SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
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 No. 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 Identification No.)
incorporation or organization)
7720 Lehigh Avenue
Niles, Illinois 60714
(Address of principal executive offices) (Zip Code)
(847) 966-1000
(Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting securities of the registrant
beneficially owned by non-affiliates of the registrant (the exclusion of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant) was
approximately $11,885,000 based on the closing sale price of $3.125 per share as
reported on the NASDAQ National Market on March 31, 1999.
The number of shares of the registrant's common stock outstanding at
March 31, 1999 was 4,922,364.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document of the registrant are incorporated
herein by reference:
Document Part of Form 10-K
Proxy Statement for the 1999 annual meeting of III
stockholders
<PAGE>
FORM 10-K CONTENTS
JANUARY 31, 1999
<TABLE>
<CAPTION>
Item Page
- ------------------------------------------------------------------------
<S> <C> <C>
Part I:
1. Business 1
Company Profile 1
Filtration Products 2
Piping Systems 5
Industrial Process Cooling Equipment 7
Employees 11
Year 2000 Issues 11
Executive Officers of the Registrant 11
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
Part II:
5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
7A. Quantitative and Qualitative Disclosures
About Market Risk 24
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
Part III:
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners
and Management 25
13. Certain Relationships and Related Transactions 25
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 26
Signatures 48
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
PART I
Item 1. BUSINESS
Company Profile
MFRI, Inc. ("MFRI") has three business segments: Filtration Products, Piping
Systems and Industrial Process Cooling Equipment.
The Company's Filtration Products Business is conducted by Midwesco Filter
Resources, Inc. ("Midwesco Filter"). Perma-Pipe, Inc. ("Perma-Pipe") conducts
the Piping Systems Business. The Industrial Process Cooling Equipment Business
is conducted by the Thermal Care Division of MFRI ("Thermal Care"). Midwesco
Filter and Perma-Pipe are wholly owned subsidiaries of MFRI. As used herein,
unless the context otherwise requires, the term "Company" includes MFRI,
Midwesco Filter, Perma-Pipe, Thermal Care, and its subsidiaries, and their
predecessors.
Midwesco Filter manufactures and sells a wide variety of filter elements for air
filtration and particulate collection systems. Air filtration systems are used
in many industries in the United States and abroad to limit particulate
emissions, primarily to comply with environmental regulations. Midwesco Filter
markets air filtration-related products and accessories, and provides
maintenance services, consisting primarily of dust collector inspection and
filter replacement.
Perma-Pipe engineers, designs and manufactures specialty piping systems and leak
detection and location systems. Perma-Pipe's piping systems include (i)
industrial and secondary containment piping systems for transporting chemicals,
waste streams and petroleum liquids, (ii) insulated and jacketed district
heating and cooling piping systems for efficient energy distribution to multiple
locations from central energy plants, and (iii) oil and gas gathering flowlines.
Perma-Pipe's leak detection and location systems are sold as part of many of its
piping system products, and, on a stand-alone basis, to monitor areas where
fluid intrusion may contaminate the environment, endanger personal safety, cause
a fire hazard or damage equipment or property.
Thermal Care engineers, designs and manufactures liquid chillers, mold
temperature controllers, cooling towers, plant circulating systems, and related
accessories for industrial process applications.
On June 1, 1998, MFRI acquired certain assets and liabilities of Boe-Therm A/S
("Boe-Therm") located in Assens, Denmark pursuant to a Transfer Agreement dated
June 1, 1998 ("Boe-Therm Acquisition"). Boe-Therm had sales of approximately
$3.2 million for the year ended December 31, 1997. Boe-Therm is a manufacturer
of mold temperature controllers and liquid chillers for removing heat from
industrial processes.
On November 2, 1998, MFRI and a wholly owned subsidiary acquired all the
outstanding shares of capital stock of Nordic Air Filtration A/S ("Nordic Air")
pursuant to a Contract of Sale dated November 2, 1998 ("Nordic Air
Acquisition"). Nordic Air had sales of approximately $2.3 million for the year
ended June 30, 1998. Nordic Air, located in Nakskov, Denmark, is a manufacturer
of pleated air filtration elements.
The information required with respect to the Company's lines of business is
included in the financial statements and related notes thereto.
<PAGE>
Filtration Products
Air Filtration and Particulate Collection Systems. Air filtration and
particulate collection systems have been used for over 50 years in many
industrial applications. However, the enactment of federal and state legislation
and related regulations and enforcement have increased the demand for air
filtration and particulate collection systems by requiring industry to meet
primary and secondary ambient air quality standards for specific pollutants,
including particulate. In certain manufacturing applications, particulate
collection systems are an integral part of the production process. Examples of
such applications include the production of cement, carbon black and industrial
absorbents.
The principal types of industrial air filtration and particulate collection
systems in use today are baghouses, cartridge collectors, electrostatic
precipitators, scrubbers and mechanical collectors. The type of technology most
suitable for a particular application is a function of such factors as the
ability of the system to meet applicable regulations, initial investment,
operating costs and the parameters of the process, including operating
temperatures, chemical constituents present, size of particulate and pressure
differential.
Cartridge collectors and baghouses are typically box-like structures, which
operate in a manner similar to a vacuum cleaner. They can contain a single
filter element or an array of several thousand cylindrical or envelope filter
elements (as short as two feet or as long as 30 feet) within a housing, which is
sealed to prevent the particulate from escaping. Exhaust gases are passed
through the filtration system, and the particulate is captured on the media of
the filter element. The particulate is removed from the filter element by such
methods as mechanical shaking, reverse air flow or compressed air pulse.
Cartridge collectors and baghouses are generally used with utility and
industrial boilers, cogeneration plants and incinerators and in the chemicals,
cement, asphalt, metals, grain and foundry industries.
In an electrostatic precipitator, the particulate in the gases is charged as it
passes electrodes and is then attracted to oppositely charged collection plates.
The collected material is periodically removed from the plates by rapping or
vibration. Electrostatic precipitators are used in such industries as electric
power generation, chemicals, and pulp and paper, as well as in incinerators.
Scrubbers are used for flue gas desulfurization, odor control, acid gas
neutralization and particulate collection. They operate by bringing gases into
contact with water or chemicals and are sometimes used in combination with
baghouses or electrostatic precipitators.
Mechanical collectors are used to remove relatively large particles from air
streams. They are frequently used in association with other systems as a
pre-screening device.
Because air pollution control equipment represents a substantial capital
investment, such systems usually remain in service for the entire life of the
plant in which they are installed. A baghouse can last up to 30 years and is
typically rebagged six to eight times during its useful life. The useful life of
a cartridge collector is 10 to 20 years, with five to ten cartridge changes
during its useful life. Although reliable industry statistics do not exist, the
Company believes there are more than 18,000 locations in the United States
presently using baghouses and/or cartridge collectors, many of which have
multiple pieces of such equipment.
Products and Services. The Company manufactures and sells a wide variety of
filter elements for cartridge collectors and baghouse air filtration and
particulate collection systems. Cartridge collectors and baghouses are used in
many industries in the United States and abroad to limit particulate emissions,
primarily to comply with environmental regulations. The Company manufactures
filter elements in standard industry sizes, shapes and filtration media and to
custom specifications, maintaining manufacturing standards for more than 10,000
styles of filter elements to suit substantially all industrial applications.
Filter elements are manufactured from industrial yarn, fabric and papers
purchased in bulk. Most filter elements are produced from cellulose, acrylic,
fiberglass, polyester, aramid or polypropylene fibers. The Company also
manufactures filter elements from more specialized materials, sometimes using
special finishes.
2
<PAGE>
The Company manufactures most of the seamless tube filter bags sold in the
United States. Seamless Tube(R) filter bag fabric is knitted by the Company on
custom knitting equipment and finished using proprietary fabric stabilization
technology. The Company believes this vertically-integrated process provides
certain advantages over purchased fabric, including lower costs and reduced
inventory requirements. In addition, the Company believes the Seamless Tube(R)
product furnishes certain users with a filtration medium of superior performance
due to its fabric structure, weight and lack of a vertical seam. In certain
applications, the structure of the knitted fabric allows equal airflow with a
lower pressure differential than conventionally-woven fabrics, thereby reducing
power costs. In other circumstances, the fabric structure and absence of a
vertical seam allow greater airflow at the same pressure differential as
conventionally-woven fabrics, thereby permitting the filtration of a greater
volume of particulate laden gas at no additional cost. The Seamless Tube(R)
product often improves filter bag durability, resulting in longer life.
The Company also markets numerous filter-related products and accessories used
during the installation, operation and maintenance of cartridge collectors and
baghouses, including wire cages used to support filter bags, spring assemblies
for proper tensioning of filter bags and clamps and hanger assemblies for
attaching filter elements. In addition, the Company markets other hardware items
used in the operation and maintenance of cartridge collectors and baghouses.
These include sonic horns to supplement the removal of particulate from filter
bags and cartridge collectors and baghouse parts such as door gaskets, shaker
bars, tube sheets, dampers, solenoid valves, timer boards, conveyors and
airlocks. The Company currently manufactures wire cages and purchases all other
filter-related products and accessories for resale, including the exclusive
North American marketing rights to a Korean-manufactured line of solenoids,
valves and timers used in conjunction with pulsejet collectors.
The Company provides maintenance services, consisting primarily of air
filtration system inspection and filter element replacement, using a network of
independent contractors. The sale of filter-related products and accessories,
collector inspection, leak detection and maintenance services accounts for
approximately 15 percent of the net sales of the Company's filtration products
and services.
Over the past three years, the Company's Filtration Products Business has served
more than 4,000 user locations. The Company has particular expertise in
supplying filter bags for use with electric arc furnaces in the steel industry.
The Company believes its production capacity and quality control procedures make
it a leading supplier of filter bags to large users in the electric power
industry. Orders from that industry tend to be substantial in size, but are
usually at reduced margins. In the fiscal year ended January 31, 1999 ("1998"),
no customer accounted for 10 percent or more of net sales of the Company's
filtration products and services.
Marketing. The customer base for the Company's filtration products and services
is industrially and geographically diverse. These products and services are used
primarily by operators of utility and industrial coal-fired boilers,
incinerators and cogeneration plants and by producers of metals, cement,
chemicals and other industrial products.
The Company has an integrated sales program for its Filtration Products
Business, which consists of field-based sales personnel, manufacturers'
representatives, a telemarketing operation and computer-based customer
information systems containing data on nearly 18,000 user locations. These
systems enable the Company's sales force to access customer information
classified by industry, equipment type, operational data and the Company's
quotation and sales history. The systems also provide reminders to telemarketing
personnel of the next scheduled customer contact date, as well as the name and
position title of the customer contact. The Company believes the computer-based
information systems are instrumental in increasing sales of filter-related
products and accessories and maintenance services, as well as sales of filter
elements.
In 1992, the Company intensified its efforts to market its filtration products
internationally by hiring employees for a new department created specifically to
target major users in foreign countries. Export sales from the U.S. have
recently decreased as the U.S. dollar strengthened against certain currencies
and totalled 9 percent of filtration product sales in the year ended January 31,
1999. In 1998, the Company purchased Nordic Air located in Nakskov, Denmark.
Nordic Air manufactures pleated filter elements and markets throughout Europe
and Asia, primarily to original equipment manufacturers.
Trademarks. The Company owns the following trademarks covering its filtration
products: Seamless Tube(R), Leak Seeker(R), Prekote(R), We Take the Dust Out of
Industry(R), Pleatkeeper(R), Pleat Plus(R) and EFC(R).
3
<PAGE>
Backlog. As of January 31, 1999, the dollar amount of backlog (uncompleted firm
orders) was $13,737,000. As of January 31, 1998, the amount of backlog was
$9,760,000. Approximately $3,100,000 of the backlog as of January 31, 1999 is
not expected to be completed in 1999.
Raw Materials and Manufacturing. The basic raw materials used in the manufacture
of the Company's filtration products are industrial fibers and media supplied by
leading producers of such materials. The majority of raw materials purchased are
woven fiberglass fabric, yarns for manufacturing Seamless Tube(R) products and
other cellulose, woven, felted and paper media. Only a limited number of
suppliers are available for some of these materials. From time to time, any of
these materials could be in short supply, adversely affecting the Company's
business. The Company believes that supplies of all materials are adequate to
meet current demand. The Company's inventory includes substantial quantities of
various types of media because lead times from suppliers are frequently longer
than the delivery time required by customers.
The manufacturing processes for filtration products include proprietary
computer-controlled systems for measuring, cutting, pleating, tubing and marking
media. The Company also operates specialized knitting machines and proprietary
fabric stabilization equipment to produce the Seamless Tube(R) product. Skilled
sewing machine operators perform the finish assembly work on each filter bag
using both standard sewing equipment and specialized machines developed by or
for the Company. The manufacturing process for pleated filter elements involves
the assembly of metal and sometimes plastic end components, filtration media and
support hardware.
The Company maintains a quality assurance program involving statistical process
control techniques for examination of raw materials, work in progress and
finished goods. Certain orders for particularly critical applications receive
100 percent quality inspection.
Competition. The Filtration Products Business is highly competitive. In
addition, new installations of cartridge collectors and baghouses are subject to
competition from alternative technologies. The Company believes that, based on
domestic sales, BHA Group, Inc.; the Menardi-Criswell division of Hosokawa
Micron International, Inc.; W.L. Gore & Associates, Inc. and the Company are the
leading suppliers of filter elements, parts and accessories for baghouses. The
Company believes that Donaldson Company, Inc.; Farr Company; Clarcor, Inc. and
the Company are the leading suppliers of filter elements for cartridge
collectors. There are at least 50 smaller competitors, most of which are doing
business on a regional or local basis. In Europe, several companies supply
filtration products and Nordic Air is a relatively small participant in that
market. Some of the Company's competitors have greater financial resources than
the Company.
The Company believes price, service and quality are the most important
competitive factors in its Filtration Products Business. Often, a manufacturer
has a competitive advantage when its products have performed successfully for a
particular customer in the past. Additional efforts are required by a competitor
to market products to such a customer. In certain applications, the Company's
proprietary Seamless Tube(R) product and customer support provide the Company
with a competitive advantage. Certain competitors of the Company may have a
competitive advantage because of proprietary products and processes, such as
specialized fabrics and fabric finishes. In addition, some competitors may have
cost advantages with respect to certain products as a result of lower wage rates
and/or greater vertical integration.
Government Regulation. The Company's Filtration Products Business is
substantially dependent upon governmental regulation of air pollution at the
federal and state levels. Federal clean air legislation requires compliance with
national primary and secondary ambient air quality standards for specific
pollutants, including particulate. The states are primarily responsible for
implementing these standards and, in some cases, have adopted more stringent
standards than those adopted by the U.S. Environmental Protection Agency ("U.S.
EPA") under the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments").
Although the Company can provide no assurances about what ultimate effect, if
any, the Clean Air Act Amendments will have on the Filtration Products Business,
the Company believes the Clean Air Act Amendments are likely to have a positive
long-term effect on demand for its filtration products and services. The recent
actions of the U.S. EPA to reduce the size of particulate regulated by the
National Air Quality Standard from 10 microns to 2.5 microns could have a
significant positive effect on demand for the Company's filtration products in
future years.
4
<PAGE>
Piping Systems
Products and Services. The Company engineers, designs and manufactures specialty
piping systems and leak detection and location systems. The Company's piping
systems include (i) industrial and secondary containment piping systems for
transporting chemicals, hazardous fluids and petroleum products, (ii) insulated
and jacketed district heating and cooling piping systems for efficient energy
distribution to multiple locations from central energy plants, and (iii) oil and
gas gathering flowlines. The Company's leak detection and location systems are
sold as part of many of its piping systems, and, on a stand-alone basis, to
monitor areas where fluid intrusion may contaminate the environment, endanger
personal safety, cause a fire hazard or damage equipment or property.
The Company's industrial and secondary containment piping systems, manufactured
in a wide variety of piping materials, are generally used for the handling of
chemicals, hazardous liquids and petroleum products. Industrial piping systems
often feature special materials, heat tracing and special fabrication. Secondary
containment piping systems consist of service pipes housed within outer
containment pipes, which are designed to contain any leaks from the service
pipes. Each system is designed to provide economical and efficient secondary
containment protection that will meet all governmental environmental
regulations. In 1990, the Company developed the Double-Quik(R) thermoplastic
secondary containment piping systems with leak detection and location
capabilities. This system is installed by using a technique that allows
simultaneous thermal welding of the service pipe and the containment pipe in a
single process, with a leak detection messenger cable in place. The leak
detection messenger cable is subsequently used to pull in the leak detection
sensor cable. In June 1993, the Company was granted a patent on the special
equipment designed to accomplish this process. In April 1998, the Company
received a patent on a method of anchoring such systems made with different
materials for the service pipe and the containment pipe. In March 1999, the
Company obtained a license for a method of anchoring such systems made of
similar materials for the service and containment pipes.
The Company's district heating and cooling piping systems are designed to
transport steam, hot water and chilled water to provide efficient energy
distribution to multiple locations from a central energy plant. These piping
systems consist of a carrier pipe made of steel, ductile iron, copper or
fiberglass; insulation made of mineral wool, calcium silicate or polyurethane
foam; and an outer conduit or jacket of steel, fiberglass, reinforced polyester
resin, polyethylene or high density polyurethane. The Company manufactures
several types of piping systems using different materials, each designed to
withstand certain levels of temperature and pressure.
The Company's oil and gas flowlines are designed to transport crude oil or
natural gas from the well head, either on land or on the ocean floor, to the
gathering point. These piping systems consist of a carrier pipe made of steel,
usually supplied by the customer; insulation made of polyurethane; jackets made
of high density polyurethane or polyethylene and sometimes a steel outer pipe,
also usually supplied by the customer.
The Company's leak detection and location systems consist of a sensor cable
attached to a microprocessor, which utilizes proprietary software. The system
sends pulse signals through the sensor cable, which is positioned in the area to
be monitored (e.g., along a pipeline in the ground or in a subfloor), and
employs a patented digital mapping technique to plot pulse reflections to
continuously monitor the sensor cable for anomalies. The system is able to
detect one to three feet of wetted cable in a monitored cable string of up to
five miles in length and is able to determine the location of the wetted cable
within five feet. Once wetted cable is detected, the microprocessor utilizes the
software to indicate the location of the leak. The Company offers a variety of
cables specific to different environments. The Company's leak detection and
location systems can sense the difference between water and petroleum products
and can detect and locate multiple leaks. With respect to these capabilities,
the Company believes that its systems are superior to systems manufactured by
other companies. Once in place, the Company's leak detection and location system
can be monitored off-site because the system can communicate with computers
through telephone lines. The Company's leak detection and location systems are
being used to monitor fueling systems at airports, including those located in
Denver, Colorado; Atlanta, Georgia; Frankfurt, Germany and Hamburg, Germany and
in many clean rooms, including such facilities operated by IBM, Intel and
Motorola. The Company believes that, in the United States, it is the only major
supplier of the type of piping systems it sells that manufactures its own leak
detection and location systems.
5
<PAGE>
The Company's piping systems are frequently custom fabricated to job site
dimensions and/or incorporate provisions for thermal expansion due to varying
temperatures. This custom fabrication helps to minimize the amount of field
labor required by the installation contractor. Most of the Company's piping
systems are produced for underground installations and, therefore, require
trenching, which is done by unaffiliated installation contractors. Generally,
sales of the Company's piping systems tend to be lower during the winter months,
due to weather constraints over much of the country. During 1998, no single
customer accounted for more than 10 percent of the net sales of the Company's
piping systems.
The Company's leak detection and location systems and its secondary containment
piping systems are used primarily by operators of military and commercial
airport fueling systems, oil refineries, pharmaceutical companies, chemical
companies, and in museums, dry storage areas and tunnels. The Company's district
heating and cooling systems are used primarily at prisons, housing developments,
military bases, cogeneration plants, hospitals, industrial locations and college
campuses. The Company believes many district heating and cooling systems in
place are 30 to 50 years old and ready for replacement. Replacement of district
heating and cooling systems is often motivated by the increased cost of
operating older systems due to leakage and heat loss. The primary users of the
Company's insulated flowlines are major oil companies, gas companies and other
providers of mineral resources.
During 1997, Perma-Pipe developed a new process for the continuous application
of polyurethane insulation and protective jackets to pipe at high speeds within
controlled dimensional tolerances. PROtherm, the new product, was introduced to
the district heating, district cooling and industrial markets in March 1998. The
Company received its first contracts to insulate and jacket pipe assemblies for
deep-sea oil gathering flowlines during the first quarter of 1998. Delivery on
these contracts began in September 1998.
Marketing. The customer base for the Company's piping system products is
industrially and geographically diverse. The Company employs one national sales
manager and seven regional sales managers who utilize and assist a network of
approximately 85 independent manufacturers' representatives, none of whom is
allowed to sell products that are competitive with the Company's piping systems.
The Company also sells its piping systems and leak detection and location
systems in Europe, through its wholly owned subsidiaries Perma-Pipe Services,
Ltd. ("PPSL") and SZE Hagenuk GmbH ("SZE Hagenuk"). In addition, the Company has
other arrangements to market its patented leak detection and location systems in
many other foreign countries through agents.
Patents, Trademarks and Approvals. The Company owns several patents covering the
features of its piping and electronic leak detection systems, which expire
commencing in 2006. In addition, the Company's leak detection system is listed
by Underwriters Laboratories and the U.S. EPA and is approved by Factory Mutual
and the Federal Communication Commission. The Company is also approved as a
supplier of underground district heating systems under the federal government
guide specifications for such systems. The Company owns numerous trademarks
connected with its piping systems business. In addition to Perma-Pipe(R), the
Company owns other trademarks for its piping and leak detection systems
including the following: Chil-Gard(R), Double-Pipe(R), Double-Quik(R),
Escon-A(R), Ferro-Shield(R), FluidWatch(R), Galva-Gard(R), Hi Gard(R),
Poly-Therm(R), Pal-AT(R), Ric-Wil(R), Ric-Wil Dual Gard(R), Stereo-Heat(R),
Safe-T-Gard(R), Therm-O-Seal(R), Uniline(R), LiquidWatch(R), TankWatch(R) and
PalCom(R). The Company also owns United Kingdom trademarks for Poly-Therm(R),
Perma-Pipe(R) and Ric-Wil(R), a Canadian trademark for Ric-Wil(R) and a German
trademark for Leacom(R).
Backlog. As of January 31, 1999, the dollar amount of backlog (uncompleted firm
orders) was $16,942,000. As of January 31, 1998, the amount of backlog was
$14,937,000. Approximately $585,000 of the backlog at January 31, 1999 is not
expected to be completed in 1999.
Raw Materials and Manufacturing. The basic raw materials used in the production
of the Company's piping system products are pipes and tubes made of carbon
steel, alloy and plastics and various chemicals such as polyalls, isocyanate
("MDI"), polyester resin and fiberglass, mostly purchased in bulk quantities.
Although such materials are generally readily available, there may be instances
when any of these materials could be in short supply. The Company believes
supplies of such materials are adequate to meet current demand.
6
<PAGE>
The sensor cables used in the Company's leak detection and location systems are
manufactured to the Company's specifications by companies regularly engaged in
the business of manufacturing such cables. The Company owns patents for some of
the features of its sensor cables. The Company assembles the monitoring
component of the leak detection and location system from standard components
purchased from many sources. The Company's proprietary software is installed in
the system on a read-only memory chip.
The Company's manufacturing processes for its piping systems include equipment
and techniques to fabricate piping systems from a wide variety of materials,
including carbon steel, alloy and copper piping, and engineered thermoplastics
and fiberglass reinforced polyesters and epoxies. The Company uses
computer-controlled machinery for electric plasma metal cutting, filament
winding, pipe coating, insulation foam application, pipe cutting and pipe
welding. The Company employs skilled workers for carbon steel and alloy welding
to various code requirements. The Company is authorized to apply the American
Society of Mechanical Engineers code symbol stamps for unfired pressure vessels
and pressure piping. The Company's inventory includes various types of pipe,
tube, insulation, pipe fittings and other components used in its products. The
Company maintains a quality assurance program involving lead worker sign-off of
each piece at each workstation and nondestructive testing protocols.
Competition. The piping system products business is highly competitive. The
Company believes its competition in the district heating and cooling market
consists of two other national companies, Rovanco Piping Systems, Inc. and
Thermacor Process, Inc., as well as numerous regional competitors. The Company's
secondary containment piping systems have a wider range of competitors than
those in the district heating and cooling market and include Asahi/America and
GF Plastics Systems. The Company's oil and gas gathering flowlines face
worldwide competition, including Bredero-Price, a subsidiary of Dresser
Industries, Inc.; Shaw Industries, Inc.; the Bredero-Shaw joint venture of
Bredero-Price and Shaw Industries, Inc.; and Logstor Rohr of Denmark. Products
competitive with the Company's leak detection and location systems include: (1)
cable-based systems manufactured by the TraceTek Division of Raychem; (2) linear
gaseous detector systems manufactured by Tracer Technologies and Arizona
Instrument Corp.; and (3) probe systems manufactured by Redjacket, as well as
several other competitors that provide probe systems for the service station and
hydrocarbon leak detection industries.
The Company believes that price, quality, service and a comprehensive product
line are the key competitive factors in the Company's Piping Systems Business.
The Company believes it has a more comprehensive line of piping system products
than any of its competitors. Certain competitors of the Company have cost
advantages as a result of manufacturing a limited range of products. Some of the
Company's competitors have greater financial resources than the Company.
Government Regulation. The demand for the Company's leak detection and location
systems and secondary containment piping systems is driven primarily by federal
and state environmental regulation with respect to hazardous waste. The Federal
Resource Conservation and Recovery Act requires, in some cases, that the
storage, handling and transportation of certain fluids through underground
pipelines feature secondary containment and leak detection. The National
Emission Standard for Hydrocarbon Airborne Particulates requires reduction of
airborne volatile organic compounds and fugitive emissions. Under this
regulation, many major refineries are required to recover fugitive vapors and
dispose of the recovered material in a process sewer system, which then becomes
a hazardous waste system that must be secondarily contained. Although there can
be no assurances as to the ultimate effect of these governmental regulations,
the Company believes they may increase the demand for its piping system
products.
Industrial Process Cooling Equipment
Products and Services. The Company's Thermal Care division engineers, designs
and manufactures coolers for industrial purposes. The Company's cooling products
include: (i) chillers (portable and central); (ii) cooling towers; (iii) plant
circulating 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. The
Company's cooling products are used to optimize manufacturing productivity by
quickly removing heat from manufacturing processes. The principal market for the
Company's cooling products is the thermoplastics processing industry. The
Company also sells its products to original equipment manufacturers, to other
cooling manufacturers on a private branded basis and to manufacturers in the
laser, metallizing, and reaction injection molding industries.
7
<PAGE>
The Company combines chillers or cooling towers with plant circulating systems
to create plant-wide systems that account for a large portion of its business.
The Company specializes in customizing cooling systems according to customer
specifications.
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 is either 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.
The Company believes that it manufactures the most complete line of chillers
available in its primary market (thermoplastics processing). The Company's line
of portable chillers are available from 1/2 horsepower to 40 horsepower and
incorporate a microprocessor capable of computer communications to standard
industry protocols. While portable chillers are considered to be a commodity
product by many customers, the Company believes that its units enable it to
provide the customer with quality, features, and benefits at a competitive
price.
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. The Company 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) are utilized in the chiller. The Company believes that the
ability to offer these units provides it with a unique concept sales advantage.
The Company'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 in which water flows 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 water at a temperature of approximately 85
degrees F to remove heat from water-cooled chillers, air compressors, hydraulic
oil heat exchangers and other processes that can effectively be cooled in this
manner.
The Company 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 United States. The cabinets for these towers are imported from
Taiwan and are available in sizes ranging from 15 to 120 tons. (One tower ton
equals 15,000 BTU's/hour of heat removal.) The FC fiberglass tower line, which
is designed and engineered by the Company and which the Company believes is the
highest quality tower in the market today, is available from 100 to 240 tons.
Fiberglass cooling towers have achieved high popularity and are available from
most suppliers.
Plant Circulating Systems. The Company manufactures and markets a variety of
tanks in various sizes with pumps and piping arrangements that utilize alarms
and other electrical options. Thus, each system is unique and customized to meet
the individual customer's needs. These plant circulating systems are used as an
integral part of central tower and chiller systems. This product line was
expanded in 1996 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 for the purpose of
improving part quality. More than 90 percent of the temperature control units
sold in the industry are water units, while the remaining units use oil as the
heat transfer medium. The Boe-Therm division manufactures a complete line of
temperature control units, including oil units and negative pressure units.
Thermal Care markets Boe-Therm's oil and negative pressure units in the United
States. Sales of temperature control units have increased substantially since
the introduction of the Company's totally redesigned unit, the RA series, in
1992.
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. The Company 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 the Company to offer a complete system to its cooling products customers.
In addition, the Company provides other items to complement a system,
principally heat exchangers, special valves, and "radiator type" coolers. These
items are purchased from a supplier and usually drop-shipped directly to the
customer.
8
<PAGE>
Parts. The Company strives to fill parts orders within 24 hours and sells parts
at competitive margins in order to enhance new equipment sales.
Marketing. In general, the Company sells its cooling products to three different
markets.
1. Domestic thermoplastics processors are 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. The Company
believes the total U.S. market for water cooling equipment in the plastics
industry is over $100 million annually, and that the Company is one of the
three largest suppliers of such equipment to the plastics industry. The
Company 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. The
Company believes that it is recognized in the domestic plastics market as a
quality equipment manufacturer and that it will be able to maintain current
market share, with potential to increase its market share through product
development. The Company's cooling 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. Sales of the Company's cooling products outside the United States have
mainly been in Latin America. Some international sales have been obtained
elsewhere as a result of the assembly of complete worldwide PET (plastic
bottle) plants by multinational companies. This activity is currently
recovering from a decline in recent years due to the devaluation of the
Mexican peso and other Latin American currencies. The Company 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 the
U.S. and, while European competitors sell equipment in Latin America, the
Company believes that they lack system design capabilities and have a
significant freight disadvantage. The Company markets its cooling products
through a combination of manufacturers' representatives, distributors and
consultants, some of which are recognized as leaders in the distribution of
plastics machinery throughout Latin America. The acquisition of Boe-Therm
in 1998 has resulted in increased sales in Europe and the Far East.
3. An increasing share of the Company'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. The Company's sales
in the laser industry, metallizing industry, and reaction injection molding
industry have been particularly strong. The Company believes that the size
of this market is more than $200 million annually. The Company expects
growth in this market due to its ability to work with original equipment
manufacturers that perceive the Company to be a quality supplier. The
original equipment manufacturer generally distributes products to the end
user in these markets.
Trademarks. The Company registered the trademark "Thermal Care" with the U.S.
Patent and Trademark Office in August 1986.
Backlog. As of January 31, 1999, the dollar amount of Thermal Care's backlog
(uncompleted firm orders) was $3,544,000, substantially all of which is expected
to be completed in 1999. As of January 31, 1998, the amount of backlog was
$4,692,000.
Raw Materials and Manufacturing. Thermal Care's production and inventory storage
facility utilizes approximately 83,000 square feet. The plant layout is designed
to facilitate movement through multiple work centers. Thermal Care uses the
Manufacturing Accounting Production Inventory Control System ("MAPICS") to
support its manufacturing operations. The status of the customer order at any
given moment can be determined through the MAPICS system. Boe-Therm's
manufacturing facility in Assens, Denmark is 20,000 square feet.
The Company utilizes prefabricated sheet metal and subassemblies manufactured by
both Thermal Care and outside vendors for temperature controller fabrication.
This reduces the labor to complete finished goods. The production line is
self-contained, allowing the Company to assemble, wire, test, and crate the
units for shipment with minimal handling.
9
<PAGE>
FT towers up to 120 tons in capacity are assembled to finished goods inventory,
which allows the Company to meet quick delivery requirements. FT cooling towers
are manufactured using fiberglass and hardware components purchased from a
Taiwanese manufacturer, which is the Company'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 the Company. Two
different cabinet sizes of the FC tower account for eight different model
variations. All FC cooling towers are assembled at the Company's Niles facility.
The Company assembles all plant circulating systems by fabricating the steel to
meet the size requirements and adding purchased components to meet customers'
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, the Company developed a fiberglass tank
for nonferrous applications.
Portable chillers are assembled utilizing components both manufactured by the
Company and supplied by outside vendors. Portable chillers are assembled using
refrigeration components, a non-corrosive tank, hose, and pre-painted sheet
metal. Many of the components utilized in these chillers are fabricated as
subassemblies 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 subassemblies 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 subassemblies are completed to coincide with the work center movements.
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. The final production step is to
complete the quality control inspection and prepare the unit for shipment.
Competition. The Company believes that there are at least 15 competitors selling
cooling equipment in the domestic plastics market. Three manufacturers,
including the Company, collectively share approximately 75 percent 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 the Company can offer competing products. However, such
local manufacturers often lack the technology and products needed for plant-wide
cooling. The Company believes that its reputation for producing quality
plant-wide cooling products 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 it 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 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 on capital expenditures, earnings or the competitive position of
Thermal Care. Management is not aware of the need for any material capital
expenditures for environmental control facilities during the remainder of the
current fiscal year or for the foreseeable future. Regulations recently
promulgated under the Federal Clean Air Act prohibit the manufacture and sale of
certain refrigerants. The Company does not use these refrigerants in its
products. The Company expects that suitable refrigerants conforming to federal,
state and local laws and regulations will continue to be available to the
Company, although no assurances can be given as to the ultimate effect of the
Clean Air Act and related laws on the Company.
10
<PAGE>
Employees
As of March 31, 1999, the Company had 784 full-time employees, 112 of whom were
engaged in sales and marketing, 108 of whom were engaged in management and
administration, and the remainder were engaged in production. Hourly production
employees of the Company's Filtration Products Business in Winchester, Virginia
are covered by a collective bargaining agreement with the International United
Automobile, Aerospace & Agricultural Implement Workers of America, which expires
in October 2000. Most of the production employees of the Company's Industrial
Process Cooling Equipment Business are represented by two unions, the
Pipefitters Union and the International Brotherhood of Electrical Workers Union,
pursuant to collective bargaining agreements, both of which expire on June 1,
1999. The Company anticipates that this contract will be renegotiated without
significant difficulty and that the resulting wage and benefit increases will be
consistent with competitive industry and community standards. The collective
bargaining agreement of the Piping Systems Business with the Pipefitters
Union-metal trade division expires in March 2001.
Year 2000 Issues
The Company has organized a program to evaluate and identify any material Year
2000 issues. Please see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 1999:
<TABLE>
<CAPTION>
Executive Officer of the
Company or its
Age Position Predecessors Since
--- -------- ------------------------
<S> <C> <C> <C>
David Unger 64 Chairman of the Board 1972
of Directors, President
and Chief Executive
Officer
Henry M. Mautner 72 Vice Chairman of the Board 1972
of Directors
Gene K. Ogilvie 59 Vice President and Director 1969
Fati A. Elgendy 50 Vice President and Director 1990
Bradley E. Mautner 43 Vice President and Director 1994
Don Gruenberg 56 Vice President and Director 1980
Michael D. Bennett 54 Vice President, Chief 1989
Financial Officer,
Secretary and Treasurer
Thomas A. Benson 46 Vice President 1985
Billy E. Ervin 53 Vice President 1986
Joseph P. Findley 59 Vice President 1991
J. Tyler Headley 48 Vice President 1973
Robert A. Maffei 50 Vice President 1987
Herbert J. Sturm 48 Vice President 1977
</TABLE>
All of the officers serve at the discretion of the Board of Directors.
11
<PAGE>
David Unger has been employed by the Company and its predecessors in various
executive and administrative capacities since 1958, served as President of
Midwesco, Inc. from 1972 through January 1994 and was Vice President from
February 1994 through December 1996. He was a director of Midwesco, Inc. from
1972 through December 1996, and served that company in various executive and
administrative capacities from 1958 until the consummation of the merger of
Midwesco, Inc. into MFRI, Inc. (the "Midwesco Merger"). He is a director of the
company formed to succeed to the non-Thermal Care business of Midwesco, Inc.
Henry M. Mautner has been employed by the Company and its predecessors in
various executive capacities since 1972, served as chairman of Midwesco, Inc.,
from 1972 through December 1996, and served that company in various executive
and administrative capacities from 1949 until the consummation of the Midwesco
Merger. Since the consummation of the Midwesco Merger, he has served as the
chairman of the company formed to succeed to the non-Thermal Care businesses of
Midwesco, Inc. Mr. Mautner is the father of Bradley E. Mautner.
Gene K. Ogilvie has been employed by the Company and its predecessors in various
executive capacities since 1969. He has been general manager of Midwesco Filter
or its predecessor since 1980 and President and Chief Operating Officer of
Midwesco Filter since 1989. From 1982 until the consummation of the Midwesco
Merger, he served as Vice President of Midwesco, Inc.
Fati A. Elgendy, who was associated with Midwesco since 1978, was Vice
President, Director of Sales of the Perma-Pipe Division of Midwesco from 1990 to
1991. In 1991 he became Executive Vice President of the Perma-Pipe Division, a
position he continued to hold after the acquisition by the Company to form
Perma-Pipe. In March 1995, Mr. Elgendy became President and Chief Operating
Officer of Perma-Pipe.
Bradley E. Mautner has served as Vice President of the Company since December
1996 and has been a director of the Company since 1995. From 1994 to the
consummation of the Midwesco Merger, he served as President of Midwesco, Inc.
and since December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care business of Midwesco, Inc. In addition, since
February 1996, he has served as the Chief Executive Officer of Midwesco
Services, Inc. (formerly known as Mid Res, Inc.). From February 1988 to January
1996, he served as the President of Mid Res, Inc. Bradley E. Mautner is the son
of Henry M. Mautner.
Don Gruenberg has been employed by the Company and its predecessors in various
executive capacities since 1974, with the exception of a period in 1979-1980. He
has been general manager of Thermal Care or its predecessor since 1980, and was
named President of Thermal Care in 1988. He has been a Vice President and
director of the Company since December 1996.
Michael D. Bennett has served as the Chief Financial Officer and Vice President
of MFRI and its predecessors since August 1989.
Thomas Benson has served as Vice President Sales and Marketing of Thermal Care
since May 1988.
Billy E. Ervin has been Vice President, Director of Production of Perma-Pipe
since 1986.
Joseph P. Findley was Vice President, Manufacturing, of Midwesco Filter from
October 1991 to March 1999, having served as Manager, Quality Control and
Assurance since January 1989. Since March 1999, he has been Vice President,
Manufacturing Engineering of Midwesco Filter. From 1971 to 1988, he served in
various executive capacities for the Menardi-Criswell division of Hosokawa
Micron International, Inc. and a predecessor of that division.
J. Tyler Headley has been employed by the Company in various executive
capacities since 1973 and has served as Vice President, Marketing and Sales of
Midwesco Filter since May 1986.
12
<PAGE>
Robert A. Maffei has been Vice President, Director of Sales and Marketing of
Perma-Pipe since August 1996. He had served as Vice President, Director of
Engineering of Perma-Pipe since 1987 and was an employee of Midwesco, Inc. from
1986 until the acquisition of Perma-Pipe by MFRI in 1994.
Herbert J. Sturm has served the Company since 1975 in various executive
capacities including Vice President, Materials and Marketing Services of
Midwesco Filter.
Item 2. PROPERTIES
The production facilities for the Company's Filtration Products Business are
located in Company-owned buildings totalling 164,500 square feet situated on
approximately 15 acres owned by the Company in a modern industrial park in
Winchester, Virginia, a 130,700 square foot building in an industrial
neighborhood in Cicero, Illinois, and a 19,000 square foot leased facility in an
industrial area with adjoining tenants in Nakskov, Denmark.
The production facilities for the Company's piping system products are located
in Lebanon, Tennessee and New Iberia, Louisiana. The Lebanon facility is located
on approximately 24 acres of land in a modern industrial park and is housed in
five buildings totalling 130,000 square feet which contain manufacturing,
warehouse and office facilities, as well as a quality assurance laboratory. The
Company owns the buildings and the land for the Tennessee facility. The New
Iberia production facility is located on leased property at the Port of New
Iberia, Louisiana and is comprised of two buildings totalling 12,000 square
feet, which contain automated manufacturing and warehouse facilities. The
Company leases the manufacturing facilities, the land and the building.
The Company's principal executive offices and the production facilities for the
Company's Industrial Process Cooling Equipment Business are located in a 126,000
square foot building in Niles, Illinois, which is leased by the Company from two
significant management stockholders. The Industrial Process Cooling Equipment
Business uses approximately 72,000 square feet of this facility for production
and offices and leases an additional 11,000 square foot warehouse facility in
Niles, Illinois. The Industrial Process Cooling Equipment Business has a 20,000
square foot manufacturing and office facility in Assens, Denmark, which was
purchased as part of the Boe-Therm acquisition in June 1998.
The Company believes its properties and equipment are well maintained, in good
operating condition and that productive capacities will generally be adequate
for present and currently anticipated needs.
Compliance with environmental regulations by the Company in its manufacturing
operations has not had, and is not anticipated to have, a material effect on the
capital expenditures, earnings or competitive position of the Company.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Stock Market under
the symbol "MFRI." The following table sets forth, for the periods indicated,
the high and low sales prices as reported by the Nasdaq National Market for 1997
and for 1998.
<TABLE>
<CAPTION>
1997 High Low
---- ------ -----
<S> <C> <C>
First Quarter..................................... $ 8.63 $6.75
Second Quarter.................................... 10.50 6.63
Third Quarter..................................... 10.50 8.94
Fourth Quarter.................................... 10.50 7.75
1998 High Low
---- ------ -----
First Quarter..................................... $ 8.75 $7.25
Second Quarter.................................... 8.88 7.50
Third Quarter..................................... 7.94 4.50
Fourth Quarter.................................... 6.13 4.75
</TABLE>
As of January 31, 1999, there were approximately 150 stockholders of record, and
approximately 1,350 beneficial stockholders, of the Company's Common Stock.
The Company has never declared or paid a cash dividend and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. Management
presently intends to retain all available funds for the development of the
business and for use as working capital. Future dividend policy will depend upon
the Company's earnings, capital requirements, financial condition and other
relevant factors. The Company's line of credit agreement contains certain
restrictions on the payment of dividends. The primary restriction limits
dividends to a cumulative amount of up to 50% of net income.
14
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 1998, 1997,
1996, 1995 and 1994 are derived from the financial statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein in response to Item 7 and the consolidated financial statements
and related notes included herein in response to Item 8.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Fiscal Year ended January 31,
---------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per 1999 1998 1997 1996 1995
share information) -------- -------- ------- ------- -------
Statements of Operations Data:
Net sales $121,960 $111,240 $93,573 $85,838 $75,495
Income from operations 3,831 6,224 6,396 4,738 2,384
Net income 336 2,758 3,230 2,373 1,203
Net income per share - basic 0.07 0.55 0.71 0.52 0.27
Net income per share - diluted 0.07 0.54 0.70 0.52 0.27
As of January 31,
---------------------------------------------
1999 1998 1997 1996 1995
(In thousands) -------- -------- ------- ------- -------
Balance Sheet Data:
Total assets $ 97,986 $ 93,395 $75,328 $58,985 $47,917
Long-term debt, less current
portion 33,924 33,073 22,627 14,050 6,650
Capitalized leases, less
current portion 2,368 2,202 1,294 217 252
</TABLE>
The following table sets forth statements of operations data for the Company's
Industrial Process Cooling Equipment Business. See Notes 4 and 11 to Notes to
Financial Statements. This information is not included in the accounts of the
Company prior to December 30, 1996 because the Midwesco Merger was not effected
until December 30, 1996. Since Thermal Care was a division of Midwesco, Inc.
prior to the Midwesco Merger, per share data is not available.
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
1997 1996 1995
(In thousands) ------- ------- -------
<S> <C> <C> <C>
Thermal Care Statements of Operations Data:
Net sales $20,036 $19,775 $18,528
Income from continuing operations 661 1,319 1,623
Net income 1,161 894 936
</TABLE>
15
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 annual 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.
The Company's fiscal year ends on January 31. Years described as 1998, 1997 and
1996 are the fiscal years ended January 31, 1999, 1998 and 1997, respectively.
Balances described as balances as of 1998, 1997 and 1996 are balances as of
January 31, 1999, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
- ---------------------
MFRI, Inc.
<TABLE>
<CAPTION>
[GRAPH APPEARS HERE]
<S> <C> <C>
Net Sales Gross Profit Net Income
- --------- ------------ ----------
(in millions) (in millions) (in millions)
1998 121.960 1998 29.666 1998 0.336
1997 111.240 1997 27.935 1997 2.758
1996 93.573 1996 21.805 1996 3.230
</TABLE>
1998 Compared to 1997
Net sales increased 9.6 percent in 1998 to $121,960,000 from $111,240,000 in
1997. Gross profit for 1998 was $29,666,000, an increase of 6.2 percent from the
$27,935,000 reported in 1997. Net sales and gross profit increased in 1998,
primarily due to inclusion of the operations of acquired businesses since their
respective dates of acquisition: TDC Filter Manufacturing, Inc. ("TDC") in
December 1997, Boe-Therm A/S ("Boe-Therm") in June 1998 and Nordic Air
Filtration A/S ("Nordic Air") in November 1998. The accounts of these businesses
were not included in the accounts of the Company prior to their acquisition
dates. Excluding the effects of acquisitions, sales were 1.7 percent lower
compared to the prior year. The gross profit margin as a percent of net sales
declined from 25.1 percent in 1997 to 24.3 percent in 1998. This decrease was
primarily related to volume, as a larger revenue base was anticipated in
planning manufacturing resource requirements.
Net income decreased 87.8 percent from $2,758,000 or $0.55 per common share
(basic) in 1997 to $336,000 or $0.07 per common share (basic) in 1998. The main
reasons for the decrease in net income were increased selling, general and
administrative expenses, higher interest expense as a result of increased
borrowings to fund acquisitions, and a higher effective tax rate in the current
year. The Company's operating results are discussed in more detail below.
16
<PAGE>
1997 Compared to 1996
Net sales increased 18.9 percent in 1997 to $111,240,000 from $93,573,000 in
1996. Gross profit for 1997 was $27,935,000 or 25.1 percent of net sales, an
increase of 28.1 percent from the $21,805,000 or 23.3 percent of net sales
reported in 1996. Net sales and gross profit increased in 1997 primarily due to
the inclusion of a full year of operations of the Company's Industrial Process
Cooling Equipment Business, which was acquired in the December 1996 merger of
Midwesco, Inc. into MFRI, Inc. (the "Midwesco Merger"). The accounts of this
business were not included in the accounts of the Company prior to its
acquisition. This increase was partially offset by a decline in sales of the
Piping Systems Business, as a major secondary containment sale essentially
completed in 1996 was not replaced in 1997.
Net income decreased 14.6 percent from $3,230,000 or $0.71 per common share
(basic) in 1996 to $2,758,000 or $0.55 per common share (basic) in 1997. The
increase in 1997 net income attributable to the acquisition of the Industrial
Process Cooling Equipment Business in the Midwesco Merger was more than offset
by warranty costs related to the piping systems business and costs incurred to
defend two patent infringement lawsuits.
Filtration Products Business
The Company's Filtration Products Business is characterized by a large number of
relatively small orders and a limited number of large orders, typically from
electric utilities and original equipment manufacturers. In 1998, the average
order amount was approximately $4,538. The timing of large orders can have a
material effect on the comparison of net sales and gross profit from period to
period. Large orders generally are highly competitive and result in a lower
gross margin. In 1998, 1997 and 1996, no customer accounted for 10 percent or
more of the net sales of the Company's filtration products and services.
The Company's Filtration Products Business, to a large extent, is dependent on
governmental regulation of air pollution at the federal and state levels. The
Company believes that continuing growth in the sale of its filtration products
and services will be materially dependent on continuing enforcement of
environmental laws such as the Clean Air Act Amendments. Although there can be
no assurances as to what ultimate effect, if any, the Clean Air Act Amendments
will have on the Company's Filtration Products Business, the Company believes
that the Clean Air Act Amendments are likely to have a long-term positive effect
on demand for the Company's filtration products and services.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Filtration Products Business
(In thousands)
% Increase
(Decrease)
1998 1997 1996 1998 1997
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales $49,155 $40,145 $37,563 22.4% 6.9%
Gross profit 11,265 10,243 9,862 10.0% 3.9%
As a percentage of net sales 22.9% 25.5% 26.3%
Income from operations 3,341 4,140 4,615 (19.3%) (10.3%)
As a percentage of net sales 6.8% 10.3% 12.3%
- ------------------------------------------------------------------------------
</TABLE>
1998 Compared to 1997
Net sales increased 22.4% to $49,155,000 in 1998 from $40,145,000 in 1997. This
increase is the result of higher sales of filter elements for cartridge
collectors, primarily due to the acquisition of TDC in December 1997 and Nordic
Air in November 1998. Acquisitions contributed sales of $9,971,000 and 1,796,000
in 1998 and 1997, respectively.
17
<PAGE>
Gross profit as a percent of net sales was 22.9% in 1998 compared to 25.5% in
1997. This decrease is primarily the result of competitive pricing pressures in
the marketplace, unusually high medical insurance claims and manufacturing
inefficiencies due to unfavorable product mix.
Selling expense in 1998 increased to $4,886,000 or 9.9 percent of net sales from
$3,726,000 or 9.3 percent of net sales in 1997. This increase is attributable to
additional sales resources, mainly as a result of the TDC and Nordic Air
acquisitions.
General and administrative expense increased in 1998 to $3,038,000 or 6.2
percent of net sales from $2,377,000 or 5.9 percent of net sales in 1997. This
change resulted from additional administrative resources and expenses, primarily
as a result of the TDC and Nordic Air acquisitions, partially offset by lower
management incentive earnings.
1997 Compared to 1996
Net sales increased 6.9 percent to $40,145,000 in 1997 from $37,563,000 in 1996
primarily due to higher sales of filter elements for cartridge collectors.
Gross profit as a percent of net sales was 25.5 percent in 1997 compared to 26.3
percent in 1996. Unfavorable product mix and the attendant manufacturing
inefficiencies were the major causes of the decline in the gross profit margin.
Selling expense increased from $3,265,000 or 8.7 percent of net sales in 1996 to
$3,726,000 or 9.3 percent of net sales in 1997, largely due to additional sales
resources.
General and administrative expenses increased from $1,982,000 in 1996 to
$2,377,000 in 1997 and from 5.3 percent to 5.9 percent of net sales. The cost of
additional administrative resources and expenses, primarily legal expenses
related to a patent infringement dispute in 1997, were partially offset by
reduced research and development expenses.
Piping Systems Business
Generally, the Company's leak detection and location systems have higher profit
margins than its district heating and cooling piping systems and secondary
containment piping systems. The Company has benefitted from continuing efforts
to have its leak detection and location systems included as part of the
customers' original specifications for an increasing number of construction
projects.
Although demand for the Company's secondary containment piping systems is
generally affected by the customer's need to comply with governmental
regulations, purchases of such products at times may be delayed by customers due
to adverse economic factors. In 1998, 1997 and 1996, no customer accounted for
10 percent or more of net sales of the Company's piping systems.
The Company's Piping Systems Business is characterized by a large number of
small and medium orders and a small number of large orders. The average order
amount for 1998 was approximately $23,776. The timing of such orders can have a
material effect on the comparison of net sales and gross profit from period to
period. Most of the Company's piping systems are produced for underground
installations and, therefore, require trenching, which is performed directly for
the customer by installation contractors unaffiliated with the Company.
Generally, sales of the Company's piping systems tend to be lower during the
winter months, due to weather constraints over much of the country.
18
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Piping Systems Business
(In thousands)
% Increase
(Decrease)
1998 1997 1996 1998 1997
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net sales $45,849 $46,232 $54,194 (0.8%) (14.7%)
Gross profit 9,861 9,723 11,373 1.4% (14.5%)
As a percentage of net sales 21.5% 21.0% 21.0%
Income from operations 1,444 2,347 4,033 (38.5%) (41.8%)
As a percentage of net sales 3.1% 5.1% 7.4%
- ------------------------------------------------------------------------------
</TABLE>
1998 Compared to 1997
Net sales decreased 0.8 percent from $46,232,000 in 1997 to $45,849,000 in 1998,
primarily due to lower sales of a foreign subsidiary.
Gross profit as a percent of sales increased from 21.0 percent in 1997 to 21.5
percent in 1998, mainly resulting from a favorable product mix of sales and
manufacturing efficiencies in the domestic operations.
Selling expense increased from $2,498,000 or 5.4 percent of net sales to
$2,658,000 or 5.8 percent of net sales, largely due to increased staffing for
international and oil and gas sales.
General and administrative expense increased from $4,878,000 or 10.6 percent of
net sales to $5,759,000 or 12.6 percent of net sales, primarily due to legal and
settlement costs related to a patent infringement lawsuit and the write-off of a
foreign subsidiary's bad debt.
1997 Compared to 1996
Net sales decreased 14.7 percent from $54,194,000 in 1996 to $46,232,000 in
1997, primarily due to a major secondary containment sale essentially completed
in 1996 which was not replaced in 1997.
Gross profit as a percent of sales remained unchanged at 21.0 percent in spite
of costs incurred to rectify a substantial warranty claim relating to a piping
system of a design which has been discontinued.
Selling expense decreased from $2,583,000 in 1996 to $2,498,000 in 1997 due to a
reduction in sales literature requirements. Product catalogs and brochures were
ordered in bulk in 1996. Selling expense as a percent of net sales increased
from 4.8 percent to 5.4 percent due to the sales expense being spread over a
smaller sales base.
General and administrative expense increased from $4,757,000 in 1996 to
$4,878,000 in 1997 and from 8.8 percent to 10.6 percent of net sales mainly due
to legal expenses related to a patent infringement lawsuit.
19
<PAGE>
Industrial Process Cooling Equipment Business
The Company's Industrial Process Cooling Equipment Business is characterized by
a large number of relatively small orders and a limited number of large orders.
In 1998, the average order amount was approximately $8,500. Generally, sales to
original equipment manufacturers have lower profit margins than sales to the
domestic and international thermoplastics industries and other markets. Large
orders are generally highly competitive and result in lower profit margins. In
1998, 1997 and 1996, no customer accounted for 10 percent or more of the
Company's net sales of cooling equipment. Although the accounts of the
industrial process cooling equipment business were not included in the accounts
of the Company prior to December 30, 1996, the pro forma information for 1996 is
presented to help the reader better understand this business.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
(In thousands)
% Increase
Pro Forma (Decrease)
1998 1997 1996 1998 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales $26,956 $24,863 $20,036 8.4% 24.1%
Gross profit 8,540 7,969 5,875 7.2% 35.6%
As a percentage of net sales 31.7% 32.1% 29.3%
Income from operations 2,378 2,836 661 (16.1%) 329.0%
As a percentage of net sales 8.8% 11.4% 3.3%
- -----------------------------------------------------------------------------
</TABLE>
1998 Compared to 1997
Net sales increased 8.4 percent to $26,956,000 in 1998 from $24,863,000 in 1997,
mainly due to inclusion of the operating results of Boe-Therm since its
acquisition in June 1998. Boe-Therm's sales were $2,639,000 in 1998.
Gross profit as a percentage of net sales declined slightly from 32.1 percent in
1997 to 31.7 percent in 1998, primarily due to production inefficiencies at the
Boe-Therm plant.
Selling expenses increased from $3,055,000 or 12.3 percent of net sales in 1997
to 3,582,000 or 13.3 percent of net sales in 1998. This increase was primarily
due to higher commission expense related to sales mix, the inclusion of
Boe-Therm's sales expense since the date of acquisition and an increase in
advertising expense in the current year.
General and administrative expenses increased from $2,078,000 or 8.4 percent of
net sales to $2,580,000 or 9.6 percent of net sales. The increase is primarily
due to the inclusion of Boe-Therm's administrative expenses since the date of
acquisition, increased management information systems expenses and increased
engineering costs compared to the prior year.
1997 Compared to 1996
Net sales increased 24.1 percent to $24,863,000 in 1997 from $20,036,000 in
1996, resulting from higher sales across all product lines, especially tanks and
central chiller systems.
Gross profit as a percentage of net sales increased from 29.3 percent in 1996 to
32.1 percent in 1997 primarily due to plant efficiencies from larger production
volumes.
20
<PAGE>
Selling expenses increased from $2,700,000 in 1996 to $3,055,000 in 1997,
primarily due to higher commission expense related to the increased sales
volume. Selling expense as a percentage of net sales declined from 13.5 percent
to 12.3 percent due to selling expenses being spread over a larger sales base in
1997.
General and administrative expenses decreased from $2,514,000 to $2,078,000 and
from 12.5 percent of net sales to 8.4 percent of net sales. Pro forma general
and administrative expenses for 1996 include a provision of $400,000 for the
estimated ultimate cost of three lawsuits which had been considered in
negotiating the acquisition price of the Midwesco Merger. Also included in the
pro forma general and administrative expenses for 1996 was $634,000 of corporate
administrative expenses attributed to support of this business. Without such pro
forma adjustments of $1,034,000, 1996 general and administrative expenses
totalled $1,480,000. The increase from $1,480,000 to $2,078,000 consisted
primarily of other corporate expenses which were not directly charged to this
business prior to 1997.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
1998 Compared to 1997
General and administrative expenses not allocated to business segments increased
7.5 percent from $3,099,000 in 1997 to $3,332,000 in 1998, primarily due to
higher occupancy and employee-related expenses, partially offset by lower
profit-based incentive compensation.
Interest expense was $2,577,000 in 1998, compared to $1,640,000 in 1997. Higher
borrowings in the current year as a result of the acquisition of TDC in December
1997, the acquisition of Boe-Therm in June 1998 and the acquisition of Nordic
Air in November 1998 were the primary reasons for the increase. (See also
Liquidity and Capital Resources.)
1997 Compared to 1996
General and administrative expenses not allocated to business segments increased
from $2,389,000 in 1996 to $3,099,000 in 1997, primarily due to the expense of
supporting the Industrial Process Cooling Equipment Business acquired in the
Midwesco Merger for the entire year of 1997. Such expenses were included in the
1996 pro forma results of operations of the Industrial Process Cooling Equipment
Business.
Interest expense was $1,640,000 in 1997, compared to $992,000 in 1996, mainly
because of higher borrowings to finance working capital, fixed asset additions,
and the acquisition of TDC, as well as the inclusion of the debt acquired in the
Midwesco merger for the full year in 1997.
Income Taxes
The effective income tax rates were 73.2 percent, 39.8 percent and 40.2 percent
for 1998, 1997 and 1996, respectively. Permanent differences had a greater
impact on the effective tax rate in 1998, as pre-tax income was substantially
lower than 1997 and 1996. In addition, tax audit issues of $109,000 and
adjustments to estimated income tax accruals of $62,000 adversely affected the
1998 effective tax rate.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents as of January 31, 1999 were $579,000 as compared to
$976,000 at January 31, 1998. Net cash inflows of $3,149,000 generated from
operating activities; $1,886,000 received from the restricted cash of the
Industrial Revenue Bonds; $1,699,000 proceeds from sale of property, plant and
equipment; $56,296,000 received from borrowings and $59,000 proceeds from stock
options exercised were used to fund purchases of property, plant and equipment
of $6,037,000; acquisitions of businesses of $3,132,000; repayment of
capitalized lease obligations of $408,000 and repayment of bank debt of
$53,902,000.
Net cash provided by operating activities was $3,149,000 in 1998, mainly due to
decreases in accounts receivable and increases in current liabilities, partially
offset by lower earnings, increased inventory and increased prepaid expenses and
other assets. In 1997, net cash used by operating activities was $275,000,
primarily as a result of increases in accounts receivable, inventories and
prepaid expenses and decreased accounts payable, partially offset by increases
in other accrued liabilities.
Net cash used in investing activities in 1998 was $5,584,000 versus $10,727,000
for 1997. Capital expenditures increased from $4,385,000 in the prior year to
$6,037,000 in the current year. This increase is primarily due to costs incurred
to construct equipment for the manufacturing facility at New Iberia, Louisiana.
Proceeds from sale of property, plant and equipment in the current year was
$1,699,000, mainly resulting from the sale of the equipment in New Iberia,
Louisiana to a third party in November 1998. The Company leased back the
equipment from the third party purchaser. The Company used $3,132,000 to acquire
businesses in 1998 compared to $7,293,000 in the prior year. Cash received from
the restricted cash of the Industrial Revenue Bonds in the current year was
$1,886,000 compared to $951,000 in the prior year.
Net cash obtained from financing activities in 1998 was $2,045,000 compared to
$8,613,000 in 1997. In 1998, net cash obtained from borrowings under revolving,
term and mortgage loans was $56,296,000, proceeds from stock options exercised
were $59,000, net repayment of capitalized lease obligations was $408,000 and
repayment of bank debt was $53,902,000. In 1997, net cash obtained from
borrowings under revolving, term and mortgage loans was $25,427,000, proceeds
from stock options exercised were $115,000, net repayment of capitalized lease
obligations was $509,000 and repayment of bank debt was $16,420,000. In
addition, the Company received 66,890 shares of common stock in 1998, which had
been held in the special escrow established as part of the Midwesco Merger to
indemnify MFRI, Inc. for legal and settlement costs related to three lawsuits
acquired in the Midwesco Merger in the event that such costs exceeded the
$400,000 reserve established at the time of the merger.
The Company's current ratio was 2.3 to 1 at January 31, 1999 and 2.6 to 1 at
January 31, 1998. Debt to total capitalization increased to 51.5 percent at
January 31, 1999 from 49.9 percent at January 31, 1998.
Financing
On December 15, 1996, the Company entered into a private placement with
institutional investors of $15,000,000 of 7.21 percent unsecured senior notes
due January 31, 2007 (the "Notes due 2007"). The Notes due 2007 require level
principal payments beginning January 31, 2001 and continuing annually
thereafter, resulting in a seven-year average life. The note agreement contains
certain financial covenants. At January 31, 1999, the Company was not in
compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.
On September 17, 1998, the Company entered into a private placement with
institutional investors of $10,000,000 of 6.97 percent unsecured senior notes
due September 17, 2008 (the "Notes due 2008"). The Notes due 2008 require level
principal payments beginning September 17, 2002 and continuing annually
thereafter, resulting in a seven-year average life. The note purchase agreement
contains certain financial covenants. At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.
22
<PAGE>
On December 19, 1996, the Company entered into an unsecured credit agreement
with a bank. Under the terms of the agreement as most recently amended, the
Company may borrow up to $6,000,000 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 January 31, 1999, the
prime rate was 7.75 percent and the margin added to the LIBOR rate, which is
determined each quarter based on the Company's interest coverage ratio, was 2.50
percent. The Company had borrowed $300,000 under the revolving line of credit at
January 31, 1999. Additionally, $658,000 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.
The credit agreement contains certain financial covenants. As of January 31,
1999, the Company was not in compliance with four such financial covenants. The
Company has obtained a waiver and amendment for such non-compliance.
On September 14, 1995, the Filtration Products Business in Winchester, Virginia
received $3,150,000 proceeds of Industrial Revenue Bonds, which mature on August
1, 2007, and on October 18, 1995, the Piping Systems Business in Lebanon,
Tennessee received $3,150,000 proceeds of Industrial Revenue Bonds, which mature
on September 1, 2007. These bonds are fully secured by bank letters of credit,
which the Company expects to renew, reissue or extend prior to each expiration
date during the term of the bonds. The bonds bear interest at a variable rate,
which approximates five percent per annum, including letter of credit and
remarketing fees. The bond proceeds were 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 and ended
during the Company's fiscal quarter ended October 31, 1998. Each bond indenture
established a trusteed project fund for deposit of the bond proceeds, the
balance of which was invested as authorized by the indenture and limited by
applicable law. As of October 31, 1998, $1,042,000 of the invested funds had not
been disbursed and will be used to redeem a portion of the principal of the
bonds outstanding. As provided by the indenture, the Company has directed the
trustee to apply such funds to the redemption of Bonds at the earliest possible
date, and has reduced the principal portion of the bonds by the amount of
unspent funds at January 31, 1999.
On May 8, 1996, the Company purchased a 10.3-acre parcel of land with a
67,000-square foot building adjacent to its Midwesco Filter property in
Winchester, Virginia for approximately $1.1 million. The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the industrial revenue bonds described above.
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.
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 4,500,000
Danish krone ("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. The second loan in the amount of 2,750,000 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 Company also has short-term credit arrangements utilized by its European
subsidiaries. These credit arrangements are generally in the form of overdraft
facilities or accounts receivable factoring arrangements at rates competitive in
the countries in which the Company operates. At January 31, 1999, borrowings
under these credit arrangements totaled $674,000; an additional $283,000
remained unused. The Company also had outstanding letters of credit in the
amount of $273,000 to guarantee performance to third parties of various trade
activities and contracts.
YEAR 2000
- ---------
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems may not
correctly recognize the year 2000, which could cause computer applications to
fail or to create erroneous results. The Company recognizes this as a potential
risk and has implemented a plan to address the Year 2000 issue.
23
<PAGE>
The Company's State of Readiness
The Company has instituted an internally managed Year 2000 Plan to identify,
test and correct potential Year 2000 problems, including non-information
technology systems and impacts from outside parties including suppliers,
customers, and service providers. The Company's efforts have included obtaining
vendor certifications, direct inquiry with outside parties, and the performance
of internal testing on software products and controls. Although the Company can
provide no assurances that all Year 2000 problems will be identified, the
Company expects to be Year 2000 compliant as of December 31, 1999.
Costs to Address the Company's Year 2000 Issues
The costs incurred by the Company related to the Year 2000 issue were the time
spent by employees to address this issue and the costs of outside contractors to
provide assistance with programming. The total Year 2000 costs have not been and
are not expected to be material to the Company's financial position or results
of operations. As of March 31, 1999, total costs of outside services to reach
Year 2000 compliance were estimated to be $100,000.
The Risks of the Company's Year 2000 Issues
The Company's primary risk with respect to the Year 2000 issue is the inability
of external parties to provide goods and services in a timely, accurate manner,
resulting in production delays and added costs while pursuing alternative
sources. While there can be no guarantee that the systems of other parties on
which the Company's operations rely will be Year 2000 compliant, the Company
believes that the performance of the Year 2000 Plan and the contingency plans
will ensure that this risk will not have a material adverse impact to the
Company.
The Company's Contingency Plans
The Company has completed contingency plans that address recovery of its
critical information systems. Ongoing updates to these plans will continue
throughout 1999, and will consider the Company's ability to perform certain
processes manually, repair or obtain replacement systems, change suppliers
and/or service providers, and work around affected operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates.
Foreign currency exchange rate risk is mitigated through several means:
maintenance of local production facilities in the markets served, invoicing of
customers in the same currency as the source of the products and limited use of
foreign currency denominated debt. The Company occasionally utilizes foreign
currency forward contracts to reduce exposure to exchange rate risks. The
forward contracts are short-term in duration, generally one year or less. The
major currency exposure hedged by the Company is the Canadian dollar. The
contract amounts, carrying amounts and fair values of these contracts were not
significant at January 31, 1999, 1998 and 1997. The implementation of the Euro
currency on January 1, 1999 is not expected to materially affect the Company's
foreign currency exchange risk profile, although some customers may require the
Company to invoice or pay in Euros rather than the functional currency of the
manufacturing entity.
Interest rate risk exposure is principally limited to the $36,292,000 of
long-term debt outstanding at January 31, 1999. Essentially all of these
borrowings are fixed-rate debt and, therefore, the impact on the Company's cash
flows and results of operations from changes in interest rates would not be
material.
24
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of January 31,
1999 and January 31, 1998 and for each of the three years in the period ended
January 31, 1999 and the notes thereto are set forth elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated
herein by reference to the table under the caption "Nominees for Election as
Directors" and the textual paragraphs following the aforesaid table in the
Company's proxy statement for the 1999 annual meeting of stockholders.
Information with respect to executive officers of the Company is
included in Item 1, Part I hereof under the caption "Executive Officers of the
Registrant."
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated
herein by reference to the information under the caption "Executive
Compensation" in the Company's proxy statement for the 1999 annual meeting of
stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management of the Company is incorporated herein by reference to the
information under the caption "Beneficial Ownership of Common Stock" in the
Company's proxy statement for the 1999 annual meeting of stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Transactions" in the Company's proxy statement for the 1999 annual meeting of
stockholders.
25
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a. (1) Consolidated Financial Statements
Refer to Part II, Item 8 of this report.
(2) Financial Statement Schedule
a. Schedule II - Valuation and Qualifying Accounts
(3) The exhibits, as listed in the Exhibit Index set
forth on page 50, are submitted as a separate section
of this report.
b. MFRI filed no reports on Form 8-K with the Securities and
Exchange Commission during the last quarter of the fiscal year
ended January 31, 1999.
c. See Item 14(a)(3) above.
d. The response to this portion of Item 14 is submitted as a
separate section of this report.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MFRI, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of MFRI, Inc. and
subsidiaries as of January 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule 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 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 MFRI, Inc. and subsidiaries as of
January 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 30, 1999
27
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share information)
<TABLE>
<CAPTION>
1998 1997 1996
Fiscal Year Ended January 31,
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $121,960 $111,240 $93,573
Cost of sales 92,294 83,305 71,768
-------- -------- -------
Gross profit 29,666 27,935 21,805
Operating expenses:
Selling expense 11,126 9,279 6,104
General and administrative expense 14,805 12,801 8,740
Management services agreement - net (96) (369) 565
--------- --------- -------
Total operating expenses 25,835 21,711 15,409
--------- --------- -------
Income from operations 3,831 6,224 6,396
Interest expense - net 2,577 1,640 992
-------- -------- -------
Income before income taxes 1,254 4,584 5,404
Income taxes 918 1,826 2,174
-------- -------- -------
Net income $ 336 $ 2,758 $ 3,230
======== ======== =======
Net income per common share - basic $0.07 $0.55 $0.71
Net income per common share - diluted $0.07 $0.54 $0.70
Weighted average common shares outstanding 4,967 4,971 4,575
Weighted average common shares outstanding
assuming full dilution 5,040 5,115 4,628
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
<TABLE>
<CAPTION>
As of January 31,
ASSETS 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 579 $ 976
Trade accounts receivable, less allowance for doubtful
accounts of $229 in 1998 and $209 in 1997 20,892 21,865
Accounts receivable - related companies 1,134 342
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,533 3,489
Income taxes receivable 864 1,096
Inventories 22,227 19,595
Deferred income taxes 2,812 2,176
Prepaid expenses and other current assets 1,128 1,452
------- -------
Total current assets 52,169 50,991
------- -------
Restricted Cash from Bond Proceeds - 2,929
Property, Plant and Equipment, Net 26,849 23,030
Other Assets:
Patents, net of accumulated amortization 1,348 1,033
Goodwill, net of accumulated amortization 14,200 12,399
Other assets 3,420 3,013
------- -------
Total other assets 18,968 16,445
------- -------
Total Assets $97,986 $93,395
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable 9,497 9,062
Accounts payable - related companies 45 30
Accrued compensation and payroll taxes 2,349 1,572
Other accrued liabilities 3,754 2,166
Commissions payable 4,855 5,821
Current maturities of long-term debt 1,664 573
Billings in excess of costs and estimated earnings
on uncompleted contracts 529 461
------- -------
Total current liabilities 22,693 19,685
------- -------
Long-Term Liabilities:
Long-term debt, less current maturities 36,292 35,275
Deferred income taxes 2,257 1,683
Other 976 711
------- -------
Total long-term liabilities 39,525 37,669
------- -------
Stockholders' Equity:
Common stock, $0.01 par value, authorized 15,000
shares; 4,922 and 4,981 issued and
outstanding in 1998 and 1997, respectively 49 50
Additional paid-in capital 21,397 21,864
Retained earnings 14,572 14,236
Accumulated other comprehensive loss (250) (109)
-------- --------
Total stockholders' equity 35,768 36,041
------- -------
Total Liabilities and Stockholders' Equity $97,986 $93,395
======= =======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
MFRI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------ Paid-in Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Loss Income
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996 4,524 $ 45 $ 17,967 $ 8,248 $ (37)
Net income 3,230 $3,230
Shares issued in connection with
the acquisition of Eurotech 31 214
Shares issued in connection with
the Midwesco Merger 2,124 22 16,718
Shares held by Midwesco retired
at time of the Midwesco Merger (1,718) (17) (13,518)
Stock options exercised 1 3
Unrealized translation adjustment (21) (21)
----- ----- --------- ------- ------ -------
Balance, January 31, 1997 4,962 50 21,384 11,478 (58) $3,209
=======
Net income 2,758 $2,758
Stock options issued in connection
with the acquisition of
TDC Filter Manufacturing, Inc. 369
Stock options exercised 19 115
Unrealized translation adjustment (51) (51)
Other (4)
----- ----- --------- ------- ------ -------
Balance January 31, 1998 4,981 50 21,864 14,236 (109) $2,707
=======
Net income 336 $ 336
Shares returned from escrow due
to final settlement of lawsuits
acquired in the Midwesco Merger (67) (1) (526)
Stock options exercised 8 59
Minimum pension liability adjustment
(net of tax benefit of $79) (128) (128)
Unrealized translation adjustment (13) (13)
----- ----- --------- ------- ------ -------
Balance January 31, 1999 4,922 $ 49 $21,397 $14,572 $(250) $ 195
===== ===== ========= ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Fiscal Year Ended January 31,
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 336 $ 2,758 $ 3,230
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for depreciation and amortization 3,529 2,715 1,810
Deferred income taxes (254) 276 (189)
Change in operating assets and liabilities,
net of effects of purchased businesses:
Accounts receivable 733 (2,039) (463)
Income taxes receivable 39 (868) 177
Inventories (1,785) (1,356) 64
Prepaid expenses and other assets (556) (2,394) 512
Accounts payable 35 (778) (1,417)
Compensation and payroll taxes 650 (102) 461
Other accrued liabilities 422 1,513 537
-------- --------- ---------
Net Cash Flows from Operating Activities 3,149 (275) 4,722
-------- --------- ---------
Cash Flows from Investing Activities:
Change in restricted cash from Industrial
Revenue Bonds 1,886 951 1,166
Acquisitions of businesses, net of cash acquired (3,132) (7,293) (211)
Proceeds from sale of property and equipment 1,699 - -
Purchases of property and equipment (6,037) (4,385) (2,726)
-------- --------- ---------
Net Cash Flows from Investing Activities (5,584) (10,727) (1,771)
-------- --------- ---------
Cash Flows from Financing Activities:
Net payments on capitalized lease obligations (408) (509) (295)
Borrowings under revolving, term and
mortgage loans 56,296 25,427 38,242
Repayment of bank debt (53,902) (16,420) (37,913)
Stock options exercised 59 115 3
-------- --------- ---------
Net Cash Flows from Financing Activities 2,045 8,613 37
-------- --------- ---------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (7) (51) (21)
-------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (397) (2,440) 2,967
Cash and Cash Equivalents - Beginning of Year 976 3,416 449
-------- --------- ---------
Cash and Cash Equivalents - End of Year $ 579 $ 976 $ 3,416
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Note 1 - Basis of Presentation
MFRI, Inc. ("MFRI") was incorporated on October 12, 1993. MFRI became successor
by merger to Midwesco Filter Resources, Inc. ("Midwesco Filter") on January 28,
1994, when all the assets of the Perma-Pipe division of Midwesco, Inc.
("Perma-Pipe") were acquired, subject to specified liabilities, in exchange for
cash and common stock of MFRI.
Through the merger of Midwesco, Inc. ("Midwesco") into MFRI on December 30, 1996
(the "Midwesco Merger"), MFRI acquired all the assets of Midwesco's Thermal Care
business ("Thermal Care"), subject to specified liabilities, which included the
following: all liabilities associated with three lawsuits arising from warranty
obligations of Perma-Pipe; Midwesco's rights under leases, primarily its lease
of the building in Niles, Illinois that serves as the principal offices of both
MFRI and Midwesco and as the manufacturing facility of Thermal Care; the
deferred tax assets of Midwesco and 1,718,000 shares of the common stock of MFRI
owned by Midwesco. Prior to the Midwesco Merger, Midwesco was primarily owned by
certain management stockholders of MFRI and their families.
Fiscal Year: The Company's fiscal year ends on January 31. Years described as
1998, 1997 and 1996 are the fiscal years ended January 31, 1999, 1998 and 1997,
respectively. Balances described as balances as of 1998, 1997 and 1996 are
balances as of January 31, 1999, 1998 and 1997, respectively.
Principles of Consolidation: The consolidated financial statements include the
accounts of MFRI; its principal wholly owned subsidiaries, Midwesco Filter and
Perma-Pipe; and the majority-owned and controlled domestic and foreign
subsidiaries of MFRI, Midwesco Filter and Perma-Pipe (collectively referred to
as the "Company"). All significant intercompany balances and transactions have
been eliminated. Acquired businesses are included in the results of operations
since their acquisition dates.
Nature of Business: Midwesco Filter is engaged principally in the manufacture
and sale of filter elements for use in industrial air filtration systems. Air
filtration systems are used in a wide variety of industries to limit particulate
emissions, primarily to comply with environmental regulations. Perma-Pipe is
engaged in engineering, designing and manufacturing specialty piping systems and
leak detection and location systems. Thermal Care is engaged in engineering,
designing and manufacturing industrial process cooling equipment, including
chillers, cooling towers, plant circulating systems, temperature controllers,
and water treatment equipment. The Company's products are sold both within the
United States and internationally.
Note 2 - Significant Accounting Policies
Revenue Recognition: Perma-Pipe and one of its subsidiaries, Perma-Pipe
Services, Ltd. ("PPSL"), recognize revenues on contracts under the "percentage
of completion" method. The percentage of completion is determined by the
relationship of costs incurred to the total estimated costs of the contract.
Provisions are made for estimated losses on uncompleted contracts in the period
in which such losses are determined. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty
provisions and final contract settlements may result in revisions to costs and
income. Such revisions are recognized in the period in which they are
determined. Claims for additional compensation due the Company are recognized in
contract revenues when realization is probable and the amount can be reliably
estimated.
The Company and all other subsidiaries of the Company recognize revenues at the
date of shipment.
32
<PAGE>
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 amount 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 those estimates.
Operating Cycle: The length of Perma-Pipe and PPSL contracts vary, but are
typically less than one year. The Company includes in current assets and
liabilities amounts realizable and payable in the normal course of contract
completion unless completion of such contracts extends significantly beyond one
year.
Cash Equivalents: All highly liquid investments with a maturity of three months
or less when purchased are considered to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for substantially all
inventories. Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------- -------
<S> <C> <C>
Raw materials $16,313 $14,296
Work in process 2,494 1,557
Finished goods 3,420 3,742
------- -------
Total $22,227 $19,595
======= =======
</TABLE>
Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is
capitalized in connection with the construction of major facilities and
amortized over the asset's estimated useful life. Interest cost capitalized in
1998 and 1997 was $54,000 and $54,000, respectively. No interest was capitalized
in 1996.
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 Company's investment in property, plant and equipment as of January 31 is
summarized below:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------- -------
<S> <C> <C>
Land, buildings and improvements $13,752 $11,575
Machinery and equipment 16,248 13,276
Furniture and office equipment 5,063 3,873
Transportation equipment 1,260 1,304
------- -------
36,323 30,028
Less accumulated depreciation and amortization 9,474 6,998
------- -------
Property, plant and equipment, net $26,849 $23,030
======= =======
</TABLE>
Goodwill, which represents the excess of acquisition cost over the net assets
acquired in business combinations, is amortized on the straight-line basis over
periods ranging from 25 to 40 years. Accumulated amortization was $1,015,000 and
$606,000 at January 31, 1999 and 1998, respectively.
Patents are capitalized and amortized on the straight-line basis over a period
not to exceed the legal lives of the patents. Accumulated amortization was
$596,000 and $484,000 at January 31, 1999 and 1998, respectively.
The carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the depreciation or amortization period or to the
unamortized balance is warranted. Such evaluation is based on the expected
utilization of the long-lived assets and the projected, undiscounted cash flows
of the oeprations in which the long-lived assets are deployed.
33
<PAGE>
Financial Instruments: The Company utilizes foreign currency forward contracts
to reduce exposure to exchange rate risks primarily associated with transactions
in the regular course of the Company's export and international operations. The
Company utilizes forward contracts which are short-term in duration, generally
one year or less. The major currency exposure hedged by the Company is the
Canadian dollar. The contract amount, carrying amount and fair value of these
contracts were not significant at January 31, 1999, 1998 and 1997.
Net Income Per Common Share: Earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding (basic) plus
all potentially dilutive common shares outstanding during the year (diluted).
The basic weighted average shares reconcile to diluted weighted average shares
as follows:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Net Income $ 336 $2,758 $3,230
===== ====== ======
Basic weighted average common shares
outstanding 4,967 4,971 4,575
Dilutive effect of stock options 73 144 53
----- ------ ------
Weighted average common shares
outstanding assuming full dilution 5,040 5,115 4,628
===== ====== ======
Net income per common share - basic $0.07 $0.55 $0.71
Net income per common share - diluted $0.07 $0.54 $0.70
</TABLE>
In 1998, 1997 and 1996, 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 411,000; 45,000 and 172,000, respectively. These options were
outstanding at the end of each of the respective years.
Fair Value of Financial Instruments: The carrying value of cash and cash
equivalents, accounts receivable, restricted cash and accounts payable are
reasonable estimates of their fair value due to their short-term nature. 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.
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss
consists of the following:
<TABLE>
<CAPTION>
Minimum
Accumulated Pension
(In thousands) Translation Liability
Adjustment Adjustment Total
----------- ---------- ------
<S> <C> <C> <C>
Balance - January 31, 1996 $ (37) $ - $ (37)
Unrealized translation adjustment (21) - (21)
------- ----- ------
Balance - January 31, 1997 (58) - (58)
Unrealized translation adjustment (51) - (51)
------- ----- ------
Balance - January 31, 1998 (109) - (109)
Unrealized translation adjustment (13) - (13)
Minimum pension liability adjustment
(net of tax benefit of $79) - (128) (128)
------ ------ ------
Balance - January 31, 1999 $(122) $(128) $(250)
====== ====== ======
</TABLE>
34
<PAGE>
New Accounting Pronouncements: During 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income;" SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." In accordance with SFAS No. 130, the Company expanded
its reporting and display of comprehensive income and its components in the
Statements of Consolidated Shareholders' Equity. SFAS No. 131 establishes new
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
Pursuant to SFAS No. 131, the Company modified its disclosures on segment
reporting included in Note 11. The new disclosures required for pensions and
other postretirement benefits according to SFAS No. 132 are included in Note 10.
The adoption of these statements had no effect on the Company's reported
financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement is effective for fiscal years beginning after
June 15, 1999. Management is still assessing the effects adoption of SFAS No.
133 will have on its financial position, results of operations and cash flows.
Reclassifications: Certain previously reported amounts have been reclassified to
conform to the current period presentation.
Note 3 - Related Party Transactions
The Company leases its primary building from two significant management
stockholders under a lease agreement. During 1998 and 1997, the Company paid
$565,000 and $567,000, respectively, under this agreement. The Company also
provides certain services and facilities to companies primarily owned by those
management shareholders and purchases certain services from those companies
under management services agreements. During 1998, the Company received $465,000
and paid $369,000 under such agreements. The Company received $666,000 and paid
$297,000 under such agreements in 1997. Prior to the Company's acquisition of
Midwesco, Midwesco provided certain services and facilities to the Company and
the Company provided certain services to Midwesco under management services
agreements. Pursuant to such agreements, the Company reimbursed Midwesco
$600,000 and Midwesco reimbursed the Company $35,000 during 1996.
The lease agreement and the management services agreements have been approved by
the Company's Independent Directors (Note 13). Management of the Company
believes the amounts paid and received under these agreements were comparable to
those which would have been paid and received under arms-length transactions.
Note 4 - Acquisitions
Nordic Air
On November 2, 1998, the Company acquired all the outstanding shares of capital
stock of Nordic Air for an aggregate purchase price of $2,005,000. Financing was
provided by borrowings under the Company's unsecured line of credit, an
overdraft facility from a Danish bank, and a note payable to the sellers. Nordic
Air, located in Nakskov, Denmark, is a manufacturer of pleated air filtration
products.
The acquisition was accounted for as a purchase and the accounts of Nordic Air
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 ($1,587,000) of the
purchase price over the fair value of net assets acquired has been recorded as
goodwill and is being amortized over a 25 year period on the straight-line
basis.
35
<PAGE>
Boe-Therm
On June 1, 1998, the Company acquired certain assets and liabilities of
Boe-Therm, including inventory and manufacturing facilities, for an aggregate
purchase price of $2,173,000. Financing was provided by borrowings under the
Company's unsecured line of credit, loans obtained from a Danish bank and a note
payable to the seller. Boe-Therm, located in Assens, Denmark, is a manufacturer
of liquid chillers for removing heat from industrial processes.
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.
TDC
On December 3, 1997, the Company acquired all the outstanding shares of capital
stock of TDC, together with its offices and manufacturing facility, for an
aggregate purchase price of $9,732,000. This amount includes $2,003,000 to repay
the debt of TDC and options to purchase 75,000 shares of MFRI, the fair value of
which were estimated to be $369,000 on the date issued using the Black-Scholes
option pricing model. (See Note 13.)
The acquisition was accounted for as a purchase and the accounts of TDC 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 ($5,151,000) of the
purchase price over the fair value of net assets acquired has been recorded as
goodwill and is being amortized over a 40 year period on the straight-line
basis.
Thermal Care
On December 30, 1996, through the Midwesco Merger, the Company acquired the
Thermal Care business of Midwesco, for 406,000 shares of the Company's stock
(net of 1,718,000 shares previously owned by Midwesco and canceled in the
merger), valued at $7.88 per share or $3,204,000.
The acquisition has been accounted for as a purchase and the accounts of Thermal
Care have been included in the consolidated financial statements since the date
of acquisition, including income from operations ($137,000), net income
($84,000) and net income per common share ($0.02). The purchase price was
allocated to the assets and liabilities acquired, based on their estimated fair
values. The excess ($3,094,000) of the purchase price over the fair value of net
assets acquired has been recorded as goodwill and is being amortized over a 25
year period on the straight line basis.
The pro forma results of operations as if the acquisition of Thermal Care had
occurred on February 1, 1996 are presented below. Included in the pro forma
results for the year 1996, is a pro forma pretax provision of $400,000 (after
tax $244,000 or $0.05 per share) for the estimated ultimate cost of three
lawsuits which had been considered in negotiating the acquisition price of the
Midwesco Merger and which, upon the consummation of the Midwesco Merger, became
the obligations of MFRI. Pursuant to the agreement relating to the Midwesco
Merger, should MFRI spend more than an aggregate of $400,000 in costs, expenses,
judgments or settlements of such lawsuits, additional amounts would be paid from
a special escrow holding 66,890 shares of MFRI common stock, such escrow having
been established as part of the Midwesco Merger. During 1997 and 1998, the
Company settled the three lawsuits. Costs associated with the lawsuits,
including settlement costs, exceeded the reserve and the special escrow by
$223,000 and, accordingly, all 66,890 shares were called from the special
escrow.
36
<PAGE>
The following represents the unaudited pro forma results of operations as if the
acquisition of Thermal Care had occurred on February 1, 1996.
(In thousands except per share information)
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net sales $111,793
Net income $ 3,362
Net income per common share - basic $ 0.68
Weighted average common shares outstanding 4,945
</TABLE>
Note 5 - Retention Receivable
Retention of $512,000 and $1,170,000 is included in the balance of trade
accounts receivable at January 31, 1999 and 1998, respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
-------- ---------
<S> <C> <C>
Costs incurred on uncompleted contracts $15,462 $13,470
Estimated earnings 3,979 3,714
-------- --------
Earned revenue 19,441 17,184
Less billings to date 17,437 14,156
-------- --------
Total $ 2,004 $ 3,028
======== ========
Classified as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,533 $ 3,489
Billings in excess of costs and estimated
earnings on uncompleted contracts (529) (461)
--------- --------
Total $ 2,004 $ 3,028
========= ========
</TABLE>
Note 7 - Debt
Long-term debt consists of the following:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Unsecured 7.21% senior notes due 2007 $15,000 $15,000
Unsecured 6.97% senior notes due 2008 10,000 -
Revolving bank loan 300 10,950
Industrial Revenue Bonds, net 5,258 6,300
Mortgage notes 2,881 843
Capitalized lease obligations (Note 8) 2,606 2,611
Short-term credit arrangements 674 -
Note payable for Nordic Air acquisition 527 -
Term loans 508 -
Other 202 144
------- -------
37,956 35,848
Less current maturities 1,664 573
------- -------
Total $36,292 $35,275
======= =======
</TABLE>
37
<PAGE>
On December 15, 1996, the Company entered into a private placement with
institutional investors of $15,000,000 of 7.21 percent unsecured senior notes
due January 31, 2007 (the "Notes due 2007"). The Notes due 2007 require level
principal payments beginning January 31, 2001 and continuing annually
thereafter, resulting in a seven-year average life. The note purchase agreement
contains certain financial covenants. At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.
On September 17, 1998, the Company entered into a private placement with
institutional investors of $10,000,000 of 6.97 percent unsecured senior notes
due September 17, 2008 (the "Notes due 2008"). The Notes due 2008 require level
principal payments beginning September 17, 2002 and continuing annually
thereafter, resulting in a seven-year average life. The note purchase agreement
contains certain financial covenants. At January 31, 1999, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver and
amendment for such non-compliance.
On December 19, 1996, the Company entered into an unsecured credit agreement
with a bank. Under the terms of the agreement as most recently amended, the
Company may borrow up to $6,000,000 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 January 31, 1999, the
prime rate was 7.75 percent and the margin added to the LIBOR rate, which is
determined each quarter based on the Company's interest coverage ratio, was 2.50
percent. The Company had borrowed $300,000 under the revolving line of credit at
January 31, 1999. Additionally, $658,000 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.
The credit agreement contains certain financial covenants. As of January 31,
1999, the Company was not in compliance with four such financial covenants. The
Company has obtained a waiver and amendment for such non-compliance.
On September 14, 1995, the Filtration Products Business in Winchester, Virginia
received $3,150,000 proceeds of Industrial Revenue Bonds, which mature on August
1, 2007, and on October 18, 1995, the Piping Systems Business in Lebanon,
Tennessee received $3,150,000 proceeds of Industrial Revenue Bonds, which mature
on September 1, 2007. These bonds are fully secured by bank letters of credit,
which the Company expects to renew, reissue or extend prior to each expiration
date during the term of the bonds. The bonds bear interest at a variable rate,
which approximates five percent per annum, including letter of credit and
remarketing fees. The bond proceeds were 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 and ended
during the Company's fiscal quarter ended October 31, 1998. Each bond indenture
established a trusteed project fund for deposit of the bond proceeds, the
balance of which was invested as authorized by the indenture and limited by
applicable law. As of October 31, 1998, $1,042,000 of the invested funds had not
been disbursed and will be used to redeem a portion of the principal of the
bonds outstanding. As provided by the indenture, the Company has directed the
trustee to apply such funds to the redemption of Bonds at the earliest possible
date, and has reduced the principal portion of the bonds by the amount of
unspent funds at January 31, 1999.
On May 8, 1996, the Company purchased a 10.3-acre parcel of land with a
67,000-square foot building adjacent to its Midwesco Filter property in
Winchester, Virginia for approximately $1.1 million. The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the industrial revenue bonds described above.
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.
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 4,500,000
Danish krone ("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. The second loan in the amount of 2,750,000 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.
38
<PAGE>
The Company also has short-term credit arrangements utilized by its European
subsidiaries. These credit arrangements are generally in the form of overdraft
facilities or accounts receivable factoring arrangements at rates competitive in
the countries in which the Company operates. At January 31, 1999, borrowings
under these credit arrangements totaled $674,000; an additional $283,000
remained unused. The Company also had outstanding letters of credit in the
amount of $273,000 to guarantee performance to third parties of various European
trade activities and contracts.
Scheduled maturities, excluding the revolving line of credit, for each of the
next five years are as follows: 1999 - $1,664,000; 2000 - $2,527,000; 2001 -
$2,478,000; 2002 - $3,911,000; 2003 - $4,551,000; thereafter $22,525,000.
Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Land, building and improvements $1,197 $1,197
Machinery and equipment 322 322
Furniture and office equipment 724 299
Transportation equipment 893 1,165
------ ------
3,136 2,983
Less accumulated amortization 1,193 1,003
------ ------
$1,943 $1,980
====== ======
</TABLE>
The Company leases the land, building and improvements from a partnership owned
by two significant management stockholders. Under the provisions of the lease,
the Company pays all expenses related to the property. The lease, which expires
in November 2017, provides for rental increases at specified intervals over the
term of the lease.
The Company sold equipment for $1,345,000 in November 1998. The equipment was
leased back from the purchaser for a period of five years. No gain or loss was
recognized on this transaction and the lease is being accounted for as an
operating lease. The lease requires the Company to pay customary operating and
repair expenses. The lease also contains a renewal option at lease termination
and purchase options at amounts that approximate fair market value at the end of
54 months and at lease termination.
The Company leases manufacturing and warehouse facilities, transportation
equipment and office space under non-cancelable operating leases, which expire
through 2010. Management expects that these leases will be renewed or replaced
by other leases in the normal course of business.
At January 31, 1999, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
------- ---------
<S> <C> <C>
1999 $ 580 $ 617
2000 477 464
2001 420 359
2002 418 350
2003 418 296
Thereafter 4,314 333
------- -------
6,627 2,419
Less amount representing interest 4,021 -
------- -------
Present value of future minimum lease
payments (Note 7) $ 2,606 $ 2,419
======= =======
</TABLE>
Rental expense for operating leases was $508,000, $429,000 and 163,000 in 1998,
1997 and 1996, respectively.
39
<PAGE>
Note 9 - Income Taxes
The following is a summary of domestic and foreign income before income taxes:
<TABLE>
<CAPTION>
(In thousands)
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Domestic $1,425 $4,303 $5,087
Foreign (171) 281 317
------- ------ ------
$1,254 $4,584 $5,404
======= ====== ======
</TABLE>
Components of income tax expense are as follows:
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 788 $1,441 $1,835
Foreign 154 (69) 218
State and other 230 178 310
-------- ------- -------
1,172 1,550 2,363
Deferred (254) 276 (189)
-------- ------- -------
Total $ 918 $1,826 $2,174
======== ======= =======
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate is as follows:
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate $ 426 $1,559 $1,837
Foreign rate tax differential 52 - 86
State taxes, net of federal benefit 61 116 170
Amortization of cost in excess
of assets acquired 115 73 29
Tax audit issues 109 - -
Adjustment to estimated income
tax accruals 62 - -
Other - net 93 78 52
-------- ------- -------
Total $ 918 $1,826 $2,174
======== ======= =======
</TABLE>
Components of the deferred income tax asset balances are as follows:
<TABLE>
<CAPTION>
(In thousands)
1998 1997
------ ------
<S> <C> <C>
Current:
Accrued commissions $1,273 $1,317
Other accruals not yet deducted 764 504
Non-qualified deferred
compensation 177 58
Inventory valuation allowance 163 93
NOL carryforward 94 -
Allowance for doubtful accounts 66 52
Inventory uniform capitalization 54 36
Foreign acquisition adjustments 45 42
Other 176 74
------- -------
2,812 2,176
Non-current 367 230
------- -------
Total $3,179 $2,406
======= =======
</TABLE>
40
<PAGE>
Components of the deferred income tax liability balance are as follows:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Depreciation $1,743 $1,180
Foreign acquisition adjustments 123 249
Goodwill 276 206
Other 115 48
------- -------
Total $2,257 $1,683
====== ======
</TABLE>
Note 10 - Employee Retirement Plans
Pension Plan
Midwesco Filter has a defined benefit plan covering its hourly rated employees.
The benefits are based on fixed amounts multiplied by years of service of
retired participants. The funding policy is to contribute such amounts as are
necessary to provide for benefits attributed to service to date and those
expected to be earned in the future. The amounts contributed to the plan are
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. Midwesco Filter may contribute
additional amounts at its discretion.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plan:
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accumulated benefit obligations:
Vested benefits $1,123 $ 911
======= =======
Accumulated benefits $1,149 $ 932
======= =======
Change in benefit obligation:
Benefit obligation - beginning of year $ 985 $ 782
Service cost 49 42
Interest cost 70 57
Amendments - 91
Actuarial (gain) loss 91 53
Benefits paid (43) (40)
-------- -------
Benefit obligation - end of year 1,152 985
-------- -------
Change in plan assets:
Fair value of plan assets - beginning of year 972 1,004
Actual return on plan assets (162) (9)
Company contributions - 17
Benefits paid (43) (40)
-------- -------
Fair value of plan assets - end of year 767 972
-------- -------
Funded status (385) (13)
Unrecognized prior service cost 101 122
Unrecognized actuarial (gain) loss 210 (124)
-------- -------
Prepaid (accrued) benefit cost recognized in the
statement of financial position $ (74) $ (15)
========= ========
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability $ (382) $ (15)
Intangible asset 101 -
Accumulated other comprehensive income 207 -
-------- -------
Net amount recognized $ (74) $ (15)
======== =======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Weighted-average assumptions at end of year:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase N/A N/A
Components of net periodic benefit cost:
Service cost 49 $ 42
Interest cost 70 57
Expected return on plan assets (79) (79)
Amortization of prior service cost 21 2
Recognized actuarial (gain) loss (2) (12)
--------- --------
Net periodic benefit cost $ 59 $ 10
========= ========
</TABLE>
401(k) Plan
The domestic employees of the Company participate in the MFRI, Inc. Employee
Savings and Protection Plan, which is applicable to all employees except certain
employees covered by collective bargaining agreement benefits. The plan allows
employee pretax payroll contributions of up to 16 percent of total compensation.
Prior to February 1, 1995, the Company made contributions to this 401(k) Plan in
an amount equal to 25 percent of each participant's contribution, up to a
maximum of 1 percent of each participant's salary. Beginning February 1, 1995,
the Company contribution was increased to 50 percent of each participant's
contribution, up to a maximum of 2 percent of each participant's salary.
Contributions to the 401(k) Plan and its predecessors were $256,000, $243,000,
and $194,000 for the years ended January 31, 1999, 1998 and 1997, respectively.
Deferred Compensation Plans
The Company also has deferred compensation agreements with key employees.
Vesting is based on years of service. Life insurance contracts have been
purchased which may be used to fund the Company's obligation under these
agreements. The charges to expense were $247,000, $150,000 and $119,000 in 1998,
1997 and 1996, respectively.
Note 11 - Business Segment and Geographic Information
Business Segment Information
The Company has three reportable segments: the Filtration Products Business, the
Piping Systems Business and the Industrial Process Cooling Equipment Business.
The Filtration Products Business manufactures and sells a wide variety of filter
elements for air filtration and particulate collection systems. The Piping
Systems Business engineers, designs and manufactures specialty piping systems
and leak detection and location systems. The Industrial Process Cooling
Equipment Business engineers, designs and manufactures chillers, mold
temperature controllers, cooling towers, plant circulating systems and coolers
for industrial process applications.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. (See Note 2.) The Company evaluates
performance based on gross profit and income or loss from operations.
Intersegment sales and transfers are accounted for as if sales or transfers were
to third parties (i.e., at current market prices) and were not material for
1998, 1997 and 1996.
42
<PAGE>
MFRI's reportable segments are strategic businesses that offer different
products and services. Each is managed separately based on fundamental
differences in their operations. Each strategic business was acquired as a unit
and management at the time of acquisition was retained.
The following is information relevant to the Company's business segments:
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net Sales:
Filtration Products $ 49,155 $ 40,145 $37,563
Piping Systems 45,849 46,232 54,194
Industrial Process Cooling Equipment 26,956 24,863 1,816
--------- --------- --------
Total Sales $121,960 $111,240 $93,573
========= ========= ========
Gross Profit:
Filtration Products $ 11,265 $ 10,243 $ 9,862
Piping Systems 9,861 9,723 11,373
Industrial Process Cooling Equipment 8,540 7,969 570
--------- --------- ---------
Total Gross Profit $ 29,666 $ 27,935 $21,805
========= ========= =========
Income from Operations:
Filtration Products $ 3,341 $ 4,140 $ 4,615
Piping Systems 1,444 2,347 4,033
Industrial Process Cooling Equipment 2,378 2,836 137
Corporate (3,332) (3,099) (2,389)
--------- --------- --------
Total Income from Operations $ 3,831 $ 6,224 $ 6,396
========= ========= ========
Segment Assets:
Filtration Products $ 40,262 $ 36,116 $21,833
Piping Systems 36,424 38,701 36,415
Industrial Process Cooling Equipment 15,330 12,290 11,413
Corporate 5,970 6,288 5,667
-------- --------- --------
Total Segment Assets $ 97,986 $ 93,395 $75,328
======== ========= ========
Capital Expenditures:
Filtration Products $ 2,010 $ 788 $ 1,371
Piping Systems 2,854 2,713 1,197
Industrial Process Cooling Equipment 596 181 10
Corporate 577 703 148
--------- --------- --------
Total Capital Expenditures $ 6,037 $ 4,385 $ 2,726
========= ========= ========
Depreciation and Amortization:
Filtration Products $ 1,154 $ 648 $ 477
Piping Systems 1,407 1,236 1,049
Industrial Process Cooling Equipment 240 155 14
Corporate 728 676 270
--------- --------- --------
Total Depreciation and Amortization $ 3,529 $ 2,715 $ 1,810
========= ========= ========
</TABLE>
43
<PAGE>
Geographic Information
Net sales are attributed to a geographic area based on the destination of the
product shipment. Long-lived assets by geographic area are based on the physical
location of the assets.
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net Sales:
United States $106,600 $ 93,632 $76,340
Canada 2,511 3,332 4,218
Europe 8,525 7,358 7,063
Mexico, South America, Central America
and the Carribean 1,867 4,533 1,275
Asia 1,487 2,149 3,551
Other 970 236 1,126
--------- --------- --------
Total Net Sales $121,960 $111,240 $93,573
========= ========= ========
Long-Lived Assets:
United States $ 24,846 $ 22,813 $14,901
Europe 2,003 217 153
--------- --------- --------
Total Long-Lived Assets $ 26,849 $ 23,030 $15,054
========= ========= ========
</TABLE>
Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash paid for:
Income taxes, net of refunds received $ 1,378 $ 2,218 $ 2,225
========= ========= ========
Interest, net of capitalized amounts $ 2,447 $ 1,812 $ 1,076
========= ========= ========
Noncash Financing and Investing Activities:
Fixed assets acquired under capital leases $ 425 $ 882 $ 643
========= ========= ========
Shares returned from escrow due to
settlement of legal contingencies
related to the Midwesco Merger $ 527 $ - $ -
========= ========= ========
Funds held in trust to repay Industrial
Revenue Bonds $ 1,042 $ - $ -
========= ========= ========
Purchase of businesses:
Fair value of assets acquired (net of
cash received) $ 3,076 $ 7,250 $ 9,921
Cost in excess of net assets acquired 1,939 4,822 3,311
Cash paid (net of cash acquired) (3,132) (7,293) (211)
Notes payable to sellers (829) - -
Fair value of stock options issued - (369) -
Common stock issued - - (3,418)
--------- --------- --------
Liabilities assumed $ 1,054 $ 4,410 $ 9,603
========= ========= ========
</TABLE>
44
<PAGE>
Note 13 - Stock Options
Under the 1989, 1993 and 1994 Stock Option Plans ("Option Plans"), 150,000,
100,000 and 250,000 shares of common stock, respectively, are reserved for
issuance to key employees of the Company and its affiliates as well as selected
advisors and consultants to the Company. In addition, under the 1994 Option
Plan, an additional one percent of shares of the Company's common stock
outstanding have been added to the shares reserved for issuance each February 1,
beginning February 1, 1995 and ending February 1, 1997, and an additional two
percent of shares of the Company's common stock outstanding are added to the
shares reserved for issuance each February 1, beginning February 1, 1998. Option
exercise prices will be no less than fair market value for the common stock on
the date of grant. The options granted under the Option Plans may be either
non-qualified options or incentive options. Such options vest ratably over four
years and are exercisable for up to ten years from the date of grant.
Pursuant to the 1990 Independent Directors' Stock Option Plan ("Directors'
Plan"), an option to purchase 10,000 shares of common stock is granted
automatically to each director who is not an employee of the Company
("Independent Director") on the date the individual is first elected as a
director of the Company. In addition, on June 20, 1995, options to purchase
1,000 shares were granted to each Independent Director and options to purchase
1,000 shares are to be granted to each Independent Director annually each May 1
thereafter. Option exercise prices will be at fair market value of the common
stock on the date of grant. Such options vest ratably over four years and are
exercisable up to ten years from the date of the grant.
In connection with the purchase agreement relating to the acquisition of TDC,
the Company issued stock options to purchase 75,000 shares of common stock at
$9.60. These options may be exercised through November 2008.
The following summarizes the changes in options under the plans:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------- ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 740,875 $7.04 479,550 $6.65
Granted 118,000 7.96 288,000 7.63
Exercised (8,375) 6.39 (18,550) 6.21
Cancelled (16,500) 7.99 (8,125) 7.02
-------- ----- -------- -----
Outstanding at end of year 834,000 $7.16 740,875 $7.04
======== ===== ======== =====
Options exercisable at year-end 491,350 412,850
======== ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at January 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Range of Number Weighted Average Number
Exercise Outstanding at Remaining Weighted Average Exercisable at Weighted Average
Prices Jan. 31, 1999 Contractual Life Exercise Price Jan. 31, 1999 Exercise Price
- ----------- -------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00-$4.99 91,350 6.3 years $4.45 66,450 $4.45
$6.00-$6.99 436,450 7.0 years 6.85 226,700 6.81
$7.00-$7.99 10,000 5.0 years 7.25 10,000 7.25
$8.00-$8.99 221,200 5.2 years 8.05 113,200 8.00
$9.00-$9.99 75,000 9.8 years 9.60 75,000 9.60
-------- --------- ----- ------- -----
834,000 6.7 years $7.16 491,350 $7.20
======== ========= ===== ======= =====
</TABLE>
45
<PAGE>
The Company's stock option plans are accounted for using the intrinsic value
method and, accordingly, no compensation cost has been recognized. Had
compensation cost been determined using the fair value method in 1998, 1997 and
1996, the Company's pro forma net income and earnings per share would have been
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Net income - as reported (in thousands) $336 $2,758 $3,230
Net income - pro forma (in thousands) $ 70 $2,577 $3,153
Net income per common share - basic,
as reported $0.07 $0.55 $0.71
Net income per common share - basic,
pro forma $0.01 $0.51 $0.69
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and 1996
are estimated at $4.01, $4.04 and $3.83 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Expected volatility 37.90% 39.61% 43.00%
Expected life in years 7.0 7.0 7.0
Risk-free interest rate 5.64% 6.44% 6.58%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
Note 14 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years 1998 and 1997:
(In thousands)
<TABLE>
<CAPTION>
1998
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Sales $29,990 $32,734 $32,418 $26,818
Gross Profit 7,762 8,435 7,990 5,479
Net Income 540 739 546 (1,489)
Per Share Data:
Net income - basic $0.11 $0.15 $0.11 $(0.30)
Net income - diluted $0.11 $0.14 $0.11 $(0.30)
1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $25,764 $30,215 $28,518 $26,743
Gross Profit 6,250 8,245 7,324 6,116
Net Income 588 1,251 911 8
Per Share Data:
Net income - basic $0.12 $0.25 $0.18 $ -
Net income - diluted $0.12 $0.24 $0.18 $ -
</TABLE>
46
<PAGE>
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
- ------------------------------- ------------- ----------------------------- --------------- ----------
Column A Column B Column C Column D Column E
- ------------------------------- ------------- ----------------------------- --------------- ----------
Additions
-----------------------------
(1)
Balance at Charged to (2) Balance at
Beginning of Costs and Charged to Other Deductions from End of
Description Period Expenses Accounts 1 Reserves 2 Period
- ------------------------------- ------------- ----------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 31, 1999:
Allowance for possible
losses in collection of
trade receivables $209,000 $218,000 $ 16,000 $214,000 $229,000
======== ======== ======== ======== ========
Year Ended January 31, 1998:
Allowance for possible
losses in collection of
trade receivables $270,000 $108,000 $ - $169,000 $209,000
======== ======== ======== ======== ========
Year Ended January 31, 1997:
Allowance for possible
losses in collection of
trade receivables $199,000 $ 99,000 $ 10,000 $ 38,000 $270,000
======== ======== ======== ======== ========
</TABLE>
1 Acquired with purchase of business.
2 Uncollectible accounts charged off.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MFRI, INC.
Date: April 30, 1999 By: /s/ David Unger
---------------------------------------------
David Unger,
Chairman of the Board of Directors (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
DAVID UNGER* Director and Chairman of the )
Board of Directors (Principal )
Executive Officer) )
)
HENRY M. MAUTNER* Director ) April 30, 1999
)
GENE K. OGILVIE* Director )
)
FATI A. ELGENDY* Director )
)
BRADLEY E. MAUTNER* Director )
)
DON GRUENBERG* Director )
)
MICHAEL D. BENNETT* Vice President, Secretary and )
Treasurer (Principal Financial )
and Accounting Officer) )
)
ARNOLD F. BROOKSTONE* Director )
)
EUGENE MILLER* Director )
)
STEPHEN B. SCHWARTZ* Director )
)
DENNIS KESSLER* Director )
)
*By:/s/ David Unger Individually and as Attorney-in- )
------------------- Fact )
David Unger )
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page No.+
----------- ----------- ---------
<S> <C> <C>
2.1 Stock Purchase Agreement, dated December 3,
1997, by and between Roy E. Greenlees,
Lorie Greenlees, Janet Marshall (collectively
"Sellers") and MFRI, Inc. ("Buyer")
[Incorporated by reference to Exhibit 2.1 to
the Company's current report on Form 8-K
dated December 12, 1997 (SEC File No. 0-18370)]
3(i) Certificate of Incorporation of MFRI, Inc.
[Incorporated by reference to Exhibit 3.3 to
Registration Statement No. 33-70298]
3(ii) By-Laws of MFRI, Inc. [Incorporated by reference
to Exhibit 3.4 to Registration Statement
No. 33-70298]
4 Specimen Common Stock Certificate [Incorporated
by reference to Exhibit 4 to Registration
Statement No. 33-70794]
10(a) Management Services Agreement dated December 30,
1996 by and between MFRI, Inc. and Midwesco, Inc.
(formerly known as Midwesco-Illinois, Inc.)
[Incorporated by reference to Exhibit 10(a) to
the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997**]
10(b) 1989 Stock Option Plan, as amended [Incorporated
by reference to Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the fiscal year
ended January 31, 1990*]
10(c) 1993 Stock Option Plan [Incorporated by reference
to Exhibit 10.4 of Registration Statement
No. 33-70794]
10(d) 1994 Stock Option Plan [Incorporated by
reference to Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the fiscal year
ended January 31, 1994 (SEC File No. 0-18370)]
10(e) 1990 Independent Directors Stock Option Plan,
as amended [Incorporated by reference to Exhibit
10.8 to Registration Statement No. 33-70794)]
10(f) Form of Directors Indemnification Agreement
[Incorporated by reference to Exhibit 10.7 to
Registration Statement No. 33-70298]
21 Subsidiaries of MFRI, Inc.
23 Consent of Deloitte & Touche LLP
24 Power of Attorney executed by directors and
officers of the Company
- --------------------------------------------------
+ Included only in manually signed original
* SEC File No. 33-31850
** SEC File No. 0-18370
</TABLE>
49
<PAGE>
Exhibit 21
MFRI, Inc. has the following wholly owned subsidiaries:
1. Midwesco Filter Resources, Inc. (Delaware corporation)
2. Perma-Pipe, Inc. (Delaware corporation)
3. TDC Filter Manufacturing, Inc. (Delaware corporation)
50
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21951 on Form S-3, Registration Statement No. 333-44787 on Form S-3 and
Registration Statement No. 333-08767 on Form S-8, of MFRI, Inc. of our report
dated April 30, 1999, appearing in the Annual Report on Form 10-K of MFRI,
Inc. for the year ended January 31, 1999 and to the reference to us under the
heading "Experts" in the Prospectus' which are part of Registration Statements
No. 333-21951 and No. 333-44787.
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 30, 1999
51
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of MFRI, INC., a Delaware corporation (the
"Corporation"), does hereby constitute and appoint DAVID UNGER, HENRY M.
MAUTNER, GENE K. OGILVIE, FATI A. ELGENDY, DON GRUENBERG, BRADLEY E. MAUTNER and
MICHAEL D. BENNETT, with full power to each of them to act alone, as the true
and lawful attorneys and agents of the undersigned, with full power of
substitution and resubstitution to each of said attorneys, to execute, file or
deliver any and all instruments and to do any and all acts and things which said
attorneys and agents, or any of them, deem advisable to enable the Corporation
to comply with the Securities Exchange Act of 1934, as amended, and any
requirements of the Securities and Exchange Commission in respect thereto,
relating to the Corporation's annual report on Form 10-K for the fiscal year
ended January 31, 1999, including specifically, but without limitation of the
general authority hereby granted, the power and authority to sign his name as
director or officer, or both, of the Corporation, as indicated below opposite
his signature, to such annual report on Form 10-K or any amendments or papers
supplemental thereto; and each of the undersigned does hereby fully ratify and
confirm all that said attorneys and agents, or any of them, or the substitute of
any of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of this 13th day of April, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ David Unger /s/ Arnold F. Brookstone
- ------------------------------------- -------------------------------------
David Unger, Chairman of the Board of Arnold F. Brookstone, Director
Directors and President
/s/ Henry M. Mautner /s/ Don Gruenberg
- -------------------------------------- -------------------------------------
Henry M. Mautner, Vice Chairman of the Don Gruenberg, Director and Vice
Board of Directors President
/s/ Gene K. Ogilvie /s/ Bradley E. Mautner
- -------------------------------------- -------------------------------------
Gene K. Ogilvie, Director and Vice Bradley E. Mautner, Director and Vice
President President
/s/ Michael D. Bennett /s/ Eugene Miller
- -------------------------------------- -------------------------------------
Michael D. Bennett, Vice President, Eugene Miller, Director
Secretary and Treasurer
/s/ Fati A. Elgendy /s/ Stephen B. Schwartz
- -------------------------------------- -------------------------------------
Fati A. Elgendy, Director and Vice Stephen B. Schwartz, Director
President
/s/ Dennis Kessler
- --------------------------------------
Dennis Kessler, Director
</TABLE>
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1999 AND THE CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 579,000
<SECURITIES> 0
<RECEIVABLES> 21,121,000
<ALLOWANCES> 229,000
<INVENTORY> 22,227,000
<CURRENT-ASSETS> 52,169,000
<PP&E> 36,323,000
<DEPRECIATION> 9,474,000
<TOTAL-ASSETS> 97,986,000
<CURRENT-LIABILITIES> 22,693,000
<BONDS> 36,292,000
0
0
<COMMON> 49,000
<OTHER-SE> 35,719,000
<TOTAL-LIABILITY-AND-EQUITY> 97,986,000
<SALES> 121,960,000
<TOTAL-REVENUES> 121,960,000
<CGS> 92,294,000
<TOTAL-COSTS> 92,294,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,577,000
<INCOME-PRETAX> 1,254,000
<INCOME-TAX> 918,000
<INCOME-CONTINUING> 336,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
