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<SEC-DOCUMENT>0000914122-01-500016.txt : 20010618
<SEC-HEADER>0000914122-01-500016.hdr.sgml : 20010618
ACCESSION NUMBER:		0000914122-01-500016
CONFORMED SUBMISSION TYPE:	10-Q/A
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20010430
FILED AS OF DATE:		20010615

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MFRI INC
		CENTRAL INDEX KEY:			0000914122
		STANDARD INDUSTRIAL CLASSIFICATION:	INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564]
		IRS NUMBER:				363922969
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0131

	FILING VALUES:
		FORM TYPE:		10-Q/A
		SEC ACT:		
		SEC FILE NUMBER:	000-18370
		FILM NUMBER:		1661562

	BUSINESS ADDRESS:	
		STREET 1:		7720 LEHIGH AVE
		CITY:			NILES
		STATE:			IL
		ZIP:			60714
		BUSINESS PHONE:		8479661000

	MAIL ADDRESS:	
		STREET 1:		7720 LEHIGH AVE
		CITY:			NILES
		STATE:			IL
		ZIP:			60714

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	MIDWESCO FILTER RESOURCES INC
		DATE OF NAME CHANGE:	19970402
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q/A
<SEQUENCE>1
<FILENAME>apr01qa.txt
<DESCRIPTION>MFRI APR 2001 10Q/A
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 FORM 10-Q/A

   X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934

For the quarterly period ended          April 30, 2001
                                  ----------------------

                                       OR

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934


For the transition period from                    to
                               ---------------         -----------------

                         Commission file number 0-18370
                                                -------

                                   MFRI, INC.
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)


Delaware                                                         36-3922969
- -------------------------------------------------------------------------------
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                              Identification No.)


7720 Lehigh Avenue                 Niles, Illinois                     60714
- -------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)


                                 (847) 966-1000
- -------------------------------------------------------------------------------
              (Registrants telephone number, including area code)



- --------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                              Yes     X     No
                                   -------      ------

On June 14, 2001, there were 4,922,364  shares of the Registrant's  common stock
outstanding.
<PAGE>

                         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,  2001.  The  results  of
operations for the quarter ended April 30, 2001 are not  necessarily  indicative
of the results to be expected for the full year 2001.
<TABLE>
<CAPTION>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share information)

                                               Three Months Ended April 30,
                                               ----------------------------
                                                  2001               2000
                                               ---------          ---------
<S>                                             <C>                <C>

Net sales                                       $30,692            $34,155
Cost of sales                                    23,681             26,397
                                               ---------          ---------
Gross profit                                      7,011              7,758

Selling expense                                   2,589              3,202
General and administrative expense                3,509              3,407
                                               ---------          ---------
Income from operations                              913              1,149

Interest expense - net                              676                681
                                               ---------          ---------
Income before income taxes                          237                468
Income taxes                                         97                192
                                               ---------          ---------
Net income                                      $   140            $   276
                                               =========          =========

Net income per common share - basic               $0.03              $0.06

Net income per common share - diluted             $0.03              $0.06

Weighted average common shares outstanding        4,922              4,922

Weighted average common shares outstanding
  assuming full dilution                          4,922              4,924
</TABLE>


                                       1
<PAGE>
<TABLE>
<CAPTION>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except per share information)
                                                   April 30,        January 31,
Assets                                                2001             2001
- -------------------------------------------------------------------------------
<S>                                             <C>                <C>
Current Assets:
  Cash and cash equivalents                     $      422         $      290
  Trade accounts receivable, net                    22,533             27,206
  Costs and estimated earnings in excess of
    billings on uncompleted contracts                5,508              3,208
  Deferred income taxes                              2,903              2,905
  Inventories                                       22,363             21,220
  Prepaid expenses and other current assets          1,014              1,142
                                                 ----------         ---------
    Total current assets                            54,743             55,971

Property, Plant and Equipment, At Cost              46,756             45,704
Less Accumulated Depreciation                       15,084             14,353
                                                 ----------         ----------
    Property, plant and equipment, net              31,672             31,351

Other Assets:
  Goodwill, net                                     12,808             12,989
  Other, net                                         4,422              4,474
                                                 ----------         ----------
    Total other assets                              17,230             17,463
                                                 ----------         ----------
Total Assets                                      $103,645           $104,785
                                                 ==========         ==========

Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------
Current Liabilities:
  Accounts payable                               $  13,445            $12,517
  Commissions payable                                5,638              5,492
  Current maturities of long-term debt               2,642              2,745
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                  693                578
  Other current liabilities                          4,066              5,160
                                                 ----------         ---------
    Total current liabilities                       26,484             26,492

Long-Term Liabilities:
  Long-Term debt, less current maturities           34,765             36,421
  Deferred income taxes                              2,084              2,090
  Other                                              1,501                983
                                                 ----------         ---------
    Total long-term liabilities                     38,350             39,494

Stockholders' Equity:
  Common stock, $.01 par value, authorized-
    50,000 shares; outstanding - 4,922
    at April 30 and January 31                          49                 49
  Additional paid-in capital                        21,397             21,397
  Retained earnings                                 18,239             18,099
  Accumulated other comprehensive loss                (874)              (746)
                                                 ----------         ---------
    Total stockholders' equity                      38,811             38,799
                                                 ----------         ---------
Total Liabilities and Stockholders' Equity        $103,645           $104,785
                                                 ==========         =========


See notes to condensed consolidated financial statements.
</TABLE>
                                       2
<PAGE>
<TABLE>
<CAPTION>

MFRI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)







                                                  Three Months Ended April 30,
                                                       2001            2000
                                                    ----------       ---------
<S>                                                  <C>              <C>
Cash Flows from Operating Activities:
  Net income                                         $    140         $   276
  Adjustments to reconcile net income to
    net cash flows from operating activities:
  Provision for depreciation and amortization             987           1,190
  Change in operating assets and liabilities:
    Trade accounts receivable                           4,821           1,603
    Costs and estimated earnings in excess of
      billings on uncompleted contracts                (2,305)         (2,555)
    Inventories                                        (1,204)         (3,320)
    Prepaid expenses and other current assets            (114)            187
    Current liabilities                                   184             455
    Other operating assets and liabilities                449             (96)
                                                    ----------       ---------
Net Cash Flows from Operating Activities                2,958          (2,260)
                                                    ----------       ---------

Cash Flows from Investing Activities:
  Net purchases of property and equipment              (1,145)         (1,457)
                                                    ----------       ---------
Net Cash Flows from Investing Activities               (1,145)         (1,457)
                                                    ----------       ---------

Cash Flows from Financing Activities:
  Payments on capitalized lease obligations               (35)            (56)
  Borrowings under revolving, term and
    mortgage loans                                    357,558          14,824
  Repayment of debt                                  (359,219)        (10,700)
                                                    ----------       ---------
Net Cash Flows from Financing Activities               (1,696)          4,068
                                                    ----------       ---------
Effect of Exchange Rate Changes on Cash
  and Cash Equivalents                                     15               6
                                                    ----------       ---------
Net Increase in Cash and Cash Equivalents                 132             357
Cash and Cash Equivalents - Beginning of Period           290             665
                                                    ----------       ---------
Cash and Cash Equivalents - End of Period           $     422          $1,022
                                                    ==========       =========




See notes to condensed consolidated financial statements.

</TABLE>
                                       3
<PAGE>


MFRI, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 2001

1. Inventories consisted of the following:

                                                 April 30,        January 31,
   (In thousands)                                  2001             2001
                                               -----------       -----------

    Raw materials                                 $16,851           $15,926
    Work in process                                 1,858             1,971
    Finished goods                                  3,654             3,323
                                               -----------       -----------
      Total                                       $22,363           $21,220
                                               ===========       ===========


2. Supplemental cash flow information:

                                                  Three Months Ended April 30,
     (In thousands)                                   2001           2000
                                                    --------       --------
   Cash paid (received) for:
     Interest, net of capitalized amounts              $849           $574
     Income taxes, net of refunds received              (13)            16


3. The basic  weighted  average  shares  reconcile to diluted  weighted  average
   shares as follows:

   (In thousands)                                  Three Months Ended April 30,
                                                        2001         2000
                                                      --------     --------
     Net Income                                          $140        $ 276
                                                      ========     ========

     Basic weighted average common
       shares outstanding                               4,922        4,922
     Dilutive effect of stock options                       -            2
                                                      --------     --------
     Weighted average common shares
       outstanding assuming full dilution               4,922        4,924
                                                      ========     ========

     Net income per common share - basic                $0.03        $0.06
     Net income per common share - diluted              $0.03        $0.06

The weighted  average number of stock options not included in the computation of
diluted  earnings per share of common stock because the options  exercise  price
exceeded the average  market price of the common shares were 876,000 and 714,000
for the three months ended April 30, 2001 and 2000, respectively.  These options
were outstanding at the end of each of the respective periods.

                                       4
<PAGE>

4.The components of comprehensive income, net of tax, were as follows:

  (In thousands)                                 Three Months Ended April 30,
                                                 ----------------------------
                                                        2001        2000
                                                      -------     -------
  Net Income                                           $ 140       $ 276

  Change in foreign currency
    translation adjustments                             (128)       (182)
                                                      -------     -------
  Comprehensive income                                 $  12       $  94
                                                      =======     =======

  Accumulated other  comprehensive  loss presented on the accompanying condensed
  consolidated balance sheets consists of the following:

                                                   April 30,     January 31,
  (In thousands)                                      2001         2001
                                                   ---------     ---------

  Accumulated translation adjustment                  $(608)        $(480)
  Minimum pension liability adjustment
    (net of tax benefit of $164)                       (266)         (266)
                                                   ---------     ---------
      Total                                           $(874)        $(746)
                                                   =========     =========



                                       5
<PAGE>

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.

  (In thousands)                                  Three Months Ended April 30,
                                                  ----------------------------
                                                      2001           2000
                                                    ---------     ---------
   Net Sales:
     Filtration Products                             $13,393       $14,385
     Piping Systems                                   11,936        12,701
     Industrial Process Cooling Equipment              5,363         7,069
                                                    ---------     ---------
   Total Net Sales                                   $30,692       $34,155
                                                    =========     =========

   Gross Profit:
     Filtration Products                             $ 2,562       $ 3,345
     Piping Systems                                    2,913         2,252
     Industrial Process Cooling Equipment              1,536         2,161
                                                    ---------     ---------
   Total Gross Profit                                $ 7,011       $ 7,758
                                                    =========     =========

   Income from Operations:
     Filtration Products                             $   598       $   965
     Piping Systems                                    1,201           546
     Industrial Process Cooling Equipment                136           555
     Corporate                                        (1,022)         (917)
                                                    ---------     ---------
   Total Income from Operations                      $   913       $ 1,149
                                                    =========     =========

6. On February 1, 2001, the Company  adopted  Statement of Financial  Accounting
Standard  (SFAS) No. 133,  "Accounting  for Derivative  Instruments  and Hedging
Activities,"  as  amended.  This  statement   standardizes  the  accounting  for
derivative  instruments by requiring that an entity recognize all derivatives as
assets and  liabilities in the statement of financial  position and measure them
at fair value.  When certain  criteria are met, it also provides for matching of
gain  or  loss  recognition  on  the  derivative  hedging  instrument  with  the
recognition  of (a) the  changes  in the fair  value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction.  The Company has a small number of derivative
instruments.  Application of SFAS 133 was not material to results of operations,
financial condition or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial  Statements." This SAB
provides guidance on the recognition,  presentation and disclosure of revenue in
the financial  statements of public  companies.  The adoption of SAB No. 101 has
not had a material  effect on the  Company's  reported  results  of  operations,
financial condition or cash flows.

                                       6
<PAGE>

In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of  Liabilities"  which the  Company  adopted  for all  applicable  transactions
occurring  after  March 31,  2001.  The  adoption  of SFAS No. 140 has not had a
material  effect on the  Company's  reported  results of  operations,  financial
condition or cash flows.







                                       7
<PAGE>

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  $30,692,000  for the quarter ended April 30, 2001  decreased  10.1
percent from  $34,155,000 for the comparable  quarter last year. Sales decreased
in all three business units. (See discussion of each unit's sales below).

Gross profit of $7,011,000  decreased  9.6 percent from  $7,758,000 in the prior
year quarter, while gross margin remained relatively flat at 22.8 percent of net
sales in the current  year  compared  to 22.7  percent of net sales in the prior
year. The dollar decrease is due to the lower sales volume in all three units.

Net  income  decreased  49.3  percent  to  $140,000  or $0.03 per  common  share
(diluted) in the current year from $276,000 or $0.06 per common share  (diluted)
in the prior year mainly due to the reduction in gross profit discussed above.


Filtration Products Business

Three months ended April 30

Net sales for the  quarter  ended  April  30,  2001  decreased  6.9  percent  to
$13,393,000  from  $14,385,000  in the  comparable  quarter  one year ago.  This
decrease is the result of lower sales in fabric filter elements partially offset
by increased  sales of pleated filter elements and  non-filtration  products and
services.

Gross profit as a percent of net sales  decreased from 23.3 percent in the prior
year to 19.1 percent in the current year, primarily as a result of manufacturing
inefficiencies  because of lower sales volume and competitive  pricing pressures
in the marketplace.

                                       8
<PAGE>

Selling expenses for the quarter ended April 30, 2001 decreased to $1,261,000 or
9.4 percent of net sales from  $1,497,000  or 10.4  percent of net sales for the
comparable  quarter last year.  The decrease is  attributable  to reduced  sales
expenses, primarily in international markets.

General and administrative  expenses decreased to $703,000 or 5.2 percent of net
sales in the current year quarter from  $883,000 or 6.1 percent of net sales for
the  comparable  period  one year ago,  primarily  due to staff  reductions  and
decreased profit-related incentive compensation.


Piping Systems Business

Three months ended April 30

Net sales  decreased 6.0 percent from  $12,701,000  in the prior year quarter to
$11,936,000  for the quarter  ended April 30, 2001.  This decrease was primarily
due to lower domestic  sales,  particularly a sale of $2,4000,000  for a mineral
transportation  line in the first quarter a year ago, partially offset by higher
export sales, primarily a sale of $2,000,000 for a high temperature oil recovery
project in Canada in the current year.

Gross  profit as a percent  of net sales  increased  from 17.7  percent  to 24.4
percent,  mainly  resulting  from a more  favorable  product  mix of  sales  and
improved plant operating efficiency.

Selling expenses decreased from $705,000 or 5.6 percent of net sales to $523,000
or 4.4  percent of net sales.  The dollar  decrease  was  primarily  due to cost
savings from the December 2000 sale of German subsidiary SZE Hagenuk GmbH, which
had selling expenses of $207,000 in the prior year quarter.

General and  administrative expenses increased from $1,001,000 in the prior year
quarter to $1,189,000 in the current year quarter, and increased as a percent of
net sales from 7.9 percent to 10.0  percent.  The increase is  primarily  due to
increases in employee-related costs and profit-related  incentive  compensation,
partially offset by the sale of SZE Hagenuk.


Industrial Process Cooling Equipment Business

Three months ended April 30

Net sales of  $5,363,000  for the quarter  ended April 30, 2000  decreased  24.1
percent from  $7,069,000  for the  comparable  quarter in the prior year.  Sales
decreased in our primary  target  markets of the plastics  industry and original
equipment manufacturers (OEM). Sales to the plastics industry decreased 36% from
the prior year, comparable to an industry-wide 37% reduction in sales. OEM sales
decreased 18% from the prior year due to a slowdown in the semiconductor sector.
Sales in plastics and OEM account for over 80% of our business.

Gross margins as a percentage of net sales  decreased  from 30.6 percent for the
prior year to 28.6 percent for the current  year.  The decrease is due primarily
to product mix, and also to distributing a smaller sales volume over essentially
constant fixed operating costs.

                                       9
<PAGE>

Selling expenses  decreased from $1,000,000 in the prior year to $805,000 in the
current year, but increased as percentage of net sales from 14.1 percent to 15.0
percent.  The dollar decrease is attributable to a decline in commission expense
of $181,000, due to lower sales volume.

General and administrative  expenses remained relatively flat at $595,000 in the
current  year  compared to $606,000 in the prior year.  As a  percentage  of net
sales,  general and  administrative  expenses  increased from 8.6 percent in the
prior year to 11.0 percent in the current year, because of lower sales volume.


General Corporate Expenses

General  corporate  expenses  include  general  and  administrative expenses not
allocated to business segments and interest expense.

Three months ended April 30

General and  administrative  expenses  increased from $917,000 or 2.7 percent of
net sales in the prior year quarter to $1,049,000 or 3.4 percent of net sales in
the current year quarter,  mainly due to increases in employee-related  expenses
and franchise taxes.

Interest  expense  remained  relatively  flat at $676,000 for the quarter  ended
April 30, 2001 compared to $681,000 for the prior year quarter.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Operating Cash Flow

Cash and cash  equivalents  as of April 30,  2001 were  $422,000  as compared to
$1,022,000 at April 30, 2000.  Net cash provided  from  operating  activities of
$2,958,000  were used to fund net  payments  on  long-term  debt of  $1,661,000,
purchases of property and equipment of  $1,145,000,  and payments on capitalized
lease obligations of $35,000.

Net cash provided by operating  activities  was  $2,958,000 for the three months
ended April 30, 2001, compared with net cash outflows from operating  activities
of $2,260,000  for the three months ended April 30, 2000. The reduction in trade
accounts   receivable  of  $4,821,000  was  partially  offset  by  increases  in
inventories  and  costs  and  estimated   earnings  in  excess  of  billings  on
uncompleted contracts.

Net cash used for investing activities for the quarters ended April 30, 2001 and
2000  were  $1,145,000  and  $1,457,000,  respectively,  and  consisted  of  net
purchases of property, plant and equipment.

In the quarter  ended April 30,  2001,  $1,661,000  was used for net payments on
long-term  debt  and  $35,000  was  used  for  payments  on  capitalized   lease
obligations. In the prior year quarter, the Company obtained $4,124,000 from net
proceeds of  long-term  debt and  utilized  $56,000 to repay  capitalized  lease
obligations.

                                       10
<PAGE>

The Company's current ratio was 2.1 to 1 at April 30, 2001 and January 31, 2001.
Debt to total  capitalization  decreased  to 48.4  percent  from 50.2 percent at
January 31, 2001.

Financing

On  December  15,  1996,  the  Company  entered  into a private  placement  with
institutional  investors of $15,000,000 of 7.21 percent  unsecured  senior notes
due January 31, 2007 (the "Notes due 2007").  The Notes due 2007 were amended on
April 30, 2001,  modifying certain covenants and increasing the interest rate to
8.46  percent.  The  amendment  requires  level  monthly  principal  payments of
$179,000 beginning May 31, 2001 and continuing monthly thereafter,  resulting in
a seven-year average life.

On  September  17,  1998,  the Company  entered  into a private  placement  with
institutional  investors of $10,000,000 of 6.97 percent  unsecured  senior notes
due September  17, 2008 (the "Notes due 2008").  The Notes due 2008 were amended
on April 30, 2001,  modifying certain covenants and increasing the interest rate
to 7.97  percent.  The amendment  requires a principal  payment of $1,429,000 on
September 17, 2002 and level monthly  principal  payments of $119,000  beginning
October 17, 2002 and continuing  monthly  thereafter,  resulting in a seven-year
average life.

On August 8, 2000, the Company entered into an unsecured credit agreement with a
bank (the "Bank"). Under the terms of this agreement,  the Company can borrow up
to $10,000,000 under a revolving line of credit, which matures on July 31, 2003.
On April 30, 2001, the credit agreement was amended, modifying certain covenants
and  increasing  the  interest  rate.  Interest  rates are based on one of three
options selected by the Company at the time of each borrowing,  as follows:  (1)
the higher of the prime rate or the federal  funds rate plus 0.50  percent,  (2)
the LIBOR rate plus a margin for the term of the loan,  or (3) a rate  quoted by
the Bank for the term of the loan.  At April 30,  2001,  the prime rate was 7.50
percent and the margin added to the LIBOR rate, which is determined each quarter
based on a financial statement ratio, was 2.25 percent. The Company had borrowed
$3,800,000  under the revolving  line of credit at April 30, 2001. The Company's
policy is to classify borrowings under the revolving line of credit as long-term
debt  since  the  Company  has the  ability  and the  intent  to  maintain  this
obligation  for longer than one year. In addition,  $433,000 was drawn under the
agreement as letters of credit.  These letters of credit  principally  guarantee
performance to third parties as a result of various trade activities;  guarantee
performance  under the  mortgage  note  secured  by the  manufacturing  facility
located in Cicero,  Illinois  with respect to the making of certain  repairs and
the payment of property taxes and insurance premiums; and guarantee repayment of
a foreign  subsidiary's  borrowings  under an  overdraft  facility.  The  credit
agreement contains certain financial  covenants.  At April 30, 2001, the Company
was  not in  compliance  with  one  of  these  covenants,  but a  waiver  of the
non-compliance had been included in the aforementioned April 30, 2001 amendment.
The Company is assessing the need to request an additional  covenant  amendment.
If an additional amendment is necessary,  the Company expects it to be finalized
during the second quarter.

The  Company  has  agreed to pledge  substantially  all of its  uncollateralized
assets as  security  for the Notes  due 2007,  the Notes due 2008,  and the Bank
credit agreement, not later than July 1, 2001.

                                       11
<PAGE>

In 1995,  the  Company  received  an  aggregate  of  $6,300,000  of  proceeds of
Industrial Revenue Bonds which were utilized by the Filtration Products Business
in Winchester,  Virginia and the Piping Systems Business in Lebanon,  Tennessee,
and which mature in August and  September  2007,  respectively.  These bonds are
fully  secured by bank  letters of credit,  which the Company  expects to renew,
reissue or extend  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. On November 1, 1999,
the  Company  utilized  $1,100,000  of unspent  bond  proceeds  to redeem  bonds
outstanding as provided in the indenture.

On May 8,  1996,  the  Company  purchased  a  10.3-acre  parcel  of land  with a
67,000-square  foot  building  adjacent  to  its  Midwesco  Filter  property  in
Winchester,  Virginia for approximately $1.1 million.  The purchase was financed
80 percent by a seven-year mortgage note bearing interest at 8.38 percent and 20
percent by the Industrial Revenue Bonds described above.

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 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.  The first  loan in the amount of
4,500,000 Danish krone ("DKK")  (approximately  $650,000) 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) is secured by the machinery and equipment of Boe-Therm, bears interest
at 5.80 percent and has a term of five years. In addition, on February 16, 1999,
the  Company  obtained a loan from a Danish  bank in the  amount of 850,000  DKK
(approximately  $125,000) to finance the  purchase of a parcel of land  directly
adjacent to the manufacturing facility in Assens,  Denmark. This loan is secured
by the land and building purchased.

On August 10, 1999, the Company obtained a loan from a Danish bank in the amount
of 3,000,000 DKK (approximately $425,000) to complete the permanent financing of
the Nordic Air A/S acquisition.  The loan bears interest at 6.22 percent and has
a term of five years.

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 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.

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.

The  Company  anticipates  that cash flows  from  operating  activities  will be
sufficient to support scheduled principal repayments through 2001.

                                       12
<PAGE>


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 and in the
United Kingdom.  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, 2001 or January 31,
2001.

The  next  phase  of the  Euro  implementation,  the  changeover  from  national
currencies  to the Euro,  is scheduled  to begin 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 through the maximum
possible use of fixed-rate long-term debt.


                                       13
<PAGE>


                                    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:        June 14, 2001           /s/ David Unger
                                     ----------------------------------
                                     David Unger
                                     Chairman of the Board of Directors



Date:        June 14, 2001          /s/ Michael D. Bennett
                                    ----------------------------------
                                    Vice President, Secretary and Treasurer
                                    (Principal Financial and Accounting Officer)







                                       14
<PAGE>




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</SEC-DOCUMENT>
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