SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2002 -------------------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the transition period from to --------------- ------------------ Commission file number 0-18370 ------- MFRI, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3922969 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7720 Lehigh Avenue Niles, Illinois 60714 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (847) 966-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- On December 16, 2002, there were 4,922,364 shares of the Registrant's common stock outstanding.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying interim condensed consolidated financial statements of MFRI, Inc. and subsidiaries (the "Company") are unaudited, but include all adjustments which the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Certain information and footnote disclosures have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended January 31, 2002. The results of operations for the quarter ended October 31, 2002 are not necessarily indicative of the results to be expected for the full year ending January 31, 2003. MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share information) <TABLE> <CAPTION> Three Months Ended Nine Months Ended October 31, October 31, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $33,230 $32,393 $94,325 $97,275 Cost of sales 25,400 25,464 72,504 75,156 -------- -------- -------- -------- Gross profit 7,830 6,929 21,821 22,119 Selling expense 2,773 2,304 7,648 7,453 General and administrative expense 3,988 3,574 11,795 10,664 -------- -------- -------- -------- Income from operations 1,069 1,051 2,378 4,002 Other Income 13 - 13 - Interest expense 460 660 1,496 2,025 -------- -------- -------- -------- Income before income taxes and net extraordinary gain (loss) 622 391 895 1,977 Income taxes 259 230 373 880 -------- -------- -------- -------- Income before net extraordinary gain (loss) 363 161 522 1,097 Net extraordinary gain (loss), net of tax benefit (expense) of $74 and ($9) for the three and nine months in 2002 (112) - 17 - -------- -------- -------- -------- Net income $ 251 $ 161 $ 539 $ 1,097 ======== ======== ======== ======== Weighted average common shares outstanding 4,922 4,922 4,922 4,922 Weighted average common shares outstanding assuming full dilution 4,922 4,922 4,922 4,922 Basic earnings per share Income before net extraordinary (loss) $0.07 $0.03 $0.11 $0.22 Net extraordinary (loss) ($0.02) - - - Net income $0.05 $0.03 $0.11 $0.22 Diluted earnings per share Income before net extraordinary (loss) $0.07 $0.03 $0.11 $0.22 Net extraordinary (loss) ($0.02) - - - Net income $0.05 $0.03 $0.11 $0.22 - ------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. </TABLE> 1
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> (In thousands) October 31, January 31, Assets 2002 2002 - -------------------------------------------------------------------------------- Current Assets: <S> <C> <C> Cash and cash equivalents $ 254 $ 119 Restricted cash 738 - Trade accounts receivable, net 21,625 18,845 Costs and estimated earnings in excess of billings on uncompleted contracts 2,055 3,324 Inventories 20,767 18,682 Deferred income taxes receivable 2,179 2,179 Prepaid expenses and other current assets 2,605 2,463 -------- -------- Total current assets 50,223 45,612 Property, plant and equipment, net 28,531 30,065 Other Assets: Patents, net of accumulated amortization 869 962 Goodwill, net of accumulated amortization 12,632 12,445 Other assets 3,810 3,445 -------- -------- Total other assets 17,311 16,852 -------- -------- Total Assets $96,065 $92,529 ======== ======== Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Current Liabilities: Trade accounts payable $10,449 $ 9,643 Other accrued liabilities 4,634 4,683 Commissions payable 5,087 4,821 Current maturities of long-term debt 1,965 11,100 Billings in excess of costs and estimated earnings on uncompleted contracts 627 525 -------- -------- Total current liabilities 22,762 30,772 Long-Term Liabilities: Long-term debt, less current maturities 31,421 21,100 Deferred income taxes payable 1,297 1,143 Other 1,603 1,527 -------- -------- Total long-term liabilities 34,321 23,770 Stockholders' Equity: Common stock, $.01 par value, authorized-50,000 shares in October 2002 and January 2002; 4,922 issued and outstanding in October 2002 and January 2002 49 49 Additional paid-in capital 21,397 21,397 Retained earnings 18,262 17,725 Accumulated other comprehensive loss (726) (1,184) -------- -------- Total stockholders' equity 38,982 37,987 -------- -------- Total Liabilities and Stockholders' Equity $96,065 $92,529 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 2
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended (In thousands) October 31, -------------------- 2002 2001 -------- -------- Cash Flows from Operating Activities: <S> <C> <C> Net income $ 539 $ 1,097 Adjustments to reconcile net income to net cash flows from operating activities: Extraordinary gain (net of tax of $9) (17) - Provision for depreciation and amortization 2,905 3,042 Change in operating assets and liabilities, net of effects of acquisition of certain assets of a business: Trade accounts receivable (2,556) 4,598 Costs and estimated earnings in excess of billings on uncompleted contracts 1,371 351 Inventories (1,207) 842 Prepaid expenses and other current assets (133) (95) Current liabilities 828 (3,805) Other operating assets and liabilities (1,290) 106 -------- -------- Net Cash Flows from Operating Activities 440 6,136 -------- -------- Cash Flows from Investing Activities: Proceeds from sale of property and equipment 162 1,366 Purchases of property and equipment (976) (2,955) Acquisition of certain assets of a business (500) - Investment in joint venture (23) - -------- -------- Net Cash Flows from Investing Activities (1,337) (1,589) -------- -------- Cash Flows from Financing Activities: Payments on capitalized lease obligations (104) (103) Borrowings under revolving, term and mortgage loans 214,603 987,169 Repayment of debt (213,500) (991,779) -------- -------- Net Cash Flows from Financing Activities 999 (4,713) -------- -------- Effect of Exchange Rate Changes on Cash and Cash Equivalents 33 8 -------- -------- Net Increase in Cash and Cash Equivalents 135 (158) Cash and Cash Equivalents - Beginning of Period 119 290 -------- -------- Cash and Cash Equivalents - End of Period $ 254 $ 132 ======== ======== Supplemental cash flow information: Cash paid for: Interest, net of capitalized amounts $ 1,500 $ 2,275 Income taxes, net of refunds received 132 938 </TABLE> See notes to condensed consolidated financial statements. 3
MFRI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OCTOBER 31, 2002 1. The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended January 31, 2002. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the January 31, 2002 audited financial statements have been omitted from these interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. 2.Inventories consisted of the following: <TABLE> <CAPTION> October 31, January 31, (In thousands) 2002 2002 ---------- ---------- <S> <C> <C> Raw materials $14,565 $14,720 Work in process 2,376 1,551 Finished goods 3,826 2,411 ---------- ---------- Total $20,767 $18,682 ========== ========== </TABLE> 3. The basic weighted average shares reconcile to diluted weighted average shares as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended (In Thousands) October 31, October 31, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Income $ 251 $ 161 $ 539 $ 1,097 ======== ======== ======== ======== Basic weighted average common shares outstanding 4,922 4,922 4,922 4,922 Dilutive effect of stock options - - - - -------- -------- -------- -------- Weighted average common shares outstanding assuming full dilution 4,922 4,922 4,922 4,922 ======== ======== ======== ======== Income per basic share before net extraordinary (loss) $ 0.07 $ 0.03 $ 0.11 $ 0.22 Net extraordinary (loss) per basic share ($ 0.02) - - - Net income per common share - basic $0.05 $ 0.03 $ 0.11 $ 0.22 Income per diluted share before net extraordinary (loss) $ 0.07 $ 0.03 $ 0.11 $ 0.22 Net extraordinary (loss) per diluted share ($ 0.02) - - - Net income per common share - diluted $ 0.05 $ 0.03 $ 0.11 $ 0.22 </TABLE> 4
The weighted average number of stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares was 966,000 and 124,000 for the three months ended October 31, 2002 and 2001, respectively, and 912,667 and 500,000 for the nine months ended October 31, 2002 and 2001, respectively. These options were outstanding at the end of each of the respective periods. 4. The components of comprehensive income, net of tax, were as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended (In Thousands) October 31, October 31, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Income $ 251 $ 161 $ 539 $ 1,097 Change in foreign currency translation adjustments 57 74 458 (79) Change in minimum pension liability - - - - -------- -------- -------- -------- Comprehensive income $ 308 $ 235 $ 997 $ 1,018 ======== ======== ======== ======== </TABLE> Accumulated other comprehensive loss presented on the accompanying condensed consolidated balance sheets consists of the following: <TABLE> <CAPTION> October 31, January 31, (In thousands) 2002 2002 ---------- ---------- <S> <C> <C> Accumulated translation adjustment $ (234) $ (692) Minimum pension liability adjustment (net of tax benefit of $302) (492) (492) ---------- ---------- Total $ (726) $(1,184) ========== ========== </TABLE> 5. The Company has three reportable segments under the criteria of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Filtration Products Business manufactures and sells a wide variety of filter elements for air filtration and particulate collection systems. The Piping Systems Business engineers, designs and manufactures specialty piping systems and leak detection and location systems. The Industrial Process Cooling Equipment Business engineers, designs and manufactures chillers, mold temperature controllers, cooling towers, plant circulating systems and coolers for industrial process applications. 5
<TABLE> <CAPTION> Three Months Ended Nine Months Ended (In Thousands) October 31, October 31, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net Sales: <S> <C> <C> <C> <C> Filtration Products $14,163 $15,041 $40,130 $40,995 Piping Systems 11,511 12,345 35,306 39,597 Industrial Process Cooling Equipment 7,556 5,007 18,889 16,683 -------- -------- -------- -------- Total Net Sales $33,230 $32,393 $94,325 $97,275 ======== ======== ======== ======== Gross Profit: Filtration Products $ 2,694 $ 3,065 $ 7,699 $ 8,047 Piping Systems 2,783 2,464 8,360 9,324 Industrial Process Cooling Equipment 2,353 1,400 5,762 4,748 -------- -------- -------- -------- Total Gross Profit $ 7,830 $ 6,929 $21,821 $22,119 ======== ======== ======== ======== Income from Operations: Filtration Products $ 357 $ 1,233 $ 901 $ 2,439 Piping Systems 1,268 748 3,776 3,989 Industrial Process Cooling Equipment 606 116 905 674 Corporate (1,162) (1,046) (3,204) (3,100) -------- -------- -------- -------- Income from Operations $ 1,069 $ 1,051 $ 2,378 $ 4,002 ======== ======== ======== ======== </TABLE> 6. On July 11, 2002, the Company executed a loan agreement with a financial institution, providing access to a revolving line of credit. Under the terms of the loan agreement, all payments by the Company's domestic customers are deposited in a bank account ("Dominion Account") from which all funds may only be used to pay the debt under the Loan Agreement. At October 31, 2002, the amount of such restricted cash was $738,000. Cash required for operations is provided by draw-downs on the line of credit. 7. On July 11, 2002, the Company completed the early extinguishment of a loan with principal balance of $700,000, resulting in an extraordinary loss on the extinguishment of $133,000 ($79,000, net of tax). See note 10 below. 8. On July 11, 2002, the Company purchased certain assets of a business for $500,000 in cash paid to the seller. Other costs incurred totaled $185,000. The asset value, in accordance with SFAS 141, was $846,000 for inventory and $0 for other assets, resulting in the recognition of an extraordinary gain of $161,000 ($96,000 net of tax). The third quarter resulted in a reduction by $185,000 ($112,000 net of tax) of the extraordinary gain, due to additional costs, including warranty expense, associated with the purchase of certain assets of a business. 9. In June 2001, the FASB issued SFAS No. 141, "Business Combinations". The statement requires all business combinations initiated after June 30, 2001 to be accounted for by the purchase method. Adoption of SFAS No. 141 did not have a material effect on reported results of operations, financial condition or cash flows of the Company. On February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill and intangible assets 6
with indefinite lives, including such assets recorded in past business combinations, ceases upon adoption. Thus, no amortization for such goodwill and indefinite lived intangibles was recognized in the accompanying condensed consolidated statements of operations for the three and nine months ended October 31, 2002, compared with $124,000 or $0.03 per share and $370,000 or $0.08 per share for the comparable periods of the prior year. Goodwill, without additional acquisitions or amortizations, may change from quarter to quarter due to effects of foreign exchange translations on foreign goodwill. On an annual basis and when there is reason to suspect that their values have been impaired, these assets must be tested for impairment, and a write down may be necessary. SFAS 142 allows up to six months from the date of adoption to complete the initial transitional impairment test, which uses a fair value methodology. Based on the results of step one of the Company's transitional impairment test, the Company has identified potential impairment of goodwill in all three of its reporting units. The Company has retained professional valuation consultants to review and/or revise its step one analysis and to perform step two testing when indicated. Step two of the transitional impairment test, in which the magnitude of any goodwill impairment will be determined, must be completed by the filing of the January 31, 2003 10-K, and any resulting impairment loss will be recorded as a cumulative effect of a change in accounting principle. Initial quantification of the impairment test, which may vary from the final quantification, indicates that the amount of the write down could be up to 100% of the Company's approximately $14,000,000 of goodwill and related intangible assets. None of the covenants with the Company's lenders will be affected by any transition-year impairment write-down that might be required. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which was effective for the Company in February 1, 2002. SFAS No. 144 addresses accounting and reporting of the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting method for the sale of long-lived assets. Adoption of SFAS No. 144 did not have a material effect on the results of operations, financial condition or cash flows of the Company. 10. On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed $10,000,000 from its new revolving line of credit from another financial institution to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is required to pay $187,500 in aggregate principal on the last day of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is required to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such prepayments on July 31, 2002. At October 31, 2002, the Company was in compliance with all covenants contained in the Note Purchase Agreements. 7
On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2005, the Company can borrow up to $28,000,000 (which has been reduced to $27,000,000 following the completion of the Lebanon, Tennessee mortgage borrowing described below), subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a base rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At October 31, 2002, the prime rate was 4.75 percent, 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 1.00 and 3.00 percentage points respectively. The Company had borrowed $13,111,000 under the revolving line of credit at October 31, 2002, $10,000,000 of which was used to reduce debt outstanding to other financial institutions under the Prior Term Loans and $700,000 under the Prior Credit Agreement (see below). The Company's policy is to classify borrowings under the revolving line of credit as long-term debt, as the Company has the ability and the intent to maintain this obligation for longer than one year. In addition, $5,815,000 was drawn under the agreement as letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings, property taxes and insurance premiums. The Loan Agreement replaced a three-year secured credit agreement with a bank which had provided a revolving line of credit of $8,000,000 ("Prior Credit Agreement") and a loan with a principal balance of $700,000. The early extinguishment of the Prior Credit Agreement resulted in an extraordinary loss of $133,000 ($79,000, net of tax). The Loan Agreement also 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 October 31, 2002, the amount of such restricted cash was $738,000. Cash required for operations is provided by draw-downs on the line of credit. At October 31, 2002, the Company was not in compliance with one covenant under the Loan Agreement. The Company has received a waiver of such non-compliance and an amendment of the covenant to levels that the Company believes should be attainable. On April 26, 2002 Midwesco Filter Resources, Inc. ("Midwesco Filter") borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the holders of the Notes due 2007 and the Notes due 2008 and the Bank. The notes each bear interest at 7.10 percent with a combined monthly payment of $40,235 for both principal and interest, and the loans' amortization schedules and terms are each ten years. On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. $1,000,000 of the proceeds was used for a required payment of amounts borrowed under the Loan Agreement with the remaining proceeds used to repay amounts borrowed under the Note Purchase Agreements. The loan bears interest at 7.75 percent 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 includes the assumption of a $2,500,000 mortgage note with a remaining balance of $2,405,000. The loan bears interest at 7.52 percent with monthly payments of $18,507 for both principal and interest and the term of the loan is ten years with an amortization schedule of 25 years. At the date of purchase, the remaining term of the loan was 7.25 years. 8
On August 10, 1999, the Company obtained a loan from a Danish bank in the amount of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing exchange rate at the time of the transaction, to complete the permanent financing of the acquisition of Nordic Air A/S. The loan bears interest at 6.22 percent and has a term of five years. On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured by the manufacturing facility in Cicero, Illinois. The loan bears interest at 6.76 percent with monthly payments of $9,682 for both principal and interest and the term of the loan is ten years with an amortization schedule of 25 years. On June 1, 1998, the Company obtained two loans from a Danish bank to partially finance the acquisition of Boe-Therm A/S ("Boe-Therm"). The first loan in the amount of 4,500,000 DKK (approximately $650,000 at the prevailing exchange rate at the time of the transaction) is secured by the land and building of Boe-Therm, bears interest at 6.48 percent and has a term of twenty years. The second loan in the amount of 2,750,000 DKK (approximately $400,000 at the prevailing exchange rate at the time of the transaction) is secured by the machinery and equipment of Boe-Therm, bears interest at 5.80 percent and has a term of five years. A third 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 percent and has a term of twenty years. The interest rates on both the twenty-year loans are guaranteed for the first ten years, after which they will be renegotiated based on prevailing market conditions. On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester, Virginia received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007, and on October 18, 1995, Perma-Pipe, Inc. in Lebanon, Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1, 2007. These bonds are fully secured by bank letters of credit, which the Company expects to renew, reissue, extend or replace prior to each expiration date during the term of the bonds. The bonds bear interest at a variable rate, which approximates five percent per annum, including letter of credit and re-marketing fees. The bond proceeds were available for capital expenditures related to manufacturing capacity expansions and efficiency improvements during a three-year period which commenced in the fourth quarter of 1995 and ended during the Company's fiscal quarter ended October 31, 1998. On November 1, 1999, the Company utilized $1,100,000 of unspent bond proceeds to redeem bonds outstanding as provided in the indenture. The Company also has short-term credit arrangements utilized by its European subsidiaries. These credit arrangements are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. At October 31, 2002, borrowings under these credit arrangements totaled $449,000; an additional $521,000 remained unused. The Company also had outstanding letters of credit in the amount of $78,000 to guarantee performance to third parties of various European trade activities and contracts. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The statements contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and certain other information contained elsewhere in this report, which can be identified by the use of 9
forward-looking terminology such as "may", "will", "expect", "continue", "remains", "intend", "aim", "should", "prospects", "could", "future", "potential", "believes", "plans" and "likely" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected. These uncertainties include, but are not limited to, economic conditions, market demand and pricing, competitive and cost factors, raw material availability and prices, global interest rates, currency exchange rates, labor relations and other risk factors. RESULTS OF OPERATIONS MFRI, Inc. Three months ended October 31 Net sales of $33,230,000 for the quarter ended October 31, 2002 increased 2.6 percent from $32,393,000 for the comparable quarter last year. (See discussion of each business segment below.) Gross profit of $7,830,000 increased 13.0 percent from $6,929,000 in the prior year quarter, and gross margin increased to 23.6 percent of net sales in the current year from 21.4 percent of net sales in the prior year. (See discussion of each business segment below.) Net income increased 55.9 percent to $251,000 in the current year quarter from $161,000 in the prior year quarter, and net income per common share (diluted) increased to $0.05 from $0.03. The dollar increase in net income was primarily due to increased gross profit and decreased interest expense, partially offset by increased selling, general and administrative expense and a $185,000 ($112,000 net of tax) due to the reduction in the extraordinary gain recognized from the purchase of certain assets of a business. Nine months ended October 31 Net sales of $94,325,000 for the nine months ended October 31, 2002 decreased 3.0 percent from $97,275,000 for the comparable period in the prior year. (See discussion of each business segment below.) Gross profit of $21,821,000 decreased 1.3 percent from $22,119,000 for the comparable period in the prior year, while gross margin increased to 23.1 percent of net sales in the current year from 22.7 percent of net sales in the prior year. (See discussion of each business segment below.) Net income decreased 50.9 percent to $539,000 or $0.11 per common share (diluted) in the current year from $1,097,000 or $0.22 per common share (diluted) in the comparable period in the prior year. The decrease in net income was partially due to decreased gross profit, increased selling, general and administrative expense and an extraordinary loss of $133,000 ($79,000 net of tax) from an early extinguishment of debt, the total of which is partially offset by a decrease in interest expense and an extraordinary gain of $161,000 ($96,000 net of tax) due to the purchase of certain assets of a business. 10
Filtration Products Business Three months ended October 31 Net sales for the quarter ended October 31, 2002 decreased 5.8 percent to $14,163,000 from $15,041,000 for the comparable quarter in the prior year. This decrease is primarily due to the weak economy and competitive pressures in the marketplace. Gross profit as a percent of net sales decreased from 20.4 percent in the prior year to 19.0 percent in the current year, primarily as a result of competitive pricing pressures in the marketplace. Selling expense for the quarter ended October 31, 2002 increased to $1,488,000 or 10.5 percent of net sales from $1,073,000 or 7.1 percent of net sales for the comparable quarter in the prior year. The increase is attributable to higher salaries, commissions, and travel expenses. General and administrative expenses increased to $849,000 or 6.0 percent of net sales in the current year quarter from $759,000 or 5.0 percent of net sales for the comparable period in the prior year, primarily due to higher legal expenses related to defending a patent infringement suit that has been settled. Nine months ended October 31 Net sales for the nine months ended October 31, 2002 decreased 2.1 percent to $40,130,000 from $40,995,000 for the comparable period in the prior year. This decrease is primarily the result of lower sales of non-filtration products and services due to the weak economy and competitive pressures in the marketplace. Gross profit as a percent of net sales decreased from 19.6 percent in the prior year to 19.2 percent in the current year, primarily as a result of competitive pricing pressures in the marketplace, partially offset by improved manufacturing efficiencies. Selling expense for the nine months ended October 31, 2002 increased to $4,116,000 or 10.3 percent of net sales from $3,507,000 or 8.6 percent of net sales for the comparable period in the prior year. The increase is attributable to higher salaries, commissions, and travel expenses. General and administrative expenses increased to $2,682,000 or 6.7 percent of net sales in the current year period from $2,101,000 or 5.1 percent of net sales for the comparable period in the prior year, due to higher legal expenses related to defending a patent infringement suit that has been settled, partially offset by cost reduction measures that were implemented in the latter half of 2001. Piping Systems Business Three months ended October 31 Net sales decreased 6.8 percent from $12,345,000 in the prior year quarter to $11,511,000 for the quarter ended October 31, 2002. This decrease is primarily due to the loss of sales of $792,000 generated by a former UK subsidiary, Perma-Pipe Services Limited (PPSL), in the prior year period. The contract for the sale of PPSL became effective in December 2001. Gross profit as a percent of net sales increased from 20.0 percent to 24.2 percent due to improved manufacturing efficiencies. 11
Selling expense decreased from $484,000 or 3.9 percent of net sales for the prior year quarter to $347,000 or 3.0 percent of net sales in the current year quarter. The dollar decrease is primarily due to lower commissions, the elimination of the selling expense due to the sale of PPSL, and an overall reduction in headcount. General and administrative expense decreased from $1,232,000 in the prior year quarter to $1,167,000 in the current year quarter, and increased as a percent of net sales from 10.0 percent to 10.1 percent. The dollar decrease is primarily due to eliminated general and administrative expenses due to the sale of PPSL and partially offset by higher legal expense in the current year period. Nine months ended October 31 Net sales of $35,306,000 for the nine months ended October 31, 2002 decreased 10.8 percent from $39,597,000 for the comparable period in the prior year. This decrease is primarily due to lower domestic sales, particularly a sale of $2,000,000 for a high-temperature oil-recovery project in Canada in the prior year and from loss of sales of $1,662,000 generated in the prior year period by PPSL. Gross profit as a percent of net sales increased from 23.5 percent to 23.7 percent, mainly due to improved manufacturing efficiencies and the loss of lower-margin sales generated by PPSL in the prior-year period. Selling expense decreased from $1,569,000 or 4.0 percent of net sales in the prior year period to $1,056,000 or 3.0 percent of net sales in the current year period. The dollar decrease is primarily due to lower commissions, eliminated selling expenses due to the sale of PPSL, and an overall reduction in headcount. General and administrative expense decreased from $3,766,000 in the prior year period to $3,527,000 in the current year period but increased as a percent of net sales from 9.5 percent to 10.0 percent. The dollar decrease is primarily due to eliminated general and administrative expenses due to the sale of PPSL and partially offset by higher legal expense in the current year period. Industrial Process Cooling Equipment Business Three months ended October 31 Net sales of $7,556,000 for the quarter ended October 31, 2002 increased by 50.9 percent from $5,007,000 for the comparable quarter in the prior year. The increase is due primarily to sales from the product lines associated with a recent acquisition of certain assets of a business and to some recovery from the weak economy. Gross profit increased from 28.0 percent of net sales in the prior year quarter to 31.1 percent of net sales in the current year quarter, primarily due to product mix and improved efficiency. Selling expense increased to $938,000 or 12.4 percent of net sales in the current year quarter from $747,000 or 14.9 percent of net sales in the prior year quarter. The dollar increase is due to higher commissions and the salary and increased headcount due to the recent acquisition of certain assets of a business. 12
General and administrative expense increased from $537,000 or 10.7 percent of net sales in the prior year quarter to $809,000 or 10.7 percent of net sales in the current year quarter. This increase is due to post-implementation costs of a new enterprise resource planning (ERP) system, increased headcount due to the recent acquisition of certain assets of a business, and engineering costs charged to general and administrative expense. Nine months ended October 31 Net sales of $18,889,000 for the nine months ended October 31, 2002 increased 13.2 percent from $16,683,000 for the comparable period in the prior year. The increase is due primarily to sales from the product lines associated with a recent acquisition of certain assets of a business and to some recovery from the weak economy. Gross margin increased from 28.5 percent of net sales in the prior year to 30.5 percent of net sales in the current year, primarily due to product mix and improved efficiency. Selling expense increased to $2,476,000 or 13.1 percent of net sales in the current year period from $2,377,000 or 14.2 percent of net sales in the prior year. The dollar increase is primarily due to higher commissions resulting from higher volume and product mix and from increased headcount due to the recent acquisition of certain assets of a business. General and administrative expense increased from $1,697,000 or 10.2 percent of net sales in the prior year to $2,381,000 or 12.6 percent of net sales in the current year. The increase is due to post-implementation costs of a new ERP system and increased headcount due to the recent acquisition of certain assets of a business. General Corporate Expense General corporate expense includes interest expense and general and administrative expense incurred by MFRI, Inc.-Corporate that has not been allocated to the business segments. Three months ended October 31 General and administrative expense increased from $1,046,000 in the prior year quarter to $1,162,000 in the current year quarter, and increased as a percentage of net sales from 3.2 percent in the prior year quarter to 3.5 percent in the current year quarter. The dollar increase is mainly due to increased outside professional service, property tax, and loan amortization costs, partially offset by decreased hospitalization and goodwill amortization costs. Interest expense decreased to $460,000 for the current year quarter from $660,000 in the prior year quarter. The decrease is primarily due to net debt reductions in the prior year and lower average costs of borrowing. Nine months ended October 31 General and administrative expense increased from $3,100,000 in the prior year period to $3,204,000 in the current year period, and increased as a percentage of net sales from 3.2 percent in the prior year period to 3.4 percent in the current year period. The dollar increase is mainly due to increases in outside professional service, loan amortization, and bank fee costs, partially offset by decreases in goodwill amortization, management bonus incentive, building repairs and maintenance, and heat, light, and power costs. 13
Interest expense decreased to $1,500,000 in the current year period from $2,025,000 for the comparable period in the prior year. The decrease is due to net debt reductions in the prior year and lower average costs of borrowing. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Operating Cash Flow Cash and cash equivalents as of October 31, 2002 were $254,000 as compared to $132,000 at October 31, 2001. For the current year period, net cash provided from operating activities was $440,000, net borrowing of long-term debt was $1,103,000, purchases of property and equipment was $976,000, and the acquisition of certain assets of a business was $500,000, in cash paid to the seller. Net cash provided by operating activities was $440,000 for the nine months ended October 31, 2002, compared with $6,136,000 for the nine months ended October 31, 2001. The decreases in current liabilities of $828,000 and costs and estimated earnings in excess of billings on uncompleted contracts of $1,371,000 were partially offset by increases in trade receivables, inventories, prepaid and other assets. Net cash used for investing activities for the nine months ended October 31, 2002 and 2001 were $1,337,000 and $1,589,000, respectively. Capital expenditures decreased from $2,955,000 in the prior year to $976,000 in the current year. In the current year, the Company acquired certain assets of a business and invested in a joint venture for $500,000 in cash paid to the seller and $23,000, respectively. Proceeds from the sale of property and equipment were $162,000 in the current year, compared with proceeds of $1,366,000 from sale and lease back transactions in the prior year period. For the nine months ended October 31, 2002, $1,103,000 was used for net borrowings of long-term debt and $104,000 was used for payments on capitalized lease obligations. In the comparable prior year period, the Company used $4,610,000 for net payments of long-term debts and utilized $103,000 to repay capitalized lease obligations. The Company's current ratio was 2.2 to 1 and 1.5 to 1 at October 31, 2002 and January 31, 2002, respectively. Debt to total capitalization at October 31, 2002 increased to 46.1 percent from 45.9 percent at January 31, 2002. Financing On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed $10,000,000 from its new revolving line of credit from another financial institution to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is required to pay $187,500 in 14
aggregate principal on the last day of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is required to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such prepayments on July 31, 2002. At October 31, 2002, the Company was in compliance with all covenants contained in the Note Purchase Agreements. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2005, the Company can borrow up to $28,000,000 (reduced to $27,000,000 upon completion of the Lebanon, Tennessee mortgage borrowing described below), subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a base rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At October 31, 2002, the prime rate was 4.75 percent, 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 1.00 and 3.00 percentage points respectively. The Company had borrowed $13,111,000 under the revolving line of credit at October 31, 2002, $10,000,000 of which was used to reduce debt outstanding to other financial institutions under the Prior Term Loans and $700,000 under the Prior Credit Agreement (see below). The Company's policy is to classify borrowings under the revolving line of credit as long-term debt, as the Company has the ability and the intent to maintain this obligation for longer than one year. In addition, $5,815,000 was drawn under the agreement as letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings, property taxes and insurance premiums. The Loan Agreement replaced a three-year secured credit agreement with a bank which had provided a revolving line of credit of $8,000,000 ("Prior Credit Agreement") and a loan with a principal balance of $700,000. The early extinguishment of the Prior Credit Agreement resulted in an extraordinary loss of $133,000 ($79,000, net of tax). The Loan Agreement also 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 October 31, 2002, the amount of such restricted cash was $738,000. Cash required for operations is provided by draw-downs on the line of credit. At October 31, 2002, the Company was not in compliance with one covenant under the Loan Agreement. The Company has received a waiver of such non-compliance and an amendment of the covenant to levels that the Company believes should be attainable. On April 26, 2002 Midwesco Filter Resources, Inc. ("Midwesco Filter") borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the holders of the Notes due 2007 and the Notes due 2008 and the Bank. The notes each bear interest at 7.10 percent with a combined monthly payment of $40,235 for both principal and interest, and the loans' amortization schedules and terms are each ten years. On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. $1,000,000 of the proceeds was used for a required payment of amounts borrowed under the Loan Agreement with the remaining proceeds used to repay amounts borrowed under the Note Purchase Agreements. The loan bears interest at 7.75 percent with monthly payments of $21,001 for both principal and interest, and has a ten year term. 15
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a 131,000-square foot building in Niles, Illinois, from two principal stockholders, who are also members of management, for approximately $4,438,000. This amount includes the assumption of a $2,500,000 mortgage note with a remaining balance of $2,405,000. The loan bears interest at 7.52 percent with monthly payments of $18,507 for both principal and interest and the term of the loan is ten years with an amortization schedule of 25 years. At the date of purchase, the remaining term of the loan was 7.25 years. On August 10, 1999, the Company obtained a loan from a Danish bank in the amount of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing exchange rate at the time of the transaction, to complete the permanent financing of the acquisition of Nordic Air A/S. The loan bears interest at 6.22 percent and has a term of five years. On June 30, 1998, the Company borrowed $1,400,000 under a mortgage note secured by the manufacturing facility in Cicero, Illinois. The loan bears interest at 6.76 percent with monthly payments of $9,682 for both principal and interest and the term of the loan is ten years with an amortization schedule of 25 years. On June 1, 1998, the Company obtained two loans from a Danish bank to partially finance the acquisition of Boe-Therm A/S ("Boe-Therm"). The first loan in the amount of 4,500,000 DKK (approximately $650,000 at the prevailing exchange rate at the time of the transaction) is secured by the land and building of Boe-Therm, bears interest at 6.48 percent and has a term of twenty years. The second loan in the amount of 2,750,000 DKK (approximately $400,000 at the prevailing exchange rate at the time of the transaction) is secured by the machinery and equipment of Boe-Therm, bears interest at 5.80 percent and has a term of five years. A third 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 percent and has a term of twenty years. The interest rates on both the twenty-year loans are guaranteed for the first ten years, after which they will be renegotiated based on prevailing market conditions. On September 14, 1995, Midwesco Filter Resources, Inc. in Winchester, Virginia received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007, and on October 18, 1995, Perma-Pipe, Inc. in Lebanon, Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1, 2007. These bonds are fully secured by bank letters of credit, which the Company expects to renew, reissue, extend or replace prior to each expiration date during the term of the bonds. The bonds bear interest at a variable rate, which approximates five percent per annum, including letter of credit and re-marketing fees. The bond proceeds were available for capital expenditures related to manufacturing capacity expansions and efficiency improvements during a three-year period which commenced in the fourth quarter of 1995 and ended during the Company's fiscal quarter ended October 31, 1998. On November 1, 1999, the Company utilized $1,100,000 of unspent bond proceeds to redeem bonds outstanding as provided in the indenture. The Company also has short-term credit arrangements utilized by its European subsidiaries. These credit arrangements are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. At October 31, 2002, borrowings under these credit arrangements totaled $449,000; an additional $521,000 remained unused. The Company also had outstanding letters of credit in the amount of $78,000 to guarantee performance to third parties of various European trade activities and contracts. 16
ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations". The statement requires all business combinations initiated after June 30, 2001 to be accounted for by the purchase method. Adoption of SFAS No. 141 did not have a material effect on reported results of operations, financial condition or cash flows of the Company. On February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business combinations, ceases upon adoption. Thus, no amortization for such goodwill and indefinite lived intangibles was recognized in the accompanying condensed consolidated statements of operations for the three and nine months ended October 31, 2002, compared with $124,000 or $0.03 per share and $370,000 or $0.08 per share for the comparable periods of the prior year. Goodwill, without additional acquisitions or amortizations, may change from quarter to quarter due to effects of foreign exchange translations on foreign goodwill. On an annual basis and when there is reason to suspect that their values have been impaired, these assets must be tested for impairment, and a write down may be necessary. SFAS 142 allows up to six months from the date of adoption to complete the initial transitional impairment test, which uses a fair value methodology. Based on the results of step one of the Company's transitional impairment test, the Company has identified potential impairment of goodwill in all three of its reporting units. The Company has retained professional valuation consultants to review and/or revise its step one analysis and to perform step two testing when indicated. Step two of the transitional impairment test, in which the magnitude of any goodwill impairment will be determined, must be completed by the filing of the January 31, 2003 10-K, and any resulting impairment loss will be recorded as a cumulative effect of a change in accounting principle. Initial quantification of the impairment test, which may vary from the final quantification, indicates that the amount of the write down could be up to 100% of the Company's approximately $14,000,000 of goodwill and related intangible assets. None of the covenants with the Company's lenders will be affected by any transition-year impairment write-down that might be required. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which was effective for the Company in February 1, 2002. SFAS No. 144 addresses accounting and reporting of the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting method for the sale of long-lived assets. Adoption of SFAS No. 144 did not have a material effect on the results of operations, financial condition or cash flows of the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. Foreign currency exchange rate risk is mitigated through maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products and use of foreign currency denominated debt in Denmark. The Company also utilizes foreign currency forward contracts to reduce exposure to exchange rate risks. The forward contracts are short-term in duration, generally one year or less. The major currency exposure hedged by the Company is the Canadian dollar. The contract amounts, carrying amounts and fair values of these contracts were not significant at October 31, 2002 or January 31, 2002. 17
The changeover from national currencies to the Euro began on January 1, 2002, and is not expected to materially affect the Company's foreign currency exchange risk profile, although some customers may require the Company to invoice or pay in Euros rather than the functional currency of the manufacturing entity. The Company has attempted to mitigate its interest rate risk by combining fixed-rate long-term debt with floating rate debt. Item 4. Controls and Procedures Within the 90 days prior to the date of this report 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 its disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of that evaluation and no corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Exhibits: (a) Exhibit 1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Michael D. Bennett (b) Exhibit 2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - David Unger 18
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MFRI, INC. Date: December 16, 2002 /s/ David Unger ---------------------------------------- David Unger Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: December 16, 2002 /s/ Michael D. Bennett ---------------------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 19
I, Michael D. Bennett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc. 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures 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 quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's Auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's Auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. December 16, 2002 /s/ Michael D. Bennett ----------------------------------------- Michael D. Bennett Vice President Chief Financial Officer (Principal Financial and Accounting Officer)
I, David Unger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MFRI, Inc. 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and we have; (a) designed such disclosure controls and procedures 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 quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's Auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's Auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. December 16, 2002 /s/ David Unger ----------------------------------------- David Unger President and Chief Executive Officer (Principal Executive Officer)