SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
(Address of principal executive offices) (Zip code)
(847) 966-1000
(Registrant's telephone number, including area code)
- ---------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On September 11, 1998, there were 4,989,254 shares of the Registrant's common
stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying interim condensed consolidated financial statements of
MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all
adjustments which the Company's management considers necessary to present fairly
the financial position and results of operations for the periods presented.
These adjustments consist of normal recurring adjustments. Certain information
and footnote disclosures have been condensed or omitted pursuant to Securities
and Exchange Commission rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's annual
report to stockholders for the year ended January 31, 1998. The results of
operations for the quarter and six months ended July 31, 1998 are not
necessarily indicative of the results to be expected for the full year 1998.
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share information)
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
-------------------------- -----------------------
1998 1997 1998 1997
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales $32,734 $30,215 $62,724 $55,979
Cost of sales 24,299 21,970 46,527 41,484
---------- --------- -------- --------
Gross profit 8,435 8,245 16,197 14,495
Selling expense 2,723 2,564 5,546 4,691
General and administrative expense 3,811 3,166 7,274 5,915
---------- --------- -------- ---------
Income from operations 1,901 2,515 3,377 3,889
Interest expense - net 670 394 1,246 772
---------- --------- -------- ----------
Income before income taxes 1,231 2,121 2,131 3,117
Income taxes 492 870 852 1,278
---------- --------- --------- ---------
Net income $ 739 $ 1,251 $ 1,279 $ 1,839
========== ========= ======= ========
Net income per common share - basic $0.15 $0.25 $0.26 $0.37
Net income per common share - diluted $0.14 $0.24 $0.25 $0.36
Weighted average common shares outstanding 4,983 4,967 4,982 4,965
Weighted average common shares outstanding
assuming full dilution 5,114 5,104 5,108 5,069
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<CAPTION>
July 31, January 31,
1998 1998
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 461 $ 976
Trade accounts receivable, net 23,192 21,641
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,752 3,489
Deferred income taxes 2,500 2,308
Inventories 21,205 19,595
Prepaid expenses and other current assets 2,252 2,758
--------- -----------
Total current assets 54,362 50,767
Restricted Cash from Bond Proceeds 1,497 2,929
Property, Plant and Equipment, At Cost 35,148 30,028
Less Accumulated Depreciation 8,246 6,998
--------- -----------
Property, plant and equipment, net 26,902 23,030
Other Assets:
Goodwill, net 12,501 12,399
Other, net 3,801 3,816
--------- -----------
Total other assets 16,302 16,215
--------- -----------
Total Assets $99,063 $92,941
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Drafts payable $ 5,106 $ 1,882
Accounts payable 7,284 7,180
Commissions payable 6,121 5,821
Current maturities of long-term debt 399 573
Billings in excess of costs and estimated
earnings on uncompleted contracts 901 461
Other current liabilities 3,615 3,544
--------- -----------
Total current liabilities 23,426 19,461
Long-Term Liabilities:
Long-term debt, less current maturities 35,880 35,275
Deferred income taxes 1,450 1,453
Other 921 711
---------- -----------
Total long-term liabilities 38,251 37,439
Stockholders' Equity:
Common stock, $ .01 par value, authorized -
15,000 shares; outstanding - 4,989 and 4,981
shares at July 31 and January 31, respectively 50 50
Additional paid-in capital 21,917 21,864
Retained earnings 15,515 14,236
Accumulated other comprehensive income (96) (109)
---------- -----------
Total stockholders' equity 37,386 36,041
---------- -----------
Total Liabilities and Stockholders' Equity $99,063 $92,941
========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Six Months Ended
July 31,
--------------------
1998 1997
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,279 $ 1,839
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 1,632 1,304
Deferred income taxes (195) 118
Change in operating assets and liabilities:
Trade accounts receivable (1,555) (4,091)
Costs and estimated earnings in excess of billings
on uncompleted contracts (1,263) (1,411)
Inventories (1,167) 222
Prepaid expenses and other current assets 525 (112)
Current liabilities 4,027 265
Other operating assets and liabilities (172) (107)
--------- ----------
Net Cash Flows from Operating Activities 3,111 (1,973)
--------- ----------
Cash Flows from Investing Activities:
Increase in restricted cash from
Industrial Revenue Bonds 1,432 797
Net purchases of property and equipment (3,825) (2,108)
Acquisition of business, net of cash acquired (1,725) -
--------- ----------
Net Cash Flows from Investing Activities (4,118) (1,311)
--------- ----------
Cash Flows from Financing Activities:
Payments on capitalized lease obligations (226) (243)
Stock options exercised 53 38
Proceeds from long-term debt, net 665 1,189
Net Cash Flows from Financing Activities 492 984
--------- ----------
Net Decrease in Cash and Cash Equivalents (515) (2,300)
Cash and Cash Equivalents - Beginning of Period 976 3,416
--------- ----------
Cash and Cash Equivalents - End of Period $ 461 $ 1,116
========= ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
<TABLE>
1. Inventories consisted of the following:
(In thousands)
<CAPTION>
July 31, January 31,
1998 1998
-------- -----------
<S> <C> <C>
Raw materials $ 15,617 $14,296
Work in process 2,410 1,557
Finished goods 3,178 3,742
-------- -------
Total $ 21,205 $19,595
======== =======
</TABLE>
<TABLE>
2. Supplemental cash flow information:
(In thousands)
<CAPTION>
Six Months Ended July 31,
-------------------------
1998 1997
-------- ------
<S> <C> <C>
Cash paid during the quarter for:
Interest, net of capitalized amounts $ 539 $ 427
Income taxes, net of refunds received 48 429
Schedule of noncash financial activities:
Fixed assets acquired under capital leases $ - $ 127
Purchase of business:
Fair value of assets acquired
(net of cash received) $ 1,768
Cost in excess of net assets acquired 352
Cash paid (1,725)
Liability under noncompete agreement (279)
---------
Liabilities assumed $ 116
=========
</TABLE>
3. On June 1, 1998, the Company acquired certain assets and liabilities of
Boe-Therm A/S ("Boe-Therm"), including inventory and manufacturing
facilities, for an aggregate purchase price of $2,004,000. Financing
was provided by borrowings under the Company's unsecured line of
credit, loans obtained from a Danish bank and a noncompete agreement
which is to be paid ratably over a period of four years. Boe-Therm,
located in Assens, Denmark, is a manufacturer of liquid chillers for
removing heat from industrial processes. Boe-Therm's sales for the two
months ended July 31, 1998 were $617,000.
The acquisition has been accounted for as a purchase and the accounts
of Boe-Therm have been included in the consolidated financial
statements since the date of acquisition. The purchase price was
allocated to the assets and liabilities acquired, based on their
estimated fair values. The excess ($352,000) of the purchase price over
the fair value of the net assets acquired has been recorded as goodwill
and is being amortized over a 25 year period on the straight-line
basis.
<PAGE>
<TABLE>
4. The basic weighted average shares reconcile to fully diluted weighted average
shares as follows:
(In thousands)
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 739 $1,251 $1,279 $1,839
====== ====== ====== ======
Basic weighted average common
shares outstanding 4,983 4,967 4,982 4,965
Dilutive effect of stock options 131 137 126 104
------ ------ ------ -------
Weighted average common shares
outstanding assuming full dilution 5,114 5,104 5,108 5,069
====== ====== ====== ======
Net income per common share-basic $0.15 $0.25 $0.26 $0.37
Net income per common share-diluted $0.14 $0.24 $0.25 $0.36
</TABLE>
At July 31, 1998 and 1997, the weighted average number of stock options
not included in the computation of diluted earnings per share of common
stock because the options exercise price exceeded the average market
price of the common shares were 75,000 and 65,600, respectively. These
options were outstanding at the end of each of the respective periods.
5. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of February 1,
1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. This standard expands or
modifies current disclosures and, accordingly, had no impact on the
Company's reported financial position, results of operations and cash
flows.
The components of comprehensive income, net of tax, were as follows:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income $ 739 $1,251 $1,279 $1,839
Change in foreign currency
translation adjustments 5 (35) 13 (34)
------ ------- ------- -------
Comprehensive income $744 $1,216 $1,292 $1,805
====== ======= ======= ======
</TABLE>
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheet consists of accumulated foreign
currency translation adjustments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
July 31, 1998
The statements contained under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and certain other information
contained elsewhere in this report, which can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "continue",
"remains", "intend", "aim", "should", "prospects", "could", "future",
"potential", "believes", "plans" and "likely" or the negative thereof or other
variations thereon or comparable terminology, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors created thereby. These statements should be
considered as subject to the many risks and uncertainties that exist in the
Company's operations and business environment. Such risks and uncertainties
could cause actual results to differ materially from those projected. These
uncertainties include, but are not limited to, economic conditions, market
demand and pricing, competitive and cost factors, raw material availability and
prices, global interest rates, currency exchange rates, labor relations and
other risk factors.
RESULTS OF OPERATIONS
MFRI, Inc.
Three months ended July 31
Net sales of $32,734,000 for the quarter ended July 31, 1998 increased 8.3
percent from $30,215,000 for the comparable quarter last year. Gross profit of
$8,435,000 or 25.8 percent of net sales in the current year quarter increased
2.3 percent from $8,245,000 or 27.3 percent of net sales in the prior year
quarter. Net sales increased in all business segments. In terms of dollars,
gross profit increased in all business segments with the exception of the
filtration products business.
Net income decreased 40.9 percent from $1,251,000 or $0.25 per common share
(basic) in the prior year to $739,000 or $0.15 per common share (basic) in the
current year. During the current year quarter, the Company settled the last of
three lawsuits related to the December 1996 merger of Midwesco, Inc. into MFRI,
Inc. (the "Midwesco Merger"). The cost of the settlement exceeded the special
reserve and the escrow account that had been established at the time of the
merger. Increased interest costs and the write-off of a foreign subsidiary's bad
debt in the current year quarter also contributed to the decline in net income.
Six months ended July 31
Net sales of $62,724,000 for the six months ended July 31, 1998 increased 12.0
percent from $55,979,000 for the comparable period last year. Gross profit of
$16,197,000 or 25.8 percent of net sales in the current year increased 11.7
percent from $14,495,000 or 25.9 percent of net sales in the prior year. Net
sales and gross profit in terms of dollars increased in all business segments
compared to the prior year.
<PAGE>
Net income decreased 30.5 percent from $1,839,000 or $0.37 per common share
(basic) in the prior year to $1,279,000 or $0.26 per common share (basic) in the
current year. This decrease was primarily due to legal and settlement costs
related to the disposition of one of the lawsuits acquired in the Midwesco
Merger described above and legal expenses related to the defense of patent
infringement lawsuits, coupled with higher interest costs and the write-off of a
foreign subsidiary's bad debt in the current year.
Filtration Products Business
Three months ended July 31
Net sales for the quarter ended July 31, 1998 increased 4.5 percent to
$11,665,000 from $11,163,000 in the comparable quarter one year ago. This
increase is the result of higher sales of filter elements for cartridge
collectors due to the acquisition of TDC Filter Manufacturing, Inc. ("TDC") in
December 1997, partially offset by a decline in sales of filter elements for
baghouse collectors.
Gross profit as a percent of net sales decreased from 28.0 percent in the prior
year to 24.0 percent, primarily as a result of competitive pricing pressures in
the marketplace, unusually high medical insurance claims costs and manufacturing
inefficiencies.
Selling expense for the quarter ended July 31, 1998 increased to $1,190,000 or
10.2 percent of net sales from $1,087,000 or 9.7 percent of net sales for the
comparable quarter last year. These increases are attributable to additional
sales resources, mainly as a result of the TDC acquisition.
General and administrative expense increased to $742,000 or 6.4 percent of net
sales in the current year quarter from $590,000 or 5.3 percent of net sales for
the comparable period one year ago. These changes are due to additional
administrative resources and expenses, primarily as a result of the TDC
acquisition, partially offset by lower management incentive compensation.
Six months ended July 31
Net sales for the six months ended July 31, 1998 increased 22.0 percent to
$24,202,000 from $19,832,000 in the comparable period last year. This increase
is the result of higher sales of filter elements for cartridge collectors due to
the TDC acquisition, partially offset by a decline in sales of filter elements
for baghouse collectors.
Gross profit for the six months as a percent of net sales decreased from 26.1
percent in the prior year to 23.7 percent, primarily as a result of competitive
pricing pressures in the marketplace, unusually high medical insurance claims
costs and manufacturing inefficiencies.
Selling expense for the six months ended July 31, 1998 increased to $2,432,000
or 10.0 percent of net sales from $1,910,000 or 9.6 percent of net sales for the
comparable period last year. These increases are attributable to additional
sales resources, mainly as a result of the TDC acquisition.
General and administrative expense increased to $1,500,000 or 6.2 percent of net
sales in the current year from $1,071,000 or 5.4 percent of net sales for the
comparable period one year ago. These changes are due to additional
administrative resources and expenses, primarily as a result of the TDC
acquisition, partially offset by lower management incentive compensation.
<PAGE>
Piping System Products Business
Three months ended July 31
Net sales increased 11.7 percent to $13,619,000 for the quarter ended July 31,
1998 from $12,195,000 in the prior year quarter, primarily due to increased pipe
sales, both in the United States and England.
Gross profit as a percent of net sales decreased from 23.9 percent in the prior
year to 22.7 percent, mainly resulting from low margins on sales of a foreign
subsidiary.
Selling expense decreased slightly from $636,000 or 5.2 percent of net sales to
$629,000 or 4.6 percent of net sales. The percentage decline was the result of
the increased sales volume in the current year.
General and administrative expense increased from $1,112,000 or 9.1 percent of
net sales in the prior year quarter to $1,517,000 or 11.1 percent of net sales
in the current year quarter primarily due to legal and settlement costs related
to the disposition of one of the lawsuits acquired in the Midwesco Merger
described above, increased engineering costs and the write-off of a foreign
subsidiary's bad debt.
Six months ended July 31
Net sales increased 4.6 percent to $24,271,000 for the six months ended July 31,
1998 from $23,207,000 in the prior year comparable period due to increased pipe
sales, both in the United States and England.
Gross profit as a percent of net sales increased from 22.3 percent in the prior
year to 23.1 percent, mainly resulting from favorable product mix of sales and
manufacturing efficiencies in the domestic operations.
Selling expense increased from $1,243,000 or 5.4 percent of net sales to
$1,353,000 or 5.6 percent of net sales, largely due to marketing expenses
related to PROtherm products, which were introduced during the quarter ended
April 30, 1998.
General and administrative expense increased from $2,176,000 or 9.4 percent of
net sales in the prior year to $2,844,000 or 11.7 percent of net sales in the
current year primarily due to legal and settlement costs related to the
disposition of one of the lawsuits acquired in the Midwesco Merger described
above, legal expenses related to the defense of a patent infringement lawsuit,
increased engineering costs and the write-off of a foreign subsidiary's bad
debt.
<PAGE>
Industrial Process Cooling Equipment Business
Three months ended July 31
Net sales of $7,450,000 for the quarter ended July 31, 1998 increased 8.6
percent from $6,857,000 for the comparable quarter in the prior year, mainly due
to the inclusion of the operating results of Boe-Therm A/S ("Boe-Therm"), which
was acquired on June 1, 1998.
Gross profit as a percent of net sales increased from 32.1 percent for the prior
year quarter to 34.2 percent for the comparable period in the current year,
primarily due to a favorable product mix of sales and increased manufacturing
efficiencies.
Selling expenses increased from $841,000 in the prior year to $904,000 in the
current year, but declined as a percentage of net sales from 12.3 percent last
year to 12.1 percent in the current year. Increased sales salaries and the
inclusion of the operating results of Boe-Therm were the main reasons for the
dollar increase. The percentage decline was the result of the increased sales
volume in the current year.
General and administrative expenses increased from $511,000 or 7.5 percent of
net sales to $638,000 or 8.6 percent of net sales. This increase was primarily
due to increased engineering and salaries expenses compared to the prior year,
coupled with the inclusion of the operating results of Boe-Therm in the current
year quarter.
Six months ended July 31
Net sales of $14,251,000 for the six months ended July 31, 1998 increased 10.1
percent from $12,940,000 for the comparable period in the prior year, mainly due
to higher sales of portable chillers and temperature controllers and the
inclusion of the operating results of Boe-Therm in the current year.
Gross profit as a percent of net sales increased from 32.1 percent last year to
34.0 percent in the current year, primarily due to a favorable product mix of
sales and increased manufacturing efficiencies.
Selling expenses increased from $1,539,000 last year to $1,761,000 and from 11.9
percent to 12.4 percent of net sales. Increased commission and salary expenses
were the main reasons for this increase.
General and administrative expenses increased from $1,035,000 or 8.0 percent of
net sales to $1,245,000 or 8.7 percent of net sales. This increase was primarily
due to increased management information systems, engineering and salaries
expenses compared to the prior year and the inclusion of the operating results
of Boe-Therm subsequent to the date of acquisition.
<PAGE>
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
Three months ended July 31
General and administrative expense decreased to $914,000 or 2.8 percent of net
sales in the current year quarter from $953,000 or 3.2 percent of net sales in
the comparable period in the prior year. The dollar decrease was mainly due to
decreases in certain employee benefit expenses, data processing expenses and
profit-based incentive compensation, partially offset by higher building,
stock-related and collection expenses.
Interest expense increased from $394,000 to $670,000, due to higher borrowings
in the current year quarter as a result of the acquisition of TDC in December
1997 and Boe-Therm in June 1998.
Six months ended July 31
General and administrative expenses increased from $1,632,000 or 2.9 percent of
net sales in the prior year to $1,685,000 or 2.7 percent of net sales in the
current year. The dollar increase was primarily due to higher building,
stock-related and collection expenses in the current year, partially offset by
decreases in data processing expenses, certain employee benefit expenses and
profit-based incentive compensation.
Interest expense increased from $772,000 to $1,246,000, due to higher borrowings
in the current year as a result of the acquisition of TDC in December 1997 and
Boe-Therm in June 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of July 31, 1998 were $461,000 as compared to
$976,000 at January 31, 1998. Net cash inflows of $3,111,000 generated from
operating activities coupled with $1,432,000 received from the restricted cash
of the Industrial Revenue Bonds, $665,000 net proceeds of long-term debt and
$53,000 proceeds from stock options exercised were used to fund purchases of
property, plant and equipment of $3,825,000, the business acquisition of
$1,725,000 and payments on capitalized lease obligations of $226,000.
Net cash provided by operating activities was $3,111,000 for the six months
ended July 31, 1998, mainly because of increased current liabilities, primarily
drafts payable. For the six months ended July 31, 1997, net cash used for
operating activities totaled $1,973,000, mainly due to increased accounts
receivable.
<PAGE>
Net cash used for investing activities for the six months ended July 31, 1998
was $4,118,000 versus $1,311,000 for the same period one year ago. Capital
expenditures increased from $2,108,000 in the prior year to $3,825,000 in the
current year. This increase is primarily due to construction in process for the
manufacturing facility at New Iberia, Louisiana for which the Company has a
commitment from a third party to provide operating lease financing upon
completion. (See Financing.) In addition, the Company used $1,725,000 for the
acquisition of a business in the current year, net of cash acquired. Cash
received from the restricted cash of the Industrial Revenue Bonds in the current
year was $1,432,000 compared to $797,000 during the comparable period one year
ago.
Net cash obtained from financing activities for the six months ended July 31,
1998 was $492,000 versus $984,000 for the comparable period in the prior year.
In the current year, the Company obtained $665,000 from net proceeds of
long-term debt and $53,000 from stock options exercised and utilized $226,000 to
repay capitalized lease obligations. The Company obtained $1,189,000 from net
proceeds of long-term debt, $38,000 from stock options exercised and used
$243,000 to repay capitalized lease obligations in the prior year.
The Company's current ratio at July 31, 1998 was 2.3 to 1 versus 2.6 to 1 at
January 31, 1998. Debt to total capitalization decreased to 49.2 percent from
49.9 percent at January 31, 1998.
Financing
On September 14, 1995, and October 18, 1995, respectively, Midwesco Filter and
Perma-Pipe 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 which commenced in the
fourth quarter of 1995 in the filtration products business in Winchester,
Virginia ($3,150,000) and the piping systems products business in Lebanon,
Tennessee ($3,150,000). The bonds bear interest at a variable rate, which
approximates five percent per annum, including letters of credit and remarketing
fees. Each bond indenture established 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 $1,497,000 at July 31, 1998. The bonds are fully 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 letters 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 Midwesco
Filter property in Winchester, Virginia. The purchase was financed 80% by a
seven-year mortgage bearing interest at 8.38% and 20% by the industrial revenue
bonds described above.
<PAGE>
The Company borrowed $4,000,000 from a bank under a term loan to finance the
September 1994 acquisition of Ricwil Piping Systems Company. Through the
Midwesco Merger, the Company assumed approximately $6,611,000 of Midwesco, Inc.
long-term debt, of which $5,000,000 was assumed bank and other debt, while the
remainder was assumed capitalized lease obligations. Effective December 15,
1996, the Company replaced its existing revolving line of credit and the unpaid
portion of the $4,000,000 September 1994 term loan with $15,000,000 of fixed
rate senior unsecured notes due 2007 (the "Notes") and a new $5,000,000 floating
rate unsecured revolving line of credit. Proceeds of the Notes were also used to
repay the Midwesco, Inc. debt assumed by the Company. The Notes bear interest at
an annual rate of 7.21 percent and require principal payments beginning in the
year ended January 31, 2001, and continuing annually thereafter, resulting in a
seven-year average life.
During 1997, the terms of the unsecured credit agreement were amended. Under the
terms of the agreement as amended, the Company may borrow up to $12,000,000
under a revolving line of credit which matures on March 31, 2000. Interest rates
are based on one of two options selected by the Company at the time of each
borrowing - the prime rate or the LIBOR rate plus a margin for the term of the
loan. At July 31, 1998, the prime rate was 8.5 percent and the margin added to
the LIBOR rate, which is redetermined each quarter based on the Company's
interest coverage ratio, was 1.25 percent. The Company had borrowed $9,200,000
under the revolving line of credit at July 31, 1998. Additionally, $637,000 was
drawn under the agreement as letters of credit, principally to guarantee
performance to third parties resulting from various trade activities and to
guarantee performance of certain repairs and payment of property taxes and
insurance related to the mortgage note secured by the manufacturing facility and
equipment located in Cicero, Illinois described in more detail below. The loan
agreement contains certain financial covenants. As of July 31, 1998, the Company
was not in compliance with two such financial covenants. The Company has
obtained a waiver for such non-compliance.
On June 1, 1998, the Company obtained two loans from a Danish bank to partially
finance the acquisition of Boe-Therm. The first loan in the amount of 2,750,000
Danish krone ("DKK") (approximately $400,000) is secured by the machinery and
equipment of Boe-Therm, bears interest at 5.80 percent and has a term of five
years. The second loan in the amount of 4,500,000 DKK (approximately $650,000)
is secured by the land and building of Boe-Therm, bears interest at 6.48 percent
and has a term of twenty years. In addition, the Company has in place an
overdraft facility with this Danish bank, whereby Boe-Therm may borrow up to
1,000,000 DKK (approximately $150,000) at a variable rate, which was 7.00
percent at the inception of the agreement.
On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured
by the manufacturing facility and equipment in Cicero, Illinois acquired in the
TDC acquisition. The loan bears interest at 6.76 percent and the term of the
loan is ten years with an amortization schedule of 25 years.
During the quarter ended April 30, 1998, the Company began construction of a
manufacturing facility in New Iberia, Louisiana, for the production of oil and
gas gathering flowlines and low temperature district heating products. The
Company has a commitment from a lender to provide operating lease financing for
this facility upon completion. At July 31, 1998, expenditures for the facility
were included in construction in process, a component of property, plant and
equipment, in the Condensed Consolidated Balance Sheet.
<PAGE>
The Company has engaged a private placement agent and financial advisor in
connection with the private offering of $10,000,000 fixed rate senior unsecured
notes due 2008 (the "Notes due 2008"). The Notes due 2008 will require principal
payment beginning at the end of the fourth year and continuing annually
thereafter, resulting in a seven-year average life. The Company has received a
commitment from an institutional investor to acquire the Notes at an annual
interest rate of 6.97 percent. Major terms and conditions have been agreed to
and the notes and related contracts are essentially complete. Although the
Company expects to have the new financing in place prior to October 31, 1998, no
assurance can be given that the foregoing transaction involving the Notes due
2008 will be consummated.
YEAR 2000
Certain computer systems with date-sensitive programs may not properly recognize
the year 2000 and may, as a result, create unreliable data or fail to operate at
all in the year 2000 and thereafter. Such occurrences could have a material
adverse effect on the Company's results of operations and financial condition.
Accordingly, the Company is assessing its financial and operating systems for
the presence of such deficiencies and is developing and executing detailed
corrective plans. The Company is also communicating with significant suppliers
of goods and services and with customers to assess its exposure to their
potential year 2000 issues. Finally, the Company is assessing its products for
the presence of technology which might adversely affect those products and the
customers to whom they have been delivered. Although there can be no assurances,
based on current assessments, Management expects the Company's year 2000 issues
to be identified and corrected before the year 2000, and does not expect the
costs of correction to have a material adverse effect on the Company's results
of operations or financial condition.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Midwesco, Inc., or one of its affiliates, PermAlert ESP, Inc. ("PermAlert") or
Perma-Pipe, Inc., was a party to three lawsuits (the "Pending Suits"), each of
which, upon the consummation of the Midwesco Merger, became the obligations of
MFRI. MFRI agreed to 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 a special
escrow holding 66,980 shares of MFRI common stock (`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.
IHP Industrial v. PermAlert ESP, the last of the Pending Suits, was settled on
June 9, 1998. IHP Industrial v. PermAlert ESP, was filed in May 1996, in the
Circuit Court of Lauderdale County, Mississippi. On June 9, 1998 the parties
reached a settlement and a confidential settlement agreement was executed by the
parties to the lawsuit, including IHP Industrial, Inc.'s insurer, Liberty Mutual
Insurance Company. The court entered a dismissal order in the case on or about
September 3, 1998.
The aggregate Expenses relating to the Pending Suits exceeded the reserve and
the value of the shares in the Special Escrow by approximately $224,000.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on June 30, 1998
in order to elect directors. David Unger, Henry M. Mautner, Gene K. Ogilvie,
Fati A. Elgendy, Bradley E. Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene
Miller and Stephen B. Schwartz were elected as directors of the Company at the
meeting. The following is a tabulation of the votes cast for, or withheld, with
respect to each nominee:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
David Unger 4,307,083 9,925
Henry M. Mautner 4,306,583 10,425
Gene K. Ogilvie 4,307,083 9,925
Fati A. Elgendy 4,307,083 9,925
Bradley E. Mautner 4,307,083 9,925
Don Gruenberg 4,307,083 9,925
Arnold F. Brookstone 4,306,548 10,460
Eugene Miller 4,306,583 10,425
Stephen B. Schwartz 4,307,048 9,925
</TABLE>
There were no votes against, nor were there abstentions or broker non-votes with
respect to any nominee.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFRI, INC.
Date: September 11, 1998 /s/ David Unger
---------------------------
David Unger
Chairman of the Board of Directors
Date: September 11, 1998 /s/ Michael D. Bennett
---------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF jULY 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 461000
<SECURITIES> 0
<RECEIVABLES> 23192000
<ALLOWANCES> 0
<INVENTORY> 21205000
<CURRENT-ASSETS> 54362000
<PP&E> 35148000
<DEPRECIATION> 8246000
<TOTAL-ASSETS> 99063000
<CURRENT-LIABILITIES> 23426000
<BONDS> 35880000
0
0
<COMMON> 50000
<OTHER-SE> 37336000
<TOTAL-LIABILITY-AND-EQUITY> 99063000
<SALES> 62724000
<TOTAL-REVENUES> 62724000
<CGS> 46527000
<TOTAL-COSTS> 46527000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1246000
<INCOME-PRETAX> 2131000
<INCOME-TAX> 852000
<INCOME-CONTINUING> 1279000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1279000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
