SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 11, 1997
MFRI, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-18370 36-3922969
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
7720 LEHIGH AVENUE, NILES, ILLINOIS 60714
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 966-1000
Item 5. Other Events.
MFRI, INC. AND SUBSIDIARIES
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial data set forth below are derived from the financial
statements appearing in or incorporated by reference elsewhere in this report.
Such information should be read in conjunction with such financial statements,
including the notes thereto.
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
1992 1993 1994 1995 1996 1995 1996
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales $21,659 $25,262 $29,866 $75,495 $85,838 $65,762 $70,281
Income from operations 1,040 1,755 2,459 2,384 4,738 3,798 5,319
Interest expense (income)-net (62) (44) (20) 496 925 574
753
Net income 695 1,149 1,534 1,203 2,373 1,978
2,718
Net income per common share 0.
0.25 41 0.54 0. 27 0.52 0.44 0.59
Weighted average number of
shares outstanding(2) 2,810 2,810 2,826 4,493 4,543 4,538
4,580
NINE MONTHS
YEAR ENDED
ENDED OCTOBER 31,
JANUARY 31, 1996
1996
(UNAUDITED)
PROFORMA STATEMENT OF OPERATIONS DATA(1):
Net sales $105,613 $85,278
Income from operations 5,908 6,476
Interest expense 1,592 1,250
Net income (2) 2,676 3,185
Net income per common share 0. 54 0.64
Weighted average number of shares outstanding(2) 4,949 4,946
JANUARY 31, OCTOBER 31, 1996
1992 1993 1994 1995 1996 HISTORICAL PROFORMA (3)
(UNAUDITED)
BALANCE SHEET DATA:
Working capital $ 8,012 $ 8,549 $ 14,206 $ 17,290 $ 19,677 $ 20,096 $ 20,157
Total assets 11,750 12,472 36,898 47,917 58,985 64,203 77,083
Long-term debt, less current 57 20 3,247 6,902 14,267 12,897 16,597
portion
Stockholders' equity 9,245 10,394 21,154 23,940 26,223 29,177 32,376
Book value per common share 3.29 3.70 7.49 5.33 5.77 6.40 6.52
(1)The proforma statement of operations data gives effect to the Acquisition
as if the transaction had occurred at the beginning of the periods presented.
See "Unaudited Proforma Combined Financial Information."
(2) On a proforma basis there would be no difference between primary and
fully-diluted earnings per share.
(3) Gives effect to Acquisition as if it had occurred on October 31, 1996.
See "Unaudited Proforma Combined Financial Information."
SELECTED FINANCIAL DATA
The following is a summary of certain condensed financial information of
MFRI, Midwesco and the Thermal Care Business of Midwesco. The selected
financial information for MFRI has been derived in part from, and should be
read in conjunction with, the audited consolidated financial statements of
MFRI and the related notes thereto incorporated by reference in this report.
The selected financial information of Midwesco has been derived in part from,
and should be read in conjunction with, the audited consolidated financial
statements of Midwesco and the related notes thereto, included as part of
this report. The proforma financial information of the Thermal Care Business
of Midwesco is derived from the unaudited financial statements of Thermal
Care. In the opinion of management, the unaudited proforma financial
information of Thermal Care has been prepared on the same basis as the
audited consolidated financial statements of Midwesco, and includes all such
adjustments necessary for the fair presentation of financial position and
results of operations for the periods noted, which adjustments are only of a
normal recurring nature. See Unaudited ProForma Combined Financial
Information. Results of interim periods, which include all adjustments that
management considers necessary for a fair presentation thereof, are not
necessarily indicative of results to be expected for the full fiscal year.
MFRI, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JANUARY 31,
1992 1993 1994 1995 1996
STATEMENT OF OPERATIONS DATA:
Net sales (1), (2) $ 21,659 $ 25,262 $ 29,866 $ 75,495 $ 85,838
Cost of sales 16,784 19,414 23,062 62,898 68,958
Gross profit 4,875 5,848 6,804 12,597 16,880
Selling expense 2,136 2,238
1,186 3,832 4,585
General and administrative 1,470 1,603 1,886 6,025 6,993
expense
Management services agreement 229 252 282 356 564
- - net
Total operating expense 3,835 4,093 4,345 10,213 12,142
Income from operations 1,040 1,755 2,459 2,384 4,738
Interest expense (income) - (62) (44) (20) 496 925
net
Income before income taxes 1,102 1,799 2,479 1,888 3,813
Income tax expense 407 650 945 685 1,440
NET INCOME $ 695 $ 1,149 $ 1,534 $ 1,203 $ 2,373
NET INCOME PER COMMON SHARE $ 0.25 $ 0.41 $ 0.54 $ 0.27 $ 0.52
JANUARY 31,
1992 1993 1994 1995 1996
BALANCE SHEET DATA:
Working capital $ 8,012 $ 8,549 $ 14,206 $ 17,290 $ 19,677
Total assets 11,750 12,472 36,898 47,917 58,985
Long-term debt, less current portion 57 20 3,247 6,902 14,267
Stockholders' equity (3) 9,245 10,394 21,154 23,940 26,223
NINE MONTHS ENDED
OCTOBER 31,
1995 1996
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales (1), (2) $ 65,762 $ 70,281
Cost of sales 52,972 53,985
Gross profit 12,790 16,296
Selling expense 3,478 4,126
General and administrative expense 5,108 6,376
Management services agreement - net 406 475
Total operating expense 8,992 10,977
Income from operations 3,798 5,319
Interest expense (income) - net 574 753
Income before income taxes 3,224 4,566
Income tax expense 1.246 1,848
NET INCOME $ 1,978 $ 2,718
NET INCOME PER COMMON SHARE $ 0.44 $ 0.59
OCTOBER 31,
1996
(UNAUDITED)
BALANCE SHEET DATA:
Working capital $ 20,096
Total assets 64,203
Long-term debt, less current portion 12,897
Stockholders' equity (3) 29,177
1.On January 28, 1994, MFRI, Inc. completed the acquisition of
the net assets of the Perma Pipe division of Midwesco, Inc.
2.On September 30, 1994, MFRI, Inc. and a subsidiary acquired
substantially all of the assets net of specified assumed
liabilities of Ricwil LP.
3.The Company does not have a history of paying dividends.
Additionally, in connection with the line of credit agreement,
there are covenants restricting payment of dividends.
MIDWESCO, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
1992 1993 1994 1995 1996 1995 1996
STATEMENT OF OPERATIONS DATA
(1):
Net sales $45,726 $43,037 $ $ 29,579 $29,210 $21,474 $26,809
20,519
Cost of sales 36,653 33,740 16,282 23,314 23,012 16,663 21,682
Gross profit 9,073 9,297 4,237 6,265 6,198 4,811 5,127
Selling expense 3,064 3,371 1,594 1,550 1,876 1,334 1,284
General and administrative 5,004 4,833 2,821 3,729 3,796 2,909 2,961
expense
Total operating expense 8,068 8,204 4,415 5,279 5,672 4,243 4,245
Income (loss) from continuing 1,005 1,093 (178) 986 526 568 882
operations
Interest expense (income) - 449 627 963 806 1,112 772 744
net
Other income (loss) - net 500 (2,235) (277) 720 989 816 1,741
Income (loss) from continuing
operations
before income taxes 1,056 (1,769) (1,418) 900 403 612 1,879
Income tax expense (benefit)
from
continuing operations (87) (521) (614) 358 291 265 744
Income (loss) from continuing $ 1,143 ($1,248) ($804) $ 542 $ 112 $ 347 $ 1,135
operations
Net income (loss) ($120) ($1,477) $ 1,753 $ 542 $ 112 $ 347 $ 1,135
Net income (loss) per share ($ 10) ($129) $ 152 $ 47 $ 10 $ 30 $ 98
JANUARY 31, OCTOBER 31,
1992 1993 1994 1995 1996 1996
BALANCE SHEET DATA:
Working Capital $ 5,437 $ 4,632 $ 2,647 $ 3,518 $ 4,312 $ 1,719
Total Assets 25,014 30,056 22,408 23,446 25,411 26,819
Long-term debt, less current 5,840 3,521 5,368 6,721 8,194 4,853
portion
Shareholders' equity 7,667 6,145 8,332 8,958 9,070 10,205
(1) On January 28, 1994 Midwesco completed the
sale of the net assets of its Perma-Pipe division
to MFRI. The 1992, 1993 and 1994 statement of
operations data reflects the operations of Perma-
Pipe as discontinued operations.
PROFORMA SELECTED FINANCIAL DATA
(IN THOUSANDS)
THERMAL CARE BUSINESS OF MIDWESCO, INC. (1)
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
1993 1994 1995 1996 1995 1996
STATEMENT OF OPERATIONS DATA:
Net sales $11,640 $13,127 $ 18,528 $19,775 $14,578 $14,997
Cost of sales 9,264 9,958 13,751 15,247 10,990 11,296
Gross profit 2,376 3,169 4,777 4,528 3,588 3,701
Selling expense 639 779 819 1,206 855 856
General and administrative 1,800 2,479 2,335 2,004 1,715 1,564
expense
Total operating expense 2,439 3,258 3,154 3,210 2,570 2,420
Income (loss) from operations (63) (89) 1,623 1,318 1,018 1,281
Interest expense 626 487 671 848 586
564
Other (income) (583)
(786) (995) (869) (1,096)
Income (loss) before income (689) 210 1,535 1,465 1,323 1,791
taxes
Income tax expense (benefit) (269) 82 599 571 521 711
NET INCOME (LOSS) $ (420) $ 128 $ $ $ 802 $ 1,080
936 894
OCTOBER
31,
1996
JANUARY 31,
1993 1994 1995 1996
BALANCE SHEET DATA:
Working capital $ 1,721 $ 3,705 $ 3,690 $ 3,374 $ 551
Total assets 6,503 13,829 15,994 17,768 18,728
Long-term debt, less current 6,685 5,019 6,666 6,609 3,680
portion
Business unit equity 5,509 5,637 6,573 7,467 8,176
(1)Since Thermal Care has only existed
as a business unit of Midwesco, Inc.,
per share data is not available.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following is a discussion of the
financial condition of operations and
results of the Thermal Care Business and
the liquidity and capital resources of
the Company. Once the Merger was
approved by the stockholders of MFRI and
the shareholders of Midwesco, Midwesco
created New Midwesco and on December 30,
1996, contributed to it certain assets
and liabilities. Midwesco, which
consisted principally of the Thermal
Care Business, was acquired by and
merged into MFRI. The historical
Midwesco financial statements included
herein include the financial position
and results of operations of all of
Midwesco's businesses, including those
contributed to New Midwesco. A
discussion of the financial condition
and results of operations of Midwesco
would include a discussion of businesses
that were not acquired by MFRI.
Accordingly, the following discussion
will only address the financial
condition and results of operations of
the Thermal Care Business and the
liquidity and capital resources of the
Company.
RESULTS OF OPERATIONS OF THERMAL CARE
Thermal Care's business is characterized
by a large number of relatively small
orders and a limited number of large
orders. In fiscal 1996, the average
order amount was approximately $4,700.
Generally, Thermal Care's OEM sales have
lower profit margins than its sales for
the domestic and international plastics
industries and other markets. Large
orders generally are highly competitive
and result in lower profit margins. In
fiscal 1996, 1995 and 1994 and the nine
months ended October 31, 1996, no
customer accounted for 10% or more of
Thermal Care's net sales. In fiscal
years 1996, 1995 and 1994 and the nine
months ended October 31, 1996, the
impact of inflation and changing prices
on Thermal Care's net sales and income
from operations was not material.
Borrowings by Midwesco to finance the
operating and investment needs of
Thermal Care and the related interest
expense were allocated to Thermal Care
in the preparation of the proforma
summary financial statements of Thermal
Care included herein. The borrowings
were assumed by MFRI in connection with
the Merger.
Nine months ended October 31, 1996
Compared with Nine Months ended October
31, 1995
Net sales increased 3% from $14,578,000
to $14,997,000 due primarily to higher
unit sales of portable chillers to
domestic OEM customers.
Gross profit as a percent of net sales
increased from 24.6% to 24.7% due
primarily to a favorable product mix and
greater efficiencies in the factory.
Selling expenses increased from $855,000
to $856,000; selling expense as a
percent of net sales decreased from 5.9%
to 5.7%. The decrease is due primarily
to lower advertising expenses.
General and administrative expenses
decreased from $1,715,000 to $1,564,000;
general and administrative expenses as a
percent of net sales decreased from
11.8% to 10.4%. The reduction came from
reduced telephone expense as a result of
a change in carriers, and a reduction to
the amount of consulting costs for
information systems.
Interest expense increased from $564,000
to $586,000, reflecting increased
borrowing.
Fiscal Year 1996 Compared with Fiscal
Year 1995
Net sales increased 6.7% from
$18,528,000 to $19,776,000. The
increase is due primarily to sales for
new large plants being built in the
People's Republic of China producing PET
(Polyethylene - Terephthalate) beverage
bottles.
Gross profit as a percent of net sales
decreased from 25.8% to 22.9% primarily
due to non-recurring costs associated
with a reorganization of the factory
work flow and an unfavorable product
mix.
Selling expenses increased from $819,000
to $1,206,000; selling expenses as a
percent of net sales increased from 4.4%
to 6.1%. The dollar increase is due
primarily to the addition of the
California sales office/warehouse,
related personnel and advertising
promoting the office/warehouse.
General and administrative expenses
decreased from $2,335,000 to $2,004,000
and from 12.6% of sales to 10.1% of
sales, due primarily to a shift in
corporate administrative resources from
Thermal Care to MFRI during fiscal 1996.
Interest expense increased from $671,000
to $848,000, due to increased borrowing
and an increase in interest rates.
Fiscal Year 1995 Compared with Fiscal
Year 1994
Net sales increased 41% from $13,127,000
to $18,528,000. The increase was due to
domestic OEM sales, international sales,
and sales in the domestic plastics
industry.
Gross profit percent increased from
24.1% to 25.8% primarily due to
spreading the fixed portion of
manufacturing costs over a higher
production volume, partially offset by
costs of training new factory personnel
for the higher production volume.
Selling expenses increased from $779,000
to $819,000; selling expenses as a
percent of net sales decreased from 5.9%
to 4.4%. The 5% increase in selling
expenses is due to an increase in
advertising costs. The decrease in
expense as a percent of net sales is due
to the increased sales volume.
General and administrative expenses
decreased from $2,479,000 to $2,335,000;
general and administrative expenses as a
percent of net sales decreased from
18.9% to 12.6%. The decrease is due to
lower corporate administrative expenses
resulting from a shift in corporate
administrative resources from Thermal
Care to MFRI during fiscal 1995,
partially offset by increased Thermal
Care administrative expenses due to
additional personnel to accommodate
higher sales volume.
Interest expense increased from $487,000
to $671,000, due to increased borrowing.
LIQUIDITY AND CAPITAL RESOURCES OF THE
COMPANY
Prior to the Merger, working capital and
capital expenditure requirements of
Thermal Care have been funded through
operations and borrowings by Midwesco.
Working capital and investment needs of
MFRI have historically been funded
through MFRI operations and MFRI's
$7,000,000 revolving line of credit.
The amount outstanding under the MFRI
line of credit as of October 31, 1996
was $5,250,000.
To finance a September 1994 acquisition,
MFRI borrowed $4,000,000 from a bank
under a term loan which is repayable in
16 consecutive quarterly installments
which commenced January 31, 1995.
The Midwesco long-term debt assumed in
the Acquisition will approximate
$6,611,000, $5,000,000 of which
represents assumed bank debt with the
remainder representing assumed lease
obligations. The Midwesco bank debt
assumed in the Acquisition will bear
interest pursuant to MFRI's existing
bank loan agreement. The interest rate
under MFRI's loan agreement is lower
than the stated interest rate on the
assumed Midwesco bank debt.
On September 14, 1995 and October 18,
1995, respectively, Midwesco Filter and
PPI received the proceeds of Industrial
Revenue Bonds. Such proceeds are
available for capital expenditures
related to manufacturing capacity
expansions and efficiency improvements
during a three-year period commencing in
the fourth quarter of 1994 in the
Filtration Products Business in
Winchester, Virginia ($3,150,000) and
the Piping System Products Business in
Lebanon, Tennessee ($3,150,000). The
bonds mature approximately 12 years from
the date of issuance, but the Company's
agreement with the bank whose letter of
credit secures payment of the bonds
requires equal annual principal
reductions sufficient to amortize the
bonds in full beginning approximately
four years after issuance. The bonds
bear interest at a variable rate, which
initially approximated 5% per annum,
including letter of credit and
remarketing fees. Each bond indenture
establishes a trusteed project fund for
deposit of the bond proceeds. The
trustee is authorized to make
disbursements from the project fund upon
requisition from the Company to pay
costs of capital expenditures which
comply with the requirements of the loan
agreement for each bond. Pending such
disbursements, the trustee invests the
balance of the project fund in
investments defined by the indenture and
limited by applicable law. Such
invested funds totaled $4,184,000 at
October 31, 1996. The bonds are secured
by bank letters of credit which expire
approximately two years from the date of
issuance; the Company expects to arrange
for renewal, reissuance or extension of
the letter of credit prior to each
expiration date during the term of the
bonds.
On May 8, 1996, the Company purchased
for approximately $1.1 million a 10.3-
acre parcel of land with a 67,000-square
foot building adjacent to its Filtration
Products property in Winchester,
Virginia to accommodate the Company's
growing activities. The purchase was
financed 80% by a seven-year mortgage
bearing interest at 8.38% and 20% by the
aforementioned revenue bonds.
Based on the unaudited pro forma
combined balance sheet, the Company will
have positive working capital in excess
of $20 million and a current ratio of
1.75 to 1. Management does not expect
Thermal Care to have a material adverse
effect on the Company's liquidity and
cash flow.
The Company believes, subsequent to the
Merger, its working capital and
investment needs will require financing
in excess of that available through its
$7,000,000 revolving line of credit and,
accordingly, has replaced that facility,
the assumed Midwesco debt and the unpaid
portion of the $4,000,000 September 1994
term loan with $15 million of fixed rate
senior unsecured notes bearing interest
at 7.21% and due 2006 (the "Notes") and
a new $5 million floating rate unsecured
revolving line of credit (the "Credit
Line"). The Notes require principal
payment beginning at the end of the
fourth year and continuing annually
thereafter, resulting in a seven-year
average life.
Item 7. Financial Statements, PRO
FORMA Financial Information and
Exhibits.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The Consolidated
Financial Statements
of Midwesco, Inc.
and subsidiaries as
of January 31, 1996
and 1995 and for the
three years ended
January 31, 1996 and
as of October 31,
1996 and for the
nine months ended
October 31, 1996 and
1995 are included at
pages F-1 through F-
19.
(b) PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro
Forma Combined
Financial Statements
of MFRI, Inc. and
Midwesco, Inc. as of
October 31, 1996 and
for the nine months
and year ended
October 31, 1996 and
January 31, 1996,
respectively, are
included at pages
PF-1 through PF-8.
(c) EXHIBITS
23.1 Consent
of
Deloitte &
Touche
LLP
INDEX TO
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets at January 31, 1996 and 1995 and
October 31, 1996
(unaudited) F-3
Consolidated Statements of Operations for each of the three
years ended
January 31, 1996 and the nine months ended October 31, 1996 F-4
and 1995 (unaudited)
Consolidated Statements of Shareholders' Equity for each of
the three years
ended January 31, 1996 and the nine months ended October 31, F-5
1996 (unaudited)
Consolidated Statements of Cash Flows for each of the three
years ended
January 31, 1996 and the nine months ended October 31, 1996 F-6
and 1995 (unaudited)
Notes to Consolidated Financial Statements F-8
Quarterly Financial Information (unaudited) F-19
INDEPENDENT AUDITORS' REPORT
Board of Directors and
Shareholders
Midwesco, Inc.:
We have audited the accompanying
consolidated balance sheets of
Midwesco, Inc. and subsidiaries
(the "Company") as of January
31, 1996 and 1995, and the
related consolidated statements
of operations, shareholders'
equity and cash flows for each
of the three years in the period
ended January 31, 1996. These
consolidated financial
statements are the
responsibility of the Company's
management. Our responsibility
is to express an opinion on
these consolidated financial
statements based on our audits.
We conducted our audits in
accordance with generally
accepted auditing standards.
Those standards require that we
plan and perform the audit to
obtain reasonable assurance
about whether the consolidated
financial statements are free of
material misstatement. An audit
includes examining, on a test
basis, evidence supporting the
amounts and disclosures in the
financial statements. An audit
also includes assessing the
accounting principles used and
significant estimates made by
management, as well as
evaluating the overall financial
statement presentation. We
believe that our audits provide
a reasonable basis for our
opinion.
In our opinion, such
consolidated financial
statements present fairly, in
all material respects, the
financial position of Midwesco,
Inc. and subsidiaries as of
January 31, 1996 and 1995, and
the results of their operations
and their cash flows for each of
the three years in the period
ended January 31, 1996, in
conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
May 28, 1996
(August 14, 1996 as to the
second paragraph of Note 6)
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31
1996
ASSETS (UNAUDITED) 1996 1995
CURRENT ASSETS:
Cash and cash equivalentss $ 89,000 $ 111,000 $ 86,000
Trade accounts receivable, less allowance
for
doubtful accounts of $42,000 in 1996 and
$43,000 in 1995 6,091,000 3,993,000 4,669,000
Due from affiliates 38,000 1,102,000
Income tax receivable 363,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 127,000 796,000 213,000
Deferred income taxes 467,000 428,000 473,000
Inventories, less reserve of $49,000 in
1996 and $130,000 in 1995 4,991,000 5,522,000 4,216,000
Prepaid expenses and other current assets 541,000 508,000 462,000
Total current assets 12,306,000 11,759,000 11,221,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,510,000 8,414,000 7,419,000
Investment in Midwesco Services, Inc. 1,159,000 1,182,000 1,218,000
Investment in and amounts due from joint
ventures 215,000 297,000 110,000
Other assets 226,000 154,000 141,000
Total other assets 11,110,000 10,047,000 8,888,000
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements 4,884,000 4,865,000 4,498,000
Machinery and equipment 962,000 923,000 1,185,000
Furniture and office equipment 1,479,000 2,449,000 2,243,000
Transportation equipment 993,000 895,000 841,000
8,318,000 9,132,000 8,767,000
Less accumulated depreciation 4,915,000 5,527,000 5,430,000
Property, plant and equipment - net 3,403,000 3,605,000 3,337,000
TOTAL ASSETS $26,819,000 $25,411,000 $23,446,000
LIABILITIES AND OCTOBER 31, JANUARY 31
SHAREHOLDERS' EQUITY 1996
(UNAUDITED) 1996 1995
CURRENT LIABILITIES:
Drafts payable - $ 649,000
Accounts payable 5,118,000 4,086,000 $ 4,168,000
Commissions payable 519,000 494,000 712,000
Other accrued expenses 580,000 659,000 1,056,000
Income taxes payable 136,000 173,000
Due to affiliates 708,000 855,000
Billings in excess of related costs and
estimated
earnings on uncompleted contracts 811,000 276,000 204,000
Current portion of long-term debt 3,424,000 575,000 535,000
Total current liabilities 10,588,000 7,447,000 7,703,000
LONG-TERM LIABILITIES:
Long-term debt, less current portion 4,853,000 8,194,000 6,721,000
Deferred income taxes 1,173,000 700,000 64,000
Total long-term liabilities 6,026,000 8,894,000 6,785,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized -
50,000 shares; issued - 11,564 shares 115,000 115,000 115,000
Capital in excess of par value 3,432,000 3,432,000 3,432,000
Retained earnings 6,658,000 5,523,000 5,411,000
Total shareholders' equity 10,205,000 9,070,000 8,958,000
___________ ___________ ___________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 26,819,000 $ 25,411,000 $ 23,446,000
MIDWESCO, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994 AND
NINE-MONTH PERIODS ENDED OCTOBER 31, 1996 AND 1995
OCTOBER 31
1996 1995
(UNAUDITED)
SALES AND EARNED REVENUES $ 26,809,000 $ 21,474,000
COST OF SALES AND EARNED REVENUES 21,682,000 16,663,000
Gross profit 5,127,000 4,811,000
SELLING EXPENSE 1,284,000 1,334,000
GENERAL AND ADMINISTRATIVE EXPENSE 2,961,000 2,909,000
Income (loss) from operations 882,000 568,000
OTHER INCOME (EXPENSE):
Interest expense - net (744,000) (772,000)
Equity in income of MFRI, Inc. 1,024,000 798,000
Equity in loss of Simtech, Inc.
Equity in income (loss) of Midwesco Services, (22,000) (19,000)
Inc.
Equity in income (loss) from joint ventures 667,000 (34,000)
Amortized gain on sale of Perma-Pipe 72,000 (71,000)
Other income (expense) 997,000 18,000
Income before income taxes 1,879,000 612,000
INCOME TAX EXPENSE 744,000 265,000
NET INCOME $ 1,135,000 $ 347,000
JANUARY 31
1996 1995 1994
SALES AND EARNED REVENUES $ 29,210,000 $ 29,579,000 $ 20,519,000
COST OF SALES AND EARNED REVENUES 23,012,000 23,314,000 16,282,000
Gross profit 6,198,000 6,265,000 4,237,000
SELLING EXPENSE 1,876,000 1,550,000 1,594,000
GENERAL AND ADMINISTRATIVE EXPENSE 3,796,000 3,729,000 2,821,000
Income (loss) from operations 526,000 986,000 (178,000)
OTHER INCOME (EXPENSE):
Interest expense - net (1,112,000) (806,000) (963,000)
Equity in income of MFRI, Inc. 900,000 463,000 786,000
Equity in loss of Simtech, Inc. (4,000)
Equity in income (loss) of Midwesco Services, Inc. (36,000) 101,000 (7,000)
Equity in income (loss) from joint ventures 30,000 36,000 (1,052,000)
Amortized gain on sale of Perma-Pipe 95,000 120,000
Other income (expense) (123,000) (86,000) (1,240,000)
Income (loss) before income taxes 403,000 900,000 (1,418,000)
INCOME TAX EXPENSE (BENEFIT) 291,000 358,000 (614,000)
Income (loss) from continuing operations 112,000 542,000 (804,000)
DISCONTINUED OPERATIONS:
Income from discontinued operations of Perma Pipe division
less
applicable income taxes of $495,000 in 1994 825,000
Recognized gain on sale of Perma-Pipe Division
less applicable income taxes of $1,107,000 in 1994 1,732,000
NET INCOME $ 112,000 $ 542,000 $ 1,753,000
MIDWESCO, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY
31, 1996, 1995 AND
1994 AND NINE-MONTH
PERIOD ENDED OCTOBER
31, 1996
PREFERRED STOCK COMMON STOCK CAPITAL IN
NUMBER NUMBER EXCESS OF
OF SHARES AMOUNT OF SHARES AMOUNT PAR VALUE
BALANCE, FEBRUARY 1, 1993 200 $ 60,000 11,457 $ 114,000 $ 2,991,000
Net income
Stock sale, redemption and elimination of
cumulative foreign
currency transactions relating to Perma-Pipe (200) (60,000) 107 1,000 57,000
Equity in transactions of affiliates:
Stock offering of MFRI, Inc. (net of income 300,000
taxes of $184,000)
BALANCE, JANUARY 31, 1994 11,564 115,000 3,348,000
Net income
Equity in transactions of affiliate:
Stock offering of MFRI, Inc. (net of income 61,000
taxes of $37,000)
Issuance of MFRI, Inc. stock for the
acquisition of
Ricwil, Inc. (net of income taxes of 23,000
$14,000)
BALANCE, JANUARY 31, 1995 11,564 115,000 3,432,000
Net income
BALANCE, JANUARY 31, 1996 11,564 115,000 3,432,000
Net income (Unaudited)
BALANCE, OCTOBER 31, 1996 (Unaudited) $ 11,564 $ 115,000 $ 3,432,000
- -
FOREIGN
CURRENCY
RETAINED TRANSLATION
EARNINGS ADJUSTMENT TOTAL
BALANCE, FEBRUARY 1, 1993 $ 3,116,000 $ (136,000) $ 6,145,000
Net income 1,753,000 1,753,000
Stock sale, redemption and elimination of cumulative foreign
currency transactions relating to Perma-Pipe 136,000 134,000
Equity in transactions of affiliates:
Stock offering of MFRI, Inc. (net of income taxes of $184,000) 300,000
BALANCE, JANUARY 31, 1994 4,869,000 8,332,000
Net income 542,000 542,000
Equity in transactions of affiliate:
Stock offering of MFRI, Inc. (net of income taxes of $37,000) 61,000
Issuance of MFRI, Inc. stock for the acquisition of
Ricwil, Inc. (net of income taxes of $14,000) 23,000
BALANCE, JANUARY 31, 1995 5,411,000 8,958,000
Net income 112,000 112,000
BALANCE, JANUARY 31, 1996 5,523,000 9,070,000
Net income (Unaudited) 1,135,000 1,135,000
BALANCE, OCTOBER 31, 1996 (Unaudited) $ 6,658,000 $ - $10 ,205,000
MIDWESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 112,000 $ 542,000 $ 1,753,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Undistributed income of unconsolidated affiliates and joint (894,000) (600,000) (1,072,000)
ventures
Amortized gain on sale of Perma-Pipe (95,000) (120,000)
Provision for depreciation and amortization 575,000 485,000 603,000
Provision for bad debts 16,000 (2,000) (97,000)
Deferred income taxes 681,000 116,000 1,543,000
Change in operating assets and liabilities:
Trade accounts receivable 660,000 745,000 (672,000)
Costs and estimated earnings in excess of billings
on uncompleted contracts (583,000) (34,000) 26,000
Inventories (1,306,000) (854,000) (295,000)
Prepaid expenses and other assets (59,000) 154,000 136,000
Accounts and commissions payable (300,000) 1,156,000 (2,948,000)
Income taxes receivable (536,000) 173,000
Due from affiliates 917,000 (275,000) (368,000)
Drafts payable 649,000 (577,000) 577,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 72,000 (571,000) 352,000
Accrued expenses and other current liabilities (397,000) (1,189,000) 201,000
Cash flows from discontinued operations (331,000)
Net cash flows from operating activities (488,000) (851,000) (592,000)
INVESTING ACTIVITIES:
Investment in joint ventures (157,000) (79,000) (293,000)
Purchase of property, plant and equipment (662,000) (800,000) (134,000)
Net cash flows from investing activities (819,000) (879,000) (427,000)
FINANCING ACTIVITIES:
Payments under capital lease obligations (251,000) (222,000) (315,000)
Proceeds from revolving line of credit 4,890,000 8,400,000 11,476,000
Payments on revolving line of credit (3,100,000) (6,400,000) (10,469,000)
Proceeds from subordinated debt and other 1,207,000
Payments on subordinated debt and other (207,000) (100,000) (909,000)
Net cash flows from financing activities 1,332,000 1,678,000 990,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,000 (52,000) (29,000)
CASH AND CASH EQUIVALENTS - Beginning of year 86,000 138,000 167,000
CASH AND CASH EQUIVALENTS - End of year $ 111,000 $ 86,000 $ 138,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 181,000 $ 235,000 $ 177,000
MIDWESCO, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
PERIOD ENDED OCTOBER
31, 1996 AND 1995
1996 1995
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $1,135,000 $349,000
Adjustments to reconcile net income to net cash flows
from operating activities:
Undistributed income of unconsolidated affiliates and joint ventures (1,001,000) (779,000)
Amortized gain on sale of Perma-Pipe (72,000) (72,000)
Provision for depreciation and amortization 464,000 398,000
Provision for bad debts (11,000) (11,000)
Deferred income taxes 379,000 445,000
Change in operating assets and liabilities:
Trade accounts receivable (2,087,000) 216,000
Costs and estimated earnings in excess of billings
on uncompleted contracts 669,000 (312,000)
Inventories 531,000 (1,135,000)
Prepaid expenses and other assets (105,000) 108,000
Accounts and commissions payable 1,158,000 385,000
Income taxes receivable 399,000 (14,000)
Due from affiliates (670,000) 247,000
Drafts payable (649,000) 0
Billings in excess of costs and estimated earnings
on uncompleted contracts 535,000 26,000
Accrued expenses and other current liabilities (80,000) (576,000)
Net cash flows from operating activities 595,000 (725,000)
INVESTING ACTIVITIES:
Investment in joint ventures 82,000 (97,000)
Purchase of property, plant and equipment (82,000) (598,000)
Net cash flows from investing activities 0 (695,000)
FINANCING ACTIVITIES:
Payments under capital lease obligations (180,000) (211,000)
Proceeds from revolving line of credit 6,100,000 2,600,000
Payments on revolving line of credit (7,100,000) (600,000)
Proceeds from subordinated debt 500,000 0
Net payments on subordinated debt 63,000 (377,000)
Net cash flows from financing activities (617,000) 1,412,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,000) (8,000)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 111,000 86,000
CASH AND CASH EQUIVALENTS - END OF YEAR $ 89,000 $ 78,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 180,000 $ 100,000
SEE NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS.
MIDWESCO, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDED JANUARY
31, 1996, 1995 AND
1994
AND NINE-MONTH PERIODS
ENDED OCTOBER 31, 1996
AND 1995
______________________________________________________________________
1.BASIS OF PRESENTATION
PRINCIPLES OF
CONSOLIDATION - The consolidated financial statements
of Midwesco, Inc. (the "Company") include the accounts
of the Company and its majority-owned subsidiary, Simtech.
All significant intercompany accounts and transactions have
been eliminated in consolidation. Midwesco's investments in
companies as of January 31, 1996, 1995 and 1994 consist
of the following: Investment in Simtech, 80.6%; MFRI,
Inc., 38.0%, 37.9% and 40.1%, respectively; and
Midwesco Services, Inc. (formally known
as Mid/Res, Inc.), 50.0%. The Company also has investments
in joint ventures (see Note 3).
NATURE OF BUSINESS - Midwesco, Inc. is
engaged in the following business:
through its Thermal Care Division, it
manufactures heat transfer equipment.
Its products include chillers, temperature
controllers, cooling towers and water
treatment systems. Its Midwesco
Mechanical and Energy Division designs and
installs energy- efficient commercial
and industrial HVAC systems and on-site
industrial power generation systems.
Midwesco's Simtech subsidiary is a
distributor of polypropylene and
PVDF pipe and fittings.
2.SIGNIFICANT
ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION - In the
opinion of management, the
unaudited information presented as of
October 31, 1996 and for the periods ended
October 31, 1996 and 1995 reflect all
adjustments, which consist of normal,
recurring adjustments necessary for a fair
presentation of the interim periods.
Operating results for interim periods are
not necessarily indicative of the
results that may be expected for a full
year.
REVENUE RECOGNITION -
Revenues of construction
contracts are recognized under the
"percentage of completion" method.
The percentage of completion is
determined by the relationship of costs
incurred to the estimated total
costs.
Provisions for estimated losses on
uncompleted contracts are made in the
period in which such losses are
determined. Changes in job performance;
job conditions; estimated
profitability, including those
arising from contract penalty provisions;
and final contract settlements may
result in revisions to costs and income
and are recognized in the period in which
the revisions are determined. Profit
incentives are included in revenues
when their realization is
reasonably assured. An amount equal to
contract costs attributable to
claims is included in revenues when
realization is probable and the
amount can be reliably estimated.
The asset, "Costs and estimated earnings in
excess of billings on uncompleted
contracts," represents revenues
recognized in excess of amounts billed.
The liability, "Billings in excess
of costs and estimated earnings on
uncompleted contracts," represents billings
in excess of revenues recognized.
USE OF ESTIMATES - The presentation of
financial statements in conformity with
generally accepted accounting principles
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 these estimates.
CASH EQUIVALENTS - The Company considers
all highly liquid investments with a
maturity of three months or less when
purchased to be cash equivalents.
INVENTORIES -
Inventories are stated at the lower
of cost (average cost which approximates
actual cost on a first-in, first-out
basis) or market. Inventories consisted
of the following:
OCTOBER 31, JANUARY 31
1996
(UNAUDITED) 1996 1995
Raw materials (net of inventory reserves) $ 3,531,000 $ 4,056,000 $ 3,130,000
Work in process 784,000 834,000 695,000
Finished goods 676,000 632,000 391,000
Total $ 4,991,000 $ 5,522,000 $ 4,216,000
PROPERTY, PLANT AND
EQUIPMENT -
Property, plant and equipment are
stated at cost. Depreciation is
computed using the straight-line
method over the estimated useful
lives of the assets, which range
from three to 30 years. Amortization
of assets under capital leases is
included in depreciation and
amortization. The carrying amounts of
property, plant and equipment are
evaluated annually to determine if
adjustment to the depreciation and
amortization period is warranted based
upon projections of future earnings.
FAIR VALUE OF
FINANCIAL
INSTRUMENTS - The carrying value of
cash and cash equivalents,
accounts receivable and accounts
payable are reasonable
estimates of their fair value. The
carrying values of long-term
obligations are a reasonable estimate
of their fair values as the
interest rates approximate rates
currently available to the Company for
debt with similar terms and remaining
maturities.
INVESTMENT IN JOINT
VENTURES AND
UNCONSOLIDATED
AFFILIATES - The
Company's investments in
joint ventures and unconsolidated
affiliates are carried at initial
cost plus equity in net income/loss
since date of inception, reduced
by cash distributions and
increased by cash contributions.
RECLASSIFICATIONS -
Certain previously reported amounts
have been reclassified to
conform with the current period
presentation.
3.INVESTMENT IN
JOINT VENTURES
MIDWESCO-PASCHEN
JOINT VENTURE
("MPJV") - In fiscal 1987, the
Company entered into a joint
venture agreement to construct three
electrical generating plants
having an adjusted combined contract
amount of approximately $53
million. The joint venture agreement
provides that 55% of the profits or
losses from joint venture activities
be allocated to the Company. However,
such agreements provide for the
modification of allocation of
profits (not losses) based on
the respective proportions in
which each partner has contributed
capital to the joint venture. The
joint venture partner has not
made its proportionate share
of capital contributions and
it is uncertain as to how the joint
venture partner will satisfy its
obligations under the joint venture
agreement. The three projects
covered by the joint venture
agreement were substantially
completed in fiscal 1989. However,
there continues to be open issues with
regard to a vendor claim against the
joint venture and a joint venture claim
against the same vendor for
completion date delay and
performance shortfall damages.
The following is condensed financial
information for MPJV at January 31,
1996 and 1995 and for the three years
ended January 31, 1996:
Assets: 1996 1995 1994
Accounts receivable $ 123,000
Claim receivable $ 2,134,000 1,950,000
Total assets $ 2,134,000 $ 2,073,000
Liabilities and venture equity:
Amounts due bonding company $ 1,760,000 $ 1,760,000
Other liabilities 174,000 117,000
1,934,000 1,877,000
Venture equity 200,000 196,000
Total liabilities and venture equity $ 2,134,000 $ 2,073,000
Net profit $ $ - $ -
-
The following issues remain
unresolved relative to the
joint venture:
Claims Against and by Turbine
Generator Supplier - The
Company's management
believes that the completion date
delay and performance
shortfall matters which resulted in
charges of almost $3,400,000 are
the fault of the turbine generator
supplier. Contracts with
the turbine generator
supplier provide for liquidating
damages for delays and
productivity shortfalls.
MPJV has filed a suit against the
turbine generator supplier and its
surety bond issuer seeking
aggregate damages in excess of $9
million for the above and other
issues. The turbine generator
supplier has filed a
counterclaim against the joint
venture for damages in excess
of $2 million. The January 31,
1996 and 1995 financial
statements of the joint venture
include a net claim receivable
and, based on advice of
counsel, management believes that the
claim has substantial merit
and that recovery of the receivable
is probable.
F. H. PASCHEN-
MIDWESCO JOINT
VENTURE - In the
fiscal year ended
January 31, 1996,
the Company
entered into a
joint venture to
retrofit the HVAC
systems of the
Social Security
Building in
Chicago,
Illinois. The
contract amount
is approximately
$17 million. The
joint venture
agreement
provides that 50%
of the profit or
losses from the
joint venture
activities be
allocated to the
Company.
The following represents the
unaudited condensed
financial information for
the joint venture as of January 31,
1996 and for the period then
ended:
Assets:
Cash $ 223,000
Contract receivable 687,000
Other assets 16,000
Total assets $ 926,000
Liabilities:
Billings in excess of costs and estimated earnings on
uncompleted contracts $ 336,000
Accounts payable and accrued expenses 494,000
830,000
Venture equity 96,000
Total liabilities and venture equity $ 926,000
Contract revenues $ 1,103,000
Contract costs 1,007,000
Net profit $ 96,000
4.INVESTMENT IN
UNCONSOLIDATED
AFFILIATES
MIDWESCO
SERVICES, INC.
- - The Company has a 50%
investment in Midwesco
Services, Inc., which is
accounted for on the equity
method. The following is
condensed financial
information of Midwesco
Services, Inc. at January 31,
1996 and 1995 and October 31,
1996 and for each of the
three years in the period
ended January 31, 1996 and
for the nine-month periods
ended October 31, 1996 and
1995:
JANUARY 31
OCTOBER 31,
1996 1996 1995
(UNAUDITED)
Current assets $ 4,124,000 $ 4,461,000 $ 5,799,000
Other 859,000 940,000 971,000
Total assets $ 4,983,000 $ 5,401,000 $ 6,770,000
Current liabilities $ 2,482,000 $ 2,793,000 $ 4,144,000
Other 182,000 245,000 191,000
Total liabilities 2,664,000 3,038,000 4,335,000
Shareholders' equity 2,319,000 2,363,000 2,435,000
Total liabilities and shareholders' equity $ 4,983,000 $ 5,401,000 $ 6,770,000
NINE MONTHS ENDED OCTOBER 31 FISCAL YEAR ENDED JANUARY 31
1996 1995 1996 1995 1994
(UNAUDITED)
Revenues $10,773,000 $11,359,000 $ 14,137,000 $ 15,424,000 $ 12,470,000
Cost of services 8,069,000 8,764,000 11,166,000 12,064,000 9,674,000
Selling, general and
administrative expenses 2,765,000 2,655,000 2,916,000 2,929,000 2,733,000
Operating profit (61,000) (60,000) 55,000 431,000 63,000
Taxes and other expenses ( 17,000) (26,000) 127,000 225,000
78,000
Net profit (loss) $ 44,000 $ (34,000) $ (72,000) $ 206,000 $
15,000)
MFRI, INC. -
The Company's investment in
MFRI, Inc. ("MFRI"),
successor by merger to
Midwesco Filter Resources, Inc.
("Filter"), at January
31, 1996, 1995 and 1994
was 39.0%, 37.9% and
40.1%, respectively. The Company's
investment in MFRI is
accounted for on the equity
method. Following is
condensed balance sheet information
of MFRI at January 31,
1996 and 1995 and October
31, 1996 and condensed
statement of operations
information for each of
the three years in the
period ended January 31,
1996, and condensed
statement of operations
information for the nine-
month periods ended October
31, 1996 and 1995:
JANUARY 31
OCTOBER 31,
1996 1996 1995
(UNAUDITED)
Current assets $40,877,000 $ 36,865,000 $ 33,587,000
Other 23,326,000 22,120,000 14,330,000
Total assets $ 64,203,000 $ 58,985,000 $ 47,917,000
Current liabilities $ 20,781,000 $ 17,188,000 $ 16,297,000
Other 14,245,000 15,574,000 7,680,000
Total liabilities 35,026,000 32,762,000 23,977,000
Shareholders' equity 29,177,000 26,223,000 23,940,000
Total liabilities and shareholders' equity $ 64,203,000 $ 58,985,000 $ 47,917,000
NINE MONTHS ENDED OCTOBER 31 FISCAL YEAR ENDED JANUARY 31
1996 1995 1996 1995 1994
(UNAUDITED)
Net sales $ 70,281,000 $ 65,762,000 $ 85,838,000 $ 75,495,000 $ 29,866,000
Cost of sales 53,985,000 52,972,000 68,958,000 62,898,000 23,062,000
Selling, general and
administrative expenses 10,977,000 8 992,000 12,142,000 10,213,000 4,345,000
Income from operations 5,319,000 3,798,000 4,738,000 2,384,000 2,459,000
Taxes and other expenses 2,601,000 1,820,000 2,365,000 1,181,000 925,000
Net income $ 2,718,000 $ 1,978,000 $ 2,373,000 $ 1,203,000 $ 1,534,000
As of January 31,
1996, based upon MFRI's
stock price and the
Company's ownership
percentage of MFRI's
outstanding common
stock, the market value
of the investment
in MFRI is approximately
$10,500,000.
5.COSTS AND
ESTIMATED
EARNINGS ON
UNCOMPLETED
CONTRACTS
Costs and estimated earnings on
uncompleted contracts are as
follows for the years ended
January 31, 1996 and 1995 and
October 31, 1996:
JANUARY 31
OCTOBER 31,
1996 1996 1995
(UNAUDITED)
Costs incurred on uncompleted contracts $ 23,705,000 $ 14,101,000 $ 8,309,000
Estimated earnings 1,462,000 1,652,000 965,000
Current revenue 25,167,000 15,753,000 9,274,000
Less billings to date 25,851,000 15,233,000 9,265,000
Total $ (684,000) $ 520,000 $ 9,000
Included in the accompanying
consolidated
balance sheets under the following
captions:
Costs and estimated earnings in excess
of
billings on uncompleted contracts $ 127,000 $ 796,000 $ 213,000
Billings in excess of related costs and
estimated earnings on uncompleted (811,000) (276,000) (204,000)
contracts
Total $ (684,000) $ 520,000 $ 9,000
6.DEBT
ARRANGEMENTS
The
Company's long-term debt
consists of the following:
JANUARY 31
OCTOBER 31,
1996 1996 1995
(UNAUDITED)
Revolving loan $ 2,790,000 $ 3,790,000 $ 2,000,000
Subordinated note payable 1,221,000 1,180,000 1,124,000
Subordinated notes payable to
officers/shareholders 1,500,000 1,000,000 1,000,000
Capitalized lease obligations 1,854,000 1,887,000 1,945,000
Former joint venture partner
subordinated note payable 912,000 912,000 1,187,000
8,277,000 8,769,000 7,256,000
Less current maturities 3,424,000 575,000 535,000
Total $ 4,853,000 $ 8,194,000 $ 6,721,000
The classification of long-
term debt in the accompanying
balance sheet reflects the terms
of the 1996 amendments to the
Revolving Loan and to the
Subordinated Note Payable.
Pertinent details of such amendments
are reflected below.
REVOLVING
LOAN - At January 31, 1996,
the Company had a loan agreement
with a bank, which provided
for a $4 million revolving
line of credit, maturing
on September 30, 1996
(extended to March 31, 1997,
see below). The agreement includes
certain financial covenants
and is collateralized
by certain accounts receivable,
equipment and inventories with a
book value of approximately
$8,500,000 and 850,000 of
the shares of MFRI stock
owned by the Company.
At January 31, 1996, the Company
was not in compliance with certain
financial covenants of the agreement.
On August 8, 1996, the Third
Amendment to the loan agreement
was signed. This amendment, among
other things, changed the maturity
date on the revolving line of
credit to March 31, 1997, modified
certain financial covenants, increased
the interest rate on the line
of credit by 2%, and effectively
brought the Company into compliance
with all financial covenants
of the agreement, as amended.
SUBORDINATED
NOTE
PAYABLE -
Subordinated note payable represents
a note with a principal
amount of $1,225,000, due
November 1, 1996
(extended to November 1, 1997,
see below). Such note was
recorded at a discount of
$315,000, based on an imputed interest
rate of 12% and had a remaining
unamortized balance of $45,000 at
January 31, 1996. On August 14, 1996,
terms of the subordinated note were
amended to extend the maturity date to
November 1, 1997, and increase the
interest rate from 6-1/4 % to 10%
subsequent to November 1, 1996.
Interest expense for 1996, 1995 and
1994 includes $76,000, $54,000 and $43,000,
respectively, relating to the amortization
of this discount.
SUBORDINATED
NOTES
PAYABLE TO
OFFICERS/SHAREHOLDERS
- -
Subordinated notes payable to
officers/shareholders have a
principal balance of $1,000,000. The notes
bear interest at the prime rate plus 1-
3/4%. The notes are subordinated to the
above bank borrowing.
FORMER
JOINT
VENTURE
PARTNER
SUBORDINATED
NOTE
PAYABLE -
Former joint venture partner subordinated
note payable has a principal balance of
$912,000. The note bears interest at the
prime rate plus 2%.
OTHER
INFORMATION
- - Interest paid on all debt arrangements
amounted to $802,000, $686,000 and $957,000
for fiscal years 1996, 1995 and 1994,
respectively; and $419,000 and $409,000
for the nine-month periods ended
October 31, 1996 and 1995, respectively.
Annual maturities of long- term debt,
exclusive of capitalized leases, at January
31, 1996 are as follows:
1997 $ 345,000
1998 6,405,000
1999 132,000
7.LEASE
INFORMATION
The following is an analysis
of property under capitalized
leases:
1996 1995
Furniture, fixture and office $ 36,000 $ 36,000
equipment
Building and improvements 1,594,000 1,594,000
Machinery and equipment 381,000 381,000
Transportation equipment 838,000 784,000
2,849,000 2,795,000
Less accumulated amortization (1,555,000) (1,415,000)
Total $ 1,294,000 $ 1,380,000
The lease for the building and
equipment, which is beneficially owned by
certain shareholders of the Company,
expires in December 2007.
Future minimum lease payments under the
capitalized leases at January 31, 1996
are as follows:
1997 $ 482,000
1998 420,000
1999 332,000
2000 283,000
2001 283,000
Thereafter 1,693,000
3,493,000
Less amount representing interest 1,606,000
Present value of future minimum lease $ 1,887,000
payments
8.
INCOME
TAXES
Components of income tax
expense (benefit) are as
follows:
YEAR ENDED JANUARY 31 1996 1995 1994
Current:
Federal $ (371,500) $ 197,230 $ (1,396,000)
State and other (18,500) 44,770 (231,000)
(390,000) 242,000 (1,627,000)
Deferred 681,000 116,000 1,013,000
Total $ 291,000 $ 358,000 $ (614,000)
The difference between the provision
(benefit) for income taxes and the
amount computed by applying the federal
statutory rate is as follows:
YEAR ENDED JANUARY 31 1996 1995 1994
Tax at federal statutory rate $ 137,000 $ 306,000 $ (482,000)
State taxes - net of federal 42,000 66,000 (127,000)
benefit
Other - net 112,000 (14,000) (5,000)
Total $ 291,000 $ 358,000 $ (614,000)
The deferred income tax provision
(benefit) reflects the temporary
differences between the financial
reporting basis and the tax basis
of the Company's assets and liabilities.
These differences relate principally
to depreciation, contract gross profit
recognition, undistributed earnings of
affiliates and various accruals and
reserves.
Components of the deferred tax asset
and liability balances as of January
31, 1996 and 1995 are as follows:
1996 1995
Current:
Allowance for doubtful accounts $ 16,000 $ 16,000
Sales reserves 50,000 2,000
Vacation accruals 48,000 34,000
Deferred profits on contract 218,000 219,000
Inventory valuation allowance 68,000 93,000
Warranty accruals 26,000 21,000
Insurance accruals (53,000) 47,000
Other 55,000 41,000
Total $ 428,000 $ 473,000
Long-term:
Capital lease $ 265,000 $ 220,000
Operating loss carry-forwards 30,000 320,000
Tax credit carry-forwards 157,000 157,000
Depreciation (53,000) (87,000)
Deferred gain on sale of Perma-Pipe 3,000 41,000
MFRI stock issuance (237,000) (237,000)
Equity in MFRI income (865,000) (478,000)
Total $ (700,000) $ (64,000)
At January 31, 1996, the Company had,
for income tax purposes, net operating loss
carry-forwards of approximately $78,000, which
will expire in 2011.
The Company also has investment and AMT tax
credit carry-forwards for approximately $157,000
available to reduce future federal income taxes.
Income taxes paid amounted to $172,000, $164,000,
and $14,000 for fiscal years 1996, 1995 and 1994,
respectively; and $182,000 and $163,000 for the
nine-month periods ended October 31, 1996 and
1995, respectively.
9.
EMPLOYEE
RETIREMENT
PLANS
The
Company makes contributions to a union-
sponsored multi-employer defined benefit
plan in accordance with negotiated labor
contracts. Contributions charged to expense
approximated $39,000 in 1996, $55,000 in
1995 and $20,000 in 1994.
401(k)
PLAN
- -
The employees of the Company participate in a
401(k) Employee Savings and Protection Plan
that is applicable to all employees not
covered by a collective bargaining agreement.
The Plan allows employees to make pretax payroll
contributions up to 16% of total compensation.
Prior to February 1, 1995, the Company made
contributions to the 401(k) Plan in an amount
equal to 25% of each participant's contribution,
up to a maximum of 1% of their salaries. Beginning
February 1, 1995, the Company contribution was
increased to 50% of each participant's contribution,
up to a maximum of 2% of their salaries.
PROFIT-
SHARING
PLAN
- -
The employees of the Company participate
in a Profit- Sharing Plan that is applicable
to all employees not covered by collective
bargaining agreements, who are at least 21
years of age and have completed one year of
employment, and certain employees who are covered
by collective bargaining agreements. The
Profit-Sharing Plan is funded solely by
contributions of such portion of profits as
determined by the Board of Directors.
401(k)
Plan and Profit- Sharing Plan costs of the
Company for the years ended January 31, 1996,
1995 and 1994 were $102,000, $81,000 and
$43,000, respectively.
10.
BUSINESS
SEGMENT
DATA
Midwesco, Inc. operates in three business
segments: (1) heat transfer equipment,
(2) HVAC systems, and (3) plastic pipe
distribution. The following is information
relevant to the Company's business segments:
1996 1995 1994
Sales:
Heat transfer equipment $ 19,775,000 $ 18,528,000 $ 13,127,000
HVAC systems 6,927,000 8,579,000 5,988,000
Plastic pipe distribution 2,508,000 2,472,000 1,404,000
Total sales $ 29,210,000 $ 29,579,000 $ 20,519,000
Income from operations:
Heat transfer equipment $ 2,231,000 $ 2,694,000 $ 1,599,000
HVAC systems 408,000 469,000 (1,097,000)
Plastic pipe distribution 67,000 (346,000) (170,000)
Corporate and other (2,180,000) (1,831,000) (510,000)
Total income from operations $ 526,000 $ 986,000 $ (178,000)
Identifiable assets:
Heat transfer equipment $ 6,869,000 $ 6,834,000 $ 5,006,000
HVAC systems 2,804,000 1,891,000 3,140,000
Plastic pipe distribution 1,779,000 1,818,000 1,538,000
Corporate and other 13,959,000 12,903,000 12,724,000
Total identifiable assets $ 25,411,000 $ 23,446,000 $ 22,408,000
Capital expenditures:
Heat transfer equipment $ 139,000 $ 79,000 $ 43,000
Plastic pipe distribution 42,000 11,000 46,000
Corporate and other 481,000 710,000 45,000
Total capital expenditures $ 662,000 $ 800,000 $ 134,000
Depreciation and
amortization:
Heat transfer equipment $ 91,000 $ 67,000 $ 74,000
HVAC systems 59,000 62,000 62,000
Plastic pipe distribution 24,000 14,000 5,000
Corporate and other 401,000 342,000 462,000
Total depreciation and $ 575,000 $ 485,000 $ 603,000
amortization
Income
from
operations
- -
corporate
and
other
includes
interest
expense
on
corporate
debt,
corporate
employee
salaries
and
related
expenses.
Identifiable
assets
- -
corporate
and
other
includes
the
corporate
building
and
related
improvements,
furniture
and
fixtures,
and
other
corporate
assets.
Depreciation
and
amortization
amounts
exclude
the
amortization
of
the
gain
on
the
sale
of
Perma-
Pipe.
11.
RELATED
PARTY
TRANSACTIONS
MFRI,
Inc.
provides
certain
services
to
the
Company
and
the
Company
provides
certain
facilities
and
services
to
MFRI,
Inc.
pursuant
to
an
agreement,
dated
February
1,
1994
(superseding
the
previous
agreement
dated
October
27,
1989).
The
Company
reimbursed
MFRI,
Inc.
$25,000
in
1995,
and
MFRI,
Inc.
reimbursed
the
Company
$564,000
in
1996,
$381,000
in
1995
and
$282,000
in
1994.
In
addition,
the
Company
paid
an
affiliate
approximately
$119,000
in
1996,
$124,000
in
1995
and
$68,000
in
1994
for
installation
services.
Also,
the
Company
was
paid
by
the
affiliate
approximately
$1,042,000
in
1996,
$1,106,000
in
1995
and
$1,146,000
in
1994
for
reimbursement
for
expenses
incurred
on
behalf
of
the
affiliate.
Finally,
the
Company
derived
sales
revenue
of
approximately
$249,000
in
1996
and
$1,300,000
in
1995
from
an
affiliated
company.
12.
DISCONTINUED
OPERATIONS
On
January
28,
1994,
the
Company
completed
the
sale
of
the
net
assets
of
its
Perma-
Pipe
Division
("Perma-
Pipe")
to
MFRI,
Inc.,
successor
by
merger
to
Midwesco
Filter
Resources,
Inc.,
which,
prior
to
the
transaction,
was
a
51.2%
owned
subsidiary
of
the
Company.
The
Company
received
proceeds
of
$4,950,000,
consisting
of
$3,069,000
in
cash
and
279,000
shares
of
MFRI
stock
valued
at
$1,881,000.
The
Company
recognized
61%
of
the
gain
on
the
sale
of
the
Perma-
Pipe
assets
of
$1,732,000,
net
of
applicable
income
taxes
of
$1,107,000.
In
addition,
39%
of
the
gain
was
deferred
($1,781,000)
and
is
being
amortized
into
income
over
periods
of 7
to
40
years.
The
1994
consolidated
financial
statements
report
the
operations
of
Perma-
Pipe
as
discontinued
operations.
Revenues
of
Perma-
Pipe
were
$32,524,000
for
fiscal
1994.
13.
QUARTERLY
FINANCIAL
DATA
(UNAUDITED)
The
following
is a
summary
of
the
unaudited
quarterly
results
of
operations
for
the
years
ended
January
31,
1996
and
1995:
FISCAL 1996 THREE MONTHS ENDED
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
Net sales $ 6,131,000 $ 7,473,000 $ 7,870,000 $ 7,736,000
Gross profit 1,422,000 1,801,000 1,475,000 1,500,000
Net income (loss) 22,000 271,000 54,000 (235,000)
FISCAL 1995 THREE MONTHS ENDED
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31
Net sales $ 6,507,000 $ 7,998,000 $ 7,720,000 $ 7,354,000
Gross profit 1,452,000 1,671,000 1,567,000 1,575,000
Net income 120,000 321,000 26,000 75,000
******
UNAUDITED
PRO
FORMA
COMBINED
FINANCIAL
STATEMENTS
The
accompanying
unaudited
pro
forma
combined
MFRI
financial
statements
set
forth
the
Unaudited
Pro
Forma
Combined
Balance
Sheet
of
MFRI
as
of
October
31,
1996,
and
the
Unaudited
Pro
Forma
Combined
Statements
of
Operations
for
the
year
ended
January
31,
1996,
and
the
nine
months
ended
October
31,
1996.
These
unaudited
pro
forma
combined
financial
statements
are
presented
to
illustrate
the
effect
of
certain
adjustments
to
the
historical
consolidated
financial
statements
that
result
from
the
Merger
between
MFRI
and
Midwesco.
MFRI
will
account
for
the
Merger
as
a
purchase
by
MFRI
of
Midwesco.
The
accompanying
MFRI
unaudited
pro
forma
combined
financial
statements
should
be
read
in
conjunction
with
the
respective
companies'
historical
consolidated
financial
statements
and
notes
thereto.
See
the
MFRI
Annual
Report
on
Form
10-
K
for
the
fiscal
year
ended
January
31,
1997
and
the
Quarterly
Report
on
Form
10-
Q
for
the
quarter
ended
October
31,
1996.
Also
see
the
Midwesco
financial
statements
on
pages
F-1
through
F-
19
of
this
report.
The
unaudited
pro
forma
combined
financial
statements
are
presented
for
informational
purposes
only
and
are
not
necessarily
indicative
of
actual
results
had
the
foregoing
transactions
occurred
as
described
in
the
preceding
paragraphs,
nor
do
they
purport
to
represent
results
of
future
operations
of
the
merged
companies.
UNAUDITED
PRO
FORMA
COMBINED
BALANCE
SHEET
OCTOBER
31,
1996
HISTORICAL
ASSETS MFRI MIDWESCO
CURRENT ASSETS:
Cash and cash equivalents $ 385,000 $ 89,000
Accounts receivable, less allowance for doubtful 19,261,000 6,091,000
accounts
Cost and estimated earnings in excess of billings on 2,798,000 127,000
uncompleted contracts
Inventories 15,626,000 4,991,000
Other current assets 2,807,000 1,008,000
Total current assets 40,877,000 12,306,000
RESTRICTED CASH FROM BOND PROCEEDS 4,184,000
PROPERTY, PLANT AND EQUIPMENT - Net 11,700,000 3,403,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,510,000
Investment in Midwesco Services, Inc. 1,159,000
Investment in and amounts due from joint ventures 215,000
Patents 1,386,000
Goodwill 4,613,000
Other assets 1,443,000 226,000
Total other assets 7,442,000 11,110,000
TOTAL ASSETS $ 64,203,000 $ 26,819,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 17,199,000 $ 6,353,000
Current maturities of long-term debt 2,332,000 3,424,000
Billings in excess of costs on uncompleted contracts 1,250,000 811,000
Total current liabilities 20,781,000 10,588,000
Long-term debt less current maturities 12,917,000 4,853,000
Deferred income taxes and other 1,328,000 1,173,000
Total long-term liabilities 14,245,000 6,026,000
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital 18,226,000 3,547,000
Retained earnings and other 10,951,000 6,658,000
Total stockholders' equity 29,177,000 10,205,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,203,000 $ 26 ,819,000
MIDWESCO PROFORMA
BUSINESSES ACQUIRED PURCHASE ADJUSTED
ASSETS SPUN-OFF MIDWESCO ADJUSTMENTS BALANCE
(A) (A) (B)
CURRENT ASSETS:
Cash and cash equivalents $ 89,000 $ 385,000
Accounts receivable, less allowance for doubtful accounts 3,891,000 $ 2,200,000 21,461,000
Cost and estimated earnings in excess of billings on 127,000 2,798,000
uncompleted contracts
Inventories 1,063,000 3,928,000 19,554,000
Other current assets 831,000 177,000 2,984,000
Total current assets 6,001,000 6,305,000 47,182,000
RESTRICTED CASH FROM BOND PROCEEDS 4,184,000
PROPERTY, PLANT AND EQUIPMENT - Net 619,000 2,784,000 $306,000 (d) 14,790,000
OTHER ASSETS:
Investment in MFRI, Inc. 9,510,000 (9,510,000)
(c)
Investment in Midwesco Services, Inc. 1,159,000
Investment in and amounts due from joint ventures 215,000
Patents 3,386,000
Goodwill 3,356,000 (d) 7,969,000
Other assets 97,000 129,000 1,572,000
Total other assets 1,471,000 9,639,000 (6,154,000) 10,927,000
TOTAL ASSETS $ 8,091,000 $ 18,728,000 $(6,010,000) $ 77,083,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,562,000 $ 2,791,000 390,000 (e) $ 20,480,000
100,000 (i)
Current maturities of long-term debt 461,000 2,963,000 5,295,000
Billings in excess of costs on uncompleted contracts 811,000 1,250,000
Total current liabilities 4,834,000 5,754,000 490,000 27,025,000
Long-term debt less current maturities 1,173,000 3,680,000 16,597,000
Deferred income taxes and other 55,000 1,118,000 (1,480,000)
(f) 1,085,000
119,000 (H)
Total long-term liabilities 1,228,000 4,798,000 (1,206,000) 17,682,000
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital 3,547,000 (3,547,000) (g) 21,425,000
16,737,000 (d)
(13,538,000) (d)
Retained earnings and other 2,029,000 4,629,000 (4,629,000) (G) 10,951,000
Total stockholders' equity 2,029,000 8,176,000 (4,977,000) 32,376,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,091,000 $ 18,728,000 $(5,848,000) $ 77,083,000
See
notes
to
unaudited
proforma
combined
financial
statements.
NOTES
TO
UNAUDITED
PROFORMA
COMBINED
FINANCIAL
STATEMENTS
YEAR
ENDED
JANUARY
31,
1996
AND
THE
NINE
MONTHS
ENDED
OCTOBER
31,
1996
The
unaudited
proforma
combined
balance
sheet
as
of
October
31,
1996
reflects
the
adjustments
necessary
to
record
the
proposed
acquisition
as
though
it
had
occurred
on
October
31,
1996.
Based
upon
the
terms
of
the
proposed
acquisition,
the
transaction
for
financial
reporting
and
accounting
purposes
will
be
accounted
for
as
a
purchase
of
Midwesco
by
MFRI.
Accordingly,
MFRI
will
revalue
the
basis
of
Midwesco's
assets
and
liabilities
to
fair
value.
The
purchase
price
of
Midwesco
will
be
calculated
as
the
fair
value
of
the
consideration
paid,
common
stock
plus
MFRI's
transaction
costs.
The
difference
between
the
purchase
price
and
the
fair
value
of
the
identifiable
tangible
and
intangible
assets
and
liabilities
will
be
recorded
as
goodwill
and
will
be
amortized
over
a
period
of
25
years
as
more
fully
discussed
in
Note
(d).
(a)Pursuant to the terms of the Agreement of Merger ("Agreement") immediately
prior to the effectiveness of the Merger, Midwesco will contribute certain
assets and liabilities to New Midwesco. The contributed assets and liabilities
relate to the other businesses of Midwesco which will not be acquired by MFRI.
The historical balance sheet information of Midwesco has been adjusted to
reflect the assets and liabilities that will be contributed to New Midwesco.
The column "Acquired Midwesco" represents the historical book value of the
assets and liabilities that will be acquired by MFRI.
(b)The Proforma Adjusted Balance represents the sum of the amounts included in
the following columns: MFRI, Acquired Midwesco and Purchase Adjustments.
(c)Represents the elimination of Midwesco's investment in MFRI. The MFRI stock
owned by Midwesco will be retired and canceled through the issuance of new
shares of MFRI stock to the shareholders of Midwesco.
(d)Pursuant to the Agreement, MFRI will issue approximately 2,124,000 shares of
MFRI Common Stock ("Stock") for the stock of Midwesco, or approximately 406,000
shares in excess of the approximate 1,718,000 shares of Stock currently owned
by the shareholders of Midwesco through their ownership of Midwesco. Pursuant
to the terms of the Agreement two escrows will be established, both of which
will be funded with Stock to be received by the Midwesco shareholders, on a pro
rata basis: 1) 300,000 shares of stock will be placed in an escrow to be
available for any other liabilities that may arise which have not been assumed
by MFRI and which New Midwesco will be unable to pay, this escrow will
terminate three years after the closing date, and 2) approximately 67,000
shares of Stock shall be placed in escrow to be available to MFRI should the
settlement costs relating to three known contingencies, which will be assumed
by MFRI, exceed an established threshold.
The fair value of the consideration paid will be determined based upon the
closing market price of the Stock on the business day immediately following the
approval of the Merger by MFRI's shareholders. The shares of Stock placed in
the escrows will be included in the purchase price and will be reflected as
outstanding in the earnings per share calculation as the resolution of the
contingencies to which the escrows relate are deemed to be determinable beyond
a reasonable doubt.
For purposes of preparing the proforma financial statements, the fair value of
the Stock has been estimated to be $7.88, the average value of the Stock for
the period from October 23, 1996 through October 29, 1996 (a reasonable period
of time before and after the date of Board of Director approval and
announcement of the acquisition, October 25, 1996). The purchase price of
$17,127,000 was allocated to the MFRI stock owned by Midwesco and to the
acquired assets and assumed liabilities based on their estimated fair value as
follows:
Purchase price:
Common stock issued (total shares issued of $16,737,000
2,124,000)
Transaction costs 390,000
$17,127,000
Purchase price allocated as follows:
Fair value of MFRI stock repurchased and (13,538,000)
retired
Fair value of net assets acquired and (233,000)
liabilities assumed
Goodwill (3,356,000)
The goodwill will be amortized over a period of 25 years. The Company
considered the following factors in establishing a 25-year amortization
period for goodwill:
- - The Thermal Care products designed in 1981 and a product line
acquired in 1983 continue to be technologically and economically
acceptable, with periodic design improvements and evolutionary product
line expansions.
- - Some recently introduced Thermal Care products have experienced
steady sales growth and, in the Company's opinion, should experience a
long product life.
- - The plastics industry, which is the largest market served by
Thermal Care, is expected to fill important needs in the United States
and elsewhere for many years.
- - Nonplastic industrial processes requiring specialized heat transfer
equipment of the type supplied by Thermal Care have continued to develop
and, in the Company's opinion, should continue to develop in the future.
Thermal Care's products and reputation should enable it to compete
effectively for business in such industries.
It is the Company's policy to regularly assess goodwill for
recoverability based on estimated future cash flows.
(e)Represents an estimate of the costs to be incurred by MFRI in
connection with the Merger. Such costs include legal, audit, financial
advisor and printing fees.
(f)Represents the elimination of the deferred income taxes on the equity
income in MFRI recorded by Midwesco due to the elimination of Midwesco's
investment in MFRI as discussed in Note (c). The Merger will constitute
a tax-free reorganization within the meaning of the Internal Revenue
Code.
(g)Represents the elimination of the purchased net worth of Midwesco.
(h)Represents the deferred tax liability relating to the difference
between the assigned value and tax basis of the acquired property and
equipment.
(i)Represents the establishment of a reserve for warranty and product
claims which will be assumed by MFRI upon consummation of the
Acquisition.
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1996
MIDWESCO
HISTORICAL BUSINESSES ACQUIRED
MFRI MIDWESCO SPUN-OFF MIDWESCO
(A) (A)
SALES AND EARNED REVENUES $ 85,838,000 $ 29,210,000 $ 9,435,000 $ 19,775,000
COST OF SALES AND EARNED REVENUES 68,958,000 23,012,000 7,765,000 15,247,000
Gross profit 16,880,000 6,198,000 1,670,000 4,528,000
SELLING EXPENSE 4,585,000 1,876,000 670,000 1,206,000
GENERAL AND ADMINISTRATIVE EXPENSE 7,557,000 3,796,000 1,792,000 2,004,000
Income (loss) from operations 4,738,000 526,000 (792,000) 1,318,000
OTHER INCOME (EXPENSE):
Interest expense - net (925,000) (1,112,000) (264,000) (848,000)
Equity in income of MFRI, Inc. 900,000 900,000
Equity in loss of Midwesco Services Inc. (36,000) (36,000)
Equity in income of joint ventures 30,000 30,000
Amortized gain on sale of Perma-Pipe 95,000 95,000
INCOME (LOSS) BEFORE TAXES 3,813,000 403,000 (1,062,000) 1,465,000
INCOME TAX EXPENSE (BENEFIT) 1,440,000 291,000 (280,000) 571,000
NET INCOME (LOSS) $ 2,373,000 $ 112,000 $ (782,000) $ 894,000
EARNINGS PER COMMON SHARE $ 0.52
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,543,000
PROFORMA
PURCHASE ADJUSTED
ADJUSTMENTS BALANCE
SALES AND EARNED REVENUES $ 105,613,000
COST OF SALES AND EARNED REVENUES $ 31,000 (c) 84,236,000
Gross profit (31,000) 21,377,000
SELLING EXPENSE 5,791,000
GENERAL AND ADMINISTRATIVE 117,000 (c)(h) 9,678,000
Income (loss) from operations (148,000) 5,908,000
OTHER INCOME (EXPENSE):
Interest expense - net 181,000 (f) (1,592,000)
Equity in income of MFRI, Inc. (900,000) (g)
Equity in loss of Mid/Res, Inc.
Equity in income of joint ventures
Amortized gain on sale of Perma-Pipe (95,000) (g)
INCOME (LOSS) BEFORE TAXES (962,000) 4,316,000
INCOME TAX EXPENSE (BENEFIT) (371,000) 1,640,000(d)
NET INCOME (LOSS) $ (591,000) $ 2,676,000
EARNINGS PER COMMON SHARE 0.54 (e)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,949,000(e)
See notes to unaudited proforma combined financial
statements.
MFRI, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS NINE
MONTHS ENDED OCTOBER 31, 1996
MIDWESCO
HISTORICAL BUSINESSES ACQUIRED
MFRI MIDWESCO SPUN-OFF MIDWESCO
(A) (A)
SALES AND EARNED REVENUES $ 70,281,000 $ 26,809,000 $11,812,000 $14,997,000
COST OF SALES AND EARNED REVENUES 53,985,000 21,682,000 10,386,000 11,296,000
Gross profit 16,296,000 5,127,000 1,426,000 3,701,000
SELLING EXPENSE 4,126,000 1,284,000 428,000 856,000
GENERAL AND ADMINISTRATIVE EXPENSE 6,851,000 2,961,000 1,397,000 1,564,000
Income (loss) from operations 5,319,000 882,000 (399,000) 1,281,000
OTHER INCOME (EXPENSE):
Interest expense - net (753,000) (744,000) (158,000) (586,000)
Equity in income of MFRI, Inc. 1,024,000 1,024,000
Equity in income of Midwesco Services Inc. (22,000) (22,000)
Equity in income of joint ventures 667,000 667,000
Amortized gain on sale of Perma-Pipe 72,000 72,000
INCOME (LOSS) BEFORE TAXES 4,566,000 1,879,000 88,000 1,791,000
INCOME TAX EXPENSE (BENEFIT) 1,848,000 744,000 33,000 711,000
NET INCOME (LOSS) $2,718,000 $1,135,000 $ 55,000 $1,080,000
EARNINGS PER COMMON SHARE $
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 0.59
4,580,000
PROFORMA
PURCHASE ADJUSTED
ADJUSTMENTS BALANCE
(B)
SALES AND EARNED REVENUES $ 85,278,000
COST OF SALES AND EARNED REVENUES 23,000 (C) 65,304,000
Gross profit (23,000) 19,974,000
SELLING EXPENSE 4,982,000
GENERAL AND ADMINISTRATIVE EXPENSE 101,000)(c)(h) 8,516,000
Income (loss) from operations (124,000) 6,476,000
OTHER INCOME (EXPENSE):
Interest expense - net 89,000 (f) (1,250,000)
Equity in income of MFRI, Inc. (1,024,000) (g)
Equity in income of Midwesco Services, Inc.
Equity in income of joint ventures
Amortized gain on sale of Perma-Pipe (72,000) (g)
INCOME (LOSS) BEFORE TAXES (1,131,000) 5,226,000
INCOME TAX EXPENSE (BENEFIT) (518,000) (B)2 2,041,000 (d)
NET INCOME (LOSS) $(613,000) $ 3,185,000
EARNINGS PER COMMON SHARE $ 0.64 (e)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,986,000 (e)
See notes to unaudited proforma combined
financial statements.
MFRI, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL
STATEMENTS YEAR ENDED JANUARY 31, 1996 AND THE
NINE MONTHS ENDED OCTOBER 31, 1996
The unaudited proforma combined statements
of operations for the twelve months ended
January 31, 1996 and the nine months ended
October 31, 1996 have been prepared assuming
the proposed acquisition had occurred at the
beginning of the periods presented and reflect
the effects of certain adjustments to the
historical financial statements that result
from the proposed acquisition between MFRI and
Midwesco.
(a)Pursuant to the terms of the Agreement of
Merger immediately prior to the effectiveness
of the Merger, Midwesco will contribute
certain assets and liabilities to New
Midwesco. The contributed assets and
liabilities relate to the other businesses of
Midwesco which will not be acquired by MFRI.
The historical statement of operations
information of Midwesco has been adjusted to
reflect the operating results of the
businesses that will be contributed to New
Midwesco. The column "Acquired Midwesco"
represents the historical operating results of
the business that will be acquired by MFRI.
(b)The proforma adjusted balance represents
the sum of the amounts included in the
following columns: MFRI, Acquired Midwesco and
Purchase Adjustments.
(c)As a result of the step-up in basis of
certain property and equipment and the
recording of goodwill, depreciation and
amortization expense is increased for the
periods shown as follows:
NINE
MONTHS
YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
ASSETS AMOUNT LIFE METHOD 1996 1996
Machinery and $ 306,000 10 years S-L $ 31,000 $ 23,000
equipment
Goodwill 3,356,000 25 years S-L 134,000 101,000
(d)Represents the estimated income
tax expense for MFRI of 38% for the
year ended January 31, 1996, and 39%
for the nine months ended October 31,
1996, based upon the statutory
federal tax rate and an estimated
state and local tax rate.
(e)The earnings per share calculation
assumes 4,949,000 and 4,967,000
weighted average number of shares
outstanding for the year ended
January 31, 1996 and the nine months
ended October 31, 1996, respectively,
computed as follows:
NINE
MONTHS
YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
1996 1996
Historical weighted average number of shares 4,543,000 4,580,000
outstanding
Incremental shares issued in connection with 406,000 406,000
acquisition
Proforma weighted average number of shares 4,949,000 4,986,000
outstanding
On a proforma basis there
would be no difference between
primary and fully-diluted
weighted average number of
shares outstanding
(f)The Midwesco bank debt
assumed in the transaction
will bear an interest rate
pursuant to MFRI's existing
loan agreement. The interest
rate under MFRI's loan
agreement is lower than the
stated interest rate on the
assumed Midwesco bank debt.
Accordingly, the proforma
financial information has been
prepared assuming that the
Midwesco bank debt bears
interest at MFRI's effective
interest rate. The new debt
is expected to bear interest
at approximately 8.25%, a one
percentage point reduction
from the debt's current
interest rate. The reduction
in the interest rate reduced
the proforma interest expense
by $181,000 and $89,000 for
the year ended January 31,
1996 and the nine months ended
October 31, 1996,
respectively.
(g)Represents the elimination
of the equity income of MFRI
due to the elimination of
Midwesco's investment in MFRI
and the elimination of the
amortization of the gain on
the sale of the Perma-Pipe
business to MFRI, which
occurred in 1994.
(h)Included in general and
administrative expense are
amounts paid by MFRI to
Midwesco pursuant to a
Management Services Agreement
of $564,000 and $475,000 for
the year ended January 31,
1996 and the nine months ended
October 31, 1996,
respectively. Subsequent to
the acquisition of Midwesco,
MFRI and New Midwesco will
enter into a New Management
Services Agreement which will
provide for the allocation of
costs for any shared
employees, services and
facilities between MFRI and
New Midwesco. MFRI management
believes that the new
agreement will not result in
any net change to the
historical general and
administrative expenses
included in the proforma
combined financial statements.
******
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 hereunto duly
authorized.
Date: August 11, 1997
MFRI,INC.
By:/S/ MICHAEL D. BENNETT
Michael D. Bennett
Vice President