SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES X EXCHANGE ACT OF 1934 - --------- ---------------------------------------------------------------------- For the quarterly period ended April 30, 2003 ------------------------------------------------- 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 _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b). Yes _____ No __X__ On June 23, 2003, 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, 2003. Certain reclassifications have been made in prior-year financial statements to conform to the current-year presentation. The results of operations for the quarter ended April 30, 2003 are not necessarily indicative of the results to be expected for the full year ending January 31, 2004.
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share information) <TABLE> <CAPTION> Three Months Ended April 30, ---------------------------- 2003 2002(1) -------- -------- <S> <C> <C> Net sales $ 28,010 $ 26,768 Cost of sales 22,816 21,139 -------- -------- 5,194 5,629 Gross profit Selling expense 2,600 2,261 General and administrative expense 3,543 3,155 -------- -------- (949) 213 Income (loss) from operations Other Income 10 - Interest expense 492 519 -------- -------- Loss before income taxes and cumulative effect of accounting change (1,431) (306) Income tax (benefit) (566) (124) -------- -------- Loss before cumulative effect of accounting change (865) (182) Cumulative effect of a change in accounting for goodwill, net of tax benefit of $1,110 in 2002 - (10,739) -------- -------- Net loss $ (865) $(10,921) ======== ======== Weighted average common shares outstanding 4,922 4,922 Weighted average common shares outstanding assuming full dilution 4,922 4,922 Basic earnings per share Loss before cumulative effect of accounting change $ (0.18) $ (0.04) Cumulative effect of accounting change - (2.18) Net loss $ (0.18) $ (2.22) Diluted earnings per share Loss before cumulative effect of accounting change $ (0.18) $ (0.04) Cumulative effect of accounting change - (2.18) Net loss $ (0.18) $ (2.22) </TABLE> (1) The first quarter of fiscal year 2002 was restated to reflect the cumulative effect of accounting change. See notes to condensed consolidated financial statements. 2
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands) <TABLE> <CAPTION> April 30, January 31, Assets 2003 2003 - -------------------------------------------------------------------------------- Current Assets: <S> <C> <C> Cash and cash equivalents $ 320 $ 346 Restricted cash 137 276 Trade accounts receivable, net 19,947 17,806 Accounts receivable - related companies 582 329 Costs and estimated earnings in excess of billings on uncompleted contracts 1,912 2,044 Income taxes receivable 1,695 1,043 Inventories 19,756 19,582 Deferred income taxes 1,822 1,822 Prepaid expenses and other current assets 909 1,828 -------- -------- Total current assets 47,080 45,076 Property, plant and equipment, net 28,533 27,888 Other Assets: Assets held for sale 271 277 Patents, net of accumulated amortization 812 844 Goodwill 2,403 2,353 Other assets 2,455 2,538 -------- -------- Total other assets 5,941 6,012 -------- -------- Total Assets $ 81,554 $ 78,976 ======== ======== Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Current Liabilities: Trade accounts payable $ 12,378 $ 9,673 Accrued compensation and payroll taxes 2,098 2,193 Other accrued liabilities 2,522 2,262 Commissions payable 3,471 4,163 Current maturities of long-term debt 17,711 2,415 Billings in excess of costs and estimated earnings on uncompleted contracts 287 299 Income taxes payable 75 82 -------- -------- Total current liabilities 38,542 21,087 Long-Term Liabilities: Long-term debt, less current maturities 15,069 29,261 Other 2,044 2,016 -------- -------- Total long-term liabilities 17,113 31,277 Stockholderss Equity: Common stock, $.01 par value, authorized - 50,000 shares in April 2003 and January 2003; 4,922 issued and outstanding in April 2003 and January 2003 49 49 Additional paid-in capital 21,397 21,397 Retained earnings 5,332 6,197 Accumulated other comprehensive loss (879) (1,031) -------- -------- Total stockholders' equity 25,899 26,612 -------- -------- Total Liabilities and Stockholders' Equity $ 81,554 $ 78,976 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 3
MFRI, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (In thousands) Three Months Ended April 30, ---------------------------- 2003 2002(1) -------- -------- Cash Flows from Operating Activities: <S> <C> <C> Net loss $ (865) $(10,921) Adjustments to reconcile net loss to net cash flows from operating activities: Cumulative effect of change in accounting for goodwill - 10,739 Provision for depreciation and amortization 945 929 Loss on sale of property, plant and equipment 10 - Change in operating assets and liabilities: Trade accounts receivable (2,141) 556 Costs and estimated earnings in excess of billings on uncompleted contracts 119 642 Inventories (97) (732) Prepaid expenses and other current assets 374 (719) Current liabilities 2,560 1,033 Other operating assets and liabilities (427) (4) -------- -------- Net Cash Flows from Operating Activities 478 1,523 -------- -------- Cash Flows from Investing Activities: Proceeds from sale of property and equipment 10 - Purchases of property and equipment (1,438) (286) Investment in joint venture (10) (60) -------- -------- Net Cash Flows from Investing Activities (1,438) (346) -------- -------- Cash Flows from Financing Activities: Payments on capitalized lease obligations (38) (32) Borrowings under revolving, term and mortgage loans 1,417 3,477 Repayment of debt (389) (4,599) -------- -------- Net Cash Flows from Financing Activities 990 (1,114) -------- -------- Effect of Exchange Rate Changes on Cash And Cash Equivalents (56) 15 -------- -------- Net Increase in Cash and Cash Equivalents (26) 78 Cash and Cash Equivalents - Beginning of Period 346 119 -------- -------- Cash and Cash Equivalents - End of Period $ 320 $ 197 ======== ======== Supplemental cash flow information: Cash paid for: Interest, net of capitalized amounts $ 480 $ 529 Income taxes, net of refunds received 3 38 </TABLE> (1) The first quarter of fiscal year 2002 was restated to reflect the cumulative effect of accounting change. See notes to condensed consolidated financial statements. 4
MFRI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) APRIL 30, 2003 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, 2003. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the January 31, 2003 audited financial statements have been omitted from these interim financial statements. Certain reclassifications have been made in prior-year financial statements to conform to the current-year presentation. 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> April 30, January 31, (In thousands) 2003 2003 -------- -------- <S> <C> <C> Raw materials $ 14,573 $ 14,647 Work in process 2,154 1,881 Finished goods 3,029 3,054 -------- -------- Total $ 19,756 $ 19,582 ======== ======== </TABLE> 3. Other intangible assets with definite lives: Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. Patents, net of accumulated amortization, were $812,000 and $844,000 at April 30, 2003 and January 31, 2003, respectively. Accumulated amortization was $1,317,000 and $1,273,000 at April 30, 2003 and January 31, 2003, respectively. Future amortizations over the next five years ending January 31, will be 2004 - $177,500, 2005 - $177,500, 2006 - $177,500, 2007 - $171,500 and 2008 - $26,400. 4. Assets held for sale: Certain machinery in Perma-Pipe is classified as held-for-sale. The estimated fair value is $271,000 and $277,000 at April 30, 2003 and January 31, 2003, respectively. The weighted average remaining useful lives is 7.2 years. 5
5. The basic weighted average shares reconcile to diluted weighted average shares as follows: <TABLE> <CAPTION> Three Months Ended (In thousands) April 30, --------------------- 2003 2002(1) -------- -------- <S> <C> <C> Net Loss $ (865) $(10,921) ======== ======== Basic weighted average common shares outstanding 4,922 4,922 Dilutive effect of stock options - - -------- -------- Weighted average common shares outstanding assuming full dilution 4,922 4,922 ======== ======== Basic earnings per share Loss before cumulative effect of accounting change $ (0.18) $ (0.04) Loss on cumulative effect of accounting change - (2.18) Net loss $ (0.18) $ (2.22) Diluted earnings per share Loss before cumulative effect of accounting change $ (0.18) $ (0.04) Loss on cumulative effect of accounting change - (2.18) Net loss $ (0.18) $ (2.22) </TABLE> (1) The first quarter of fiscal year 2002 was restated to reflect the cumulative effect of accounting change. 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 were 939,000 and 846,000 for the three months ended April 30, 2003 and 2002, respectively. These options were outstanding at the end of each of the respective periods. 6. The components of comprehensive loss, net of tax, were as follows: <TABLE> <CAPTION> Three Months Ended (In thousands) April 30, --------------------- 2003 2002(1) -------- -------- <S> <C> <C> Net Loss $ (865) $(10,921) Change in foreign currency translation adjustments 152 63 -------- -------- Comprehensive loss $ (713) $(10,858) ======== ======== </TABLE> (1) The first quarter of fiscal year 2002 was restated to reflect the cumulative effect of accounting change. Accumulated other comprehensive loss presented on the accompanying condensed consolidated balance sheets consists of the following: 6
<TABLE> <CAPTION> (In thousands) April 30, January 31, 2003 2003 -------- -------- <S> <C> <C> Accumulated translation adjustment $ 191 $ 39 Minimum pension liability adjustment (net of tax benefit of $655 at April 30 and January 31, 2003) (1,070) (1,070) -------- -------- Total $ (879) $ (1,031) ======== ======== </TABLE> 7. 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, manufactures and sells specialty piping systems and leak detection and location systems. The Industrial Process Cooling Equipment Business engineers, designs, manufactures and sells chillers, cooling towers, plant circulating systems and accessories for industrial process applications. <TABLE> <CAPTION> Three Months Ended (In thousands) April 30, --------------------- 2003 2002 -------- -------- Net Sales: <S> <C> <C> Filtration Products $ 13,390 $ 12,392 Piping Systems 8,805 9,323 Industrial Process Cooling Equipment 5,815 5,053 -------- -------- Total Net Sales $ 28,010 $ 26,768 ======== ======== Gross Profit: Filtration Products $ 2,275 $ 2,216 Piping Systems 1,274 2,018 Industrial Process Cooling Equipment 1,645 1,395 -------- -------- Total Gross Profit $ 5,194 $ 5,629 ======== ======== Income (loss) from Operations: Filtration Products $ 198 $ 370 Piping Systems 105 731 Industrial Process Cooling Equipment 8 1 Corporate (1,260) (889) -------- -------- Income (loss) from Operations $ (949) $ 213 ======== ======== </TABLE> 8. In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," parts of which apply to existing contracts, but is generally effective for contracts entered into after June 30, 2003. SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and, among other issues, clarifies the conditions under which a contract with a net initial investment should be accounted for 7
as a derivative instrument and amends the definition of an underlying to conform with the language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Adoption of SFAS No. 149 did not have a material effect on the results of operations, financial condition or cash flows of the Company. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation" which was effective for the Company December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair-value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both the annual and interim financial statements about the Company's method of accounting for stock-based employee compensation and the effects of the method used on reported results. Adoption of SFAS No. 148 did not have a material effect on the results of operations, financial condition or cash flows of the Company. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions of the Interpretation has not had and will not have a material effect on the financial statements of the Company, based on guarantees in effect on April 30, 2003. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Statement is effective for fiscal years beginning after May 15, 2002 and rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, all gains and losses from extinguishments of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 eliminated SFAS No. 4 and, thus, the exception to applying Accounting Principles Board (APB) No. 30 to all gains and losses related to extinguishments of debt (other than extinguishments of debt to satisfy sinking-fund requirements - the exception to applications of SFAS No. 4 noted in SFAS No. 64). As a result, gains and losses from extinguishments of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Adoption of SFAS No. 145 will result in the reclassification of an extraordinary loss of $133,000 recorded in the quarter ended July 31, 2002 to an operating expense in the current year's presentation of the prior year financial information. On February 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite lives from an amortization method to an impairment-only approach. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business combinations, ceased upon adoption. Thus, no amortization for such goodwill and indefinite lived intangibles was recognized in the accompanying condensed consolidated statements of operations for the quarters ended April 30, 2003 and 8
April 30, 2002. SFAS No.142 requires that goodwill and other intangible assets with indefinite lives be analyzed for impairment at its adoption with any resulting impairment loss recorded as a cumulative effect of change in accounting principle. Subsequent to the initial impairment test, SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives be analyzed for impairment on an annual basis or when there is reason to suspect that their values have been impaired. The Company has designated the beginning of its fiscal year as the date of its annual goodwill impairment test. The Company's initial impairment analysis of its goodwill in 2002 resulted in an impairment loss of $11,849,000 or $10,739,000 net of a tax benefit of $1,110,000 for the year ended January 31, 2003. The impairment loss was restated to the first quarter of 2002 to reflect the cumulative effect of accounting change. The Company's annual impairment test at February 1, 2003 did not result in an impairment. Goodwill, net of accumulated amortization, was $2,403,000 and $2,353,000 at April 30, 2003 and January 31, 2003, respectively. 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 February 1, 2002. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting method for the sale of long-lived assets. Impairment testing required by the adoption of SFAS No. 144, when events or changes in circumstances indicate that asset carrying amounts might not be recoverable, did not have a material effect on the results of operations, financial condition or cash flows of the Company. 9. The Company's stock option plans are accounted for using the intrinsic value method and, accordingly, no compensation cost has been recognized. Had compensation cost been determined using the fair value method in 2003 and 2002, the Company's pro forma net income (loss) and earnings (loss) per share would have been unchanged from the reported amounts for the quarters ended April 30, 2003 and 2002, as no stock options were granted in those quarters. <TABLE> <CAPTION> Three Months Ended April 30, --------------------- 2003 2002(1) -------- -------- <S> <C> <C> Net loss - as reported (in thousands) $ (865) $(10,921) Compensation cost under fair-market value-based accounting method, net of tax (in thousands) (34) (34) -------- -------- Net loss - pro forma (in thousands) (899) (10,955) Net loss per common share - basic, as reported $ (0.18) $ (2.22) Net loss per common share - basic, pro forma $ (0.18) $ (2.23) Net loss per common share - diluted, as reported $ (0.18) $ (2.22) Net loss per common share - diluted, pro forma $ (0.18) $ (2.23) Reported diluted EPS higher than pro forma diluted EPS - $ (0.01) </TABLE> (1) The first quarter of fiscal year 2002 was restated to reflect the cumulative effect of accounting change. 10. On January 29, 2003, the Company obtained a loan from a Danish bank to purchase a building, in the amount of 1,050,000 Euro, approximately $1,136,000 at the exchange rate prevailing at the time of the transaction. The loan has a term of twenty years. The loan bears interest at 6.1 percent with quarterly payments of $19,000 for both principal and interest. 9
On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed $10,000,000 from its new revolving line of credit from another financial institution (described below) to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is scheduled to pay $188,000 in aggregate principal on the last days of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is scheduled to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement (defined below) and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such a prepayment on July 31, 2002. The Company's noncompliance with a covenant under the Loan Agreement described below, of which the holders of the Notes have been kept timely informed by management, constitutes an event of default under the Note Purchase Agreement. However, the holders of Notes due 2007 have not declared an event of default or accelerated the indebtedness of the Company evidenced by the Notes. The Company has made all required payments of principal and interest under the Note Purchase Agreement to date. See the Loan Agreement paragraph below for a discussion of negotiation of waiver and amendment under the Loan Agreement. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2005, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a base rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At January 31, 2003, the prime rate was 4.25 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. As of April 30, 2003, the Company had borrowed $11,630,000 and had $2,072,000 available to it under the revolving line of credit. In addition, $6,089,000 of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At April 30, 2003, the amount of restricted cash was $137,000. Cash required for operations is provided by draw-downs on the line of credit. At April 30, 2003, the Company was not in compliance with one covenant under the Loan Agreement. The Company has not yet obtained a waiver for such noncompliance. Although this noncompliance constitutes an event of default under the Loan Agreement, the lender has not declared an event of default or accelerated the indebtedness of the Company under the Loan Agreement. The Company has made all required payments of principal and interest under the Loan Agreement to date. The Company and the lender are discussing a waiver and amendment. The Company believes it is probable that agreement will be reached for the waiver and amendment, although agreement is not assured. If it does not occur, the Company believes it will be able to obtain replacement financing on acceptable terms, although there is no assurance that any such financing will be obtained. 10
As required by generally accepted accounting principles, due to the unwaived covenant noncompliance discussed above, all amounts owing under the Note Purchase Agreements and the Loan Agreement have been classified as current in the accompanying Balance Sheet. On April 26, 2002 Midwesco Filter borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the lenders under the Prior Term Loans and the Bank. The notes each bear interest at 7.10 percent with a combined monthly payment of $40,235 for both principal and interest, and the note's amortization schedules and terms are each ten years. On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. 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 included the assumption of a $2,500,000 mortgage note with a remaining balance of $2,405,000. The loan bears interest at 7.52 percent with monthly payments of $18,507 for both principal and interest based on an amortization schedule of 25 years with a balloon payment at the end of the ten-year term. At the date of purchase, the remaining term of the loan was 7.25 years. On August 10, 1999, the Company obtained a loan from a Danish bank in the amount of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing exchange rate at the time of the transaction, to complete the permanent financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter. The loan bears interest at 6.22 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 based on an amortization schedule of 25 years with a balloon payment at the end of the ten-year term. On June 1, 1998, the Company obtained 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. 11
On September 14, 1995, Midwesco Filter in Winchester, Virginia received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007, and on October 18, 1995, Perma-Pipe in Lebanon, Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1, 2007. These bonds are fully secured by bank letters of credit, which the Company expects to renew, reissue, extend or replace prior to each expiration date during the term of the bonds. The bonds bear interest at a variable rate, which approximates 4.5 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 used $1,100,000 of unspent bond proceeds to redeem bonds outstanding as provided in the indenture. The Company also has short-term credit arrangements used by its European subsidiaries. These credit arrangements are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. At April 30, 2003, borrowings under these credit arrangements totaled $525,000; an additional $82,000 remained unused. Effective in January 2003, Boe-Therm's line of credit was increased from 2,500,000 DKK to 3,000,000 DKK. The Company also had outstanding letters of credit in the amount of $78,000 to guarantee performance to third parties of various foreign 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 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 April 30 Net sales of $28,010,000 for the quarter ended April 30, 2003 increased 4.6 percent from $26,768,000 for the comparable quarter ended April 30, 2003. (See discussion of each business segment below.) 12
Gross profit of $5,194,000 decreased 7.7 percent from $5,629,000 in the prior year quarter, and gross margin decreased to 18.5 percent of net sales in the current year from 21.6 percent of net sales in the prior year quarter. (See discussion of each business segment below.) Net loss before cumulative effect of accounting change increased 375.3 percent to $865,000 in the current year quarter from $182,000 in the prior year quarter, and net loss before cumulative effect of accounting change per common share (diluted) increased to $0.18 from a loss of $0.04. The increase in net loss was primarily due to decreased gross profit and increased selling and general and administrative expenses. Filtration Products Business Three months ended April 30 Net sales for the quarter ended April 30, 2003 increased 8.1 percent to $13,390,000 from $12,392,000 for the comparable quarter in the prior year. This increase is primarily due to increased sales of pleated filter elements. Gross profit as a percent of net sales decreased from 17.9 percent in the prior year to 17.0 percent in the current year, primarily as a result of product mix and competitive pricing pressures in the marketplace. Selling expense for the quarter ended April 30, 2003 increased to $1,431,000 or 10.7 percent of net sales from $1,222,000 or 9.9 percent of net sales for the comparable quarter in the prior year. The increase is attributable to higher advertising, commissions and travel expenses. General and administrative expenses increased to $646,000 or 4.8 percent of net sales in the current year quarter from $622,000 or 5.0 percent of net sales for the comparable quarter in the prior year. Piping Systems Business Three months ended April 30 Net sales decreased 5.6 percent from $9,323,000 in the prior year quarter to $8,805,000 for the quarter ended April 30, 2003. This decrease is primarily due to the lower pricing for an equivalent volume of work as in the prior-year quarter. Gross profit as a percent of net sales decreased from 21.7 percent to 14.5 percent due to the lower pricing referred to above and increased hospitalization. Selling expense increased from $339,000 or 3.6 percent of net sales for the prior year quarter to $341,000 or 3.9 percent of net sales in the current year quarter. The percent increase is primarily due to lower sales at the same spending levels. General and administrative expense decreased from $948,000 in the prior year quarter to $827,000 in the current year quarter, and decreased as a percent of net sales from 10.2 percent to 9.4 percent. The decrease is primarily due to reduced salaries charged to general and administrative expense and lower legal expense. 13
Industrial Process Cooling Equipment Business Three months ended April 30 Net sales of $5,815,000 for the quarter ended April 30, 2003 increased by 15.1 percent from $5,053,000 for the comparable quarter in the prior year. The increase is due primarily to sales from the product lines associated with the July 2002 purchase of a business (by acquiring specified assets and assuming specified liabilities) and to some recovery from the weak economy. Gross profit increased from 27.6 percent of net sales in the prior year quarter to 28.3 percent of net sales in the current year quarter, primarily due to higher-margin product sales associated with the July 2002 purchase of a business (by acquiring specified assets and assuming specified liabilities) and improved efficiency. Selling expense increased to $828,000 or 14.2 percent of net sales in the current year quarter from $700,000 or 13.9 percent of net sales in the prior year quarter. The increase is due to the costs of additional salespeople associated with the July 2002 purchase of a business (by acquiring specified assets and assuming specified liabilities). General and administrative expense increased from $697,000 or 13.8 percent of net sales in the prior year quarter to $810,000 or 13.9 percent of net sales in the current year quarter. This increase is due to the additional headcount associated with the July 2002 purchase of a business (by acquiring specified assets and assuming specified liabilities) as well as expenses incurred in the current quarter related to Thermal Care's efforts to acquire ISO (International Organization for Standardization) certification for quality management and control. 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 April 30 General and administrative expense increased from $889,000 in the prior year quarter to $1,260,000 in the current year quarter, and increased as a percentage of net sales from 3.3 percent in the prior year quarter to 4.5 percent in the current year quarter. The increase is mainly due to increased salaries due to filled positions that were vacant in the prior-year quarter, partially offset by reduced expenses for temporary help, increased information services costs related to servicing the business segments, increased loan amortization expense due to debt restructuring in July 2002, and an adjustment for accrued expenses. Interest expense decreased to $492,000 for the current year quarter from $519,000 in the prior year quarter. The decrease is primarily due to slightly lower average costs of borrowing. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of April 30, 2003 were $320,000 as compared to $197,000 at April 30, 2002. For the current year period, net cash provided from operating activities was $478,000, net debt borrowing was $990,000, and net purchases of property and equipment was $1,438,000. 14
Net cash provided by operating activities was $478,000 for the three months ended April 30, 2003, compared with $1,523,000 for the three months ended April 30, 2002. The increase in current liabilities of $2,560,000 and the decreases in prepaid and other current assets of $374,000 and in costs and estimated earnings in excess of billings on uncompleted contracts of $119,000 were partially offset by increases in trade receivables of $2,141,000 and other operating assets and liabilities of $427,000. Net cash used for investing activities for the three months ended April 30, 2003 and 2002 were $1,438,000 and $346,000, respectively. Capital expenditures increased from $286,000 in the prior year quarter to $1,438,000 in the current quarter. The increase is primarily due to the construction of a new building in Nakskov, Denmark for the Nordic Air division of Midwesco Filter Resources and the addition of machinery at the Perma-Pipe Lebanon, Tennessee facility. For the three months ended April 30, 2003, net cash inflows from financing activity was $990,000 of which $38,000 was used for payments on capitalized lease obligations. During the quarter, $1,417,000 was borrowed and $389,000 in debt was paid. In the comparable prior year quarter, the Company used $1,114,000 for net payments of debts, including $32,000 used to repay capitalized lease obligations. The Company's current ratio was 1.2 to 1 and 2.1 to 1 at April 30, 2003 and January 31, 2003, respectively. Debt to total capitalization at April 30, 2003 increased to 55.9 percent from 54.3 percent at January 31, 2003. Financing On January 29, 2003, the Company obtained a loan from a Danish bank to purchase a building, in the amount of 1,050,000 Euro, approximately $1,136,000 at the exchange rate prevailing at the time of the transaction. The loan has a term of twenty years. The loan bears interest at 6.1 percent with quarterly payments of $19,000 for both principal and interest. On July 11, 2002, the Company entered into secured note purchase agreements with certain institutional investors ("Note Purchase Agreements"). Under the terms of the Note Purchase Agreements, the Company entered into a five-year $6,000,000 term loan replacing prior term loans with an aggregate original principal balance of $25,000,000 ("Prior Term Loans"). The outstanding principal balance of the Prior Term Loans at July 11, 2002 was $16,000,000. The Company borrowed $10,000,000 from its new revolving line of credit from another financial institution (described below) to pay down this loan from $16,000,000 to $6,000,000. Interest rates under the Note Purchase Agreements are 12% per annum if the outstanding principal is greater than $5,000,000 or 10% per annum if the outstanding principal is $5,000,000 or less. The Company is scheduled to pay $188,000 in aggregate principal on the last days of March, June, September and December in each year, commencing on September 30, 2002 and ending on June 30, 2007. In addition, the Company is scheduled to make annual prepayments of excess cash flow (as defined in the Note Purchase Agreements). Finally, the Loan Agreement (defined below) and the Note Purchase Agreements permit voluntary prepayments sufficient to reduce the outstanding term loan principal to $5,000,000 subject to certain conditions. The Company met such conditions and made such a prepayment on July 31, 2002. The Company's noncompliance with a 15
covenant under the Loan Agreement described below, of which the holders of the Notes have been kept timely informed by management, constitutes an event of default under the Note Purchase Agreement. However, the holders of Notes due 2007 have not declared an event of default or accelerated the indebtedness of the Company evidenced by the Notes. The Company has made all required payments of principal and interest under the Note Purchase Agreement to date. See the Loan Agreement paragraph below for a discussion of negotiation of waiver and amendments under the Loan Agreement. On July 11, 2002, the Company entered into a secured loan and security agreement with a financial institution ("Loan Agreement"). Under the terms of the Loan Agreement, which matures on July 10, 2005, the Company can borrow up to $27,000,000, subject to borrowing base and other requirements, under a revolving line of credit. Interest rates generally are based on options selected by the Company as follows: (a) a margin in effect plus a base rate; or (b) a margin in effect plus the LIBOR rate for the corresponding interest period. At January 31, 2003, the prime rate was 4.25 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. As of April 30, 2003, the Company had borrowed $11,630,000 and had $2,072,000 available to it under the revolving line of credit. In addition, $6,089,000 of availability was used under the Loan Agreement primarily to support letters of credit to guarantee amounts owed for Industrial Revenue Bond borrowings. The Loan Agreement provides that all payments by the Company's customers are deposited in a bank account from which all funds may only be used to pay the debt under the Loan Agreement. At April 30, 2003, the amount of restricted cash was $137,000. Cash required for operations is provided by draw-downs on the line of credit. At April 30, 2003, the Company was not in compliance with one covenant under the Loan Agreement. The Company has not yet obtained a waiver for such noncompliance. Although this noncompliance constitutes an event of default under the Loan Agreement, the lender has not declared an event of default or accelerated the indebtedness of the Company under the Loan Agreement. The Company has made all required payments of principal and interest under the Loan Agreement to date. The Company and the lender are discussing a waiver and amendment. The Company believes it is probable that agreement will be reached for the waiver and amendment, although agreement is not assured. If it does not occur, the Company believes it will be able to obtain replacement financing on acceptable terms, although there is no assurance that any such financing will be obtained. As required by generally accepted accounting principles, due to the unwaived covenant noncompliance discussed above, all amounts owing under the Note Purchase Agreements and the Loan Agreement have been classified as current in the accompanying Balance Sheet. On April 26, 2002 Midwesco Filter borrowed $3,450,000 under two mortgage notes secured by two parcels of real property and improvements owned by Midwesco Filter in Winchester, Virginia. Proceeds from the mortgages, net of a prior mortgage loan, were approximately $2,700,000 and were used to make principal payments to the lenders under the Prior Term Loans and the Bank. The notes each bear interest at 7.10 percent with a combined monthly payment of $40,235 for both principal and interest, and the note's amortization schedules and terms are each ten years. On July 31, 2002 Perma-Pipe, Inc. borrowed $1,750,000 under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. 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. 16
On September 20, 2000, the Company purchased an 8.1-acre parcel of land with a 131,000-square foot building in Niles, Illinois, from two principal stockholders, who are also members of management, for approximately $4,438,000. This amount included the assumption of a $2,500,000 mortgage note with a remaining balance of $2,405,000. The loan bears interest at 7.52 percent with monthly payments of $18,507 for both principal and interest based on an amortization schedule of 25 years with a balloon payment at the end of the ten-year term. At the date of purchase, the remaining term of the loan was 7.25 years. On August 10, 1999, the Company obtained a loan from a Danish bank in the amount of 3,000,000 Danish Krone (DKK), approximately $425,000 at the prevailing exchange rate at the time of the transaction, to complete the permanent financing of the acquisition of Nordic Air A/S, a subsidiary of Midwesco Filter. The loan bears interest at 6.22 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 based on an amortization schedule of 25 years with a balloon payment at the end of the ten-year term. On June 1, 1998, the Company obtained 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 in Winchester, Virginia received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on August 1, 2007, and on October 18, 1995, Perma-Pipe in Lebanon, Tennessee received $3,150,000 of proceeds of Industrial Revenue Bonds, which mature on September 1, 2007. These bonds are fully secured by bank letters of credit, which the Company expects to renew, reissue, extend or replace prior to each expiration date during the term of the bonds. The bonds bear interest at a variable rate, which approximates 4.5 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 used $1,100,000 of unspent bond proceeds to redeem bonds outstanding as provided in the indenture. The Company also has short-term credit arrangements used by its European subsidiaries. These credit arrangements are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. At April 30, 2003, borrowings under these credit arrangements totaled $525,000; an additional $82,000 remained unused. Effective in January 2003, Boe-Therm's line of credit was increased from 2,500,000 DKK to 3,000,000 DKK. The Company 17
also had outstanding letters of credit in the amount of $78,000 to guarantee performance to third parties of various foreign trade activities and contracts. ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," parts of which apply to existing contracts, but is generally effective for contracts entered into after June 30, 2003. SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and, among other issues, clarifies the conditions under which a contract with a net initial investment should be accounted for as a derivative instrument and amends the definition of an underlying to conform with the language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Adoption of SFAS No. 149 did not have a material effect on the results of operations, financial condition or cash flows of the Company. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation" which was effective for the Company December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair-value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both the annual and interim financial statements about the Company's method of accounting for stock-based employee compensation and the effects of the method used on reported results. Adoption of SFAS No. 148 did not have a material effect on the results of operations, financial condition or cash flows of the Company. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. Adoption of the provisions of the Interpretation has not had and will not have a material effect on the financial statements of the Company, based on guarantees in effect on April 30, 2003. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Statement is effective for fiscal years beginning after May 15, 2002 and rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, all gains and losses from extinguishments of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 eliminated SFAS No. 4 and, thus, the exception to applying Accounting Principles Board (APB) No. 30 to all gains and losses related to extinguishments of debt (other than extinguishments of debt to satisfy sinking-fund requirements - - the exception to applications of SFAS No. 4 noted in SFAS No. 64). As a result, gains and losses from extinguishments of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Adoption of SFAS No. 145 will result in the reclassification of an extraordinary loss of $133,000 18
recorded in the quarter ended July 31, 2002 to an operating expense in the current year's presentation of the prior year financial information. On February 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite lives from an amortization method to an impairment-only approach. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business combinations, ceased upon adoption. Thus, no amortization for such goodwill and indefinite lived intangibles was recognized in the accompanying condensed consolidated statements of operations for the quarters ended April 30, 2003 and April 30, 2002. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives be analyzed for impairment at its adoption with any resulting impairment loss recorded as a cumulative effect of change in accounting principle. Subsequent to the initial impairment test, SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives be analyzed for impairment on an annual basis or when there is reason to suspect that their values have been impaired. The Company has designated the beginning of its fiscal year as the date of its annual goodwill impairment test. The Company's initial impairment analysis of its goodwill in 2002 resulted in an impairment loss of $11,849,000 or $10,739,000 net of a tax benefit of $1,110,000 for the year ended January 31, 2003. The impairment loss was restated to the first quarter of 2002 to reflect the cumulative effect of accounting change. The Company's annual impairment test at February 1, 2003 did not result in an impairment. Goodwill, net of accumulated amortization, was $2,403,000 and $2,353,000 at April 30, 2003 and January 31, 2003, respectively. 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 February 1, 2002. SFAS No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, and establishes a single accounting method for the sale of long-lived assets. Impairment testing required by the adoption of SFAS No. 144, when events or changes in circumstances indicate that asset carrying amounts might not be recoverable, 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 April 30, 2003 or January 31, 2003. The changeover from national currencies to the Euro began on January 1, 2002, and has not materially affected, and is not expected to materially affect, the Company's foreign currency exchange risk profile, although some customers may require the Company to invoice or pay in Euros rather than the functional currency of the manufacturing entity. The Company has attempted to mitigate its interest rate risk by combining fixed-rate long-term debt with floating rate debt. 19
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 our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of that evaluation. PART 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 20
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MFRI, INC. Date: June 23, 2003 /s/ David Unger ----------------------------------- David Unger Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: June 23, 2003 /s/ Michael D. Bennett ------------------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) 21
Exhibit 1 Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, Michael D. Bennett, Chief Financial Officer (principal financial officer), of MFRI, Inc. (the "Registrant"), certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended April 30, 2003 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Michael D. Bennett - ------------------------------- Michael D. Bennett June 23, 2003 22
Exhibit 2 Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) I, David Unger, President and Chief Executive Officer (principal executive officer), of MFRI, Inc. (the "Registrant"), certify that to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended April 30, 2003 of the Registrant (the "Report"): (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ David Unger - ------------------------------- David Unger June 23, 2003 23
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. June 23, 2003 /s/ Michael D. Bennett - ------------------------------- Michael D. Bennett Vice President, Secretary and Treasurer (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. June 23, 2003 /s/ David Unger - ------------------------------- David Unger Director and Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)