SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18370
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MFRI, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3922969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
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(Address of principal executive offices) (Zip code)
(847) 966-1000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On September 8, 2000, there were 4,922,364 shares of the Registrant's common
stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying interim condensed consolidated financial statements of
MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all
adjustments which the Company's management considers necessary to present fairly
the financial position and results of operations for the periods presented.
These adjustments consist of normal recurring adjustments. Certain information
and footnote disclosures have been condensed or omitted pursuant to Securities
and Exchange Commission rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's annual
report on Form 10-K for the year ended January 31, 2000. The results of
operations for the quarter and six months ended July 31, 2000 are not
necessarily indicative of the results to be expected for the full year 2000.
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share information)
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $41,579 $36,505 $75,734 $66,044
Cost of sales 32,429 27,179 58,826 49,429
------- ------- ------- -------
Gross profit 9,150 9,326 16,908 16,615
Selling expense 3,177 2,991 6,379 5,816
General and administrative expense 3,838 3,806 7,245 7,211
------- ------- ------- -------
Income from operations 2,135 2,529 3,284 3,588
Interest expense - net 766 737 1,447 1,413
------- ------- ------- -------
Income before income taxes 1,369 1,792 1,837 2,175
Income taxes 561 735 753 892
------- ------- ------- -------
Net income $ 808 $ 1,057 $ 1,084 $ 1,283
======= ======= ======= =======
Net income per common share - basic $0.16 $0.21 $0.22 $0.26
Net income per common share - diluted $0.16 $0.21 $0.22 $0.26
Weighted average common shares outstanding 4,922 4,922 4,922 4,922
Weighted average common shares outstanding
assuming full dilution 4,922 4,932 4,923 4,927
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
<CAPTION>
July 31, January 31,
2000 2000
-------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 559 $ 665
Trade accounts receivable, net 28,208 22,842
Costs and estimated earnings in excess
of billings on uncompleted contracts 4,686 2,517
Deferred income taxes 2,433 2,432
Inventories 24,446 20,800
Prepaid expenses and other current assets 1,742 2,239
-------- -------
Total current assets 62,074 51,495
Property, Plant and Equipment, At Cost 42,172 40,261
Less Accumulated Depreciation 13,558 11,788
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Property, plant and equipment, net 28,614 28,473
Other Assets:
Goodwill, net 13,155 13,499
Other, net 4,168 4,309
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Total other assets 17,323 17,808
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Total Assets $108,011 $97,776
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 13,634 $ 9,700
Commissions payable 5,716 5,640
Current maturities of long-term debt 2,761 2,774
Billings in excess of costs and estimated
earnings on uncompleted contracts 800 317
Other current liabilities 5,070 5,322
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Total current liabilities 27,981 23,753
Long-Term Liabilities:
Long-term debt, less current maturities 39,000 33,755
Deferred income taxes 1,963 1,974
Other 311 466
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Total long-term liabilities 41,274 36,195
Stockholders' Equity:
Common stock, $ .01 par value,
authorized - 50,000 and 15,000 shares
at July 31 and January 31, respectively;
outstanding - 4,922 shares at July 31
and January 31 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 18,057 16,973
Accumulated other comprehensive loss (747) (591)
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Total stockholders' equity 38,756 37,828
--------- --------
Total Liabilities and Stockholders' Equity $108,011 $97,776
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Six Months Ended July 31,
-------------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,084 $ 1,283
Adjustments to reconcile net income
to net cash flows from operating activities:
Provision for depreciation and amortization 2,262 1,925
Change in operating assets and liabilities:
Trade accounts receivable (5,511) (3,390)
Costs and estimated earnings in excess of
billings on uncompleted contracts (2,180) (1,290)
Inventories (3,716) (1,457)
Prepaid expenses and other current assets 476 412
Current liabilities 4,379 1,389
Other operating assets and liabilities (194) (284)
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Net Cash Flows from Operating Activities (3,400) (1,412)
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Cash Flows from Investing Activities:
Proceeds from sale of property and equipment - 342
Net purchases of property and equipment (2,031) (1,830)
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Net Cash Flows from Investing Activities (2,031) (1,488)
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Cash Flows from Financing Activities:
Payments on capitalized lease obligations (111) (144)
Borrowings under revolving, term and mortgage loans 25,439 22,776
Repayment of debt (20,018) (19,629)
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Net Cash Flows from Financing Activities 5,310 3,003
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Effect of Exchange Rate Changes on Cash
and Cash Equivalents 15 (28)
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Net Increase (Decrease) in Cash and Cash Equivalents (106) 75
Cash and Cash Equivalents - Beginning of Period 665 579
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Cash and Cash Equivalents - End of Period $ 559 $ 654
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2000
1. Inventories consisted of the following:
<TABLE>
<CAPTION>
(In thousands) July 31, January 31,
2000 2000
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<S> <C> <C>
Raw materials $18,262 $15,851
Work in process 2,777 2,641
Finished goods 3,407 2,308
------- -------
Total $24,446 $20,800
======= =======
</TABLE>
2. Supplemental cash flow information:
<TABLE>
<CAPTION>
(In thousands) Six Months Ended July 31,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Cash paid for:
Interest, net of amounts capitalized $ 1,402 $ 899
Income taxes, net of refunds received 38 111
</TABLE>
3. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
2000 1999 2000 1999
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net income $ 808 $ 1,057 $1,084 $1,283
====== ======= ====== ======
Basic weighted average common
shares outstanding 4,922 4,922 4,922 4,922
Dilutive effect of stock options - 10 1 5
------ ------- ------ ------
Weighted average common shares
outstanding assuming full dilution 4,922 4,932 4,923 4,927
====== ====== ====== ======
Net income per common share - basic $0.16 $0.21 $0.22 $0.26
Net income per common share - diluted $0.16 $0.21 $0.22 $0.26
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 911,000 and 746,000 for the three months ended July 31, 2000 and
1999, respectively, and 859,000 and 790,000 for the six months ended
July 31, 2000 and 1999, respectively. These options were outstanding at the
end of each of the respective periods.
</TABLE>
4
<PAGE>
4. The components of comprehensive income, net of tax, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) July 31, July 31,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 808 $1,057 $1,084 $1,283
Change in foreign currency
translation adjustments 26 31 (156) (142)
------ ------ -------- -------
Comprehensive income $ 834 $1,088 $ 928 $1,141
====== ====== ====== ======
</TABLE>
Accumulated other comprehensive loss presented on the accompanying condensed
consolidated balance sheets consists of the following:
<TABLE>
<CAPTION>
(In thousands) July 31, January 31,
2000 2000
-------- -----------
<S> <C> <C>
Accumulated translation adjustment $(678) $(522)
Minimum pension liability adjustment (net of
tax benefit of $43) (69) (69)
------ ------
Total $(747) $(591)
====== ======
</TABLE>
5. The Company has three reportable segments under the criteria of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." 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.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales:
Filtration Products $16,378 $13,632 $30,763 $27,010
Piping Systems 16,912 15,302 29,613 24,606
Industrial Process Cooling Equipment 8,289 7,571 15,358 14,428
------- ------- ------- -------
Total Net Sales $41,579 $36,505 $75,734 $66,044
======= ======= ======= =======
Gross Profit:
Filtration Products $ 3,312 $ 3,504 $ 6,657 $ 6,797
Piping Systems 3,109 3,374 5,361 5,238
Industrial Process Cooling Equipment 2,729 2,448 4,890 4,580
------- ------- ------- -------
Total Gross Profit $ 9,150 $ 9,326 $16,908 $16,615
======= ======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
July 31, July 31,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income from Operations:
Filtration Products $ 1,104 $ 1,287 $ 2,069 $ 2,426
Piping Systems 1,217 1,506 1,763 1,680
Industrial Process Cooling Equipment 1,022 756 1,577 1,369
Corporate (1,208) (1,020) (2,125) (1,887)
-------- -------- -------- --------
Total Income from Operations $ 2,135 $ 2,529 $ 3,284 $ 3,588
======== ======== ======== =======
</TABLE>
6. 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, 2000. Management is still assessing the effects adoption of
SFAS No. 133 will have on its financial position, results of operations and
cash flows.
6
<PAGE>
Item 2. 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 report, which can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "continue",
"remains", "intend", "aim", "should", "prospects", "could", "future",
"potential", "believes", "plans" and "likely" or the negative thereof or other
variations thereon or comparable terminology, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors created thereby. These statements should be
considered as subject to the many risks and uncertainties that exist in the
Company's operations and business environment. Such risks and uncertainties
could cause actual results to differ materially from those projected. These
uncertainties include, but are not limited to, economic conditions, market
demand and pricing, competitive and cost factors, raw material availability and
prices, global interest rates, currency exchange rates, labor relations and
other risk factors.
RESULTS OF OPERATIONS
MFRI, Inc.
Three months ended July 31
Net sales of $41,579,000 for the quarter ended July 31, 2000 increased 13.9
percent from $36,505,000 for the comparable quarter last year. Gross profit of
$9,150,000 decreased 1.9 percent from $9,326,000 in the prior year quarter and
gross margin declined to 22.0 percent of net sales in the current year from 25.5
percent of net sales in the prior year. Net sales increased in all business
segments compared with the prior year quarter. Gross profit and gross margin in
the filtration products business and the piping systems business were adversely
impacted by lower margins on a large utility contract in the filtration products
business and higher than expected costs on two large contracts in the piping
systems business.
Net income decreased 23.6 percent to $808,000 or $0.16 per common share
(diluted) in the current year from $1,057,000 or $0.21 per common share
(diluted) in the prior year mainly due to the reduction in gross profit
discussed above and higher selling expenses in the current year.
7
<PAGE>
Six months ended July 31
Net sales of $75,734,000 for the six months ended July 31, 2000 increased 14.7
percent from $66,044,000 for the comparable period last year. Gross profit of
$16,908,000 in the current year increased 1.8 percent from $16,615,000 in the
prior year, while the gross margin decreased from 25.2 percent of net sales in
the prior year to 22.3 percent of net sales in the current year. Net sales
increased in all business segments compared with the prior year, while gross
profit increased in all business segments except the filtration products
business. Margins in the filtration products business and the piping systems
business were adversely impacted by lower margins on a large utility contract in
the filtration products business and higher than expected costs on two large
contracts in the piping systems business.
Net income decreased 15.5 percent to $1,084,000 or $0.22 per common share
(diluted) in the current year from $1,283,000 or $0.26 per common share
(diluted) in the prior year. The improved gross profit discussed above was more
than offset by higher selling expenses in the current year.
Filtration Products Business
Three months ended July 31
Net sales for the quarter ended July 31, 2000 increased 20.1 percent to
$16,378,000 from $13,632,000 for the comparable quarter one year ago. This
increase is the result of higher sales in all product categories.
Gross profit as a percent of net sales decreased from 25.7 percent in the prior
year to 20.2 percent in the current year, primarily as a result of competitive
pricing pressures, reduced manufacturing efficiencies and lower margins on a
large utility contract in the current year quarter.
Selling expense for the quarter ended July 31, 2000 increased to $1,387,000 from
$1,321,000 for the comparable quarter last year, but decreased as a percent of
net sales from 9.7 percent in the prior year to 8.5 percent in the current year.
The dollar increase is attributable to additional sales resources utilized by
the domestic operations in the current year.
General and administrative expense decreased to $821,000 or 5.0 percent of net
sales in the current year quarter from $896,000 or 6.6 percent of net sales for
the comparable period one year ago, primarily due to reduced profit-based
incentive compensation.
Six months ended July 31
Net sales for the six months ended July 31, 2000 increased 13.9 percent to
$30,763,000 from $27,010,000 for the comparable period last year. This increase
is the result of higher sales in all product categories.
Gross profit for the six months as a percent of net sales decreased from 25.2
percent in the prior year to 21.6 percent in the current year, primarily as a
result of competitive pricing pressures, reduced manufacturing efficiencies and
lower margins on a large utility contract in the current year six-month period.
8
<PAGE>
Selling expense for the six months ended July 31, 2000 increased to $2,884,000
from $2,623,000 for the comparable period last year, but decreased from 9.7
percent of net sales in the prior year to 9.4 percent of net sales in the
current year. The dollar increase is attributable to additional sales resources
utilized by the domestic operations in the current year.
General and administrative expense decreased to $1,704,000 or 5.5 percent of net
sales in the current year from $1,748,000 or 6.5 percent of net sales for the
comparable period one year ago. These changes are primarily due to reduced
profit-based incentive compensation.
Piping Systems Business
Three months ended July 31
Net sales increased 10.5 percent to $16,912,000 for the quarter ended July 31,
2000 from $15,302,000 for the prior year quarter. This increase was primarily
due to higher domestic sales, particularly sales of secondary containment piping
systems and long lines for mineral transportation, where the remaining $2.1
million of a $5.5 million sales order was realized in the second quarter of the
current year.
Gross profit as a percent of net sales decreased to 18.4 percent in the current
year from 22.0 percent in the prior year, mainly as a result of higher than
expected costs on two large contracts.
Selling expense increased from $700,000 to $765,000, but was relatively flat as
a percentage of net sales at 4.6 percent in the prior year compared with 4.5
percent in the current year. The dollar increase is primarily due to an increase
in commission expense for inside sales personnel in the current year resulting
from higher sales volume.
General and administrative expense decreased from $1,168,000 or 7.6 percent of
net sales in the prior year quarter to $1,127,000 or 6.7 percent of net sales in
the current year quarter, primarily resulting from reduced profit-based
incentive compensation.
Six months ended July 31
Net sales increased 20.3 percent to $29,613,000 for the six months ended July
31, 2000 from $24,606,000 in the prior year comparable period, mainly due to
increased domestic sales in the all product categories, partially offset by
lower sales in the foreign subsidiaries.
Gross profit as a percent of net sales decreased from 21.3 percent in the prior
year to 18.1 percent in the current year, mainly as a result of higher than
expected costs on two large contracts.
Selling expense increased from $1,363,000 in the prior year to $1,470,000 in the
current year, but decreased from 5.5 percent of net sales in the prior year to
5.0 percent of net sales in the current year. The dollar increase is primarily
due to an increase in commission expense for inside sales personnel in the
current year resulting from the higher sales volume.
9
<PAGE>
General and administrative expense decreased to $2,128,000 or 7.2 percent of net
sales in the current year from $2,195,000 or 8.9 percent of net sales in the
prior year, mainly because of lower product development costs in the current
year.
Industrial Process Cooling Equipment Business
Three months ended July 31
Net sales of $8,289,000 for the quarter ended July 31, 2000 increased 9.5
percent from $7,571,000 for the comparable quarter in the prior year, mainly due
to increased sales to original equipment manufacturers.
Gross margin increased from 32.3 percent of net sales in the prior year quarter
to 32.9 percent of net sales in the current year quarter, primarily due to a
more favorable product mix of sales.
Selling expense increased to $1,025,000 in the current year from $970,000 in the
prior year, but decreased as a percentage of net sales from 12.8 percent in the
prior year to 12.4 percent in the current year. The dollar increase is due to
additional personnel needed to expand into new markets.
General and administrative expense decreased from $722,000 or 9.5 percent of net
sales in the prior year to $682,000 or 8.2 percent of net sales in the current
year. This decrease was primarily the result of lower product development costs.
Six months ended July 31
Net sales of $15,358,000 for the six months ended July 31, 2000 increased 6.4
percent from $14,428,000 for the comparable period in the prior year, mainly due
to increased sales to original equipment manufacturers.
Gross margin was relatively flat at 31.8 percent of net sales in the current
year compared with 31.7 percent of net sales in the prior year.
Selling expense increased from $1,829,000 or 12.7 percent of net sales in the
prior year to $2,024,000 or 13.2 percent of net sales in the current year. This
increase was primarily the result of additional personnel needed to expand into
new markets, coupled with higher commission expenses.
General and administrative expense decreased from $1,382,000 or 9.6 percent of
net sales to $1,289,000 or 8.4 percent of net sales, mainly due to lower product
development costs.
10
<PAGE>
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
Three months ended July 31
General and administrative expense increased from $1,020,000 or 2.8 percent of
net sales in the prior year quarter to $1,208,000 or 2.9 percent of net sales in
the current year quarter, mainly due to higher medical claims expenses, building
occupancy costs and employee-related expenses.
Interest expense remained relatively flat at $766,000 for the quarter ended July
31, 2000 compared to $737,000 for the prior year quarter.
Six months ended July 31
General and administrative expenses increased from $1,887,000 in the prior year
to $2,125,000 in the current year, but decreased as a percentage of net sales
from 2.9 percent in the prior year to 2.8 percent in the current year. The
dollar increase was primarily due to increases in building occupancy costs and
employee-related expenses.
Interest expense remained relatively flat at $1,447,000 for the six months ended
July 31, 2000 compared to $1,413,000 for the comparable period in the prior
year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Operating Cash Flow
Cash and cash equivalents as of July 31, 2000 were $559,000 as compared to
$654,000 at July 31, 1999. For the six months ended July 31, 2000, $5,421,000
net proceeds of long-term debt were used to fund net operating activities of
$3,400,000, net purchases of property and equipment of $2,031,000 and payments
on capitalized lease obligations of $111,000.
Net cash used by operating activities was $3,400,000 for the six months ended
July 31, 2000, compared with $1,412,000 for the six months ended July 31, 1999.
The higher sales volume in the current year increased working capital
requirements, primarily to fund increases in inventories, accounts receivable
and costs and estimated earnings in excess of billings on uncompleted contracts.
Net cash used for investing activities for the six months ended July 31, 2000
was $2,031,000 versus $1,488,000 for the same period one year ago. Capital
expenditures increased from $1,830,000 in the prior year to $2,031,000 in the
current year. Proceeds from the sale of property and equipment in the prior year
were $342,000, mainly resulting from the sale of certain equipment in New
Iberia, Louisiana to a third party in July 1999. The Company leased back the
equipment from the third party purchaser.
11
<PAGE>
Net cash obtained from financing activities for the six months ended July 31,
2000 was $5,310,000 versus $3,003,000 for the comparable period in the prior
year. In the current year, the Company obtained $5,421,000 from net proceeds of
long-term debt and utilized $111,000 to repay capitalized lease obligations. The
Company obtained $3,147,000 from net proceeds of long-term debt and used
$144,000 to repay capitalized lease obligations in the prior year.
The Company's current ratio was 2.2 to 1 at July 31, 2000 and January 31, 2000.
Debt to total capitalization increased to 51.9 percent at July 31, 2000 from
49.1 percent at January 31, 2000.
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.
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.
On December 19, 1996, the Company entered into an unsecured credit
agreement with a bank. Under the terms of this agreement as in effect at July
31, 2000, the Company could borrow up to $6,000,000 under a revolving line of
credit. Interest rates were based on one of two options selected by the Company
at the time of each borrowing - the prime rate or the LIBOR rate plus a margin
for the term of the loan. At July 31, 2000, the prime rate was 9.50 percent and
the margin added to the LIBOR rate, which is determined each quarter based on a
financial statement ratio, was 1.50 percent. The Company had borrowed $5,500,000
under the revolving line of credit at July 31, 2000. The Company's policy is to
classify borrowings under the revolving line of credit as long-term debt since
the Company has the ability and the intent to maintain this obligation for
longer than one year. In addition, $528,000 was drawn under the agreement as
letters of credit. These letters of credit principally guarantee performance to
third parties as a result of various trade activities; guarantee performance of
certain repairs and payment of property taxes and insurance related to the
mortgage note secured by the manufacturing facility located in Cicero, Illinois;
and guarantee repayment of a foreign subsidiary's borrowings under an overdraft
facility. On August 8, 2000, the December 19, 1996 credit agreement was
terminated and the Company entered into an amended and restated unsecured credit
agreement with the bank. Under the terms of the August 8 agreement, the Company
may borrow up to $10,000,000 under a revolving line of credit, which matures on
July 31, 2003. Interest rates are based on one of three options selected by the
Company at the time of each borrowing, as follows: (1) the higher of the prime
rate or the federal funds rate plus 0.50 percent, (2) the LIBOR rate plus a
margin for the term of the loan, or (3) a rate quoted by the bank for the term
of the loan.
12
<PAGE>
In 1995, the Company received an aggregate of $6,300,000 of proceeds of
Industrial Revenue Bonds which were utilized by the Filtration Products Business
in Winchester, Virginia and the Piping Systems Business in Lebanon, Tennessee,
and which mature in August and September 2007, respectively. 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 re-marketing fees. On November 1, 1999,
the Company utilized $1,100,000 of unspent bond proceeds to redeem bonds
outstanding as provided in the indenture.
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 in Cicero, Illinois acquired with 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. In addition, on February 16, 1999, the
Company obtained a loan from a Danish bank in the amount of 850,000 DKK
(approximately $125,000) to finance the purchase of a parcel of land directly
adjacent to the manufacturing facility in Assens, Denmark. This loan is secured
by the land and building purchased.
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the Nordic Air acquisition. The loan bears interest at 6.22 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 at rates competitive in the countries in which the Company operates.
The Company anticipates that cash flows from operating activities will be
sufficient to support scheduled principal repayments through 2001.
13
<PAGE>
Item 3. 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 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, 2000, 1999, and 1998. During the
quarter ended April 30, 2000, the Company received a contract from the Greater
Toronto Airport Authority which is expected to generate approximately 5,600,000
Canadian dollar receipts net of Canadian dollar disbursements (approximately
$3,900,000). The Company is using forward contracts to hedge risk from exchange
rate changes in the Canadian dollar resulting from transactions related to this
contract. The forward contracts are scheduled to settle on or near the maturity
dates of the anticipated contract transactions.
The next phase of the Euro implementation, the changeover from national
currencies to the Euro, is scheduled to begin on January 1, 2002, and 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.
The impact on the Company's cash flows and results of operations from changes in
interest rates would not be material because a major portion of the Company's
long-term debt is fixed-rate or low interest rate Industrial Revenue Bond debt.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on June 27, 2000.
David Unger, Henry M. Mautner, Gene K. Ogilvie, Fati A. Elgendy, Bradley E.
Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene Miller, Stephen B. Schwartz
and Dennis Kessler were elected as directors of the Company at the meeting. The
following is a tabulation of the votes cast for, or withheld, with respect to
each nominee:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
David Unger 3,701,207 290,685
Henry M. Mautner 3,695,907 295,985
Gene K. Ogilvie 3,718,092 273,800
Fati A. Elgendy 3,720,292 271,600
Bradley E. Mautner 3,718,292 273,600
Don Gruenberg 3,718,292 273,600
Arnold F. Brookstone 3,712,992 278,900
Eugene Miller 3,712,992 278,900
Stephen B. Schwartz 3,718,292 273,600
Dennis Kessler 3,718,292 273,600
</TABLE>
14
<PAGE>
There were no votes cast against, nor were there any abstentions or broker
non-votes with respect to, any nominee.
At the annual meeting, the stockholders also considered and voted on a proposal
to amend the Company's Certificate of Incorporation to increase the authorized
shares of common stock from 15,000,000 shares to 50,000,000 shares. The result
of the vote was as follows: 3,263,979 shares of Common Stock were voted to
approve the plan, 721,362 shares were voted against, and 6,551 shares abstained.
There were no broker non-votes with respect to this proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFRI, INC.
Date: September 8, 2000 /s/ David Unger
---------------------------------------------
David Unger
Chairman of the Board of Directors
Date: September 8, 2000 /s/ Michael D. Bennett
---------------------------------------------
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
16
