SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ------- EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 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 number 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 incorporation or organization) Identification No.) 7720 Lehigh Avenue Niles, Illinois 60714 (Address of principal executive offices) (Zip code) (847) 966-1000 (Registrant's telephone number, including area code) - --------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On September 11, 1998, there were 4,989,254 shares of the Registrant's common stock outstanding.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying interim condensed consolidated financial statements of MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments which the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Certain information and footnote disclosures have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report to stockholders for the year ended January 31, 1998. The results of operations for the quarter and six months ended July 31, 1998 are not necessarily indicative of the results to be expected for the full year 1998. <TABLE> MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share information) <CAPTION> Three Months Ended July 31, Six Months Ended July 31, -------------------------- ----------------------- 1998 1997 1998 1997 ---------- --------- -------- -------- <S> <C> <C> <C> <C> Net sales $32,734 $30,215 $62,724 $55,979 Cost of sales 24,299 21,970 46,527 41,484 ---------- --------- -------- -------- Gross profit 8,435 8,245 16,197 14,495 Selling expense 2,723 2,564 5,546 4,691 General and administrative expense 3,811 3,166 7,274 5,915 ---------- --------- -------- --------- Income from operations 1,901 2,515 3,377 3,889 Interest expense - net 670 394 1,246 772 ---------- --------- -------- ---------- Income before income taxes 1,231 2,121 2,131 3,117 Income taxes 492 870 852 1,278 ---------- --------- --------- --------- Net income $ 739 $ 1,251 $ 1,279 $ 1,839 ========== ========= ======= ======== Net income per common share - basic $0.15 $0.25 $0.26 $0.37 Net income per common share - diluted $0.14 $0.24 $0.25 $0.36 Weighted average common shares outstanding 4,983 4,967 4,982 4,965 Weighted average common shares outstanding assuming full dilution 5,114 5,104 5,108 5,069 See notes to condensed consolidated financial statements. </TABLE>
<TABLE> MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands except per share information) <CAPTION> July 31, January 31, 1998 1998 --------- ----------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 461 $ 976 Trade accounts receivable, net 23,192 21,641 Costs and estimated earnings in excess of billings on uncompleted contracts 4,752 3,489 Deferred income taxes 2,500 2,308 Inventories 21,205 19,595 Prepaid expenses and other current assets 2,252 2,758 --------- ----------- Total current assets 54,362 50,767 Restricted Cash from Bond Proceeds 1,497 2,929 Property, Plant and Equipment, At Cost 35,148 30,028 Less Accumulated Depreciation 8,246 6,998 --------- ----------- Property, plant and equipment, net 26,902 23,030 Other Assets: Goodwill, net 12,501 12,399 Other, net 3,801 3,816 --------- ----------- Total other assets 16,302 16,215 --------- ----------- Total Assets $99,063 $92,941 ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Drafts payable $ 5,106 $ 1,882 Accounts payable 7,284 7,180 Commissions payable 6,121 5,821 Current maturities of long-term debt 399 573 Billings in excess of costs and estimated earnings on uncompleted contracts 901 461 Other current liabilities 3,615 3,544 --------- ----------- Total current liabilities 23,426 19,461 Long-Term Liabilities: Long-term debt, less current maturities 35,880 35,275 Deferred income taxes 1,450 1,453 Other 921 711 ---------- ----------- Total long-term liabilities 38,251 37,439 Stockholders' Equity: Common stock, $ .01 par value, authorized - 15,000 shares; outstanding - 4,989 and 4,981 shares at July 31 and January 31, respectively 50 50 Additional paid-in capital 21,917 21,864 Retained earnings 15,515 14,236 Accumulated other comprehensive income (96) (109) ---------- ----------- Total stockholders' equity 37,386 36,041 ---------- ----------- Total Liabilities and Stockholders' Equity $99,063 $92,941 ========== =========== See notes to condensed consolidated financial statements. </TABLE>
<TABLE> MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) <CAPTION> Six Months Ended July 31, -------------------- 1998 1997 -------- --------- <S> <C> <C> Cash Flows from Operating Activities: Net income $ 1,279 $ 1,839 Adjustments to reconcile net income to net cash flows from operating activities: Provision for depreciation and amortization 1,632 1,304 Deferred income taxes (195) 118 Change in operating assets and liabilities: Trade accounts receivable (1,555) (4,091) Costs and estimated earnings in excess of billings on uncompleted contracts (1,263) (1,411) Inventories (1,167) 222 Prepaid expenses and other current assets 525 (112) Current liabilities 4,027 265 Other operating assets and liabilities (172) (107) --------- ---------- Net Cash Flows from Operating Activities 3,111 (1,973) --------- ---------- Cash Flows from Investing Activities: Increase in restricted cash from Industrial Revenue Bonds 1,432 797 Net purchases of property and equipment (3,825) (2,108) Acquisition of business, net of cash acquired (1,725) - --------- ---------- Net Cash Flows from Investing Activities (4,118) (1,311) --------- ---------- Cash Flows from Financing Activities: Payments on capitalized lease obligations (226) (243) Stock options exercised 53 38 Proceeds from long-term debt, net 665 1,189 Net Cash Flows from Financing Activities 492 984 --------- ---------- Net Decrease in Cash and Cash Equivalents (515) (2,300) Cash and Cash Equivalents - Beginning of Period 976 3,416 --------- ---------- Cash and Cash Equivalents - End of Period $ 461 $ 1,116 ========= ========== See notes to condensed consolidated financial statements. </TABLE>
MFRI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1998 <TABLE> 1. Inventories consisted of the following: (In thousands) <CAPTION> July 31, January 31, 1998 1998 -------- ----------- <S> <C> <C> Raw materials $ 15,617 $14,296 Work in process 2,410 1,557 Finished goods 3,178 3,742 -------- ------- Total $ 21,205 $19,595 ======== ======= </TABLE> <TABLE> 2. Supplemental cash flow information: (In thousands) <CAPTION> Six Months Ended July 31, ------------------------- 1998 1997 -------- ------ <S> <C> <C> Cash paid during the quarter for: Interest, net of capitalized amounts $ 539 $ 427 Income taxes, net of refunds received 48 429 Schedule of noncash financial activities: Fixed assets acquired under capital leases $ - $ 127 Purchase of business: Fair value of assets acquired (net of cash received) $ 1,768 Cost in excess of net assets acquired 352 Cash paid (1,725) Liability under noncompete agreement (279) --------- Liabilities assumed $ 116 ========= </TABLE> 3. On June 1, 1998, the Company acquired certain assets and liabilities of Boe-Therm A/S ("Boe-Therm"), including inventory and manufacturing facilities, for an aggregate purchase price of $2,004,000. Financing was provided by borrowings under the Company's unsecured line of credit, loans obtained from a Danish bank and a noncompete agreement which is to be paid ratably over a period of four years. Boe-Therm, located in Assens, Denmark, is a manufacturer of liquid chillers for removing heat from industrial processes. Boe-Therm's sales for the two months ended July 31, 1998 were $617,000. The acquisition has been accounted for as a purchase and the accounts of Boe-Therm have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the assets and liabilities acquired, based on their estimated fair values. The excess ($352,000) of the purchase price over the fair value of the net assets acquired has been recorded as goodwill and is being amortized over a 25 year period on the straight-line basis.
<TABLE> 4. The basic weighted average shares reconcile to fully diluted weighted average shares as follows: (In thousands) <CAPTION> Three Months Ended Six Months Ended July 31, July 31, ------------------ ---------------- 1998 1997 1998 1997 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net Income $ 739 $1,251 $1,279 $1,839 ====== ====== ====== ====== Basic weighted average common shares outstanding 4,983 4,967 4,982 4,965 Dilutive effect of stock options 131 137 126 104 ------ ------ ------ ------- Weighted average common shares outstanding assuming full dilution 5,114 5,104 5,108 5,069 ====== ====== ====== ====== Net income per common share-basic $0.15 $0.25 $0.26 $0.37 Net income per common share-diluted $0.14 $0.24 $0.25 $0.36 </TABLE> At July 31, 1998 and 1997, the weighted average number of stock options not included in the computation of diluted earnings per share of common stock because the options exercise price exceeded the average market price of the common shares were 75,000 and 65,600, respectively. These options were outstanding at the end of each of the respective periods. 5. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," as of February 1, 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. This standard expands or modifies current disclosures and, accordingly, had no impact on the Company's reported financial position, results of operations and cash flows. The components of comprehensive income, net of tax, were as follows: (In thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended July 31, July 31, ------------------ ---------------- 1998 1997 1998 1997 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net Income $ 739 $1,251 $1,279 $1,839 Change in foreign currency translation adjustments 5 (35) 13 (34) ------ ------- ------- ------- Comprehensive income $744 $1,216 $1,292 $1,805 ====== ======= ======= ====== </TABLE> Accumulated other comprehensive income presented on the accompanying condensed consolidated balance sheet consists of accumulated foreign currency translation adjustments.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations July 31, 1998 The statements contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and certain other information contained elsewhere in this report, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "continue", "remains", "intend", "aim", "should", "prospects", "could", "future", "potential", "believes", "plans" and "likely" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected. These uncertainties include, but are not limited to, economic conditions, market demand and pricing, competitive and cost factors, raw material availability and prices, global interest rates, currency exchange rates, labor relations and other risk factors. RESULTS OF OPERATIONS MFRI, Inc. Three months ended July 31 Net sales of $32,734,000 for the quarter ended July 31, 1998 increased 8.3 percent from $30,215,000 for the comparable quarter last year. Gross profit of $8,435,000 or 25.8 percent of net sales in the current year quarter increased 2.3 percent from $8,245,000 or 27.3 percent of net sales in the prior year quarter. Net sales increased in all business segments. In terms of dollars, gross profit increased in all business segments with the exception of the filtration products business. Net income decreased 40.9 percent from $1,251,000 or $0.25 per common share (basic) in the prior year to $739,000 or $0.15 per common share (basic) in the current year. During the current year quarter, the Company settled the last of three lawsuits related to the December 1996 merger of Midwesco, Inc. into MFRI, Inc. (the "Midwesco Merger"). The cost of the settlement exceeded the special reserve and the escrow account that had been established at the time of the merger. Increased interest costs and the write-off of a foreign subsidiary's bad debt in the current year quarter also contributed to the decline in net income. Six months ended July 31 Net sales of $62,724,000 for the six months ended July 31, 1998 increased 12.0 percent from $55,979,000 for the comparable period last year. Gross profit of $16,197,000 or 25.8 percent of net sales in the current year increased 11.7 percent from $14,495,000 or 25.9 percent of net sales in the prior year. Net sales and gross profit in terms of dollars increased in all business segments compared to the prior year.
Net income decreased 30.5 percent from $1,839,000 or $0.37 per common share (basic) in the prior year to $1,279,000 or $0.26 per common share (basic) in the current year. This decrease was primarily due to legal and settlement costs related to the disposition of one of the lawsuits acquired in the Midwesco Merger described above and legal expenses related to the defense of patent infringement lawsuits, coupled with higher interest costs and the write-off of a foreign subsidiary's bad debt in the current year. Filtration Products Business Three months ended July 31 Net sales for the quarter ended July 31, 1998 increased 4.5 percent to $11,665,000 from $11,163,000 in the comparable quarter one year ago. This increase is the result of higher sales of filter elements for cartridge collectors due to the acquisition of TDC Filter Manufacturing, Inc. ("TDC") in December 1997, partially offset by a decline in sales of filter elements for baghouse collectors. Gross profit as a percent of net sales decreased from 28.0 percent in the prior year to 24.0 percent, primarily as a result of competitive pricing pressures in the marketplace, unusually high medical insurance claims costs and manufacturing inefficiencies. Selling expense for the quarter ended July 31, 1998 increased to $1,190,000 or 10.2 percent of net sales from $1,087,000 or 9.7 percent of net sales for the comparable quarter last year. These increases are attributable to additional sales resources, mainly as a result of the TDC acquisition. General and administrative expense increased to $742,000 or 6.4 percent of net sales in the current year quarter from $590,000 or 5.3 percent of net sales for the comparable period one year ago. These changes are due to additional administrative resources and expenses, primarily as a result of the TDC acquisition, partially offset by lower management incentive compensation. Six months ended July 31 Net sales for the six months ended July 31, 1998 increased 22.0 percent to $24,202,000 from $19,832,000 in the comparable period last year. This increase is the result of higher sales of filter elements for cartridge collectors due to the TDC acquisition, partially offset by a decline in sales of filter elements for baghouse collectors. Gross profit for the six months as a percent of net sales decreased from 26.1 percent in the prior year to 23.7 percent, primarily as a result of competitive pricing pressures in the marketplace, unusually high medical insurance claims costs and manufacturing inefficiencies. Selling expense for the six months ended July 31, 1998 increased to $2,432,000 or 10.0 percent of net sales from $1,910,000 or 9.6 percent of net sales for the comparable period last year. These increases are attributable to additional sales resources, mainly as a result of the TDC acquisition. General and administrative expense increased to $1,500,000 or 6.2 percent of net sales in the current year from $1,071,000 or 5.4 percent of net sales for the comparable period one year ago. These changes are due to additional administrative resources and expenses, primarily as a result of the TDC acquisition, partially offset by lower management incentive compensation.
Piping System Products Business Three months ended July 31 Net sales increased 11.7 percent to $13,619,000 for the quarter ended July 31, 1998 from $12,195,000 in the prior year quarter, primarily due to increased pipe sales, both in the United States and England. Gross profit as a percent of net sales decreased from 23.9 percent in the prior year to 22.7 percent, mainly resulting from low margins on sales of a foreign subsidiary. Selling expense decreased slightly from $636,000 or 5.2 percent of net sales to $629,000 or 4.6 percent of net sales. The percentage decline was the result of the increased sales volume in the current year. General and administrative expense increased from $1,112,000 or 9.1 percent of net sales in the prior year quarter to $1,517,000 or 11.1 percent of net sales in the current year quarter primarily due to legal and settlement costs related to the disposition of one of the lawsuits acquired in the Midwesco Merger described above, increased engineering costs and the write-off of a foreign subsidiary's bad debt. Six months ended July 31 Net sales increased 4.6 percent to $24,271,000 for the six months ended July 31, 1998 from $23,207,000 in the prior year comparable period due to increased pipe sales, both in the United States and England. Gross profit as a percent of net sales increased from 22.3 percent in the prior year to 23.1 percent, mainly resulting from favorable product mix of sales and manufacturing efficiencies in the domestic operations. Selling expense increased from $1,243,000 or 5.4 percent of net sales to $1,353,000 or 5.6 percent of net sales, largely due to marketing expenses related to PROtherm products, which were introduced during the quarter ended April 30, 1998. General and administrative expense increased from $2,176,000 or 9.4 percent of net sales in the prior year to $2,844,000 or 11.7 percent of net sales in the current year primarily due to legal and settlement costs related to the disposition of one of the lawsuits acquired in the Midwesco Merger described above, legal expenses related to the defense of a patent infringement lawsuit, increased engineering costs and the write-off of a foreign subsidiary's bad debt.
Industrial Process Cooling Equipment Business Three months ended July 31 Net sales of $7,450,000 for the quarter ended July 31, 1998 increased 8.6 percent from $6,857,000 for the comparable quarter in the prior year, mainly due to the inclusion of the operating results of Boe-Therm A/S ("Boe-Therm"), which was acquired on June 1, 1998. Gross profit as a percent of net sales increased from 32.1 percent for the prior year quarter to 34.2 percent for the comparable period in the current year, primarily due to a favorable product mix of sales and increased manufacturing efficiencies. Selling expenses increased from $841,000 in the prior year to $904,000 in the current year, but declined as a percentage of net sales from 12.3 percent last year to 12.1 percent in the current year. Increased sales salaries and the inclusion of the operating results of Boe-Therm were the main reasons for the dollar increase. The percentage decline was the result of the increased sales volume in the current year. General and administrative expenses increased from $511,000 or 7.5 percent of net sales to $638,000 or 8.6 percent of net sales. This increase was primarily due to increased engineering and salaries expenses compared to the prior year, coupled with the inclusion of the operating results of Boe-Therm in the current year quarter. Six months ended July 31 Net sales of $14,251,000 for the six months ended July 31, 1998 increased 10.1 percent from $12,940,000 for the comparable period in the prior year, mainly due to higher sales of portable chillers and temperature controllers and the inclusion of the operating results of Boe-Therm in the current year. Gross profit as a percent of net sales increased from 32.1 percent last year to 34.0 percent in the current year, primarily due to a favorable product mix of sales and increased manufacturing efficiencies. Selling expenses increased from $1,539,000 last year to $1,761,000 and from 11.9 percent to 12.4 percent of net sales. Increased commission and salary expenses were the main reasons for this increase. General and administrative expenses increased from $1,035,000 or 8.0 percent of net sales to $1,245,000 or 8.7 percent of net sales. This increase was primarily due to increased management information systems, engineering and salaries expenses compared to the prior year and the inclusion of the operating results of Boe-Therm subsequent to the date of acquisition.
General Corporate Expenses General corporate expenses include general and administrative expense not allocated to business segments and interest expense. Three months ended July 31 General and administrative expense decreased to $914,000 or 2.8 percent of net sales in the current year quarter from $953,000 or 3.2 percent of net sales in the comparable period in the prior year. The dollar decrease was mainly due to decreases in certain employee benefit expenses, data processing expenses and profit-based incentive compensation, partially offset by higher building, stock-related and collection expenses. Interest expense increased from $394,000 to $670,000, due to higher borrowings in the current year quarter as a result of the acquisition of TDC in December 1997 and Boe-Therm in June 1998. Six months ended July 31 General and administrative expenses increased from $1,632,000 or 2.9 percent of net sales in the prior year to $1,685,000 or 2.7 percent of net sales in the current year. The dollar increase was primarily due to higher building, stock-related and collection expenses in the current year, partially offset by decreases in data processing expenses, certain employee benefit expenses and profit-based incentive compensation. Interest expense increased from $772,000 to $1,246,000, due to higher borrowings in the current year as a result of the acquisition of TDC in December 1997 and Boe-Therm in June 1998. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Operating Cash Flow Cash and cash equivalents as of July 31, 1998 were $461,000 as compared to $976,000 at January 31, 1998. Net cash inflows of $3,111,000 generated from operating activities coupled with $1,432,000 received from the restricted cash of the Industrial Revenue Bonds, $665,000 net proceeds of long-term debt and $53,000 proceeds from stock options exercised were used to fund purchases of property, plant and equipment of $3,825,000, the business acquisition of $1,725,000 and payments on capitalized lease obligations of $226,000. Net cash provided by operating activities was $3,111,000 for the six months ended July 31, 1998, mainly because of increased current liabilities, primarily drafts payable. For the six months ended July 31, 1997, net cash used for operating activities totaled $1,973,000, mainly due to increased accounts receivable.
Net cash used for investing activities for the six months ended July 31, 1998 was $4,118,000 versus $1,311,000 for the same period one year ago. Capital expenditures increased from $2,108,000 in the prior year to $3,825,000 in the current year. This increase is primarily due to construction in process for the manufacturing facility at New Iberia, Louisiana for which the Company has a commitment from a third party to provide operating lease financing upon completion. (See Financing.) In addition, the Company used $1,725,000 for the acquisition of a business in the current year, net of cash acquired. Cash received from the restricted cash of the Industrial Revenue Bonds in the current year was $1,432,000 compared to $797,000 during the comparable period one year ago. Net cash obtained from financing activities for the six months ended July 31, 1998 was $492,000 versus $984,000 for the comparable period in the prior year. In the current year, the Company obtained $665,000 from net proceeds of long-term debt and $53,000 from stock options exercised and utilized $226,000 to repay capitalized lease obligations. The Company obtained $1,189,000 from net proceeds of long-term debt, $38,000 from stock options exercised and used $243,000 to repay capitalized lease obligations in the prior year. The Company's current ratio at July 31, 1998 was 2.3 to 1 versus 2.6 to 1 at January 31, 1998. Debt to total capitalization decreased to 49.2 percent from 49.9 percent at January 31, 1998. Financing On September 14, 1995, and October 18, 1995, respectively, Midwesco Filter and Perma-Pipe received the proceeds of Industrial Revenue Bonds. Such proceeds are 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 in the filtration products business in Winchester, Virginia ($3,150,000) and the piping systems products business in Lebanon, Tennessee ($3,150,000). The bonds bear interest at a variable rate, which approximates five percent per annum, including letters of credit and remarketing fees. Each bond indenture established a trusteed project fund for deposit of the bond proceeds. The trustee is authorized to make disbursements from the project fund upon requisition from the Company to pay costs of capital expenditures which comply with the requirements of the loan agreement for each bond. Pending such disbursements, the trustee invests the balance of the project fund in investments defined by the indenture and limited by applicable law. Such invested funds totaled $1,497,000 at July 31, 1998. The bonds are fully secured by bank letters of credit which expire approximately two years from the date of issuance; the Company expects to arrange for renewal, reissuance or extension of the letters of credit prior to each expiration date during the term of the bonds. On May 8, 1996, the Company purchased for approximately $1.1 million a 10.3-acre parcel of land with a 67,000 square foot building adjacent to its Midwesco Filter property in Winchester, Virginia. The purchase was financed 80% by a seven-year mortgage bearing interest at 8.38% and 20% by the industrial revenue bonds described above.
The Company borrowed $4,000,000 from a bank under a term loan to finance the September 1994 acquisition of Ricwil Piping Systems Company. Through the Midwesco Merger, the Company assumed approximately $6,611,000 of Midwesco, Inc. long-term debt, of which $5,000,000 was assumed bank and other debt, while the remainder was assumed capitalized lease obligations. Effective December 15, 1996, the Company replaced its existing revolving line of credit and the unpaid portion of the $4,000,000 September 1994 term loan with $15,000,000 of fixed rate senior unsecured notes due 2007 (the "Notes") and a new $5,000,000 floating rate unsecured revolving line of credit. Proceeds of the Notes were also used to repay the Midwesco, Inc. debt assumed by the Company. The Notes bear interest at an annual rate of 7.21 percent and require principal payments beginning in the year ended January 31, 2001, and continuing annually thereafter, resulting in a seven-year average life. During 1997, the terms of the unsecured credit agreement were amended. Under the terms of the agreement as amended, the Company may borrow up to $12,000,000 under a revolving line of credit which matures on March 31, 2000. Interest rates are based on one of two options selected by the Company at the time of each borrowing - the prime rate or the LIBOR rate plus a margin for the term of the loan. At July 31, 1998, the prime rate was 8.5 percent and the margin added to the LIBOR rate, which is redetermined each quarter based on the Company's interest coverage ratio, was 1.25 percent. The Company had borrowed $9,200,000 under the revolving line of credit at July 31, 1998. Additionally, $637,000 was drawn under the agreement as letters of credit, principally to guarantee performance to third parties resulting from various trade activities and to guarantee performance of certain repairs and payment of property taxes and insurance related to the mortgage note secured by the manufacturing facility and equipment located in Cicero, Illinois described in more detail below. The loan agreement contains certain financial covenants. As of July 31, 1998, the Company was not in compliance with two such financial covenants. The Company has obtained a waiver for such non-compliance. On June 1, 1998, the Company obtained two loans from a Danish bank to partially finance the acquisition of Boe-Therm. The first loan in the amount of 2,750,000 Danish krone ("DKK") (approximately $400,000) is secured by the machinery and equipment of Boe-Therm, bears interest at 5.80 percent and has a term of five years. The second loan in the amount of 4,500,000 DKK (approximately $650,000) is secured by the land and building of Boe-Therm, bears interest at 6.48 percent and has a term of twenty years. In addition, the Company has in place an overdraft facility with this Danish bank, whereby Boe-Therm may borrow up to 1,000,000 DKK (approximately $150,000) at a variable rate, which was 7.00 percent at the inception of the agreement. On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured by the manufacturing facility and equipment in Cicero, Illinois acquired in the TDC acquisition. The loan bears interest at 6.76 percent and the term of the loan is ten years with an amortization schedule of 25 years. During the quarter ended April 30, 1998, the Company began construction of a manufacturing facility in New Iberia, Louisiana, for the production of oil and gas gathering flowlines and low temperature district heating products. The Company has a commitment from a lender to provide operating lease financing for this facility upon completion. At July 31, 1998, expenditures for the facility were included in construction in process, a component of property, plant and equipment, in the Condensed Consolidated Balance Sheet.
The Company has engaged a private placement agent and financial advisor in connection with the private offering of $10,000,000 fixed rate senior unsecured notes due 2008 (the "Notes due 2008"). The Notes due 2008 will require principal payment beginning at the end of the fourth year and continuing annually thereafter, resulting in a seven-year average life. The Company has received a commitment from an institutional investor to acquire the Notes at an annual interest rate of 6.97 percent. Major terms and conditions have been agreed to and the notes and related contracts are essentially complete. Although the Company expects to have the new financing in place prior to October 31, 1998, no assurance can be given that the foregoing transaction involving the Notes due 2008 will be consummated. YEAR 2000 Certain computer systems with date-sensitive programs may not properly recognize the year 2000 and may, as a result, create unreliable data or fail to operate at all in the year 2000 and thereafter. Such occurrences could have a material adverse effect on the Company's results of operations and financial condition. Accordingly, the Company is assessing its financial and operating systems for the presence of such deficiencies and is developing and executing detailed corrective plans. The Company is also communicating with significant suppliers of goods and services and with customers to assess its exposure to their potential year 2000 issues. Finally, the Company is assessing its products for the presence of technology which might adversely affect those products and the customers to whom they have been delivered. Although there can be no assurances, based on current assessments, Management expects the Company's year 2000 issues to be identified and corrected before the year 2000, and does not expect the costs of correction to have a material adverse effect on the Company's results of operations or financial condition. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Midwesco, Inc., or one of its affiliates, PermAlert ESP, Inc. ("PermAlert") or Perma-Pipe, Inc., was a party to three lawsuits (the "Pending Suits"), each of which, upon the consummation of the Midwesco Merger, became the obligations of MFRI. MFRI agreed to bear all costs and expenses of the Pending Suits, including, but not limited to, any judgments or settlement costs (the "Expenses"); provided, however, after MFRI has spent an aggregate of $400,000 in Expenses, all such Expenses of the Pending Suits will be paid from a special escrow holding 66,980 shares of MFRI common stock (`the "Special Escrow"). In the event there are no shares of MFRI common stock in the Special Escrow, the responsibility for the Pending Suits will be solely that of MFRI. IHP Industrial v. PermAlert ESP, the last of the Pending Suits, was settled on June 9, 1998. IHP Industrial v. PermAlert ESP, was filed in May 1996, in the Circuit Court of Lauderdale County, Mississippi. On June 9, 1998 the parties reached a settlement and a confidential settlement agreement was executed by the parties to the lawsuit, including IHP Industrial, Inc.'s insurer, Liberty Mutual Insurance Company. The court entered a dismissal order in the case on or about September 3, 1998. The aggregate Expenses relating to the Pending Suits exceeded the reserve and the value of the shares in the Special Escrow by approximately $224,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the stockholders of the Company was held on June 30, 1998 in order to elect directors. David Unger, Henry M. Mautner, Gene K. Ogilvie, Fati A. Elgendy, Bradley E. Mautner, Don Gruenberg, Arnold F. Brookstone, Eugene Miller and Stephen B. Schwartz were elected as directors of the Company at the meeting. The following is a tabulation of the votes cast for, or withheld, with respect to each nominee: <TABLE> <CAPTION> For Withheld --------- -------- <S> <C> <C> David Unger 4,307,083 9,925 Henry M. Mautner 4,306,583 10,425 Gene K. Ogilvie 4,307,083 9,925 Fati A. Elgendy 4,307,083 9,925 Bradley E. Mautner 4,307,083 9,925 Don Gruenberg 4,307,083 9,925 Arnold F. Brookstone 4,306,548 10,460 Eugene Miller 4,306,583 10,425 Stephen B. Schwartz 4,307,048 9,925 </TABLE> There were no votes against, nor were there abstentions or broker non-votes with respect to any nominee. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None. (b) Reports on Form 8-K - None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MFRI, INC. Date: September 11, 1998 /s/ David Unger --------------------------- David Unger Chairman of the Board of Directors Date: September 11, 1998 /s/ Michael D. Bennett --------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer)