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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2001
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File No. 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7720 Lehigh Avenue
Niles, Illinois 60714
(Address of principal executive offices) (Zip Code)
(847) 966-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /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 $9,022,000 based on the closing sale price of $2.50 per share as
reported on the NASDAQ National Market on March 31, 2001.
The number of shares of the registrant's common stock outstanding at
March 31, 2001 was 4,922,364.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document of the registrant are incorporated
herein by reference:
Document Part of Form 10-K
-------- -----------------
Proxy Statement for the 2001 annual meeting of III
stockholders
FORM 10-K CONTENTS
JANUARY 31, 2001
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 25
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
Part III:
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners and Management 26
13. Certain Relationships and Related Transactions 26
Part IV:
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures 49
- ------------------------------------------------------------------------------
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.
On December 31, 2000, the Company sold its 81 percent interest in SZE Hagenuk
GmbH ("SZE Hagenuk") to the former minority shareholder. SZE Hagenuk
manufactures, markets and installs leak detection and location systems in
Germany. The Company has entered into an exclusive distribution agreement with
SZE Hagenuk to market its leak detection products in Germany. SZE Hagenuk had
sales of $1,063,000 for the eleven months ended December 2000.
Thermal Care engineers, designs and manufactures liquid chillers, mold
temperature controllers, cooling towers, plant circulating systems, and related
accessories for industrial process applications.
Additional information with respect to the Company's lines of business is
included in the financial statements and related notes thereto.
1
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
The Company manufactures virtually all 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
17 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, 2001, 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 7 percent of domestic filtration product
sales during the year ended January 31, 2001, have decreased 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
Backlog. As of January 31, 2001, the dollar amount of backlog (uncompleted firm
orders) for filtration products was $12,217,000. As of January 31, 2000, the
amount of backlog was $18,324,000. Approximately $1,580,000 of the backlog as of
January 31, 2001 is not expected to be completed in 2001.
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 woven, felted, spun bond and cellulose 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. The recent
U.S. Supreme Court decision upholding the right 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
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, impair essential services 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, leak detection 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 PVC. The Company manufactures several types of piping
systems using different materials, each designed to withstand certain levels of
temperature and pressure.
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
fifteen 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 2000, no single
customer accounted for more than 10 percent of the net sales of the Company's
piping systems.
5
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. They are also
utilized for water detection by internet service providers, application service
providers, web hosts, as well as financial, telecommunication and other
electronic service companies. 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.
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 subsidiary Perma-Pipe Services, Ltd. ("PPSL"). The
Company has entered into an exclusive distribution agreement with SZE Hagenuk, a
former subsidiary, to market its leak detection products in Germany. 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),
PalCom(R), Xtru-therm(R), and Ultra-Pipe(R). The Company also owns United
Kingdom trademarks for Poly-Therm(R), Perma-Pipe(R) and Ric-Wil(R), and a
Canadian trademark for Ric-Wil(R).
Backlog. As of January 31, 2001, the dollar amount of backlog (uncompleted firm
orders) for piping and leak detection systems was $18,009,000, substantially all
of which is expected to be completed in 2001. As of January 31, 2000, the amount
of backlog was $15,539,000.
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 polyals, 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.
6
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 and protective jacket 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
bulk resins, chemicals and 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, statistical process control, 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 Haliburton
Corp.; 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, a subsidiary of Tyco
Industries; (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 machine tool
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.
7
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(Degree)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 stainless steel and/or 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
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. 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 machine tool 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, 2001, the dollar amount of backlog (uncompleted firm
orders) for industrial process cooling equipment was $3,343,000, substantially
all of which is expected to be completed in 2001. As of January 31, 2000, the
amount of backlog was $4,747,000.
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.
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.
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.
9
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 steel tanks are 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 used 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 wiring. 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
Employees
As of March 31, 2001, the Company had 798 full-time employees, 93 of whom were
engaged in sales and marketing, 120 of whom were engaged in management,
engineering 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 2003. 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, 2001. 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 2004.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 2001:
Executive Officer
of Company or its
Predecessors
Age Position Since
- -------------------------------------------------------------------------------
David Unger 66 Chairman of the Board of Directors, 1972
President and Chief Executive Officer
Henry M. Mautner 74 Vice Chairman of the Board of Directors 1972
Gene K. Ogilvie 61 Vice President and Director 1969
Fati A. Elgendy 52 Vice President and Director 1990
Bradley E. Mautner 45 Vice President and Director 1994
Don Gruenberg 58 Vice President and Director 1980
Michael D. Bennett 56 Vice President, Chief Financial 1989
Officer,Secretary and Treasurer
Thomas A. Benson 47 Vice President 1988
Billy E. Ervin 55 Vice President 1986
J. Tyler Headley 50 Vice President 1973
Robert A. Maffei 52 Vice President 1987
Herbert J. Sturm 50 Vice President 1977
All of the officers serve at the discretion of the Board of Directors.
11
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.
Herbert J. Sturm has served the Company since 1975 in various executive
capacities including Vice President, Materials and Marketing Services of
Midwesco Filter.
12
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 Winchester, Virginia. The building occupied by TDC Filter
Manufacturing has a total area of 130,700 square feet and is located in Cicero,
Illinois. The Company leases a 22,800 square foot facility 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 and is housed in five buildings totalling 152,000
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 comprised
of two buildings with a total area of 12,000 square feet, which contain
automated manufacturing and warehouse facilities. In September 2000, the Company
purchased the buildings, and signed a long-term lease for the land, which
expires in 2017.
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 on 8.1 acres in Niles, Illinois. 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
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 1999
and for 2000.
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
2000 High Low
---- ---- ---
First Quarter................................. $4.94 $3.63
Second Quarter................................ 4.38 3.50
Third Quarter................................. 3.94 3.25
Fourth Quarter................................ 3.50 2.25
As of January 31, 2001, there were approximately 120 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 and note agreements
contain certain restrictions on the payment of dividends.
14
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 2000, 1999,
1998, 1997 and 1996 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.
2000 1999 1998 1997 1996
(In Thousands, except per share information) Fiscal Year ended January 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Statements of Operations Data:
Net sales .................................. $148,731 $137,170 $121,960 $111,240 $93,573
Income from operations ..................... 4,920 6,980 3,831 6,224 6,396
Net income ................................. 1,126 2,401 336 2,758 3,230
Net income per share - basic ............... 0.23 0.49 0.07 0.55 0.71
Net income per share - diluted ............. 0.23 0.49 0.07 0.54 0.70
(In Thousands) ......................... As of January 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance Sheet Data:
Total assets ........................... $104,785 $ 97,776 $ 97,619 $ 93,395 $ 75,328
Long-term debt, less current portion ... 36,073 31,357 33,924 33,073 22,627
Capitalized leases, less current portion 348 2,398 2,368 2,202 1,294
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.
Fiscal Year Ended
January 31, 1997
--------------------
Thermal Care Statements of Operations Data:
Net sales $ 20,036
Income from continuing operations 661
Net income 1,161
15
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 2000, 1999 and
1998 are the fiscal years ended January 31, 2001, 2000 and 1999, respectively.
Balances described as balances as of 2000, 1999 and 1998 are balances as of
January 31, 2001, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
MFRI, Inc.
[GRAPHS APPEAR HERE]
Net Sales Gross Profit Net Income
--------- ------------ ----------
(in millions) (in millions) (in millions)
2000 148.731 2000 32.121 2000 1.126
1999 137.170 1999 33.186 1999 2.401
1998 121.960 1998 29.666 1998 0.336
2000 Compared to 1999
Net sales increased 8.4% in 2000 to $148,731,000 from $137,170,000 in 1999.
Gross profit of $32,121,000 in 2000 decreased 3.2 percent from $33,186,000 in
1999, while the gross margin decreased from 24.2 percent of net sales in the
1999 to 21.6 percent of net sales in 2000. Net sales increased in all business
segments compared with the prior year, while gross profit decreased in the
filtration products business and the piping system business. Overall gross
margins were adversely impacted by low margins on a large utility contract and
high warranty expenses in the filtration products business and higher than
expected costs on two large contracts in the piping systems business.
Net income decreased 53.1% to $1,126,000 or $0.23 per common share (diluted) in
2000 from $2,401,000 or $0.49 per common share (diluted) in the prior year
mainly due to the reduction in gross profit discussed above and increased
selling, general and administrative expenses. The Company's operating results
are discussed in more detail below.
16
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 24.3 percent in 1998.
Net income increased from $336,000 or $0.07 per common share (diluted) in 1998
to $2,401,000 or $0.49 per common share (diluted) 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.
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 2000, the average
order amount was approximately $3,960. 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 2000, 1999 and 1998, 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.
- --------------------------------------------------------------------------------
Filtration Products Business
- ----------------------------- % Increase
(In thousands) (Decrease)
---------------
2000 1999 1998 2000 1999
------- ------- ------- ------- -------
Net sales $64,148 $56,165 $49,155 14.2% 14.3%
Gross profit 11,844 12,730 11,265 (7.0%) 13.0%
As a percentage of net sales 18.5% 22.7% 22.9%
Income from operations 3,026 3,883 3,341 (22.1%) 16.2%
As a percentage of net sales 4.7% 6.9% 6.8%
- -------------------------------------------------------------------------------
2000 Compared to 1999
Net sales increased 14.2% to $64,148,000 in 2000 from $56,165,000 in 1999. This
increase is the result of higher sales in all product categories, particularly
in pleated filter elements and non-filtration products and services.
17
Gross profit as a percent of net sales decreased from 22.7% in 1999 to 18.5% in
2000, primarily as a result of manufacturing inefficiencies, high product
warranty expenses, low margins on a large utility contract in the current year,
and continuing competitive pricing pressures.
Selling expense in 2000 increased to $5,396,000 from $5,334,000 in 1999, but
decreased from 9.5 percent of net sales in 1999 to 8.4 percent of net sales in
2000. The dollar increase is attributable to higher expenses to support pleated
product sales, partially offset by reduced selling expense in the international
marketing effort.
General and administrative expense decreased to $3,422,000 or 5.3 percent of net
sales in 2000 from $3,513,000 or 6.3 percent of net sales in 1999, primarily due
to reduced profit-based incentive compensation.
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.
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 1999.
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 1999 versus 6.2 percent of net sales in 1998. 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.
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 benefited 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 2000, 1999 and 1998, 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 2000 was approximately $37,000. 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
- --------------------------------------------------------------------------------
% Increase
Piping Systems Business (Decrease)
- ------------------------ ----------------
(In thousands) 2000 1999 1998 2000 1999
------- ------- ------- ------- -------
Net sales $54,809 $51,710 $45,849 6.0% 12.8%
Gross profit 10,784 11,278 9,861 (4.4%) 14.4%
As a percentage of net sales 19.7% 21.8% 21.5%
Income from operations 3,085 4,030 1,444 (23.4%) 179.1%
As a percentage of net sales 5.6% 7.8% 3.1%
- --------------------------------------------------------------------------------
2000 compared to 1999
Net sales increased 6.0% to $54,809,000 in 2000 from $51,710,000 in 1999, mainly
due to increased sales of long lines for mineral transportation and sales of
leak detection systems.
Gross profit as a percent of net sales decreased from 21.8% in 1999 to 19.7% in
2000, mainly as a result of a higher than expected costs on two large contracts.
Selling expense increased from $2,780,000 in 1999 to $2,858,000 in 2000,
primarily due to an increase in commission and salary expense for inside sales
personnel. Selling expense as a percentage of net sales decreased from 5.4
percent in 1999 to 5.2 percent in 2000.
General and administrative expense increased from $4,468,000 or 8.6 percent of
net sales in 1999 to $4,841,000 or 8.8 percent of net sales in 2000. The
increase is mainly due to a pretax loss from the sale of the Company's foreign
subsidiary SZE Hagenuk GmbH ("SZE Hagenuk") of $241,000, which was included in
general and administrative expense in 2000.
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 1998.
19
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 2000, the average order amount was approximately $13,500. Large orders are
generally highly competitive and result in lower profit margins. In 2000, sales
to Teradyne Inc. were $3,386,000, or 11.4 percent of net sales of the Cooling
Equipment Business. However, this customer accounted for less than 10 percent of
the Company's total consolidated net sales. In 1999 and 1998, no customer
accounted for 10 percent or more of net sales of the Cooling Equipment Business.
- --------------------------------------------------------------------------------
% Increase
Industrial Process Cooling Equipment Business (Decrease)
- --------------------------------------------- ----------------
(In thousands) 2000 1999 1998 2000 1999
------- ------- ------- ------ ------
Net sales $29,774 $29,295 $26,956 1.6% 8.7%
Gross profit 9,493 9,178 8,540 3.4% 7.5%
As a percentage of net sales 31.9% 31.3% 31.7%
Income from operations 2,995 2,867 2,378 4.5% 20.6%
As a percentage of net sales 10.1% 9.8% 8.8%
- --------------------------------------------------------------------------------
2000 Compared to 1999
Net sales increased 1.6% to $29,774,000 in 2000 from $29,295,000 in 1999. The
increase resulted from growth in sales to original equipment manufacturers.
Gross margins as a percentage of net sales increased to 31.9 percent in 2000
from 31.3 percent in 1999, primarily due to product mix.
Selling expenses increased from $3,646,000 or 12.4 percent of net sales in 1999
to $3,821,000 or 12.8 percent of net sales in 2000. The increase is due to
higher commissions in the first quarter of the current year.
General and administrative expenses increased slightly from $2,665,000 in 1999
to $2,677,000 in 2000. General and administrative expense as a percentage of net
sales decreased from 9.1 percent in 1999 to 9.0 percent in 2000.
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 1998.
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 in 1998 to 12.4
percent in 1999.
20
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 a percentage of net sales from 9.6 percent in 1998 to 9.1 percent in 1999.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
2000 Compared to 1999
General and administrative expenses not allocated to business segments increased
10.2% from $3,800,000 in 1999 to $4,186,000 in 2000, primarily due to increases
in employee-related expenses and franchise taxes. The percentage of
non-allocated general and administrative expenses to net sales remained flat at
2.8 percent.
Interest expense increased 5.3 percent to $2,938,000 in 2000 from $2,790,000 in
1999, due to increased borrowings for working capital requirements in the
current year.
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 1999 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.)
Income Taxes
The effective income tax rates were 43.2 percent, 42.7 percent, and 73.2 percent
in 2000, 1999 and 1998, respectively. Pre-tax income was substantially lower in
1998, so permanent differences had a greater impact on the effective tax rate.
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, 2001 were $290,000 as compared to
$665,000 at January 31, 2000. Net cash inflows of $3,105,000 generated from
operating activities; $30,000 proceeds from sale of property, plant and
equipment; and $2,443,000 net proceeds of long-term debt were used to fund
purchases of property, plant and equipment of $5,534,000 and repayment of
capitalized lease obligations of $196,000. The disposition of SZE Hagenuk
resulted in a reduction of cash of $356,000.
Net cash provided by operating activities was $3,105,000, mainly due to an
increase in accounts receivable and reduced earnings, offset by an increase in
accounts payable. Net cash provided by operating activities was $6,096,000 in
1999, mainly due to increased earnings.
21
Net cash used in investing activities in 2000 was $5,860,000 versus $3,592,000
in 1999. Capital expenditures increased from $5,032,000 in the prior year to
$5,534,000 in the current year. In the current year, the Company purchased an
8.1 acre parcel of land with a 131,000-square foot building in Niles, Illinois,
from two significant management stockholders for approximately $4,438,000. Prior
to the purchase, the land and building had been leased from the two significant
stockholders. The purchase price included cash paid of $1,767,000 and the
assumption of a $2,405,000 mortgage note. The Company also purchased two
buildings with a total area of 12,000 square feet, in New Iberia, Louisiana, for
$380,000 in the current year. In the prior year, proceeds from the sale of
property and equipment were $398,000, mainly resulting from the sale of certain
equipment in New Iberia, Louisiana to a third party in July 1999. The Company
leased back the equipment from the third party purchaser.
Net cash obtained from financing activities in 2000 was $2,247,000 compared to
net cash used in financing activities of $2,358,000 in 1999. In 2000, net cash
obtained from borrowings under revolving, term and mortgage loans was
$246,466,000, net repayment of capitalized lease obligations was $196,000 and
repayment of debt was $244,023,000. 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.
The Company's current ratio was 2.1 to 1 at January 31, 2001 and 2.2 to 1 at
January 31, 2000. Debt to total capitalization increased to 50.2 percent at
January 31, 2001 from 49.1 percent at January 31, 2000.
Financing
On December 15, 1996, the Company entered into a private placement with
institutional investors of $15,000,000 of 7.21 percent unsecured senior notes
due January 31, 2007 (the "Notes due 2007"). The Notes due 2007 were amended on
November 15, 2000, increasing the interest rate to 7.46 percent. The note
purchase agreement contains certain financial covenants. At January 31, 2001,
the Company was not in compliance with two of these covenants. The Company has
obtained a waiver for such non-compliance and the note purchase agreement was
amended on April 30, 2001, modifying certain covenants and increasing the
interest rate to 8.46 percent. The amendment requires a principal payment of
$536,000 on April 30, 2001 and level monthly principal payments of $179,000
beginning May 31, 2001 and continuing monthly 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 note purchase agreement
contains certain financial covenants. At January 31, 2001, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver for
such non-compliance and the note purchase agreement was amended on April 30,
2001, modifying certain covenants and increasing the interest rate to 7.97
percent. The amendment requires a principal payment of $1,429,000 on September
17, 2002 and level monthly principal payments of $119,000 beginning October 17,
2002 and continuing monthly thereafter, resulting in a seven-year average life.
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement, the Company can borrow up
to $10,000,000 under a revolving line of credit, which matures on July 31, 2003.
Interest rates are based on one of three options selected by the Company at the
time of each borrowing, as follows: (1) the higher of the prime rate or the
federal funds rate plus 0.50 percent, (2) the LIBOR rate plus a margin for the
term of the loan, or (3) a rate quoted by the Bank for the term of the loan. At
January 31, 2001, the prime rate was 9.00 percent and the margin added to the
LIBOR rate, which is determined each quarter based on a financial statement
ratio, was 1.50 percent. The Company had borrowed $4,800,000 under the revolving
line of credit at January 31, 2001. The Company's policy is to classify
borrowings under the revolving line of credit as long-term debt since the
Company has the ability and the intent to maintain this obligation for longer
than one year. In addition, $528,000 was drawn under the agreement as letters of
credit. These letters of credit principally guarantee performance to third
parties as a result of various trade activities; guarantee performance under the
mortgage note secured by the manufacturing facility located in Cicero, Illinois
with respect to the making of certain repairs and the payment of property taxes
and insurance premiums; and guarantee repayment of a foreign subsidiary's
borrowings under an overdraft facility. The credit agreement contains certain
financial covenants. At January 31, 2001, the Company was not in compliance with
two of these covenants. The Company has obtained a waiver of such non-compliance
and the credit agreement was amended on April 30, 2001, modifying certain
covenants and increasing the margin added to the LIBOR rate to 2.25 percent
based on the current level of the applicable financial statement ratio.
22
The Company has agreed to pledge substantially all of its uncollateralized
assets as security for the Notes due 2007, the Notes due 2008, and the Bank
credit agreement, not later than July 1, 2001.
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. 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.
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a
131,000-square foot building in Niles, Illinois, from two principal stockholders
who are also members of management for approximately $4,438,000. This amount
includes the assumption of a $2,500,000 mortgage note with a remaining balance
of $2,405,000. The loan bears interest at 7.52 percent and the term of the loan
is ten years with an amortization schedule of 25 years. At the date of purchase,
the remaining term of the loan was 7.25 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, 2001, borrowings under these credit arrangements totaled
$180,000; an additional $790,000 remained unused. The Company also had
outstanding letters of credit in the amount of $78,000 to guarantee performance
to third parties of various European trade activities and contracts.
ACCOUNTING PRONOUNCEMENTS
On February 1, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets and liabilities in the statement of financial position and measure them
at fair value. When certain criteria are met, it also provides for matching of
gain or loss recognition on the derivative hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The Company has a small number of derivative
instruments. Application of SFAS 133 is not material to results of operations,
financial condition or cash flows.
23
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This SAB
provides guidance on the recognition, presentation and disclosure of revenue in
the financial statements of public companies. The adoption of SAB No. 101 has
not had a material effect on our reported results of operations, financial
condition or cash flows.
In September 2000, the Financial Accounting Standards Board issued SFAS NO. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which we must adopt for all applicable transactions occurring
after March 31, 2001. Management is currently assessing the impact of this
standard on our results of operations, financial condition and cash flows.
24
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 maintenance of local production facilities in the markets
served, invoicing of customers in the same currency as the source of the
products and use of foreign currency denominated debt, in Denmark and in the
United Kingdom. The Company also 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, 2001, 2000 and
1999.
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 Company has attempted to mitigate its interest rate risk through the maximum
use of fixed-rate long-term debt.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of January 31, 2001
and January 31, 2000 and for each of the three years in the period ended
January 31, 2001 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 2001 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 2001 annual meeting of stockholders.
25
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 2001 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 2001 annual meeting of
stockholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a. (1) Consolidated Financial Statements
Refer to Part II, Item 8 of this report.
(2) Financial Statement Schedule
a. Schedule II - Valuation and Qualifying Accounts
(3) The exhibits, as listed in the Exhibit Index set forth on page
50, are submitted as a separate section of this report.
b. MFRI filed no reports on Form 8-K with the Securities and Exchange
Commission during the last quarter of the fiscal year ended January 31,
2001.
c. See Item 14(a)(3) above.
d. The response to this portion of Item 14 is submitted as a separate
section of this report.
26
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, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended January 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 30, 2001
27
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share information)
2000 1999 1998
Fiscal Year Ended January 31,
2001 2000 1999
- --------------------------------------------------------------------------------
Net sales $148,731 $137,170 $121,960
Cost of sales 116,610 103,984 92,294
---------- ---------- ----------
Gross profit 32,121 33,186 29,666
Operating expenses:
Selling expense 12,075 11,760 11,126
General and administrative expense 15,045 14,572 14,805
Management services agreement - net 81 (126) (96)
---------- ---------- ----------
Total operating expenses 27,201 26,206 25,835
---------- ---------- ----------
Income from operations 4,920 6,980 3,831
Interest expense - net 2,938 2,790 2,577
---------- ---------- ----------
Income before income taxes 1,982 4,190 1,254
Income taxes 856 1,789 918
---------- ---------- ----------
Net income $ 1,126 $ 2,401 $ 336
========== ========== ==========
Net income per common share - basic $0.23 $0.49 $0.07
Net income per common share - diluted $0.23 $0.49 $0.07
Weighted average common shares outstanding 4,922 4,922 4,967
Weighted average common shares outstanding
assuming full dilution 4,923 4,928 5,040
See notes to consolidated financial statements.
28
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
As of January 31,
ASSETS 2001 2000
- ----------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 290 $ 665
Trade accounts receivable, less allowance for
doubtful accounts of $410 in 2000 and $250 in 1999 26,944 22,842
Accounts receivable - related companies 262 313
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,208 2,517
Income taxes receivable - 776
Inventories 21,220 20,800
Deferred income taxes 2,905 2,432
Prepaid expenses and other current assets 1,142 1,150
--------- ---------
Total current assets 55,971 51,495
--------- ---------
Property, Plant and Equipment, Net 31,351 28,473
Other Assets:
Patents, net of accumulated amortization 1,091 1,225
Goodwill, net of accumulated amortization 12,989 13,499
Other assets 3,383 3,084
--------- ---------
Total other assets 17,463 17,808
--------- ---------
Total Assets $104,785 $97,776
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable $ 12,469 $ 9,700
Accounts payable - related companies 48 45
Accrued compensation and payroll taxes 2,491 2,970
Other accrued liabilities 2,656 2,106
Commissions payable 5,492 5,640
Income taxes payable 13 -
Current maturities of long-term debt 2,745 2,774
Billings in excess of costs and estimated
earnings on uncompleted contracts 578 317
--------- ---------
Total current liabilities 26,492 23,552
--------- ---------
Long-Term Liabilities:
Long-term debt, less current maturities 36,421 33,755
Deferred income taxes 2,090 1,974
Other 983 667
--------- ---------
Total long-term liabilities 39,494 36,396
--------- ---------
Stockholders' Equity:
Common stock, $0.01 par value, authorized-
50,000 and 15,000 shares in 2000 and 1999, respectively;
4,922 issued and outstanding in 2000 and 1999,
respectively 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 18,099 16,973
Accumulated other comprehensive loss (746) (591)
--------- ---------
Total stockholders' equity 38,799 37,828
--------- ---------
Total Liabilities and Stockholders' Equity $104,785 $97,776
========= =========
See notes to consolidated financial statements.
29
MFRI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Common Stock Additional Other
----------------- Paid-in Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Loss Income
------------------------------------------------------------------------
Balance February 1, 1998 4,981 $ 50 $21,864 $14,236 $(109)
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
=======
Net income 1,126 $1,126
Minimum pension liability adjustment
(net of tax benefit of $121) (197) (197)
Unrealized translation adjustment 42 42
-------- ---- -------- -------- ------ -------
Balance January 31, 2001 4,922 $49 $21,397 $18,099 $(746) $ 971
======== ==== ======== ======== ====== =======
See notes to consolidated financial statements.
30
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2000 1999 1998
Fiscal Year Ended January 31,
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 1,126 $ 2,401 $ 336
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for depreciation and amortization 4,124 3,893 3,529
Deferred income taxes (293) 454 (254)
Loss on sale of business 241 - -
Change in operating assets and liabilities,
net of effects of acquisitions/divestitures:
Accounts receivable (4,338) (1,323) 733
Income taxes receivable 710 114 39
Inventories (718) 1,240 (1,785)
Prepaid expenses and other assets (1,331) (482) (556)
Accounts payable 2,838 300 35
Compensation and payroll taxes (322) 677 650
Other accrued liabilities 1,068 (1,178) (422)
---------- --------- ----------
Net Cash Flows from Operating Activities 3,105 6,096 3,149
---------- --------- ----------
Cash Flows from Investing Activities:
Change in restricted cash from Industrial
Revenue Bonds - 1,042 1,886
Acquisitions of businesses, net of cash acquired - - (3,132)
Reduction in cash balance due to sale of business (356) - -
Proceeds from sale of property and equipment 30 398 1,699
Purchases of property and equipment (5,534) (5,032) (6,037)
---------- --------- ----------
Net Cash Flows from Investing Activities (5,860) (3,592) (5,584)
---------- --------- ----------
Cash Flows from Financing Activities:
Net payments on capitalized lease obligations (196) (218) (408)
Borrowings under revolving, term and mortgage loans 246,466 52,032 56,296
Repayment of debt (244,023) (54,172) (53,902)
Stock options exercised - - 59
---------- --------- ----------
Net Cash Flows from Financing Activities 2,247 (2,358) 2,045
---------- --------- ----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 132 (60) (7)
---------- --------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (375) 86 (397)
Cash and Cash Equivalents - Beginning of Year 665 579 976
---------- --------- ---------
Cash and Cash Equivalents - End of Year $ 290 $ 665 $ 579
========== ========= =========
See notes to consolidated financial statements.
31
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000, AND 1999
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
2000, 1999 and 1998 are the fiscal years ended January 31, 2001, 2000 and 1999,
respectively. Balances described as balances as of 2000, 1999 and 1998 are
balances as of January 31, 2001, 2000 and 1999, 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 its subsidiary, 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
accounting principles generally accepted in the United States of America
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.
32
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:
(In thousands)
2000 1999
-------- --------
Raw materials $15,926 $15,851
Work in process 1,971 2,641
Finished goods 3,323 2,308
-------- --------
Total $21,220 $20,800
======== ========
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
2000, 1999 and 1998 was $0, $57,000 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:
(In thousands)
2000 1999
--------- ---------
Land, buildings and improvements $18,392 $14,815
Machinery and equipment 19,526 18,789
Furniture and office equipment 6,992 5,730
Transportation equipment 794 927
--------- ---------
45,704 40,261
Less accumulated depreciation and amortization 14,353 11,788
--------- ---------
Property, plant and equipment, net $31,351 $28,473
========= =========
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 $1,895,000 and
$1,456,000 at January 31, 2001 and 2000, 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
$929,000 and $761,000 at January 31, 2001 and 2000, 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, 2001, 2000 and 1999.
33
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)
2000 1999 1998
------- -------- --------
Net Income $1,126 $2,401 $ 336
====== ====== ======
Basic weighted average common shares outstanding 4,922 4,922 4,967
Dilutive effect of stock options 1 6 73
------ ------ ------
Weighted average common shares
outstanding assuming full dilution 4,923 4,928 5,040
====== ====== ======
Net income per common share - basic $0.23 $0.49 $0.07
Net income per common share - diluted $0.23 $0.49 $0.07
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 841,000, 828,000 and 411,000, respectively. These options
were outstanding at the end of each of the respective years, except for options
for 13,000 and 96,000 shares, which expired in April 2000 and December 1999,
respectively.
Fair value of Financial Instruments: The carrying values of cash and cash
equivalents, accounts receivable and accounts payable are reasonable estimates
of their fair value due to their short-term nature. The carrying values of the
Company's unsecured senior notes at January 31, 2001 are also reasonable
estimates of their fair value, as evidenced by the renegotiation of interest
rates and terms that occurred at that time as described in Note 7. The estimated
fair value of the Company's unsecured senior notes at January 31, 2000 totaled
$23,360,000, based on interest rates estimated to be available to the Company
for debt with similar terms and remaining maturities based on information
available at that time.
Accumulated Other Comprehensive Loss: Accumulated other comprehensive loss
consists of the following:
Minimum
Accumulated Pension
(In thousands) Translation Liability
Adjustment Adjustment Total
-------------- ------------- --------
Balance - February 1, 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) - (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)
Unrealized translation adjustment 42 - 42
Minimum pension liability adjustment
(net of tax benefit of $121) - (197) (197)
-------- -------- --------
Balance - January 31, 2001 $(480) $(266) $(746)
======== ======== ========
34
Accounting Pronouncements: On February 1, 2001, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. This statement standardizes the
accounting for derivative instruments by requiring that an entity recognize all
derivatives as assets and liabilities in the statement of financial position and
measure them at fair value. When certain criteria are met, it also provides for
matching of gain or loss recognition on the derivative hedging instrument with
the recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The Company has a small number of derivative
instruments. Application of SFAS 133 is not material to results of operations,
financial condition or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This SAB
provides guidance on the recognition, presentation and disclosure of revenue in
the financial statements of public companies. The adoption of SAB No. 101 has
not had a material effect on our reported results of operations, financial
condition or cash flows.
In September 2000, the Financial Accounting Standards Board issued SFAS NO. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which we must adopt for all applicable transactions occurring
after March 31, 2001. Management is currently assessing the impact of this
standard on our results of operations, financial condition and cash flows.
Reclassifications: Certain previously reported amounts have been reclassified to
conform to the current period presentation.
Note 3 - Related Party Transactions
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a
131,000-square foot building in Niles, Illinois from two principal stockholders
who are also members of management. Prior to the purchase, the land and building
had been leased from the two principal stockholders. The aggregate purchase
price was $4,438,000, which includes the assumption of a mortgage note with a
remaining balance of $2,405,000. During 2000 and 1999, the Company paid $359,000
and $610,000, respectively, under the lease agreement in effect prior to the
property purchase.
The Company also provides certain services and facilities to a company primarily
owned by those management stockholders and purchases certain services from those
companies under a management services agreement. The Company received $269,000
and paid $350,000 under such agreements in 2000. During 1999, the Company
received $365,000 and paid $239,000 under such agreements. The Company received
$465,000 and paid $369,000 under such agreements in 1998.
Until February 28, 2001, the Company leased certain office and warehouse
facilities substantially all of which are occupied by a company primarily owned
by the two management stockholders. The Company made rental payments of $236,000
directly to the lessor in 2000, and allocated the expense to users based on
space occupied. The related company paid rent of $211,000 and $199,000 directly
to the lessor in 1999 and 1998, respectively. On February 28, 2001, the related
company began leasing the facilities directly from the lessor.
The purchase agreement, 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 in
arm's-length transactions.
Note 4 - Acquisitions and Divestitures
SZE Hagenuk GmbH
On December 31, 2000, the Company sold its 81 percent interest in SZE Hagenuk
GmbH ("SZE Hagenuk") to the former minority shareholder. The Company received a
note receivable of 500,000 Deutsche Marks ("DM") (approximately $240,000) from
the former minority shareholder. The Company received 400,000 DM in the first
quarter of 2001, with the balance due in January 2003. The book basis of the
investment and intercompany receivable was $482,000, resulting in a loss of
$241,000.
35
Nordic Air A/S
On November 2, 1998, the Company acquired all the outstanding shares of capital
stock of Nordic Air A/S ("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, which was subsequently paid from the proceeds of a term loan from a
Danish bank (See Note 7). 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 A/S
On June 1, 1998, the Company acquired certain assets and liabilities of
Boe-Therm A/S ("Boe-Therm"), including inventory and manufacturing facilities,
for an aggregate purchase price of $2,173,000. 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.
Note 5 - Retention Receivable
Retention is the amount withheld by a customer until a long-term contract is
completed. Retention of $395,000 and $603,000 is included in the balance of
trade accounts receivable at January 31, 2001 and 2000, respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
(In thousands)
2000 1999
--------- ---------
Costs incurred on uncompleted contracts $21,882 $13,792
Estimated earnings 5,299 3,289
--------- ---------
Earned revenue 27,181 17,081
Less billings to date 24,551 14,881
--------- ---------
Total $ 2,630 $ 2,200
========= =========
Classified as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,208 $ 2,517
Billings in excess of costs and estimated
earnings on uncompleted contracts (578) (317)
--------- ---------
Total $ 2,630 $ 2,200
========= =========
36
Note 7 - Debt
Long-term debt consists of the following:
(In thousands)
2000 1999
---------- ----------
Unsecured senior notes due 2007 $12,857 $15,000
Unsecured senior notes due 2008 10,000 10,000
Revolving bank loan 4,800 -
Industrial Revenue Bonds 5,200 5,200
Mortgage notes 5,002 2,712
Capitalized lease obligations (Note 8) 515 2,592
Term loans 562 735
Short-term credit arrangements 180 171
Other 50 119
---------- ----------
39,166 36,529
Less current maturities 2,745 2,774
---------- ----------
Total $36,421 $33,755
========== ==========
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 were amended on
November 15, 2000, increasing the interest rate to 7.46 percent. The note
purchase agreement contains certain financial covenants. At January 31, 2001,
the Company was not in compliance with two of these covenants. The Company has
obtained a waiver for such non-compliance and the note purchase agreement was
amended on April 30, 2001, modifying certain covenants and increasing the
interest rate to 8.46 percent. The amendment requires a principal payment of
$536,000 on April 30, 2001 and level monthly principal payments of $179,000
beginning May 31, 2001 and continuing monthly 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 note purchase agreement
contains certain financial covenants. At January 31, 2001, the Company was not
in compliance with one of these covenants. The Company has obtained a waiver for
such non-compliance and the note purchase agreement was amended on April 30,
2001, modifying certain covenants and increasing the interest rate to 7.97
percent. The amendment requires a principal payment of $1,429,000 on September
17, 2002 and level monthly principal payments of $119,000 beginning October 17,
2002 and continuing monthly thereafter, resulting in a seven-year average life.
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement, the Company can borrow up
to $10,000,000 under a revolving line of credit, which matures on July 31, 2003.
Interest rates are based on one of three options selected by the Company at the
time of each borrowing, as follows: (1) the higher of the prime rate or the
federal funds rate plus 0.50 percent, (2) the LIBOR rate plus a margin for the
term of the loan, or (3) a rate quoted by the Bank for the term of the loan. At
January 31, 2001, the prime rate was 9.00 percent and the margin added to the
LIBOR rate, which is determined each quarter based on a financial statement
ratio, was 1.50 percent. The Company had borrowed $4,800,000 under the revolving
line of credit at January 31, 2001. The Company's policy is to classify
borrowings under the revolving line of credit as long-term debt since the
Company has the ability and the intent to maintain this obligation for longer
than one year. In addition, $528,000 was drawn under the agreement as letters of
credit. These letters of credit principally guarantee performance to third
parties as a result of various trade activities; guarantee performance under the
mortgage note secured by the manufacturing facility located in Cicero, Illinois
with respect to the making of certain repairs and the payment of property taxes
and insurance premiums; and guarantee repayment of a foreign subsidiary's
borrowings under an overdraft facility. The credit agreement contains certain
financial covenants. At January 31, 2001, the Company was not in compliance with
two of these covenants. The Company has obtained a waiver of such non-compliance
and the credit agreement was amended on April 30, 2001, modifying certain
covenants and increasing the margin added to the LIBOR rate to 2.25 percent
based on the current level of the applicable financial statement ratio.
37
The Company has agreed to pledge substantially all of its uncollateralized
assets as security for the Notes due 2007, the Notes due 2008, and the Bank
credit agreement, not later than July 1, 2001.
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. 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.
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a
131,000-square foot building in Niles, Illinois, from two principal stockholders
who are also members of management for approximately $4,438,000. This amount
includes the assumption of a $2,500,000 mortgage note with a remaining balance
of $2,405,000. The loan bears interest at 7.52 percent and the term of the loan
is ten years with an amortization schedule of 25 years. At the date of purchase,
the remaining term of the loan was 7.25 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, 2001, borrowings under these credit arrangements totaled
$180,000; an additional $790,000 remained unused. The Company also had
outstanding letters of credit in the amount of $78,000 to guarantee performance
to third parties of various European trade activities and contracts.
Scheduled maturities, excluding the revolving line of credit, for each of the
next five years are as follows: 2001 - $2,745,000; 2002 - $4,024,000; 2003 -
$4,689,000; 2004 - $3,820,000; 2005 - $3,696,000; thereafter - $15,392,000.
38
Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
(In thousands)
2000 1999
-------- --------
Land, building and improvements $ - $1,197
Machinery and equipment 66 322
Furniture and office equipment 698 653
Transportation equipment 652 767
-------- --------
1,417 2,939
Less accumulated amortization 916 1,076
-------- --------
$ 501 $1,863
======== ========
The Company leased the land, building and improvements from a partnership owned
by two principal stockholders who are also members of management. Under the
provisions of the lease, the Company paid all expenses related to the property.
The Company purchased the land, building and improvements on September 20, 2000.
Until February 28, 2001, the Company leased certain office and warehouse
facilities substantially all of which are occupied by a company primarily owned
by the two management stockholders. The Company made the rental payments
directly to the lessor in 2000, and allocated the expense to users based on
space occupied. The related company made rental payments directly to the lessor
in 1999 and 1998. On February 28, 2001, the related company began leasing the
facilities directly from the lessor.
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, land, transportation
equipment and office space under non-cancelable operating leases, which expire
through 2017. Management expects that these leases will be renewed or replaced
by other leases in the normal course of business.
At January 31, 2001, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
Capital Operating
Leases Leases
(In thousands) -------- ---------
2001 $ 167 $ 656
2002 169 477
2003 162 363
2004 66 72
2005 - 72
Thereafter - 380
-------- --------
564 2,020
Less amount representing interest 49 -
-------- --------
Present value of future minimum lease
payments (Note 7) $ 515 $2,020
======== ========
Rental expense for operating leases was $1,082,000, $944,000, and $508,000 in
2000, 1999 and 1998, respectively.
39
Note 9 - Income Taxes
The following is a summary of domestic and foreign income before income taxes:
(In thousands)
2000 1999 1998
-------- -------- --------
Domestic $1,702 $3,509 $1,425
Foreign 280 681 (171)
-------- -------- --------
Total $1,982 $4,190 $1,254
======== ======== ========
Components of income tax expense are as follows:
(In thousands)
2000 1999 1998
-------- -------- --------
Current:
Federal $ 928 $ 881 $ 788
Foreign 151 275 154
State and other 70 179 230
-------- -------- --------
1,149 1,335 1,172
Deferred (293) 454 (254)
-------- -------- --------
Total $ 856 $1,789 $ 918
======== ======== ========
The difference between the provision for income taxes and the amount computed by
applying the federal statutory rate is as follows:
(In thousands)
2000 1999 1998
-------- -------- -------
Tax at federal statutory rate $674 $1,425 $426
Foreign rate tax differential 13 84 52
State taxes, net of federal benefit 82 163 61
Amortization of cost in excess of assets acquired 108 108 115
Tax audit issues - - 109
Adjustment to estimated income tax accruals - - 62
Other - net (21) 9 93
-------- -------- ------
Total $856 $1,789 $918
======== ======== ======
Components of the deferred income tax asset balances are as follows:
(In thousands)
2000 1999
--------- --------
Current:
Accrued commissions $1,179 $1,124
Other accruals not yet deducted 706 669
Capital loss carryforward from sale
of foreign subsidiary 395 -
Non-qualified deferred compensation 272 217
Inventory valuation allowance 214 151
Allowance for doubtful accounts 78 68
Inventory uniform capitalization 32 50
Foreign acquisition adjustments - 38
NOL carryforward 83 91
Other (54) 24
--------- --------
Total $2,905 $2,432
========= ========
40
Components of the deferred income tax liability balance are as follows:
(In thousands) 2000 1999
--------- ---------
Depreciation $ 1,801 $1,841
Goodwill 398 344
Foreign acquisition adjustments - 104
Other (109) (315)
--------- ---------
Total $ 2,090 $1,974
========= =========
Note 10 - Employee Retirement Plans
Pension Plan
Midwesco Filter has a defined benefit plan covering its hourly rated employees.
The benefits are based on fixed amounts multiplied by years of service of
retired participants. The funding policy is to contribute such amounts as are
necessary to provide for benefits attributed to service to date and those
expected to be earned in the future. The amounts contributed to the plan are
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. Midwesco Filter may contribute
additional amounts at its discretion.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plan:
(In thousands) 2000 1999
-------- ---------
Accumulated benefit obligations:
Vested benefits $1,745 $ 1,137
======== =========
Accumulated benefits $1,786 $ 1,159
======== =========
Change in benefit obligation:
Benefit obligation - beginning of year $1,159 $ 1,152
Service cost 53 59
Interest cost 82 76
Amendments 550 -
Actuarial (gain) loss 82 (81)
Benefits paid (52) (47)
-------- ---------
Benefit obligation - end of year 1,874 1,159
-------- ---------
Change in plan assets:
Fair value of plan assets - beginning of year 923 767
Actual return on plan assets 46 74
Company contributions 396 129
Benefits paid (52) (47)
-------- ---------
Fair value of plan assets - end of year 1,313 923
-------- ---------
Funded status (562) (236)
Unrecognized prior service cost 628 89
Unrecognized actuarial loss 226 112
-------- ---------
Prepaid (accrued) benefit cost recognized
in the consolidated balance sheet $ 292 $ (35)
======== =========
Amounts recognized in the consolidated
balance sheet:
Accrued benefit liability $ (766) $ (236)
Intangible asset 628 89
Accumulated other comprehensive income 430 112
-------- ---------
Net amount recognized $ 292 $ (35)
======== =========
41
2000 1999
------- ---------
Weighted-average assumptions at end of year:
Discount rate 7.00% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase N/A N/A
Components of net periodic benefit cost:
Service cost $ 53 $ 59
Interest cost 82 76
Expected return on plan assets (78) (64)
Amortization of prior service cost 12 12
Recognized actuarial loss - 7
------- -------
Net periodic benefit cost $ 69 $ 90
======= =======
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 $348,000, $321,000,
and $256,000 for the years ended January 31, 2001, 2000 and 1999, 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 other
long term liabilities in the consolidated balance sheet. The charges to expense
were $226,000, $175,000, and $247,000 in 2000, 1999 and 1998, 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
2000, 1999 and 1998.
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.
42
The following is information relevant to the Company's business segments:
(In thousands)
2000 1999 1998
---------- ---------- ----------
Net Sales:
Filtration Products $ 64,148 $ 56,165 $ 49,155
Piping Systems 54,809 51,710 45,849
Industrial Process Cooling Equipment 29,774 29,295 26,956
---------- ---------- ----------
Total Net Sales $148,731 $137,170 $121,960
========== ========== ==========
Gross Profit:
Filtration Products $ 11,844 $ 12,730 $ 11,265
Piping Systems 10,784 11,278 9,861
Industrial Process Cooling Equipment 9,493 9,178 8,540
---------- ---------- ----------
Total Gross Profit $ 32,121 $ 33,186 $ 29,666
========== ========== ==========
Income from Operations:
Filtration Products $ 3,026 $ 3,883 $ 3,341
Piping Systems 3,085 4,030 1,444
Industrial Process Cooling Equipment 2,995 2,867 2,378
Corporate (4,186) (3,800) (3,332)
---------- ---------- ----------
Total Income from Operations $ 4,920 $ 6,980 $ 3,831
========== ========== ==========
Segment Assets:
Filtration Products $ 43,591 $ 39,868 $ 40,183
Piping Systems 38,605 35,828 36,424
Industrial Process Cooling Equipment 17,223 14,885 15,330
Corporate 5,366 7,195 5,682
---------- ---------- ----------
Total Segment Assets $104,785 $ 97,776 $ 97,619
========== ========== ==========
Capital Expenditures:
Filtration Products $ 1,066 $ 1,317 $ 2,010
Piping Systems 1,878 2,725 2,854
Industrial Process Cooling Equipment 93 171 596
Corporate 2,497 819 577
---------- ---------- ----------
Total Capital Expenditures $ 5,534 $ 5,032 $ 6,037
========== ========== ==========
Depreciation and Amortization:
Filtration Products $ 1,359 $ 1,359 $ 1,154
Piping Systems 1,628 1,489 1,407
Industrial Process Cooling Equipment 327 332 240
Corporate 810 713 728
---------- ---------- ----------
Total Depreciation and Amortization $ 4,124 $ 3,893 $ 3,529
========== ========== ==========
43
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.
(In thousands)
2000 1999 1998
---------- ---------- ----------
Net Sales:
United States $127,577 $114,726 $106,600
Canada 7,241 5,166 2,511
Europe 10,624 10,593 8,525
Mexico, South America, Central America
and the Caribbean 969 2,432 1,867
Asia 1,889 3,513 1,487
Other 431 740 970
---------- ---------- ----------
Total Net Sales $148,731 $137,170 $121,960
========== ========== ==========
Long-Lived Assets:
United States $ 29,958 $ 26,874 $ 24,846
Europe 1,393 1,599 2,003
---------- ---------- ----------
Total Long-Lived Assets: $ 31,351 $ 28,473 $ 26,849
========== ========== ==========
Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
(In thousands)
2000 1999 1998
-------- -------- --------
Cash paid for:
Income taxes, net of refunds received $ 396 $ 1,306 $ 1,378
======== ======== ========
Interest, net of amounts capitalized $ 2,980 $ 2,813 $ 2,447
======== ======== ========
Noncash Financing and Investing Activities:
Fixed assets acquired under capital leases $ 46 $ 210 $ 425
======== ======== ========
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
Cost in excess of net assets acquired - - 1,939
Cash paid (net of cash acquired) - - (3,132)
Notes payable to sellers - - (829)
-------- --------- --------
Liabilities assumed $ - $ - $ 1,054
======== ========= ========
Sale of business:
Note receivable from buyer $ 241 $ - $ -
======== ======== ========
Purchase of building:
Purchase price $ 4,438 $ - $ -
Cash paid 1,767 - -
-------- -------- --------
Net liabilities assumed $ 2,671 $ - $ -
======== ======== ========
44
Note 13 - Stock Options
Under the 1993 and 1994 Stock Option Plans ("Option Plans"), 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.
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,
(acquired in December 1997 as part of the Filtration business), 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:
2000 1999
------------------------------ -------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------------ ---------------- ----------- ----------------
Outstanding at beginning of year 821,650 $6.68 834,000 $7.16
Granted 114,700 4.09 113,600 4.25
Exercised - - - -
Cancelled (60,800) 5.79 (125,950) 7.68
--------- ------- --------- -------
Outstanding at end of year 875,550 $6.40 821,650 $6.68
========= ======= ========= =======
Options exercisable at year-end 600,800 511,075
========= =========
The following table summarizes information concerning outstanding and
exercisable options at January 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices Jan. 31, 2001 Contractual Life Exercise Price Jan. 31, 2001 Exercise Price
- --------------- --------------- ----------------- -------------- --------------- --------------
$4.00-$4.99 286,150 7.4 years $4.26 111,650 $4.41
$6.00-$6.99 395,500 5.1 years 6.86 343,750 6.85
$7.00-$7.99 10,000 3.0 years 7.25 10,000 7.25
$8.00-$8.99 108,900 6.8 years 8.09 60,400 8.08
$9.00-$9.99 75,000 7.8 years 9.60 75,000 9.60
--------- ----------- ------- ---------- -------
875,550 6.3 years $6.40 600,800 $6.87
========= =========== ======= ========== =======
45
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 2001, 2000, and
1999, the Company's pro forma net income and earnings per share would have been
as follows:
2000 1999 1998
--------- --------- ---------
Net income - as reported (in thousands) $1,126 $2,401 $ 336
Net income - pro forma (in thousands) $ 847 $2,115 $ 70
Net income per common share - basic, as reported $ 0.23 $ 0.49 $ 0.07
Net income per common share - basic, pro forma $ 0.17 $ 0.43 $ 0.01
The weighted average fair value of options granted during 2000, 1999, and 1998
are estimated at $2.36, $2.37, and $4.01 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
2000 1999 1998
--------- --------- ---------
Expected volatility 46.33% 46.02% 37.90%
Risk-free interest rate 6.49% 5.42% 5.64%
Divided yield 0.0% 0.0% 0.0%
Expected life in years 7.0 7.0 7.0
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.
46
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years 2000 and 1999:
(In thousands except per share information) 2000
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
Net Sales $34,155 $41,579 $36,943 $36,054
Gross Profit 7,758 9,150 7,525 7,688
Net Income (loss) 276 808 157 (115)
Per Share Data:
Net income (loss) - basic $0.06 $0.16 $0.03 $(0.02)
Net income (loss) - diluted $0.06 $0.16 $0.03 $(0.02)
1999
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- --------- ---------- ---------
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
47
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------
Additions
---------------------------
(1) (2)
Balance at Charged to Charged Deductions
Beginning of Costs and to Other from Balance at
Description Period Expenses Accounts1 Reserves 2 End of Period
- ------------------------------------------------------------------------------------------------------------
Year Ended January 31, 2001:
Allowance for possible
losses in collection of
trade receivables $250,000 $333,000 - $173,000 $410,000
========= ========= ========= ========= =========
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
========= ========= ========= ========= =========
1 Acquired with purchase of business.
2 Uncollectible accounts charged off.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MFRI, INC.
Date: April 30, 2001 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.
DAVID UNGER* Director and Chairman of the )
Board of Directors (Principal )
Executive Officer) )
)
HENRY M. MAUTNER* Director ) April 30, 2001
)
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 )
49
EXHIBIT INDEX
Exhibit No. Description
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 ofRegistration 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 Janaury 31, 1994 (SEC File No.0-18370)]
10(e) 1990 Independent Directors Stock Option Plan, as amended
[Incorporated by reference to Exhibit10.8 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
------------------------
* SEC File No. 33-31850
50
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)
51
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 30, 2001, appearing in the Annual Report on Form 10-K of MFRI, Inc.
for the year ended January 31, 2001 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 30, 2001
52
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, 2001, 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, 2001.
/s/ David Unger /s/ Arnold F. Brookstone
David Unger, Chairman of the Board of Arnold F. Brookstone, Director
of Directors and President
/s/ Henry M. Mautner /s/ Don Gruenberg
Henry M. Mautner, Vice Chairman Don Gruenberg, Director and
of the Board of Directors Vice President
/s/ Gene K. Ogilvie /s/ Bradley E. Mautner
Gene K. Ogilvie, Director and Bradley E. Mautner, Director and
Vice 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 Stephen B. Schwartz, Director
Vice President
/s/ Dennis Kessler
Dennis Kessler, Director
53