UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K CONTENTS
JANUARY 31, 2006
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Part 1: |
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1. |
Business |
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Company Profile |
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Filtration Products |
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Piping Systems |
3 |
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Industrial Process Cooling Equipment |
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Employees |
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Executive Officers of the Registrant |
8 |
1A. |
Risk Factors |
9 |
1B. |
Unresolved Staff Comments |
10 |
2. |
Properties |
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3. |
Legal Proceedings |
11 |
4. |
Submission of Matters to a Vote of Security Holders |
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Part II: |
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5. |
Market for Registrants Common Equity; Related Stockholder Matters and Issuer Purchases of Equity Securities |
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6. |
Selected Financial Data |
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7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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7A. |
Quantitative and Qualitative Disclosures About Market Risk |
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8. |
Financial Statements and Supplementary Data |
23 |
9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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9A. |
Controls and Procedures |
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9B. |
Other Information |
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Part III: |
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10. |
Directors and Executive Officers of the Registrant |
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11. |
Executive Compensation |
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12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
24 |
13. |
Certain Relationships and Related Transactions |
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14. |
Principal Accountant Fees and Services |
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Part IV: |
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15. |
Exhibits, Financial Statement Schedules |
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Signatures |
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PART I
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Item 1. |
BUSINESS |
Company Profile
MFRI, Inc. ("MFRI", the "Company" or the "Registrant") is engaged in the manufacture and sale of products in three distinct business segments: filtration products, piping systems and industrial process cooling equipment. As used herein, unless the context otherwise requires, the term Company includes MFRI and its subsidiaries, Midwesco Filter Resources, Inc., Perma-Pipe Inc., Thermal Care Inc., and their respective predecessors and subsidiaries.
The Filtration Products business segment 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 to comply with environmental regulations. The Filtration Products business segment markets air filtration-related products and accessories, and provides maintenance services, consisting primarily of dust collector inspection, filter cleaning and filter replacement.
The Piping System business segment engineers, designs, manufactures and sells specialty piping systems and leak detection and location systems. This segments 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. The Piping System business segments 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.
The Industrial Process Cooling Equipment business segment engineers, designs, manufactures and sells 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 business segments 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. 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. This equipment is used to eliminate particulate from the air by passing particulate laden gases through fabric filters (filter bags) or pleated media filter elements, in the case of baghouses or cartridge collectors, and between electrically charged collector plates, in the case of electrostatic precipitators.
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. 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.
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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. 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 11% 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 lower margins than other industries. In the fiscal year ended January 31, 2006, 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 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 Companys filtration products are marketed domestically under the names, Midwesco Filter and TDC Manufacturing.
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 10% of the domestic filtration companys product sales during the year ended January 31, 2006, were slightly higher than the previous year. Nordic Air Filtration A/S (Nordic Air), a wholly-owned subsidiary of the Company, manufactures in Nakskov, Denmark, 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®, Leak Seeker®, Prekote®, We Take the Dust Out of Industry®, Pleatkeeper®, Pleat Plus® and EFC®.
Backlog. As of January 31, 2006, the dollar amount of backlog (uncompleted firm orders) for filtration products was $20,426,000. As of January 31, 2005, the amount of backlog was $17,518,000. Certain customers have placed orders that are deliverable over multiple years. Therefore, approximately $5,552,000 of the backlog as of January 31, 2006 is not expected to be completed in 2006.
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® 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
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suppliers are frequently longer than the delivery times required by customers. Nevertheless, the Company employs an aggressive program to limit inventory to levels compatible with meeting customer needs.
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, its principal competitors in this segment are: the BHA brand within GE Energy Services; the Menardi division of Beacon Industrial Group; W.L. Gore & Associates, Inc. Donaldson Company, Inc.; Farr Company; and Clarcor, Inc. 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 the Company is a relatively small participant in that market. Some of the Company's competitors have greater financial resources than the Company.
The Company believes quality, service, and price 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® product and customer support provide the Company with a competitive advantage. Certain competitors of the Company may have a competitive advantage with respect to their own 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).
Piping Systems Business
Products and Services. The Company engineers, designs, manufactures and sells 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.
With respect to the leak detection and location system capabilities, the Company believes that its systems are superior to systems manufactured by other companies. 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.
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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 northern hemisphere. In the fiscal year ended January 31, 2006, no single customer accounted for more than 10% of the net sales of the Company's piping systems.
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.
Recent Development. In March 2006, the Company opened a new facility (PPME), in the United Arab Emirates (U.A.E.). PPME will manufacture specialty pre-insulated piping systems. Initially, the plant will produce pipe that will serve the district cooling market in the U.A.E. as well as other Middle Eastern countries such as Kuwait, Qatar, and Oman. District cooling is the main air conditioning method in the Middle East. With major construction going on in Dubai and other Middle East locations, cooling needs for these buildings is expected to increase greatly. The cooling load in the Middle East is expected to grow by 4 million tons in the next 6 years, according to the International District Energy Association. PPME also intends to participate in the oil and gas markets in the region including hot oil, sulfur and liquid natural gas.
In September, 2005 the Company received initial orders for its new Autotherm, automatically applied Glass Syntactic Polyurethane (GSPU) for oil and gas sub-sea flowlines. The Companys Autotherm GSPU is a thermal insulation application process that continuously molds specially formulated compounds on the exterior of steel pipes for oil and gas flowlines to be installed on the sea floor connecting oil wells to their host platforms. The Autotherm system is designed to provide reliable insulation properties when subjected to the large hydrostatic pressures of deep water over long periods of time. These pipelines will be installed in water depths ranging from 2,000 to 4,500 feet. Insulating sub-sea oil flowlines is a common practice at these water depths in order to prevent paraffin or hydrate build-up on the internal pipe surfaces thus ensuring a steady flow of oil.
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®, the Company owns other trademarks for its piping and leak detection systems including the following: Chil-Gard®, Double-Pipe®, Double-Quik®, Escon-A®, Ferro-Shield®, FluidWatch®, Galva-Gard®, Hi Gard®, Poly-Therm®, Pal-AT®, Ric-Wil®, Ric-Wil Dual Gard®, Stereo-Heat®, Safe-T-Gard®, Therm-O-Seal®, Uniline®, LiquidWatch®, TankWatch®, PalCom®, Xtru-therm®, Ultra-Pipe®, PEX-GARD®, and ULTRA-THERM®. The Company also owns United Kingdom trademarks for Poly-Therm®, Perma-Pipe® and Ric-Wil®, and a Canadian trademark for Ric-Wil®.
Backlog. As of January 31, 2006, the dollar amount of backlog (uncompleted firm orders) for piping and leak detection systems was $19,869,000, substantially all of which is expected to be completed in 2006. As of January 31, 2005, the amount of backlog was $18,125,000.
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. The Company believes that there are currently adequate supplies or sources of availability of the needed raw materials. 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 the Companys needs.
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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.
Competition. The piping system products business is highly competitive. The Company believes its principal competition in this segment consists of Rovanco Piping Systems, Inc.; Thermacor Process, Inc.; Asahi/America; GF Plastics Systems; Bredero-Price, a subsidiary of Shaw Industries, Inc.; CRP of UK; Soctherm of Italy; Soccoreal of Argentina; Logstor Rohr of Denmark; TraceTek; Raychem, a Division of Tyco Thermal Controls LLC, a subsidiary of Tyco Industries; RLE Technologies; Tracer Technologies; Arizona Instrument Corp.; Veeder Root; and Pneumecator.
The Company believes that quality, service, a comprehensive product line and price 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 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, manufactures and sells coolers for industrial purposes. The Company's cooling products include: chillers (portable and central); cooling towers; plant circulating assemblies; hot water, hot oil, and negative pressure temperature controllers; water treatment equipment; specialty cooling devices for printing presses and ink management; and replacement parts and various 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.
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The principal markets for the Companys 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.
The Company believes it manufactures the most complete line of chillers available in its primary markets. 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. The Company believes that the ability to offer central chillers that are used for plant-wide cooling provides it with a unique, total cooling approach concept sales advantage.
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 $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. Twenty representatives are responsible for covering the United States and are supported by four regional managers employed by the Company.
Sales of the Company's cooling products outside the United States have mainly been in Latin America. Some international sales have been obtained elsewhere as a result of the assembly of complete worldwide PET (plastic bottle) plants by multinational companies. The Company believes that it has a significant opportunity for growth due to the high quality of its equipment and the fact that it offers complete system design. Many United States competitors do not provide equipment outside the U.S. and, while European competitors sell equipment in Latin America, the Company believes that they lack system design capabilities and have a significant freight disadvantage. The Company markets its cooling products through a combination of manufacturers' representatives, distributors and consultants 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®, AWS® and Applied Web Systems®.
Backlog. As of January 31, 2006, the dollar amount of backlog (uncompleted firm orders) for industrial process cooling equipment was $9,306,000, substantially all of which is expected to be completed in 2006. As of January 31, 2005, the amount of backlog was $5,321,000.
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Raw Materials and Manufacturing. 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.
Cooling towers up to 120 tons in capacity are assembled to finished goods inventory, which allows the Company to meet quick delivery requirements. The cooling towers are manufactured using fiberglass and hardware components purchased from several sources. The wet deck is cut from bulk fill material and installed inside the tower. Customer-specified options can be added at any time. The Company believes that its access to sheet metal, subassemblies, fiberglass and hardware components is adequate.
The Company assembles all plant circulating systems by fabricating the steel to meet the size requirements and adding purchased components to meet customers specifications. Portable chillers are assembled utilizing components both manufactured by the Company and supplied by outside vendors. Central chillers are manufactured to customer specifications.
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, account for approximately 50% 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 Companys business in this area.
The Company believes that quality, service, a comprehensive product line and price 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 Companys 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 Federal Clean Air Act and related laws on the Company.
Employees
As of March 31, 2006, the Company had 760 full-time employees, 83 of whom were engaged in sales and marketing, 215 of whom were engaged in management, engineering and administration, and 462 were engaged in production. Hourly production employees of the Company's Filtration Products Business in Winchester, Virginia are covered by a collective bargaining agreement with the International United Automobile, Aerospace & Agricultural Implement Workers of America, which expires in October 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, 2006, and the IBEW agreement expires on May 31, 2006, with both agreements thereafter continuing to be in effect for yearly periods unless amended or terminated in writing. The collective bargaining agreement of the Piping Systems Business in Lebanon, Tennessee, with the Metal Trades Division of UAJAPPI expires in March 2007.
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Executive Officers of the Registrant
The following table set forth information regarding the officers of the Company as of March 31, 2006:
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Name |
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Offices and Positions, if any, held with the Company; Age |
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Executive Officer of the Company or its Predecessor since |
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David Unger |
Director, Chairman of the Board, and Chief Executive Officer of the Company; Age 71 |
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1972 |
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Henry M. Mautner |
Director and Vice Chairman of the Board of the Company; Age 79 |
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1972
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Bradley E. Mautner |
Director, President and Chief Operating Officer of the Company; Age 50 |
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1994
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Gene K. Ogilvie |
Vice President; Age 66
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1969
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Fati A. Elgendy |
Vice President; Age 57 |
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1990 |
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Don Gruenberg |
Vice President; Age 63 |
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1980 |
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Michael D. Bennett |
Vice President, Chief Financial Officer, Secretary and Treasurer; Age 62 |
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1989 |
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Thomas A. Benson |
Vice President; Age 52 |
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1988 |
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Billy E. Ervin |
Vice President; Age 60 |
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1986 |
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Robert A. Maffei |
Vice President; Age 57 |
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1987 |
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Herbert J. Sturm |
Vice President; Age 55 |
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1977 |
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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. (Midwesco) from 1972 through January 1994, and was Vice President from February 1994 through December 1996. He was also a director of Midwesco 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 into the Company in December 1996 (the Merger). He became a director and Vice President of the company formed to succeed to the non-Thermal Care business of Midwesco (New Midwesco). He is the Companys Chairman of the Board of Directors and Chief Executive Officer.
Henry M. Mautner has been employed by the Company and its predecessors in various executive capacities since 1972, served as Chairman of Midwesco from 1972 through December 1996, and served that company in various executive and administrative capacities from 1949 until the consummation of the Merger. Since the consummation of the Merger, he has served as the Chairman of New Midwesco. Mr. Mautner is the father of Bradley E. Mautner.
Bradley E. Mautner has been employed by the Company and its predecessors in various executive and administrative capacities since 1978, has served as President and Chief Operating Officer since December 2004, was Executive Vice President from December 2002 to December 2004, was Vice President of the Company from December 1996 through December 2002 and has been a director of the Company since 1995. From 1994 to the consummation of the Merger, he served as President of Midwesco and since December 30, 1996 he has
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served as President of New Midwesco. In addition, since February 1996, he has served as the Chief Executive Officer of Midwesco Services, Inc. (Midwesco Services) which was 50% owned by New Midwesco until May 19, 2000, at which time it became a wholly-owned subsidiary of New Midwesco. On November 17, 2000, Midwesco Services was merged into New Midwesco (Midwesco Services Merger). From February 1988 to January 1996, he served as the President of Mid Res Inc. (predecessor to Midwesco Services). 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.
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.
1A. |
Risk Factors |
Competition Business. The businesses in which the Company is engaged are highly competitive. Many of the competitors are larger than the Company and have more resources. Many of the Companys products are also subject to competition from alternative technologies and alternative products. To the extent the Company relies upon a single source for key components of several of its products, the Company believes that there are alternate sources available for such components; however, there can be no assurance that the interruption of supplies of such components would not have an adverse effect on the financial condition of the Company, and that the Company, if required to do so, would be able to negotiate agreements with alternative sources on acceptable terms.
Government Regulation. The demand for the Companys leak detection and location systems and secondary containment piping systems is driven primarily by government regulation with respect to hazardous waste. Laws such as the Federal Resource Conservation and Recovery Act (RCRA), and standards such as the National Emission Standard for Hydrocarbon Airborne Particulates (NESHAP), have increased the demand for the Companys leak detection and location and secondary containment piping systems. The Companys filtration products business to a large extent is dependent on governmental regulation of air pollution at the federal and state levels. The Company believes that continuing growth in the sale of filtration products and
9
services will be materially dependent on continuing enforcement of environmental laws such as the Federal Clean Air Act Amendments of 1990 (Clean Air Act Amendments). Although changes in such environmental regulations could significantly alter the demand for the Companys products and services, the Company does not believe that such a change is likely to decrease demand in the foreseeable future. In addition, the Company has experienced, and may experience additional, increased costs of compliance with other government regulation, such as the Sarbanes-Oxley Act.
Dividends. The Company has not paid dividends in the past and does not anticipate paying cash dividends on its common stock in the foreseeable future. The Companys line of credit agreement contains certain restrictions on payment of dividends.
Changes in Government Policies and Laws, Worldwide Economic Conditions . The Company anticipates that international sales will represent an increasing portion of its total sales and that continued growth and profitability may require further international expansion. The Companys financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include but are not limited to changes in a countrys or regions economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales.
Economic Factors . The Company is exposed to fluctuations in currency exchange rates and commodity prices. The Company monitors and manages currency exposures that are associated with monetary asset positions, committed currency purchases and sales, and other assets and liabilities created in the normal course of business. Failure to successfully manage these risks could have an adverse impact on the Companys financial position, results of operations and cash flows.
Seasonality. Sales in the Piping Systems business segment have a tendency to be lower during the winter months due to weather constraints in the northern hemisphere. Severity and duration of winter weather could have an adverse effect on the results of this segment.
1B. |
Unresolved Staff Comments |
None
Item 2. |
PROPERTIES |
Filtration Products Business
Illinois |
Owned Production Facilities and Office Space |
130,700 square feet and on 2.75 acres |
Virginia |
Owned Production Facilities Leased Office Space |
97,500 square feet and on 5 acres 12,000 square feet |
Denmark |
Owned Production Facilities and Office Space |
69,800 square feet on 3.5-acres |
Piping Systems Business
Louisiana |
Owned Production Facilities Leased land |
12,000 square feet |
Tennessee |
Owned Production Facilities and Office Space |
152,000 square feet on approximately 24 acres |
United Arab Emirates |
Leased Production Facilities and Office Space |
80,200 square feet on 4.3 acres |
10
Industrial Process Cooling Equipment Business
Illinois |
Owned Production Facilities and Office Space |
88,000 square feet on 8.1 acres |
Denmark |
Owned Production Facilities and Office Space |
20,000 square feet |
The Company's principal executive offices which occupied approximately 43,000 square feet of space in Niles, Illinois is owned by the Company. 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.
For further information regarding lease commitments, see note 7 of the notes to consolidated financial statements.
Item 3. |
LEGAL PROCEEDINGS |
None
Item 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
PART II
Item 5. |
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Companys fiscal year ends on January 31. Years described as 2005, 2004 and 2003 are the fiscal years ended January 31, 2006, 2005 and 2004, respectively. Balances described as balances as of 2005 and 2004 are balances as of January 31, 2006 and 2005, 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 Common Stock sale prices as reported by the Nasdaq National Market for 2004 and for 2005.
2004 |
|
High |
|
Low |
||
First Quarter |
|
$ |
2.87 |
|
$ |
2.50 |
Second Quarter |
|
|
3.39 |
|
|
2.99 |
Third Quarter |
|
|
6.67 |
|
|
3.28 |
Fourth Quarter |
|
|
11.20 |
|
|
5.85 |
2005 |
|
High |
|
Low |
||
First Quarter |
|
$ |
10.43 |
|
$ |
6.19 |
Second Quarter |
|
|
8.37 |
|
|
6.40 |
Third Quarter |
|
|
8.00 |
|
|
6.00 |
Fourth Quarter |
|
|
6.30 |
|
|
5.09 |
As of May 10, 2006, 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
11
Company's earnings, capital requirements, financial condition and other relevant factors. The Company's line of credit agreement contains certain restrictions on the payment of dividends.
Neither the Company nor any affiliated purchaser as defined in Rule 10b-18 purchased any shares of the Companys Common Stock during the period covered by this report. The Company has not made any sale of unregistered securities during the preceding three years.
Item 6. |
SELECTED FINANCIAL DATA |
The following selected financial data for the Company for the years 2005, 2004, 2003, 2002, and 2001 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.
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||||
(In thousands, except per share information) |
|
Fiscal Year ended January 31, |
|
|||||||||||||||
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
2002 |
|
||||||
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
154,587 |
|
$ |
145,096 |
|
$ |
120,889 |
|
|
$ |
122,897 |
|
|
$ |
125,534 |
|
Income (loss) from operations |
|
|
2,679 |
|
|
5,177 |
|
|
(721 |
) |
|
|
914 |
|
|
|
2,172 |
|
Income (loss) before extraordinary items and cumulative effect of accounting change |
|
|
531 |
|
|
2,813 |
|
|
(1,097 |
) |
|
|
(824 |
) |
|
|
(374 |
) |
Net income (loss) |
|
|
531 |
|
|
2,813 |
|
|
(1,097 |
) |
|
|
(11,528 |
) |
|
|
(374 |
) |
Net income (loss) per share basic |
|
|
0.10 |
|
|
0.56 |
|
|
(0.22 |
) |
|
|
(2.34 |
) |
|
|
(0.08 |
) |
Net income (loss) per share diluted |
|
|
0.10 |
|
|
0.54 |
|
|
(0.22 |
) |
|
|
(2.34 |
) |
|
|
(0.08 |
) |
(In thousands, except per share information) |
|
As of January 31, |
|||||||||||||
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
88,635 |
|
$ |
85,516 |
|
$ |
78,927 |
|
$ |
78,976 |
|
$ |
92,529 |
Long-term debt (excluding capital leases), Less current portion |
|
|
29,715 |
|
|
26,190 |
|
|
16,653 |
|
|
18,983 |
|
|
20,883 |
Capitalized leases, less current portion |
|
|
9 |
|
|
15 |
|
|
8 |
|
|
66 |
|
|
217 |
Item 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The statements contained under the caption Managements 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 Companys 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.
12
RESULTS OF OPERATIONS
MFRI, Inc.
|
|
|
MFRI, Inc. ("MFRI", the "Company" or the "Registrant") is engaged in the manufacture and sale of products in three distinct business segments: filtration products, piping systems and industrial process cooling equipment. Generally, sales of the Company's piping systems have had a tendency to be lower during the winter months, due to weather constraints over much of the northern hemisphere. The Companys other businesses do not demonstrate seasonality.
Our analysis presented below is organized to provide instructive information for understanding the business going forward. However, this discussion should be read in conjunction with the consolidated financial statements in Item 8 of this report, including the notes thereto. An overview of the segment results is provided in Note 10 - Business Segment and Geographic Information to the consolidated financial statements in Item 8 of this report.
2005 Compared to 2004
Net sales of $154,587,000 in 2005 increased 6.5% from $145,096,000 in 2004. Sales increased in all business segments. Gross profit of $32,686,000 in 2005 increased 5.0% from $31,128,000 in 2004. Gross margin decreased to 21.1% of net sales in 2005 from 21.5% in 2004. (See discussion of each business segment below.)
Selling expense increased 18.2% to $12,383,000 in 2005 from $10,477,000 in 2004 due primarily to increased number of selling personnel and related commissions. (See discussion of each business segment below.)
General and administrative expenses increased 13.9% to $17,624,000 in 2005 from $15,474,000 in 2004. General administrative expense increases included $656,000 related to professional services expenses and use of consultants for Sarbanes-Oxley Section 404 (SOX404) compliance related spending. Other general administrative expense increases included $585,000 in start up costs described in the Piping Systems Business section of this report, and costs from operations interruption related to Hurricane Rita. The plant located in New Iberia, LA suffered damage of $172,000 and was not operational for most of October 2005. (See discussion of each business segment below.)
Net income declined to $531,000 or $0.10 per common share (basic), compared to net income of $2,813,000 or $0.56 per common share in 2004. The decrease in net income was primarily for reasons summarized above and discussed in more detail below.
2004 Compared to 2003
Net sales of $145,096,000 in 2004 increased 20.0% from $120,889,000 in 2003. Sales increased in all business segments. Gross profit of $31,128,000 in 2004 increased 26.5% from $24,598,000 in 2003. Gross margin increased to 21.5% of net sales in 2004 from 20.3% in 2003. (See discussion of each business segment below.)
13
Selling, general and administrative expenses increased 2.5% to $25,951,000 in 2004 from $25,319,000 in 2003. (See discussion of each business segment below.)
Net income rose to $2,813,000 or $0.56 per common share (basic), compared with a loss of $1,097,000 or $0.22 per common share in 2003. The increase in net income was due to increased revenue and increased gross profit.
Filtration Products Business
The Filtration Products Business sales consist primarily of a large number of small orders and a limited number of large orders. The large orders are primarily from electric utilities and original equipment manufacturers. In 2005, the average order amount was approximately $3,900. The timing of large orders can have a material effect on net sales and gross profit from period to period. Pricing on large orders was generally extremely competitive and therefore resulted in lower gross margins. In 2005, 2004 and 2003, no customer accounted for 10% or more of the net sales of the Companys filtration products and services.
The Companys Filtration Products Business is dependent on government regulation of air quality 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 assurance what the ultimate effect of the Clean Air Act Amendments will be on the Companys Filtration Products Business, the Company believes that the Clean Air Act Amendments are likely to have a positive long-term effect on demand for the Companys filtration products and services.
Filtration Products Business |
|
|
||||||||||||||
(In thousands) |
|
% Increase (Decrease) |
||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
64,413 |
|
$ |
61,740 |
|
$ |
54,872 |
|
|
4.3% |
|
|
12.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,758 |
|
|
12,320 |
|
|
9,782 |
|
|
(4.6% |
) |
|
25.9% |
|
As a percentage of net sales |
|
|
18.3% |
|
|
20.0% |
|
|
17.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2,221 |
|
|
3,539 |
|
|
1,145 |
|
|
(37.2% |
) |
|
209.1% |
|
As a percentage of net sales |
|
|
3.4% |
|
|
5.7% |
|
|
2.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Compared to 2004
Net sales increased 4.3% to $64,413,000 in 2005 from $61,740,000 in 2004. This increase was primarily the result of increased sales of filter elements. This increase was offset to some extent by a decline in sales of related products. The increase in sales also resulted from better economic conditions in general and improved conditions in the domestic steel industry in particular.
Gross profit as a percent of net sales decreased to 18.3% in 2005 from 20.0% in 2004, primarily as a result of a decline in gross margin on filter bag sales as a result of competitive marketplace pricing and product mix.
Selling expense increased to $6,388,000 or 9.9% of net sales in 2005 from $5,644,000 or 9.1% of net sales in 2004. The increase was primarily due to additional selling resources and increased travel expenses.
General and administrative expenses decreased by 0.2% of net sales to $3,150,000 or 4.9% of net sales from $3,137,000 or 5.1% of net sales in 2004. This dollar increase was primarily the result of increased legal expense and depreciation expense. The increase in depreciation expense was related to installed computer hardware and software.
14
2004 Compared to 2003
Net sales increased 12.5% to $61,740,000 in 2004 from $54,872,000 in 2003. This increase was the result of increased sales of all product lines. This increase was primarily due to a better economic environment including improved conditions in the domestic steel industry.
Gross profit as a percent of net sales increased to 20.0% in 2004 from 17.8% in 2003, primarily as a result of improved manufacturing efficiency on higher unit volume and a favorable product mix.
Selling expense increased to $5,644,000 or 9.1% of net sales in 2004 from $5,531,000 or 10.1% of net sales in 2003. The increase primarily resulted from increased selling expense in pleated element product line.
General and administrative expenses decreased by 0.6% of sales to $3,137,000 or 5.1% of net sales in 2004 from $3,106,000 or 5.7% of net sales in 2003. This dollar increase was primarily due to increased professional services expenses.
Piping Systems Business
Generally, sales of the Company's piping systems have had a tendency to be lower during the winter months, due to weather constraints over much of the northern hemisphere.
The Companys leak detection and location systems generally have higher profit margins than its District Heating and Cooling (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.
The Companys 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 2005 was approximately $58,000. In 2005, 2004 and 2003, no customer accounted for 10% or more of net sales of the Companys Piping Systems Business. 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 Companys 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.
Piping Systems Business |
|
|
||||||||||||||
(In thousands) |
|
% Increase (Decrease) |
||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
54,657 |
|
$ |
54,053 |
|
$ |
40,523 |
|
|
1.1% |
|
|
33.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,862 |
|
|
10,284 |
|
|
7,516 |
|
|
5.6% |
|
|
36.8% |
|
As a percentage of net sales |
|
|
19.9% |
|
|
19.0% |
|
|
18.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5,060 |
|
|
5,405 |
|
|
2,281 |
|
|
(6.4% |
) |
|
137.0% |
|
As a percentage of net sales |
|
|
9.3% |
|
|
10.0% |
|
|
5.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Compared to 2004
Net sales increased 1.1% to $54,657,000 in 2005 from $54,053,000 in 2004, primarily due to a slight increase in the oil and gas piping products.
15
Gross profit as a percent of net sales increased to 19.9% in 2005 from 19.0% in 2004, mainly due to product mix and an increase in the oil and gas piping products.
Selling expense increased to $1,442,000 or 2.6% of net sales in 2005 from $1,209,000 or 2.2% of net sales in 2004. The increase was primarily due to additional personnel early in the year.
General and administrative expense increased to $4,360,000 or 8.0% of net sales in 2005 from $3,670,000 or 6.8% of net sales in 2004. In March, 2006 the Company opened a new facility (PPME), in the U.A.E. The company will manufacture specialty pre-insulated piping systems for Dubai, other parts of the U.A.E., and other markets in the region. The increase in general and administrative expense was primarily due to $585,000 in start up costs related to PPME. In addition, the plant located in New Iberia, LA suffered hurricane damage of $172,000 and was not operational for most of October 2005.
2004 Compared to 2003
Net sales increased 33.4% to $54,053,000 in 2004 from $40,523,000 in 2003. This increase was primarily due to some recovery from the weak economy in both the private and public sectors and to a single large international sale.
Gross profit as a percent of net sales increased to 19.0% in 2004 from 18.5% in 2003, mainly due to product mix and increased volume.
Selling expense decreased to $1,209,000 or 2.2% of net sales in 2004 from $1,250,000 or 3.1% of net sales in 2003. The decrease was primarily due to one less sales employee.
General and administrative expense decreased to $3,670,000 or 6.8% of net sales in 2004 from $3,985,000 or 9.8% of net sales in 2003. The decrease was primarily due to a 2003 legal settlement of $510,000 and legal fees associated with that settlement.
Industrial Process Cooling Equipment Business
The Companys Industrial Process Cooling Equipment Business is characterized by a large number of relatively small orders and a limited number of large orders. In 2005, the average order amount was approximately $4,900. In 2005, 2004 and in 2003, no customer accounted for 10% or more of net sales of the Cooling Equipment Business.
Industrial Process Cooling Equipment Business |
|
|
||||||||||||||
(In thousands) |
|
% Increase (Decrease) |
||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
35,517 |
|
$ |
29,303 |
|
$ |
25,494 |
|
|
21.2% |
|
|
14.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,066 |
|
|
8,524 |
|
|
7,300 |
|
|
18.1% |
|
|
16.8% |
|
As a percentage of net sales |
|
|
28.3% |
|
|
29.1% |
|
|
28.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,544 |
|
|
1,570 |
|
|
738 |
|
|
(1.7% |
) |
|
112.7% |
|
As a percentage of net sales |
|
|
4.3% |
|
|
5.4% |
|
|
2.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Compared to 2004
Net sales increased 21.2% to $35,517,000 in 2005 from $29,303,000 in 2004 mainly due to improved conditions in domestic plastic molding and printing markets and continued economic recovery.
16
Gross profit as a percentage of net sales decreased to 28.3% in 2005 from 29.1% in 2004, primarily due to pricing pressure in international markets and material cost increases.
Selling expense increased to $4,553,000 or 12.8% of net sales in 2005 from $3,624,000 or 12.4% of net sales in 2004. The increase was primarily due to additional personnel and higher commissions associated with increased sales.
General and administrative expense increased to $3,969,000 or 11.2% of net sales in 2005 from $3,330,000 or 11.4% of net sales in 2004. The dollar increase was primarily due to increased professional services expenses and costs of $290,000 for the use of consultants to implement production planning systems.
2004 Compared to 2003
Net sales increased 14.9% to $29,303,000 in 2004 from $25,494,000 in 2003 mainly due to some recovery from the weak economy. Sales increased in both the domestic and international markets.
Gross profit as a percentage of net sales increased to 29.1% in 2004 from 28.6% in 2003, primarily due improved pricing and production efficiencies
As a percentage of sales, selling expense decreased 0.8% to $3,624,000 or 12.4% of net sales in 2004 from $3,361,000 or 13.2% of net sales in 2003. The dollar increase was primarily due to the higher commissions associated with increased sales.
General and administrative expense decreased 1.2% of sales to $3,330,000 or 11.4% of net sales in 2004 from $3,201,000 or 12.6% of net sales in 2003. The dollar increase was primarily due to higher costs for the international operation resulting from additional personnel and increased product development costs.
General Corporate Expense
General corporate expense included interest expense and general and administrative expenses that were not allocated to the business segments.
2005 Compared to 2004
General and administrative expense increased 15.1% to $6,146,000 in 2005 from $5,337,000 in 2004, and increased as a percentage of consolidated net sales to 4.0% in 2005 from 3.7% in 2004. The increase was mainly due to expenses incurred to comply with Sarbanes-Oxley including consulting fees of $656,000, additional personnel of $130,000 primarily in the accounting and control area, and increased group insurance expense of $110,000.
Interest expense increased 10.9% to $1,839,000 in 2005 from $1,658,000 in 2004. The increase was primarily due to the increase in interest rates and an increase of net borrowings.
2004 Compared to 2003
General and administrative expense increased 9.2% from $4,885,000 in 2003 to $5,337,000 in 2004, and decreased as a percentage of consolidated net sales from 4.0% in 2003 to 3.7% in 2004. The dollar increase was mainly due to management incentive compensation earned and building repairs and maintenance costs.
Interest expense decreased 17.2% to $1,658,000 in 2004 from $2,003,000 in 2003. The decrease was primarily due to lower interest expense due to the sale of a building in Winchester, Virginia in June 2004, and to lower floating interest rates in 2004. Interest income on federal tax refunds was received in 2004.
17
Income Taxes
The effective income tax expense (benefit) rates were 48.7%, 24.9%, and (50.8%) in 2005, 2004 and 2003, respectively. The differences between the effective income tax rate and the U.S. Statutory tax rate for 2005 and 2004 were:
|
|
2005 |
|
|
2004 |
|
||
Statutory tax rate |
|
|
34.0% |
|
|
|
34.0% |
|
State taxes, net of federal benefit |
|
|
5.4% |
|
|
|
4.2% |
|
Differences in foreign tax rate |
|
|
8.0% |
|
|
|
(1.6% |
) |
All other, net |
|
|
1.3% |
|
|
|
(11.7% |
) |
Effective tax rate |
|
|
48.7% |
|
|
|
24.9% |
|
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of January 31, 2006 were $1,114,000 as compared to $723,000 at January 31, 2005. The Company generated $2,134,000 from operations in 2005. Operating cash flows increased by $1,885,000 from 2004. There were $46,000 in proceeds from the sale of property, plant and equipment. Cash distributions of $270,000 in 2005 were received from the Companys investment in a joint venture. These cash flows were used to support $6,315,000 in capital spending.
Trade receivables decreased $2,129,000 due to collection of Piping Systems Business aged receivables. Inventories increased $2,662,000 in 2005 due to increased make and hold orders that will ship in 2006. Prepaid expenses and other current assets increased $639,000 in 2005 partially due to an increase in deferred tax assets and prepaid insurance due to a change in funding method for workers compensation insurance. Other operating assets and liabilities decreased $1,618,000 in 2005.
Net cash used in 2005 investing activities was $5,999,000. Capital expenditures in 2005 increased to $6,315,000 from $1,755,000 in 2004. In March 2006, the Company opened a new facility (PPME), in the U.A.E. The company will manufacture specialty pre-insulated piping systems for Dubai, other parts of the U.A.E., and other markets in the region. Capital expenditures of $3,445,000 in equipment and other costs relate to PPME. Capital expenditures of $1,258,000 relate to the Companys construction of a new 20,900 square foot addition to production facilities which was completed in 2005 for filtration products in Denmark. Other capital expenditures included those related to new Enterprise Resources Planning system software and to equipment purchases.
The Company estimates that capital expenditures for 2006 will be approximately $7,300,000. Other capital expenditures primarily will relate to machinery and equipment, building and leasehold improvements, and computer hardware and software purchases. The Company may finance capital expenditures through equipment financing loans, internally generated funds and its revolving line of credit.
Debt totaled $31,286,000, an increase of $3,748,000 since the beginning of 2005. Net cash inflows from financing activity were $4,203,000, primarily consisting of $4,004,000 in net borrowings on debt obligations.
18
The following table summarizes the Companys estimated contractual obligations excluding the revolving lines of credit of $14,567,000 at January 31, 2006.
In Thousands |
|
|
Payment Due By: |
|||||||||||||||||
Contractual Obligations (1) |
Total |
|
1/31/07 |
|
1/31/08 |
|
1/31/09 |
|
1/31/10 |
|
1/31/11 |
|
Thereafter |
|||||||
Mortgages (2) |
$ |
11,607 |
|
$ |
1,039 |
|
$ |
1,049 |
|
$ |
2,102 |
|
$ |
932 |
|
$ |
932 |
|
$ |
5,553 |
IRB Payable (2) |
|
3,250 |
|
|
65 |
|
|
3,185 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Term Loans (3) |
|
5,778 |
|
|
1,120 |
|
|
3,038 |
|
|
240 |
|
|
238 |
|
|
222 |
|
|
920 |
Subtotals |
|
20,635 |
|
|
2,224 |
|
|
7,272 |
|
|
2,342 |
|
|
1,170 |
|
|
1,154 |
|
|
6,473 |
Capitalized Lease Obligations |
|
15 |
|
|
6 |
|
|
4 |
|
|
4 |
|
|
1 |
|
|
- |
|
|
- |
Operating Lease Obligations (4) |
|
3,373 |
|
|
1,046 |
|
|
818 |
|
|
516 |
|
|
373 |
|
|
356 |
|
|
264 |
Projected pension contributions (5) |
|
2,212 |
|
|
154 |
|
|
173 |
|
|
190 |
|
|
196 |
|
|
199 |
|
|
1,300 |
Deferred Compensation (6) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Totals |
$ |
26,235 |
|
$ |
3,430 |
|
$ |
8,267 |
|
$ |
3,052 |
|
$ |
1,740 |
|
$ |
1,709 |
|
$ |
8,037 |
|
(1) |
Interest obligations exclude floating rate interest on debt payable under revolving lines of credit. Based on the amount of such debt at January 31, 2006, and the weighted average interest rates on that debt at that date (6.99%), such interest was being incurred at an annual rate of approximately $952,000. See Note (7) below. |
|
(2) |
Scheduled maturities, including interest. |
|
(3) |
Term loan obligations exclude floating rate interest on Term Loan with a January 31 balance of $3,655,000. Based on the amount of such debt at January 31, 2006, and the weighted average interest rates on that debt at that date (7.14%), such interest was being incurred at an annual rate of approximately $261,000. See Note (7) below. |
|
(4) |
Minimum contractual amounts. We have assumed no changes in variable expenses. |
|
(5) |
Estimate future benefit payments reflecting expected future service. |
|
(6) |
Non-qualified deferred compensation plan The Company 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 Companys obligation under these agreements. No specific event to trigger a payment date has occurred. |
|
(7) |
To partially hedge the interest described in Notes (1) and (3) above, the Company entered into an Interest Swap Agreement for $8,000,000 fixed at 4.72% plus LIBOR margin. Based on the LIBOR margin in effect at January 31, 2006, the Companys fixed interest obligation under the Swap Agreement was 6.97%, or $558,000 on an annual basis. The counter party to the Swap Agreement is obligated to pay the company interest on $8,000,000 each month at the one-month LIBOR interest rate in effect at the beginning of the month which effectively hedges interest rate variability on $8,000,000 of the debt described in (1) and (3) above. |
Other long term liabilities of $2,866,000 were composed primarily of accrued pension cost and deferred compensation.
The Companys working capital was approximately $28,543,000 at January 31, 2006 compared to approximately $26,332,000 at January 31, 2005. This increase was partially due to the decrease in accounts payable offset by the increase in inventories.
The Companys current ratio was 2.2 to 1 and 2.0 to 1 at January 31, 2006 and January 31, 2005, respectively. Debt to total capitalization at January 31, 2006 increased to 49.6% from 46.8% at January 31, 2005.
Financing
At January 31, 2006 and October 31, 2005, the Company was not in compliance with two financial performance covenants under the Loan Agreement (see the paragraphs below that describe the Loan Agreement). The Company has received a waiver and amendment dated May 10, 2006 from the lender. The Company has made all required payments of principal and interest under the Loan Agreement to date.
19
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 November 30, 2007, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows. 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, 2006, the prime rate was 7.5%, 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 0.25 and 2.25 percentage points, respectively. Monthly interest payments were made. The average interest rate for the year ending January 31, 2006 was 6.02%. As of January 31, 2006, the Company had borrowed $13,612,000 and had $1,423,000 available to it under the revolving line of credit. In addition, $3,796,600 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, 2006, the amount of restricted cash was $369,000. Cash required for operations is provided by draw-downs on the line of credit.
At September 12, 2005 the Company entered into an interest rate swap agreement through November 28, 2008 under which the interest rate on $8,000,000 is fixed at 4.72% plus LIBOR Margin. The interest rate swap was effective as a cash flow hedge and no charge to earnings was required during the year ended January 31, 2006. The fair value of the derivative financial instrument was $20,500, and $13,500, net of deferred tax benefits of $7,000, was recorded in other assets and accumulated other comprehensive income associated with the cash flow hedge at January 31, 2006.
On March 28, 2005, the Company's Loan Agreement was amended to (1) add a term loan of $4,300,000 ("Term Loan") and (2) amend certain covenants. The total that can be borrowed under the Loan Agreement was unchanged at $27,000,000, subject to borrowing base and other requirements. Interest rates under the Term Loan 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 March 28, 2005 the prime rate was 5.75% 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 3.5 percentage points, respectively. The Company is scheduled to pay $215,000 of principal on the first days of March, June, September, and December in each year, commencing on June 1, 2005 and ending on September 30, 2007, with the remaining unpaid principal payable on November 30, 2007.
On May 10, 2006, the Companys Loan Agreement was amended to (1) increase the revolving credit line to $30,000,000 subject to borrowing base and other requirements, (2) add an equipment loan facility (Equipment Loan Facility) of $1,000,000 subject to certain restrictions, and (3) amend certain financial performance covenants. Interest rates under the Equipment Loan Facility 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 May 10, 2006 the prime rate was 8.00% 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 .50 and 2.50 percentage points, respectively.
The proceeds of the Term Loan were used to repay the outstanding balance due under the Company's Note Purchase Agreements ($3,125,000), which have now been cancelled and to reduce the Company's revolving debt under the Loan Agreement ($1,175,000). Interest rates under the Note Purchase Agreements had been 10% per annum.
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, 2006, borrowings under these credit arrangements totaled $955,000; an additional $691,000 remained unused.
20
CRITICAL ACCOUNTING POLICIES
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 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.
Percentage of Completion Method 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.
Revenue Recognition: The Company recognizes revenues when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the sellers price to the buyer is fixed or determinable, and (iii) collectibility is reasonably assured. All subsidiaries of the Company except Perma-Pipe recognize revenues when product has been shipped (for FOB shipping point orders) or delivered (for FOB destination sales) or when services have been rendered.
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: The Company reviews the carrying value of goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which 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. For the 2005 and 2004, evaluations the fair value was determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. Based upon the Companys evaluations for 2005 and 2004, no impairment of goodwill was required. Goodwill was $2,509,000 and $2,616,000 at January 31, 2006 and 2005, respectively. As of January 31, 2006 and 2005, $1,100,000 of goodwill was allocated to the Industrial Process Cooling Equipment segment. As of January 31, 2006 and 2005 $1,409,000 and $1,516,000, respectively, was allocated to the Filtration Products segment. The change in goodwill of the Filtration Products segment was due to foreign currency translation.
ACCOUNTING PRONOUNCEMENTS
In April 2005, the SEC announced the adoption of a new rule that amends the compliance dates for SFAS No. 123 (revised 2004), Share-Based Payment (Statement No. 123R). SFAS No. 123R, as amended, is applicable for all fiscal years beginning after June 15, 2005. As a result the Company is required to implement SFAS No. 123R at the beginning of its next fiscal year, and accordingly, the Company will begin to reflect the adjustment to earnings for the impact of this accounting pronouncement in the interim reporting period ending April 30, 2006. The Company does not expect the adoption of SFAS 123R to have a material effect on its financial statements.
21
On December 5, 2005, the Board of Directors of the Company approved the acceleration of the vesting requirements for out-of-the-money stock options previously granted to employees, including its officers, pursuant to the 2004 Stock Incentive Plan, and out-of-the-money stock options previously granted to independent directors pursuant to the 2001 Independent Directors Stock Option Plan. The primary purpose of the acceleration is to eliminate reportable compensation expense the Company would recognize in future periods in its statements of operations upon its adoption of FASB Statement No. 123R (Share-Based Payments) in the year beginning February 1, 2006. The Company anticipates that such acceleration of vesting will reduce its pre-tax stock option compensation expense in each of the years 2006 through 2009 by approximately $109,000, or $.02 per share. A Form 8-K was filed on December 9, 2005.
FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards with an effective date of December 15, 2005 provides an elective alternative transition method. The Company has one year from December 15, 2005, the initial adoption of SFAS No. 123R to evaluate the available transition alternatives and make its one-time election. The transition method prescribed by SFAS 123R will be followed until the alternative method is elected.
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 apply to the Company.
Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and commodity prices. 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 has been the Canadian dollar. The contract amounts, carrying amounts and fair values of these contracts were not significant at January 31, 2006, 2005 and 2004.
The Company has attempted to mitigate its interest rate risk by maintaining a balance of fixed-rate long-term debt and floating-rate debt.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Under the terms of the swap agreement, the Company agreed to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to the notional principal amount. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation. Financial instruments are not held or issued for trading purposes.
At January 31, 2006 one interest rate swap agreement was in effect with a notional value of $8,000,000 maturing in 2008. The swap agreement exchanges the variable rate to fixed interest rate payments of 4.72% plus LIBOR margin. The interest rate swap was effective as a cash flow hedge and no charge to earnings was required during the year ended January 31, 2006. The fair value of the derivative financial instrument was $20,500, and $13,500, net of deferred tax benefits of $7,000, was recorded in other assets and accumulated other comprehensive income associated with the cash flow hedge at January 31, 2006.
A hypothetical ten percent change in market interest rates over the next year would increase interest on the Company's floating rate debt instruments by approximately $66,000.
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 the Company uses in the production of piping systems. The Company attempts to mitigate such risks
22
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 for each of the three years in the period ended as of January 31, 2006, 2005 and 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, 2006, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based solely on the material weakness described below, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of January 31, 2006, the Company's disclosure controls and procedures were not effective as of the end of the fiscal period covered by this Report on Form 10-K. The Company has restated previously reported 2005 quarterly financial results. Due to this material weakness, the Company, in preparing its consolidated financial statements as of and for the period ended January 31, 2006, performed additional procedures relating to inventory to enable it to conclude that the consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles.
When processing inventory transactions using an Enterprise Resources Planning system installed in December 2004 at the Company's production facility for filtration products in Winchester, VA ("Winchester Facility"), errors were made subsequent to Winchester Facility's January 31, 2005 physical inventory, and during each of the interim fiscal quarters of 2005, which were discovered by Registrant's accounting personnel only when analyzing the Winchester Facility physical inventory as of January 31, 2006. The errors did not affect the quantity of physical inventory, and no restatement for any such period affects the Registrant's sales, cash flows, or business prospects. However, the errors did result in the overstatement of inventories, current assets, total assets, income before income taxes, and net income for each of the interim fiscal quarters of 2005.
Changes in Internal Controls.
Since January 31, 2006, the Company has taken steps to correct transaction processing procedures, accounting controls and reporting controls at the Winchester Facility to prevent recurrence of such errors. The Company has also examined controls and procedures at the Registrant's other locations to detect the presence of possible weaknesses similar to those that caused the above errors, and has analyzed the inventory accounts at Registrant's other locations to detect the possible presence of errors similar to those described above. No such weaknesses or errors were detected.
Other than the change discussed above, 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.
|
Item 9B. |
OTHER INFORMATION |
None.
23
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 and the information contained under the captions Board of Director Meetings and Committees and Section 16(a) Beneficial Ownership Reporting Compliance in the Company's proxy statement for the 2006 annual meeting of stockholders.
Information with respect to executive officers of the Company is included in Item1, 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 2006 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 2006 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 2006 annual meeting of stockholders.
Item 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information with respect to the independence of the Companys public accountants and the fees paid to such accountants is incorporated herein by reference to the information under the caption Independent Registered Public Accounting Firm in the Companys proxy statement for the 2006 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. |
Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section of this report. |
|
c. |
The response to this portion of Item15 is submitted under 15a (2) above. |
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Chicago, Illinois
May 10, 2006
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MFRI, Inc. and subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated statements of operations, stockholders equity, and cash flows for the year ended January 31, 2004 of MFRI, Inc. and subsidiaries. Our audit also included the financial statement schedule listed in the Index at Item 15a(2) for the year ended January 31, 2004. 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 audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of MFRI, Inc. and subsidiaries operations and their cash flows for the year 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 for the year ended January 31, 2004, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 14, 2004
26
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
|
2005 |
2004 |
2003 |
|
||||||||||
|
Fiscal Year Ended January 31, |
|
||||||||||||
|
2006 |
2005 |
2004 |
|
||||||||||
Net sales |
$ |
154,587 |
|
|
$ |
145,096 |
|
|
$ |
120,889 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cost of sales |
|
121,901 |
|
|
|
113,968 |
|
|
|
96,291 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gross profit |
|
32,686 |
|
|
|
31,128 |
|
|
|
24,598 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||
Selling expense |
|
12,383 |
|
|
|
10,477 |
|
|
|
10,141 |
|
|||
General and administrative expense |
|
17,624 |
|
|
|
15,474 |
|
|
|
15,178 |
|
|||
Total operating expenses |
|
30,007 |
|
|
|
25,951 |
|
|
|
25,319 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income (loss) from operations |
|
2,679 |
|
|
|
5,177 |
|
|
|
(721 |
) |
|||
Income from Joint Venture |
|
196 |
|
|
|
225 |
|
|
|
492 |
|
|||
Interest expense, net |
|
1,839 |
|
|
|
1,658 |
|
|
|
2,003 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income (loss) before income taxes |
|
1,036 |
|
|
|
3,744 |
|
|
|
(2,232 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Income tax expense (benefit) |
|
505 |
|
|
|
931 |
|
|
|
(1,135 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net Income (Loss) |
$ |
531 |
|
|
$ |
2,813 |
|
|
$ |
(1,097 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Weighted average number of common shares outstanding basic |
|
5,254 |
|
|
|
4,986 |
|
|
|
4,922 |
|
|||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|||
Net income (loss) |
$ |
0.10 |
|
|
$ |
0.56 |
|
|
$ |
(0.22 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Weighted average number of common shares outstanding diluted |
|
5,585 |
|
|
|
5,223 |
|
|
|
4,922 |
|
|||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|||
Net income (loss) |
$ |
0.10 |
|
|
$ |
0.54 |
|
|
$ |
(0.22 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
See accompanying notes to consolidated financial statements.
27
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share information)
|
|
As of January 31, |
|||||||||
ASSETS |
|
2006 |
|
2005 |
|||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
$ |
1,114 |
|
|
$ |
723 |
|
Restricted cash |
|
|
|
|
|
369 |
|
|
|
973 |
|
Trade accounts receivable, less allowance for doubtful accounts of $504 in 2005 and $482 in 2004 |
|
|
|
|
|
20,377 |
|
|
|
22,715 |
|
Accounts receivable related company |
|
|
|
|
|
1,149 |
|
|
|
887 |
|
Income taxes receivable |
|
|
|
|
|
145 |
|
|
|
48 |
|
Costs and estimated earnings in excess of billings on uncompleted
|
|
|
|
|
|
2,471 |
|
|
|
2,472 |
|
Inventories, net |
|
|
|
|
|
23,711 |
|
|
|
21,050 |
|
Deferred income taxes |
|
|
|
|
|
2,131 |
|
|
|
1,842 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
1,311 |
|
|
|
915 |
|
Total current assets |
|
|
|
|
|
52,778 |
|
|
|
51,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
|
|
|
28,320 |
|
|
|
25,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
Patents, net |
|
|
|
|
|
453 |
|
|
|
582 |
|
Goodwill |
|
|
|
|
|
2,509 |
|
|
|
2,616 |
|
Other assets |
|
|
|
|
|
4,575 |
|
|
|
4,893 |
|
Total other assets |
|
|
|
|
|
7,537 |
|
|
|
8,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
$ |
88,635 |
|
|
$ |
85,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable |
|
|
|
|
$ |
10,929 |
|
|
$ |
13,072 |
|
Accrued compensation and payroll taxes |
|
|
|
|
|
2,478 |
|
|
|
2,665 |
|
Commissions payable |
|
|
|
|
|
5,018 |
|
|
|
4,192 |
|
Other accrued liabilities |
|
|
|
|
|
4,114 |
|
|
|
3,172 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
|
|
|
134 |
|
|
|
790 |
|
Income taxes payable |
|
|
|
|
|
- |
|
|
|
68 |
|
Current maturities of long-term debt |
|
|
|
|
|
1,562 |
|
|
|
1,334 |
|
Total current liabilities |
|
|
|
|
|
24,235 |
|
|
|
25,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
|
|
|
29,724 |
|
|
|
26,205 |
|
Other |
|
|
|
|
|
2,866 |
|
|
|
2,748 |
|
Total long-term liabilities |
|
|
|
|
|
32,590 |
|
|
|
28,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, authorized 50,000 shares in 2005 and 2004 respectively; 5,276 and 5,226 issued and outstanding in 2005 and 2004, respectively |
|
|
|
|
|
53 |
|
|
|
52 |
|
Additional paid-in capital |
|
|
|
|
|
23,084 |
|
|
|
22,868 |
|
Retained earnings |
|
|
|
|
|
8,444 |
|
|
|
7,913 |
|
Accumulated other comprehensive income |
|
|
|
|
|
229 |
|
|
|
437 |
|
Total stockholders equity |
|
|
|
|
|
31,810 |
|
|
|
31,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
|
|
|
$ |
88,635 |
|
|
$ |
85,516 |
|
See accompanying notes to consolidated financial statements.
28
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
|
|
|
|
|||||||||||||||||
|
|
|
|
|
Additional Paid-in Capital |
|
Retained Earnings |
|
Accumulated Other Comprehensive Income (Loss) |
|
Comprehensive
|
|||||||||
Common Stock |
||||||||||||||||||||
|
|
|
Shares |
|
Amount |
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at 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 cumulative tax benefit of $217) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715 |
|
|
715 |
|
|
Unrealized translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643 |
|
|
643 |
|
|
Balances at January 31, 2004 |
|
|
4,922 |
|
$ |
49 |
|
$ |
21,397 |
|
$ |
5,100 |
|
$ |
327 |
|
$ |
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
2,813 |
|
|
|
|
|
2,813 |
|
|
Stock options exercised (including a tax benefit of $542) |
|
|
304 |
|
|
3 |
|
|
1,471 |
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of cumulative tax benefit of $320) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168 |
) |
|
(168 |
) |
|
Unrealized translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278 |
|
|
278 |
|
|
Balances at January 31, 2005 |
|
|
5,226 |
|
$ |
52 |
|
$ |
22,868 |
|
$ |
7,913 |
|
$ |
437 |
|
$ |
2,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
531 |
|
|
|
|
|
531 |
|
|
Stock options exercised (including a tax benefit of $71) |
|
|
50 |
|
|
1 |
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of cumulative tax benefit of $154) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271 |
|
|
271 |
|
|
Interest Rate Swap (including a tax benefit of $7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
13 |
|
|
Unrealized translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(492 |
) |
|
(492 |
) |
|
Balances at January 31, 2006 |
|
|
5,276 |
|
$ |
53 |
|
$ |
23,084 |
|
$ |
8,444 |
|
$ |
229 |
|
$ |
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
29
MFRI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
2005 |
2004 |
2003 |
||||||||
|
Fiscal Year Ended January 31, |
||||||||||
|
2006 |
2005 |
2004 |
||||||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
531 |
|
|
$ |
2,813 |
|
|
$ |
(1,097 |
) |
Adjustments, to reconcile net income (loss) to net cash flows from perating activities: |
|
|
|
|
|
|
|
|
|
|
|
Income from Joint Venture |
|
(196 |
) |
|
|
(225 |
) |
|
|
(492 |
) |
Depreciation and amortization |
|
3,522 |
|
|
|
3,779 |
|
|
|
4,144 |
|
Provisions for uncollectible accounts |
|
113 |
|
|
|
(75 |
) |
|
|
147 |
|
Deferred income taxes |
|
(234 |
) |
|
|
(184 |
) |
|
|
(1,259 |
) |
Gain on sales of assets |
|
(53 |
) |
|
|
(10 |
) |
|
|
(23 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
2,225 |
|
|
|
(4,287 |
) |
|
|
(694 |
) |
Income taxes receivable |
|
(125 |
) |
|
|
348 |
|
|
|
632 |
|
Inventories |
|
(2,662 |
) |
|
|
(2,659 |
) |
|
|
1,594 |
|
Prepaid expenses and other current assets |
|
(639 |
) |
|
|
(1,594 |
) |
|
|
1,922 |
|
Accounts payable |
|
(2,415 |
) |
|
|
693 |
|
|
|
2,519 |
|
Compensation and payroll taxes |
|
640 |
|
|
|
(29 |
) |
|
|
442 |
|
Other assets and liabilities |
|
1,427 |
|
|
|
1,679 |
|
|
|
(1,044 |
) |
Net cash flows from operating activities |
|
2,134 |
|
|
|
249 |
|
|
|
6,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
(6,315 |
) |
|
|
(1,755 |
) |
|
|
(4,102 |
) |
Proceeds from sales of property and equipment |
|
46 |
|
|
|
1,804 |
|
|
|
476 |
|
Distributions from joint venture |
|
270 |
|
|
|
50 |
|
|
|
427 |
|
Net cash flows from investing activities |
|
(5,999 |
) |
|
|
99 |
|
|
|
(3,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving, term and mortgage loans |
|
57,005 |
|
|
|
15,141 |
|
|
|
27,396 |
|
Repayments of debt |
|
(53,002 |
) |
|
|
(16,271 |
) |
|
|
(30,854 |
) |
Net payments on capitalized lease obligations |
|
(17 |
) |
|
|
(43 |
) |
|
|
(141 |
) |
Tax benefit of stock options exercised |
|
71 |
|
|
|
542 |
|
|
|
- |
|
Stock options exercised |
|
146 |
|
|
|
934 |
|
|
|
- |
|
Net cash flows from financing activities |
|
4,203 |
|
|
|
303 |
|
|
|
(3,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
53 |
|
|
|
(82 |
) |
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
391 |
|
|
|
569 |
|
|
|
(192 |
) |
Cash and cash equivalents beginning of year |
|
723 |
|
|
|
154 |
|
|
|
346 |
|
Cash and Cash Equivalents end of year |
$ |
1,114 |
|
|
$ |
723 |
|
|
$ |
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized amounts |
$ |
1,753 |
|
|
$ |
1,818 |
|
|
$ |
1,962 |
|
Income taxes paid (refunded) |
|
719 |
|
|
|
(207 |
) |
|
|
(400 |
) |
See accompanying notes to consolidated financial statements.
30
MFRI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2006, 2005 AND 2004
Note 1 - Basis of Presentation
MFRI, Inc. ("MFRI", the Company, or the Registrant) was incorporated on October 12, 1993. MFRI is engaged in the manufacture and sale of products in three distinct business segments: filtration products, piping systems and industrial process cooling equipment.
Fiscal Year: The Companys fiscal year ends on January 31. Years described as 2005, 2004 and 2003 are the fiscal years ended January 31, 2006, 2005 and 2004, respectively. Balances described as balances as of 2005, 2004 and 2003 are balances as of January 31, 2006, 2005 and 2004, respectively.
Nature of Business: The Filtration Products business segment manufactures and sells a wide variety 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. The Filtration Products business segment markets air filtration-related products and accessories, and provides maintenance services, consisting primarily of dust collector inspection, filter cleaning and filter replacement. The Piping System business segment engineers, designs, manufactures and sells specialty piping systems and leak detection and location systems. This segments 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. The Piping System business segments 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. The Industrial Cooling Equipment business segment engineers, designs, manufactures and sells industrial process cooling equipment, including chillers, cooling towers, plant circulating systems, and related accessories for use in industrial process applications. The Companys products are sold both within the United States and internationally.
Note 2 - Significant Accounting Policies
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.
Revenue Recognition: The Company recognizes revenues when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the sellers price to the buyer is fixed or determinable, and (iii) collectibility is reasonably assured. All business segments of the Company except the Piping System business segment recognize revenues when product has been shipped (for FOB shipping point orders) or delivered (for FOB destination sales) or when services have been rendered.
Percentage of Completion Revenue Recognition: The Piping System business segment 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.
31
Shipping and Handling: Shipping and handling costs are included in cost of goods sold, and the amounts invoiced to customers relating to shipping and handling are included in net sales.
Operating Cycle: The length of the Piping System segments 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. The Companys other businesses do not have an operating cycle beyond one year.
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.
Translation of Foreign Currency: Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at average exchange rates prevailing during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The resulting translation adjustments are included in stockholders equity as part of accumulated comprehensive income.
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 Companys estimates of the outcomes of these matters, its experience in contesting, litigating and settling other similar matters.
The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Companys financial position, liquidity or future operations.
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 Companys customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement.
Accounts Receivable Collection: The majority of the Companys accounts receivable are mainly due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customers financial condition, including the availability of credit insurance, and, generally, collateral is not required. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts.
Concentration of Credit Risk: The Company has a broad customer base doing business in all regions of the United States as well as other areas in the world. The Company maintained foreign credit insurance covering selected foreign sales not secured by letters of credit or guarantees from parent companies in the United States. This expense is included in general and administrative expense in the Consolidated Statements of Operations.
32
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) |
|
2005 |
|
2004 |
||||
Raw materials |
|
$ |
17,695 |
|
|
$ |
17,943 |
|
Work in process |
|
|
3,045 |
|
|
|
2,211 |
|
Finished goods |
|
|
4,254 |
|
|
|
1,854 |
|
Subtotal inventories |
|
|
24,994 |
|
|
|
22,008 |
|
Less allowances |
|
|
1,283 |
|
|
|
958 |
|
Inventories, net |
|
$ |
23,711 |
|
|
$ |
21,050 |
|
|
|
|
|
|
|
|
|
|
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 assets estimated useful life. No interest was capitalized during 2005 and 2004. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an estimated fair value.
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.
The Companys investment in property, plant and equipment as of January 31 is summarized below:
(In thousands) |
|
2006 |
|
2005 |
||||
Land, buildings and improvements |
|
$ |
20,710 |
|
|
$ |
19,859 |
|
Machinery and equipment |
|
|
25,521 |
|
|
|
21,996 |
|
Furniture, office equipment and computer software and systems |
|
|
9,399 |
|
|
|
8,930 |
|
Transportation equipment |
|
|
167 |
|
|
|
155 |
|
|
|
|
55,797 |
|
|
|
50,940 |
|
Less accumulated depreciation and amortization |
|
|
27,477 |
|
|
|
25,140 |
|
Property, plant and equipment, net |
|
$ |
28,320 |
|
|
$ |
25,800 |
|
Goodwill and other intangible assets with indefinite lives: The Company reviews the carrying value of goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which 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. For the 2005 and 2004 evaluations the fair value was determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. Based upon the Companys evaluations for 2005 and 2004, no impairment of goodwill was required. Goodwill was $2,509,000 and $2,616,000 at January 31, 2006 and 2005, respectively. As of January 31, 2006 and 2005, $1,100,000 of goodwill was allocated to the Industrial Process Cooling Equipment segment. As of January 31, 2006 and 2005 $1,409,000 and $1,516,000, respectively, was allocated to the Filtration Products segment. The change in goodwill of the Filtration Products segment was due to foreign currency translation.
The changes in the carrying amount of goodwill for the year ended January 31, 2006, are as follows:
(In thousands) |
|
|
|
|
|
|
|
|
Balance as of February 1, 2005 |
|
|
|
|
|
$ |
2,616 |
|
Foreign translation effect |
|
|
|
|
|
|
(107 |
) |
Balance as of January 31, 2006 |
|
|
|
|
|
$ |
2,509 |
|
|
|
|
|
|
|
|
|
|
33
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 $453,000 and $582,000 at January 31, 2006 and 2005, respectively. Accumulated amortization was $1,835,000 and $1,636,000 at January 31, 2006 and 2005, respectively. Future amortizations over the next five years ending January 31, will be 2007 - $174,000, 2008 - $30,000, 2009 - $27,000, 2010 - $23,000 and 2011 - $21,000.
Investment in Joint Venture: In April 2002, Perma-Pipe 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. The Company received partner distributions from its joint venture of $270,000, $50,000 and $427,000 in 2005, 2004 and 2003 respectively. The Company accounts for its joint venture investment using the equity method. The Company's share of joint venture income was $196,000, $225,000 and $492,000 in 2005, 2004 and 2003 respectively.
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 Companys 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 has been the Canadian dollar. The contract amount, carrying amount and fair value of these contracts were not significant at January 31, 2006, 2005 and 2004.
The Company entered into an interest rate swap agreement to reduce its exposure to market risks from changing interest rates under the revolving credit agreement. Any differences paid or received on the interest rate swap agreements are recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation.
Income Tax Provision: Deferred income taxes have been provided for temporary differences arising from differences in basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assessed its deferred tax assets for realizability at each reporting period.
Net Income (Loss) Per Common Share: Earnings (loss) per share are computed by dividing net income by the weighted average number of common shares outstanding (basic) plus all potentially dilutive common shares outstanding during the year (diluted).
The basic weighted average shares reconcile to diluted weighted average shares as follows:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Basic weighted average number of common shares outstanding |
|
5,254 |
|
|
|
4,986 |
|
|
|
4,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
331 |
|
|
|
237 |
|
|
|
- |
|
Weighted average number of common shares outstanding assuming full
|
|
5,585 |
|
|
|
5,223 |
|
|
|
4,922 |
|
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Weighted average number of stock options not included in the
|
|
176 |
|
|
|
340 |
|
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired options during the year |
|
6 |
|
|
|
30 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options with an exercise price below the average stock price |
|
558 |
|
|
|
611 |
|
|
|
225 |
|
In 2005, a total of 50,034 stock options were exercised. There were 5,200 stock options exercised from February 1, 2006 through May 10, 2006.
34
Stock Options: The Companys 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. Accordingly, no compensation cost has been recognized. The Companys net income (loss) and income (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) |
2005 |
|
2004 |
|
2003 |
||||||
Net income (loss) as reported |
$ |
531 |
|
|
$ |
2,813 |
|
|
$ |
(1,097 |
) |
Compensation cost under fair-market value-based accounting method,
|
$ |
(343 |
) |
|
$ |
(221 |
) |
|
$ |
(134 |
) |
Net income (loss) pro forma |
$ |
188 |
|
|
$ |
2,592 |
|
|
$ |
(1,231 |
) |
Net income (loss) per common share basic and diluted, as reported |
$ |
0.10 |
|
|
$ |
0.56 |
|
|
$ |
(0.22 |
) |
Net income (loss) per common share basic and diluted, pro forma |
$ |
0.04 |
|
|
$ |
0.52 |
|
|
$ |
(0.25 |
) |
Reported diluted EPS higher than pro forma diluted EPS |
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
The compensation cost includes costs related to out-of-the-money stock options that had accelerated vesting on December 5, 2005.
The weighted average fair value of options granted during 2005 (net of options surrendered), 2004 and 2003 are estimated at $4.36, $1.85 and $1.14, per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
2005 |
|
2004 |
|
2003 |
||||||
Expected volatility |
|
51.95 |
% |
|
|
49.18 |
% |
|
|
50.01 |
% |
Risk-free interest rate |
|
3.86 |
% |
|
|
4.31 |
% |
|
|
2.93 |
% |
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 Companys unsecured senior notes at January 31, 2006 and 2005 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 6.
Accumulated Other Comprehensive Income (Loss): Accumulated other comprehensive income (loss) consists of the following:
(In thousands) |
|
Accumulated Translation Adjustment |
|
|
Minimum Pension Liability Adjustment |
|
|
Interest Rate Swap |
|
|
Total |
|
Balances as of January 31, 2003 |
$ |
39 |
|
$ |
(1,070 |
) |
$ |
- |
|
$ |
(1,031 |
) |
Unrealized translation adjustment |
|
643 |
|
|
- |
|
|
|
|
|
643 |
|
Minimum pension liability adjustment (net of cumulative tax benefit of $217) |
|
- |
|
|
715 |
|
|
|
|
|
715 |
|
Balances as of February 1, 2004 |
|
682 |
|
|
(355 |
) |
|
- |
|
|
327 |
|
Unrealized translation adjustment |
|
278 |
|
|
- |
|
|
|
|
|
278 |
|
Minimum pension liability adjustment (net of cumulative tax benefit of $320) |
|
- |
|
|
(168 |
) |
|
|
|
|
(168 |
) |
Balances as of January 31, 2005 |
|
960 |
|
|
(523 |
) |
|
- |
|
|
437 |
|
Unrealized translation adjustment |
|
(492 |
) |
|
|
|
|
|
|
|
(492 |
) |
Interest Rate Swap (including a tax benefit of $7) |
|
|
|
|
|
|
|
13 |
|
|
13 |
|
Minimum pension liability adjustment (net of cumulative tax benefit of $154) |
|
|
|
|
271 |
|
|
|
|
|
271 |
|
Balances as of January 31, 2006 |
$ |
468 |
|
$ |
(252 |
) |
$ |
13 |
|
$ |
229 |
|
35
Accounting Pronouncements: |
|
In April 2005, the SEC announced the adoption of a new rule that amends the compliance dates for SFAS No. 123 (revised 2004), Share-Based Payment (Statement No. 123R). SFAS No. 123R, as amended, is applicable for all fiscal years beginning after June 15, 2005. As a result the Company is required to implement SFAS No. 123R at the beginning of its next fiscal year, and accordingly, the Company will begin to reflect the adjustment to earnings for the impact of this accounting pronouncement in the interim reporting period ending April 30, 2006. The Company does not expect the adoption of SFAS 123R to have a material effect on its financial statements.
On December 5, 2005, the Board of Directors of the Company approved the acceleration of the vesting requirements for out-of-the-money stock options previously granted to employees, including its officers, pursuant to the 2004 Stock Incentive Plan, and out-of-the-money stock options previously granted to independent directors pursuant to the 2001 Independent Directors Stock Option Plan. The primary purpose of the acceleration is to eliminate reportable compensation expense the Company would recognize in future periods in its statements of operations upon its adoption of FASB Statement No. 123R (Share-Based Payments) in the year beginning February 1, 2006. The Company anticipates that such acceleration of vesting will reduce its pre-tax stock option compensation expense in each of the years 2006 through 2009 by approximately $109,000, or $.02 per share. A Form 8-K was filed on December 9, 2005.
FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards with an effective date of December 15, 2005 provides an elective alternative transition method. The Company has one year from December 15, 2005, the initial adoption of SFAS No. 123R to evaluate the available transition alternatives and make its on-time election. The transition method prescribed by SFAS 123R will be followed until the alternative method FSP is elected.
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 apply to the Company.
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. The Company also purchases certain services from that company under a lease and management services agreement. The Company received $102,000 and paid $121,000 from the affiliate under such agreements in 2005. The Company received $140,000 and paid $147,000 from the affiliate under such agreements in 2004.
Related company accounts receivable of $1,149,000 and $887,000 were included in the receivable balances at January 31, 2006 and 2005, respectively.
The lease agreement and the management services agreement were approved by the Companys Committee of Independent Directors.
Note 4 - Retention Receivable
Retention is the amount withheld by a customer until a contract is completed. Retentions of $91,544 and $142,800 were included in the balance of trade accounts receivable at January 31, 2006 and 2005, respectively.
36
Note 5 - Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts are as follows:
(In thousands) |
|
2005 |
|
2004 |
||||
Costs incurred on uncompleted contracts |
|
$ |
11,669 |
|
|
$ |
19,186 |
|
Estimated earnings |
|
|
2,694 |
|
|
|
5,664 |
|
Earned revenue |
|
|
14,363 |
|
|
|
24,850 |
|
Less billings to date |
|
|
12,026 |
|
|
|
23,168 |
|
Total |
|
$ |
2,337 |
|
|
$ |
1,682 |
|
Classified as follows: |
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on
|
|
$ |
2,471 |
|
|
$ |
2,472 |
|
Billings in excess of costs and estimated earnings on
|
|
|
(134 |
) |
|
|
(790 |
) |
Total |
|
$ |
2,337 |
|
|
$ |
1,682 |
|
Note 6 - Debt
Debt consists of the following:
(In thousands) |
|
2005 |
|
2004 |
||||
Secured senior notes |
|
$ |
- |
|
|
$ |
3,125 |
|
Revolving bank loan domestic |
|
|
13,612 |
|
|
|
11,370 |
|
Industrial revenue bonds |
|
|
3,150 |
|
|
|
3,150 |
|
Mortgage notes |
|
|
8,998 |
|
|
|
9,163 |
|
Term loans |
|
|
4,556 |
|
|
|
32 |
|
Short-term credit arrangements |
|
|
955 |
|
|
|
668 |
|
Capitalized lease obligations (Note 7) |
|
|
15 |
|
|
|
31 |
|
Total debt |
|
|
31,286 |
|
|
|
27,539 |
|
Less current maturities |
|
|
1,562 |
|
|
|
1,334 |
|
Total Long-Term Debt |
|
$ |
29,724 |
|
|
$ |
26,205 |
|
The following table summarizes the Companys scheduled maturities, excluding the revolving lines of credit of $14,567,000 at January 31, 2006:
( In thousands) |
Total |
|
1/31/07 |
|
1/31/08 |
|
1/31/09 |
|
1/31/10 |
|
1/31/11 |
|
Thereafter |
|||||||
Mortgages |
$ |
8,998 |
|
$ |
579 |
|
$ |
598 |
|
$ |
1,726 |
|
$ |
631 |
|
$ |
671 |
|
$ |
4,793 |
IRB Payable |
|
3,150 |
|
|
- |
|
|
3,150 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Term Loans |
|
4,556 |
|
|
977 |
|
|
2,908 |
|
|
121 |
|
|
128 |
|
|
136 |
|
|
286 |
Capitalized Lease Obligations |
|
15 |
|
|
6 |
|
|
4 |
|
|
4 |
|
|
1 |
|
|
|
|
|
|
Totals |
$ |
16,719 |
|
$ |
1,562 |
|
$ |
6,660 |
|
$ |
1,851 |
|
$ |
760 |
|
$ |
807 |
|
$ |
5,079 |
Debt
At January 31, 2006 and October 31, 2005, the Company was not in compliance with two financial performance covenants under the Loan Agreement (see the paragraphs below that describe the Loan Agreement). The Company has received a waiver and amendment dated May 10, 2006 from the lender. The Company has made all required payments of principal and interest under the Loan Agreement 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 November 30, 2007, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. The Loan Agreement covenants restrict debt, liens, and investments, do not permit payment of dividends, and require attainment of certain levels of profitability and cash flows. 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, 2006, the prime
37
rate was 7.5%, 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 0.25 and 2.25 percentage points, respectively. Monthly interest payments were made. The average interest rate for the year ending January 31, 2006 was 6.02%. As of January 31, 2006, the Company had borrowed $13,612,000 and had $1,423,000 available to it under the revolving line of credit. In addition, $3,796,600 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, 2006, the amount of restricted cash was $369,000. Cash required for operations is provided by draw-downs on the line of credit.
At September 12, 2005 the Company entered into an interest rate swap agreement through November 28, 2008 under which the interest rate on $8,000,000 is fixed at 4.72% plus LIBOR Margin. The interest rate swap was effective as a cash flow hedge and no charge to earnings was required during the year ended January 31, 2006. The fair value of the derivative financial instrument was $20,500, and $13,500, net of deferred tax benefits of $7,000, was recorded in other assets and accumulated other comprehensive income associated with the cash flow hedge at January 31, 2006.
On March 28, 2005, the Company's Loan Agreement was amended to (1) add a term loan of $4,300,000 ("Term Loan") and (2) amend certain covenants. The total that can be borrowed under the Loan Agreement was unchanged at $27,000,000, subject to borrowing base and other requirements. Interest rates under the Term Loan 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 March 28, 2005 the prime rate was 5.75% 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 3.5 percentage points, respectively. The Company is scheduled to pay $215,000 of principal on the first days of March, June, September, and December in each year, commencing on June 1, 2005 and ending on September 30, 2007, with the remaining unpaid principal payable on November 30, 2007.
On May 10, 2006, the Companys Loan Agreement was amended to (1) increase the revolving credit line to $30,000,000 subject to borrowing base and other requirements, (2) add an equipment loan facility (Equipment Loan Facility) of $1,000,000 subject to certain restrictions, and (3) amend certain financial performance covenants. Interest rates under the Equipment Loan Facility 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 May 10, 2006 the prime rate was 8.00% 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 .50 and 2.50 percentage points, respectively.
The proceeds of the Term Loan were used to repay the outstanding balance due under the Company's Note Purchase Agreements ($3,125,000), which have now been cancelled and to reduce the Company's revolving debt under the Loan Agreement ($1,175,000). Interest rates under the Note Purchase Agreements had been 10% per annum.
On December 31, 2005, the Company obtained a loan in the amount of 7,067,000 Danish Kroners (DKK) (approximately $1,122,000 at the prevailing exchange rate at the time of the transaction) from a Danish bank to partially finance the building addition. The loan has a term of twenty years. The loan bears interest at 4.28% with quarterly payments of $23,500 for both principal and interest.
On December 30, 2005 Perma-Pipe, Inc. borrowed $900,000 under an equipment loan secured by equipment. The loan bears interest at 6.23% with monthly payments of $13,400 for both principal and interest, and has a seven year term.
On May 11, 2005, the Company obtained a loan in the amount of 3,241,500 DKK (approximately $536,000 at the prevailing exchange rate at the time of the transaction) from a Danish bank to partially finance the building
38
addition. The loan has a term of twenty years. The loan bears interest at 4.89% with quarterly payments of $10,700 for both principal and interest.
On April 8, 2003, the Company obtained a loan from a Danish bank to purchase equipment and office furniture for the new building, in the amount of 700,000 Euro, approximately $754,600 at the exchange rate prevailing at the time of the transaction. The loan has a term of ten years. The loan bears interest at 6.1% with quarterly payments of $9,400 for both principal and interest.
On January 29, 2003, the Company obtained a loan from a Danish bank to construct 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 4.0% with quarterly payments of $19,000 for both principal and interest.
On April 26, 2002, Midwesco Filter borrowed $2,025,000 under a mortgage note secured by its manufacturing facility in Winchester, Virginia. Proceeds from the mortgage, net of a prior mortgage loan were used to make principal payments to the lenders under the Prior Term Loans and the bank which was the lender under the Companys revolving line of credit at that time. The loan bears interest at 7.10% with a monthly payment of $23,616 for both principal and interest, and has a ten year term.
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 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 October 18, 1995, Perma-Pipe in Lebanon, Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1, 2007. The 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 Companys 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.
39
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, 2006, borrowings under these credit arrangements totaled $955,000; an additional $691,000 remained unused.
Note 7 - Lease Information
The following is an analysis of property under capitalized leases:
(In thousands) |
|
2005 |
|
2004 |
||||
Machinery and equipment |
|
$ |
164 |
|
|
$ |
164 |
|
Furniture and office equipment |
|
|
698 |
|
|
|
698 |
|
Transportation equipment |
|
|
38 |
|
|
|
245 |
|
|
|
|
900 |
|
|
|
1,107 |
|
Less accumulated amortization |
|
|
890 |
|
|
|
1,084 |
|
|
|
$ |
10 |
|
|
$ |
23 |
|
The Piping Systems Business leases manufacturing and warehouse facilities, land, transportation equipment and office space under non-cancelable operating leases, which expire beginning 2007 through 2017. The Filtration Products Business leases approximately 12,000 square feet of office space under an operating lease which began in June 2004 and expires in June 2007. Management expects that these leases will be renewed or replaced by other leases in the normal course of business.
At January 31, 2006, future minimum annual rental commitments under non-cancelable lease obligations were as follows:
(In thousands) |
|
Operating Leases |
|
Capital Leases |
||||
2007 |
|
$ |
1,046 |
|
|
$ |
6 |
|
2008 |
|
|
818 |
|
|
|
4 |
|
2009 |
|
|
516 |
|
|
|
4 |
|
2010 |
|
|
373 |
|
|
|
1 |
|
2011 |
|
|
356 |
|
|
|
|
|
Thereafter |
|
|
264 |
|
|
|
|
|
Present value of future minimum lease payments (Note 6) |
|
$ |
3,373 |
|
|
$ |
15 |
|
Rental expense for operating leases was $1,341,600, $752,300 and $807,000 in 2005, 2004 and 2003, respectively.
Note 8 - Income Taxes
The following is a summary of domestic and foreign income (loss) before income taxes:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Domestic |
$ |
(210 |
) |
|
$ |
2,172 |
|
|
$ |
(2,995 |
) |
Foreign |
|
1,246 |
|
|
|
1,572 |
|
|
|
763 |
|
Total |
$ |
1,036 |
|
|
$ |
3,744 |
|
|
$ |
(2,232 |
) |
40
Components of income tax expense (benefit) are as follows:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
(109 |
) |
|
$ |
467 |
|
|
$ |
41 |
|
Foreign |
|
566 |
|
|
|
475 |
|
|
|
158 |
|
State and other |
|
140 |
|
|
|
173 |
|
|
|
78 |
|
|
|
597 |
|
|
|
1,115 |
|
|
|
277 |
|
Accrued (Deferred) |
|
(92 |
) |
|
|
(184 |
) |
|
|
(1,412 |
) |
Totals |
$ |
505 |
|
|
$ |
931 |
|
|
$ |
(1,135 |
) |
The tax benefit related to stock options recorded through equity was $71,000 and $542,000 in 2005 and 2004 which did not affect net income in 2005 and 2004.
The difference between the provision (benefit) for income taxes and the amount computed by applying the federal statutory rate is as follows:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Tax (benefit) at federal statutory rate |
$ |
352 |
|
|
$ |
1,273 |
|
|
$ |
(759 |
) |
Foreign rate tax differential |
|
83 |
|
|
|
(59 |
) |
|
|
(171 |
) |
State (benefit) taxes, net of federal benefit |
|
56 |
|
|
|
157 |
|
|
|
(120 |
) |
Research & development credit |
|
(68 |
) |
|
|
(401 |
) |
|
|
- |
|
Other net |
|
82 |
|
|
|
(39 |
) |
|
|
(85 |
) |
Totals |
$ |
505 |
|
|
$ |
931 |
|
|
$ |
(1,135 |
) |
Components of the current deferred income tax asset (liability) balances are as follows:
(In thousands) |
|
2005 |
|
2004 |
||||
Accrued commissions and bonuses |
|
$ |
969 |
|
|
$ |
788 |
|
Other accruals not yet deducted |
|
|
590 |
|
|
|
507 |
|
Inventory valuation allowance |
|
|
489 |
|
|
|
373 |
|
Allowance for doubtful accounts |
|
|
170 |
|
|
|
140 |
|
Inventory uniform capitalization |
|
|
(20 |
) |
|
|
(15 |
) |
Other |
|
|
(22 |
) |
|
|
49 |
|
Totals |
|
$ |
2,176 |
|
|
$ |
1,842 |
|
Components of the long-term deferred income tax asset (liability) balances are as follows:
(In thousands) |
|
2005 |
|
2004 |
||||
Capital loss carry forward from sale of foreign subsidiary |
|
$ |
114 |
|
|
$ |
307 |
|
Depreciation |
|
|
(1,124 |
) |
|
|
(1,291 |
) |
Goodwill |
|
|
338 |
|
|
|
424 |
|
Non-qualified deferred compensation |
|
|
642 |
|
|
|
434 |
|
Minimum pension liability |
|
|
(230 |
) |
|
|
(91 |
) |
Net operating loss |
|
|
744 |
|
|
|
536 |
|
Research & development credit |
|
|
426 |
|
|
|
358 |
|
Alternative minimum tax credit |
|
|
- |
|
|
|
55 |
|
Foreign deferred liability |
|
|
(230 |
) |
|
|
(145 |
) |
Other |
|
|
237 |
|
|
|
524 |
|
Totals |
|
$ |
917 |
|
|
$ |
1,111 |
|
At January 31, 2006 the Company had a net operating loss carryforward of $2,235,000 available to offset future taxable income in the United States and certain foreign jurisdictions, which expires in 2024.
41
Note 9 - Employee Retirement Plans
Pension Plan
The Winchester facility 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. The Company may contribute additional amounts at its discretion.
The market related value of plan assets at January 31, 2006 was $3,419,846. The plans hold no securities of MFRI, Inc. 100% of the assets are held for benefits under the plan. The target asset allocation was 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. At January 31, 2006, 98.5% of plan assets were held in a mutual fund and the remaining 1.5% was in a money market fund. 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) |
|
|
2005 |
|
2004 |
||||||
Accumulated benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
Vested benefits |
|
|
|
|
$ |
3,456 |
|
|
$ |
3,413 |
|
Accumulated benefits |
|
|
|
|
|
3,466 |
|
|
|
3,422 |
|
Total accumulated benefit obligations |
|
|
|
|
|
6,922 |
|
|
|
6,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation beginning of year |
|
|
|
|
$ |
4,647 |
|
|
$ |
3,312 |
|
Service cost |
|
|
|
|
|
114 |
|
|
|
99 |
|
Interest cost |
|
|
|
|
|
248 |
|
|
|
187 |
|
Amendments |
|
|
|
|
|
- |
|
|
|
- |
|
Actuarial loss |
|
|
|
|
|
(1,319 |
) |
|
|
1,134 |
|
Benefits paid |
|
|
|
|
|
(90 |
) |
|
|
(85 |
) |
Benefit obligation end of year |
|
|
|
|
|
3,600 |
|
|
|
4,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year |
|
|
|
|
$ |
3,091 |
|
|
$ |
2,683 |
|
Actual return on plan assets |
|
|
|
|
|
260 |
|
|
|
163 |
|
Company contributions |
|
|
|
|
|
159 |
|
|
|
330 |
|
Benefits paid |
|
|
|
|
|
(90 |
) |
|
|
(85 |
) |
Fair value of plan assets end of year |
|
|
|
|
|
3,420 |
|
|
|
3,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
|
|
$ |
(179 |
) |
|
$ |
(1,556 |
) |
Unrecognized prior service cost |
|
|
|
|
|
489 |
|
|
|
571 |
|
Unrecognized actuarial loss |
|
|
|
|
|
539 |
|
|
|
2,067 |
|
Prepaid benefit cost recognized in the consolidated balance sheet |
|
|
|
|
$ |
849 |
|
|
$ |
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
|
|
|
$ |
849 |
|
|
$ |
1,082 |
|
Accrued benefit liability |
|
|
|
|
|
(895 |
) |
|
|
(1,413 |
) |
Intangible asset |
|
|
|
|
|
489 |
|
|
|
571 |
|
Accumulated other comprehensive income |
|
|
|
|
|
406 |
|
|
|
842 |
|
Net amount recognized |
|
|
|
|
$ |
849 |
|
|
$ |
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net cost and benefit |
|
|
|
|
|
|
|
|
|
|
|
Obligations for years ended January 31: |
|
|
|
|
|
|
|
|
|
|
|
End of year benefit obligation |
|
|
|
|
|
5.620% |
|
|
|
5.735% |
|
Service cost discount rate |
|
|
|
|
|
5.388% |
|
|
|
5.388% |
|
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 |
|
|
|
|
$ |
114 |
|
|
$ |
99 |
|
Interest cost |
|
|
|
|
|
248 |
|
|
|
187 |
|
Expected return on plan assets |
|
|
|
|
|
(252 |
) |
|
|
(223 |
) |
Amortization of prior service cost |
|
|
|
|
|
82 |
|
|
|
82 |
|
Recognized actuarial loss |
|
|
|
|
|
201 |
|
|
|
78 |
|
Net periodic benefit cost |
|
|
|
|
$ |
393 |
|
|
$ |
223 |
|
43
Cash Flows:
(In thousands) |
|
|
|
|
|||
Expected employer contributions for fiscal year ending 1/31/2007 |
|
$ |
0 |
|
|||
Expected employee contributions for fiscal year ending 1/31/2007 |
|
|
$ |
0 |
|
||
Estimated future benefit payments reflecting expected future service for the fiscal year(s) ending: |
|
|
|
|
|
||
1/31/2007 |
|
|
$ |
154 |
|
||
1/31/2008 |
|
|
|
173 |
|
||
1/31/2009 |
|
|
|
190 |
|
||
1/31/2010 |
|
|
|
196 |
|
||
1/31/2011 |
|
|
|
199 |
|
||
1/31/2012-1/31/2016 |
|
|
$ |
1,300 |
|
||
|
|
|
|
|
|
||
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 participants salary.
Contributions to the 401(k) Plan and its predecessors were $346,400, $329,300 and $347,000 for the years ended January 31, 2006, 2005 and 2004, respectively. The Company estimates that it will contribute $347,000 for the year ending January 31, 2007.
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 Companys obligation under these agreements. The cash surrender value of the life insurance contracts was included in other assets and the deferred compensation liability was included in other long-term liabilities in the consolidated balance sheet. The charges to expense were $225,900, $288,200 and $209,000 in 2005, 2004 and 2003, respectively.
Note 10 - 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, manufactures, and sells specialty piping systems and leak detection and location systems. The Industrial Process Cooling Equipment Business engineers, designs, manufactures and sells 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.
MFRIs 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) |
2005 |
|
2004 |
|
2003 |
||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
64,413 |
|
|
$ |
61,740 |
|
|
$ |
54,872 |
|
Piping Systems |
|
54,657 |
|
|
|
54,053 |
|
|
|
40,523 |
|
Industrial Process Cooling Equipment |
|
35,517 |
|
|
|
29,303 |
|
|
|
25,494 |
|
Total Net Sales |
$ |
154,587 |
|
|
$ |
145,096 |
|
|
$ |
120,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
11,758 |
|
|
$ |
12,320 |
|
|
$ |
9,782 |
|
Piping Systems |
|
10,862 |
|
|
|
10,284 |
|
|
|
7,516 |
|
Industrial Process Cooling Equipment |
|
10,066 |
|
|
|
8,524 |
|
|
|
7,300 |
|
Total Gross Profit |
$ |
32,686 |
|
|
$ |
31,128 |
|
|
$ |
24,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
2,221 |
|
|
$ |
3,539 |
|
|
$ |
1,145 |
|
Piping Systems |
|
5,060 |
|
|
|
5,405 |
|
|
|
2,281 |
|
Industrial Process Cooling Equipment |
|
1,544 |
|
|
|
1,570 |
|
|
|
738 |
|
Corporate |
|
(6,146 |
) |
|
|
(5,337 |
) |
|
|
(4,885 |
) |
Total Income (loss) from Operations |
$ |
2,679 |
|
|
$ |
5,177 |
|
|
$ |
(721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
2,221 |
|
|
$ |
3,539 |
|
|
$ |
1,145 |
|
Piping Systems |
|
5,256 |
|
|
|
5,630 |
|
|
|
2,773 |
|
Industrial Process Cooling Equipment |
|
1,544 |
|
|
|
1,570 |
|
|
|
738 |
|
Corporate |
|
(7,985 |
) |
|
|
(6,995 |
) |
|
|
(6,888 |
) |
Total Income (loss) before Income Taxes |
$ |
1,036 |
|
|
$ |
3,744 |
|
|
$ |
(2,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
36,179 |
|
|
$ |
33,511 |
|
|
$ |
35,621 |
|
Piping Systems |
|
30,333 |
|
|
|
29,696 |
|
|
|
22,852 |
|
Industrial Process Cooling Equipment |
|
12,545 |
|
|
|
12,101 |
|
|
|
11,228 |
|
Corporate |
|
9,578 |
|
|
|
10,208 |
|
|
|
9,226 |
|
Total Segment Assets |
$ |
88,635 |
|
|
$ |
85,516 |
|
|
$ |
78,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
1,654 |
|
|
$ |
623 |
|
|
$ |
2,236 |
|
Piping Systems |
|
4,043 |
|
|
|
762 |
|
|
|
1,605 |
|
Industrial Process Cooling Equipment |
|
230 |
|
|
|
139 |
|
|
|
87 |
|
Corporate |
|
388 |
|
|
|
226 |
|
|
|
174 |
|
Total Capital Expenditures |
$ |
6,315 |
|
|
$ |
1,750 |
|
|
$ |
4,102 |
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
Filtration Products |
$ |
1,194 |
|
|
$ |
1,214 |
|
|
$ |
1,262 |
|
Piping Systems |
|
1,416 |
|
|
|
1,385 |
|
|
|
1,577 |
|
Industrial Process Cooling Equipment |
|
357 |
|
|
|
357 |
|
|
|
385 |
|
Corporate |
|
555 |
|
|
|
823 |
|
|
|
920 |
|
Total Depreciation and Amortization |
$ |
3,522 |
|
|
$ |
3,779 |
|
|
$ |
4,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
2005 |
|
2004 |
|
2003 |
||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
United States |
$ |
129,556 |
|
|
$ |
117,511 |
|
|
$ |
100,017 |
|
Europe |
|
9,830 |
|
|
|
12,994 |
|
|
|
10,219 |
|
Asia |
|
8,860 |
|
|
|
8,200 |
|
|
|
3,588 |
|
Canada |
|
2,471 |
|
|
|
3,415 |
|
|
|
3,711 |
|
Mexico, South America, Central America and the Caribbean |
|
3,719 |
|
|
|
2,686 |
|
|
|
3,201 |
|
Other |
|
151 |
|
|
|
290 |
|
|
|
153 |
|
|
$ |
154,587 |
|
|
$ |
145,096 |
|
|
$ |
120,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets: |
|
|
|
|
|
|
|
|
|
|
|
United States |
$ |
20,340 |
|
|
$ |
21,882 |
|
|
$ |
25,054 |
|
Europe |
|
4,535 |
|
|
|
3,918 |
|
|
|
3,774 |
|
United Arab Emirates |
|
3,445 |
|
|
|
- |
|
|
|
- |
|
Total Long-Lived Assets |
$ |
28,320 |
|
|
$ |
25,800 |
|
|
$ |
28,828 |
|
Note 11 - Supplemental Cash Flow Information
A summary of annual supplemental cash flow information follows:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Cash Paid For: |
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of (refunds) received |
$ |
719 |
|
|
$ |
(207 |
) |
|
$ |
(400 |
) |
Interest paid, net of amounts capitalized |
$ |
1,753 |
|
|
$ |
1,818 |
|
|
$ |
1,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Financing and Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
Fixed assets acquired under capital leases |
$ |
- |
|
|
$ |
- |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 - Stock Options
Under the 2004 Stock Option Plan (Option Plans), 250,000 shares of common stock 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 2004 Option Plan, an additional two percent of shares of the Companys common stock outstanding have been added to the shares reserved for issuance each February 1, beginning February 1, 2006. 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 Plan may be either non-qualified options or incentive options. Such options vest ratably over four years and are exercisable for up to ten years from the date of grant.
Pursuant to the 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 acting 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 Companys annual meeting for the year 2002.
46
In connection with the purchase agreement relating to the acquisition of TDC Filter Manufacturing, Inc., (acquired in December 1997 as part of the Filtration Products 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:
|
|
2005 |
|
2004 |
|
2003 |
||||||||||||||
|
|
Shares |
|
Weighted Average Exercise Price |
|
Shares |
|
Weighted Average Exercise Price |
|
Shares |
|
Weighted Average Exercise Price |
||||||||
Outstanding at beginning of year |
|
|
688,380 |
|
|
$ |
3.62 |
|
|
1,017,950 |
|
|
$ |
3.44 |
|
|
946,400 |
|
$ |
3.57 |
Granted |
|
|
101,600 |
|
|
|
7.61 |
|
|
4,000 |
|
|
|
3.31 |
|
|
103,250 |
|
|
2.16 |
Exercised |
|
|
(50,034 |
) |
|
|
2.90 |
|
|
(303,757 |
) |
|
|
3.08 |
|
|
- |
|
|
- |
Cancelled |
|
|
(6,350 |
) |
|
|
3.49 |
|
|
(29,813 |
) |
|
|
2.91 |
|
|
(31,700 |
) |
|
3.41 |
Outstanding at end of year |
|
|
733,596 |
|
|
$ |
4.22 |
|
|
688,380 |
|
|
$ |
3.62 |
|
|
1,017,950 |
|
$ |
3.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end |
|
|
655,496 |
|
|
|
|
|
|
385,025 |
|
|
|
|
|
|
486,374 |
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|||||||||||
Range of Exercise Prices |
|
Number Outstanding at January 31, 2006 |
|
Weighted Average Remaining Contractual Life |
|
Weighted Average Exercise Price |
|
Number Outstanding at January 31, 2006 |
|
Weighted Average Exercise Price |
||||||
$2.00-$2.99 |
|
|
154,933 |
|
|
6.9 |
|
$ |
2.16 |
|
|
79,833 |
|
$ |
2.16 |
|
$3.00-$3.99 |
|
|
390,163 |
|
|
5.9 |
|
|
3.12 |
|
|
387,163 |
|
|
3.12 |
|
$4.00-$4.99 |
|
|
11,200 |
|
|
3.9 |
|
|
4.14 |
|
|
11,200 |
|
|
4.14 |
|
$5.00-$5.99 |
|
|
1,500 |
|
|
0.9 |
|
|
6.92 |
|
|
1,500 |
|
|
6.92 |
|
$6.00-$6.99 |
|
|
100,300 |
|
|
9.4 |
|
|
7.61 |
|
|
100,300 |
|
|
7.61 |
|
$8.00-$8.99 |
|
|
500 |
|
|
2.2 |
|
|
8.10 |
|
|
500 |
|
|
8.10 |
|
$9.00-$9.99 |
|
|
75,000 |
|
|
1.8 |
|
|
9.60 |
|
|
75,000 |
|
|
9.60 |
|
|
|
|
733,596 |
|
|
6.2 |
|
$ |
4.22 |
|
|
655,496 |
|
$ |
4.46 |
|
The Companys 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 Companys net income (loss) and income (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) |
2005 |
|
2004 |
|
2003 |
||||||
Net income (loss) as reported |
$ |
531 |
|
|
$ |
2,813 |
|
|
$ |
(1,097 |
) |
Compensation cost under fair-market value-based accounting method,
|
$ |
(343 |
) |
|
$ |
(221 |
) |
|
$ |
(134 |
) |
Net income (loss) pro forma |
$ |
188 |
|
|
$ |
2,592 |
|
|
$ |
(1,231 |
) |
Net income (loss) per common share basic and diluted, as reported |
$ |
0.10 |
|
|
$ |
0.56 |
|
|
$ |
(0.22 |
) |
Net income (loss) per common share basic and diluted, pro forma |
$ |
0.04 |
|
|
$ |
0.52 |
|
|
$ |
(0.25 |
) |
Reported diluted EPS higher than pro forma diluted EPS |
$ |
0.06 |
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
47
The weighted average fair value of options granted during 2005 (net of options surrendered), 2004 and 2003 are estimated at $4.36, $1.85 and $1.14, per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
2005 |
|
2004 |
|
2003 |
||||||
Expected volatility |
|
51.95 |
% |
|
|
49.18 |
% |
|
|
50.01 |
% |
Risk-free interest rate |
|
3.86 |
% |
|
|
4.31 |
% |
|
|
2.93 |
% |
Dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life in years |
|
7.0 |
|
|
|
7.0 |
|
|
|
7.0 |
|
Note 13 - Stock Rights
On September 15, 1999, the Companys Board of Directors declared a dividend of one common stock purchase right (a Right) for each share of MFRIs 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 is 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 MFRIs 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 Companys common stock, or announces a tender offer that, if consummated, would result in 15% or more ownership of the Companys 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 Companys 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, MFRIs 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 Companys 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. MFRIs 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 MFRIs common stock. Under certain circumstances, the decision to redeem requires the concurrence of a majority of the independent directors.
48
Note 14 - Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years 2005 and 2004:
|
2005 |
||||||||||||||
(In thousands except per share information) |
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
||||||||
Net Sales |
$ |
36,202 |
|
|
$ |
40,691 |
|
|
$ |
39,384 |
|
|
$ |
38,310 |
|
Gross Profit |
|
7,867 |
|
|
|
9,074 |
|
|
|
9,163 |
|
|
|
6,582 |
|
Net income (loss) |
|
218 |
|
|
|
619 |
|
|
|
788 |
|
|
|
(1,094 |
) |
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding basic |
|
5,234 |
|
|
|
5,252 |
|
|
|
5,262 |
|
|
|
5,267 |
|
Outstanding diluted |
|
5,623 |
|
|
|
5,606 |
|
|
|
5,596 |
|
|
|
5,541 |
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) basic |
$ |
0.04 |
|
|
|
0.12 |
|
|
|
0.15 |
|
|
$ |
(0.21 |
) |
Net income (loss) - diluted |
$ |
0.04 |
|
|
|
0.11 |
|
|
|
0.14 |
|
|
$ |
(0.19 |
) |
|
2004 |
||||||||||||||
(In thousands except per share information) |
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
||||||||
Net Sales |
$ |
32,128 |
|
|
$ |
38,068 |
|
|
$ |
39,708 |
|
|
$ |
35,192 |
|
Gross Profit |
|
5,906 |
|
|
|
8,952 |
|
|
|
9,164 |
|
|
|
7,106 |
|
Net income (loss) |
|
(329 |
) |
|
|
1,369 |
|
|
|
1,614 |
|
|
|
160 |
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding basic |
|
4,922 |
|
|
|
4,922 |
|
|
|
4,961 |
|
|
|
5,138 |
|
Outstanding diluted |
|
4,922 |
|
|
|
4,997 |
|
|
|
5,304 |
|
|
|
5,527 |
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) basic |
$ |
(0.07 |
) |
|
$ |
0.27 |
|
|
$ |
0.33 |
|
|
$ |
0.03 |
|
Net income (loss) - diluted |
$ |
(0.07 |
) |
|
$ |
0.27 |
|
|
$ |
0.31 |
|
|
$ |
0.03 |
|
Note 15 - Product Warranties
The Company issues a standard warranty with the sale of its products and sells extended warranty contracts to customers. The Companys 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 2005 and 2004 are summarized below:
(In thousands) |
2005 |
|
2004 |
|
2003 |
||||||
Aggregate product warranty liability at beginning of year |
$ |
738 |
|
|
|
630 |
|
|
$ |
553 |
|
Aggregate accruals related to product warranties |
|
907 |
|
|
|
451 |
|
|
|
535 |
|
Aggregate reductions for payments |
|
(802 |
) |
|
|
(387 |
) |
|
|
(567 |
) |
Aggregate changes for pre-existing warranties |
|
(16 |
) |
|
|
44 |
|
|
|
109 |
|
Aggregate product warranty liability at end of year |
$ |
827 |
|
|
$ |
738 |
|
|
$ |
630 |
|
49
Schedule II
MFRI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2006, 2005 and 2004
In Thousands
Description |
|
Balance at Beginning of Period |
|
Charged to Costs and Expenses |
|
Deductions from Reserves (1) |
|
Recoveries from previous accounts charged off (2) |
|
|
Balance at End of Period |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses in collection of trade receivables |
|
$ |
482 |
|
$ |
91 |
|
$ |
142 |
|
$ |
73 |
|
$ |
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses in collection of trade receivables |
|
$ |
557 |
|
$ |
189 |
|
$ |
264 |
|
$ |
- |
|
$ |
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses in collection of trade receivables |
|
$ |
410 |
|
$ |
308 |
|
$ |
161 |
|
$ |
- |
|
$ |
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Uncollectible accounts charged off |
|
(2) |
Recoveries from accounts previously charged off |
50
SIGNATURES
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: |
May 15, 2006 |
/s/ David Unger |
|
|
David Unger |
|
|
Chairman of the Board of Directors, and |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Date: |
May 15, 2006 |
/s/ Michael D. Bennett |
|
|
Michael D. Bennett |
|
|
Vice President, Secretary and Treasurer |
|
|
(Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
DAVID UNGER* |
|
Director, Chairman of the Board of Directors, and Chief Executive Officer (Principal Executive Officer) |
) ) ) |
|
|
|
|
|
) |
|
|
HENRY M. MAUTNER* |
|
Director |
) |
|
|
|
|
|
) |
|
|
BRADLEY E. MAUTNER* |
|
Director and President |
) |
|
|
|
|
|
) |
|
|
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 Companys Schedule TO filed on May 25, 2001 (SEC File No. 0-18370)] |
|
||
10(d)* |
|
Form of Directors Indemnification Agreement |
|
||
10(e) |
|
MFRI 2004 Stock Incentive Plan [Incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2005 (SEC File No. 0-18370)] |
|
||
10(f) |
|
Loan and Security Agreement between the Company and Fleet Capital Corporation dated July 11, 2002 and the amendments thereto dated October 3, 2002, December 12, 2002, April 30, 2003, October 31, 2003, July 1, 2004 and March 28, 2005. [Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2005 (SEC File No. 0-18370)] |
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10(g) |
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Seventh Amendment to Loan and Security Agreement between the Company and Bank of America dated May 10, 2006 |
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14 |
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Code of Conduct [Incorporated by reference to Exhibit 14 of the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (SEC File No. 0-18370)] |
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21* |
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Subsidiaries of MFRI, Inc. |
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23* 23.1* |
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Consent of Independent Registered Public Accounting Firm Grant Thornton LLP Consent of Independent Registered Public Accounting Firm Deloitte & Touche LLP |
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24* |
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Power of Attorney executed by directors and officers of the Company |
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31* |
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Rule 13a 14(a)/15d 14(a) Certifications
(1) Chief Executive Officer certification pursuant to Section 302 of the
(2) Chief Financial Officer certification pursuant to Section 302 of the
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32* |
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Section 1350 Certifications
(1) Chief Executive Officer certification pursuant to Section 906 of the
(2) Chief Financial Officer certification pursuant to Section 906 of the
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* Filed herewith
52
5.10.06
SEVENTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (Seventh Amendment) is made as of the 10th day of May, 2006 by and among MFRI, Inc., a Delaware corporation (MFRI), Midwesco Filter Resources, Inc., a Delaware corporation (Midwesco), Perma-Pipe, Inc., a Delaware corporation (Perma-Pipe), Thermal Care, Inc., a Delaware corporation (Thermal Care) and TDC Filter Manufacturing, Inc., a Delaware corporation (TDC), the lenders who are signatories hereto (Lenders), and Bank of America, N.A., a national banking association (B of A) as successor-in-interest to Fleet Capital Corporation, as agent for Lenders hereunder (B of A, in such capacity, being Agent). MFRI, Midwesco, Perma-Pipe, Thermal Care and TDC are sometimes hereinafter referred to individually as a Borrower and collectively as Borrowers.
W I T N E S S E T H :
WHEREAS, Borrowers, Agent and Lenders entered into a certain Loan and Security Agreement dated as of July 11, 2002 as amended by a certain First Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders and dated October 31, 2002, a certain Second Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders dated December 12, 2002, a certain Third Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders dated April 30, 2003, a certain Fourth Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders dated October 31, 2003, a certain Fifth Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders dated July 1, 2004 and by a certain Sixth Amendment to Loan and Security Agreement by and among Borrowers, Agent and Lenders dated March 28, 2005 (said Loan and Security Agreement, as amended, is hereinafter referred to as the Loan Agreement); and
WHEREAS, Borrowers desire to amend and modify certain provisions of the Loan Agreement and, subject to the terms hereof, Agent and Lenders are willing to agree to such amendments and modifications;
NOW THEREFORE, in consideration of the premises, the mutual covenants and agreements herein contained, and any extension of credit heretofore, now or hereafter made by Agent and Lenders to Borrowers, the parties hereto hereby agree as follows:
1. Definitions . All capitalized terms used herein without definition shall have the meaning given to them in the Loan Agreement.
2. Amended and Additional Definition . The definitions of Applicable Margin, Base Rate Portion, Borrowing Base, LIBOR Portion, LIBOR Request, Majority Lenders, Notes, Revolving Credit Maximum Amount and Total Credit Facility contained in Appendix A to the Loan Agreement are hereby deleted and the following are inserted in their stead. The definition of EBITDA contained in Exhibit 8.3 to the Loan Agreement is hereby deleted and the following is inserted in its stead. The definitions of Base Rate Equipment
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Portion, BHP Eligible Accounts, Equipment Loans, Equipment Loan Commitment, Equipment Loan Notes, Equipment Loan Percentage, LIBOR Equipment Portion, New South African Foreign Subsidiary, New UAE Foreign Subsidiary, New VI Foreign Subsidiary, Perma-Pipe Sale and Leaseback, Seventh Amendment and Seventh Amendment Effective Date are hereby inserted into Appendix A to the Loan Agreement.
* * *
Applicable Margin - from the Seventh Amendment Effective Date to, but not including, the first Adjustment Date (as hereinafter defined) the percentages set forth below with respect to the Base Rate Revolving Portion, the Base Rate Equipment Portion, the Base Rate Term Portion, the LIBOR Equipment Portions, the LIBOR Revolving Portions, the LIBOR Term Portions and the Unused Line Fee:
Base Rate Equipment Portion |
0.50% |
Base Rate Revolving Portion |
0.25% |
Base Rate Term Portion |
0.50% |
LIBOR Equipment Portions |
2.50% |
LIBOR Revolving Portions |
2.25% |
LIBOR Term Portions |
2.50% |
Unused Line Fee |
0.375% |
The percentages set forth above with respect to the Base Rate Equipment Portion, Base Rate Revolving Portion, Base Rate Term Portion, LIBOR Revolving Portions, LIBOR Equipment Portions, LIBOR Term Portions and Unused Line Fee will be adjusted on the first day of the month following delivery by Borrowers to Agent of the financial statements required to be delivered pursuant to subsection 8.1.3(ii) of the Agreement for each January 31, April 30, July 31 and October 31 during the Term, commencing with the month ending January 31, 2006 (each such date an Adjustment Date), effective prospectively, by reference to the applicable Financial Measurement (as defined below) for the four quarters most recently ending in accordance with the following table.
provided that, (i) if MFRIs audited financial statements for any fiscal year delivered pursuant to subsection 8.1.3(i) of the Agreement reflect a Financial Measurement that yields a higher Applicable Margin than that yielded by the
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monthly financial statements previously delivered pursuant to subsection 8.1.3(ii) of the Agreement for the last month of such fiscal year, the Applicable Margin shall be readjusted retroactively for the period that was incorrectly calculated and (ii) if Borrowers fail to deliver the financial statements required to be delivered pursuant to subsection 8.1.3(i) or subsection 8.1.3(ii) of the Agreement on or before the due date thereof, including any applicable grace period, the interest rate shall automatically adjust to the highest interest rate set forth above, effective prospectively from such due date until the next Adjustment Date. For purposes hereof, Financial Measurement shall mean the Fixed Charge Coverage Ratio (as such term is defined in Exhibit 8.3 to the Agreement).
Base Rate Equipment Portion that portion of the Equipment Loans that is not subject to a LIBOR Option.
Base Rate Portion the Base Rate Term Portion, the Base Rate Equipment Portion and/or the Base Rate Revolving Portion.
BHP Eligible Accounts shall mean Accounts (BHP Account) of Borrowers where the Account Debtor is BHP Billiton Petroleum (Americas), Inc. (BHP) that are Eligible Accounts and with respect to which (i) the Master Contract or other purchase agreement under which such BHP Accounts arise has terms and conditions acceptable to Agent and its counsel and (ii) Borrowers have delivered to Agent evidence that BHP has approved the invoice/shipment order evidencing said Account. In the event that any BHP Account remains unpaid more than 60 days after the original invoice date, the no BHP Account will constitute a BHP Eligible Account.
Borrowing Base as at any date of determination thereof, an amount equal to the lesser of:
(i) the Revolving Credit Maximum Amount minus the sum of (x) unpaid principal balance of the Term Loan plus (y) the unpaid principal balance of the Equipment Loans; or
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(ii) |
an amount equal to: |
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(x) |
the sum of: |
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(a) eighty-five percent (85%) of the net amount of Eligible Accounts (other than Eligible Accounts arising from Short Term Projects and Eligible Accounts that are BHP Accounts) outstanding at such date; plus
(b) the lesser of One Million Five Hundred Thousand Dollars ($1,500,000) or eighty-five percent (85%) of the next amount of Eligible Accounts arising from Short Term Projects outstanding at such date; plus
(c) the lesser of $3,700,000 or eighty-five percent (85%) of the net amount of BHP Eligible Accounts; plus
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(d) the lesser of (1) Eleven Million Dollars ($11,000,000) or (2) fifty-five percent (55%) of the value of Eligible Inventory at such date;
MINUS (subtract from the sum of (a) plus (b) plus (c)),
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(y) |
$1,000,000. |
The limitations set forth in the immediately preceding sentence and each of the advance rates set forth above may be adjusted downward by Agent, as Agent shall deem necessary or appropriate in its reasonable credit judgment. For purposes hereof, (1) the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Agents option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time and (2) the amount of Eligible Inventory shall be determined on a first-in, first-out, lower of cost or market basis in accordance with GAAP.
* * *
EBITDA with respect to any period, the sum of Consolidated Net Income (Loss) before (x) Interest Expense, income taxes, depreciation and amortization for such period (but excluding any extraordinary gains for such period) and (y) with respect to fiscal periods ending on or prior to April 30, 2007, to the extent not included in clause (x), any non-cash expense for such period for capitalized leasehold expense of TDC in an amount not to exceed $1,500,000, all as determined for Borrowers and their Subsidiaries on a Consolidated basis and in accordance with GAAP.
* * *
Equipment Loans - the Loans described in Section 1.4 of the Agreement.
Equipment Loan Commitment - with respect to any Lender, the amount of such Lenders Equipment Loan Commitment pursuant to Section 1.4 of the Loan Agreement, as set forth below such Lenders name on the signature pages to the Seventh Amendment or any Assignment and Acceptance Agreement executed by such Lender, minus all Equipment Loan payments paid to such Lender.
Equipment Loan Notes - the Secured Promissory Notes to be executed by Borrowers from time to time in favor of each applicable Lender to evidence its Equipment Loan Percentage of any Equipment Loans, which shall be in the form of Exhibit 1.4 to the Seventh Amendment, together with any replacement or successor notes therefor.
Equipment Loan Percentage - with respect to each Lender, the percentage equal to the quotient of such Lenders Equipment Loan Commitment divided by the aggregate of all Equipment Loan Commitments.
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* * *
LIBOR Equipment Portion that portion of the Equipment Loans specified in a LIBOR Request which, as of the date of the LIBOR Request specifying such LIBOR Equipment Portion, has met the conditions for basing interest on the LIBOR in Section 3.1 of the Agreement and the Interest Period of which has not terminated.
LIBOR Portion a LIBOR Revolving Portion, a LIBOR Equipment Portion and/or a LIBOR Term Portion.
LIBOR Request - a notice in writing (or by telephone confirmed electronically or by telecopy or other facsimile transmission on the same day as the telephone request) from MFRI, on its own behalf and on behalf of all other Borrowers, to Agent requesting that interest on a Revolving Credit Loan, a portion of the LIBOR Equipment Portion or a portion of the Term Loan be based on LIBOR, specifying: (i) the first day of the Interest Period (which shall be a Business Day); (ii) the length of the Interest Period; (iii) whether the LIBOR Portion is a new Loan, a conversion of a Base Rate Portion, or a continuation of a LIBOR Portion, and (iv) the dollar amount of the LIBOR Revolving Portion, LIBOR Equipment Portion or LIBOR Term Portion, which shall be in an amount not less than One Million Dollars ($1,000,000) or an integral multiple of One Hundred Thousand Dollars ($100,000) in excess thereof.
* * *
Majority Lenders - as of any date, Lenders holding 51% of the Term Loan, Equipment Loan Commitments and Revolving Loan Commitments determined on a combined basis and following the termination of the Revolving Loan Commitments, Lenders holding 51% or more of the outstanding Loans, LC Amounts and LC Obligations not yet reimbursed by Borrowers or funded with a Revolving Credit Loan; provided , that (i) in each case, if there are 2 or more Lenders with outstanding Loans, LC Amounts, unfunded and unreimbursed LC Obligations or Revolving Loan Commitments, at least 2 Lenders shall be required to constitute Majority Lenders; and (ii) prior to termination of the Revolving Loan Commitments, if any Lender breaches its obligation to fund any requested Revolving Credit Loan, for so long as such breach exists, its voting rights hereunder shall be calculated with reference to its outstanding Loans, LC Amounts and unfunded and unreimbursed LC Obligations, rather than its Revolving Loan Commitment.
* * *
New South African Foreign Subsidiary [to come] .
New UAE Foreign Subsidiary Perma-Pipe Middle East FZE.
New VI Foreign Subsidiary MFRI Holdings (B.V.I) Ltd.
Notes the Revolving Notes, the Equipment Notes and the Term Notes.
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* * *
Perma-Pipe Equipment Loan as defined in Section 14 of the Seventh Amendment.
* * *
Revolving Credit Maximum Amount Thirty Million Dollars ($30,000,000); provided that upon three (3) Business Days notice, Borrowers may reduce the Revolving Credit Maximum Amount by amounts not exceeding Two Million Dollars ($2,000,000) within any calendar year. Any such reduction shall be in a minimum amount of One Million Dollars ($1,000,000) and shall be an integral multiple of One Million Dollars ($1,000,000). The Revolving Credit Maximum Amount may not, however, be reduced below Twenty-Three Million Dollars ($23,000,000). Once the Revolving Credit Maximum Amount has been so reduced, it may not be subsequently increased.
* * *
Seventh Amendment that certain Seventh Amendment to Loan and Security Agreement dated as of May __, 2006 by and among Borrowers, Agent and Lenders.
Seventh Amendment Effective Date as defined in Section 20 of the Seventh Amendment.
* * *
Total Credit Facility Thirty Million Dollars ($30,000,000) as reduced from time to time pursuant to the terms of this Agreement.
3. Total Credit Facility . The first paragraph of Section 1 of the Agreement is hereby deleted and the following is inserted in its stead:
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents Lenders agree to make a Total Credit Facility of up to Thirty Million Dollars ($30,000,000) available upon Borrowers request therefor, as follows:
4. Equipment Loans . The following is inserted into the Loan Agreement as Section 4.
1.4 Equipment Loans . Each Lender agrees, severally and not jointly, for so long as no Default or Event of Default exists, to make Equipment Loans from time to time to Borrower as requested by Borrower in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount equal to the product of such Lenders Equipment Loan Percentage multiplied by $1,000,000. The Equipment Loans shall be repayable in accordance with the terms of the Equipment Loan Notes and shall be
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secured by all of the Collateral. No repayment in respect of any Equipment Loan may be reborrowed. Each Lender will make Equipment Loans only if each of the following conditions is satisfied:
(a) Borrowers shall have provided evidence to Agent, in form and substance reasonably satisfactory to Agent, that Borrowers will use the proceeds of each requested Equipment Loan to purchase new production Equipment (i) in a Borrowers business operations, (ii) to be located at a location in compliance with this Agreement, and (iii) subject to no Liens other than those in favor of Agent;
(b) Agent shall have received the invoice from the seller of the Equipment evidencing the cost of the Equipment, the applicable Borrower proposes to purchase with the proceeds of each Equipment Loan, and such invoice discloses that the original principal amount of such requested Equipment Loan does not exceed seventy-five percent (75%) of the cost thereof, exclusive of transportation, installation, taxes, perishable tooling and other soft costs (as determined by Agent in its reasonable credit judgment) pertaining thereto;
(c) Agent shall have received, in form and substance reasonably satisfactory to Agent, evidence of insurance covering the Equipment, the applicable Borrower proposes to purchase with the proceeds of each Equipment Loan;
(d) the requested Equipment Loan is in a minimum original principal amount of $300,000;
(e) the requested Equipment Loan would be the only Equipment Loan funded by Lenders during Borrowers then existing fiscal quarter;
(f) the original principal amount of the requested Equipment Loan, together with the original principal amounts of all other Equipment Loans funded by Lenders during Borrowers then existing fiscal year, does not exceed $1,000,000;
(g) Borrowers shall have delivered or caused to be delivered to Agent and each Lender any and all documents, agreements and instruments deemed reasonably necessary by Agent or any Lender in connection with the making of such Equipment Loan;
(h) Borrowers shall not be permitted to request more than two Equipment Loans within any twelve consecutive month period; and
(i) with respect to the first requested Equipment Loan only, average Availability for the 30-day period immediately prior to the date of the requested Equipment Loan, equals or exceeds $3,000,000.
The proceeds of the Equipment Loans shall be used solely for the purposes specified in this subsection 1.4.
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5. Interest . Section 2.1 of the Loan Agreement is hereby deleted and the following is inserted in its stead:
2.1.1 Rates of Interest . Interest shall accrue on the principal amount of the Base Rate Revolving Portion outstanding at the end of each day at a fluctuating rate per annum equal to the Applicable Margin then in effect plus the Base Rate. Interest shall accrue on the principal amount of the Base Rate Term Portion outstanding at the end of each day at a fluctuating rate per annum equal to the Applicable Margin then in effect plus the Base Rate. Interest shall accrue in the principal amount of the Base Rate Equipment Portion outstanding at the end of each day at a fluctuating rate per annum equal to the Applicable Margin then in effect plus the Base Rate. Said rate of interest shall increase or decrease by an amount equal to any increase or decrease in the Base Rate, effective as of the opening of business on the day that any such change in the Base Rate occurs. If MFRI, on its own behalf and on behalf of all other Borrowers, exercises its LIBOR Option as provided in Section 3.1, (i) interest shall accrue on the principal amount of the LIBOR Revolving Portions outstanding at the end of each day at a rate per annum equal to the Applicable Margin then in effect plus the LIBOR applicable to each LIBOR Portion for the corresponding Interest Period, (ii) interest shall accrue on the principal amount of the LIBOR Term Portions outstanding at the end of each day at a per annum rate equal to the Applicable Margin then in effect plus the LIBOR applicable to each LIBOR Portion for the corresponding Interest Period and (iii) interest shall accrue on the principal amount of the LIBOR Equipment Portions outstanding at the end of each day at a per annum rate equal to the Applicable Margin then in effect plus the LIBOR applicable to each LIBOR Portion for the corresponding Interest Period.
6. Subsections 3.1.1, 3.1.2 and 3.1.3 of the Loan Agreement are hereby deleted and the following are inserted in their stead:
3.1 Manner of Borrowing Revolving Credit Loans and Equipment Loans/LIBOR Option . Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows:
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3.1.1 |
Loan Requests. |
(i) Revolving Credit Loans . A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (a) MFRI, on its own behalf and on behalf of all other Borrowers, may give Agent notice of Borrowers intention to borrow a Revolving Credit Loan, in which notice MFRI shall specify the amount of the proposed borrowing of a Revolving Credit Loan and the proposed borrowing date, which shall be a Business Day, no later than 11:00 a.m. (Chicago, Illinois time) on the proposed borrowing date (or in accordance with subsection 3.1.7, 3.1.8 or 3.1.9, as applicable, in the case of a request for a LIBOR Revolving Portion), provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (b) the becoming due of any amount required to be paid under this Agreement, or the Notes, whether as interest or for any other Obligation,
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shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation.
(ii) Equipment Loans . A request for an Equipment Loan shall be made in the following manner: MFRI, on its behalf and on behalf of each other Lender, may give Agent notice of Borrowers intention to borrow an Equipment Loan, in which MFRI shall specify the amount of the proposed borrowing (consistent with Section 1.4) and the proposed borrowing date, which shall be a Business Day, no later than 11:00 a.m. (Chicago, Illinois time) on the date 2 Business Days prior to such proposed borrowing date (or in accordance with subsection 3.1.7, 3.1.8 or 3.1.9, as applicable, in the case of a request for a LIBOR Equipment Portion); provided , however , that no such request may be made at a time when there exists a Default or an Event of Default. In addition, Borrowers shall also comply with the requirements of Section 1.4 with respect to such Equipment Loan.
3.1.2 Disbursement . Borrowers hereby irrevocably authorize Agent to disburse the proceeds of each Loan requested, or deemed to be requested, pursuant to subsection 3.1.1 as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(a) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from MFRI, on its own behalf and on behalf of all other Borrowers, and in the case of each subsequent borrowing, by wire transfer to Borrowers main disbursement account or such other bank account as Agent in its discretion may agree to from time to time; (ii) the proceeds of each Revolving Credit Loan deemed requested under subsection 3.1.1(i)(b) shall be disbursed by Agent by way of direct payment of the relevant interest or other Obligation; and (iii) the proceeds of each Equipment Loan required under subsection 3.1.1(ii) shall be disbursed by Agent in lawful month of the United States of America in immediately available funds as directed by MFRI in writing with respect to such Equipment Loans. If at any time any Loan is funded by Agent or Lenders in excess of the amount requested or deemed requested by MFRI, on its own behalf and on behalf of all other Borrowers, Borrowers agree to repay the excess to Agent immediately upon the earlier to occur of (a) any Borrowers discovery of the error and (b) notice thereof to Borrowers from Agent or any Lender.
3.1.3 Payment by Lenders . Agent shall give to each Lender prompt written notice by facsimile, telex or cable of the receipt by Agent from MFRI of any request for an Equipment Loan or a Revolving Credit Loan. Each such notice shall specify the requested date and amount of such Equipment Loan or Revolving Credit Loan, whether such Equipment Loan or Revolving Credit Loan shall be subject to the LIBOR Option, and the amount of each Lenders advance thereunder (in accordance with its applicable Equipment Loan Percentage or Revolving Loan Percentage, as applicable. Each Lender shall, not later than
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12:00 p.m. (Chicago time) on such requested date, wire to a bank designated by Agent the amount of that Lenders Revolving Loan Percentage or Equipment Loan Percentage of the requested Revolving Credit Loan or Equipment Loan, as applicable. The failure of any Lender to make the Revolving Credit Loans or Equipment Loans to be made by it shall not release any other Lender of its obligations hereunder to make its Revolving Credit Loan or Equipment Loan, as applicable. Neither Agent nor any other Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Loan or Equipment Loan to be made by such other Lender. The foregoing notwithstanding, Agent, in its sole discretion, may from its own funds make a Revolving Credit Loan on behalf of any Lender. In such event, the Lender on behalf of whom Agent made the Revolving Credit Loan shall reimburse Agent for the amount of such Revolving Credit Loan made on its behalf, on a weekly (or more frequent, as determined by Agent in its sole discretion) basis. On each such settlement date, Agent will pay to each Lender the net amount owing to such Lender in connection with such settlement, including without limitation amounts relating to Loans, fees, interest and other amounts payable hereunder. The entire amount of interest attributable to such Revolving Credit Loan for the period from the date on which such Revolving Credit Loan was made by Agent on such Lenders behalf until Agent is reimbursed by such Lender, shall be paid to Agent for its own account.
7. LIBOR Portions . Subsection 3.1.7 of the Loan Agreement is hereby deleted from the Loan Agreement and the following is inserted in its stead:
3.1.7 LIBOR Portions . Provided that as of both the date of the LIBOR Request and the first day of the Interest Period, no Default or Event of Default exists, in the event Borrowers desire to obtain a LIBOR Portion, MFRI, on its own behalf and on behalf of all other Borrowers, shall give Agent a LIBOR Request no later than 11:00 a.m. (Chicago, Illinois time) on the third Business Day prior to the requested borrowing date. Each LIBOR Request shall be irrevocable and binding on all Borrowers. In no event shall Borrowers be permitted to have outstanding at any one time LIBOR Portions with more than five (5) different Interest Periods. LIBOR Portions shall be included within the definition of LIBOR Revolving Credit Portion, LIBOR Equipment Portion or LIBOR Term Portion as determined by the definitions of such terms.
8. Equipment Loan Principal . The following is inserted into the Loan Agreement as subsection 3.2.1(iii):
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3.2.1 |
Principal . |
* * *
(iii) Equipment Loans . Principal payable on account of the Equipment Loans shall be payable by Borrowers in accordance with the terms of the Equipment Loan Notes.
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9. |
Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. |
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3.3 |
Mandatory and Optional Prepayments. |
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3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral . Except as provided in subsections 6.4.2 and 8.2.9, if any Borrower or any of its Subsidiaries sells any of the Collateral or if any of the Collateral is lost or destroyed or taken by condemnation, such Borrowers shall, unless otherwise agreed by Majority Lenders, pay to Agent for the ratable benefit of Lenders as and when received by such Borrowers or such Subsidiary and as a mandatory prepayment of the Loans, as herein provided, a sum equal to the proceeds (including insurance payments but net of costs and taxes incurred in connection with such sale or event) received by such Borrower or such Subsidiary from such sale, loss, destruction or condemnation. To the extent that the Collateral sold, lost, destroyed or condemned consists of Equipment (other than Equipment that was financed with the proceeds of Equipment Loans), real Property, or other Property other than Accounts or Inventory, the applicable prepayment shall be applied first to the installments of principal due under the Term Notes ratably, to be applied to future installment payments in inverse order of maturity/on a ratable basis until paid in full, second to the installments of principal due under the Equipment Loan Notes ratably, to be applied to future installment payments in inverse order of maturity, and third to repay outstanding principal of Revolving Credit Loans and to reduce the Revolving Loan Commitments on a ratable basis. To the extent that Collateral sold, lost, destroyed or condemned consists of Equipment that was financed with the proceeds of Equipment Loans, the applicable prepayment shall be applied first to the installments of principal due under the applicable Equipment Loan Notes, ratably, to be applied to future installment payments in inverse order of maturity until paid in full, second to installments of principal due under the other Equipment Loan Notes, ratably, to be applied to future installment payments in inverse order of maturity, third to installments of principal due under the Term Notes, ratably, to be applied to future installment payments in inverse order of maturity, and fourth to repay outstanding principal of Revolving Credit Loans and to reduce the Revolving Loan Commitments on a pro rata basis. To the extent that the Collateral sold, lost, destroyed or condemned consists of Accounts or Inventory, the applicable prepayment shall be applied to reduce the outstanding principal balance of the Revolving Credit Loans, but shall not permanently reduce the Revolving Loan Commitments. Notwithstanding the foregoing, if the proceeds of insurance (net of costs and taxes incurred) with respect to any loss or destruction of Equipment, Inventory or real Property (i) are less than $500,000, unless an Event of Default is then in existence, Agent shall remit such proceeds to Borrowers for use in replacing or repairing the damaged Collateral or (ii) are equal to or greater than $500,000 and Borrowers have requested that Agent agree to permit Borrowers or the applicable Subsidiary to repair or replace the damaged Collateral, such amounts shall be provisionally applied to reduce the outstanding principal balance of the Revolving Credit Loans until the earlier of Agents decision with respect thereto or the expiration of 90 days from such request. If Agent agrees, in its
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reasonable judgment, to permit such repair or replacement under such clause (ii), such amount shall, unless an Event of Default is in existence, be remitted to Borrowers for use in replacing or repairing the damaged Collateral; if Agent declines to permit such repair or replacement or does not respond to Borrowers within such 90 day period, such amount shall be applied to the Loans in the manner specified in the second or third sentence of this subsection 3.3.1, as applicable, until payment thereof in full.
9. Optional Prepayments . Subsection 3.3.5 of the Loan Agreement is hereby deleted from the Loan Agreement and the following is inserted in its stead:
3.3.5 Optional Prepayments . Borrowers may, at their option from time to time upon not less than 3 days prior written notice to Agent, prepay installments of the Equipment Notes or the Term Notes; provided that the amount of any such prepayment is at least $500,000 and in integral multiples of $100,000 above $500,000, that such prepayments are made ratably with respect to all Equipment Notes and Term Notes. Each such prepayment shall be applied to the installments of principal due under the Equipment Notes and/or Term Notes in the inverse order of maturity. Except for charges under Section 2.6 applicable to the termination of the Total Credit Facility, such prepayments shall be without premium or penalty.
10. Total Indebtedness . Subsection 8.2.3 of the Loan Agreement is hereby deleted and the following is inserted in its stead:
8.2.3 Total Indebtedness . Create, incur, assume, or suffer to exist, or permit any Subsidiary of any Borrower to create, incur or suffer to exist, any Indebtedness, except:
(i) Obligations owing to Agent or any Lender under this Agreement or any of the other Loan Documents;
(ii) Indebtedness, including without limitation Subordinated Debt, existing on the date of this Agreement and listed on Exhibit 8.2.3;
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Permitted Purchase Money Indebtedness; |
(iv) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business;
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Guaranties of any Indebtedness permitted hereunder; |
(vi) Indebtedness in respect of intercompany advances permitted by Section 8.2.2(iv);
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obligations to pay Rentals permitted by subsection 8.2.18; |
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Indebtedness outstanding pursuant to the Term Loan Documents; |
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IRB Indebtedness; |
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Existing Mortgage Indebtedness; |
(xi) Money Borrowed (either as an operating loan or a real estate mortgage loan) in a principal amount not to exceed Two Million Four Hundred Fifty Thousand Dollars ($2,450,000) incurred by Midwescos Danish Subsidiaries and guaranteed by Midwesco and/or MFRI;
(xii) Money Borrowed in a principal amount not to exceed Three Million Dollars ($3,000,000) incurred by New UAE Foreign Subsidiary and guaranteed by MFRI and Perma-Pipe so long as the terms and conditions of such Money Borrowed, the guaranty thereof and related documentation are acceptable to Agent as evidenced by Agents written approval thereof;
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(xiii) |
Indebtedness incurred in connection with the Lebanon Refinancing; |
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(xiv) |
Indebtedness incurred pursuant to the Perma-Pipe Equipment Loan. |
(xv) to the extent not included above, trade payables, accruals and accounts payable in the ordinary course of business (in each case to the extent not overdue) not for Money Borrowed; and
(xvi) Indebtedness not included in paragraphs (i) through (xiv) above which does not exceed at any time, in the aggregate, the sum of One Million Dollars ($1,000,000).
11. Liens . Subsection 8.2.5 of the Loan Agreement is hereby deleted and the following is inserted in its stead:
8.2.5 Limitation on Liens . Create or suffer to exist, or permit any Subsidiary of any Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except:
(i) Liens at any time granted in favor of Agent for the benefit of Lenders;
(ii) Liens for taxes, assessments or governmental charges (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 7.1.14 hereto, but only if in Agents judgment such Lien would not reasonably be expected to adversely effect Agents rights or the priority of Agents lien on any Collateral;
(iii) Liens arising in the ordinary course of the business of any Borrower or any of its Subsidiaries by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of any Borrower or any of its Subsidiaries or materially impair the use thereof in the operation of the business of any Borrower or any of its Subsidiaries;
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(iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness;
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such other Liens as appear on Exhibit 8.2.5 hereto; |
(vi) Liens incurred or deposits made in the ordinary course of business in connection with (1) workers compensation, social security, unemployment insurance and other like laws or (2) sales contracts, leases, statutory obligations, work in progress advances and other similar obligations not incurred in connection with the borrowing of money or the payment of the deferred purchase price of property;
(vii) reservations, covenants, zoning and other land use regulations, title exceptions or encumbrances granted in the ordinary course of business, affecting real Property owned or leased by any Borrower or one of its Subsidiaries; provided that such exceptions do not in the aggregate materially interfere with the use of such Property in the ordinary course of such Borrowers or such Subsidiarys business;
(viii) judgment Liens that do not give rise to an Event of Default under subsection 10.1.15;
(ix) Liens securing Indebtedness outstanding under the Term Loan Documents;
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Liens securing the IRB Indebtedness; |
(xi) Liens on a Borrowers or Guarantors real Property, improvements, and Fixtures securing the Existing Mortgage Indebtedness;
(xii) Liens on the real Property of Midwescos Danish Subsidiaries securing Money Borrowed of such Danish Subsidiaries;
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Liens securing the Lebanon Refinancing; |
(xiv) Liens incurred in connection with the Computer Sale and Leaseback;
(xv) Liens incurred in connection with the Perma-Pipe Equipment Loan; and
(xvi) such other Liens as Majority Lenders may hereafter approve in writing.
12. Capital Expenditures . As of the Seventh Amendment Effective Date, subsection 8.2.8 (Capital Expenditures) shall be deleted from the Agreement and the following is inserted in its stead:
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8.2.8 |
Intentionally Omitted . |
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13. Investments . Subsection 8.2.12 of the Loan Agreement is hereby deleted and the following is inserted in its stead:
8.2.12 Restricted Investment . Make or have, or permit any Subsidiary of any Borrower to make or have, any Restricted Investment, except that as provided in (a) and (b) below:
(a) after the Seventh Amendment Effective Date, Borrowers may invest up to Four Million Seven Hundred Fifty Thousand Dollars ($4,750,000) in New VI Foreign Subsidiary and/or New UAE Foreign Subsidiary so long as (x) immediately after the applicable Borrower has made such Investment, no Event of Default has occurred and is continuing, (y) prior to or simultaneously with the making of such Investment, MFRI shall have received at least Nine Hundred Thousand Dollars ($900,000) in proceeds from Money Borrowed and/or the Perma-Pipe Equipment Loan, (z) the terms and conditions of such Money Borrowed referred to in clause (y) and related documentation, including any guaranty thereof by other Borrower(s), are acceptable to Agent and (aa) Borrowers shall have pledged to Agent for the benefit of Lenders sixty-six and two-thirds percent (66-2/3%) of the outstanding capital stock of New VI Foreign Subsidiary pursuant to a pledge agreement or amendment in form and substance acceptable to Agent. So long as Borrowers shall have complied with the provisions of the preceding sentence, Agent and Lenders shall be deemed to have consented to the creation of New UAE Foreign Subsidiary and New VI Foreign Subsidiary and Borrowers shall be deemed to have complied with subsection 8.1.7 of the Loan Agreement with respect to the New UAE Foreign Subsidiary and New VI Foreign Subsidiary. In addition to the Four Million Seven Hundred Fifty Thousand Dollars ($4,750,000) and additional investment in New VI Foreign Subsidiary and/or New UAE Foreign Subsidiary permitted above, Borrowers may transfer to New UAE Foreign Subsidiary the two pieces of Equipment described as Krauss Maffei Spray Foam System and Applied Machine Quench Conveyor. Upon the transfer of such Equipment to New UAE Foreign Subsidiary, Borrowers shall make a mandatory prepayment of the Team Loan in the amount of $338,000, which prepayment shall be applied against the Team Loan in the manner set forth in Subsection 3.3.1.
(b) After the Seventh Amendment Effective Date, Borrowers may invest up to Two Hundred Thousand Dollars ($200,000) in New South African Foreign Subsidiary so long as (x) immediately after the applicable Borrower has made such Investment, no Event of Default has occurred and is continuing and (y) Borrowers shall have pledged to Agent for the benefit of Lenders sixty-six and two-thirds percent (66-2/3%) of the outstanding capital stock of New South African Foreign Subsidiary pursuant to a pledge agreement or amendment in form and substance acceptable to Agent. So long as Borrowers shall have complied with the provisions of the preceding sentence, Agent and Lenders shall be deemed to have consented to the creation of New South African Foreign Subsidiary and Borrowers shall be deemed to have complied with subsection 8.1.7 of the Loan Agreement with respect to the New South African Foreign Subsidiary.
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14. Amendment Fee . In order to induce Agent and Lenders to enter into this Seventh Amendment, Borrowers agree to pay to Agent, for the ratable benefit of Lenders, an amendment fee in the amount of $50,000. Said amendment fee shall be payable and deemed fully earned and non-refundable on the Seventh Amendment Effective Date.
15. Consent to Perma-Pipe Equipment Loan . In reliance upon and subject to the accuracy of the representations set forth in this Seventh Amendment, upon the Seventh Amendment Effective Date, Majority Lenders hereby consent to (x) Perma-Pipe incurring Money Borrowed in the original principal amount of $900,000 owing to General Electric Capital Corporation and (y) the pledge by Perma-Pipe of the Equipment specified in Schedule 8.2.9 to the Seventh Amendment (as such schedule may be modified or amended from time to time by Borrowers with Agents written consent) to General Electric Capital Corporation to secure the Money Borrowed referred to in clause (x) above (such transaction, the Perma-Pipe Equipment Loan); provided that (i) the aggregate net cash proceeds to Borrowers received in respect of the Perma-Pipe Equipment Loan shall be at least equal to the orderly liquidation value of such Equipment as determined by Agent, (ii) Borrowers shall pay the cash proceeds from such Perma-Pipe Equipment Loan to Agent in an amount equal to or greater than the net orderly liquidation value of the Equipment subject thereto, with such proceeds to be applied for prepayment of the Term Loan as provided in subsection 3.3.1 of the Loan Agreement, (iii) the maximum annual amount of principal and interest payable in connection with the Perma-Pipe Equipment Loan (including, without limitation, obligations to reimburse General Electric Capital Corporations expenses) in respect of the Perma-Pipe Equipment Loan shall not exceed an amount acceptable to Agent, (iv) the documentation in respect of the Perma-Pipe Equipment Loan shall be reasonably satisfactory in all material respects to Agent and (v) if the Perma-Pipe Equipment Loan is not consummated within 120 days after the date hereof, then this Section 15 of this Seventh Amendment shall be null and void ab initio.
16. Waivers . Upon the Seventh Amendment Effective Date, Agent and Lenders shall be deemed to have waived any Event of Default resulting from the failure of Borrowers to comply with the provisions of (i) subsection 8.2.8 (Capital Expenditures) for the fiscal year ending January 31, 2006 and (ii) Section 8.3 regarding (x) Minimum EBITDA for fiscal periods ending on or prior to January 31, 2006 and (y) Minimum Cash Flow for fiscal periods ending on or prior to January 31, 2006. The waiver contained in this Section 17 of this Seventh Amendment does not apply to any Section of the Loan Agreement other than subsection 8.2.8 (Capital Expenditures) and Section 8.3 (Minimum EBITDA and Minimum Cash Flow) or to any other fiscal period other than the fiscal periods ending on or prior to January 31, 2006.
17. Financial Covenants . Upon the Seventh Amendment Effective Date, Exhibit 8.3 to the Loan Agreement shall be hereby deleted and Exhibit 8.3 attached to this Seventh Amendment and incorporated herein shall be inserted in its stead.
18. Equipment Loan Commitments . Clause (y) of the last sentence of subsection 11.9.1 and clause (i)(l) of the first sentence of Section 11.10 shall be deemed to include a reference to Equipment Loan Commitments.
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19. Seventh Amendment Effective Date . This Seventh Amendment shall become effective upon satisfaction of each of the following conditions:
(i) Borrowers, Agent and Lenders shall have executed and delivered to each other this Seventh Amendment and the amended and restated Revolving Note in the form attached hereto as Exhibit 1.1 and the Equipment Loan Note in the form attached hereto as Exhibit 1.4 ;
(ii) Each Borrower shall have delivered to Agent a properly executed Certificate of Secretary of such Borrower together with a true and correct copy of the resolutions of such Borrowers Board of Directors authorizing or ratifying the execution, delivery and performance of this Seventh Amendment, the amended and restated Revolving Note and the Equipment Note, the names of the officers authorized to sign this Seventh Amendment, the amended and restated Revolving Note and the Equipment Note and a sample of the true signature of each such officer;
(iii) Borrowers shall have paid to Agent for the ratable benefit of Lenders the amendment fee referred to in Section 15 of this Seventh Amendment;
(iv) No Default or Event of Default shall have occurred and be continuing; and
(v) Agent shall have received by 8/31/06 an updated appraisal of Borrowers Inventory in form and substance and from an appraiser acceptable to Agent.
The date on which each of the foregoing conditions precedent is satisfied shall be referred to as the Seventh Amendment Effective Date. Promptly after the Seventh Amendment Effective Date, Bank of America, N.A. shall return the Revolving Note previously delivered to it pursuant to the Loan Agreement marked Amended and Superceded.
20. Signature Block . Upon the Seventh Amendment Effective Date, the signature block of the Loan Agreement shall be amended to read as the signature block to this Seventh Amendment to reflect the increased Revolving Loan Commitment of Bank of America, N.A. to $30,000,000 and the Equipment Loan Commitment of Bank of America, N.A. of $1,000,000.
21. Execution in Counterparts . This Seventh Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
22. Continuing Effect . Except as otherwise specifically set out herein, the provisions of the Loan Agreement shall remain in full force and effect.
(Signature Page Follows)
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(Signature Page to Seventh Amendment to Loan Agreement)
IN WITNESS WHEREOF, this Seventh Amendment has been duly executed as of the day and year specified at the beginning hereof.
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BANK OF AMERICA, N.A., (Agent and a Lender) |
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Revolving Loan Commitment: $30,000,000 |
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Equipment Loan Commitment: $1,000,000 |
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MFRI, INC. (a Borrower) |
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By: |
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Title: |
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MIDWESCO FILTER RESOURCES, INC.
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PERMA-PIPE, INC. (a Borrower) |
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THERMAL CARE, INC. (a Borrower) |
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TDC FILTER MANUFACTURING, INC.
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EXHIBIT 1.1
FORM OF REVOLVING CREDIT NOTE
SECURED PROMISSORY NOTE
(AMENDED AND RESTATED)
$30,000,000 |
Amended and Restated as of
May 10, 2006
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FOR VALUE RECEIVED , the undersigned (individually a Borrower and collectively Borrowers ) promises to pay to the order of Bank of America, N.A. ( Lender ), at the principal office of Bank of America, N.A., as agent for said Lender, or at such other place in the United States of America as the holder of this Note may designate from time to time in writing, in lawful money of the United States of America and in immediate available funds, the principal amount of Thirty Million Dollars ($30,000,000) or such lesser principal amount as may be outstanding pursuant to the Loan Agreement (as hereinafter defined) with respect to the Revolving Credit Loan, together with interest on the unpaid principal amount of this Note outstanding from time to time.
This Revolving Note (the Note ) is one of the Revolving Notes referred to in, and is issued pursuant to, that certain Loan and Security Agreement among Borrowers, the lender signatures thereto (including Lender) and Bank of America, N.A. (B of A) as agent for such lenders (B of A, in such capacity, Agent) dated as of July 11, 2002 (hereinafter, as amended from time to time, the Loan Agreement ), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the other Loan Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement.
The rate of interest in effect hereunder shall be calculated with reference to the Base Rate or LIBOR, as applicable, as more specifically provided in the Loan Agreement. The interest due shall be computed in the manner provided in the Loan Agreement.
Except as otherwise expressly provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity there of shall be extended to the next succeeding Business Day, and with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Notwithstanding the foregoing, if any portion of the Revolving Credit Loans evidenced by this promissory note is subject to a LIBOR Option, and an extension of the maturity of any payment hereon would cause the maturity thereof to occur during the next calendar month, then such payment shall mature on the next preceding Business Day.
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Exhibit 1.1 Page 1 |
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This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence and continuation of any one or more of the Events of Default specified in the Loan Agreement which have not been cured by Borrowers or waived by Lenders or Majority Lenders (as required by the Loan Agreement) may declare all Obligations evidenced hereby to be immediately due and payable (except with respect to any Event of Default set forth in subsection 10.1.8 of the Loan Agreement, in which case all Obligations evidenced hereby shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of Majority Lenders or Agent.
Time is of the essence of this Note. Each Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights.
Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Agent or Lenders in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Agent or Lenders of any right or remedy preclude any other right or remedy. Agent and/or Lenders, at its or their option, may enforce its or their rights against any collateral securing this Note without enforcing its or their rights against Borrowers, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrowers. Each Borrower agrees that, without releasing or impairing such Borrowers liability hereunder, Agent and/or Lenders may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note.
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Exhibit 1.1 Page 2 |
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The validity, interpretation and enforcement of this promissory note shall be governed by the internal laws of the state of Illinois without giving effect to the conflict of laws principles thereof.
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BORROWERS: |
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MFRI, INC. |
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MIDWESCO FILTER RESOURCES, INC. |
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PERMA-PIPE, INC. |
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THERMAL CARE, INC. |
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TDC FILTER MANUFACTURING, INC. |
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Exhibit 1.1 Page 3 |
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EXHIBIT 1.4
FORM OF EQUIPMENT NOTE
[Aggregate of $1,000,000] |
As of __________, 200_ Chicago, Illinois |
FOR VALUE RECEIVED, the undersigned (hereinafter Borrowers), hereby promises to pay to the order of Bank of America, N.A., a National Banking Corporation (hereinafter Lender), or its registered assigns at the office of Bank of America, N.A., as agent for such Lender, or at such other place in the United States of America as the holder of this Note may designate from time to time in writing, in lawful money of the United States, in immediately available funds, at the time of payment, the principal sum of _____________________ Dollars ($________________) or such lesser principal amount of as may be outstanding pursuant to the Loan Agreement (as hereinafter defined) with respect to Equipment Loans, together with interest from and after the date hereof on the unpaid principal balance outstanding from time to time.
This Secured Promissory Note (the Note) is one of the Equipment Notes referred to in, and is issued pursuant to, that certain Loan and Security Agreement dated as of July 11, 2002, by and among Borrowers, the lender signatories thereto and Bank of America, N.A. (B of A) as Agent for said lenders (B of A in such capacity Agent) (hereinafter, as amended from time to time, the Loan Agreement), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement.
For so long as no Event of Default shall have occurred and be continuing the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth:
(a) Interest on the unpaid principal balance outstanding from time to time shall be paid at such interest rates and at such times as are specified in the Loan Agreement; and
(b) Principal shall be due and payable monthly commencing on the first day of the month in which the first Equipment Loan is made and continuing on the first day of each month thereafter, in installments equal to one sixtieth (1/60) of the aggregate amount of all Equipment Loans made by Lender to Borrowers on or after May __, 2006; and
(c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on the last day of the Term.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 4 thereof.
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Exhibit 1.4 Page 1 |
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This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrowers may also prepay this Note in the manner provided in subsection 3.3.5 or Section 4 of the Loan Agreement.
Upon the occurrence and during the continuation of an Event of Default, this Note shall or may, as provided in the Loan Agreement, become or be declared immediately due and payable.
The right to receive principal of, and stated interest on, this Note may only be transferred in accordance with the provisions of the Loan Agreement.
Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Borrower.
(Signature Page Follows)
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Exhibit 1.4 Page 2 |
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(Signature Page to Equipment Note)
This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Illinois.
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BANK OF AMERICA, N.A., (Agent and a Lender) |
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MFRI, INC. (a Borrower) |
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MIDWESCO FILTER RESOURCES, INC.
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PERMA-PIPE, INC. (a Borrower) |
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THERMAL CARE, INC. (a Borrower) |
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TDC FILTER MANUFACTURING, INC.
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Exhibit 1.4 Page 3 |
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Schedule 8.2.9
PERMA-PIPE EQUIPMENT LOAN
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Schedule 8.2.9 Page 1 |
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EXHIBIT 8.3
FINANCIAL COVENANTS
DEFINITIONS
Cash Flow with respect to any fiscal period, EBITDA for such period minus (i) Capital Expenditures (excluding, however, Capital Expenditures financed by third party financing) made within such period, (ii) income taxes paid in cash in such period, (iii) Interest Expense paid in cash within such period and (iv) principal payments of Money Borrowed (other than Revolving Credit Loans) made within such period.
Consolidated Net Income (Loss) with respect to any fiscal period, the net income (or loss) of MFRI determined in accordance with GAAP on a Consolidated basis; provided, however, Consolidated Net Income shall not include: (a) the income (or loss) of any Person (other than a Subsidiary of any Borrower) in which a Borrower or any of its wholly-owned subsidiaries has an ownership interest unless received in a cash distribution or requiring the payment of cash; (b) the income (or loss) of any Person accrued prior to the date it became a Subsidiary of a Borrower or is merged into or consolidated with a Borrower; (c) all amounts included in determining net income (or loss) in respect of the write-up of assets on or after the Closing Date, including the subsequent amortization or expensing of the written-up portion of the assets; (d) extraordinary gains as defined under GAAP; and (e) gains from asset dispositions (other than sales of inventory); and any increase or decrease in expenses resulting from the implementation of FASB 146.
EBITDA with respect to any fiscal period, the sum of Consolidated Net Income (Loss) before Interest Expense, income taxes, depreciation and amortization for such period (but excluding any extraordinary gains for such period), all as determined for Borrowers and their Subsidiaries on a Consolidated basis and in accordance with GAAP.
Fixed Charge Coverage Ratio with respect to any fiscal period, the ratio of (i) EBITDA for such period minus Capital Expenditures (excluding, however, Capital Expenditures financed by third party financing) made within such period minus income taxes paid in cash in such period to (ii) the sum of Interest Expense paid in cash within such period plus principal payments of Money Borrowed (other than Revolving Credit Loans) made within such period.
Interest Coverage Ratio with respect to any fiscal period, the ratio of (i) EBITDA for such period to (ii) Interest Expense paid in cash in such period, all as defined for MFRI and its subsidiaries on a Consolidated basis in accordance with GAAP.
Interest Expense with respect to any fiscal period, interest expense paid or accrued for such period, including without limitation the interest portion of Capitalized Lease Obligations, plus the Letter of Credit and LC Guaranty fees owing for such period, all as determined for MFRI and its Subsidiaries on a Consolidated basis and in accordance with GAAP.
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Schedule 8.3 Page 1 |
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The foregoing notwithstanding, there shall be excluded from the calculations of Cash Flow, Consolidated Net Income (Loss), EBITDA, Fixed Charges, Interest Coverage Ratio and Interest Expense, all amounts that would otherwise be included in such items that are generated or incurred by, or result from the operations of, Midwesco Filter Resources Denmark A/S, Nordic Air Filtration A/S and Boe-Therm A/S, Borrowers Danish Subsidiaries.
COVENANTS
Minimum EBITDA . Borrowers shall not permit EBITDA for any period set forth below to be less than the amount set forth below opposite such period:
Period |
Amount
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3 Months Ended 4/30/06 |
$900,000 |
6 Months Ended 7/31/06 |
$4,500,000 |
9 Months Ended 10/31/06 |
$7,300,000 |
12 Months Ended 1/31/07 and the last day of each fiscal quarter thereafter |
$7,850,000 |
Minimum Fixed Charge Coverage Ratio . Borrowers shall not permit Fixed Charge Coverage Ratio for any period set forth below to be less than the amount set forth below opposite such period:
Period |
Amount
|
3 Months Ended 4/30/06 |
1.10 to 1 |
6 Months Ended 7/31/06 |
1.10 to 1 |
9 Months Ended 10/31/06 |
1.10 to 1 |
12 Months ended 1/31/75 and the last day of each fiscal quarter thereafter |
1.10 to 1 |
The foregoing notwithstanding, the financial covenants listed above and the Financial Measurement used in the definition of Applicable Margin shall be computed excluding the financial results and positions of Perma-Pipe Middle East FZE, MFRI Holdings (B.V.I.) Ltd. and MFRIs South African Subsidiary. That is the financial results or financial positions of such Subsidiaries shall be excluded from the Consolidated financial statements of MFRI for such purposes.
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Exhibit 8.3 Page 2 |
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, Registration Statement No. 333-121526 on Form S-8, and Registration Statement No. 333-130517 on Form S-8, of MFRI, Inc. of our report dated May 14, 2004, appearing in this Annual Report on Form 10-K of MFRI, Inc. and subsidiaries for the year ended January 31, 2006.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 10, 2006
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
We have issued our report dated May 10, 2006, accompanying the consolidated balance sheets of MFRI, Inc. (a Delaware corporation) and Subsidiaries as of January 31, 2006 and 2005, and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended, included in their Annual Report on Form 10-K filed with the Securities and Exchange Commission. We hereby 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, Registration Statement No. 333-08767 on Form S-8, Registration Statement No. 333-121526 on Form S-8, and Registration Statement No. 333-130517 on Form S-8, of MFRI, Inc. and Subsidiaries.
/S/ GRANT THORNTON LLP
Chicago, Illinois
May 10, 2006
Exhibit 10.1
MFRI, INC.
FORM OF INDEMNIFICATION AGREEMENT
THIS AGREEMENT made at Niles, Illinois as of __________________, by and between MFRI, INC., a Delaware corporation (the Company), and the undersigned (the Indemnified Party).
WITNESSETH :
WHEREAS , the Company desires and has requested the Indemnified Party to serve or continue to serve as a director or officer of the Company or both; and
WHEREAS , the Board of Directors of the Company, has determined that it is in the best interests of the Company to provide for indemnification of the Indemnified Party to induce the Indemnified Party to become a director or officer of the Company or to continue to serve as a director or officer of the Company or both.
NOW, THEREFORE , in consideration of the mutual agreements and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned parties do hereby agree as follows:
1. Indemnification . The Company shall indemnify and hold harmless the Indemnified Party from and against any and all costs, expenses and liabilities of any nature or kind, whether realized or contingent, including but not limited to, attorneys fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnified Party (Expenses), which arise out of or in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (collectively an Action) to which the Indemnification Party is, was or is threatened to be made a party by reason of the fact that the Indemnified Party is or was a director, officer, employee or agent of the Company, or another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, at the request of the Company, to the extent of the highest and most advantageous to the Indemnified Party, of one or any combination of the following:
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(a) |
the benefits provided under this Agreement; |
(b) the benefits provided by the Companys Certificate of Incorporation in effect on the date hereof;
(c) the benefits provided by the Certificate, the Companys Amended and Restated By-Laws or their equivalent in effect at the time Expenses are incurred by the Indemnified Party;
(d) the benefits allowable under the Delaware Business Corporation Law and Delaware decisional law in effect at the date hereof;
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(e) the benefits allowable under the laws of the jurisdiction under which the Company exists at the time Expenses are incurred by the Indemnified Party;
(f) the benefits available under any liability insurance obtained by the Company; and
(g) such other benefits as are or may be otherwise available to the Indemnified Party.
Combination of two or more of the benefits provided by (a) through (g) shall be available to the extent that the Applicable Document (as defined below) does not require that the benefits provided therein be exclusive of other benefits. The document or law providing for the benefits listed in items (a) through (g) above is called the Applicable Document in this Agreement.
2. Advances . The Company shall advance the reasonable costs and expenses, including reasonable attorneys fees, arising from the investigation of any claim, preparation for the defense or defense or settlement of an Action.
3. Defense . The Company shall be entitled to participate in the defense of any action and to assume the defense thereof, with counsel who shall be reasonably satisfactory to the Indemnified Party provided, however, that the Indemnified Party shall be entitled to separate counsel selected by him if he shall reasonably believe that (i) there exist conflicting interests between himself and the Company or other parties (the defense of whom the Company shall have assumed) or (ii) there is any substantial likelihood that the Company will be financially or legally unable to satisfy its obligations as expressed herein. After notice from the Company to the Indemnified Party of its election to assume the defense of such action pursuant to the preceding sentence, the Company shall not be liable to the Indemnified Party without the consent of the Company in connection with the defense of the Action.
4. Time of Payment . At the Indemnified Partys request, upon written notice to the Company, the Company shall pay the Expenses as and when incurred by the Indemnified Party within thirty (30) days of its receipt of such request, together with reasonable documentation (consistent, in the case of attorneys fees, with Company practice in payment of legal fees) evidencing the amount and nature of such Expenses, subject to its also having received such a notice and Undertaking.
5. Non-Exclusivity . The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnified Party may have under any provision of law, the Companys Certificate of Incorporation or Bylaws, the vote of the Companys stockholders or disinterested directors, other agreements, or otherwise, whether as to actions in his official capacity or actions in another capacity while occupying his position as a director, officer, employee, or agent. The Indemnified Partys rights hereunder shall continue after the Indemnified Party has ceased acting as a director, officer, employee, or agent and shall inure to the benefit of the heirs, successors and assigns of the Indemnified Party.
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6. Insurance . The Company agrees that the provisions hereof shall remain in effect regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company. Notwithstanding any other provision of this Agreement to the contrary, the Company shall not be liable to the Indemnified Party for any amounts actually paid on behalf of the Indemnified Party pursuant to any insurance policy maintained by the Company or any affiliate of the Company.
7. Presumption . If any payment, advance or indemnification of the Indemnified Party under this Agreement or otherwise shall require that he acted in good faith, in a manner he reasonably believed to be for or not opposed to the best interests of the Company or without reasonable cause to believe his conduct was unlawful, then it shall be presumed that he so acted unless proven otherwise by clear and convincing evidence.
8. Cooperation in Defense . The Indemnified Party and the Company shall cooperate to the extent reasonably possible with each other and with the Companys insurers in connection with the defense of any Action.
9. Enforcement . In the event that any dispute or controversy shall arise under this Agreement between the Indemnified Party and the Company with respect to whether the Indemnified Party is entitled to indemnification in connection with any Proceeding or with respect to the amount of Expenses or Monetary Losses incurred, then with respect to each such dispute or controversy the Indemnified Party may seek to enforce the Agreement through legal action. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorneys fees) incurred in connection with such legal action; provided that the Indemnified Party shall not be obligated to reimburse the Company unless the court which resolves the dispute determines that the Indemnified Party acted in bad faith in bringing such action.
10. Binding Effect . This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns.
11. Waiver . Failure to insist upon strict compliance with any of the terms or provisions hereof shall not be deemed a waiver of such term or provision, nor shall any waiver or relinquishment of any right or remedy hereunder at any one or more times be deemed a waiver of such right or remedy at any other time or times. Such waiver of any term or condition of this Agreement shall not affect any other term or condition of this Agreement which shall remain in full force and effect.
12. Severability . If any provision hereof shall be adjudicated invalid or unenforceable by a court of competent jurisdiction, such adjudication shall not affect the validity or enforceability of any other provision hereof, and such invalid or unenforceable provision shall be severed from this Agreement.
13. Entire Agreement . This Agreement (together with the applicable provisions of the Companys Certificate of Incorporation and Bylaws) constitutes the
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~CHGO1:30674982.v2 |
entire agreement between the parties with respect to the subject matter hereof, and all prior negotiations, understandings, and agreements are merged herein. Notwithstanding any provision of this Agreement to the contrary, if the Indemnified Party is a party to any other indemnification agreement between the Company and such Indemnified Party, this Agreement shall not be exclusive and the Indemnified Party shall continue to have such rights as may be provided to such Indemnified Party under such other agreement. This Agreement may not be modified, amended, or rescinded except pursuant to a written instrument signed by the party against whom enforcement is sought.
14. Governing Law . Except as otherwise provided herein, this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
III.
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IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date first written above.
MFRI, INC. , a Delaware corporation
By:
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David Unger |
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Its: |
Chairman |
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INDEMNIFIED PARTY
Name
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Exhibit 31.1 I, David Unger, certify that: |
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1. |
I have reviewed this annual report on Form 10-K of MFRI, Inc. |
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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; |
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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; |
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4. |
The registrants 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: |
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(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; |
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(b) |
Evaluated the effectiveness of the registrants 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 |
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(c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
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5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
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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 registrants ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
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Date: May 15, 2006 /s/ David Unger |
David Unger
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(1) |
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
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/s/ David Unger |
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David Unger
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. |
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Exhibit 31.2 I, Michael D. Bennett, certify that: |
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1. |
I have reviewed this annual report on Form 10-K of MFRI, Inc. |
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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; |
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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; |
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4. |
The registrants 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: |
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(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; |
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(b) |
Evaluated the effectiveness of the registrants 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 |
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(c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
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5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
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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 registrants ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
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Date: |
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/s/ Michael D. Bennett |
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Michael D. Bennett
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May 15, 2006
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(1) |
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
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/s/ Michael D. Bennett |
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Michael D. Bennett
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. |
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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) |
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/s/ David Unger | /s/ Arnold F. Brookstone | |
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David Unger
, Chairman of the Board of Directors, and
Chief Executive Officer (Principal Executive Officer) |
Arnold F. Brookstone , Director | |
/s/ Henry M. Mautner | /s/ Eugene Miller | |
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Henry M. Mautner
, Vice Chairman of the Board of
Directors |
Eugene Miller , Director | |
/s/ Bradley E. Mautner | /s/ Stephen B. Schwartz | |
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Bradley E. Mautner , Director and President | Stephen B. Schwartz , Director | |
/s/ Michael D. Bennett | /s/ Dennis Kessler | |
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Michael D. Bennett
, Vice President, Secretary and
Treasurer (Principal Financial and Accounting Officer) |
Dennis Kessler , Director | |
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