SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 2000
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 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. /x/
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 $15,668,000 based on the closing sale price of $4.125 per share as
reported on the NASDAQ National Market on March 31, 2000.
The number of shares of the registrant's common stock outstanding at
March 31, 2000 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
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Proxy Statement for the 2000 annual meeting of III
stockholders
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FORM 10-K CONTENTS
JANUARY 31, 2000
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Item Page
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Part I:
1. Business 1
Company Profile 1
Filtration Products 2
Piping Systems 5
Industrial Process Cooling Equipment 7
Employees 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 24
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
Part III:
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and
Management 24
13. Certain Relationships and Related Transactions 24
Part IV:
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 25
Signatures 46
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PART I
Item 1. BUSINESS
Company Profile
MFRI, Inc. ("MFRI" or the "Company") 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 Thermal Care, Inc. ("Thermal Care"). Midwesco Filter, Perma-Pipe
and Thermal Care are wholly owned subsidiaries of MFRI. As used herein, unless
the context otherwise requires, the term "Company" includes MFRI and its
subsidiaries, Midwesco Filter, Perma-Pipe, Thermal Care, and their respective
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
and long lines for oil and mineral transportation. 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.
The information required with respect to the Company's lines of business is
included in the financial statements and related notes thereto.
1
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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 elements, 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, as well as air intake
filters for gas turbines.
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
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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 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 also
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
13 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, 2000 ("1999"),
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.
The Company markets its U.S. manufactured filtration products internationally
using domestically based sales resources to target major users in foreign
countries. Export sales, which were 11 percent of domestic filtration product
sales during the year ended January 31, 2000, have decreased recently as the
U.S. dollar has strengthened against certain foreign currencies. Nordic Air
Filtration A/S, a wholly owned subsidiary of the Company located in Nakskov,
Denmark, manufactures and markets pleated filter elements 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
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Backlog. As of January 31, 2000, the dollar amount of backlog (uncompleted firm
orders) for filtration products was $18,324,000. As of January 31, 1999, the
amount of backlog was $13,737,000. Approximately $2,500,000 of the backlog as of
January 31, 2000 is not expected to be completed in 2000.
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 times 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 division of Beacon Industrial
Group; 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. Ongoing
efforts 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
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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 and long lines for oil and mineral transportation. 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.
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. Long lines for oil and mineral transportation are used for
solution mining and long line transportation of heated hydrocarbons. 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 or internet connections. 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. They are also used in mission-critical facilities
such as those operated by web hosts, application service providers and internet
service providers, 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.
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 1999, no single
customer accounted for more than 10 percent of the net sales of the Company's
piping systems.
5
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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/or 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 sells
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, 2000, the dollar amount of backlog (uncompleted firm
orders) for piping and leak detection systems was $15,539,000, substantially all
of which is expected to be completed in 2000. As of January 31, 1999, the amount
of backlog was $16,942,000.
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.
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.
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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 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.
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.
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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 fiberglass reinforced polyester 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. Boe-Therm A/S ("Boe-Therm"), a wholly owned subsidiary of
the Company, manufactures a complete line of temperature control units,
including oil units and negative pressure units. The Company 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 and chemicals needed to properly treat
the water. While a relatively small part of the Company'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 suppliers and usually drop-shipped
directly to customers.
Parts. The Company strives to fill parts orders within 24 hours and sells parts
at competitive margins in order to serve existing customers and to enhance new
equipment sales.
8
<PAGE>
Marketing. In general, the Company sells its cooling products in three different
markets: domestic thermoplastics processors, the international market, and
non-plastics industries that require specialized heat transfer equipment.
Domestic thermoplastics processors are the largest market served by the Company,
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 regional managers employed by the Company.
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 it 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.
The Company has increased sales 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, 2000, the dollar amount of backlog (uncompleted firm
orders) for industrial process cooling equipment was $4,747,000, substantially
all of which is expected to be completed in 2000. As of January 31, 1999, the
amount of backlog was $3,544,000.
Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility utilizes approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers. The Company 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 1996, 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
central system 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 its Industrial Process Cooling Equipment
Business. The Company believes that it has a more comprehensive line of cooling
products than any of its competitors. Certain competitors of the Company have
cost advantages as a result of manufacturing in non-union shops and offering a
limited range of products. Some of the Company'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 Company's competitive
position. 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, 2000, the Company had 834 full-time employees, 110 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 United
Association of Journeymen and Apprentices of the Plumbing and Pipefitting
Industry of the United States and the International Brotherhood of Electrical
Workers Union, pursuant to collective bargaining agreements, both of which
expire on June 1, 2000. The collective bargaining agreement of the Piping
Systems Business in Lebanon, Tennessee with the United Association of Journeymen
and Apprentices of the Plumbing and Pipefitting Industry of the United States -
Metal Trades Division expires in March 2001.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 2000:
<TABLE>
<CAPTION>
Executive Officer of the
Company or its
Age Position Predecessors Since
--- -------- ------------------------
<S> <C> <C> <C>
David Unger 65 Chairman of the Board 1972
of Directors, President
and Chief Executive
Officer
Henry M. Mautner 73 Vice Chairman of the Board 1972
of Directors
Gene K. Ogilvie 60 Vice President and Director 1969
Fati A. Elgendy 51 Vice President and Director 1990
Bradley E. Mautner 44 Vice President and Director 1994
Don Gruenberg 57 Vice President and Director 1980
Michael D. Bennett 55 Vice President, Chief 1989
Financial Officer,
Secretary and Treasurer
Thomas A. Benson 46 Vice President 1988
Billy E. Ervin 54 Vice President 1986
J. Tyler Headley 49 Vice President 1973
Robert A. Maffei 51 Vice President 1987
Jesse R. Rice 47 Vice President 1999
Herbert J. Sturm 49 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 has been associated with the Company and its predecessors
since 1978, was Vice President, Director of Sales of the Perma-Pipe Division of
Midwesco, Inc. 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 and Chief Operating Officer 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 the Company and its predecessors since August 1989.
Thomas A. 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.
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.
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 the Company in 1994.
Jesse R. Rice has been Vice President, Manufacturing of Midwesco Filter since
March 1999. He served as Plant Manager for Shenandoah Knitting Mills Inc. of
Edinburg, Virginia from 1990 through 1999.
Herbert J. Sturm has served the Company since 1975 in various executive
capacities including Vice President, Materials and Marketing Services of
Midwesco Filter.
12
<PAGE>
Item 2. PROPERTIES
The Company's Filtration Products Business has three production facilities. The
Winchester, Virginia facility has a total area of 164,500 square feet and is
located on 15 acres in a modern industrial park in Winchester, Virginia. The
building in Cicero, Illinois has a total area of 130,700 square feet and is
located in an industrial neighborhood in Cicero, Illinois. The Company leases a
22,800 square foot facility in an industrial area with adjoining tenants in
Nakskov, Denmark. The Company owns the land and buildings in Winchester,
Virginia and Cicero, Illinois.
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 with a total area of 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 131,000
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 88,000 square feet of this facility for production
and offices. The Industrial Process Cooling Equipment Business also 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 1998
and for 1999.
<TABLE>
<CAPTION>
1998 High Low
---- ----- -----
<S> <C> <C>
First Quarter.............................. $8.75 $7.25
Second Quarter............................. 8.88 7.50
Third Quarter.............................. 7.94 4.50
Fourth Quarter............................. 6.13 4.75
1999 High Low
---- ----- -----
First Quarter.............................. $5.25 $2.75
Second Quarter............................. 5.13 4.13
Third Quarter.............................. 5.75 3.38
Fourth Quarter............................. 4.69 3.25
</TABLE>
As of January 31, 2000, 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 1999, 1998,
1997, 1996 and 1995 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>
1999 1998 1997 1996 1995
Fiscal Year ended January 31,
----------------------------------------------
(In thousands, except per 2000 1999 1998 1997 1996
share information) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $137,170 $121,960 $111,240 $93,573 $85,838
Income from operations 6,980 3,831 6,224 6,396 4,738
Net income 2,401 336 2,758 3,230 2,373
Net income per share - basic 0.49 0.07 0.55 0.71 0.52
Net income per share - diluted 0.49 0.07 0.54 0.70 0.52
</TABLE>
<TABLE>
<CAPTION>
As of January 31,
--------------------------------------------
2000 1999 1998 1997 1996
(In thousands) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $97,776 $ 97,619 $ 93,395 $75,328 $58,985
Long-term debt, less
current portion 31,357 33,924 33,073 22,627 14,050
Capitalized leases, less
current portion 2,398 2,368 2,202 1,294 217
</TABLE>
The following table sets forth statements of operations data for the Company's
Industrial Process Cooling Equipment Business. See Note 11 to Notes to Financial
Statements. This information was not included in the accounts of the Company
prior to December 30, 1996 because the merger of Midwesco, Inc. into MFRI (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
(In thousands) ---- ----
<S> <C> <C>
Thermal Care Statements of Operations Data:
Net sales $20,036 $19,775
Income from continuing operations 661 1,319
Net income 1,161 894
</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 1999, 1998 and
1997 are the fiscal years ended January 31, 2000, 1999 and 1998, respectively.
Balances described as balances as of 1999, 1998 and 1997 are balances as of
January 31, 2000, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
- ---------------------
MFRI, Inc.
<TABLE>
<CAPTION>
[GRAPHS APPEAR HERE]
Net Sales Gross Profit Net Income
- --------- ------------ ----------
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C>
1999 137.170 1999 33.186 1999 2.401
1998 121.960 1998 29.666 1998 0.336
1997 111.240 1997 27.935 1997 2.758
</TABLE>
1999 Compared to 1998
Net sales increased 12.5 percent in 1999 to $137,170,000 from $121,960,000 in
1998. Gross profit for 1999 was $33,186,000, an increase of 11.9 percent from
the $29,666,000 reported in 1998. These increases were primarily due to strong
performance in the domestic operations, especially in the Piping Systems
Business, coupled with the inclusion of the operations of acquired businesses
since their respective dates of acquisition: 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. The gross profit margin as a percent of net sales was
24.2 percent, virtually unchanged from the prior year which was 24.3 percent.
Net income increased from $336,000 or $0.07 per common share (basic) in 1998 to
$2,401,000 or $0.49 per common share (basic) in 1999. The improved margins
discussed above, coupled with a reduction in selling, general and administrative
expenses as a percentage of net sales, were the major reasons for the increase.
The Company's operating results are discussed in more detail below.
16
<PAGE>
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 in June 1998 and Nordic Air Filtration in November
1998. 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.
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 1999, the average
order amount was approximately $4,267. 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 1999, 1998 and 1997, 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)
-------------
1999 1998 1997 1999 1998
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $56,165 $49,155 $40,145 14.3% 22.4%
Gross profit 12,730 11,265 10,243 13.0% 10.0%
As a percentage of net sales 22.7% 22.9% 25.5%
Income from operations 3,883 3,341 4,140 16.2% (19.3%)
As a percentage of net sales 6.9% 6.8% 10.3%
</TABLE>
- --------------------------------------------------------------------------------
1999 Compared to 1998
Net sales increased 14.3% to $56,165,000 in 1999 from $49,155,000 in 1998. This
increase is the result of higher sales of filter elements for cartridge
collectors and baghouses, coupled with the Nordic Air acquisition in November
1998, which contributed incremental sales of $2,591,000 in 1999.
17
<PAGE>
Gross profit as a percent of net sales was 22.7% in 1999 compared to 22.9% in
1998. This decrease is primarily the result of competitive pricing pressures in
the marketplace, partially offset by reduced medical claims in the current year.
Selling expense in 1999 increased to $5,334,000 from $4,886,000 in 1998. This
increase is attributable to additional sales resources, mainly as a result of
the Nordic Air acquisition. Selling expense as a percentage of net sales
declined to 9.5 percent in 1999 compared to 9.9 percent in 1998.
General and administrative expense increased in 1999 to $3,513,000 from
$3,038,000 in 1998, but remained relatively constant at 6.3 percent of net sales
in the current year versus 6.2 percent of net sales in the prior year. The
dollar increase resulted from additional administrative resources and expenses,
primarily as a result of the Nordic Air acquisition, partially offset by lower
management incentive earnings.
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.
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.
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 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 1999, 1998 and 1997, 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 $28,000. 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)
---------------
1999 1998 1997 1999 1998
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales $51,710 $45,849 $46,232 12.8% (0.8%)
Gross profit 11,278 9,861 9,723 14.4% 1.4%
As a percentage of net sales 21.8% 21.5% 21.0%
Income from operations 4,030 1,444 2,347 179.1% (38.5%)
As a percentage of net sales 7.8% 3.1% 5.1%
</TABLE>
- --------------------------------------------------------------------------------
1999 Compared to 1998
Net sales increased from $45,849,000 in 1998 to $51,710,000 in 1999, primarily
due to higher sales in the district heating and cooling segment of the domestic
market.
Gross profit as a percentage of sales increased from 21.5 percent in 1998 to
21.8 percent in 1999, mainly as a result of improved margins in both the
domestic and foreign operations.
Selling expenses increased from $2,658,000 in 1998 to $2,780,000 in 1999 due to
increased commission expense related to the increase in sales. Selling expense
as a percentage of net sales decreased from 5.8 percent in 1998 to 5.4 percent
in 1999.
General and administrative expense decreased from $5,759,000 or 12.6 percent of
net sales to $4,468,000 or 8.6 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 in the prior year.
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.
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 1999, the average order amount was approximately $13,000. Large orders are
generally highly competitive and result in lower profit margins. In 1999, 1998
and 1997, no customer accounted for 10 percent or more of the Company's net
sales of cooling equipment.
19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
(In thousands)
% Increase
(Decrease)
--------------
1999 1998 1997 1999 1998
------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C>
Net sales $29,295 $26,956 $24,863 8.7% 8.4%
Gross profit 9,178 8,540 7,969 7.5% 7.2%
As a percentage of net sales 31.3% 31.7% 32.1%
Income from operations 2,867 2,378 2,836 20.6% (16.1%)
As a percentage of net sales 9.8% 8.8% 11.4%
</TABLE>
- --------------------------------------------------------------------------------
1999 Compared to 1998
Net sales increased 8.7 percent to $29,295,000 in 1999 from $26,956,000 in 1998,
mainly due to an increase in sales to original equipment manufacturers and the
inclusion of the operating results of Boe-Therm for an entire year. Boe-Therm's
sales to third parties increased $941,000 compared to the prior year.
Gross profit as a percentage of net sales decreased slightly from 31.7 percent
in 1998 to 31.3 percent in 1999, primarily due to production inefficiencies in
the Boe-Therm operation.
Selling expenses increased from $3,582,000 in 1998 to $3,646,000 in 1999,
primarily due to increases in commission expense, expenses related to opening a
Boe-Therm sales office in Poland and increased trade show expense. Selling
expense as a percentage of net sales decreased from 13.3 percent of net sales in
1998 to 12.4 percent of net sales in 1999.
General and administrative expenses increased from $2,580,000 in 1998 to
$2,665,000 in 1999. This increase is due to the inclusion of Boe-Therm for the
full year, coupled with higher product support and research and development
costs in the first half of 1999. General and administrative expenses decreased
as percentage of net sales from 9.6 percent in 1998 to 9.1 percent in 1999.
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 in the
Boe-Therm operation.
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.
20
<PAGE>
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
1999 Compared to 1998
General and administrative expenses not allocated to business segments increased
14.0 percent from $3,332,000 in 1998 to $3,800,000 in 1999, primarily due to
higher occupancy and employee-related expenses, including an increase in
profit-based incentive compensation.
Interest expense was $2,790,000 in 1999, compared to $2,577,000 in 1998. Higher
borrowings in the current year as a result of the acquisition of Boe-Therm in
June 1998 and the acquisition of Nordic Air in November 1998, coupled with
increased net borrowings under the Industrial Revenue Bonds were the primary
reasons for the increase. (See also Liquidity and Capital Resources.)
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.)
Income Taxes
The effective income tax rates were 42.7 percent, 73.2 percent, and 39.8 percent
in 1999, 1998 and 1997, respectively. Permanent differences had a greater impact
on the effective tax rate in 1998, as pre-tax income was substantially lower
than 1997 and 1999. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2000 were $665,000 as compared to
$579,000 at January 31, 1999. Net cash inflows of $6,096,000 generated from
operating activities; $1,042,000 received from the restricted cash of the
Industrial Revenue Bonds; $398,000 proceeds from sale of property, plant and
equipment; and $52,032,000 received from borrowings were used to fund purchases
of property, plant and equipment of $5,032,000; repayment of capitalized lease
obligations of $218,000 and repayment of debt of $54,172,000.
Net cash provided by operating activities was $6,096,000 in 1999, mainly due to
increased earnings in the current year. In 1998, net cash provided by operating
activities was $3,149,000, 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.
21
<PAGE>
Net cash used in investing activities in 1999 was $3,592,000 versus $5,584,000
in 1998. Capital expenditures decreased from $6,037,000 in the prior year to
$5,032,000 in the current year. This decrease is primarily due to costs incurred
to construct equipment for the manufacturing facility in New Iberia, Louisiana
in the prior year. Proceeds from sale of property, plant and equipment in the
current year was $398,000 compared to $1,699,000 in the prior year, mainly
resulting from the sale of the equipment in New Iberia, Louisiana to a third
party in November 1998 and July 1999 under a master lease. The Company leased
back the equipment from the third-party purchaser and the lease is being
accounted for as an operating lease. The Company used $3,132,000 to acquire
businesses in 1998. There were no acquisitions in the current year. Cash
received from the restricted cash of the Industrial Revenue Bonds in the current
year was $1,042,000 compared to $1,886,000 the prior year.
Net cash used in financing activities in 1999 was $2,358,000 compared to net
cash obtained from financing activities of $2,045,000 in 1998. In 1999, net cash
obtained from borrowings under revolving, term and mortgage loans was
$52,032,000, net repayment of capitalized lease obligations was $218,000 and
repayment of debt was $54,172,000. 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 debt was $53,902,000.
The Company's current ratio was 2.2 to 1 at January 31, 2000 and 2.3 to 1 at
January 31, 1999. Debt to total capitalization decreased to 49.1 percent at
January 31, 2000 from 51.5 percent at January 31, 1999.
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 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, 2001. 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, 2000, the
prime rate was 8.50 percent and the margin added to the LIBOR rate, which is
determined each quarter based on the Company's interest coverage ratio, was 1.50
percent. The Company had no borrowings under the revolving line of credit at
January 31, 2000. However, $522,000 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 and 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.
On September 14, 1995, the Filtration Products Business in Winchester, Virginia
received $3,150,000 of 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 of 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 re-marketing 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. On
November 1, 1999, the Company utilized $1,100,000 of unspent bond proceeds to
redeem bonds outstanding as provided in the indenture.
22
<PAGE>
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.
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.
At January 31, 2000, borrowings under these credit arrangements totaled
$171,000; an additional $850,000 remained unused. The Company also had
outstanding letters of credit in the amount of $147,000 to guarantee performance
to third parties of various European trade activities and contracts.
YEAR 2000
The Company expensed approximately $100,000 during 1999 and 1998 in connection
with remediating its systems to become Year 2000 compliant. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
RECENT ACCOUNTING PRONOUNCEMENT
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.
23
<PAGE>
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 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. 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 essentially all of the Company's
long-term debt is fixed-rate debt.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of January 31,
2000 and January 31, 1999 and for each of the three years in the period ended
January 31, 2000 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 2000 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 2000 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 2000 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 2000 annual meeting of
stockholders.
24
<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 47, 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, 2000.
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.
25
<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, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2000 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 25, 2000
26
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share information)
<TABLE>
<CAPTION>
1999 1998 1997
Fiscal Year Ended January 31,
2000 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $137,170 $121,960 $111,240
Cost of sales 103,984 92,294 83,305
-------- -------- --------
Gross profit 33,186 29,666 27,935
Operating expenses:
Selling expense 11,760 11,126 9,279
General and administrative expense 14,572 14,805 12,801
Management services agreement - net (126) (96) (369)
--------- --------- ---------
Total operating expenses 26,206 25,835 21,711
-------- --------- --------
Income from operations 6,980 3,831 6,224
Interest expense - net 2,790 2,577 1,640
-------- -------- --------
Income before income taxes 4,190 1,254 4,584
Income taxes 1,789 918 1,826
-------- -------- --------
Net income $ 2,401 $ 336 $ 2,758
======== ======== ========
Net income per common share - basic $0.49 $0.07 $0.55
Net income per common share - diluted $0.49 $0.07 $0.54
Weighted average common shares outstanding 4,922 4,967 4,971
Weighted average common shares outstanding
assuming full dilution 4,928 5,040 5,115
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
<TABLE>
<CAPTION>
As of January 31,
ASSETS 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 665 $ 579
Trade accounts receivable, less allowance for doubtful
accounts of $250 in 1999 and $229 in 1998 22,842 20,892
Accounts receivable - related companies 313 1,134
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,517 2,533
Income taxes receivable 776 864
Inventories 20,800 22,227
Deferred income taxes 2,432 2,812
Prepaid expenses and other current assets 1,150 1,128
------- -------
Total current assets 51,495 52,169
------- -------
Property, Plant and Equipment, Net 28,473 26,849
Other Assets:
Patents, net of accumulated amortization 1,225 1,348
Goodwill, net of accumulated amortization 13,499 14,200
Other assets 3,084 3,053
------- -------
Total other assets 17,808 18,601
------- -------
Total Assets $97,776 $97,619
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 9,700 $ 9,497
Accounts payable - related companies 45 45
Accrued compensation and payroll taxes 2,970 2,349
Other accrued liabilities 2,307 3,754
Commissions payable 5,640 4,855
Current maturities of long-term debt 2,774 1,664
Billings in excess of costs and estimated earnings
on uncompleted contracts 317 529
------- -------
Total current liabilities 23,753 22,693
------- -------
Long-Term Liabilities:
Long-term debt, less current maturities 33,755 36,292
Deferred income taxes 1,974 1,890
Other 466 976
------- -------
Total long-term liabilities 36,195 39,158
------- -------
Stockholders' Equity:
Common stock, $0.01 par value, authorized 15,000
shares; 4,922 issued and outstanding in
1999 and 1998, respectively 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 16,973 14,572
Accumulated other comprehensive loss (591) (250)
------- --------
Total stockholders' equity 37,828 35,768
------- -------
Total Liabilities and Stockholders' Equity $97,776 $97,619
======= =======
</TABLE>
See notes to consolidated financial statements.
28
<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, February 1, 1997 4,962 $50 $21,384 $11,478 $ (58)
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
=======
Net income 2,401 $2,401
Minimum pension liability adjustment
(net of tax expense of $36) 59 59
Unrealized translation adjustment (400) (400)
----- ---- ------- ------- ------- ------
Balance January 31, 2000 4,922 $ 49 $21,397 $16,973 $(591) $2,060
===== ==== ======= ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
Fiscal Year Ended January 31,
2000 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,401 $ 336 $ 2,758
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for depreciation and amortization 3,893 3,529 2,715
Deferred income taxes 454 (254) 276
Change in operating assets and liabilities,
net of effects of purchased businesses:
Accounts receivable (1,323) 733 (2,039)
Income taxes receivable 114 39 (868)
Inventories 1,240 (1,785) (1,356)
Prepaid expenses and other assets (482) (556) (2,394)
Accounts payable 300 35 (778)
Compensation and payroll taxes 677 650 (102)
Other accrued liabilities (1,178) 422 1,513
--------- --------- ---------
Net Cash Flows from Operating Activities 6,096 3,149 (275)
--------- --------- ---------
Cash Flows from Investing Activities:
Change in restricted cash from Industrial
Revenue Bonds 1,042 1,886 951
Acquisitions of businesses, net of cash acquired (3,132) (7,293)
Proceeds from sale of property and equipment 398 1,699 -
Purchases of property and equipment (5,032) (6,037) (4,385)
--------- --------- ---------
Net Cash Flows from Investing Activities (3,592) (5,584) (10,727)
--------- --------- ---------
Cash Flows from Financing Activities:
Net payments on capitalized lease obligations (218) (408) (509)
Borrowings under revolving, term and
mortgage loans 52,032 56,296 25,427
Repayment of debt (54,172) (53,902) (16,420)
Stock options exercised - 59 115
--------- --------- ---------
Net Cash Flows from Financing Activities (2,358) 2,045 8,613
--------- --------- ---------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (60) (7) (51)
--------- -------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 86 (397) (2,440)
Cash and Cash Equivalents - Beginning of Year 579 976 3,416
--------- -------- ---------
Cash and Cash Equivalents - End of Year $ 665 $ 579 $ 976
========= ======== =========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000, 1999, AND 1998
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, 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 the Thermal Care business; 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
1999, 1998 and 1997 are the fiscal years ended January 31, 2000, 1999 and 1998,
respectively. Balances described as balances as of 1999, 1998 and 1997 are
balances as of January 31, 2000, 1999 and 1998, respectively.
Principles of Consolidation: The consolidated financial statements include the
accounts of MFRI; its principal wholly owned subsidiaries, Midwesco Filter,
Perma-Pipe and Thermal Care, Inc. ("Thermal Care"); and the majority-owned and
controlled domestic and foreign subsidiaries of MFRI, Midwesco Filter,
Perma-Pipe and Thermal Care (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.
All other subsidiaries of the Company recognize revenues at the date of
shipment.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
31
<PAGE>
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)
1999 1998
------- -------
<S> <C> <C>
Raw materials $15,851 $16,313
Work in process 2,641 2,494
Finished goods 2,308 3,420
------- -------
Total $20,800 $22,227
======= =======
</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
1999, 1998 and 1997 was $57,000, $54,000 and $54,000, respectively.
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)
1999 1998
------- -------
<S> <C> <C>
Land, buildings and improvements $14,815 $13,752
Machinery and equipment 18,789 16,248
Furniture and office equipment 5,730 5,063
Transportation equipment 927 1,260
------- -------
40,261 36,323
Less accumulated depreciation and amortization 11,788 9,474
------- -------
Property, plant and equipment, net $28,473 $26,849
======= =======
</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 $1,456,000 and
$1,015,000 at January 31, 2000 and 1999, 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
$761,000 and $596,000 at January 31, 2000 and 1999, 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 operations in which the long-lived assets are deployed.
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, 2000, 1999 and 1998.
32
<PAGE>
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:
(In thousands except per share information)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Net Income $2,401 $ 336 $2,758
====== ======= ======
Basic weighted average common shares
outstanding 4,922 4,967 4,971
Dilutive effect of stock options 6 73 144
------ ------ ------
Weighted average common shares
outstanding assuming full dilution 4,928 5,040 5,115
====== ====== ======
Net income per common share - basic $0.49 $0.07 $0.55
Net income per common share - diluted $0.49 $0.07 $0.54
</TABLE>
In 2000, 1999 and 1998, 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 828,000, 411,000 and 45,000, respectively. These options were
outstanding at the end of each of the respective years, except for options for
96,000 shares which expired in December 1999.
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
estimated fair values of the Company's unsecured senior notes totaled
$23,360,000 and $25,000,000 at January 31, 2000 and 1999, respectively. The
estimated fair value was $1,640,000 lower than the carrying value at January 31,
2000, and approximated the carrying value at January 31, 1999. Estimated fair
values are based on interest rates estimated to be available to the Company for
debt with similar terms and remaining maturities based on information available
as of year-end.
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, 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)
Unrealized translation adjustment (400) (400)
Minimum pension liability adjustment
(net of tax expense of $36) - 59 59
------ ------- ------
Balance - January 31, 2000 $(522) $ (69) $(591)
====== ======= ======
</TABLE>
33
<PAGE>
Recent Accounting Pronouncement: 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.
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 1999 and 1998, the Company paid
$610,000 and $565,000, 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. The Company received $365,000 and paid
$239,000 under such agreements in 1999. 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. In addition, the Company leases
certain office and warehouse facilities substantially all of which are occupied
by a company primarily owned by two significant management stockholders. Rental
payments of $211,000, $199,000 and $65,000 were paid directly to the lessor by
that company in 1999, 1998 and 1997, respectively.
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 arm's-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.
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.
34
<PAGE>
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.
Note 5 - Retention Receivable
Retention is the amount withheld by a customer until a long-term contract is
completed. Retention of $603,000 and $512,000 is included in the balance of
trade accounts receivable at January 31, 2000 and 1999, respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts $13,792 $15,462
Estimated earnings 3,289 3,979
------- -------
Earned revenue 17,081 19,441
Less billings to date 14,881 17,437
------- -------
Total $ 2,200 $ 2,004
======= =======
Classified as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,517 $ 2,533
Billings in excess of costs and estimated
earnings on uncompleted contracts (317) (529)
-------- --------
Total $ 2,200 $ 2,004
======== =======
</TABLE>
Note 7 - Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------- -------
<S> <C> <C>
Unsecured 7.21% senior notes due 2007 $15,000 $15,000
Unsecured 6.97% senior notes due 2008 10,000 10,000
Revolving bank loan - 300
Industrial Revenue Bonds 5,200 5,258
Mortgage notes 2,712 2,881
Capitalized lease obligations (Note 8) 2,592 2,606
Term loans 735 508
Short-term credit arrangements 171 674
Note payable for Nordic Air acquisition - 527
Other 119 202
------- -------
36,529 37,956
Less current maturities 2,774 1,664
------- -------
Total $33,755 $36,292
======= =======
</TABLE>
35
<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.
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 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, 2001. 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, 2000, the
prime rate was 8.50 percent and the margin added to the LIBOR rate, which is
determined each quarter based on the Company's interest coverage ratio, was 1.50
percent. The Company had no borrowings under the revolving line of credit at
January 31, 2000. However, $522,000 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 and 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.
On September 14, 1995, the Filtration Products Business in Winchester, Virginia
received $3,150,000 of 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 of 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 re-marketing 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. 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.
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.
At January 31, 2000, borrowings under these credit arrangements totaled
$171,000; an additional $850,000 remained unused. The Company also had
outstanding letters of credit in the amount of $147,000 to guarantee performance
to third parties of various European trade activities and contracts.
36
<PAGE>
Scheduled maturities, excluding the revolving line of credit, for each of the
next five years are as follows: 2000 - $2,774,000; 2001 - $2,570,000; 2002 -
$4,008,000; 2003 - $4,662,000; 2004 - $3,811,000; thereafter - $18,704,000.
Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------ ------
<S> <C> <C>
Land, building and improvements $1,197 $1,197
Machinery and equipment 322 322
Furniture and office equipment 653 724
Transportation equipment 767 893
------ ------
2,939 3,136
Less accumulated amortization 1,076 1,193
------ ------
$1,863 $1,943
====== ======
</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 is the lessee of certain office and warehouse facilities
substantially all of which are occupied by a company primarily owned by two
significant management stockholders. During 1999, 1998 and 1997, all rental
payments were made directly to the lessor by that company. Future minimum rental
payments under the lease are $207,000 and $18,000 for 2000 and 2001,
respectively.
The Company sold equipment for $1,345,000 in November 1998 and $295,000 in July
1999. The equipment was leased back from the purchaser under a master lease
agreement for a period of five years. No gain or loss was recognized on these
transactions 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, 2000, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
------- ---------
<S> <C> <C>
2000 $ 514 $ 922
2001 461 571
2002 460 427
2003 459 347
2004 376 56
Thereafter 4,002 218
------ ------
6,272 2,541
Less amount representing interest 3,680 -
------ ------
Present value of future minimum
lease payments (Note 7) $2,592 $2,541
====== ======
</TABLE>
Rental expense for operating leases was $944,000, $508,000, and $429,000 in
1999, 1998 and 1997, respectively.
37
<PAGE>
Note 9 - Income Taxes
The following is a summary of domestic and foreign income before income taxes:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Domestic $3,509 $1,425 $4,303
Foreign 681 (171) 281
------ ------- ------
$4,190 $1,254 $4,584
====== ====== ======
</TABLE>
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 881 $ 788 $1,441
Foreign 275 154 (69)
State and other 179 230 178
------ ------ ------
1,335 1,172 1,550
Deferred 454 (254) 276
------ ------- ------
Total $1,789 $ 918 $1,826
====== ======= ======
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Tax at federal statutory rate $1,425 $ 426 $1,559
Foreign rate tax differential 84 52 -
State taxes, net of federal benefit 163 61 116
Amortization of cost in excess
of assets acquired 108 115 73
Tax audit issues - 109 -
Adjustment to estimated income
tax accruals - 62 -
Other - net 9 93 78
------ -------- ------
Total $1,789 $ 918 $1,826
====== ======== ======
</TABLE>
Components of the deferred income tax asset balances are as follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------ ------
<S> <C> <C>
Current:
Accrued commissions $1,124 $1,273
Other accruals not yet deducted 669 764
Non-qualified deferred
compensation 217 177
Inventory valuation allowance 151 163
NOL carryforward 91 94
Allowance for doubtful accounts 68 66
Inventory uniform capitalization 50 54
Foreign acquisition adjustments 38 45
Other 24 176
------- ------
$2,432 $2,812
======= ======
</TABLE>
38
<PAGE>
Components of the deferred income tax liability balance are as follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------ ------
<S> <C> <C>
Depreciation $1,841 $1,743
Foreign acquisition adjustments 104 123
Goodwill 344 276
Other (315) (252)
------- -------
Total $1,974 $1,890
====== ======
</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:
<TABLE>
<CAPTION>
(In thousands)
1999 1998
------ ------
<S> <C> <C>
Accumulated benefit obligations:
Vested benefits $1,137 $1,123
====== ======
Accumulated benefits $1,159 $1,149
====== ======
Change in benefit obligation:
Benefit obligation - beginning of year $1,152 $ 985
Service cost 59 49
Interest cost 76 70
Amendments - -
Actuarial (gain) loss (81) 91
Benefits paid (47) (43)
------- -------
Benefit obligation - end of year 1,159 1,152
------ -------
Change in plan assets:
Fair value of plan assets - beginning of year 767 972
Actual return on plan assets 74 (162)
Company contributions 129 -
Benefits paid (47) (43)
------- -------
Fair value of plan assets - end of year 923 767
------ -------
Funded status (236) (385)
Unrecognized prior service cost 89 101
Unrecognized actuarial loss 112 210
------ ------
Accrued benefit cost recognized in the
consolidated balance sheet $ (35) $ (74)
======= =======
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability $ (236) $ (382)
Intangible asset 89 101
Accumulated other comprehensive income 112 207
------ -------
Net amount recognized $ (35) $ (74)
======== =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Weighted-average assumptions at end of year:
Discount rate 7.25% 6.75%
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 $ 59 $ 49
Interest cost 76 70
Expected return on plan assets (64) (79)
Amortization of prior service cost 12 21
Recognized actuarial (gain) loss 7 (2)
------- -------
Net periodic benefit cost $ 90 $ 59
======= =======
</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.
The Company matches 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 $287,000, $256,000,
and $243,000 for the years ended January 31, 2000, 1999 and 1998, 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 cash surrender value of the life insurance contracts is included
in other assets and the deferred compensation liability is included in accrued
compensation and payroll taxes in the consolidated balance sheet. The charges to
expense were $175,000, $247,000, and $150,000 in 1999, 1998 and 1997,
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
1999, 1998 and 1997.
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.
40
<PAGE>
The following is information relevant to the Company's business segments:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Filtration Products $ 56,165 $ 49,155 $ 40,145
Piping Systems 51,710 45,849 46,232
Industrial Process Cooling Equipment 29,295 26,956 24,863
-------- -------- --------
Total Net Sales $137,170 $121,960 $111,240
======== ======== ========
Gross Profit:
Filtration Products $ 12,730 $ 11,265 $ 10,243
Piping Systems 11,278 9,861 9,723
Industrial Process Cooling Equipment 9,178 8,540 7,969
-------- -------- --------
Total Gross Profit $ 33,186 $ 29,666 $ 27,935
======== ======== ========
Income from Operations:
Filtration Products $ 3,883 $ 3,341 $ 4,140
Piping Systems 4,030 1,444 2,347
Industrial Process Cooling Equipment 2,867 2,378 2,836
Corporate (3,800) (3,332) (3,099)
--------- --------- --------
Total Income from Operations $ 6,980 $ 3,831 $ 6,224
======== ======== ========
Segment Assets:
Filtration Products $ 39,868 $ 40,183 $ 36,116
Piping Systems 35,828 36,424 38,701
Industrial Process Cooling Equipment 14,885 15,330 12,290
Corporate 7,195 5,682 6,288
-------- -------- --------
Total Segment Assets $ 97,776 $ 97,619 $ 93,395
======== ======== ========
Capital Expenditures:
Filtration Products $ 1,317 $ 2,010 $ 788
Piping Systems 2,725 2,854 2,713
Industrial Process Cooling Equipment 171 596 181
Corporate 819 577 703
-------- -------- --------
Total Capital Expenditures $ 5,032 $ 6,037 $ 4,385
======== ======== ========
Depreciation and Amortization:
Filtration Products $ 1,359 $ 1,154 $ 648
Piping Systems 1,489 1,407 1,236
Industrial Process Cooling Equipment 332 240 155
Corporate 713 728 676
-------- -------- ----------
Total Depreciation and Amortization $ 3,893 $ 3,529 $ 2,715
======== ======== ========
</TABLE>
Geographic Information
Net sales are attributed to a geographic area based on the destination of the
product shipment. Long-lived assets are based on the physical location of the
assets and consist of property, plant and equipment used in the generation of
revenues in the geographic area.
41
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
United States $114,726 $106,600 $ 93,632
Canada 5,166 2,511 3,332
Europe 10,593 8,525 7,358
Mexico, South America, Central America
and the Carribean 2,432 1,867 4,533
Asia 3,513 1,487 2,149
Other 740 970 236
-------- -------- --------
Total Net Sales $137,170 $121,960 $111,240
======== ======== ========
Long-Lived Assets:
United States $ 26,874 $ 24,846 $ 22,813
Europe 1,599 2,003 217
-------- -------- --------
Total Long-Lived Assets $ 28,473 $ 26,849 $ 23,030
======== ======== ========
</TABLE>
Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
<TABLE>
<CAPTION>
(In thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash paid for:
Income taxes, net of refunds received $ 1,306 $ 1,378 $ 2,218
======== ======== ========
Interest, net of amounts capitalized $ 2,813 $ 2,447 $ 1,812
======== ======== ========
Noncash Financing and Investing Activities:
Fixed assets acquired under capital leases $ 210 $ 425 $ 882
======== ======== ========
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
Cost in excess of net assets acquired - 1,939 4,822
Cash paid (net of cash acquired) - (3,132) (7,293)
Notes payable to sellers - (829) -
Fair value of stock options issued - - (369)
-------- --------- ---------
Liabilities assumed $ - $ 1,054 $ 4,410
========= ========= =========
</TABLE>
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 certain
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.
42
<PAGE>
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>
1999 1998
----------------------- -----------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------- --------------- ------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 834,000 $7.16 740,875 $7.04
Granted 113,600 4.25 118,000 7.96
Exercised - - (8,375) 6.39
Cancelled (125,950) 7.68 (16,500) 7.99
--------- ----- -------- -----
Outstanding at end of year 821,650 $6.68 834,000 $7.16
========= ===== ======= =====
Options exercisable at year-end 511,075 491,350
========= =======
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at January 31, 2000:
<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, 2000 Contractual Life Exercise Price Jan. 31, 2000 Exercise Price
- ----------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$4.00-$4.99 198,050 7.4 years $4.34 90,850 $4.45
$6.00-$6.99 422,200 6.0 years 6.85 294,950 6.83
$7.00-$7.99 10,000 4.0 years 7.25 10,000 7.25
$8.00-$8.99 116,400 7.7 years 8.09 40,275 8.06
$9.00-$9.99 75,000 8.8 years 9.60 75,000 9.60
-------- --------- ----- -------- ------
821,650 6.8 years $6.68 511,075 $6.92
======== ========= ===== ======== =====
</TABLE>
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 1999, 1998, and
1997, the Company's pro forma net income and earnings per share would have been
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income - as reported (in thousands) $2,401 $ 336 $2,758
Net income - pro forma (in thousands) $2,115 $ 70 $2,577
Net income per common share - basic, as reported $0.49 $0.07 $0.55
Net income per common share - basic, pro forma $0.43 $0.01 $0.51
</TABLE>
The weighted average fair value of options granted during 1999, 1998, and 1997
are estimated at $2.37, $4.01, and $4.04 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected volatility 46.02% 37.90% 39.61%
Expected life in years 7.0 7.0 7.0
Risk-free interest rate 5.42% 5.64% 6.44%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
43
<PAGE>
Note 14 - Stock Rights
On September 15, 1999, the Company's Board of Directors declared a dividend of
one common stock purchase right (a "Right") for each share of MFRI's common
stock outstanding at the close of business on September 22, 1999. The stock
issued after September 22, 1999 and before the redemption or expiration of the
Rights are also entitled to one Right for each such additional share. Each Right
entitles the registered holders, under certain circumstances, to purchase from
the Company one share of MFRI's common stock at $25.00, subject to adjustment.
At no time will the Rights have any voting power.
The Rights may not be exercised until 10 days after a person or group acquires
15 percent or more of the Company's common stock, or announces a tender offer
that, if consummated, would result in 15 percent or more ownership of the
Company's common stock. Separate Rights certificates will not be issued and the
Rights will not be traded separately from the stock until then.
Should an acquirer become the beneficial owner of 15 percent or more of the
Company's common stock, Rights holders other than the acquirer would have the
right to buy common stock in MFRI, or in the surviving enterprise if MFRI is
acquired, having a value of two times the exercise price then in effect. Also,
MFRI's Board of Directors may exchange the Rights (other than those of the
acquirer which will have become void), in whole or in part, at an exchange ratio
of one share of MFRI common stock (and/or other securities, cash or other assets
having equal value) per Right subject to adjustment. The Rights described in
this paragraph and the preceding paragraph shall not apply to an acquisition,
merger or consolidation approved by the Company's Board of Directors.
The Rights will expire on September 15, 2009, unless exchanged or redeemed prior
to that date. The redemption price is $0.01 per Right. MFRI's Board of Directors
may redeem the Rights by a majority vote at any time prior to the 20th day
following public announcement that a person or group has acquired 15 percent of
MFRI's common stock. Under certain circumstances, the decision to redeem
requires the concurrence of a majority of the independent directors.
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years 1999 and 1998:
(In thousands except per share information)
<TABLE>
<CAPTION>
1999
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales $29,539 $36,505 $37,019 $34,107
Gross Profit 7,289 9,326 9,070 7,501
Net Income 226 1,057 965 153
Per Share Data:
Net income - basic $0.05 $0.21 $0.20 $0.03
Net income - diluted $0.05 $0.21 $0.20 $0.03
</TABLE>
<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)
</TABLE>
44
<PAGE>
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2000, 1999, AND 1998
<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, 2000:
Allowance for possible
losses in collection of
trade receivables $229,000 $156,000 $ - $135,000 $250,000
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
</TABLE>
1 Acquired with purchase of business.
2 Uncollectible accounts charged off.
45
<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 27, 2000 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 27, 2000
)
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>
46
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- -------------- --------------------------------------------------
<S> <C>
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(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
27 Financial Data Schedule
</TABLE>
- ------------------------------
* SEC File No. 33-31850
47
<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)
4. Thermal Care, Inc. (Delaware corporation)
48
<PAGE>
Exhibit 23
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 25, 2000, appearing in the Annual Report on Form 10-K of MFRI, Inc.
for the year ended January 31, 2000 and to the reference to us under the heading
"Experts" in the Prospectuses which are part of Registration Statements No.
333-21951 and No. 333-44787.
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 25, 2000
49
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, 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, 2000, 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 18th day of April, 2000.
<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
President Vice President
/s/ Michael D. Bennett /s/ Eugene Miller
- --------------------------------------- --------------------------------
Michael D. Bennett, Vice President, Eugene Miller, Director
Chief Financial Officer, 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>
50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 2000 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-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 665000
<SECURITIES> 0
<RECEIVABLES> 23092000
<ALLOWANCES> 250000
<INVENTORY> 20800000
<CURRENT-ASSETS> 51495000
<PP&E> 40261000
<DEPRECIATION> 11788000
<TOTAL-ASSETS> 97776000
<CURRENT-LIABILITIES> 23753000
<BONDS> 33755000
0
0
<COMMON> 49000
<OTHER-SE> 37779000
<TOTAL-LIABILITY-AND-EQUITY> 97776000
<SALES> 137170000
<TOTAL-REVENUES> 137170000
<CGS> 103984000
<TOTAL-COSTS> 103984000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2790000
<INCOME-PRETAX> 4190000
<INCOME-TAX> 1789000
<INCOME-CONTINUING> 2401000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2401000
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.49
</TABLE>
