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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
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For the quarterly period ended April 30, 2003
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 0-18370
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MFRI, INC.
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(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 _____
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)
Three Months Ended April 30,
----------------------------
2003 2002(1)
-------- --------
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)
(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)
April 30, January 31,
Assets 2003 2003
- --------------------------------------------------------------------------------
Current Assets:
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
======== ========
See notes to condensed consolidated financial statements.
3
MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Three Months Ended April 30,
----------------------------
2003 2002(1)
-------- --------
Cash Flows from Operating Activities:
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
(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:
April 30, January 31,
(In thousands) 2003 2003
-------- --------
Raw materials $ 14,573 $ 14,647
Work in process 2,154 1,881
Finished goods 3,029 3,054
-------- --------
Total $ 19,756 $ 19,582
======== ========
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:
Three Months Ended
(In thousands) April 30,
---------------------
2003 2002(1)
-------- --------
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)
(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:
Three Months Ended
(In thousands) April 30,
---------------------
2003 2002(1)
-------- --------
Net Loss $ (865) $(10,921)
Change in foreign currency translation adjustments 152 63
-------- --------
Comprehensive loss $ (713) $(10,858)
======== ========
(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
(In thousands) April 30, January 31,
2003 2003
-------- --------
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)
======== ========
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.
Three Months Ended
(In thousands) April 30,
---------------------
2003 2002
-------- --------
Net Sales:
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
======== ========
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.
Three Months Ended
April 30,
---------------------
2003 2002(1)
-------- --------
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)
(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
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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
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David Unger
Director and Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)