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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, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File No. 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7720 Lehigh Avenue Niles, Illinois 60714
(Address of principal executive offices) (Zip Code)
(847) 966-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting securities of the registrant
beneficially owned by non-affiliates of the registrant (the exclusion of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant) was
approximately $11,161,000 based on the closing sale price of $3.051 per share as
reported on the NASDAQ National Market on March 31, 2002.
The number of shares of the registrant's common stock outstanding at
March 31, 2002 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 2002 annual meeting of III
stockholders
FORM 10-K CONTENTS
JANUARY 31, 2002
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 10
Executive Officers of the Registrant 11
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
Part II:
5. Market for Registrant's Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 23
Part III:
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 23
12. Security Ownership of Certain Beneficial Owners and Management 24
13. Certain Relationships and Related Transactions 24
Part IV:
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
Signatures 48
- --------------------------------------------------------------------------------
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 had 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.
The Company has signed a contract to sell Perma-Pipe Services Limited subsidiary
("PPSL") to a third party purchaser, effective as of December 1, 2001. PPSL
sales were $1,766,000 for the ten months ended November 30, 2001.
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 ss Tube(R) product often improves filter bag durability, resulting in
longer life.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, 2002, 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 6 percent of the domestic filtration
company's product sales during the year ended January 31, 2002, have decreased
as the U.S. dollar has strengthened against certain foreign currencies and
export sales have been de-emphasized. 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, 2002, the dollar amount of backlog (uncompleted firm
orders) for filtration products was $10,518,000. As of January 31, 2001, the
amount of backlog was $12,217,000. Approximately $1,000,000 of the backlog as of
January 31, 2002 is not expected to be completed in 2002.
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 oil and gas flowlines are designed to transport crude oil or
natural gas from the well head, either on land or on the ocean floor, to the
gathering point. Long lines for oil and mineral transportation are used for
solution mining and long line transportation of heated hydrocarbons. These
piping systems consist of a carrier pipe made of steel, usually supplied by the
customer; insulation made of polyurethane; jackets made of high density
polyurethane or polyethylene and sometimes a steel outer pipe, also usually
supplied by the customer.
The Company's leak detection and location systems consist of a sensor cable
attached to a microprocessor, which utilizes proprietary software. The system
sends pulse signals through the sensor cable, which is positioned in the area to
be monitored (e.g., along a pipeline in the ground or in a subfloor), and
employs a patented digital mapping technique to plot pulse reflections to
continuously monitor the sensor cable for anomalies. The system is able to
detect one to three feet of wetted cable in a monitored cable string of up to
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,
5
due to weather constraints over much of the country. On the fiscal year ended
January 31, 2002, no single customer accounted for more than 10 percent of the
net sales of the Company's piping systems.
The Company's leak detection and location systems and its secondary containment
piping systems are used primarily by operators of military and commercial
airport fueling systems, oil refineries, pharmaceutical companies, chemical
companies, and in museums, dry storage areas, and tunnels. 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 six 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.
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), Ultra-Pipe(R) and PEX-GARD(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, 2002, the dollar amount of backlog (uncompleted firm
orders) for piping and leak detection systems was $14,393,000, substantially all
of which is expected to be completed in 2002. As of January 31, 2001, the amount
of backlog was $18,009,000.
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.
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
6
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 and/or cooling towers with plant circulating
systems to create plant-wide systems that account for a large portion of its
business. The Company specializes in customizing cooling systems according to
customer specifications.
Chillers. Chillers are refrigeration units designed to provide cool water to a
process for the purpose of removing heat from the process and transferring that
heat to an area where it can be dissipated. This heat is either dissipated using
air (air-cooled chillers) or water (water-cooled chillers). Water-cooled
chillers use a cooling tower to transfer the heat from the chiller using water
and then releasing the heat to the atmosphere with the cooling tower.
The Company believes that it manufactures the most complete line of chillers
available in its primary market (thermoplastics processing). The Company's line
of portable chillers is available from 1/2 horsepower to 40 horsepower. It
incorporates 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
7
provide the customer with quality, features, customization and other 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 that are usually attached to reservoirs. 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. These chillers also utilize uniquely programmed PLC
controls capable of handling either the chillers only or they can be programmed
to handle the entire plant cooling system based on customer plant demand. The
Company believes that the ability to offer these chiller systems provides it
with a unique, total cooling approach concept sales advantage. The Company's
central chillers are available from 10 horsepower to 200 horsepower per module.
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, is available from 100 to 240 tons.
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. They are designed 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 under it's own
name.
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.
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
8
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. 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, particularly the laser industry,
metallizing industry, and machine tool industry. The Company believes that the
size of this market is more than $200 million annually. 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, 2002, the dollar amount of backlog (uncompleted firm
orders) for industrial process cooling equipment was $3,548,000, substantially
all of which is expected to be completed in 2002. As of January 31, 2001, the
amount of backlog was $3,343,000.
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 "Made to Manage" (M2M) MRP System installed in 2001 to support its sales,
manufacturing production, inventory, customer relations and accounting
operations. The status of the customer order at any given moment can be
determined through the M2M system.
The Company utilizes prefabricated sheet metal and subassemblies manufactured by
both Thermal Care and outside vendors for temperature controller fabrication.
The production line is self-contained to reduce handling required to assemble,
wire, test, and crate the units for shipment.
FT towers up to 120 tons in capacity are assembled to finished goods inventory,
which allows the Company to meet quick delivery requirements. FT cooling towers
are manufactured using fiberglass and hardware components purchased from a
Taiwanese manufacturer, which is the Company's sole source for such products.
The wet deck is cut from bulk fill material and installed inside the tower.
Customer-specified options can be added at any time.
The FC towers are rectangular in design and are engineered by the Company. Two
different cabinet sizes of the FC tower account for eight different model
variations. All FC cooling towers are assembled at the Company's Niles facility.
The Company assembles all plant circulating systems by fabricating the steel to
meet the size requirements and adding purchased components to meet customers'
specifications. Electrical control boxes assembled in the electrical panel shop
are then added to the tank and hardwired to all electrical components. The
interior of the 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.
9
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 about 15 competitors selling
cooling equipment in the domestic plastics market. The Company further believes
that three manufacturers, including the Company, collectively share
approximately 75 percent of the plastics market. Many international customers,
with relatively small cooling needs, are able to purchase small refrigeration
units (portable chillers) that are manufactured in their respective local
markets at prices below that which the Company can offer due to issues such as
freight cost and duty. However, such local manufacturers often lack the
technology and products needed for plant-wide cooling systems. The Company
believes that its reputation for producing quality plant-wide cooling products
results in a significant portion of the Company's 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, 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.
Employees
As of March 31, 2002, the Company had 739 full-time employees, 75 of whom were
engaged in sales and marketing, 181 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, 2002. 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.
10
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 2002:
Executive Officer of
the Company or its
Age Position Predecessors Since
- ------------------- --- --------------------------------------- ------------------
David Unger 67 Chairman of the Board of Directors, 1972
President and Chief Executive Officer
Henry M. Mautner 75 Vice Chairman of the Board of Directors 1972
Gene K. Ogilvie 62 Vice President and Director 1969
Fati A. Elgendy 53 Vice President and Director 1990
Bradley E. Mautner 46 Vice President and Director 1994
Don Gruenberg 59 Vice President and Director 1980
Michael D. Bennett 57 Vice President, Chief Financial Officer, 1989
Secretary and Treasurer
Thomas A. Benson 48 Vice President 1988
Billy E. Ervin 56 Vice President 1986
Robert A. Maffei 53 Vice President 1987
Herbert J. Sturm 51 Vice President 1977
All of the officers serve at the discretion of the Board of Directors.
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.
11
and since December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care businesses of Midwesco, 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.
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.
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
12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders of the Company on June 26, 2001, the
stockholders considered and voted on two proposals.
The first proposal was whether to adopt the 2001 Independent Directors Stock
Option Plan (the "2001 Directors Plan"), which would replace the 1990
Independent Directors Stock Option Plan, under which authority to grant options
had expired in September 1999. The maximum number of shares that may be sold
pursuant to the 2001 Directors Plan is 100,000 shares. Stockholders approved the
first proposal; the result of the vote was as follows: 3,182,851 shares of
Common Stock were voted to approve the plan, 506,402 voted against, and 13,691
shares abstained. There were no broker non-votes with respect to the proposal.
The second proposal was whether to adopt the 2001 Stock Option Exchange Plan
(the "2001 Exchange Plan"), which would allow employees, including officers, to
exchange options from prior plans for options to be granted in December 2001.
The exercise price of the new options was to be the market price at the date of
grant, and the options were to vest in four equal annual installments. The new
options were to have a maximum term of ten years from the date of grant.
Stockholders approved the second proposal; the result of the vote was as
follows: 2,224,601 shares of Common Stock were voted to approve the plan,
1,463,752 shares voted against, and 14,591 shares abstained. There were no
broker non-votes with respect to the proposal.
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 2000
and for 2001.
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
2001 High Low
First Quarter....................................... $2.94 $2.28
Second Quarter................................. .... 3.60 2.40
Third Quarter................................... ... 3.35 2.60
Fourth Quarter...................................... 3.42 2.88
As of January 31, 2002, there were approximately 110 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.
13
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 2001, 2000,
1999, 1998 and 1997 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.
2001 2000 1999 1998 1997
(In thousands, except per share information) Fiscal Year ended January 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ------------ -----------
Statements of Operations Data:
Net sales $125,534 $149,533 $137,170 $121,960 $111,240
Income from operations 2,172 4,920 6,980 3,831 6,224
Net income (loss) (374) 1,126 2,401 336 2,758
Net income (loss) per share - basic (0.08) 0.23 0.49 0.07 0.55
Net income (loss) per share - diluted (0.08) 0.23 0.49 0.07 0.54
(In thousands) As of January 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ------------ -----------
Balance Sheet Data:
Total assets $92,529 $104,785 $ 97,776 $97,619 $ 93,395
Long-term debt (excluding capital leases), less
current portion 20,883 36,073 31,357 33,924 33,073
Capitalized leases, less current portion 217 348 2,398 2,368 2,202
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 2001, 2000 and
1999 are the fiscal years ended January 31, 2002, 2001 and 2000, respectively.
Balances described as balances as of 2001 and 2000 are balances as of January
31, 2002 and 2001, respectively.
14
RESULTS OF OPERATIONS
MFRI, Inc.
2001 Compared to 2000
Net sales of $125,534,000 in 2001 decreased 16.0% from $149,533,000 in 2000.
Sales declined in all businesses due to the economic recession. Gross profit of
$26,332,000 in 2001 decreased 18.0% from $32,121,000 in 2000. Gross margin
decreased slightly to 21.0 percent of net sales in 2001 from 21.5 percent in
2000. Overall gross profit in all businesses was adversely impacted by lower
sales, partially offset by gross margin increase in the piping systems business
due to improved plant efficiency and favorable product mix.
Selling, general and administrative expenses decreased 11.2% to $24,160,000 in
2001 from $27,201,000 in 2000 primarily due to lower sales commissions and cost
reduction measures that were implemented during the year.
2001 resulted in a net loss of $374,000 or $(0.08) per common share, a decrease
of 133% from a net income of $1,126,000 or $0.23 per common share in 2000 mainly
due to decreased gross profit as discussed above and due to loss on the
divestiture of Perma-Pipe Services, Ltd. ($204,000).
The Company's operating results are discussed in more detail below.
2000 Compared to 1999
Net sales increased 9.0% in 2000 to $149,533,000 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 21.5 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.
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 2001, the average
order amount was approximately $3,616. The timing % Increase of large orders can
have a material effect on the (Decrease) 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 2001 and 2000 no customer accounted for 10
percent or more of the net sales of the Company's filtration products and
services.
15
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
- ----------------------------
(In thousands) %Increase
(Decrease)
---------------
2001 2000 1999 2001 2000
------- ------- ------- ------- -------
Net sales $54,434 $64,950 $56,165 (16.2%) 15.6%
Gross profit 10,063 11,844 12,730 (15.0%) (7.0%)
As a percentage of net sales 18.5% 18.2% 22.7%
Income from operations 2,168 3,026 3,883 (28.4%) 22.1%)
As a percentage of net sales 4.0% 4.7% 6.9%
- --------------------------------------------------------------------------------
2001 Compared to 2000
Net sales decreased 16.2% to $54,434,000 in 2001 from $64,950,000 in 2000. This
decrease is the result of lower sales in all product categories, particularly in
fabric filter elements in the domestic market, where we believe the market
declined by 20 to 30%.
Gross profit as a percent of net sales increased to 18.5% in 2001 from 18.2% in
2000, but remains historically depressed due to continuing competitive pricing
pressure and manufacturing inefficiencies caused by the volume decline.
Selling expense in 2001 decreased to $4,865,000 from $5,396,000 in 2000, but
increased from 8.3 percent of net sales in 2000 to 8.9 percent of net sales in
2001. The dollar decrease is primarily due to lower sales volume related selling
expenses.
General and administrative expense decreased from $3,422,000 or 5.3 percent of
net sales in 2000 to $3,030,000 or 5.6 percent of net sales in 2001, primarily
due to cost reduction measures.
2000 Compared to 1999
Net sales increased 15.6% to $64,950,000 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.
Gross profit as a percent of net sales decreased from 22.7% in 1999 to 18.2% in
2000, primarily as a result of manufacturing inefficiencies, high product
warranty expenses, low margins on a large utility contract in 2000 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 8.3 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.
16
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.
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 2001, 2000 and 1999, 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 2001 was approximately $22,000. 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.
- --------------------------------------------------------------------------------
Piping Systems Business
- ----------------------
(In thousands) % Increase
(Decrease)
-----------------
2001 2000 1999 2001 2000
------- ------- ------- ------- -------
Net sales $49,417 $54,809 $51,710 (9.8%) 6.0%
Gross profit 10,208 10,784 11,278 (5.3%) (4.4%)
As a percentage of net sales 20.7% 19.7% 21.8%
Income from operations 3,347 3,085 4,030 8.5% (23.4%)
As a percentage of net sales 6.8% 5.6% 7.8%
- --------------------------------------------------------------------------------
2001 Compared to 2000
Net sales decreased 9.8% to $49,417,000 in 2001 from $54,809,000 in 2000, mainly
due to decreased sales of leak detection systems, a slight decrease in DHC
business, and loss of sales of $1,063,000 from SZE Hagenuk GmbH, a subsidiary
that was sold in 2000.
Gross profit as a percent of net sales increased from 19.7% in 2000 to 20.7% in
2001, mainly as a result of improved manufacturing efficiencies.
Selling expense decreased from $2,858,000 in 2000 to $1,849,000 in 2001,
primarily due to the decrease in net sales and decrease in selling expense by
$716,000 for SZE Hagenuk GmbH. Selling expense as a percent of net sales
decreased from 5.2% in 2000 to 3.7% in 2001.
General and administrative expense increased from $4,841,000 or 8.8 percent of
net sales in 2000 to $5,012,000 or 10.1 percent of net sales in 2001. The
increase is mainly due to increases in executive incentives and legal expense,
partially offset by eliminated expenses in 2001 due to the sale of SZE Hagenuk
GmbH in 2000.
17
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 percent of net sales decreased from 5.4% in 1999
to 5.2% 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.
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 2001, the average order amount was approximately $3,616. Large orders are
generally highly competitive and result in lower profit margins. In 2001, no
customer accounted for 10 percent or more of net sales of the Cooling Equipment
Business. 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.
- --------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
- ---------------------------------------------
(In thousands) %Increase
(Decrease)
-----------------
2001 2000 1999 2001 2000
------- ------- ------- ------- -------
Net sales $21,683 $29,774 $29,295 (27.2%) 1.6%
Gross profit 6,061 9,493 9,178 (36.1%) 3.4%
As a percentage of net sales 28.0% 31.9% 31.3%
Income from operations 627 2,995 2,867 (79.1%) 4.5%
As a percentage of net sales 2.9% 10.1% 9.8%
- --------------------------------------------------------------------------------
2001 Compared to 2000
Net sales decreased 27.2% from $29,774,000 in 2000 to $21,683,000 in 2001. The
decrease resulted from the economic recession in 2001.
Gross margins as a percentage of net sales decreased to 28.0% in 2001 from 31.9%
in 2000, primarily due to product mix.
Selling expenses decreased from $3,821,000 or 12.8 percent of net sales in 2000
to $3,061,000 or 14.1 percent of net sales in 2001. The decrease is due to a
decline in commission expense based on lower sales volume and decrease in
advertising.
General and administrative expenses decreased from $2,677,000 in 2000 to
$2,372,000 in 2001. The decrease is due to staff reduction and related costs as
well as a one time settlement charge recorded in 2000. General and
administrative expense as a percent of net sales increased to 10.9% in 2001 from
9.0% in 2000, mainly due to lower sales.
18
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% in 2000 from 31.3%
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 2000.
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% in 1999 to 9.0% in 2000.
General Corporate Expenses
General corporate expenses include general and administrative expense not
allocated to business segments and interest expense.
2001 Compared to 2000
General corporate expenses not allocated to business segments decreased 5.2%
from $4,186,000 in 2000 to $3,970,000 in 2001, primarily due to decrease in
professional services and lower expenses for corporate information services
projects, as more resources were devoted to information services projects in the
company's business segments.
Interest expense decreased 11.5% from $2,938,000 in 2000 to $2,600,000 in 2001
due to reduction of net borrowings by $6,804,000 or 17.4% in 2001, partially
offset by increased interest expense from renegotiated rates on refinancing of
remaining borrowings.
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%.
Interest expense increased 5.3% to $2,938,000 in 2000 from $2,790,000 in 1999,
due to increased borrowings for working capital requirements in 2000.
Income Taxes
The effective income tax (benefit) rates were (12.5%), 43.2% and 42.7% in 2001,
2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2002 were $119,000 as compared to
$290,000 at January 31, 2001. Net cash inflows of $8,562,000 generated from
operating activities and $1,380,000 proceeds from sale of property, plant and
equipment were used to fund purchases of property, plant and equipment of
$3,455,000 and net reduction of long-term debt of $6,647,000 and capitalized
lease obligations of $157,000.
19
Net cash provided by operating activities was $8,562,000, mainly due to earnings
before depreciation and amortization and a decrease in accounts receivable and
inventories, and offset by a decrease in accounts payable. Net cash provided by
operating activities was $3,105,000 in 2000, mainly due to earnings before
depreciation and amortization and increase in accounts receivable, offset by an
increase in accounts payable.
Net cash used in investing activities in 2001 was $1,894,000 versus $5,860,000
in 2000. Capital expenditures decreased from $5,534,000 in 2000 to $3,455,000 in
2001. In 2001, proceeds from the sale of property and equipment were $1,380,000,
mainly resulting from the sale of certain equipment in Lebanon, Tennessee to a
third party in June 2001. The Company leased back the equipment from the third
party purchaser. In 2000, 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 2000.
Net cash used in financing activities in 2001 was $6,804,000 compared to net
cash obtained from financing activities of $2,247,000 in 2000. In 2001, net cash
obtained from borrowings under revolving, term and mortgage loans was
$1,224,921,000, net repayment of capitalized lease obligations was $157,000 and
repayment of debt was $1,231,568,000. 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.
The Company's current ratio was 1.5 to 1 at January 31, 2002 and 2.1 to 1 at
January 31, 2001. Debt to total capitalization decreased to 45.9% at January 31,
2002 from 50.2% at January 31, 2001.
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
April 30, 2001, modifying certain covenants, increasing the interest rate to
8.46 percent, and changing the schedule of principal payments and were again
amended on December 18, 2001, to require previously unscheduled principal
payments of $1,000,000 no later than March 31, 2002 and $1,296,000 on June 30,
2002, in addition to the previously scheduled level monthly principal payments
of $179,000 beginning May 31, 2001 and continuing monthly thereafter as required
by the April 30, 2001 amendment. Based on the amended schedule of principal
repayments, the Notes due 2007 are payable in full in September 2004. The note
purchase agreement contains certain financial covenants. At January 31, 2002,
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 26, 2002, modifying certain covenants and deferring the
required March 31, 2002 principal payment to April 30, 2002.
On September 17, 1998, the Company entered into a private placement with
institutional investors of $10,000,000 of 6.97 percent unsecured senior notes
due September 17, 2008 (the "Notes due 2008"). The Notes due 2008 were amended
on April 30, 2001, modifying certain covenants, increasing the interest rate to
7.97 percent, and changing the schedule of principal payments, and were again
amended on December 18, 2001, to require previously unscheduled principal
payments of $1,000,000 no later than March 31, 2002 and $2,196,000 on June 30,
2002, in addition to the previously scheduled level monthly principal payments
of $119,000 beginning October 17, 2002 and continuing monthly thereafter as
required by the April 30, 2001 amendment. Based on the amended schedule of
principal repayments, the Notes due 2008 will be paid in full by July 2006. The
note purchase agreement contains certain financial covenants. At January 31,
2002, 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 26, 2002, modifying certain covenants and deferring the
required March 31, 2002 principal payment to April 30, 2002.
20
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement, as amended, the Company
can borrow up to $8,000,000, subject to borrowing base and other requirements,
under a revolving line of credit, which matures on July 31, 2003. On April 30,
2001 and September 14, 2001, the agreement was amended, modifying certain
covenants and increasing the interest rate. 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, 2002, the prime rate was
4.75 percent and the margin added to the LIBOR rate, which is determined each
quarter based on a financial statement ratio, was 2.25 percent. The Company had
borrowed $2,300,000 under the revolving line of credit at January 31, 2002. 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, $793,000 was drawn under the
agreement as letters of credit. These letters of credit principally guarantee
performance to third parties as a result of various insurance and 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. At January 31, 2002, the Company was not in compliance with two
covenants under the line of credit. The Company has obtained a waiver for such
non-compliance.
On October 10, 2001, the Company pledged substantially all of its assets that
were not previously pledged as security for the Notes due 2007, the Notes due
2008 and the Bank credit agreement, as required by those agreements.
The Company has determined that it will need to renegotiate or refinance the
note purchase agreements for the Notes due 2007 and the Notes due 2008, which
currently require principal payments aggregating $4,286,000 to be made by the
Company on June 30, 2002. The Company is currently engaged in a review of the
options available to address its long-term capital needs and is negotiating
amendments to or replacements of the note purchase agreements and credit
agreement. While the Company believes it will have adequate financing available
to meet its needs in the future, there is no assurance any such financing will
be available or that the terms of any financing will be more favorable than the
Company's existing financing.
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 (the
"Old Winchester Mortgage") and 20 percent by the Industrial Revenue Bonds
described above. On April 26, 2002 the Company borrowed $3,450,000 under a new
mortgage note secured by all its property in Winchester, Virginia (the "New
Winchester Mortgage"). Proceeds from the New Winchester Mortgage, net of
repayment of the Existing Winchester Mortgage, were approximately $2,700,000.
The New Winchester Mortgage bears interest at 7.10 percent, and the loan's
amortization schedule and term are ten years. 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 A/S ("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.
21
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 acquisition of Nordic Air A/S. 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, 2002, 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.
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 (FASB) issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which the Company adopted for all applicable
transactions occurring after March 31, 2001. The adoption of SFAS No. 140 has
not had a material effect on the reported results of operations, financial
condition or cash flows of the Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". The
statement requires all business combinations initiated after June 30, 2001 to be
accounted for by the purchase method. The Company anticipates that adopting SFAS
No. 141 will not have a material effect on reported results of operations,
financial condition or cash flows of the Company.
The Company is currently evaluating the impact of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets." The Company plans to adopt SFAS No. 142
for the Company's fiscal year beginning February 1, 2002. The Company
anticipates that adopting SFAS No. 142 will require it to report a material
adverse change in its financial position and results of operations due to
writing down between 70% and 100% of the Company's approximately $14,000,000 of
goodwill and related intangible assets, but will have no effect at all on cash
flow, when such statement is adopted.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Retirement
Obligations," which is effective February 1, 2003. It requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as part of
the carrying amount of the long-lived asset. The Company does not expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows.
22
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for the Company starting
February 1, 2002. SFAS No. 144 addresses accounting and reporting of the
impairment or disposal of long-lived assets, including discontinued operations,
and establishes a single accounting method for the sale of long-lived assets.
The Company does not expect adoption of SFAS No. 144 to have a material effect
on the results of operations, financial condition or cash flows.
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, 2002, 2001 and
2000.
The changeover from national currencies to the Euro began 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
possible 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, 2002 and
January 31, 2001 and for each of the three years in the period ended January 31,
2002 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 2002 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 2002 annual meeting of stockholders.
23
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 2002 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 2002 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, 2002.
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.
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MFRI, Inc. and subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of MFRI, Inc. and
subsidiaries as of January 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 14a(2). These financial
statements and financial statement schedule are the responsibility of the
Company'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 at
January 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2002 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, 2002
25
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
2001 2000 1999
Fiscal Year Ended January 31,
2002 2001 2000
- --------------------------------------------------------------------------------
Net sales $125,534 $149,533 $137,170
Cost of sales 99,202 117,412 103,984
-------- -------- --------
Gross profit 26,332 32,121 33,186
Operating expenses:
Selling expense 9,775 12,075 11,760
General and administrative expense 14,459 15,045 14,572
Management services agreement - net (74) 81 (126)
-------- -------- --------
Total operating expenses 24,160 27,201 26,206
-------- -------- --------
Income from operations 2,172 4,920 6,980
Interest expense - net 2,600 2,938 2,790
-------- -------- --------
Income (loss) before income taxes (428) 1,982 4,190
Income taxes (benefit) (54) 856 1,789
-------- -------- -------
Net income (loss) $ (374) $ 1,126 $ 2,401
======== ======== =======
Net income(loss)per common share - basic $(0.08) $0.23 $0.49
Net income (loss) per common share - diluted $(0.08) $0.23 $0.49
Weighted average common shares outstanding 4,922 4,922 4,922
Weighted average common shares outstanding
assuming full dilution 4,922 4,923 4,928
See notes to consolidated financial statements.
26
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
As of January 31,
ASSETS 2002 2001
- -----------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 119 $ 290
Trade accounts receivable, less allowance for doubtful
accounts of $343 in 2001 and $410 in 2000 18,845 26,944
Accounts receivable - related companies 2 262
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,324 3,208
Income taxes receivable 1,000 -
Inventories 18,682 21,220
Deferred income taxes 2,179 2,905
Prepaid expenses and other current assets 1,461 1,142
-------- --------
Total current assets 45,612 55,971
-------- --------
Property, Plant and Equipment, Net 30,065 31,351
Other Assets:
Patents, net of accumulated amortization 962 1,091
Goodwill, net of accumulated amortization 12,445 12,989
Other assets 3,445 3,383
-------- --------
Total other assets 16,852 17,463
-------- --------
Total Assets $ 92,529 $104,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable $ 9,643 $ 12,469
Accounts payable - related companies 188 48
Accrued compensation and payroll taxes 2,009 2,491
Other accrued liabilities 2,459 2,656
Commissions payable 4,821 5,492
Income taxes payable 27 13
Current maturities of long-term debt 11,100 2,745
Billings in excess of costs and estimated earnings
on uncompleted contracts 525 578
-------- --------
Total current liabilities 30,772 26,492
-------- --------
Long-Term Liabilities:
Long-term debt, less current maturities 21,100 36,421
Deferred income taxes 1,143 2,090
Other 1,527 983
-------- --------
Total long-term liabilities 23,770 39,494
-------- --------
Stockholders' Equity:
Common stock, $0.01 par value, authorized-
50,000 and 50,000 shares in 2001 and 2000, respectively;
4,922 issued and outstanding in 2001 and 2000,
respectively 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 17,725 18,099
Accumulated other comprehensive loss (1,184) (746)
-------- --------
Total stockholders' equity 37,987 38,799
-------- --------
Total Liabilities and Stockholders' Equity $ 92,529 $104,785
======== ========
See notes to consolidated financial statements.
27
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 (Loss)
--------------------------------------------------------------------------------------
Balance February 1, 1999 4,922 $ 49 $ 21,397 $ 14,572 $ (250)
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 (loss) 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
========
Net income (loss) (374) $(374)
Minimum pension liability adjustment
(net of tax benefit of $138) (227) (227)
Unrealized translation adjustment (211) (211)
-------- -------- -------- -------- -------- --------
Balance January 31, 2002 4,922 $ 49 $21,397 $ 17,725 $(1,184) $(812)
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
28
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2001 2000 1999
Fiscal Year Ended January 31,
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ (374) $ 1,126 $ 2,401
Adjustments to reconcile net income to
net cash flows from operating activities:
Provision for depreciation and amortization 4,110 4,124 3,893
Deferred income taxes (89) (293) 454
(Gain) loss on sale of asset (8) 241 -
Loss on sale of business 204 - -
Change in operating assets and liabilities,
net of effects of divestitures:
Accounts receivable 7,308 (4,338) (1,323)
Income taxes receivable (975) 710 114
Inventories 2,378 (718) 1,240
Prepaid expenses and other assets (835) (1,331) (482)
Accounts payable (2,050) 2,838 300
Compensation and payroll taxes (391) (322) 677
Other accrued liabilities (716) 1,068 (1,178)
-------- -------- -------
Net Cash Flows from Operating Activities 8,562 3,105 6,096
-------- -------- -------
Cash Flows from Investing Activities:
Change in restricted cash from Industrial
Revenue Bonds - - 1,042
Proceeds on sale of business 184 - -
Reduction in cash balance due to sale of business (3) (356) -
Proceeds from sale of property and equipment 1,380 30 398
Purchases of property and equipment (3,455) (5,534) (5,032)
-------- -------- -------
Net Cash Flows from Investing Activities (1,894) (5,860) (3,592)
-------- -------- -------
Cash Flows from Financing Activities:
Net payments on capitalized lease obligations (157) (196) (218)
Borrowings under revolving, term and mortgage loans 1,224,921 246,466 52,032
Repayment of debt (1,231,568) (244,023) (54,172)
-------- -------- -------
Net Cash Flows from Financing Activities (6,804) 2,247 (2,358)
-------- -------- -------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (35) 132 (60)
-------- -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (171) (375) 86
Cash and Cash Equivalents - Beginning of Year 290 665 579
-------- -------- -------
Cash and Cash Equivalents - End of Year $ 119 $ 290 $ 665
======== ======== =======
See notes to consolidated financial statements.
29
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
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
2001, 2000 and 1999 are the fiscal years ended January 31, 2002, 2001 and 2000,
respectively. Balances described as balances as of 2001, 2000 and 1999 are
balances as of January 31, 2002, 2001 and 2000, 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 recognizes 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.
30
Operating Cycle: The length of Perma-Pipe 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)
2001 2000
--------- --------
Raw materials $14,720 $15,926
Work in process 1,551 1,971
Finished goods 2,411 3,323
--------- --------
Total $18,682 $21,220
========= ========
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. The Company did not incur any
cost to be capitalized during 2001 and 2000.
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)
2001 2000
--------- --------
Land, buildings and improvements $18,901 $18,392
Machinery and equipment 20,229 19,526
Furniture and office equipment 7,038 6,992
Transportation equipment 520 794
--------- --------
46,688 45,704
Less accumulated depreciation and amortization (16,623) (14,353)
--------- --------
Property, plant and equipment, net $30,065 $31,351
========= ========
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 $2,438,594 and
$1,895,000 at January 31, 2002 and 2001, 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
$1,099,479 and $929,000 at January 31, 2002 and 2001, 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, 2002, 2001 and 2000.
31
Net Income (Loss) Per Common Share: Earnings (loss) 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) 2001 2000 1999
-------- -------- --------
Net Income (loss) $(374) $1,126 $2,401
======== ======== ========
Basic weighted average common shares outstanding 4,922 4,922 4,922
Dilutive effect of stock options - 1 6
-------- -------- --------
Weighted average common shares
Outstanding assuming full dilution 4,922 4,923 4,928
======== ======== ========
Net income (loss) per common share - basic $(0.08) $0.23 $0.49
Net income (loss) per common share - diluted $(0.08) $0.23 $0.49
In 2001, 2000 and 1999, the weighted average number of stock options not
included in the computation of diluted earnings (loss) per share of common stock
because the options exercise price exceeded the average market price of the
common shares were 846,000, 876,000 and 828,000, respectively. These options
were outstanding at the end of each of the respective years, except for options
for 4,000, 13,000 and 96,000 shares, which expired in 2001, 2000 and 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, 2002 and 2001 are also
reasonable estimates of their fair value, as evidenced by the renegotiation of
interest rates and terms that occurred recently as described in Note 7.
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, 1999 $(122) $(128) $(250)
Unrealized translation adjustment (400) - (400)
Minimum pension liability adjustment
(net of tax expense of $36) - 59 59
-------- -------- --------
Balance - January 31, 2000 (522) (69) (591)
Unrealized translation adjustment 42 - 42
Minimum pension liability adjustment
(net of tax benefit of $121) - (197) (197)
-------- -------- --------
Balance - January 31, 2001 (480) (266) (746)
Unrealized translation adjustment (211) - (211)
Minimum pension liability adjustment
(net of tax benefit of $138) - (227) (227)
-------- -------- --------
Balance - January 31, 2002 $(691) $(493) $(1,184)
======== ======== ========
32
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 (FASB) issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which the Company adopted for all applicable
transactions occurring after March 31, 2001. The adoption of SFAS No. 140 has
not had a material effect on the reported results of operations, financial
condition or cash flows of the Company.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". The
statement requires all business combinations initiated after June 30, 2001 to be
accounted for by the purchase method. The Company anticipates that adopting SFAS
No. 141 will not have a material effect on reported results of operations,
financial condition or cash flows of the Company.
The Company is currently evaluating the impact of adopting SFAS No. 142,
"Goodwill and Other Intangible Assets." The Company plans to adopt SFAS No. 142
for the Company's fiscal year beginning February 1, 2002. The Company
anticipates that adopting SFAS No. 142 will require it to report a material
adverse change in its financial position and results of operations due to
writing down between 70% and 100% of the Company's approximately $14,000,000 of
goodwill and related intangible assets, but will have no effect at all on cash
flow, when such statement is adopted.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Retirement
Obligations," which is effective January 1, 2003. It requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as part of
the carrying amount of the long-lived asset. The Company does not expect
adoption of SFAS No. 143 to have a material effect on the results of operations,
financial condition or cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for the Company starting in
February 1, 2002. SFAS No. 144 addresses accounting and reporting of the
impairment or disposal of long-lived assets, including discontinued operations,
and establishes a single accounting method for the sale of long-lived assets.
The Company does not expect adoption of SFAS No. 144 to have a material effect
on the results of operations, financial condition or 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
33
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 $244,000 and paid $170,000 under such agreements in 2001. 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.
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 paid $54,000 in 2001 to the
related company for space occupied. The Company made rental payments of $236,000
directly to the lessor in 2000, and allocated the expense to users based on
space occupied. 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. 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
Perma-Pipe Services Limited
The Company has signed a contract to sell its subsidiary Perma-Pipe Services
Ltd. Cash proceeds of $358,000 are to be received in May 2002. The book basis of
the investment and intercompany receivable were $562,000 resulting in a loss of
$204,000.
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.
Note 5 - Retention Receivable
Retention is the amount withheld by a customer until a long-term contract is
completed. Retention of $505,611 and $395,000 is included in the balance of
trade accounts receivable at January 31, 2002 and 2001, respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
(In thousands)
2001 2000
-------- --------
Costs incurred on uncompleted contracts $13,926 $21,882
Estimated earnings 1,834 5,299
-------- --------
Earned revenue 15,760 27,181
Less billings to date 12,961 24,551
-------- --------
Total $ 2,799 $ 2,630
======== ========
Classified as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,324 $ 3,208
Billings in excess of costs and estimated
earnings on uncompleted contracts (525) (578)
-------- --------
Total $ 2,799 $ 2,630
======== ========
34
Note 7 - Debt
Long-term debt consists of the following:
(In thousands)
2001 2000
--------- --------
Unsecured senior notes due 2007 $ 8,714 $12,857
Unsecured senior notes due 2008 10,000 10,000
Revolving bank loan 2,300 4,800
Industrial Revenue Bonds 5,200 5,200
Mortgage notes 4,416 5,002
Capitalized lease obligations (Note 8) 358 515
Term loans 871 562
Short-term credit arrangements 339 180
Other 2 50
--------- --------
32,200 39,166
Less current maturities 11,100 2,745
--------- --------
Total $21,100 $36,421
========= ========
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
April 30, 2001, modifying certain covenants, increasing the interest rate to
8.46 percent, and changing the schedule of principal payments and were again
amended on December 18, 2001, to require previously unscheduled principal
payments of $1,000,000 no later than March 31, 2002 and $1,296,000 on June 30,
2002, in addition to the previously scheduled level monthly principal payments
of $179,000 beginning May 31, 2001 and continuing monthly thereafter as required
by the April 30, 2001 amendment. Based on the amended schedule of principal
repayments, the Notes due 2007 are payable in full in September 2004. The note
purchase agreement contains certain financial covenants. At January 31, 2002,
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 26, 2002, modifying certain covenants and deferring the
required March 31, 2002 principal payment to April 30, 2002.
On September 17, 1998, the Company entered into a private placement with
institutional investors of $10,000,000 of 6.97 percent unsecured senior notes
due September 17, 2008 (the "Notes due 2008"). The Notes due 2008 were amended
on April 30, 2001, modifying certain covenants, increasing the interest rate to
7.97 percent, and changing the schedule of principal payments, and were again
amended on December 18, 2001, to require previously unscheduled principal
payments of $1,000,000 no later than March 31, 2002 and $2,196,000 on June 30,
2002, in addition to the previously scheduled level monthly principal payments
of $119,000 beginning October 17, 2002 and continuing monthly thereafter as
required by the April 30, 2001 amendment. Based on the amended schedule of
principal repayments, the Notes due 2008 will be paid in full by July 2006. The
note purchase agreement contains certain financial covenants. At January 31,
2002, 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 26, 2002, modifying certain covenants and deferring the
required March 31, 2002 principal payment to April 30, 2002.
On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement, as amended, the Company
can borrow up to $8,000,000, subject to borrowing base and other requirements,
under a revolving line of credit, which matures on July 31, 2003. On April 30,
2001 and September 14, 2001, the agreement was amended, modifying certain
covenants and increasing the interest rate. 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
35
by the Bank for the term of the loan. At January 31, 2002, the prime rate was
4.75 percent and the margin added to the LIBOR rate, which is determined each
quarter based on a financial statement ratio, was 2.25 percent. The Company had
borrowed $2,300,000 under the revolving line of credit at January 31, 2002. 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, $793,000 was drawn under the
agreement as letters of credit. These letters of credit principally guarantee
performance to third parties as a result of various insurance and 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. At January 31, 2002, the Company was not in compliance with two
covenants under the line of credit. The Company has obtained a waiver for such
non-compliance.
On October 10, 2001, the Company pledged substantially all of its assets that
were not previously pledged as security for the Notes due 2007, the Notes due
2008 and the Bank credit agreement, as required by those agreements.
The Company has determined that it will need to renegotiate or refinance the
note purchase agreements for the Notes due 2007 and the Notes due 2008, which
currently require principal payments aggregating $4,286,000 to be made by the
Company on June 30, 2002. The Company is currently engaged in a review of the
options available to address its long-term capital needs and is negotiating
amendments to or replacements of the note purchase agreements and credit
agreement. While the Company believes it will have adequate financing available
to meet its needs in the future, there is no assurance any such financing will
be available or that the terms of any financing will be more favorable than the
Company's existing financing.
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 (the
"Old Winchester Mortgage") and 20 percent by the Industrial Revenue Bonds
described above. On April 26, 2002 the Company borrowed $3,450,000 under a new
mortgage note secured by all its property in Winchester, Virginia (the "New
Winchester Mortgage"). Proceeds from the New Winchester Mortgage, net of
repayment of the Existing Winchester Mortgage, were approximately $2,700,000.
The New Winchester Mortgage bears interest at 7.10 percent, and the loan's
amortization schedule and term are ten years.
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 A/S ("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.
36
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 acquisition of Nordic Air A/S. 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, 2002, 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: 2002 - $11,100,000; 2003 - $4,706,000; 2004 -
$2,950,000; 2005 - $1,553,000; 2006 - $798,000; thereafter - $8,792,000.
Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
(In thousands)
2001 2000
-------- --------
Machinery and equipment $ 66 $ 66
Furniture and office equipment 698 698
Transportation equipment 438 652
-------- --------
1,202 1,417
Less accumulated amortization 853 916
-------- --------
$ 349 $ 501
======== ========
Until February 28, 2001, the Company leased certain office and warehouse
facilities substantially all of which are occupied by a related 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. 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 sold equipment for $1,359,000 in June 2001. The equipment was leased
back from the purchaser under a master lease agreement for a period of seven
years. No gain or loss was recognized on this transaction and the lease is being
accounted for as an operating lease. The lease requires the Company to pay
customary operating and repair expenses. The lease also contains a renewal
option at lease termination and a purchase option at the higher of fair market
value or 20% of cost.
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.
37
At January 31, 2002, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
Capital Operating
Leases Leases
(In thousands) -------- ---------
2002 $158 $ 702
2003 162 540
2004 62 234
2005 - 234
2006 - 234
Thereafter - 637
-------- ---------
382 2,581
Less amount representing interest 24 -
-------- ---------
Present value of future minimum lease payments (Note 7) $358 $2,581
======== =========
Rental expense for operating leases was $834,000, $1,082,000 and $944,000 in
2001, 2000 and 1999, respectively.
Note 9 - Income Taxes
The following is a summary of domestic and foreign income (loss) before income
taxes:
(In thousands)
2001 2000 1999
-------- -------- --------
Domestic ($417) $1,702 $3,509
Foreign (11) 280 681
-------- -------- --------
Total ($428) $1,982 $4,190
======== ======== ========
Components of income tax expense (benefit) are as follows:
(In thousands)
2001 2000 1999
-------- -------- --------
Current:
Federal $ 60 $ 928 $ 881
Foreign (43) 151 275
State and other 18 70 179
-------- -------- --------
35 1,149 1,335
Deferred (89) (293) 454
-------- -------- --------
Total $ (54) $ 856 $1,789
======== ======== ========
38
The difference between the provision (benefit) for income taxes and the amount
computed by applying the federal statutory rate is as follows:
(In thousands)
2001 2000 1999
-------- -------- --------
Tax (benefit) at federal statutory rate $ (146) $ 674 $1,425
Foreign rate tax differential (150) 13 84
State (benefit) taxes, net of federal benefit (11) 82 163
Amortization of cost in excess of assets acquired 108 108 108
Officer's life insurance 60 - -
Adjustment to estimated income tax accruals 39 - -
Other - net 46 (21) 9
-------- -------- --------
Total $ (54) $ 856 $1,789
======== ======== ========
Components of the deferred income tax asset and liability balances are as
follows:
(In thousands)
2001 2000 1999
-------- -------- --------
Current:
Accrued commissions $1,055 $1,179 $1,124
Other accruals not yet deducted 842 706 669
Non-qualified deferred compensation 23 272 217
Inventory valuation allowance 182 214 151
Allowance for doubtful accounts 113 78 68
Inventory uniform capitalization 12 32 50
Foreign acquisition adjustments - - 38
NOL carryforward - 83 91
Other (48) (54) 24
-------- -------- --------
Total $2,179 $2,905 $2,432
======== ======== ========
(In thousands) 2001 2000 1999
-------- -------- --------
Long-term:
Capital loss carryforward from sale of foreign subsidiary $ (466) $ - $ -
Depreciation 1,590 1,801 1,841
Goodwill 429 398 344
Foreign acquisition adjustments - - 104
Non-qualified deferred compensation (220) - -
Other (190) (109) (315)
-------- -------- --------
Total $1,143 $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.
39
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plan:
(In thousands) 2001 2000
-------- --------
Accumulated benefit obligations:
Vested benefits $1,957 $1,745
======== ========
Accumulated benefits $1,983 $1,786
======== ========
Change in benefit obligation:
Benefit obligation - beginning of year $1,874 $1,159
Service cost 90 53
Interest cost 129 82
Amendments - 550
Actuarial loss 215 82
Benefits paid (97) (52)
-------- --------
Benefit obligation - end of year 2,211 1,874
-------- --------
Change in plan assets:
Fair value of plan assets - beginning of year 1,313 923
Actual return on plan assets (17) 46
Company contributions 377 396
Benefits paid (97) (52)
-------- --------
Fair value of plan assets - end of year 1,576 1,313
-------- --------
Funded status (635) (562)
Unrecognized prior service cost 566 628
Unrecognized actuarial loss 546 226
-------- --------
Prepaid benefit cost recognized in the
consolidated balance sheet $ 477 $ 292
======== =========
Amounts recognized in the consolidated
balance sheet:
Accrued benefit liability $ (883) $ (766)
Intangible asset 566 628
Accumulated other comprehensive income 794 430
-------- --------
Net amount recognized $ 477 $ 292
======== ========
2001 2000
-------- --------
Weighted-average assumptions at end of year:
Discount rate 6.89% 7.00%
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 $ 90 $ 53
Interest cost 129 82
Expected return on plan assets (110) (78)
Amortization of prior service cost 62 12
Recognized actuarial loss 22 -
--------- --------
Net periodic benefit cost $ 193 $ 69
========= ========
40
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 $319,000, $348,000,
and $321,000 for the years ended January 31, 2002, 2001 and 2000, 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 $150,000, $226,000, and $175,000 in 2001, 2000 and 1999, 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
2001, 2000 and 1999.
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.
41
The following is information relevant to the Company's business segments:
(In thousands)
2001 2000 1999
-------- -------- --------
Net Sales:
Filtration Products $ 54,434 $ 64,950 $ 56,165
Piping Systems 49,417 54,809 51,710
Industrial Process Cooling Equipment 21,683 29,774 29,295
-------- -------- --------
Total Net Sales $125,534 $149,533 $137,170
======== ======== ========
Gross Profit:
Filtration Products $ 10,063 $ 11,844 $ 12,730
Piping Systems 10,208 10,784 11,278
Industrial Process Cooling Equipment 6,061 9,493 9,178
-------- -------- --------
Total Gross Profit $ 26,332 $ 32,121 $ 33,186
======== ======== ========
Income from Operations:
Filtration Products $ 2,168 $ 3,026 $ 3,883
Piping Systems 3,347 3,085 4,030
Industrial Process Cooling Equipment 627 2,995 2,867
Corporate (3,970) (4,186) (3,800)
-------- -------- --------
Total Income from Operations $ 2,172 $ 4,920 $ 6,980
======== ======== ========
Segment Assets:
Filtration Products $ 40,848 $ 43,591 $ 39,868
Piping Systems 33,934 38,605 35,828
Industrial Process Cooling Equipment 10,932 17,223 14,885
Corporate 6,815 5,366 7,195
-------- -------- --------
Total Segment Assets $ 92,529 $104,785 $ 97,776
======== ======== ========
Capital Expenditures:
Filtration Products $ 866 $ 1,066 $ 1,317
Piping Systems 1,687 1,878 2,725
Industrial Process Cooling Equipment 740 93 171
Corporate 162 2,497 819
-------- -------- --------
Total Capital Expenditures $ 3,455 $ 5,534 $ 5,032
======== ======== =========
Depreciation and Amortization:
Filtration Products $ 1,396 $ 1,359 $ 1,359
Piping Systems 1,500 1,628 1,489
Industrial Process Cooling Equipment 334 327 332
Corporate 880 810 713
-------- -------- --------
Total Depreciation and Amortization $ 4,110 $ 4,124 $ 3,893
======== ======== ========
42
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)
2001 2000 1999
-------- -------- --------
Net Sales:
United States $104,155 $128,379 $114,726
Canada 7,055 7,241 5,166
Europe 10,400 10,624 10,593
Mexico, South America, Central America
and the Caribbean 1,689 969 2,432
Asia 1,600 1,889 3,513
Other 635 431 740
-------- -------- --------
Total Net Sales $125,534 $149,533 $137,170
======== ======== ========
Long-Lived Assets:
United States $ 28,859 $ 29,958 $ 26,874
Europe 1,206 1,393 1,599
-------- -------- --------
Total Long-Lived Assets $ 30,065 $ 31,351 $ 28,473
======== ======== ========
Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
(In thousands)
2001 2000 1999
-------- -------- --------
Cash paid for:
Income taxes, net of refunds received $ 1,096 $ 396 $ 1,306
======== ======== ========
Interest, net of amounts capitalized $ 2,837 $ 2,980 $ 2,813
======== ======== ========
Noncash Financing and Investing Activities:
Fixed assets acquired under capital leases $ - $ 46 $ 210
======== ======== ========
Sale of business:
Note receivable from buyer $ 358 $ 241 $ -
======== ======== ========
Purchase of building:
Purchase price $ - $ 4,438 $ -
Cash paid - 1,767 -
-------- -------- --------
Net liabilities assumed $ - $ 2,671 $ -
======== ======== ========
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.
43
Pursuant to the 2001 Independent Directors' Stock Option Plan (the "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 (an
"Independent Director") on the date the individual is first elected as an
Independent Director, an option to purchase 1,000 shares was granted to each
Independent Director on December 31, 2001, and options to purchase 1,000 shares
are to be granted to each Independent Director upon each date such Independent
Director is re-elected as an Independent Director, commencing with the Company's
annual meeting for the year 2002. Provisions of a predecessor plan, the 1990
Independent Directors' Stock Option Plan, were the same as those of the
Directors' Plan in every significant respect.
The MFRI 2001 Stock Option Exchange Plan ("Exchange Plan"), offered eligible
optionees an opportunity to replace their stock options with new options. On the
Exchange Plan offer's expiration date of June 26, 2001, the Company accepted and
canceled 728,800 options. Pursuant to the terms of the Exchange Plan, the
Company granted 674,600 new options to those tendering optionees who were active
employees at December 31, 2001. 54,200 options were tendered by individuals no
longer employed by the Company at December 31, 2001.
In connection with the purchase agreement relating to the acquisition of TDC
Filter Manufacturing, Inc., (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:
2001 2000 1999
--------------------------- -------------------------- ---------- ---------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- --------------- ---------- --------------- ---------- ---------------
Outstanding at beginning of year 875,550 $6.40 821,650 $6.68 834,000 $7.16
Granted 731,800 3.12 114,700 4.09 113,600 4.25
Exercised - - - - - -
Cancelled (761,750) 6.13 (60,800) 5.79 (125,950) 7.68
----------- ------- ---------- ------- ---------- -------
Outstanding at end of year 845,600 $3.80 875,550 $6.40 821,650 $6.68
=========== ======= ========== ======= ========== =======
Options exercisable at year-end 109,425 600,800 511,075
=========== ========== ==========
The following table summarizes information concerning outstanding and
exercisable options at January 31, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted
Exercise Outstanding at Remaining Exercise Price Exercisable at Average
Prices Jan. 31, 2002 Contractual Life Jan. 31, 2002 Exercise Price
- ---------------- ----------------- -------------------- ----------------- ---------------- ------------------
$3.00-$3.99 729,800 9.9 years $3.12 8,700 $3.12
$4.00-$4.99 23,700 7.6 years 4.16 9,375 4.21
$6.00-$6.99 14,100 3.9 years 6.86 14,100 6.86
$8.00-$8.99 3,000 6.2 years 8.10 2,250 8.10
$9.00-$9.99 75,000 5.8 years 9.60 75,000 9.60
----------- ------------- --------- ---------- --------
845,600 9.4 years $3.80 109,425 $8.24
=========== ============= ========= ========== ========
44
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 (loss) and earnings (loss) per share
would have been as follows:
2001 2000 1999
-------- -------- --------
Net income (loss) - as reported (in thousands) $ (374) $ 1,126 $ 2,401
Net income (loss) - pro forma (in thousands) $ (405) $ 847 $ 2,115
Net income (loss) per common share - basic, as reported $ (0.08) $ 0.23 $ 0.49
Net income (loss) per common share - basic, pro forma $ (0.08) $ 0.17 $ 0.43
The weighted average fair value of options granted during 2001 (net of options
surrendered), 2000 and 1999 are estimated at $1.14, $2.36 and $2.37, per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
2001 2000 1999
-------- -------- ----------
Expected volatility 44.85% 46.33% 46.02%
Risk-free interest rate 4.95% 6.49% 5.42%
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.
45
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years 2001 and 2000:
(In thousands except per share information) 2001
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- ---------- --------- ---------
Net Sales $30,692 $34,190 $32,393 $28,259
Gross Profit 7,011 8,179 6,929 4,213
Net Income (loss) 140 796 161 (1,471)
Per Share Data:
Net income (loss) - basic $0.03 $0.16 $0.03 $(0.30)
Net income (loss) - diluted $0.03 $0.16 $0.03 $(0.30)
2000
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Net Sales $34,155 $41,579 $36,943 $36,856
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)
46
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning of Costs and Charged to Other Deductions from Balance at
Description Period Expenses Accounts (1) Reserves (2) End of Period
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 2002:
Allowance for possible
losses in collection of
trade receivables $410,000 $335,000 $139,000 $263,000 $343,000
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
(1) Disposed with sale of business.
(2) Uncollectible accounts charged off.
47
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, 2002 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, 2002
)
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 )
48
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(a) 1993 Stock Option Plan [Incorporated by reference to Exhibit 10.4
of Registration Statement No. 33-70794]
10(b) 1994 Stock Option Plan [Incorporated by reference to Exhibit
10(c) to the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1994 (SEC File No. 0-18370)]
10(c) 2001 Independent Directors Stock Option Plan, as amended
[Incorporated by reference to Exhibit 10(d)(5) to the Company's
Schedule TO filed on May 25, 2001 (SEC File No. 0-18370)]
10(d) Form of Directors Indemnification Agreement [Incorporated by
reference to Exhibit 10.7 to Registration Statement No. 33-70298]
10(e) Offer to Exchange dated May 25, 2001 [Incorporated by reference
to Exhibit (a)(1)(A) to the Company's Schedule TO filed on
May 25, 2001 (SEC File No. 0-18370)]
10(f) Form of Supplemental Letter to Eligible Optionholders
[Incorporated by reference to Exhibit (a)(1)(C) to Amendment
No. 3 to the Company's Scheudle TO filed on June 19, 2001
(SEC File No. 0-18370)]
21* Subsidiaries of MFRI, Inc.
23* Consent of Deloitte & Touche LLP
24* Power of Attorney executed by directors and officers of the
Company
- --------------------
* Filed herewith
49
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)
50
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, 2002 appearing in the Annual Report on Form 10-K of MFRI, Inc.
for the year ended January 31, 2002 and to the reference to us under the heading
of "Experts" in the Prospectuses, which are a part of Registration Statements
No. 333-21951 and No. 333-44787.
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 30, 2002
51
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of MFRI, INC., a Delaware corporation (the
"Company"), does hereby constitute and appoint DAVID UNGER, HENRY M. 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 all acts and things which said
attorneys and agents, or any of them, deem advisable to enable the Company to
comply with the Securities Exchange Act of 1934, as amended, and any
requirements or regulations of the Securities and Exchange Commission in respect
thereof, in connection with the Company's filing of an annual report on Form
10-K for the Company's fiscal year 2001, including specifically, but without
limitation of the general authority hereby granted, the power and authority to
sign his name as a director or officer, or both, of the Bank, as indicated below
opposite his signature, to the Form 10-K, and any amendment 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 25th day of April, 2002.
/s/ David Unger /s/ Arnold F. Brookstone
David Unger, Chairman of the Board of Arnold F. Brookstone, Director
Directors and President
/s/ Henry M. Mautner /s/ Don Gruenberg
Henry M. Mautner, Vice Chairman of Don Gruenberg, Director and
the Board of Directors Vice President
/s/ Gene K. Ogilvie /s/ Bradley E. Mautner
Gene K. Ogilvie, Director and Bradley E. Mautner, Director
Vice President and 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
52