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UNITED STATES
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, 2004
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-18370
MFRI, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7720 Lehigh Avenue
Niles, Illinois 60714
(Address of principal executive offices) (Zip Code)
(847) 966-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b). Yes/ / No /x/
The aggregate market value of the voting securities of the registrant
beneficially owned by non-affiliates of the registrant (the exclusion of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant) was
approximately $7,037,985 based on the closing sale price of $1.950 per share as
reported on the NASDAQ National Market on July 31, 2003.
The number of shares of the registrant's common stock outstanding
at March 31, 2004 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 2004 III
annual meeting of stockholders
FORM 10-K CONTENTS
JANUARY 31, 2004
Item Page
- --------------------------------------------------------------------------------
Part I:
1. Business 1
Company Profile 1
Filtration Products 1
Piping Systems 4
Industrial Process Cooling Equipment 6
Employees 9
Executive Officers of the Registrant 10
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 12
Part II:
5. Market for Registrant's Common Equity and Related Stockholder Matters 12
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
7A. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
9A. Controls and Procedures 24
Part III:
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
13. Certain Relationships and Related Transactions 24
14. Principal Accountant Fees and Services 25
Part IV:
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 51
Certifications 58
- --------------------------------------------------------------------------------
PART I
Item 1. BUSINESS
Company Profile
MFRI, Inc. ("MFRI" or the "Company") is a holding company which has subsidiaries
engaged in the manufacture and sale of products in three distinct business
segments: filtration products, piping systems and industrial process cooling
equipment.
The Company's filtration products business (the "Filtration Products Business")
is conducted by Midwesco Filter Resources, Inc. ("Midwesco Filter"). Perma-Pipe,
Inc. ("Perma-Pipe") conducts the piping systems business (the "Piping Systems
Business"). The industrial process cooling equipment 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 and subsidiaries.
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, filter
cleaning and filter replacement.
Perma-Pipe engineers, designs, manufactures and sells specialty piping systems
and leak detection and location systems. Perma-Pipe's specialty 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
flow lines 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 systems
products 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.
Thermal Care engineers, designs and manufactures industrial process cooling
equipment, including liquid chillers, mold temperature controllers, cooling
towers, plant circulating systems, and related accessories for use in industrial
process applications.
Additional information with respect to the Company's lines of business is
included in the following discussions of the separate business segments and in
the financial statements and related notes thereto.
Filtration Products Business
Air Filtration and Particulate Collection Systems. Air filtration and
particulate collection systems have been used for over 55 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.
1
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.
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 26,000 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.
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. 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,
maintenance services and leak detection account for approximately 13% 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, 2004, no
customer accounted for 10% 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 approximately 8% of the domestic filtration
company's product sales during the year ended January 31, 2004, were about the
same level as the previous year. Nordic Air Filtration A/S ("Nordic Air"), 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).
2
Backlog. As of January 31, 2004, the dollar amount of backlog (uncompleted firm
orders) for filtration products was $14,499,000. As of January 31, 2003, the
amount of backlog was $11,781,000. A customer has placed an order that is
deliverable over multiple years. Therefore, approximately $4,200,000 of the
backlog as of January 31, 2004 is not expected to be completed in 2004.
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. Nevertheless, the Company has
implemented an aggressive program to limit inventory to the minimum levels
compatible with meeting customer needs.
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% 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 effort is 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 issued 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 U.S.
Supreme Court decision upholding the right of the U.S. EPA to reduce the minimum
size of particulates 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.
3
Piping Systems Business
Products and Services. The Company engineers, designs and manufactures specialty
piping systems and leak detection and location systems. The Company's specialty
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 flow lines 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 (DHC) 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 flow lines 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 or other
substances. 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, polyethylene or polypropylene 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 uses 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 sub floor), 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 uses 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; and Frankfurt and Hamburg,
Germany. They are also used in facilities used for mission-critical operations
such as those operated by web hosts, application service providers, 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 above-referenced types of specialty piping
systems that manufactures its own leak detection and location systems.
The Company's piping systems are frequently custom-fabricated to job site
dimensions and/or incorporate provisions for thermal expansion due to varying
temperatures. This custom fabrication helps to minimize the amount of field
labor required by the installation contractor. Most of the Company's piping
systems are produced for underground installations and, therefore, require
trenching, which is done by unaffiliated installation contractors. Generally,
sales of the Company's piping systems tend to be lower during the winter months,
due to weather constraints over much of the country. In the fiscal year ended
January 31, 2004, no single customer accounted for more than 10% of the net
sales of the Company's piping systems.
4
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 used
for water detection by internet service providers, application service
providers, and 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 flow
lines are the major oil companies, gas companies and other providers of mineral
resources.
Marketing. The customer base for the Company's piping systems products is
industrially and geographically diverse. The Company employs a national sales
manager and regional sales managers who use and assist a network of
approximately 80 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 Communications 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), PEX-GARD(R), and ULTRA-THERM(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, 2004, the dollar amount of backlog (uncompleted firm
orders) for piping and leak detection systems was $16,635,000, substantially all
of which is expected to be completed in 2004. As of January 31, 2003, the amount
of backlog was $15,063,000.
Raw Materials and Manufacturing. The basic raw materials used in the production
of the Company's piping systems products are pipes and tubes made of carbon
steel, alloy and plastics and various chemicals such as polyols, isocyanate,
polyester resin, polyethylene and fiberglass, mostly purchased in bulk
quantities. We believe that we currently have adequate supplies or sources of
availability of the raw materials necessary to meet our needs. However, there
are risks and uncertainties with respect to the supply of certain of these raw
materials that could impact their availability in sufficient quantities to meet
our needs. In particular, the price of steel and alloy tube has risen rapidly
during the early months of 2004 perhaps reflecting growing shortages in supply.
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
bending, pipe cutting and pipe welding. The Company employs skilled workers for
carbon steel and alloy welding to various code requirements. The Company is
authorized to apply the American Society of Mechanical Engineers code symbol
stamps for unfired pressure vessels and pressure piping. The Company's inventory
includes bulk resins, chemicals and various types of pipe, tube, insulation,
pipe fittings and other components used in its products. The Company maintains a
quality assurance program involving lead worker sign-off of each piece at each
workstation, statistical process control, and nondestructive testing protocols.
5
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 face several competitors including
Asahi/America and GF Plastics Systems. The Company's oil and gas gathering flow
lines face worldwide competition, including Bredero-Price, a subsidiary of Shaw
Industries, Inc.; CRP of UK; Soctherm of Italy, Soccoreal of Argentina; and
Logstor Rohr of Denmark. In addition to factory-fabricated systems of the type
sold by the Company, the Company competes with district heating and cooling
systems and secondary containment systems manufactured on the job site by
contractors and sellers of component parts of systems. Products competitive with
the Company's leak detection and location systems include: (1) cable-based
systems manufactured by the TraceTek by Raychem, a Division of Tyco Thermal
Controls LLC a subsidiary of Tyco Industries and RLE Technologies; (2) linear
gaseous detector systems manufactured by Tracer Technologies and Arizona
Instrument Corp.; and (3) probe systems manufactured by Veeder Root and
Pneumecator, 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 systems 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 secondary waste system that must be contained. Although there can be
no assurances as to the ultimate effects of these governmental regulations, the
Company believes they may increase the demand for its piping systems products.
Industrial Process Cooling Equipment Business
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) hot water, hot oil, and negative pressure temperature controllers;
(v) water treatment equipment and various other accessories; (vi) specialty
cooling devices for printing presses and ink management; and (vii) 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 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 and their computerized controls according to customer
specifications.
The principal markets for the Company's cooling products are thermoplastics
processing and the printing industries. 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.
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.
The Company believes it manufactures the most complete line of chillers
available in its primary markets. 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 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 separate pumping systems
that are usually attached to reservoirs. These chillers are distinguished by the
manner in which the compressor (refrigerant pump) and the evaporator (heat
exchanger water-to-refrigerant) are used in the chiller. These chillers also use
6
unique programmed logic controllers 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 20 horsepower to
400 horsepower.
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 fiberglass tower line
was introduced in 1984 and at the time was the first fiberglass cooling tower
line to be sold in the United States. The cabinets for these towers are imported
from China 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 is
designed and engineered by the Company and is manufactured in the U.S.A. The FC
line 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 use alarms and
other electrical options. Thus, the Company can provide a plant circulating
system which 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. These tanks are available in mild steel, stainless steel,
fiberglass reinforced polyester and polyethylene.
Temperature Control Units. Most of the Company's temperature control units are
used by injection molders of plastic parts and by printing companies. They are
designed to remove heat from the molds for the purpose of improving part
quality. More than 90% 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 Danish 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 under its 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.
Ink Products. Ink products are products sold specifically for the proper
temperature control and distribution of the ink and cooling solutions used by
printing companies. These include printers of large newspapers, magazines,
forms, etc.
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 the domestic
and international thermoplastics and printing markets as well as to
manufacturers of digital video discs ("DVDs") and other non-plastics industries
that require specialized heat transfer equipment.
Domestic thermoplastics processors are the largest market served by the Company,
representing the core of its business.
There are approximately 8,000 companies processing plastic products in the
United States, primarily using injection molding, extrusion, and blow molding
machinery. The Company believes the total U.S. market for water cooling
equipment in the plastics industry is over $100 million annually, and that the
Company is one of the three largest suppliers of such equipment to the plastics
industry. The Company believes that the plastics industry is a mature industry
with growth generally consistent with that of the national economy. Due to the
high plastics content in many major consumer items, such as cars and appliances,
this industry experiences cyclical economic 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.
7
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 managed by regional managers, reporting to a
National Sales and Marketing Manager.
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 in 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 has registered the trademarks Thermal Care(R), AWS(R)
and Applied Web Systems(R).
Backlog. As of January 31, 2004, the dollar amount of backlog (uncompleted firm
orders) for industrial process cooling equipment was $3,825,000, substantially
all of which is expected to be completed in 2004. As of January 31, 2003, the
amount of backlog was $3,521,000.
Raw Materials and Manufacturing. The Company's domestic production and inventory
storage facility occupies approximately 88,000 square feet. The plant layout is
designed to facilitate movement through multiple work centers. The Company uses
an enterprise resource planning system installed in 2001 to support its sales,
manufacturing production, inventory, customer relations and accounting
operations. The status of a customer order at any given moment can be determined
through the system.
The Company uses 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
Chinese 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.
We believe that the Company s access to sheet metal, subassemblies, fiberglass
and hardware components is adequate.
The FC towers are designed and 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. The Company also sells a fiberglass tank
for nonferrous applications.
Portable chillers are assembled utilizing components both manufactured by the
Company and supplied by outside vendors. Portable chillers are assembled using
refrigeration components, a non-corrosive tank, hose, and pre-painted sheet
metal. Many of the components used in these chillers are fabricated as
subassemblies and held in inventory. Once the water and refrigeration components
have been assembled, the unit is moved to the electrical department for the
addition of control subassemblies and wiring. The chillers are then evacuated,
charged with refrigerant and tested under fully loaded conditions. The final
production step is to clean, insulate, label, and crate the chiller for
shipment.
Central chillers are manufactured to customer specifications. Many of the
components are purchased to the job requirements and production is planned so
that subassemblies are completed to coincide with the work center movements.
8
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 about 15 competitors selling
cooling equipment in the domestic plastics market. The Company further believes
that three manufacturers, including the Company, collectively share
approximately 60% of the domestic plastics cooling equipment 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 customs duties. 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 may 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 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, 2004, the Company had 674 full-time employees, 73 of whom were
engaged in sales and marketing, 179 of whom were engaged in management,
engineering and administration, and the remainder of 422 was 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 2006. 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
(UAJAPPI) and the International Brotherhood of Electrical Workers Union (IBEW).
The collective bargaining agreement for UAJAPPI is scheduled to expire on June
1, 2004, but will automatically continue to be in effect until terminated. The
collective bargaining agreement for IBEW expires on May 31, 2004. The collective
bargaining agreement of the Piping Systems Business in Lebanon, Tennessee, with
the Metal Trades Division of UAJAPPI expires in March 2007.
9
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers of
the Company as of March 31, 2004:
Executive Officer of the
Company or its
Age Position Predecessors Since
- -------------------- ------- ----------------------------------------- ------------------------
David Unger 69 Chairman of the Board of Directors, 1972
President and Chief Executive Officer
Henry M. Mautner 77 Vice Chairman of the Board of Directors 1972
Bradley E. Mautner 48 Executive Vice President and Director 1994
Gene K. Ogilvie 64 Vice President 1969
Fati A. Elgendy 55 Vice President 1990
Don Gruenberg 61 Vice President 1980
Michael D. Bennett 59 Vice President, Chief Financial Officer, 1989
Secretary and Treasurer
Thomas A. Benson 50 Vice President 1988
Billy E. Ervin 58 Vice President 1986
Robert A. Maffei 55 Vice President 1987
Herbert J. Sturm 53 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 businesses 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.
Bradley E. Mautner has served as Executive Vice President of the Company since
December 2002, was Vice President of the Company from December 1996 to December
2002 and has been a director of the Company since 1995. From 1994 to the
consummation of the Midwesco Merger, he served as President of Midwesco, Inc.
and since December 30, 1996 he has served as President of the company formed to
succeed to the non-Thermal Care businesses of Midwesco, Inc. Bradley E. Mautner
is the son of Henry M. 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.
10
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 of
which it owns the land and buildings in Winchester, Virginia and Cicero,
Illinois and Nakskov, Denmark. 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 on 2.75 acres in Cicero, Illinois. The Company owns a
newly constructed 48,900 square-foot facility on a 3.5-acre site in Nakskov,
Denmark.
In February, 2004 the Company signed a contract to sell one of its buildings
located in Winchester, Virginia. The building consists of 66,998 square feet on
10 acres. The Company will be leasing from the Buyer 7,000 square feet of the
building. The sale is expected to close in May 2004 and there will not be a
material gain or loss on the sale.
The production facilities for the Company's piping systems 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 totaling 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, with lease
expiring 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 owned by the Company. 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 owns 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 and 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
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's fiscal year ends on January 31. Years described as 2003, 2002 and
2001 are the fiscal years ended January 31, 2004, 2003 and 2002, respectively.
Balances described as balances as of 2003 and 2002 are balances as of January
31, 2004 and 2003, respectively.
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 sale prices as reported by the Nasdaq National Market for 2002
and for 2003.
2002 High Low
---- ----
First Quarter.......................................... $3.50 $2.90
Second Quarter......................................... 3.22 1.92
Third Quarter.......................................... 2.35 1.66
Fourth Quarter......................................... 1.80 1.50
2003 High Low
---- ----
First Quarter.......................................... $1.84 $1.65
Second Quarter......................................... 1.95 1.67
Third Quarter.......................................... 2.68 1.91
Fourth Quarter......................................... 2.86 2.31
As of January 31, 2004, there were approximately 100 stockholders of record.
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.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the Company for the years 2003, 2002,
2001, 2000 and 1999 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.
12
2003 2002 2001 2000 1999
(In thousands, except per share information) Fiscal Year ended January 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Statements of Operations Data:
Net sales $120,889 $122,897 $125,534 $149,533 $137,170
Income (loss) from operations (721) 914 2,172 4,920 6,980
Income (loss) before extraordinary items and
cumulative effect of accounting change (1,097) (824) (374) 1,126 2,401
Net income (loss) (1,097) (11,528) (374) 1,126 2,401
Net income (loss) per share - basic and diluted (0.22) (2.34) (0.08) 0.23 0.49
(In thousands) As of January 31,
--------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Balance Sheet Data:
Total assets $ 78,927 $ 79,976 $ 92,529 $104,785 $ 97,776
Long-term debt (excluding capital leases), less
current portion 16,653 29,195 20,883 36,073 31,357
Capitalized leases, less current portion 8 66 217 348 2,398
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", "likely" and "probable" or the negative
thereof or other variations thereon or comparable terminology, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbors created thereby. These
statements should be considered as subject to the many risks and uncertainties
that exist in the Company's operations and business environment. Such risks and
uncertainties could cause actual results to differ materially from those
projected. These uncertainties include, but are not limited to, economic
conditions, market demand and pricing, competitive and cost factors, raw
material availability and prices, global interest rates, currency exchange
rates, labor relations and other risk factors.
RESULTS OF OPERATIONS
MFRI, Inc.
2003 Compared to 2002
Net sales of $120,889,000 in 2003 decreased 1.6% from $122,897,000 in 2002.
Sales declined in the Piping Systems and the Industrial Process Cooling
Equipment businesses due to the weak economy which was partially offset by
increased sales from the Filtration Products business. Gross profit of
$24,598,000 in 2003 decreased 8.7% from $26,940,000 in 2002. Gross margin
decreased to 20.3% of net sales in 2003 from 21.9% in 2002. Overall gross margin
13
decreased primarily as the result of competitive pricing pressures and the
unfavorable effect of spreading fixed manufacturing costs over lower production
volumes. (See discussion of each business segment below.)
Selling, general and administrative expenses decreased 2.7% to $25,319,000 in
2003 from $26,026,000 in 2002. The prior-year period included significant legal
expense associated with a patent-infringement suit that has been settled, a
warranty claim that has been settled, higher data processing expenses and
recognition of uncollectible receivables. Additionally, cost-reduction measures
implemented in the current year have led to reductions in current general and
administrative expense. (See discussion of each business segment below.)
Loss before extraordinary items and cumulative effect of an accounting change
was $1,097,000 or $0.22 per common share, compared with a loss of $824,000 or
$0.17 per common share in 2002. This loss is due to decreased sales and
decreased gross profit.
2002 Compared to 2001
Net sales of $122,897,000 in 2002 decreased 2.1% from $125,534,000 in 2001.
Sales declined in the Filtration Products and the Piping Systems businesses due
to the weak economy and loss of sales from Perma-Pipe Services Limited ("PPSL"),
a European subsidiary that was sold in 2001, which was partially offset by
increased sales from the newly-acquired product line associated with the
purchase of a business by acquiring specified assets and assuming specified
liabilities by the Industrial Process Cooling Equipment business. Gross profit
of $26,940,000 in 2002 increased 2.3% from $26,332,000 in 2001. Gross margin
increased to 21.9% of net sales in 2002 from 21.0% in 2001. Overall gross margin
improved, primarily the result of Thermal Care's product mix due to the addition
of a new product line and improved manufacturing efficiencies in Perma-Pipe,
partially offset by competitive pricing pressures and the unfavorable effect of
spreading fixed manufacturing costs over lower production volumes.
Selling, general and administrative expenses increased 7.7% to $26,026,000 in
2002 from $24,160,000 in 2001 primarily due to additional sales, engineering and
administrative people associated with the newly-acquired product line
(approximately $300,000), increase in outside professional services, bank fees
(approximately $100,000) and loan cost amortization (approximately $125,000)
from the debt restructuring and increased legal and settlement costs mostly
related to a warranty claim and a patent dispute (approximately $800,000), which
were partially offset by the elimination of expenses related to PPSL and by
cost-reduction measures that were implemented in the second half of 2001.
Loss before extraordinary items and cumulative effect of an accounting change
was $824,000 or $0.17 per common share, compared with a net loss of $374,000 or
$0.08 per common share in 2001. This loss is due to decreased sales and
increased selling, general and administrative expenses.
The 2002 net loss of $11,528,000 or $2.34 per common share is mainly the result
of an adjustment for a write-off of impaired goodwill, and the operating results
described above. In February 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, which requires that goodwill be analyzed for
impairment on an annual basis. The Company's analysis of its goodwill in 2002
resulted in a loss on impairment of $11,849,000 or $10,739,000 net of a tax
benefit of $1,110,000.
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 2003, the average
order amount was approximately $3,623. The timing of large orders can have a
material effect on the comparison of net sales and gross profit from period to
period. Large orders generally are highly competitive and result in a lower
gross margin. In 2003, 2002 and 2001, no customer accounted for 10% or more of
the net sales of the Company's filtration products and services.
The Company's Filtration Products Business, to a large extent, is dependent on
governmental regulation of air pollution at the federal and state levels. The
Company believes that growth in the sale of its filtration products and services
will be materially dependent on continued 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.
14
- -------------------------------------------------------------------------------------------------------------------
Filtration Products Business
- ---------------------------- % Increase
(In thousands) (Decrease)
--------------------
2003 2002 2001 2003 2002
-------- -------- -------- -------- --------
Net sales $ 54,872 $ 53,174 $ 54,434 3.2% (2.3%)
Gross profit 9,782 9,498 10,063 3.0% (5.6%)
As a percentage of net sales 17.8% 17.9% 18.5%
Income from operations 1,145 400 2,168 186.3% (81.5%)
As a percentage of net sales 2.1% 0.8% 4.0%
- -------------------------------------------------------------------------------------------------------------------
2003 Compared to 2002
Net sales increased 3.2% to $54,872,000 in 2003 from $53,174,000 in 2002. This
increase is the result of increased sales of pleated filter elements, which are
partially offset by lower filter bag sales.
Gross profit as a percent of net sales decreased to 17.8% in 2003 from 17.9% in
2002, primarily as a result of product mix and competitive pricing pressures in
the marketplace.
Selling expense decreased to $5,531,000 or 10.1% of net sales in 2003 from
$5,598,000 or 10.5% of net sales in 2002. The decrease is primarily as a result
of staff reductions.
General and administrative expenses decreased to $3,106,000 or 5.7% of net sales
in 2003 from $3,500,000 or 6.6% of net sales in 2002. The prior-year period
included significant legal expense associated with a patent-infringement suit
that has been settled, a warranty claim that has been settled, higher data
processing expenses and recognition of uncollectible receivables. Additionally,
cost-reduction measures implemented in the current year have led to reductions
in current general and administrative expense.
2002 Compared to 2001
Net sales decreased 2.3% to $53,174,000 in 2002 from $54,434,000 in 2001. This
decrease is the result of lower sales in fabric filter elements and the products
and services related to collection systems, partially offset by significant
growth in pleated filter element sales, particularly in the international
market.
Gross profit as a percent of net sales decreased to 17.9% in 2002 from 18.5% in
2001, due to continuing competitive pricing pressure and manufacturing
inefficiencies caused by the sales volume decline.
Selling expense increased to $5,598,000 or 10.5% of net sales in 2002 from
$4,865,000 or 8.9% of net sales in 2001. The dollar and percentage increases are
primarily due to aggressive marketing programs that did not generate the
expected sales volume.
General and administrative expense increased from $3,030,000 or 5.6% of net
sales in 2001 to $3,500,000 or 6.6% of net sales in 2002, primarily due to legal
expenses associated with a patent-infringement suit that has been settled and a
warranty claim dispute (approximately $800,000), partially offset by
cost-reduction measures that were implemented in the second half of 2001.
Piping Systems Business
Generally, the Company's leak detection and location systems have higher profit
margins than its DHC 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
15
to adverse economic factors. In 2003, 2002 and 2001, no customer accounted for
10% or more of net sales of the Company's Piping Systems Business.
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 2003 was approximately $38,000. 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
- ----------------------- % Increase
(In thousands) (Decrease)
--------------------
2003 2002 2001 2003 2002
-------- -------- -------- -------- --------
Net sales $ 40,523 $ 44,037 $ 49,417 (8.0%) (10.9%)
Gross profit 7,516 10,187 10,208 (26.2%) (0.2%)
As a percentage of net sales 18.5% 23.1% 20.7%
Income from operations 2,281 4,321 3,347 (47.2%) 29.1%
As a percentage of net sales 5.6% 9.8% 6.8%
- -------------------------------------------------------------------------------------------------------------------
2003 Compared to 2002
Net sales decreased 8% to $40,523,000 in 2003 from $44,037,000 in 2002. This
decrease is primarily due to lower sales in product lines that are mainly
dependent on state and federal government spending.
Gross profit as a percent of net sales decreased from 23.1% in 2002 to 18.5% in
2003, mainly due to accepting lower margin jobs to maintain work levels.
Selling expense decreased from $1,430,000 or 3.2% of net sales in 2002 to
$1,250,000 or 3.1% of net sales in 2003. The decrease is primarily due to
reduced commissions due to lower sales.
General and administrative expense decreased to $3,985,000 or 9.8% of net sales
in 2003 from $4,435,000 or 10.1% of net sales in 2002. A settlement of $510,000
and $360,000 in related legal fees were incurred in the current year. This was
offset by lower MIS expenses, currency exchange gains from the collection of
Canadian Dollar accounts receivable, lower management incentive expenses, and
reduced salaries charged to general and administrative expense.
2002 Compared to 2001
Net sales decreased 10.9% to $44,037,000 in 2002 from $49,417,000 in 2001,
mainly due to a decrease in DHC business, a sale of $2,000,000 for a
high-temperature oil-recovery project in Canada in 2001, and the loss of sales
of $1,766,000 from PPSL, a subsidiary that was sold in 2001.
Gross profit as a percent of net sales increased from 20.7% in 2001 to 23.1% in
2002, mainly as a result of improved manufacturing efficiencies and elimination
of lower-margin sales generated by PPSL in 2001.
Selling expense decreased from $1,849,000 in 2001 to $1,430,000 in 2002,
primarily due to the decrease in sales-volume-related expenses, cost-sharing
with a joint venture for oil and gas and a decrease in selling expense by
$105,000 for PPSL. Selling expense as a percent of net sales decreased from 3.7%
in 2001 to 3.2% in 2002.
General and administrative expense decreased from $5,012,000 or 10.1% of net
sales in 2001 to $4,435,000 or 10.1% of net sales in 2002. The dollar decrease
is mainly due to the elimination of expenses related to PPSL, partially offset
by higher legal expense.
16
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 2003, the average order amount was approximately $2,252.The average sales
order decrease from the prior year is primarily due to a higher sales mix of
parts, service and start-up orders in 2002 versus 2003 which reflects the
increasing sales mix of printing and OEM customers. In 2003, 2002 and in 2001,
no customer accounted for 10% or more of net sales of the Cooling Equipment
Business. In 2002, the Company purchased a business by acquiring specified
assets and assuming specified liabilities, resulting in a new product line to
broaden the industry penetration. This new product line complements the Cooling
Equipment Business and resulted in sales growth in 2002 over 2001.
- -------------------------------------------------------------------------------------------------------------------
Industrial Process Cooling Equipment Business
- --------------------------------------------- % Increase
(In thousands) (Decrease)
--------------------
2003 2002 2001 2003 2002
-------- -------- -------- -------- --------
Net sales $ 25,494 $ 25,686 $ 21,683 (0.7%) 18.5%
Gross profit 7,300 7,255 6,061 0.6% 19.7%
As a percentage of net sales 28.6% 28.2% 28.0%
Income from operations 738 702 627 5.1% 12.0%
As a percentage of net sales 2.9% 2.7% 2.9%
- -------------------------------------------------------------------------------------------------------------------
2003 Compared to 2002
Net sales decreased 0.7% from $25,686,000 in 2002 to $25,494,000 in 2003. Demand
for equipment was down, but largely offset by increased orders for installation
and other services and new product sales from the July 2002 purchase of a
business (by acquiring specified assets and assuming specified liabilities).
Gross profit as a percentage of net sales increased to 28.6% in 2003 from 28.2%
in 2002, primarily due increased sales for services, new product features and
some new products associated with the July 2002 purchase of a business (by
acquiring specified assets and assuming specified liabilities) to competitive
pricing pressures and higher production costs associated with new products.
Selling expense decreased to $3,361,000 or 13.2% of net sales in 2003 from
$3,418,000 or 13.3% in 2002. This decrease is primarily due to increased sales
to direct manufacturers, which results in lower selling expenses, partially
offset by the additional sales employees associated with the July 2002 purchase
of a business (by acquiring specified assets and assuming specified
liabilities).
General and administrative expense increased to $3,201,000 or 12.6% of net sales
in the current year period from $3,136,000 or 12.2% of net sales in the prior
year. The dollar increase is due to additional employees and certification
expenses for the ISO partially offset by elimination of expenses associated with
the prior-year completion of a new ERP business applications software.
2002 Compared to 2001
Net sales increased 18.5% from $21,683,000 in 2001 to $25,686,000 in 2002. The
increase is due to sales from the product line associated with the purchase of a
business by acquiring specified assets and assuming specified liabilities, and
increased demand for temperature control and chiller products.
Gross profit as a percentage of net sales increased to 28.2% in 2002 from 28.0%
in 2001, primarily due to the newly acquired product line.
17
Selling expense increased from $3,061,000 in 2001 to $3,418,000 in 2002, but
decreased as a percent of net sales from 14.1% in 2001 to 13.3% in 2002. The
increased spending is due to higher commissions expense based on sales volume
and additional sales people (approximately $150,000) associated with the newly
acquired product line.
General and administrative expense increased from $2,372,000 or 10.9% of net
sales in 2001 to $3,136,000 or 12.2% of net sales in 2002. The increase is due
to expenses associated with implementation of a new enterprise resource planning
system that was installed in late 2001 and additional administrative and
engineering people (approximately $150,000) associated with the newly acquired
product line.
General Corporate Expense
General corporate expense includes general and administrative expense not
allocated to business segments and interest expense.
2003 Compared to 2002
General and administrative expense increased 8.4% from $4,509,000 in 2002 to
$4,886,000 in 2003, and increased as a percentage of net sales from 3.7% in 2002
to 4.0% in the current year period. Adoption of SFAS No. 145 resulted in the
reclassification of an extraordinary loss of $133,000 recorded in the quarter
ended July 31, 2002 to an operating expense in the current year's presentation
of prior-year financial information. The increase in the current year is mainly
due to increased salaries due to filled positions that were vacant in the
prior-year, partially offset by reduced expenses for temporary help, increased
costs related to maintenance of director and officer insurance, increased loan
amortization expense due to debt restructuring in July 2002 and amendments
thereafter, and increased utilities costs.
Interest expense decreased 4.9% from $2,107,000 in 2002 to $2,003,000 in 2003.
The decrease is primarily due to reduced interest rates from the July 2002 debt
restructuring.
2002 Compared to 2001
General corporate expense not allocated to business segments increased 13.6%
from $4,509,000 in 2001 to $4,430,000 in 2002, primarily due to increased
outside professional services, bank fees (approximately $100,000) and loan cost
amortization (approximately $125,000) from debt restructuring. These were
partially offset by decreases in goodwill amortization, management incentives,
building repairs and maintenance.
Interest expense decreased 19.0% from $2,600,000 in 2001 to $2,107,000 in 2002
due to a reduction of net borrowings by $6,804,000 in the fourth quarter of 2001
and slightly lower average cost of borrowing.
Income Taxes
The effective income tax (benefit) rates were (50.8%), (27.5%) and (12.6%) in
2003, 2002 and 2001, respectively. The difference between the effective income
tax rate and the U.S. Statutory tax rate for 2003 was:
Statutory tax rate 34.0%
State taxes, net of federal benefit 5.4%
Differences in foreign tax rate 7.6%
All other, net 3.8%
Effective tax rate 50.8%
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2004 were $154,000 as compared to
$346,000 at January 31, 2003. The Company generated $6,791,000 from operations
in 2003. Operating cash flows increased by $3,958,000 from 2002. The $476,000
proceeds from the sale of property, plant and equipment mainly resulted from the
sale of certain equipment to a third party in July 2003. The Company leased back
the equipment from the third-party purchaser. Cash distributions of $160,000 in
October 2003 and $267,000 in January 2004 were received from the Company's
investment in a joint venture. These cash flows were used to support $4,102,000
in capital spending and net payment of debts of $3,599,000.
18
Trade receivables increased $547,000 in 2003. Inventories decreased $1,594,000
in 2003 due to the reduction of specialized inventories at January 2003 being
held for custom orders . This decrease is also a result of higher levels of work
in process inventories from January 2003 that have been completed and sold, and
a focused effort to reduce levels of inventory on hand. Prepaid expenses and
other current assets decreased $1,922,000 in 2003 due to the receipt of a
remaining $1,053,000 receivable from the Danish bank loan that was obtained in
January 2003, partially offset by an increased income tax receivable and an
increased receivable from related companies. Other operating assets and
liabilities increased $1,044,000 in 2003. Net cash provided by operating
activities in 2002 was $2,890,000. Such cash came mainly from earnings from
operations and cash from decreases in accounts receivable and prepaid expenses
and other current assets, partially offset by an increase in other assets and
liabilities and a decrease in accounts payable. Net cash provided by operating
activities was $8,562,000 in 2001, mainly due to earnings from operations and
cash from decreases in accounts receivable and inventories, partially offset by
a decrease in accounts payable and an increase in income taxes receivable.
Net cash used for investing activities in 2003 and 2002 were $3,199,000 and
$1,685,000, respectively. Capital expenditures increased from $1,185,000 in the
prior year to $4,102,000 in the current year. Capital additions of $2,042,000
relate to the Company's construction of a new building for one of its foreign
subsidiaries, $281,000 relate to new ERP business applications software, and the
remainder relates to equipment purchases. In 2002, the Company purchased a
business by acquiring specified assets and assuming specified liabilities for
$500,000 in cash paid to the seller and also invested $10,000 in a joint
venture. In 2002, proceeds from the sale of property and equipment were $10,000,
compared with $1,380,000 in 2001. The 2001 proceeds mainly resulted 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.
We estimate that capital expenditures for 2004 will be approximately $2,500,000.
Capital expenditures primarily will relate to machinery and equipment, building
and leasehold improvements, and new ERP business applications software equipment
purchases. We may finance capital expenditures through internally generated
funds or the revolving line of credit.
Debt totaled $28,525,000, down $3,151,000 since the beginning of the year. Net
cash outflows from financing activity were $3,599,000, consisting of $3,458,000
from net payments and $141,000 used for payments on capitalized lease
obligations. In the prior-year, the Company paid a net $560,000 of long-term
debts and utilized $142,000 to pay capitalized lease obligations.
The following table summarizes the Company's estimated contractual obligations
at January 31, 2004.
Total 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 Thereafter
----- ------- ------- ------- ------- ------- ----------
Mortgages $10,809,000 $587,900 $626,100 $666,300 $709,700 $756,000 $7,463,000
Senior Debt 3,875,000 750,000 750,000 750,000 1,625,000 - -
IRB Payable 5,200,000 - - - 5,200,000 - -
Term Loans 122,200 122,200
--------------------------------------------------------------------------------------------------
Subtotal (1) 20,006,200 1,460,100 1,376,100 1,416,300 7,534,700 756,000 7,463,000
Capitalized Lease
Obligations 75,000 67,000 6,000 2,000 - - -
Operating Lease
Obligations 2,054,000 535,000 400,000 389,000 326,000 39,000 365,000
Purchase
Commitments (2) 6,294,000 5,653,000 552,000 89,000
--------------------------------------------------------------------------------------------------
Total $28,429,200 $7,715,100 $2,334,100 $1,896,300 $7,860,700 $795,000 $7,828,000
(1) Scheduled maturities, excluding the revolving line of credits.
(2) Purchase commitments are for purchases made in the normal course of
business to meet operational and capital expenditure requirements.
Other long term liability of $2,275,000 is composed of accrued pension cost and
deferred compensation.
The Company's working capital was approximately $8,759,000 at January 31, 2004
compared to approximately $23,989,000 at January 31, 2003.
19
The Company's current ratio was 1.3 to 1 and 2.1 to 1 at January 31, 2004 and
January 31, 2003, respectively. Debt to total capitalization at January 31, 2004
decreased to 51.5% from 54.3% at January 31, 2003.
Financing
On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase Agreements, the Company entered into a five-year $6,000,000
term loan replacing prior term loans with an aggregate original principal
balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance
of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed
$10,000,000 from its new revolving line of credit from another financial
institution (described below) to pay down this loan from $16,000,000 to
$6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding principal is greater than $5,000,000 or 10% per annum if the
outstanding principal is $5,000,000 or less. The Company is scheduled to pay
$188,000 in aggregate principal on the last days of March, June, September and
December in each year, commencing on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash flow (as defined in the Note Purchase Agreements). Finally, the Loan
Agreement (defined below) and the Note Purchase Agreements permit voluntary
prepayments sufficient to reduce the outstanding term loan principal to
$5,000,000 subject to certain conditions. The Company met such conditions and
made such a prepayment on July 31, 2002.
At January 31, 2004, the Company was not in compliance with one covenant under
the Note Purchase Agreements. The Company and the lenders are discussing a
waiver. Also, the Company's noncompliance with a covenant under the Loan
Agreement constitutes an event of default under the Note Purchase Agreements
(see the paragraphs below that refer to the Loan Agreement). Although this
noncompliance constitutes an event of default under the Note Purchase Agreement,
the lender has not declared an event of default or accelerated the indebtedness
of the Company evidenced by the Notes. The Company has made all required
payments of principal and interest under the Note Purchase Agreements to date.
On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial institution ("Loan Agreement"). Under the terms of the Loan
Agreement, which matures on July 10, 2005, the Company can borrow up to
$27,000,000, subject to borrowing base and other requirements, under a revolving
line of credit. Interest rates generally are based on options selected by the
Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in
effect plus the LIBOR rate for the corresponding interest period. At January 31,
2004, the prime rate was 4.00%, and the margins added to the prime rate and the
LIBOR rate, which are determined each quarter based on the applicable financial
statement ratio, were 1.25 and 3.25 percentage points, respectively. As of
January 31, 2004, the Company had borrowed $7,229,000 and had $2,300,000
available to it under the revolving line of credit. In addition, $6,521,000 of
availability was used under the Loan Agreement primarily to support letters of
credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The
Loan Agreement provides that all payments by the Company's customers are
deposited in a bank account from which all funds may only be used to pay the
debt under the Loan Agreement. At January 31, 2004, the amount of restricted
cash was $238,000. Cash required for operations is provided by draw-downs on the
line of credit.
At January 31, 2004, the Company was not in compliance with two covenants under
the Loan Agreement. The Company and the lenders are discussing a waiver.
Although this noncompliance constitutes an event of default under the Loan
Agreement, the lender has not declared an event of default or accelerated the
indebtedness of the Company under the Loan Agreement. The Company has made all
required payments of principal and interest under the Loan Agreement to date.
The Company and the lenders under the Note Purchase Agreements and the Loan
Agreement are discussing waivers and amendments. The Company believes it is
probable that agreements will be reached for the waivers and amendments,
although agreement is not assured. If it does not occur, the Company believes it
will be able to obtain replacement financing on acceptable terms, although there
is no assurance that any such financing will be obtained. As required by
accounting principles generally accepted in the United States, due to the
unwaived covenant noncompliance discussed above, all amounts owing under the
Note Purchase Agreements and the Loan Agreement have been classified as current
as of January 31, 2004.
The Company is in compliance with all terms and covenants of the following
loans.
20
On January 29, 2003, the Company obtained a loan from a Danish bank to purchase
a building, in the amount of 1,050,000 Euro, approximately $1,136,000 at the
exchange rate prevailing at the time of the transaction. The loan has a term of
twenty years. The loan bears interest at 6.1% with quarterly payments of $19,000
for both principal and interest.
On April 26, 2002 Midwesco Filter borrowed $3,450,000 under two mortgage notes
secured by two parcels of real property and improvements owned by Midwesco
Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior
mortgage loan, were approximately $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank. The notes each
bear interest at 7.10% with a combined monthly payment of $40,235 for both
principal and interest, and the note's amortization schedules and terms are each
ten years. Upon completion of the pending sale of the building, one of the
mortgages will be paid. The relating mortgage had a balance of $1,242,500 at
January 31, 2004.
On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note
secured by its manufacturing facility in Lebanon, Tennessee. From the proceeds,
$1,000,000 was used for a payment of amounts borrowed under the Note Purchase
Agreements with the remaining proceeds used to repay amounts borrowed under the
Loan Agreement. The loan bears interest at 7.75% with monthly payments of
$21,001 for both principal and interest, and has a ten-year term.
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 included the assumption of a $2,500,000 mortgage note with a
remaining balance of $2,405,000. The loan bears interest at 7.52% with monthly
payments of $18,507 for both principal and interest based on an amortization
schedule of 25 years with a balloon payment at the end of the ten-year term. At
the date of purchase, the remaining term of the loan was 7.25 years.
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing
exchange rate at the time of the transaction, to complete the permanent
financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter.
The loan bears interest at 6.22% and has a term of five 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% with monthly payments of $9,682 for both principal and interest based on
an amortization schedule of 25 years with a balloon payment at the end of the
ten-year term.
On June 1, 1998, the Company obtained a loan in the amount of 4,500,000 DKK
(approximately $650,000 at the prevailing exchange rate at the time of the
transaction) from a Danish bank to partially finance the acquisition of
Boe-Therm A/S ("Boe-Therm"). It is secured by the land and building of
Boe-Therm, bears interest at 6.48% and has a term of twenty years. Another loan
in the amount of 850,000 DKK (approximately $134,000 at the prevailing exchange
rate at the time of the transaction) was obtained on January 1, 1999 to acquire
land and a building, bears interest at 6.1% and has a term of twenty years. The
interest rates on both the twenty-year loans are guaranteed for the first ten
years, after which they will be renegotiated based on prevailing market
conditions.
On September 14, 1995, Midwesco Filter in Winchester, Virginia received
$3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1,
2007, and on October 18, 1995, Perma-Pipe 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, extend or replace prior to each expiration date
during the term of the bonds. The bonds bear interest at a variable rate, which
approximates 4.5% 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 used $1,100,000 of unspent bond proceeds to redeem bonds outstanding as
provided in the indenture.
The Company also has short-term credit arrangements used 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, 2004, borrowings under these credit arrangements totaled
$1,215,000; an additional $510,000 remained unused. The Company also had
outstanding letters of credit in the amount of $69,000 to guarantee performance
to third parties of various foreign trade activities and contracts.
21
CRITICAL 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. The Company has five accounting policies which it believes
are important to the Company's financial condition and results of operations,
and which require the Company to make estimates about matters that are
inherently uncertain. These critical accounting policies include revenue
recognition, realizability of inventories, collectibility of accounts
receivable, depreciation of plant and equipment, and income taxes. The Company
believes that the above critical policies have resulted in past actual results
approximating the estimated amounts in those areas.
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.
Goodwill and other intangible assets with indefinite lives: Goodwill, which
represents the excess of acquisition cost over the net assets acquired in
business combinations, was amortized in 2001 on a straight-line basis over
periods ranging from 25 to 40 years. On February 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and
other intangible assets with indefinite lives from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations,
ceased upon adoption. Thus, no amortization for such goodwill and indefinite
lived intangibles was recognized in the accompanying consolidated statements of
operations for the years ended January 31, 2004 and 2003. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite lives be analyzed for
impairment upon adoption with any resulting impairment loss recorded as a
cumulative effect of change in accounting principle. Subsequent to the initial
impairment test, SFAS No. 142 requires that goodwill and other intangible assets
with indefinite lives be analyzed for impairment on an annual basis or when
there is reason to suspect that their values have been impaired. The Company has
designated the beginning of its fiscal year as the date of its annual goodwill
impairment test. The Company's initial impairment analysis of its goodwill in
2002 resulted in an impairment loss of $11,849,000 or $10,739,000 net of a tax
benefit of $1,110,000 for the year ended January 31, 2003. As required by SFAS
No. 142, the impairment loss was recognized in the first quarter of 2002 to
reflect the cumulative effect of accounting change. The Company's annual
impairment test at February 1, 2003 did not result in an impairment. Goodwill
was $2,549,000 and $2,353,000 at January 31, 2004 and January 31, 2003,
respectively. The change in Goodwill was due to foreign currency translation.
ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits." This Statement retains the disclosures previously
required by SFAS 132 but adds additional disclosure requirements about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. It also
calls for the required information to be provided separately for pension plans
and for other postretirement benefit plans. In addition to expanded annual
disclosures, the standard improves information available to investors in interim
financial statements. SFAS 132R is effective for fiscal years ending after
December 15, 2003, and for quarters beginning after December 15, 2003. The
adoption of SFAS 132R did not have a material impact on the Company's financial
statements, however required disclosures have been reflected in the current
financial statements.
22
In May 2003, the FASB issued SFAS No. 150, :Accounting for certain financial
instruments with characteristics of both liabilities and equity," effective in
June 2003. SFAS No. 150 requires an issuer to classify, as liabilities, any
financial instruments that fall within the scope of this pronouncement. Adoption
of SFAS 150 did not have a material effect on the results of operations,
financial condition, or cash flows of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," parts of which apply to existing
contracts, but which is generally effective for contracts entered into after
June 30, 2003. Adoption of SFAS No. 149 did not have a material effect on the
results of operations, financial condition or cash flows of the Company.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires
that the assets, liabilities, and the results of activities of a variable
interest entity in which a business enterprise has controlling financial
interest be included in consolidation with those of the business enterprise.
Adoption of FIN No. 46R did not have a material effect on the results of
operations, financial condition or cash flows of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation" which was effective for the Company on December 15, 2002. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair-value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both the annual and interim financial
statements about the Company's method of accounting for stock-based employee
compensation and the effects of the method used on reported results. Adoption of
SFAS No. 148 did not have a material effect on the results of operations,
financial condition or cash flows of the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. Adoption of the provisions of the
Interpretation has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2004.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The
Statement is effective for fiscal years beginning after May 15, 2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, all gains and losses
from extinguishments of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 eliminated SFAS No. 4 and, thus, the exception to applying Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of debt (other than extinguishments of debt to satisfy sinking-fund
requirements. As a result, gains and losses from extinguishments of debt should
be classified as extraordinary items only if they meet the criteria in APB No.
30. Adoption of SFAS No. 145 resulted in the reclassification of an
extraordinary loss of $133,000 ($79,000 net of tax) recorded in 2002 to an
operating expense.
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. The Company
has used 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, 2004, 2003 and 2002.
The changeover from national currencies to the Euro began on January 1, 2002 and
it has not materially affected 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 by maintaining a
balance of fixed-rate long-term debt and floating-rate debt.
23
Commodity price risk is the possibility of higher or lower costs due to changes
in the prices of commodities, such as ferrous alloys (e.g., steel) which we use
in the production of piping systems. The Company attempts to mitigate such risks
by obtaining price commitments from its commodity suppliers and, when it appears
appropriate, purchasing quantities in advance of likely price increases.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of January 31, 2004 and
January 31, 2003 and for each of the three years in the period ended January 31,
2004 and the notes thereto are set forth elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of January 31, 2004, the Company carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to us required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls, or in other factors that could significantly affect
these controls, subsequent to the date of that evaluation.
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 2004 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 2004 annual meeting of stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and
management of the Company and related stockholder matters is incorporated herein
by reference to the information under the captions "Beneficial Ownership of
Common Stock" and "Equity Compensation Plan Information" in the Company's proxy
statement for the 2004 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 2004 annual meeting of
stockholders.
24
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 2004 annual meeting of
stockholders.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a. List of documents filed as part of this report:
(1) Financial Statements - Consolidated Financial
Statements of the Company Refer to Part II, Item 8
of this report.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
b. Reports on Form 8-K: 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, 2004.
c. Exhibits: The exhibits, as listed in the Exhibit Index
included herein, are submitted as a separate section of this
report.
d. The response to this portion of Item 15 is submitted under
15a(2) above.
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MFRI, Inc. and subsidiaries
Chicago, IL
We have audited the accompanying consolidated balance sheets of MFRI, Inc.
and subsidiaries as of January 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2004. Our audits also included the
financial statement schedule listed in the Index at Item 15a(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2004, 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.
As discussed in Note 2, effective February 1, 2002, MFRI, Inc. changed its
method of accounting for goodwill and intangible assets upon adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 12, 2004
26
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
2003 2002 2001
Fiscal Year Ended January 31,
2004 2003 2002
- -------------------------------------------------------------------------------------------
Net sales $120,889 $122,897 $125,534
Cost of sales 96,291 95,957 99,202
-------- -------- --------
Gross profit 24,598 26,940 26,332
Operating expenses:
Selling expense 10,141 10,446 9,775
General and administrative expense 15,178 15,580 14,459
Management services agreement - net - - (74)
-------- -------- --------
Total operating expenses 25,319 26,026 24,160
-------- -------- --------
Income (loss) from operations (721) 914 2,172
Income from Joint Venture 492 57 -
Interest expense - net 2,003 2,107 2,600
-------- -------- --------
Loss before income taxes, extraordinary items and
cumulative effect of accounting change (2,232) (1,136) (428)
Income tax (benefit) (1,135) (312) (54)
-------- -------- --------
Loss before extraordinary items and cumulative effect of
accounting change (1,097) (824) (374)
Net extraordinary gain, net of tax benefit of $23 - (35) -
-------- -------- --------
Loss before cumulative effect of accounting change (1,097) (789) (374)
Loss on cumulative effect of a change in accounting for
goodwill, net of tax benefit of $1,110 - (10,739) -
-------- -------- --------
Net loss $ (1,097) $(11,528) $ (374)
======== ======== ========
Weighted average common shares outstanding-(basic
and diluted) 4,922 4,922 4,922
Basic and diluted earnings per share
Loss before extraordinary items and cumulative
effect of accounting change $(0.22) $(0.17) $(0.08)
Net extraordinary gain 0.01 -
Loss before cumulative effect of accounting change (0.22) (0.16) (0.08)
Loss on cumulative effect of accounting change (2.18) -
Net loss $(0.22) $(2.34) $(0.08)
See notes to consolidated financial statements.
27
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
As of January 31,
ASSETS 2004 2003
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 154 $ 346
Restricted cash 238 276
Trade accounts receivable, less allowance for doubtful
accounts of $557 in 2003 and $410 in 2002 18,353 17,806
Accounts receivable - related companies 853 329
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,115 2,044
Income taxes receivable 393 1,043
Inventories 18,275 19,582
Deferred income taxes 1,639 1,822
Prepaid expenses and other current assets 857 1,828
-------- --------
Total current assets 41,877 45,076
-------- --------
Property, Plant and Equipment, Net 28,828 27,888
Other Assets:
Assets held for sale - 277
Patents, net of accumulated amortization 716 844
Goodwill 2,549 2,353
Other assets 4,957 2,538
-------- --------
Total other assets 8,222 6,012
-------- --------
Total Assets $ 78,927 $ 78,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities:
Trade accounts payable $ 12,337 $ 9,673
Accrued compensation and payroll taxes 2,673 2,193
Other accrued liabilities 2,835 2,262
Commissions payable 3,046 4,163
Current maturities of long-term debt 11,864 2,415
Billings in excess of costs and estimated earnings
on uncompleted contracts 299 299
Income taxes payable 64 82
-------- --------
Total current liabilities 33,118 21,087
-------- --------
Long-Term Liabilities:
Long-term debt, less current maturities 16,661 29,261
Other 2,275 2,016
-------- --------
Total long-term liabilities 18,936 31,277
-------- --------
Stockholders' Equity:
Common stock, $0.01 par value, authorized-
50,000 shares in 2003 and 2002, respectively;
4,922 issued and outstanding in 2003 and 2002,
respectively 49 49
Additional paid-in capital 21,397 21,397
Retained earnings 5,100 6,197
Accumulated other comprehensive loss 327 (1,031)
-------- --------
Total stockholders' equity $ 26,873 26,612
-------- --------
Total Liabilities and Stockholders' Equity $ 78,927 $ 78,976
======== ========
See notes to consolidated financial statements.
28
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 January 31, 2001 4,922 $ 49 $ 21,397 $ 18,099 $ (746) $ 971
Net loss (374) (374)
Minimum pension liability adjustment
(net of tax benefit of $120) (227) (227)
Unrealized translation adjustment (211) (211)
-------- -------- -------- -------- -------- --------
Balance January 31, 2002 4,922 49 21,397 17,725 (1,184) $ (812)
========
Net loss (11,528) (11,528)
Minimum pension liability adjustment
(net of tax benefit of $348) (577) (577)
Unrealized translation adjustment 730 730
-------- -------- -------- -------- -------- --------
Balance January 31, 2003 4,922 49 21,397 6,197 (1,031) (11,375)
Net loss (1,097) (1,097)
Minimum pension liability adjustment
(net of tax benefit of $217) 715 715
Unrealized translation adjustment 643 643
-------- -------- -------- -------- -------- ---------
Balance January 31, 2004 4,922 $ 49 $ 21,397 $ 5,100 $ 327 $ 261
======== ======== ======== ======== ======== =========
See notes to consolidated financial statements.
29
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2003 2002 2001
Fiscal Year Ended January 31,
2004 2003 2002
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (1,097) $(11,528) $ (374)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Net extraordinary loss (net of tax of $23) - 35 -
Loss on impairment of goodwill (net of tax of $1,110) - 10,739 -
Income from Joint Venture (492) (57) -
Provision for depreciation and amortization 4,144 3,944 4,110
Deferred income taxes (1,259) 365 (89)
Provision for uncollectible accounts 147 67 (67)
Gain on sale of asset (23) - (8)
Loss on sale of business - - 204
Change in operating assets and liabilities:
Accounts receivable (694) 448 7,375
Income taxes receivable 632 (9) (975)
Inventories 1,594 (7) 2,378
Prepaid expenses and other current assets 1,922 1,428 (835)
Accounts payable 2,519 (159) (2,050)
Compensation and payroll taxes 442 138 (391)
Other assets and liabilities (1,044) (2,571) (716)
-------- -------- --------
Net Cash Flows from Operating Activities 6,791 2,833 8,562
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sale of business - - 184
Reduction in cash balance due to sale of business - - (3)
Proceeds from sale of property and equipment 476 10 1,380
Purchases of property and equipment (4,102) (1,185) (3,455)
Purchase of a business by acquiring specified assets an
assuming specified liabilities - (500) -
Investment in joint venture 427 (10) -
-------- -------- --------
Net Cash Flows from Investing Activities (3,199) (1,685) (1,894)
-------- -------- --------
Cash Flows from Financing Activities:
Net payments on capitalized lease obligations (141) (142) (157)
Borrowings under revolving, term and mortgage loans 27,396 25,050 321
Repayment of debt (30,854) (25,610) (6,968)
-------- -------- --------
Net Cash Flows from Financing Activities (3,599) (702) (6,804)
-------- -------- --------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (185) (219) (35)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (192) 227 (171)
Cash and Cash Equivalents - Beginning of Year 346 119 290
-------- -------- --------
Cash and Cash Equivalents - End of Year $ 154 $ 346 $ 119
======== ======== ========
See notes to consolidated financial statements.
30
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, 2003 AND 2002
Note 1 - Basis of Presentation
MFRI, Inc. ("MFRI" or the "Company") was incorporated on October 12, 1993. MFRI
is a holding company which has subsidiaries engaged in the manufacture and sale
of products in three distinct business segments: filtration products, piping
systems and industrial process cooling equipment. 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
2003, 2002 and 2001 are the fiscal years ended January 31, 2004, 2003 and 2002,
respectively. Balances described as balances as of 2003, 2002 and 2001 are
balances as of January 31, 2004, 2003 and 2002, respectively.
Nature of Business: Midwesco Filter is engaged principally in the manufacture
and sale of filter elements for use in industrial air filtration systems and
particulate collection systems. Air filtration systems are used in a wide
variety of industries 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, filter cleaning and filter replacement.
Perma-Pipe is engaged in engineering, designing, manufacturing and sells
specialty piping systems and leak detection and location systems. Perma-Pipe's
specialty 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 flow lines 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, impair essential services or damage
equipment or property. Thermal Care is engaged in engineering, designing and
manufacturing industrial process cooling equipment, including chillers, cooling
towers, plant circulating systems, and related accessories for use in industrial
process applications. The Company's products are sold both within the United
States and internationally.
Reclassifications: Certain minor reclassifications and additional disclosures
have been made to prior-year financial statements to conform to the current-year
presentation.
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
31
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company has five accounting policies which it believes
are important to the Company's financial condition and results of operations,
and which require the Company to make estimates about matters that are
inherently uncertain. These critical accounting policies include revenue
recognition, realizability of inventories, collectibility of accounts
receivable, depreciation of plant and equipment, and income taxes. The Company
believes that the above critical policies have resulted in past actual results
approximating the estimated amounts in those areas.
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.
Contingencies: The Company is subject to various legal proceedings and claims
that arise in the ordinary course of business, including those involving
environmental, tax, product liability and general liability claims. The Company
accrues for such liabilities when it is probable that future costs will be
incurred and such costs can be reasonably estimated. Such accruals are based on
developments to date, the Company's estimates of the outcomes of these matters,
its experience in contesting, litigating and settling other similar matters, and
any related insurance coverage.
The Company does not currently anticipate the amount of any ultimate liability
with respect to these matters will materially affect the Company's financial
position, liquidity or future operations.
Other: MFRI has no material exposures to off-balance sheet arrangements; no
variable interest entities; nor activities that include non-exchange-traded
contracts accounted for at fair value.
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.
Cash Equivalents: All highly liquid investments with a maturity of three months
or less when purchased are considered to be cash equivalents.
Restricted Cash: The Loan Agreement provides that all payments by the Company's
customers are deposited in a bank account from which all funds may only be used
to pay the debt under the Loan Agreement.
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)
2003 2002
-------- --------
Raw materials $ 13,593 $ 14,647
Work in process 1,905 1,881
Finished goods 2,777 3,054
-------- --------
Total $ 18,275 $ 19,582
======== ========
Long-Lived Assets: Property, plant and equipment are stated at cost. Interest is
capitalized in connection with the construction of facilities and amortized over
the asset's estimated useful life. No interest was capitalized during 2003 and
2002.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 30 years. Amortization of
assets under capital leases is included in depreciation and amortization.
32
The Company's investment in property, plant and equipment as of January 31 is
summarized below:
(In thousands)
2003 2002
-------- --------
Land, buildings and improvements $ 21,398 $ 19,197
Machinery and equipment 21,920 20,367
Furniture, office equipment and computer software
and systems 8,382 7,750
Transportation equipment 279 418
-------- --------
51,979 47,732
Less accumulated depreciation and amortization (23,151) (19,844)
-------- --------
Property, plant and equipment, net $ 28,828 $ 27,888
======== ========
Goodwill and other intangible assets with indefinite lives: Goodwill, which
represents the excess of acquisition cost over the net assets acquired in
business combinations, was amortized in 2001 on a straight-line basis over
periods ranging from 25 to 40 years. On February 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 changes the accounting for goodwill and other
intangible assets with indefinite lives from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including such assets recorded in past business combinations,
ceased upon adoption. Thus, no amortization for such goodwill and indefinite
lived intangibles was recognized in the accompanying consolidated statements of
operations for the years ended January 31, 2004 and 2003. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite lives be analyzed for
impairment upon adoption with any resulting impairment loss recorded as a
cumulative effect of change in accounting principle. Subsequent to the initial
impairment test, SFAS No. 142 requires that goodwill and other intangible assets
with indefinite lives be analyzed for impairment on an annual basis or when
there is reason to suspect that their values have been impaired. The Company has
designated the beginning of its fiscal year as the date of its annual goodwill
impairment test. The Company's initial impairment analysis of its goodwill in
2002 resulted in an impairment loss of $11,849,000 or $10,739,000 net of a tax
benefit of $1,110,000 for the year ended January 31, 2003. As required by SFAS
No. 142, the impairment loss was recognized in the first quarter of 2002 to
reflect the cumulative effect of accounting change. The Company's annual
impairment test at February 1, 2003 did not result in an impairment. Goodwill
was $2,549,000 and $2,353,000 at January 31, 2004 and January 31, 2003,
respectively. The change in Goodwill was due to foreign currency translation.
The following is a reconciliation of reported net income adjusted for adoption
of SFAS No. 142:
2003 2002 2001
-------- -------- --------
Reported net income (loss) $ (1,097) $(11,528) $ (374)
Add back: goodwill amortization, net of tax - - 304
Adjusted net income (loss) $ (1,097) $(11,528) $ (70)
Basic and diluted earnings per share:
Reported net income (loss) $ (0.22) $ (2.34) $ 0.08)
Add back: goodwill amortization, net of tax - - 0.06
Adjusted net income (loss) $ (0.22) $ (2.34) $ (0.02)
The changes in the carrying amount of goodwill for the year ended January 31,
2004, are as follows:
Balance as of February 1, 2003 $2,353,000
Goodwill acquired during the year -
Foreign translation effect 196,000
Impairment loss -
Balance as of January 31, 2004 $2,549,000
Other intangible assets with definite lives: Patents are capitalized and
amortized on a straight-line basis over a period not to exceed the legal lives
of the patents. Patents, net of accumulated amortization, were $716,000 and
$844,000 at January 31, 2004 and January 31, 2003, respectively. Accumulated
amortization was $1,453,000 and $1,273,000 at January 31, 2004 and January 31,
2003, respectively. Future amortizations over the next five years ending January
31, will be 2005 - $182,000, 2006 - $182,000, 2007 - $175,000, 2008 - $29,000
and 2009 - $26,000.
33
Assets held for sale: Certain machinery in Perma-Pipe had previously been
classified as held-for-sale. In October 2003, management determined it was not
probable that these assets would be sold within one year from their
classification as held for sale. As a result, these fixed assets have been
reclassified as held for use and are included in property, plant and equipment
at January 31, 2004. Additional depreciation of $40,000 was recorded when the
property was transferred to held for use.
Investment in Joint Venture: In April 2002, the Company's Piping Systems
Business and two unrelated companies formed an equally owned joint venture to
more efficiently market their complementary thermal insulation products and
systems for use in undersea pipeline flow assurance projects worldwide. During
the year ended January 31, 2003, the Company invested $10,000 as its initial
capital contribution and loaned $50,000, its share of advances to fund costs and
expenses. The $50,000 loan was paid in July 2003. In October 2003 and January
2004, the Company received a partner distribution of $160,000 and $266,700
respectively from its investment in the joint venture. The Company accounts for
its joint venture investment using the equity method. The Company's share of
income for the current year is $492,000.
Financial Instruments: The Company uses 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 uses 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, 2004, 2003 and 2002.
Net 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:
2003 2002 2001
-------- -------- --------
Basic weighted average common shares outstanding 4,922 4,922 4,922
Dilutive effect of stock options - - -
-------- -------- --------
Weighted average common shares
outstanding assuming full dilution 4,922 4,922 4,922
======== ======== ========
In 2003, 2002 and 2001, the weighted average number of stock options not
included in the computation of diluted (loss) per share of common stock because
the options exercise price exceeded the average market price of the common
shares were 775,000, 910,000 and 846,000, respectively. Additionally in 2003
225,000 stock options had an exercise price below the average stock price
however, the inclusion of such stock options would be anti dilutive and as a
result these stock options are excluded from the computation of weighted average
common shares oustanding assuming full dilution. These options were outstanding
at the end of each of the respective years, except for options for 8,975, 14,750
and 4,000 shares, which expired in 2003, 2002 and 2001, respectively.
Stock Options: The Company's stock option plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, using the intrinsic value method and, accordingly, no compensation
cost has been recognized. The Company's net loss and loss per share would have
been reduced to the amounts shown below if compensation cost related to stock
options had been determined based on fair value at the grant dates in accordance
with Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation ("SFAS 148"). The pro forma net income effect of
applying SFAS 148 was as follows:
(In thousands except per share information) 2003 2002 2001
-------- -------- --------
Net income (loss) - as reported (in thousands) $ (1,097) $(11,528) $ (374)
Compensation cost under fair-market value-based
accounting method, net of tax (in thousands) $ (134) $ (136) $ (31)
Net income (loss) - pro forma (in thousands) $ (1,231) $(11,664) $ (405)
Net income (loss) per common share - basic
and diluted, as reported $ (0.22) $ (2.34) $ (0.08)
Net income (loss) per common share - basic
and diluted, pro forma $ (0.25) $ (2.37) $ (0.08)
Reported diluted EPS higher than pro forma diluted EPS $ 0.02 $ 0.03 -
The weighted average fair value of options granted during 2003 (net of options
surrendered), 20021 and 2001 are estimated at $1.14, $1.17 and $1.14, per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
34
with the following weighted average assumptions:
2003 2002 2001
-------- -------- --------
Expected volatility 50.01% 46.81% 44.85%
Risk-free interest rate 2.93% 4.51% 4.95%
Dividend yield 0.0% 0.0% 0.0%
Expected life in years 7.0 7.0 7.0
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, 2004 and 2003 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 Income (Loss): Accumulated other comprehensive
loss consists of the following:
Minimum
Accumulated Pension
(In thousands) Translation Liability
Adjustment Adjustment Total
-------- -------- --------
Balance - January 31, 2001 (480) (266) (746)
Unrealized translation adjustment (211) - (211)
Minimum pension liability adjustment
(net of tax benefit of $120) - (227) (227)
-------- -------- --------
Balance - January 31, 2002 (691) (493) (1,184)
Unrealized translation adjustment 730 - 730
Minimum pension liability adjustment
(net of tax benefit of $348) - (577) (577)
-------- -------- --------
Balance - February 1, 2003 39 (1,070) (1,031)
Unrealized translation adjustment 643 643
Minimum pension liability adjustment
(net of tax benefit of $217) - 715 715
-------- -------- --------
Balance - January 31, 2004 $ 682 $ (355) $ 327
======== ======== ========
Accounting Pronouncements: In December 2003, the Financial Accounting Standards
Board (FASB) issued a revision to SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." This Statement retains the
disclosures previously required by SFAS 132 but adds additional disclosure
requirements about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. It also calls for the required information to be provided separately for
pension plans and for other postretirement benefit plans. In addition to
expanded annual disclosures, the standard improves information available to
investors in interim financial statements. SFAS 132R is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after December
15, 2003. The adoption of SFAS 132R did not have a material impact on the
Company's financial statements, however required disclosures have been reflected
in the current financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for certain financial
instruments with characteristics of both liabilities and equity," effective in
June 2003. SFAS No. 150 requires an issuer to classify, as liabilities, any
financial instruments that fall within the scope of this pronouncement. Adoption
of SFAS 150 did not have a material effect on the results of operations,
financial condition, or cash flows of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," parts of which apply to existing
contracts, but which is generally effective for contracts entered into after
June 30, 2003. Adoption of SFAS No. 149 did not have a material effect on the
results of operations, financial condition or cash flows of the Company.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which requires
that the assets, liabilities, and the results of activities of a variable
interest entity in which a business enterprise has controlling financial
interest be included in consolidation with those of the business enterprise.
35
Adoption of FIN No. 46R did not have a material effect on the results of
operations, financial condition or cash flows of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation" which was effective for the Company on December 15, 2002. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair-value method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both the annual and interim financial
statements about the Company's method of accounting for stock-based employee
compensation and the effects of the method used on reported results. Adoption of
SFAS No. 148 did not have a material effect on the results of operations,
financial condition or cash flows of the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. Adoption of the provisions of the
Interpretation has not had and will not have a material effect on the financial
statements of the Company, based on guarantees in effect on January 31, 2004.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The
Statement is effective for fiscal years beginning after May 15, 2002 and
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, all gains and losses
from extinguishments of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 eliminated SFAS No. 4 and, thus, the exception to applying Accounting
Principles Board (APB) No. 30 to all gains and losses related to extinguishments
of debt (other than extinguishments of debt to satisfy sinking-fund
requirements. As a result, gains and losses from extinguishments of debt should
be classified as extraordinary items only if they meet the criteria in APB No.
30. Adoption of SFAS No. 145 resulted in the reclassification of an
extraordinary loss of $133,000 ($79,000 net of tax) recorded in 2002 to an
operating expense.
Note 3 - Related Party Transactions
The Company provides certain services and facilities to a company (affiliate)
primarily owned by two principal stockholders who are also members of management
and purchases certain services from those companies under a management services
agreement. The Company billed the affiliate $260,000 and was invoiced $171,000
by the affiliate under such agreements in 2003. The Company billed $250,000 and
was invoiced $167,000 under such agreements in 2002. During 2001, the Company
billed $244,000 and was invoiced $170,000 under such agreements.
Until February 28, 2001, the Company leased certain office and warehouse
facilities substantially all of which were occupied by a company primarily owned
by the two management stockholders. The Company made rental payments of $236,000
directly to the lessor in 2000, and allocated the expense to users based on
space occupied. The Company paid $54,000 in 2001 to the related company for
space occupied. On February 28, 2001, the affiliated company began leasing the
facilities directly from the lessor.
The lease agreement and the management services agreements were approved by the
Company's Committee of 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
In December 2001, the Company sold its subsidiary, Perma-Pipe Services Ltd. Cash
proceeds of $358,000 were received in May 2002. The aggregate value of the book
basis of the investment and a related intercompany receivable was $562,000
resulting in a loss of $204,000.
Other
On June 19, 2002, the Company purchased a business by acquiring specified assets
and assuming specified liabilities for $500,000 in cash. In accordance with SFAS
No. 141, the purchase price plus purchase-related expenses is first applied to
36
current assets and any excess of value over the current assets is allocated to
extraordinary gain. The asset values were $815,000 and $0 for inventory and
other assets, which mainly consisted of property, plant and equipment,
respectively, which, combined with purchase-related expenses of $257,000,
resulted in the recognition of an extraordinary gain of $58,000 ($35,000 net of
tax).
Note 5 - Retention Receivable
Retention is the amount withheld by a customer until a long-term contract is
completed. Retentions of $64,000 and $193,000 are included in the balance of
trade accounts receivable at January 31, 2004 and 2003, respectively.
Note 6 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
(In thousands)
2003 2002
-------- --------
Costs incurred on uncompleted contracts $ 7,233 $ 6,990
Estimated earnings 979 1,969
-------- --------
Earned revenue 8,212 8,959
Less billings to date 7,396 7,214
-------- --------
Total $ 816 $ 1,745
======== ========
Classified as follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,115 $ 2,044
Billings in excess of costs and estimated
earnings on uncompleted contracts (299) (299)
-------- --------
Total $ 816 $ 1,745
======== ========
Note 7 - Debt
Long-term debt consists of the following:
(In thousands)
2003 2002
-------- --------
Secured senior notes due 2007 $ 3,875 $ 4,626
Revolving bank loan Domestic 7,229 10,211
Industrial Revenue Bonds 5,200 5,200
Mortgage notes 10,809 8,552
Term loans 122 2,274
Short-term credit arrangements 1,215 597
Capitalized lease obligations (Note 8) 75 216
Other - -
-------- --------
28,525 31,676
Less current maturities 11,864 2,415
-------- --------
Total $ 16,661 $ 29,261
======== ========
The following table summarizes the Company's scheduled maturities, excluding the
revolving line of credits at January 31, 2004.
Total 1/31/05 1/31/06 1/31/07 1/31/08 1/31/09 Thereafter
----------- ----------- ---------- ---------- ---------- ---------- ------------
Mortgages $10,809,000 $587,900 $626,100 $666,300 $709,700 $756,000 $7,463,000
Senior Debt 3,875,000 750,000 750,000 750,000 1,625,000 - -
IRB Payable 5,200,000 - - - 5,200,000 - -
Term Loans 122,200 122,200
----------- ----------- ---------- ---------- ---------- ---------- ------------
Total $20,006,200 $1,460,100 $1,376,100 $1,416,300 $7,534,700 $756,000 $7,463,000
=========== =========== ========== ========== ==========
37
Financing
On July 11, 2002, the Company entered into secured note purchase agreements with
certain institutional investors ("Note Purchase Agreements"). Under the terms of
the Note Purchase Agreements, the Company entered into a five-year $6,000,000
term loan replacing prior term loans with an aggregate original principal
balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance
of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed
$10,000,000 from its new revolving line of credit from another financial
institution (described below) to pay down this loan from $16,000,000 to
$6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum
if the outstanding principal is greater than $5,000,000 or 10% per annum if the
outstanding principal is $5,000,000 or less. The Company is scheduled to pay
$188,000 in aggregate principal on the last days of March, June, September and
December in each year, commencing on September 30, 2002 and ending on June 30,
2007. In addition, the Company is scheduled to make annual prepayments of excess
cash flow (as defined in the Note Purchase Agreements). Finally, the Loan
Agreement (defined below) and the Note Purchase Agreements permit voluntary
prepayments sufficient to reduce the outstanding term loan principal to
$5,000,000 subject to certain conditions. The Company met such conditions and
made such a prepayment on July 31, 2002.
At January 31, 2004, the Company was not in compliance with one covenant under
the Note Purchase Agreements. The Company and the lenders are discussing a
waiver. Also, the Company's noncompliance with a covenant under the Loan
Agreement constitutes an event of default under the Note Purchase Agreements
(see the paragraphs below that refer to the Loan Agreement). Although this
noncompliance constitutes an event of default under the Note Purchase Agreement,
the lender has not declared an event of default or accelerated the indebtedness
of the Company evidenced by the Notes. The Company has made all required
payments of principal and interest under the Note Purchase Agreements to date.
On July 11, 2002, the Company entered into a secured loan and security agreement
with a financial institution ("Loan Agreement"). Under the terms of the Loan
Agreement, which matures on July 10, 2005, the Company can borrow up to
$27,000,000, subject to borrowing base and other requirements, under a revolving
line of credit. Interest rates generally are based on options selected by the
Company as follows: (a) a margin in effect plus a prime rate; or (b) a margin in
effect plus the LIBOR rate for the corresponding interest period. At January 31,
2004, the prime rate was 4.00%, and the margins added to the prime rate and the
LIBOR rate, which are determined each quarter based on the applicable financial
statement ratio, were 1.25 and 3.25 percentage points, respectively. As of
January 31, 2004, the Company had borrowed $7,229,000 and had $2,300,000
available to it under the revolving line of credit. In addition, $6,521,000 of
availability was used under the Loan Agreement primarily to support letters of
credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The
Loan Agreement provides that all payments by the Company's customers are
deposited in a bank account from which all funds may only be used to pay the
debt under the Loan Agreement. At January 31, 2004, the amount of restricted
cash was $238,000. Cash required for operations is provided by draw-downs on the
line of credit.
At January 31, 2004, the Company was not in compliance with two covenants under
the Loan Agreement. The Company and the lenders are discussing a waiver.
Although this noncompliance constitutes an event of default under the Loan
Agreement, the lender has not declared an event of default or accelerated the
indebtedness of the Company under the Loan Agreement. The Company has made all
required payments of principal and interest under the Loan Agreement to date.
The Company and the lenders under the Note Purchase Agreements and the Loan
Agreement are discussing waivers and amendments. The Company believes it is
probable that agreements will be reached for the waivers and amendments,
although agreement is not assured. If it does not occur, the Company believes it
will be able to obtain replacement financing on acceptable terms, although there
is no assurance that any such financing will be obtained. As required by
accounting principles generally accepted in the United States, due to the
unwaived covenant noncompliance discussed above, all amounts owing under the
Note Purchase Agreements and the Loan Agreement have been classified as current
as of January 31, 2004.
The Company is in compliance with all terms and covenants of the following
loans.
On January 29, 2003, the Company obtained a loan from a Danish bank to purchase
a building, in the amount of 1,050,000 Euro, approximately $1,136,000 at the
exchange rate prevailing at the time of the transaction. The loan has a term of
twenty years. The loan bears interest at 6.1% with quarterly payments of $19,000
for both principal and interest.
38
On April 26, 2002 Midwesco Filter borrowed $3,450,000 under two mortgage notes
secured by two parcels of real property and improvements owned by Midwesco
Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior
mortgage loan, were approximately $2,700,000 and were used to make principal
payments to the lenders under the Prior Term Loans and the Bank. The notes each
bear interest at 7.10% with a combined monthly payment of $40,235 for both
principal and interest, and the note's amortization schedules and terms are each
ten years. Upon completion of the pending sale of the building, one of the
mortgages will be paid. The relating mortgage had a balance of $1,242,500 at
January 31, 2004.
On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note
secured by its manufacturing facility in Lebanon, Tennessee. From the proceeds,
$1,000,000 was used for a payment of amounts borrowed under the Note Purchase
Agreements with the remaining proceeds used to repay amounts borrowed under the
Loan Agreement. The loan bears interest at 7.75% with monthly payments of
$21,001 for both principal and interest, and has a ten-year term.
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 included the assumption of a $2,500,000 mortgage note with a
remaining balance of $2,405,000. The loan bears interest at 7.52% with monthly
payments of $18,507 for both principal and interest based on an amortization
schedule of 25 years with a balloon payment at the end of the ten-year term. At
the date of purchase, the remaining term of the loan was 7.25 years.
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing
exchange rate at the time of the transaction, to complete the permanent
financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter.
The loan bears interest at 6.22% and has a term of five 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% with monthly payments of $9,682 for both principal and interest based on
an amortization schedule of 25 years with a balloon payment at the end of the
ten-year term.
On June 1, 1998, the Company obtained a loan in the amount of 4,500,000 DKK
(approximately $650,000 at the prevailing exchange rate at the time of the
transaction) from a Danish bank to partially finance the acquisition of
Boe-Therm A/S ("Boe-Therm"). It is secured by the land and building of
Boe-Therm, bears interest at 6.48% and has a term of twenty years. Another loan
in the amount of 850,000 DKK (approximately $134,000 at the prevailing exchange
rate at the time of the transaction) was obtained on January 1, 1999 to acquire
land and a building, bears interest at 6.1% and has a term of twenty years. The
interest rates on both the twenty-year loans are guaranteed for the first ten
years, after which they will be renegotiated based on prevailing market
conditions.
On September 14, 1995, Midwesco Filter in Winchester, Virginia received
$3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1,
2007, and on October 18, 1995, Perma-Pipe 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, extend or replace prior to each expiration date
during the term of the bonds. The bonds bear interest at a variable rate, which
approximates 4.5% 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 used $1,100,000 of unspent bond proceeds to redeem bonds outstanding as
provided in the indenture.
The Company also has short-term credit arrangements used 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, 2004, borrowings under these credit arrangements totaled
$1,215,000; an additional $510,000 remained unused. The Company also had
outstanding letters of credit in the amount of $69,000 to guarantee performance
to third parties of various foreign trade activities and contracts.
39
Note 8 - Lease Information
The following is an analysis of property under capitalized leases:
(In thousands)
2003 2002
-------- --------
Machinery and equipment $ 124 $ 124
Furniture and office equipment 698 698
Transportation equipment 225 292
-------- --------
1,047 1,114
Less accumulated amortization 957 898
-------- --------
$ 90 $ 216
======== ========
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.
At January 31, 2004, future minimum annual rental commitments under
non-cancelable lease obligations were as follows:
Capital Operating
Leases Leases
(In thousands) -------- --------
2005 $ 67 $ 535
2006 6 400
2007 2 389
2008 - 326
2009 - 39
Thereafter 365
-------- --------
75 2,054
Less amount representing interest - -
-------- --------
Present value of future minimum lease payments (Note 7) $ 75 $ 2,054
======== ========
Rental expense for operating leases was $807,000, $914,000 and $834,000 in 2003,
2002 and 2001, respectively.
Note 9 - Income Taxes
The following is a summary of domestic and foreign income (loss) before income
taxes, extraordinary items and cumulative effect of accounting change:
(In thousands)
2003 2002 2001
-------- -------- --------
Domestic $ (2,995) $ (1,817) $ (417)
Foreign 763 681 (11)
-------- -------- --------
Total $ (2,232) $ (1,136) $ (428)
======== ======== ========
40
Components of income tax expense (benefit) are as follows:
(In thousands)
2003 2002 2001
-------- -------- --------
Current:
Federal $ 41 $ (390) $ 60
Foreign 158 173 (43)
State and other 78 (460) 18
-------- -------- --------
277 (677) 35
Accrued (Deferred) (1,412) 365 (89)
-------- -------- --------
Total $ (1,135) $ (312) $ (54)
======== ======== ========
The difference between the provision (benefit) for income taxes and the amount
computed by applying the federal statutory rate is as follows:
(In thousands)
2003 2002 2001
-------- -------- --------
Tax (benefit) at federal statutory rate $ (759) $ (359) $ (146)
Foreign rate tax differential (171) (13) (150)
State (benefit) taxes, net of federal benefit (120) (70) (11)
Amortization of cost in excess of assets acquired - - 108
Officer's life insurance - - 60
Other - net (85) 130 85
-------- -------- --------
Total $ (1,135) $ (312) $ (54)
======== ======== ========
Components of the current deferred income tax asset balance are as follows:
(In thousands)
2003 2002
-------- --------
Accrued commissions $ 643 $ 613
Other accruals not yet deducted 550 807
Non-qualified deferred compensation - 19
Inventory valuation allowance 353 297
Allowance for doubtful accounts 160 109
Inventory uniform capitalization (16) 32
Other (51) (55)
-------- --------
Total $ 1,639 $ 1,822
======== ========
Components of the long-term deferred income tax asset (liability) balances are
as follows:
(In thousands) 2003 2002
-------- --------
Capital loss carryforward from sale of foreign subsidiary $ 307 $ 307
Depreciation (1,164) (1,470)
Goodwill 509 594
Non-qualified deferred compensation 336 200
Minimum pension liability 269 656
Net operating loss 1,233 -
Other (118) 9
-------- --------
Total $ 1,372 $ 296
======== ========
41
At January 31, 2004 the Company had net operating loss carryforwards available
to offset future taxable income in the United States and certain foreign
jurisdictions, which expire as follows:
In thousands Loss Carryforward: Expires In:
1/31/03 776 1/31/2023
1/31/04 2,319 1/31/2024
----------------
Total 3,095
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 Company engages outside actuaries to calculate its
obligations and costs. The funding policy is to contribute such amounts as are
necessary to provide for benefits attributed to service to date and those
expected to be earned in the future. The amounts contributed to the plan are
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974. Midwesco Filter may contribute
additional amounts at its discretion.
The market related value of plan assets at January 31, 2004 was $2,682,942. The
plans hold no securities of MFRI, Inc. 100% of the assets are held for benefits
under the plan. The target asset allocation is 95% to 100% mutual funds. The
investment policy is to invest all funds in the Vanguard Balanced Index Fund
except for cash needed to pay benefits and investment expenses for the year. 97%
of plan assets are held in a mutual fund, and the remaining 3% is in a money
market fund at January 31, 2004. The expected long-term rate-of-return-on-assets
is based on historical long-term rates of equity and fixed income investments
and the asset mix objective of the fund.
42
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plan:
(In thousands) 2003 2002
-------- --------
Accumulated benefit obligations:
Vested benefits $ 2,915 $ 2,451
======== ========
Accumulated benefits $ 2,933 $ 2,479
======== ========
Change in benefit obligation:
Benefit obligation - beginning of year $ 2,711 $ 2,211
Service cost 96 98
Interest cost 169 150
Amendments 206 -
Actuarial loss 210 315
Benefits paid (80) (63)
-------- --------
Benefit obligation - end of year 3,312 2,711
-------- --------
Change in plan assets:
Fair value of plan assets - beginning of year 1,868 1,576
Actual return on plan assets 476 (175)
Company contributions 419 530
Benefits paid (80) (63)
-------- --------
Fair value of plan assets - end of year 2,683 1,868
-------- --------
Funded status (629) (843)
Unrecognized prior service cost 653 504
Unrecognized actuarial loss 951 1,148
-------- --------
Prepaid benefit cost recognized in the $ 975 $ 809
consolidated balance sheet ======== ========
Amounts recognized in the consolidated
balance sheet:
Prepaid benefit cost $ 975 $ 0
Accrued benefit liability (1,225) (1,420)
Intangible asset 653 504
Accumulated other comprehensive income 572 1,725
-------- --------
Net amount recognized $ 975 $ 809
======== ========
2003 2002
-------- --------
Weighted-average assumptions used to determine benefit
obligations as of January 31:
Discount rate 5.735% 6.320%
Rate of compensation increase N/A N/A
Weighted-average assumptions used to determine net
cost for years ended January 31:
Discount rate 6.320% 6.885%
Expected return on plan assets 8.000% 8.000%
Rate of compensation increase N/A N/A
Components of net periodic benefit cost:
Service cost $ 96 $ 98
Interest cost 169 150
Expected return on plan assets (166) (145)
Amortization of prior service cost 57 62
Recognized actuarial loss 97 32
-------- --------
Net periodic benefit cost $ 253 $ 197
======== ========
43
Cash Flows:
Expected Employer Contributions for Fiscal Year Ending 1/31/2005 $ 329
Expected Employee Contributions for Fiscal Year Ending 1/31/2005 -
Estimated Future Benefit Payments Reflecting Expected Future
Service for the Fiscal Year(s) Ending:
1/31/2005 121
1/31/2006 142
1/31/2007 175
1/31/2008 192
1/31/2009 222
1/31/2010 - 1/31/2014 1,382
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% of total compensation. The
Company matches 50% of each participant's contribution, up to a maximum of 2% of
each participant's salary.
Contributions to the 401(k) Plan and its predecessors were $347,000, $329,000
and $319,000 for the years ended January 31, 2004, 2003 and 2002, respectively.
The Company estimates that it will contribute $347,000 for the year ending
January 31, 2005.
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 $209,000, $187,000 and $150,000 in 2003, 2002 and 2001, 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
2003, 2002 and 2001.
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.
44
The following is information relevant to the Company's business segments:
(In thousands)
2003 2002 2001
-------- -------- --------
Net Sales:
Filtration Products $ 54,872 $ 53,174 $ 54,434
Piping Systems 40,523 44,037 49,417
Industrial Process Cooling Equipment 25,494 25,686 21,683
-------- -------- --------
Total Net Sales $120,889 $122,897 $125,534
======== ======== ========
Gross Profit:
Filtration Products $ 9,782 $ 9,498 $ 10,063
Piping Systems 7,516 10,187 10,208
Industrial Process Cooling Equipment 7,300 7,255 6,061
-------- -------- --------
Total Gross Profit $ 24,598 $ 26,940 $ 26,332
======== ======== ========
Income from Operations:
Filtration Products $ 1,145 $ 400 $ 2,168
Piping Systems 2,281 4,321 3,347
Industrial Process Cooling Equipment 738 702 627
Corporate (4,885) (4,509) (3,970)
-------- -------- --------
Total Income from Operations $ (721) $ 914 $ 2,172
======== ======== ========
Segment Assets:
Filtration Products $ 35,621 $ 39,916 $ 40,848
Piping Systems 22,852 25,444 33,934
Industrial Process Cooling Equipment 11,228 11,560 10,932
Corporate 9,226 2,056 6,815
-------- -------- --------
Total Segment Assets $ 78,927 $ 78,976 $ 92,529
======== ======== ========
Capital Expenditures:
Filtration Products $ 2,236 $ 297 $ 866
Piping Systems 1,605 698 1,687
Industrial Process Cooling Equipment 87 50 740
Corporate 173 140 162
-------- -------- --------
Total Capital Expenditures $ 4,102 $ 1,185 $ 3,455
======== ======== ========
Depreciation and Amortization:
Filtration Products $ 1,262 $ 1,222 $ 1,396
Piping Systems 1,577 1,493 1,500
Industrial Process Cooling Equipment 385 377 334
Corporate 920 852 880
-------- -------- --------
Total Depreciation and Amortization $ 4,144 $ 3,944 $ 4,110
======== ======== ========
45
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)
2003 2002 2001
-------- -------- --------
Net Sales:
United States $100,017 $107,513 $104,155
Canada 3,711 2,776 7,055
Europe 10,219 8,502 10,400
Mexico, South America, Central America
and the Caribbean 3,201 1,224 1,689
Asia 3,588 2,253 1,600
Other 153 629 635
-------- -------- --------
Total Net Sales $120,889 $122,897 $125,534
======== ======== ========
Long-Lived Assets:
United States $ 25,054 $ 26,408 $ 28,859
Europe 3,774 1,480 1,206
-------- -------- --------
Total Long-Lived Assets $ 28,828 $ 27,888 $ 30,065
======== ======== ========
Note 12 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
(In thousands)
2003 2002 2001
-------- -------- --------
Cash paid for:
Income taxes, net of refunds received $ (400) $ (796) $ 1,096
======== ======== ========
Interest, net of amounts capitalized $ 2,003 $ 2,099 $ 2,837
======== ======== ========
Noncash Financing and Investing Activities:
Fixed assets acquired under capital leases $ 18 $ - $ -
======== ======== ========
Sale of business:
Note receivable from buyer $ - $ 44 $ 358
======== ======== ========
Purchase of a business for specified assets
and assumption of specified liabilities:
Purchase price $ - $ 500 $ -
Cash paid - 500 -
Net liabilities assumed $ - $ 257 $ -
======== ======== ========
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
46
incentive options. Such options vest ratably over four years and are exercisable
for up to ten years from the date of grant.
Pursuant to the 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 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. Additionally, 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:
2003 2002 2001
-------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year 946,400 $3.57 845,600 $3.80 875,550 $6.40
Granted 103,250 2.16 132,000 2.15 731,800 3.12
Exercised - - - - - -
Cancelled (31,700) 3.41 (31,200) 3.77 (761,750) 6.13
--------- ------- --------- ------- ---------- -------
Outstanding at end of year 1,017,950 $3.44 946,400 $3.57 845,600 $3.80
========= ======= ========= ======= ========== =======
Options exercisable at year-end 486,374 276,899 109,425
========= ========= ==========
The following table summarizes information concerning outstanding and
exercisable options at January 31, 2004:
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, 2004 Contractual Life Jan. 31, 2004 Exercise Price
----------------- -------------------- ----------------- ---------------- ------------------
$2.00-$2.99 227,250 9.1 years $2.16 32,000 $ 2.15
$3.00-$3.99 687,400 7.9 years 3.12 354,249 3.12
$4.00-$4.99 19,800 5.6 years 4.16 16,625 4.18
$6.00-$6.99 6,500 3.2 years 6.92 6,500 6.92
$8.00-$8.99 2,000 4.3 years 8.10 2,000 8.10
$9.00-$9.99 75,000 3.8 years 9.60 75,000 9.60
------------ ------------- --------- ---------- --------
1,017,950 7.8 years $3.44 486,374 $4.23
============ ============= ========= ========== ========
The Company's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using
the intrinsic value method and, accordingly, no compensation cost has been
recognized. The Company's net loss and loss per share would have been reduced to
the amounts shown below if compensation cost related to stock options had been
determined based on fair value at the grant dates in accordance with Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
47
Compensation ("SFAS 148"). The pro forma net income effect of applying SFAS 148
was as follows:
2003 2002 2001
-------- -------- --------
Net income (loss) - as reported (in thousands) $ (1,097) $(11,528) $ (374)
Compensation cost under fair-market value-based accounting
method, net of tax (in thousands) $ (134) $ (136) $ (31)
Net income (loss) - pro forma (in thousands) $ (1,231) $(11,664) $ (405)
Net income (loss) per common share - basic and diluted, as reported $ (0.22) $ (2.34) $ (0.08)
Net income (loss) per common share - basic and diluted, pro forma $ (0.25) $ (2.37) $ (0.08)
Reported diluted EPS higher than pro forma diluted EPS $ 0.02 $ 0.03 -
The weighted average fair value of options granted during 2003 (net of options
surrendered), 20021 and 2001 are estimated at $1.14, $1.17 and $1.14, per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
2003 2002 2001
-------- -------- --------
Expected volatility 50.01% 46.81% 44.85%
Risk-free interest rate 2.93% 4.51% 4.95%
Dividend 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% or more of the Company's common stock, or announces a tender offer that, if
consummated, would result in 15% 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% 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% of MFRI's
common stock. Under certain circumstances, the decision to redeem requires the
concurrence of a majority of the independent directors.
48
Note 15 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years 2003 and 2002:
(In thousands except per share information) 2003
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net Sales $ 28,010 $ 33,148 $ 32,635 $ 27,096
Gross Profit 5,194 7,681 6,903 4,820
Net income (loss) (865) 603 (127) (709)
Weighted average common shares
Outstanding - basic and diluted 4,922 4,922 4,922 4,922
Per Share Data:
Net income (loss) - basic and diluted $ (0.18) $ 0.12 $ (0.03) $ (0.13)
2003
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net Sales $ 26,768 $ 34,326 $ 33,230 $ 28,573
Gross Profit 5,780 8,239 7,830 5,091
Net income (loss) (10,921)(1) 470 251 (1,328)
Per Share Data:
Net income (loss) - basic and diluted $ (2.22) $ 0.10 $ 0.05 $ (0.27)
(1) First quarter net loss is restated to reflect the cumulative effect of
accounting change.
Note 16 - Product Warranties
The Company issues a standard warranty with the sale of its products and sells
extended warranty contracts to customers. The Company's recognition of warranty
liability is based, generally, on analyses of warranty claims experiences in the
operating units in the preceding years. Changes in the warranty liability in
2003 are summarized below:
2003 2002
-------- --------
Aggregate product warranty liability at January 31, 2003 $552,644 $359,052
Aggregate accruals related to product warranties in 2003 534,607 504,944
Aggregate reductions for payments made in 2003 (566,921) (213,214)
Aggregate changes in 2003 for pre-existing warranties 109,496 (98,138)
-------- --------
Aggregate product warranty liability at January 31, 2004 $629,826 $552,644
======== ========
49
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2004, 2003 and 2002
- -------------------------------------------------------------------------------------------------------------------------------
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, 2004:
Allowance for possible
losses in collection of
trade receivables $410,000 $308,000 - $161,000 $557,000
======== ======== ======== ======== ========
Year Ended January 31, 2003:
Allowance for possible
losses in collection of
trade receivables $343,000 $352,000 - $285,000 $410,000
======== ======== ======== ======== ========
Year Ended January 31, 2002:
Allowance for possible
losses in collection of
trade receivables $410,000 $335,000 $139,000 $263,000 $343,000
======== ======== ======== ======== ========
(1) Disposed with sale of business.
(2) Uncollectible accounts charged off.
50
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: May 12,2004 By: /s/ David Unger
David Unger,
Chairman of the Board of Directors, President
and Chief Executive Officer
(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, President )
and Chief Executive Officer )
(Principal Executive Officer) )
)
HENRY M. MAUTNER* Director )May 12, 2004
)
BRADLEY E. MAUTNER* 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 )
51
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) MFRI 2004 Stock Incentive Plan
21* Subsidiaries of MFRI, Inc.
23* Consent of Deloitte & Touche LLP
24* Power of Attorney executed by directors and officers of the Company
31* Rule 13a - 14(a)/15d - 14(a) Certifications
(1) Chief Executive Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(2) Chief Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32* Section 1350 Certifications
(1) Chief Executive Officer certification pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
(2) Chief Financial Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------------------
* Filed herewith
52
Exhibit 10(e)
MFRI, INC.
2004 STOCK INCENTIVE PLAN
MFRI, Inc. (the "Company") may from time to time on or before November 30,
2013 grant to key employees (including officers, whether or not directors) of
the Company, any of its subsidiaries, any parent of the Company or any of such
parent's affiliates options to purchase shares of the Company's common stock,
restricted or unrestricted stock awards, other stock-based awards, or any
combination of the foregoing (the "Plan"). All stock options and stock awards
granted pursuant to this Plan are referred to herein as "Awards." Key employees,
for the purposes of the MFRI, Inc. 2004 Stock Incentive Plan with respect to the
grant of non-statutory options only, shall also include advisors and consultants
to the Company (including employees of such advisors and consultants) provided
that such advisors and consultants render bona fide services to the Company that
are not connected with the offer or sale of securities in a capital-raising
transaction. Subject to adjustment for corporate transactions and other events
as specifically described herein, the aggregate number of shares of such stock
which may be issued with respect to Awards pursuant to this Plan shall not
exceed 250,000; provided, however, that on January 31, 2005 and each January 31
thereafter until January 31, 2013, the aggregate number of shares that may be
issued with respect to Awards pursuant to the terms of this Plan shall be
increased by the number equal to 2% of the aggregate number of shares of common
stock outstanding as of the last day of the most recently ended fiscal year of
the Company. The Board of Directors may provide for the exercise of Awards under
this Plan from time to time in installments or otherwise, and may authorize the
granting of such Awards upon such other terms and conditions and for such
periods up to ten years from the date of grant as it may in its discretion
determine; provided, however, that (1) except as otherwise determined by the
Company, and in any event in the case of an incentive stock option (as defined
below) or a stock appreciation right granted with respect to an incentive stock
option, no Award granted under the Plan shall be transferable by the grantee
otherwise than by will or the laws of descent and distribution, (2) except as
otherwise determined by the Company, any Award granted hereunder may be
exercisable during such grantee's lifetime only by the grantee or by such
grantee's guardian or legal representative, and (3) the aggregate fair market
value (determined at the time an Award is granted) of shares with respect to
which incentive stock options are exercisable for the first time by an option
holder during any calendar year (under all incentive stock option plans of the
Company, any parent and any subsidiary corporations of the Company) shall not
exceed $100,000. Notwithstanding anything contained herein to the contrary, the
aggregate number of shares of common stock which may be issued to all grantees
or holders pursuant to the exercise of incentive stock options pursuant to the
Plan shall not exceed 250,000.
The Company may from time to time grant to eligible participants Awards of
stock options under this Plan. Options granted under this Plan may be either
options which are intended to be incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("incentive stock
options"), or options which are not intended to be incentive stock options
("non-statutory options"). The purchase price per share to be specified in any
option granted pursuant to this Plan shall be not less than the fair market
value of such stock on the date such option is granted, and may be paid in cash,
in common stock of the Company or in any combination thereof.
The Company may from time to time grant to the holder of any option issued
hereunder the right to elect to exercise stock appreciation rights with respect
to all or any portion of the shares subject to such option in lieu of such
option rights thereunder by surrendering the option rights as to all or such
portion of the shares as to which option rights shall at such time be
exercisable under such option, and receiving, with respect to each share as to
which option rights are so surrendered, an amount in payment equal to the excess
of the fair market value of such share on the date of surrender over the
purchase price specified for such share in the option. Such payment may be made
in cash, in common stock of the Company, or in any combination thereof, subject,
in the case of cash, to the consent of the Company. The number of shares of
common stock to be issued and delivered by the Company upon the exercise of
stock appreciation rights hereunder shall be determined by dividing the amount
of the payment to be made in the form of common stock by the fair market value
of a share of the Company's common stock as of the date of surrender, and the
value of any fractional share shall be paid by the Company in cash. No stock
appreciation right shall, in any event, be exercisable within six months of the
date of its grant. For purposes of determining the aggregate number of shares of
the Company's common stock sold to all Award grantees pursuant to this Plan,
each share as to which option rights have been surrendered upon the exercise of
stock appreciation rights shall be treated as if it were a share sold under this
Plan.
The Company may from time to time grant restricted or unrestricted stock
Awards or other stock-based Awards to eligible participants in such amounts, on
such terms and conditions and for such consideration, including no consideration
or such minimum consideration as may be required by law, as it shall determine.
53
Grantees and holders of Awards shall pay to the Company or its affiliate,
or make provision satisfactory to the Company for the payment of, any taxes
required to be withheld in respect of Awards under the Plan no later than the
date of the event creating the tax liability. The Company or its affiliate may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the grantee or holder of an Award. At any time when
an Award grantee is required to pay to the grantee's employer an amount required
to be withheld under applicable income tax laws in connection with the exercise
of a non-statutory Award, the Award grantee may satisfy this obligation in whole
or in part by electing (the "Election") to have the Company withhold shares of
common stock having a value equal to the amount required to be withheld. The
value of the shares to be withheld shall be based on the fair market value of
such shares on the date that the amount of tax to be withheld shall be
determined ("Tax Date"). Each Election must be made prior to the Tax Date. The
Board may disapprove of any Election or may suspend or terminate the right to
make Elections. An Election is irrevocable.
If the Award grantee is an officer of the Company within the meaning of
section 16 of the Securities Exchange Act of 1934, as amended, then the Election
is subject to the following additional restrictions:
(1) No Election shall be effective for a Tax Date which occurs within
six months of the grant of the Award.
(2) The Election must be made either six months prior to the Tax Date or
must be made during a period beginning on the third business day
following the date of release for publication of the Company's
quarterly or annual summary statements of sales and earnings and
ending on the twelfth business day following such date.
In the event of a stock dividend, stock split, or combination or other
reduction in the number of issued shares of common stock of the Company, the
Board of Directors of the Company shall make such adjustments in the number of
unpurchased shares subject to this Plan, the number of shares subject to Awards
outstanding in this Plan, the exercise price specified in Awards outstanding
under this Plan, and the number of shares subject to stock appreciation rights
outstanding under this Plan as it shall determine to be appropriate and
equitable. In the event of a merger, consolidation, reorganization or
dissolution of the Company, or the sale or exchange of substantially all of the
Company's assets, (i) the rights under Awards, including stock appreciation
rights, outstanding hereunder shall terminate, except to the extent and subject
to such adjustments as may be provided by the Board of Directors of the Company
or by the terms of the plan or agreement of merger, consolidation,
reorganization, dissolution or sale or exchange of such assets, and (ii) the
Company shall notify the holders of outstanding Awards of such event at least 30
days prior to the effective date of such event.
The Board of Directors of the Company, or a committee or committees of the
Board of Directors as may be appointed by the Board of Directors from time to
time, shall have full power and authority, in its sole and absolute discretion,
to (1) take all actions necessary to carry out the purpose and intent of the
Plan, (2) administer and interpret the Plan, options and other Award grant
agreements and all other documents relevant to the Plan and/or to Awards issued
thereunder, (3) adopt and interpret such rules, regulations, agreements,
guidelines and instruments for the implementation and administration of the Plan
as it deems necessary or advisable, and (4) select the grantees, determine the
type of any Award to be granted, determine the time or times at which Awards
shall be granted, impose such terms, limitations, restrictions and conditions
upon any such Award as it shall deem appropriate, determine the number of shares
to be allocated to each Award grantee, and to modify, amend, extend or renew
outstanding Awards, or accept the surrender of outstanding Awards and substitute
new Awards, provided, however, that, subject to modifications, amendments or
terminations expressly described in this Plan, any modification that would
materially adversely affect any outstanding Award shall not be made without the
consent of the holder. The Board of Directors of the Company may, without
stockholder consent, amend this Plan; provided, however, any amendment that
would (i) materially increase the benefits accruing to participants hereunder,
(ii) materially increase the number of shares which may be issued hereunder, or
(iii) materially modify the requirements as to eligibility for participation
hereunder, must be approved by a vote of the stockholders of the Company.
54
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)
55
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, May 12, 2004, (which report expresses an unqualified opinion and includes
an explanatory paragraph as to MFRI, Inc.'s change in its method of accounting
for goodwill and intangible assets) appearing in this Annual Report on Form 10-K
of MFRI, Inc. and subsidiaries for the year ended January 31, 2004.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 17, 2004
56
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 2003, 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 Company, 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 12th day of May, 2004.
/s/ David Unger /s/ Arnold F. Brookstone
David Unger, Chairman of the Board Arnold F. Brookstone, Director
of Directors, President and Chief
Executive Officer (Principal
Executive Officer)
/s/ Henry M. Mautner /s/ Eugene Miller
Henry M. Mautner, Vice Chairman Eugene Miller, Director
of the Board of Directors
/s/ Bradley E. Mautner /s/ Stephen B. Schwartz
Bradley E. Mautner, Director and Stephen B. Schwartz, Director
Executive Vice President
/s/ Michael D. Bennett /s/ Dennis Kessler
Michael D. Bennett, Vice President, Dennis Kessler, Director
Secretary and Treasurer
(Principal Financial and Accounting Officer)
57
Exhibit 31.1
I, David Unger, certify that:
1. I have reviewed this annual report on Form 10-K of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(b) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ David Unger_________
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
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Exhibit 31.2
I, Michael D. Bennett, certify that:
1. I have reviewed this annual report on Form 10-K of MFRI, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ Michael D. Bennett____
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
59
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, David Unger, President and Chief Executive Officer (principal executive
officer) of MFRI, Inc. (the "Registrant"), certify that to the best of my
knowledge, based upon a review of the Annual Report on Form 10-K for the period
ended January 31, 2004 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ David Unger
David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
May 17, 2004
A signed original of this written statement required by Section 906 has been
provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
60
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Michael D. Bennett, Chief Financial Officer (principal financial officer) of
MFRI, Inc. (the "Registrant"), certify that to the best of my knowledge, based
upon a review of the Annual Report on Form 10-K for the period ended January 31,
2004 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
/s/ Michael D. Bennett
Michael D. Bennett
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
May 17, 2004
A signed original of this written statement required by Section 906 has been
provided to MFRI, Inc. and will be retained by MFRI, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
61