
date hereof, such handbooks fairly and accurately summarize all employee
policies, vacation policies and payroll practices of Midwesco.
2.29 CUSTOMERS.
(a) Except as set forth in writing and delivered
by Midwesco to MFRI prior to the date hereof, to the knowledge of
Midwesco, Midwesco has not been advised that any of its customers of
the Business intend to cease doing business with it or reduce the
amount of goods or services of the Business purchased on a regular
on-going basis from it, which cessation or reduction would have a
Material Adverse Effect on its sales or income from the Business;
provided, however, that such representation shall not apply to a
cancellation, reduction or termination primarily because of the Merger
or the announcement thereof.
(b) Except as set forth in writing and delivered by
Midwesco to MFRI prior to the date hereof, during the past five years,
Midwesco has not received complaints from customers of the Business or
relating to the warranty obligations to be retained by Midwesco
pursuant to Section 4.2(d) hereof which have not been promptly
resolved.
2.30 SUPPLIES AND SUPPLIERS. Except as set forth in writing and
delivered by Midwesco to MFRI, to the knowledge of Midwesco, Midwesco has not
experienced in the past twelve (12) months any material shortage of supplies or
any price increase in its supplies which could reasonably be expected to have a
Material Adverse Effect. Midwesco has not been advised that any of its
suppliers intends to cease doing business with MFRI after the effective date or
to materially reduce the amount of goods sold to MFRI after the effective date.
2.31 PAYROLL. Midwesco has set forth in writing and delivered to
MFRI prior to the date hereof the names and current salary and payroll rates of
all employees of Midwesco together with a summary of the bonuses, additional
compensation and other benefits paid to such employees for calendar year 1995
and the calendar year 1996 to date.
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2.32 POWERS OF ATTORNEY. There are no outstanding powers of
attorney executed on behalf of Midwesco.
2.33 PROXY STATEMENT. As soon as practicable after the execution
of this Agreement, MFRI shall prepare the Proxy Statement. Midwesco shall
furnish such information as reasonably necessary or as reasonably requested by
MFRI to properly prepare the Proxy Statement, provided that Midwesco shall have
the right to review and approve the Proxy Statement. None of the information
furnished by Midwesco in writing for the Proxy Statement shall, as of the
Closing Date, include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
2.34 BROKERAGE FEE. Midwesco has not engaged any investment
banker, finder, broker or similar agent with respect to the transactions
contemplated by this Agreement which may give rise to any brokerage fee,
finder's fee, commission or similar liability on the part of MFRI or any of the
Subsidiaries.
2.35 PRODUCT WARRANTY. Except as set forth in writing and
delivered by Midwesco to MFRI prior to the date hereof, there is neither
pending nor, to the knowledge of Midwesco, threatened, any action or proceeding
against Midwesco under any foreign, federal, state, local or other laws or
regulations relating to product warranties or guarantees related to the
Business. A true, correct and complete copy of the standard product warranty
for each product manufactured or sold by Midwesco related to the Business has
been delivered to MFRI prior to the date hereof. The reserves for warranty
work related to the Business taken in the financial statements of Midwesco are
adequate in accordance with generally accepted accounting principles.
2.36 FULL DISCLOSURE. To the knowledge of Midwesco, the
representations and warranties of Midwesco contained in this Agreement, and the
documents executed and delivered by Midwesco pursuant hereto, taken as a whole,
as of the date hereof and as of the Closing Date, do not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
2.37 DEFINITION OF KNOWLEDGE. As used in this Agreement, the
phrase "to the knowledge of Midwesco", or words of similar import, means the
knowledge and belief of any of the officers and directors of Midwesco.
2.38 DEFINITION OF "MATERIAL". For purposes of this Agreement, any
item shall be deemed material if it involves $50,000.00 or more (exclusive of
costs and expenses of investigating and defending such item, such as attorneys'
and accountants' fees), and it shall be
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deemed not material if it involves less than $50,000.00 (exclusive of costs and
expenses of investigating and defending such item, such as attorneys' and
accountants' fees).
2.39 SHAREHOLDERS OF MIDWESCO. Upon the date of this Agreement,
Midwesco shall provide to MFRI a true and correct list of each of the
shareholders of Midwesco specifying their name, number of shares owned and
state of residence.
Notwithstanding anything to the contrary contained in this Article 2,
MFRI acknowledges and agrees that all representations and warranties contained
in this Article 2, shall be deemed made subject to the terms and conditions of
the loan agreement by and between Midwesco and Harris Trust and Savings Bank
("Harris Bank"), dated as of January 28, 1994, as amended prior to the date
hereof (the "Credit Agreement").
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MFRI
MFRI hereby represents and warrants to Midwesco that, as of the date
hereof and as of the Effective Time, except as otherwise provided in this
Agreement:
3.1 ORGANIZATION AND CORPORATE POWER. MFRI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. MFRI has full corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it.
3.2 AUTHORIZATION. MFRI has full corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and to perform its
obligations hereunder and thereunder. The execution and delivery of this
Agreement and the Plan of Merger by MFRI and the performance of its obligations
hereunder and thereunder have been duly authorized by resolutions duly adopted
by its Board of Directors, and a copy of such resolutions, certified by the
Secretary or an Assistant Secretary of MFRI, shall be provided to Midwesco
prior to the Closing Date.
3.3 BINDING EFFECT. This Agreement and the Plan of Merger have
been duly executed and delivered by MFRI and constitute its legal, valid and
binding obligations, enforceable in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and general equitable principles.
Except as contemplated by this Agreement, MFRI is not required to give any
notice to, make any filing with, or obtain any authorization, consent or
approval of, any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
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3.4 NONCONTRAVENTION. Neither the execution and delivery of this
Agreement or the Plan of Merger by MFRI nor the consummation of the
transactions contemplated hereby and thereby will: (a) violate any statute,
regulation, rule, judgment, order, decree, stipulation or injunction to which
MFRI is subject; (b) conflict with or result in a breach of the provisions of
the Certificate or Articles of Incorporation or By-laws of MFRI, as amended as
of the Closing Date; or (c) except as set forth in writing and delivered by
MFRI to Midwesco, conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any person or entity the right
to accelerate, terminate, modify or cancel, or require any notice under, any
contract, lease, license, indenture, agreement, mortgage, instrument of
indebtedness or other instrument to which MFRI is a party or by which MFRI or
any property of MFRI is bound.
ARTICLE 4
TRANSFER AND DISTRIBUTION OF NEW MIDWESCO
4.1 ASSETS OF NEW MIDWESCO. On the Closing Date, immediately
prior to the Effective Time, Midwesco shall transfer to New Midwesco all of its
assets except for the following assets, subject to the Liabilities
(collectively, the "Transferred Assets"):
(a) all inventory used in connection with the operation
of the Business, including raw materials, work in process and finished
goods (the "Inventory");
(b) all machinery, equipment, tools, trade fixtures,
furniture, packaging, supplies, spare parts and computer hardware and
software used in connection with the operation of the Business (the
"Equipment");
(c) the Leases and all leasehold improvements and other
assets thereon;
(d) all patents and patent applications used in
connection with the operation of the Business;
(e) all prepaid expenses related to the Business;
(f) all accounts receivable for products and services
provided by Midwesco in the ordinary course of its Business (the
"Accounts Receivable");
(g) all tradenames, trademarks, trademark applications,
customer lists, customer data, costing data, technical data, supplier
lists and all other data pertaining to the assets related to the
Business;
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(h) all of Midwesco's interest in technical information,
technology, know-how, designs, drawings, trade secrets, processes,
discoveries, research and development data, operating practices and
techniques related to the Business;
(i) all causes of action relating to the Business;
(j) all claims for refund related to the Business;
(k) all other assets of Midwesco, tangible or intangible
related to the Business;
(l) the goodwill of Midwesco and the Business as a going
concern;
(m) all books and records of Midwesco, except for books
and records specifically related to assets or liabilities transferred
to New Midwesco;
(n) the MFRI Shares; and
(o) the deferred tax assets of Midwesco; and
(p) to the extent the deferred tax assets of Midwesco as
of the Effective Time do not include an aggregate of at least $157,000
of realized tax credits, cash in an amount equal to $157,000 less the
aggregate amount of realizable tax credits as of the Effective Time.
4.2 LIABILITIES OF NEW MIDWESCO. On the Closing Date, immediately
after the Closing and immediately prior to the Effective Time, Midwesco shall
transfer the Transferred Assets to New Midwesco subject to all liabilities of
Midwesco which shall be assumed by New Midwesco, including, but not limited to,
any liabilities whether disclosed or undisclosed, absolute or contingent,
liquidated or unliquidated, and whether due or to become due and deferred tax
liabilities (the "Liabilities"), except the following liabilities
(collectively, the "Excluded Liabilities"):
(a) all contracts and agreements of Midwesco related to
the Business;
(b) the liabilities of Midwesco existing immediately
prior to the Effective Time relating specifically to the Business,
including, but not limited to, accounts payable, trade payables,
commissions payable, costs associated with work in process, sales tax
payable on unpaid invoices, and accrued expenses (including payroll
and vacation pay) ;
(c) all obligations and liabilities relating to the
Pending Suits;
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(d) all warranty obligations related to the assets and
piping systems business transferred by Midwesco to Perma-Pipe, Inc.
on January 28, 1994 retained by Midwesco; and
(e) indebtedness for borrowed funds aggregating
$5,000,000;
(f) all obligations under the Leases; and
(g) leases on automobiles and other assets leased for
use in the Business.
4.3 WARRANTY SERVICE. From and after the Effective Time, MFRI
agrees to assume all out-of-pocket costs incurred in connection with servicing
any claims relating to products sold by the Business prior to the Closing Date,
and under warranty or guarantee. Nothing in this Section 4.3 shall be deemed
to result in or create any liability on the part of MFRI with respect to any
other products sold or services provided by Midwesco prior to the Closing Date,
except as provided in Section 4.2(d).
4.4 NEW MIDWESCO'S COVENANT NOT TO COMPETE. In order to induce
MFRI to enter into this Agreement and the Plan of Merger, New Midwesco
covenants and agrees that for a period of five years from and after the
Effective Time, New Midwesco shall not engage in any business the same as or
competitive with the Business. The covenants of Midwesco hereunder refer to
engaging in such prohibited business directly or indirectly, whether as
principal, partner, joint venturer, shareholder, proprietor, agent,
distributor, consultant or otherwise; provided, however, that the covenants
contained herein shall not apply to New Midwesco's ownership of shares of stock
in MFRI or any assistance it provides MFRI in connection with the operation of
the Business.
4.5 PERSONNEL. All of the personnel directly working only in the
Business shall become employees of MFRI. Any personnel not working in the
Business but any other business of Midwesco except for general administration
shall become employees of New Midwesco and New Midwesco shall assume all the
obligations of Midwesco of any type, including, but not limited to, employee
benefit plan obligations and retirement plans with respect to such employees.
Midwesco and MFRI shall agree five (5) days prior to the consummation of the
Merger which other employees of Midwesco that are not of the type referred to
in the first two sentences of this Section, shall become employees of New
Midwesco or continue as employees of MFRI. Notwithstanding any provision of
this Section 4.5 to the contrary, Midwesco shall have no liability in the event
that any employee of Midwesco does not become an employee of MFRI.
4.6 EMPLOYEE BENEFIT PLANS. Effective on the Closing Date: (a)
the parties agree that MFRI will become the plan administrator and plan sponsor
of all Benefit Plans covering employees of MFRI and Midwesco prior to the
Closing Date; (b) employees of New Midwesco
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may, subject to the terms and conditions of each Benefit Plan, continue to
participate in the Benefit Plans made available to employees of Midwesco
generally prior to the Closing Date, except to the extent that, under its
existing terms and conditions, extending a Benefit Plan to employees of New
Midwesco would violate applicable law; (c) employees of New Midwesco who were
employed by Midwesco prior to the Closing Date shall not be treated as new
participants under the Benefit Plans except to the extent that they would
otherwise be treated as new participants had they terminated employment with
Midwesco and the transactions contemplated by this Merger Agreement did not
occur; (d) New Midwesco shall, at its own cost and expense, take all action
necessary under applicable law to become a participating employer under the
Benefit Plans extended to its employees; and (e) participants in the Benefit
Plans who are now employed by MFRI, but who were employed by Midwesco
immediately prior to the Closing Date, shall not be treated as employees of New
Midwesco under the Benefit Plans.
In accordance with policies and procedures established from time to
time by MFRI, New Midwesco shall reimburse MFRI for its proportionate share of
administrative and funding costs incurred by MFRI with respect to each Benefit
Plan. New Midwesco may withdraw as a participating employer in the Benefit
Plans by providing at least ninety (90) days advance written notice to MFRI
specifying a withdrawal date (the "Withdrawal Date"). After a Withdrawal Date,
the following procedures will become effective:
(a) Any claim for benefits incurred prior to a Withdrawal
Date relating to employees of New Midwesco under a Welfare Plan
sponsored by MFRI shall be filed with the plan no later than ninety
(90) days after the Withdrawal Date. New Midwesco will be responsible
for notifying its employees and their dependents of this procedure.
After all of these claims are processed, MFRI shall have no further
responsibility or obligation under any of its Welfare Plans relating
to employees of New Midwesco.
(b) New Midwesco shall establish a new Pension Plan that
is qualified under Section 401(a) of the Code and contains appropriate
provisions to facilitate a transfer of plan assets and liabilities
attributable to employees of New Midwesco from a Pension Plan
sponsored by MFRI. New Midwesco and MFRI shall negotiate, in good
faith, to effectuate such a transfer of assets and liabilities
pursuant to the requirements of applicable law. However, prior to
such transfer, New Midwesco shall provide satisfactory evidence to
MFRI that its Pension Plan is qualified under Section 401(a) of the
Code. After this transfer of assets and liabilities is completed,
MFRI shall have no further responsibility or obligation under any of
its Pension Plans relating to employees of New Midwesco.
(c) Until such time as these procedures are completed,
New Midwesco shall continue to reimburse MFRI for its proportionate
share of administrative and funding costs associated with the Benefit
Plans.
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The parties agree that the transactions contemplated by this Agreement
are not intended to confer severance benefits on any employee of Midwesco who
becomes an employee of MFRI or New Midwesco after the Closing Date. Prior to
the Closing Date, Midwesco shall review all communications distributed to its
employees relating to severance benefits. If any such communication is
inconsistent with the first sentence of this Paragraph, Midwesco shall take all
necessary steps to revise such communication accordingly.
4.7 STOCK OPTION PLANS. MFRI agrees to amend outstanding options
held by each employee of Midwesco who will become an employee of New Midwesco
to continue such stock option in effect in accordance with its terms for such
period of time as such employee may be an employee of New Midwesco; provided,
however, such option shall thereafter terminate upon the termination of
employment with New Midwesco and upon its expiration date.
ARTICLE 5
COVENANTS PENDING CLOSING
5.1 CONDUCT OF BUSINESSES. Until the Effective Time, Midwesco
shall conduct the Business in the ordinary and usual course, consistent with
past practices, and shall use its best efforts to preserve the goodwill of the
employees, representatives, suppliers and customers of the Business.
5.2 FOREBEARANCES BY MIDWESCO. Except as contemplated by this
Agreement or the Plan of Merger, or consented to by MFRI in writing, during the
period from the date hereof through the Effective Time, Midwesco shall not:
(a) authorize or effect any change in its charter or
by-laws;
(b) grant any options, warrants or other rights to
purchase or obtain any of its capital stock, or issue, sell or
otherwise dispose of any of its capital stock;
(c) declare, set aside or pay any dividend or
distribution with respect to its capital stock, or redeem, repurchase
or otherwise acquire any of its capital stock, except for the
distribution of shares of New Midwesco to the shareholders of
Midwesco;
(d) create, incur, assume or guaranty any indebtedness
for borrowed money, provided, however, this Section 5.2(d) shall not
prohibit draws under the Credit Agreement;
(e) grant any lien, pledge, security interest or other
encumbrance upon any of its assets;
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(f) make any loan to or investment in, or acquire any
securities or assets of any other person or entity, other than
purchases of inventory, supplies, tools and equipment in the ordinary
course of business or the conversion of intercompany loans to Simtech,
Inc. to equity;
(g) increase the rate of compensation or materially
increase the benefits payable or to become payable to any of its
directors, officers or employees (other than raises made in the
ordinary course of business to employees who are not directors or
officers provided that such raise to any such employee shall not
exceed five percent (5%) of the base compensation of such employee in
effect at December 31, 1995) or make any material change in any of the
terms of employment of any of its directors, officers or employees;
(h) change any accounting policies, procedures or
practices employed by it;
(i) sell any of its assets, other than sales of inventory
in the ordinary course of business, and sales of equipment made in the
ordinary course of business due to the replacement or abandonment
thereof;
(j) enter into any material contract, agreement or lease
which would be required to be disclosed hereunder, or make any change
in any existing contracts, agreements or leases other than in the
ordinary course of business;
(k) modify, amend or alter leases of real property; or
(l) permit or record any transfers of shares of its
common stock.
ARTICLE 6
ADDITIONAL COVENANTS AND AGREEMENTS
6.1 ACCESS AND INFORMATION. Midwesco will afford to MFRI and its
representatives such access during normal business hours throughout the period
prior to the Closing Date to the books and records of the Business as MFRI may
reasonably request. Such due diligence investigation may include, without
limitation, a physical count of the Inventory of the Business taken at MFRI's
expense prior to the Closing. No investigation by MFRI of the Business prior
to the date hereof or pursuant to this Section shall be deemed to modify any of
the representations or warranties of Midwesco in Article 2.
6.2 ISSUANCE OF SHARES. MFRI covenants and agrees that prior to
the consummation of the Merger its authorized common stock is 15,000,000 shares
and it will reserve for issuance
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out of its authorized but unissued shares of common stock at least that number
of shares equal to the total number of shares of common stock of MFRI to be
issued in the Merger.
6.3 PROXY STATEMENT. MFRI shall prepare and file the Proxy
Statement with the SEC regarding the stockholders' meeting to consider and vote
upon, among other things, the Merger. Midwesco shall furnish such information
as reasonably necessary or reasonably requested by MFRI for the Proxy
Statement.
6.4 REGISTRATION. MFRI hereby agrees to register the share of
MFRI issued to the shareholders of Midwesco pursuant to the terms of the
Registration Rights Agreement.
6.5 CONSENTS. Prior to the date hereof, Midwesco and MFRI shall
use reasonable efforts to obtain the consents, waivers and other approvals
which may be required from any lender, lessor, customer or supplier in order to
effectuate the Merger.
6.6 EXPENSES. Except as otherwise specifically provided in
Article 8, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expenses.
6.7 ADDITIONAL FINANCIAL STATEMENTS. Midwesco shall furnish to
MFRI unaudited consolidated financial statements for the quarter ended October
31, 1996 as soon as practical, but in no event later than the Closing Date.
Such financial statements shall be certified by the chief financial officer of
Midwesco as: (a) having been prepared in accordance with generally accepted
accounting principles applied on a consistent basis; (b) fairly presenting the
consolidated financial position of Midwesco as at the dates of each financial
statement; and (c) fairly presenting the results of operations, changes in
equity and cash terms for the respective words covered by the Financial
Statements.
6.8 PUBLICITY. Neither Midwesco nor MFRI, nor any of the
Subsidiaries shall announce or disclose publicly the terms or provisions hereof
without the prior written approval of MFRI, and MFRI shall not announce or
disclose publicly the terms or provisions hereof without the prior written
approval of Midwesco, except: (a) pursuant to the Proxy Statement; (b) such
disclosure as may be required under securities law or common law (subject to
giving the other party notice as promptly as possible of the intention to make
such disclosure and providing the other party an opportunity to review the
wording of such disclosure); and (c) disclosure to its attorneys, accountants,
lenders, bankers, investment bankers and employees of the parties to this
Agreement.
6.9 CERTAIN SECURITIES LAW MATTERS. Midwesco acknowledges and
agrees that:
(a) no federal, state or other agency has made any
finding or determination as to the adequacy or accuracy of the
information provided to Midwesco or its
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shareholders in connection with the offering of MFRI Shares or as to
the fairness of the offering for investment, nor any recommendation or
endorsement of MFRI Shares;
(b) because MFRI Shares have not been registered under
the Securities Act of 1933, as amended ("Securities Act"), or
applicable state or other securities laws, the economic risk of the
investment must be borne indefinitely by the shareholders of Midwesco,
and the MFRI Shares cannot be sold unless subsequently registered
under the Securities Act and such state or other applicable laws, or
an exemption from such registration is available. MFRI is not
obligated to file a notification under Regulation A of the Securities
Act or a registration statement under the Securities Act, except as
provided in the Registration Rights Agreement;
(c) Midwesco shall solicit the vote of its shareholders
using such proxy solicitation material which, at the time and in light
of the circumstances under which it is used, is not false or
misleading with respect to a material fact or omits to state any
material fact necessary to make a statement contained therein not
false or misleading or necessary to correct any statement in an
earlier communication which has become false or misleading. In
addition, Midwesco shall deliver to its shareholders before their
approval of the proposed merger such materials as MFRI shall request
including, but not limited to, MFRI annual report on Form 10-K for the
year ended January 31, 1996, MFRI quarterly reports on Form 10-Q for
the quarters ended April 30, 1996 and July 31, 1996, the proxy
statement for the 1996 annual meeting of MFRI shareholders dated June
6, 1996, the annual report of shareholders of MFRI for the fiscal year
ended January 31, 1996 and this Agreement;
(d) the certificates representing MFRI Shares in the
Merger to the shareholders of Midwesco shall bear the following
legend:
"The transfer, sale, pledge, distribution or
other disposition of the shares evidenced by
this certificate is restricted by and subject
to the terms and conditions of that certain
Agreement for Merger dated as of October 25,
1996 by and between MFRI and Midwesco, a copy
of which is available for inspection at the
principal executive office of MFRI."; and
(e) except as may be specifically provided in this
Agreement, no Transaction in the MFRI Shares can be made and
appropriate stop transfer instructions shall be recorded in the stock
ledger of MFRI.
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6.10 DISTRIBUTION OF SHARES OF NEW MIDWESCO. Immediately prior to
the consummation of the Merger, Midwesco shall distribute the shares of New
Midwesco to its shareholders of record.
ARTICLE 7
CONDITIONS
7.1 MUTUAL CONDITIONS. The obligations of each party to effect
the Merger shall be subject to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) APPROVAL BY STOCKHOLDERS OF MFRI. This Agreement and
the Plan of Merger shall have been approved and adopted by the
affirmative vote of a majority of the issued and outstanding shares of
common stock of MFRI entitled to vote on the Merger, at the
stockholders' meeting held for the purpose of acting on the Merger.
(b) TAX OPINION. The parties shall have received an
opinion, in form and substance reasonable satisfactory to them, to the
effect that the transactions contemplated hereby should not be
currently taxable to them or their respective shareholders.
(c) LISTING. The shares of capital stock of MFRI to be
issued to the shareholders of Midwesco shall have been approved for
trading on the National Association of Securities Dealers Automated
Quotation System.
(d) LITIGATION. Immediately prior to the Effective Time,
there shall be no action or proceeding initiated by any governmental
agency or third party which seeks to restrain, prohibit or invalidate
the Merger or to recover substantial damages or other substantial
relief with respect thereto, and no injunction or restraining order
shall have been issued by any court restraining, prohibiting or
invalidating the Merger.
(e) PRICE OF MFRI COMMON STOCK. The average market price
for the ten (10) trading days immediately preceding the Closing Date
shall be less than $11.48 per share and more than $3.48 per share.
7.2 CONDITIONS TO OBLIGATIONS OF MFRI TO EFFECT THE MERGER. The
obligations of MFRI to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Midwesco set forth in Article 2 of this Agreement
shall be true and correct in all material respects on the date hereof
and as of the Effective Time. MFRI shall have received
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certificates from each of Midwesco, executed by the President or a Vice
President, dated the Closing Date to the effect that the representations and
warranties of set forth in Article 2 of this Agreement are true and correct on
the date of this Agreement and as of the Closing Date, as if made again on and
as of the Closing Date.
(b) PERFORMANCE OF OBLIGATIONS. Midwesco shall have
performed all obligations required to be performed by it under this
Agreement on and prior to the Closing Date, and MFRI shall have
received a certificate executed by the President or a Vice President
of Midwesco to that effect dated the Closing Date.
(c) OPINION OF COUNSEL. MFRI shall have received the
written opinion of Schwartz, Cooper, Greenberger & Krauss Chtrd.,
counsel to Midwesco, dated the Closing Date, in form and substance
reasonably acceptable to MFRI, relating to matters set forth in
Sections 2.1, 2.2, 2.3, 2.4, 2.5 and 2.6 hereof.
(d) CONSENTS. Midwesco shall have received all consents,
waivers and other approvals from lenders, lessors and such other third
parties as necessary to effectuate the Merger.
(e) FAIRNESS OPINION. MFRI shall have received a
fairness opinion, in form and substance satisfactory to MFRI with
respect to the proposed transaction from an investment banking firm
acceptable to MFRI.
(f) APPROVAL OF SPECIAL COMMITTEE. MFRI shall have
received the recommendation of a committee of independent directors,
advised by independent counsel as to the fairness of the proposed
transaction.
(g) DISSENTERS. Not more than the record owners of one
percent (1%) of the issued and outstanding shares of Midwesco shall
have exercised their right to dissent pursuant to Section 11.65 of the
Business Corporation Act of 1983 as in effect in the State of
Illinois.
7.3 CONDITIONS TO OBLIGATIONS OF MIDWESCO TO EFFECT THE MERGER.
The obligation of Midwesco to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations
and warranties of MFRI set forth in Article 3 of this Agreement shall
be true and correct in all material respects as of the date hereof and
as of the Effective Time. Midwesco shall have received a certificate,
executed by the President or a Vice President of MFRI, to the effect
that the representations and warranties of MFRI set forth in Article 3
of this
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Agreement are true and correct on the date of this Agreement and as of
the Closing Date, as if made again on and as of the Closing Date.
(b) PERFORMANCE OF OBLIGATIONS. MFRI shall have
performed all obligations required to be performed by it under this
Agreement prior to the Closing Date, and Midwesco shall have received
a certificate executed by the President or a Vice President of MFRI to
that effect dated the Closing Date.
(c) OPINION OF COUNSEL. Midwesco shall have received the
written opinion of Rudnick & Wolfe, counsel to MFRI, dated the Closing
Date, in form and substance reasonably acceptable to Midwesco,
relating to Sections 3.1, 3.2, 3.3 and 3.4.
(d) REGISTRATION RIGHTS AGREEMENT. MFRI shall have
executed and delivered the Registration Rights Agreement for the
benefit of each shareholder of Midwesco.
ARTICLE 8
TERMINATION
8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval by the stockholders
of MFRI;
(a) by mutual consent of Midwesco and MFRI;
(b) by either Midwesco or MFRI if the Closing Date or
Effective Time has not occurred by March 31, 1997;
(c) by MFRI, if any condition in Section 7.1 or 7.2
cannot be satisfied by the Closing Date; or
(d) by Midwesco, if any condition in Section 7.1 or 7.3
cannot be satisfied by the Closing Date.
8.2 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.1, (a) this Agreement and the Plan of Merger shall
forthwith become void and there shall be no liability or obligation on the part
of Midwesco or MFRI to each other under this Agreement or the Plan of Merger.
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ARTICLE 9
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in this Agreement and in any other
document delivered pursuant hereto shall survive for three (3) years from and
after the Closing Date (other than the representations contained in Sections
2.10 and 2.25, which shall survive until the expiration of the statute of
limitations applicable thereto), and shall not survive thereafter (the
"Survival Period"). Any claim or cause of action based upon or arising out of
a breach of a representation or warranty made hereunder or in any other
document delivered pursuant hereto must be made within the Survival Period or
the party against which such claim is made shall have no liability with respect
thereto. Any claim or cause of action based upon or arising out of a breach of
such a representation or warranty which is made within the Survival Period
shall survive the expiration of the Survival Period.
9.2 SURVIVAL LIMITATION NOT APPLICABLE TO COVENANTS. Nothing
contained in this Article 9 shall affect the obligations of any party to
perform the agreements and covenants to be performed by such party hereunder or
in connection herewith either before or after the Closing Date, which
agreements and covenants shall survive until such time as the same have been
performed in full.
ARTICLE 10
INDEMNIFICATION
10.1 INDEMNIFICATION OF MFRI. From and after the Effective Time,
New Midwesco and the shareholders of Midwesco (collectively, New Midwesco and
the shareholders of Midwesco are referred to herein as the "Indemnifying
Parties"), shall, jointly and severally, indemnify, defend and hold MFRI and
each of its officers, directors, shareholders, employees, attorneys,
accountants and agents (collectively, MFRI and each of its officers, directors,
shareholders, employees, attorneys, accountants and agents are referred to
herein as the "Indemnified Parties") harmless from and against any and all
demands, claims, actions, suits, proceedings, judgments, assessments, costs,
expenses, losses, damages, liabilities fines or penalties (including without
limitation, reasonable attorneys' fees), net of insurance recoveries or
demonstrable tax benefits available to and utilized by MFRI, if any
(collectively, "Damages") to the extent incurred or suffered by MFRI or any of
its officers, directors, shareholders, employees, attorneys, accountants or
agents with respect to, in connection with, or resulting from, arising out of
or by reason of:
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(a) the activities of Midwesco, for all periods prior to
the Effective Time, except with respect to activities specifically
related to the Business and any Excluded Liabilities, including, but
not limited to, obligations and liabilities relating to taxes,
penalties and interest thereon, and any violation of environmental
laws by Midwesco;
(b) the existence of any fact, circumstance, situation or
condition or the happening of any event constituting a breach or
violation of any of the representations, warranties, covenants or
agreements of Midwesco contained in this Agreement or in any document
delivered pursuant hereto or the untruth or inaccuracy thereof;
(c) any default under or failure to perform, prior to the
Effective Time, any of the contracts described in Section 4.2(a);
(d) all liabilities and obligations assumed by New
Midwesco;
(e) the existence of Hazardous Materials in, under,
beneath, over, upon or emanating from the Properties on or prior to
the Effective Time, or the off-site storage or disposal of any
Hazardous Materials by Midwesco, including, but not limited to: (i)
claims of third parties (including governmental agencies) for damages,
penalties, response costs, clean-up costs, injunctive or other relief;
(ii) costs and expenses of removal and restoration; (iii) costs of
environmental studies; and (iv) costs of reporting the existence of
any Hazardous Materials to any governmental agency;
(f) the underground and above the ground storage tanks,
including any leakage therefrom (whether before or after the Effective
Time), any removal, upgrading, testing or monitoring thereof and
resulting remediation required by law and any reports of the existence
thereof required by law; or
(g) all claims for damages to persons or property arising
from events occurring as of or prior to the Effective Time relating to
the operation of the Business as of or prior to the Effective Time,
except to the extent a liability has been accrued on the balance sheet
of Midwesco relating to such claims.
10.2 PROCEDURE FOR INDEMNIFICATION.
(a) MFRI shall promptly give notice hereunder to the
Indemnifying Parties after obtaining written notice of any claim as to
which recovery may be sought against the Indemnifying Parties because
of the indemnity in Section 10.1 and, if such indemnity shall arise
from the claim of a third party, shall permit the Indemnifying Parties
to assume the defense of any such claim and any litigation resulting
from such claim with counsel satisfactory to MFRI but at the
Indemnifying Parties' expense. Notwithstanding the foregoing, the
right to indemnification hereunder shall not be affected by any
failure of an Indemnified Party to give such notice or any delay by an
Indemnified Party in
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giving such notice unless, and then only to the extent that, the
rights and remedies of the Indemnifying Parties shall have been
prejudiced as a result of the failure to give, or delay in giving,
such notice. Failure by an Indemnifying Party to notify an
Indemnified Party of its election to defend any such claim or action
by a third party within twenty-one (21) days after notice thereof
shall have been given to the Indemnifying Parties shall be deemed a
waiver by the Indemnifying Party of its right to defend such claim or
action.
(b) If the Indemnifying Parties assume the defense of
such claim or litigation resulting therefrom, then counsel selected by
the Indemnifying Parties shall be reasonably acceptable to the
Indemnified Party. The obligations of the Indemnifying Party
hereunder as to such claim shall include taking all steps reasonably
necessary in the defense or settlement of such claim or litigation and
holding the Indemnified Party harmless from and against any and all
Damages caused by or arising out of any settlement approved by the
Indemnifying Parties or any judgment in connection with such claim or
litigation. The Indemnifying Parties shall keep the Indemnified Party
fully informed of the status of such claims and litigation. The
Indemnifying Parties shall not, in the defense of such claim or any
litigation resulting therefrom, consent to entry of any judgment
(other than a judgment of dismissal on the merits without costs)
except with the written consent of the Indemnified Party or enter into
any settlement (except with the written consent of the Indemnified
Party) which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff of a release of the
Indemnified Party from all liability in respect of such claim or which
acts as an admission of a violation of any law, rule, regulation,
ordinance, policy or order. Anything in this Article 10 to the
contrary notwithstanding, the Indemnified Party may, with counsel of
is choice and at its expense, participate in the defense of any such
claim or litigation.
(c) If the Indemnifying Parties shall not assume the
defense of any such claim by a third party or litigation resulting
therefrom after receipt of notice from such Indemnified Party in
accordance herewith, the Indemnified Party may defend against such
claim or litigation in such manner as it deems appropriate, and unless
the Indemnifying Parties shall deposit with the Indemnified Party a
sum in cash, letter of credit or bond, equal to the total amount
demanded in such claim or litigation plus the Indemnified Party's
reasonable estimate of the costs of defending the same, MFRI may
settle such claim or litigation on such terms as it may deem
appropriate, and the Indemnifying Party shall promptly reimburse MFRI
for the amount of such settlement and for all other Damages incurred
by MFRI in connection with the defense against or settlement of such
claim or litigation.
(d) The Indemnifying Party shall promptly reimburse MFRI
for the amount of any final and unappealable judgment rendered with
respect to any claim by a third party in such litigation and for all
other Damages incurred by MFRI in connection with the defense against
such claim or litigation, whether or not resulting from, arising out
of, or incurred with respect to, the act of a third party.
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(e) Any payment pursuant to this Section 10.2 shall be
made not later than thirty (30) days after receipt by the Indemnifying
Party of written notice from the Indemnified party stating the amount
thereof and the indemnity payment requested. Any payment not made
when due shall bear interest at a rate per annum equal to the Prime
Rate for each day until paid. "Prime Rate" means the rate of interest
as reported in The Wall Street Journal from time to time.
10.3 MINIMUM THRESHOLD. Notwithstanding anything to the contrary
contained in Section 10.1, no Indemnifying Party shall be liable to any
Indemnified Party with respect to the indemnities provided under Section 10.1
until such time as the aggregate amount of Damages exceeds One Hundred Thousand
Dollars ($100,000). Thereafter, the Indemnifying Parties shall be liable for
all such Damages in excess of One Hundred Thousand Dollars ($100,000).
10.4 ESCROW. The shareholders of Midwesco shall deposit 300,000
shares of stock of MFRI with Chicago Title and Trust Company as escrow agent.
The escrow agreement shall provide that distributions from the escrow shall be
made only upon the joint order of the Shareholder Representatives (as defined
herein) and MFRI. The escrow shall terminate three (3) years after the
Effective Date. MFRI and the shareholders of Midwesco by adopting the Merger
Agreement hereby agree that upon the happening of any event upon which an
indemnification payment is required to be made by any Indemnifying Party under
this Article 10 and New Midwesco does not make such payment as required by this
Article 10, the Shareholder Representatives shall cause such payment to be made
by withdrawing shares of MFRI stock from the escrow and delivering such shares
to the Indemnified Party in payment of such indemnification claim. Any MFRI
shares withdrawn shall be valued at the average of the closing prices for MFRI
stock on the NASDAQ National Stock Market the ten (10) trading days prior to
the date prior to the third (3rd) business day prior to the date of
distribution from the escrow. On the third (3rd) anniversary of the Effective
Date, the parties hereby agree to distribute all of the MFRI shares remaining
in escrow to the shareholders of Midwesco in the same proportion as they owned
shares of Midwesco at the Effective Time; provided, however, in the event that
there are any claims for indemnification pending pursuant to Article 10 hereof
on such date, the distribution from the escrow shall not be made until such
claims have been finally resolved and the shares in the escrow shall continue
to remain available for the payment of any such pending claims. For purposes
of this Section 10.4, "Shareholder Representatives" shall mean David Unger and
Henry Mautner or such person or persons as may be designated by a majority in
interest of the persons who were shareholders of Midwesco at the Effective
Time. No shareholder of Midwesco shall have any personal liability as an
Indemnifying Party hereunder, their sole liability being to the pro rata
portion of the shares in the escrow.
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ARTICLE 11
SPECIAL ESCROW
11.1 ESTABLISHMENT OF SPECIAL ESCROW. The shareholders of Midwesco
shall deposit 66,890 shares of stock of MFRI with Chicago Title and Trust
Company as escrow agent (the "Special Escrow"). The escrow agreement relating
to the Special Escrow shall provide that distributions from the Special Escrow
shall be made only upon the joint order of the Shareholder Representatives and
MFRI. The Special Escrow shall terminate at Termination (as hereinafter
defined) of the Pending Suits. For purposes of this Article 11, references to
"Termination" shall mean the termination of a Pending Suit by final
non-appealable judgment on the merits or by settlement, provided that any
settlement results in the release of MFRI from all post-settlement liability
relating to or arising from such Pending Suit. MFRI and Midwesco hereby agree
that MFRI shall from and after the Effective Time, bear all costs and expenses
of the Pending Suits, including, but not limited to, any judgments or
settlement costs (the "Expenses"); provided, however, after MFRI has spent an
aggregate of $400,000 in Expenses, all such Expenses of the Pending Suits shall
be paid from the Special Escrow. In the event there are no shares of MFRI in
the Special Escrow, the responsibility for the Pending Suits shall be solely
that of MFRI. Upon the Termination of all of the Pending Suits, any shares in
the Special Escrow shall be distributed to the shareholders of Midwesco as of
the Effective Time prorata to their interests in Midwesco at the Effective
Time. Any MFRI shares withdrawn from the escrow shall be valued at the closing
price for MFRI stock on the NASDAQ National Stock Market the ten (10) trading
days prior to the third (3rd) business day prior to the date of distribution
from the Special Escrow.
11.2 REDUCTION OF SHARES IN SPECIAL ESCROW. In the event of the
Termination of any of the Pending Suits prior to the Effective Time, the number
of shares placed in the Special Escrow shall be reduced in the manner set forth
in writing and delivered by the parties to each other prior to the date hereof.
In no event shall the Special Escrow be reduced to less than zero.
ARTICLE 12
MISCELLANEOUS
12.1 ENTIRE AGREEMENT. This Agreement, the Plan of Merger, and the
documents delivered pursuant hereto constitute the entire agreement between the
parties with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof.
12.2 ASSIGNMENT. This Agreement and the Plan of Merger may not be
assigned by operation of law or otherwise.
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12.3 REMEDIES FOR BREACH. The parties agree that irreparable
damage would occur if any provision of this Agreement is not performed in
accordance with its specific terms or is otherwise breached. The parties
accordingly agree that the party not in breach shall be entitled to injunction
to prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof in addition to any other right or remedy provided hereunder
or at law or in equity.
12.4 NOTICES AND OTHER COMMUNICATIONS. All notices, demands or
requests provided for or permitted to be given pursuant to this Agreement must
be in writing. All notices, demands and requests shall be deemed to have been
properly served if given by personal delivery, or if transmitted by telecopy,
or if delivered to Federal Express or other reputable overnight carrier for
next business day delivery, charges billed to or prepaid by shipper, or if
deposited in the United States mail, registered or certified with return
receipt requested, proper postage prepaid, addressed as follows:
If to Midwesco: Midwesco, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714
Attention: Bradley E. Mautner, President
Facsimile No.: (847) 470-1204
With a copy to: Schwartz Cooper Greenberger & Krauss
180 North LaSalle Street
Suite 2700
Chicago, Illinois 60601
Attn: Robert A. Smoller, Esq.
Facsimile No.: (312) 782-8416
If to MFRI: MFRI, Inc.
7720 North Lehigh Avenue
Niles, Illinois 60714
Attention: David Unger, Chairman
Facsimile No.: (847) 470-1204
With a copy to: Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601
Attn: Hal M. Brown, Esq.
Facsimile No.: (312) 236-7516
Each notice, demand or request shall be effective upon personal
delivery, or upon confirmation of receipt of the applicable telecopy, or one
(1) business day after delivery to a reputable overnight carrier in accordance
with the foregoing, or three (3) business days after the
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date on which the same is deposited in the United States mail in accordance
with the foregoing. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall not
adversely impact the effectiveness of any such notice, demand or request.
Service by personal delivery upon Midwesco shall be valid only if delivered
personally to an officer of Midwesco, and service by personal delivery upon
MFRI shall be valid only if delivered personally to an officer of MFRI.
Any addressee may change its address for notices hereunder by giving
written notice in accordance with this Section.
12.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute one and the same agreement.
12.6 LAW TO GOVERN. THE VALIDITY, CONSTRUCTION AND ENFORCE-
ABILITY OF THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE
STATE OF ILLINOIS WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES.
12.7 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
12.8 BUSINESS DAY. As used in this Agreement, "business day" means
any day on which national banks in Chicago, Illinois are not required or
permitted to be closed.
12.9 INTERPRETATION. The masculine, feminine or neuter pronouns
used herein shall be interpreted without regard to gender, and the use of the
singular or plural shall be deemed to include the other whenever the context so
requires. The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
this Agreement. Unless otherwise expressly stated herein, all references
herein to sections and paragraphs are to sections and paragraphs in this
Agreement and all references herein to Exhibits are to Exhibits to this
Agreement.
12.10 EXHIBITS. The Exhibits referred to herein, and attached to
this Agreement, are incorporated herein by such reference as if fully set forth
in the text hereof.
12.11 AMENDMENT. Midwesco and MFRI may mutually agree to amend this
Agreement at any time prior to the filing of the Plan of Merger.
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IN WITNESS WHEREOF, each of Midwesco and MFRI has caused this
Agreement to be executed on its behalf by its officer thereunto duly
authorized, all on or as of the day and year first above written.
MIDWESCO, INC.
By:_____________________________________
Its:____________________________________
MFRI, INC.
By:_____________________________________
Its:____________________________________
Midwesco - Illinois, Inc. executes this Agreement for purposes of being bound
by the provisions of Section 4.6 and Article 10 hereof.
MIDWESCO - ILLINOIS, INC.
By:_____________________________________
Its:____________________________________
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EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement and Plan of
Merger"), dated as of October 25, 1996, is by and among MFRI, INC., a Delaware
corporation ("MFRI") and MIDWESCO, INC., an Illinois corporation ("Midwesco").
RECITALS
WHEREAS, MFRI is a corporation duly organized and existing under the
laws of the State of Delaware;
WHEREAS, Midwesco is a corporation duly organized and existing under
the laws of the State of Illinois;
WHEREAS, Midwesco desires to merge with and into MFRI, and MFRI
desires to merge with Midwesco upon the terms and subject to the conditions of
this Agreement and Plan of Merger and in accordance with the applicable
provisions of the laws of the States of Delaware and Illinois; and
WHEREAS, the respective Boards of Directors of MFRI and Midwesco deem
it advisable and in the best interests of each such corporation and their
respective stockholders that Midwesco be merged with and into MFRI as provided
herein, and they have accordingly adopted resolutions approving this Agreement
and Plan of Merger and direct the submission of this Agreement and Plan of
Merger to the stockholders of MFRI and of Midwesco.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, MFRI and Midwesco hereby
agree as follows:
ARTICLE 1
THE MERGER; EFFECTIVE TIME
1.1 THE MERGER. At the Effective Time (as hereinafter defined),
MFRI and Midwesco shall consummate the merger (the "Merger") in which: (a)
Midwesco shall be merged with and into MFRI and the separate corporate
existence of Midwesco shall thereupon cease; (b) MFRI shall be the successor or
surviving corporation in the Merger and shall continue to be governed by the
laws of the State of Delaware; (c) each outstanding share of common stock of
Midwesco shall be converted into 183.7 shares of common stock of MFRI; and (d)
the
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separate corporate existence of MFRI with all of its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger.
MFRI as the corporation surviving the Merger is sometimes hereinafter referred
to as the "Surviving Corporation". The Merger shall be pursuant to the
provisions of and with the effect provided in the Delaware General Corporation
Law.
1.2 EFFECTIVE TIME. The effective time of the Merger (the
"Effective Time") shall be at Midnight on January 31, 1997.
1.3 EFFECTS OF THE MERGER. At and after the Effective Time:
(a) title to all real, personal and mixed property owned
by Midwesco shall be vested in MFRI without reversion or impairment;
(b) MFRI shall have all of the liabilities of Midwesco,
and all debts due on whatever account, including subscriptions to
shares of capital stock, and all other choses in action and all and
every other interest of, or belonging to, or due Midwesco shall be
deemed to be transferred to and vested in MFRI without further act or
deed;
(c) any proceeding pending against Midwesco may be
continued as if the Merger did not occur, or MFRI may be substituted
in its place in the proceeding;
(d) the assets and liabilities of Midwesco shall be
recorded on the books of MFRI in the amounts at which they are stated
on the books of Midwesco as of the Effective Time, subject to such
adjustments as may be required to effect comparability of accounting
policies and practices;
(e) the name of MFRI, the purposes for which MFRI is
formed and the nature of the business to be transacted by it, shall be
as set forth in the Certificate of Incorporation of MFRI. If at any
time after the Effective Time, MFRI shall consider, or be advised that
any further assignment or assurances in law or any other things are
necessary or desirable to vest, perfect or confirm, of record or
otherwise, in MFRI, its right, title or interest in, to or under any
of the rights, privileges, powers, franchises, properties or assets of
Midwesco, and otherwise to carry out the intent and purposes of this
Agreement and Plan of Merger, the proper officers and directors of
MFRI are fully authorized in the name of Midwesco or otherwise to take
any and all such action.
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ARTICLE 2
DIRECTORS AND OFFICERS OF
THE SURVIVING CORPORATION
2.1 DIRECTORS. The directors of MFRI as of the Effective Time
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and By-Laws.
2.2 OFFICERS. The officers of MFRI as of the Effective Time
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their successors shall have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
By-Laws.
ARTICLE 3
MANNER AND BASIS OF CONVERSION OF SHARES
3.1 CONVERSION. At the Effective Time, each share of common stock
of Midwesco issued and outstanding (the "Midwesco Common Stock"), shall, by
virtue of the Merger and without any action on the part of any holder thereof,
be converted into 183.7 fully paid and nonassessable shares of common stock of
MFRI.
3.2 FRACTIONAL SHARES. No fractional share of MFRI Stock shall be
issued in the Merger. In lieu of any such fractional securities, each holder
of shares of Midwesco common stock who would otherwise have been entitled to a
fraction of a share of MFRI Stock upon surrender of Midwesco certificates for
exchange pursuant to this Article 3 will be paid an amount in cash (without
interest), rounded to the lowest full cent, determined by multiplying (i) the
aggregate value of MFRI shares on the closing date (determined on a per share
basis and based upon the Closing Price) by (ii) the fractional interest to
which such holder would otherwise be entitled. For purposes of this Agreement,
the Closing Price shall mean the closing price on the Nasdaq Stock Market's
National Market ("Nasdaq National Market") on the Effective Time and if the
stock of MFRI was not traded on such date, the closing price of the stock of
MFRI on the Nasdaq National Market on the day most recently preceding the
Effective Time that MFRI stock was traded on the Nasdaq National Market.
3.3 STOCK CERTIFICATES. After the Effective Time, each holder of
an outstanding certificate or certificates representing Midwesco Common Stock
shall surrender same to MFRI or to its agent for such purpose and such holders
shall be entitled upon such surrender to receive in exchange therefor a
certificate or certificate representing the number of full shares of MFRI into
which such shares of Midwesco have been converted, less each such shareholder's
prorata
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share of the number of MFRI shares placed in two escrows ("Escrows") pursuant
to the terms of that certain Agreement for Merger between Midwesco and MFRI
dated as of the date of this Agreement. Each certificate of MFRI issued shall
bear the following legend:
"The transfer, sale, pledge, distribution or other disposition
of the shares evidenced by this certificate is restricted by
and subject to the terms and conditions of that certain
Agreement for Merger dated as of October 25, 1996 by and
between MFRI and Midwesco, a copy of which is available for
inspection at the principal executive office of MFRI."
Until surrendered as provided in this Section 3.3 certificates representing
Midwesco shares shall represent solely the right to receive shares of MFRI and
any cash in lieu of fractional shares as contemplated by Section 3.2 hereof.
No dividends or other distributions that are declared on MFRI shares after the
Effective Time shall be paid on Midwesco shares until the certificate or
certificates representing such shares have been surrendered as provided herein.
No transfers of shares of Midwesco shall be made on the stock transfer books of
the Company after the Effective Time and no shares of MFRI shall be issued to
anyone who was not the shareholder of Midwesco at the Effective Time.
ARTICLE 4
STOCK OPTION PLANS
4.1 CONTINUATION OF MFRI PLANS. Each stock option plan of MFRI in
effect as of the Effective Time shall remain in full force and effect; however,
each outstanding option issued under any MFRI stock option plan which is held
by a person to be employed by Midwesco - Illinois, Inc. ("New Midwesco") shall
be amended to terminate on the earlier of three months after the termination of
employment with New Midwesco or a subsidiary of New Midwesco or the option's
expiration date.
ARTICLE 5
AMENDMENT AND TERMINATION
5.1 AMENDMENT. The board of directors of MFRI and Midwesco may
amend this Agreement and Plan of Merger at any time prior to the approval
hereof by the stockholders of MFRI.
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5.2 TERMINATION. This Agreement and Plan of Merger may be
terminated and abandoned at any time before the Effective Time by the
respective Board of Directors of Midwesco or MFRI.
ARTICLE 6
MISCELLANEOUS
6.1 This Agreement and Plan of Merger may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
6.2 This Agreement and Plan of Merger shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
States of Illinois and Delaware.
6.3 This Agreement and Plan of Merger (a) shall not be waived,
except by an instrument in writing, signed by the party to be charged, and (b)
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties.
6.4 The parties hereto each agree to execute and deliver such
instruments, and to take all such further action, including, without
limitation, the execution and filing of such instruments in the States of
Delaware and Illinois, as shall be necessary or desirable to carry out this
Agreement and Plan of Merger and to consummate and effect the Merger.
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IN WITNESS WHEREOF, MFRI and Midwesco have caused this Agreement and
Plan of Merger to be executed on its behalf by its officers hereunto duly
authorized, all as of the date first written above.
MIDWESCO, INC., an Illinois corporation
By:_____________________________________
Title:__________________________________
ATTEST:
________________________________
_____________ Secretary
MFRI, INC., a Delaware corporation
By:_____________________________________
Title:__________________________________
ATTEST:
____________________________________________
__________________ Secretary
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APPENDIX B
OPINION OF DUFF & PHELPS, LLC
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[LETTERHEAD OF DUFF & PHELPS, LLC]
October 21, 1996
Special Committee of the Board of Directors
MFRI, Inc.
7720 North Lehigh Avenue
Niles, IL 60714
Directors:
You have retained Duff & Phelps, LLC ("Duff & Phelps") as independent financial
advisor to MFRI, Inc. ("MFRI" or the "Company") in connection with the
contemplated merger (the "Merger") of Midwesco, Inc. ("Midwesco") with and into
the Company. In the Merger, the Company will issue approximately 2.122 million
shares of its common stock for the entire 11,564 shares of common stock of
Midwesco, or a merger ratio of 183.7 shares of MFRI common stock for each share
of Midwesco common stock. Specifically, we have been asked to provide an
opinion (the "Opinion") as to whether the Merger is fair, from a financial
point of view, to the shareholders of the Company solely in their capacity as
shareholders of MFRI. Prior to this assignment, Duff & Phelps has not provided
financial advisory services to the Company.
The primary assets and liabilities of Midwesco immediately prior to the Merger
will be:
1. 1,717,666 shares of MFRI common stock;
2. the operating assets, and liabilities of the Thermal Care division of
Midwesco (all other operating divisions (the "Former Midwesco
Businesses") will have been spun off to Midwesco shareholders);
3. certain tax credits or their cash equivalent totaling approximately
$157,000;
4. all obligations under the lease of the primary property at 7720 North
Lehigh Avenue, but also the right to receive reimbursement for prior
capitalized leasehold expenditures from all other tenants of the
primary facility at 7720 North Lehigh Avenue;
5. all warranty obligations related to the assets and piping systems
business transferred to Perma-Pipe, Inc. in January, 1994 retained by
Midwesco;
6. all obligations and liabilities relating to three pending lawsuits
(the "Pending Suits"); and
7. indebtedness for borrowed funds aggregating $5,000,000.
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Special Committee of the Board of Directors
MFRI, Inc.
October 21, 1996
Page 2
In addition, other key elements in the Merger include:
1. An escrow of MFRI common stock established to protect MFRI against
expenses and obligations over and above the amount reflected in the
merger ratio;
2. An additional escrow of MFRI common stock established to protect MFRI
against certain indemnified obligations which may be asserted in the
three years following the Merger against MFRI;
3. An established ratio based upon the 10-day average of the closing
price of MFRI (the "MFRI Merger Price") common stock for the last ten
trading days ended October 10, 1996;
4. A collar provision by which either party to the Merger could
renegotiate the terms of the Merger if the share price of MFRI were
greater than the MFRI Merger Price plus $4.00 per share or if the
share price of MFRI were less than the MFRI Merger Price minus $4.00
per share.
In conducting our analysis and arriving at our Opinion, we have reviewed and
analyzed, among other things:
1. the Draft Merger Agreement dated October 15, 1996;
2. Audited consolidated financial statements for Midwesco for the five
years ended January 31, 1992 through 1996; divisional financial
statements prepared by Midwesco management for its Thermal Care
division for the years ended January 31, 1993 through 1996; interim
consolidated financial statements for the six months ended July 31,
1996 which were reviewed by Midwesco's auditors; interim financial
statements for the Thermal Care division and the other Midwesco
divisions for the six months ended July 31, 1996 which were reviewed
by Midwesco's auditors, and for the eight months ended September 30,
1996 which were compiled by Midwesco management;
3. Form 10-K for the year ended January 31, 1996 and Form 10-Q for the
six months ended July 31, 1996 for the Company;
4. certain operating and financial information, including financial
projections and estimates of expense allocations between operating
divisions of Midwesco;
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Special Committee of the Board of Directors
MFRI, Inc.
October 21, 1996
Page 3
5. memoranda and cost estimates regarding certain lawsuits for which the
obligations will be assumed as part of the Merger;
6. historical prices and trading volume of the common stock of MFRI;
7. publicly available financial data and stock market performance data of
companies which we deemed generally comparable, in whole or in part,
to Thermal Care;
8. the terms of recent mergers and acquisitions of companies which we
deemed generally comparable, in whole or in part, to the Merger; and
9. such other documents, financial studies and analyses deemed necessary
or appropriate by Duff & Phelps.
As background for its analysis, Duff & Phelps held discussions with members of
the senior management of Midwesco and Thermal Care at corporate headquarters in
Niles, Illinois regarding the history, current business operations, financial
condition, future prospects and strategic objectives of the Thermal Care
division of Midwesco, supplemented by discussions with attorneys involved in
litigation matters for which expenses and contingent liabilities will be
assumed.
In performing its analysis and rendering its Opinion, Duff & Phelps relied upon
the accuracy of all information provided to it, whether obtained from public or
private sources, and did not attempt to independently verify any such
information. We relied without independent verification upon the information
provided in connection with the expense and contingent liabilities for the
obligations assumed in the Merger. With respect to financial forecasts, except
as otherwise indicated by management as not indicative of management's current
expectations, we have assumed that these have been reasonably prepared on bases
reflecting the best currently available estimates of Midwesco / Thermal Care
management and of the expected future financial performance of Thermal Care.
Duff & Phelps also took into account its assessment of general economic, market
and financial conditions, as well as its experience in securities and business
valuation, in general, and with respect to similar transactions, in particular.
Duff & Phelps did not make any independent appraisals of the assets or
liabilities of Thermal Care or Midwesco.
Duff & Phelps has prepared its Opinion effective as of October 21, 1996. Its
Opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of such date.
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Special Committee of the Board of Directors
MFRI, Inc.
October 21, 1996
Page 4
Based upon and subject to the foregoing, Duff & Phelps is of the opinion that
the Merger is fair from a financial point of view to the shareholders of MFRI
solely in their capacity as shareholders of MFRI.
Respectively submitted,
/s/ Duff & Phelps, LLC
Duff & Phelps, LLC
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PRELIMINARY COPY
MFRI, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /
<TABLE>
<S> <C> <C> <C>
A vote FOR item is recommended by
the Board of Directors.
For Against Abstain
1. The merger of Midwesco, Inc. [ ] [ ] [ ]
with and into MFRI, Inc.
</TABLE>
Dated ___________, 1996
______________________________
Signature
______________________________
Signature
THIS PROXY WILL BE VOTED IN ACCORDANCE NOTE: PLEASE SIGN EXACTLY AS
WITH SPECIFICATIONS MADE. IF NO CHOICES NAME APPEARS HEREON. FOR JOINT
ARE INDICATED, THIS PROXY WILL BE VOTED ACCOUNTS, BOTH OWNERS SHOULD
FOR THE PROPOSAL. SIGN. WHEN SIGNING AS
EXECUTOR, ADMINISTRATOR,
ATTORNEY, TRUSTEE OR GUARDIAN,
ETC., PLEASE SIGN YOUR FULL
TITLE.
_______________________________________________________________________________
PROXY PROXY
MFRI, INC.
FOR SHARES OF COMMON STOCK SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING
OF STOCKHOLDERS TO BE HELD ON DECEMBER _____, 1996
The undersigned hereby appoints DAVID UNGER, HENRY M. MAUTNER, FATI A.
ELGENDY, GENE K. OGILVIE AND BRADLEY E. MAUTNER, and each of them, proxies with
power of substitution and revocation, acting by majority of those present and
voting, or if only one is present and voting then that one, to vote, as
designated on the reverse side hereof, all of the shares of stock of MFRI, INC.
which the undersigned is entitled to vote, at the special meeting of
stockholders to be held at The Standard Club, 320 South Plymouth Court,
Chicago, Illinois on December _____, 1996 at 10:00 a.m. Chicago time, and at
any adjournment thereof, with all the powers the undersigned would possess if
present.
PLEASE VOTE SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.