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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
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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
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MFRI, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3922969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7720 Lehigh Avenue Niles, Illinois 60714
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(Address of principal executive offices) (Zip Code)
(847) 966-1000
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(Registrant's telephone number, including area code)
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(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)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
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.
1
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
October 31, January 31,
Assets 2002 2002
- --------------------------------------------------------------------------------
Current Assets:
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
======== ========
See notes to condensed consolidated financial statements.
2
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
(In thousands) October 31,
--------------------
2002 2001
-------- --------
Cash Flows from Operating Activities:
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
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:
October 31, January 31,
(In thousands) 2002 2002
---------- ----------
Raw materials $14,565 $14,720
Work in process 2,376 1,551
Finished goods 3,826 2,411
---------- ----------
Total $20,767 $18,682
========== ==========
3. The basic weighted average shares reconcile to diluted weighted average
shares as follows:
Three Months Ended Nine Months Ended
(In Thousands) October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
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
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:
Three Months Ended Nine Months Ended
(In Thousands) October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
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
======== ======== ======== ========
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the following:
October 31, January 31,
(In thousands) 2002 2002
---------- ----------
Accumulated translation adjustment $ (234) $ (692)
Minimum pension liability adjustment
(net of tax benefit of $302) (492) (492)
---------- ----------
Total $ (726) $(1,184)
========== ==========
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
Three Months Ended Nine Months Ended
(In Thousands) October 31, October 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Sales:
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
======== ======== ======== ========
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)