UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File Number 0-15582
MINUTEMAN INTERNATIONAL, INC.
(Exact name of registrant, as specified in its charter)
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Illinois |
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36-2262931 |
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(State or other
jurisdiction of |
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(I.R.S. Employer Identification No.) |
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|
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111 South Rohlwing Road, Addison, Illinois |
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60101 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code |
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(630) 627-6900 |
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of common stock, no par value, of the registrant outstanding as of July 31, 2003 was 3,574,279.
MINUTEMAN INTERNATIONAL, INC.
AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2003
TABLE OF CONTENTS
2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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Unaudited |
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Audited |
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ASSETS |
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|
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Current assets: |
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|
|
|
|
||
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Cash & cash equivalents |
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$ |
825,000 |
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$ |
1,307,000 |
|
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Short-term investments |
|
1,300,000 |
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4,900,000 |
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||
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Accounts receivable, less allowances of $1,269,000 in 2003 and $987,000 in 2002 |
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20,422,000 |
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15,165,000 |
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||
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Due from affiliates |
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80,000 |
|
291,000 |
|
||
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Inventories |
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19,983,000 |
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18,856,000 |
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||
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Prepaid expenses |
|
491,000 |
|
467,000 |
|
||
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Refundable income taxes |
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— |
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456,000 |
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||
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Deferred income taxes |
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781,000 |
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672,000 |
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||
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Total current assets |
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43,882,000 |
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42,114,000 |
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||
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|
|
|
|
|
|
||
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Property, plant and equipment, at cost |
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24,998,000 |
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24,716,000 |
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||
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Accumulated depreciation |
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(17,582,000 |
) |
(16,831,000 |
) |
||
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Net property, plant and equipment |
|
7,416,000 |
|
7,885,000 |
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||
|
|
|
|
|
|
|
||
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Intangible assets, net of amortization of $1,066,000 in 2003 and 2002 |
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5,201,000 |
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5,201,000 |
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Total assets |
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$ |
56,499,000 |
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$ |
55,200,000 |
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|
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||
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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|
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Current liabilities: |
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|
|
|
|
||
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Current maturities of long-term debt |
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$ |
1,500,000 |
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$ |
1,500,000 |
|
|
Accounts payable |
|
2,714,000 |
|
2,037,000 |
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||
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Accrued expenses |
|
3,503,000 |
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3,107,000 |
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||
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Income taxes |
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234,000 |
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— |
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||
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Total current liabilities |
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7,951,000 |
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6,644,000 |
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||
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Long-term debt, less current maturities |
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6,750,000 |
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7,500,000 |
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||
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Derivative financial instrument |
|
642,000 |
|
684,000 |
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||
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Deferred income taxes |
|
411,000 |
|
256,000 |
|
||
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Total liabilities |
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15,754,000 |
|
15,084,000 |
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Commitments and contingencies (Note 8) |
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|
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Shareholders’ equity: |
|
|
|
|
|
||
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Common stock, no par value; 10,000,000 shares authorized; 3,574,279 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
|
6,596,000 |
|
6,596,000 |
|
||
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Retained earnings |
|
34,351,000 |
|
33,868,000 |
|
||
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Unearned restricted stock |
|
(47,000 |
) |
(83,000 |
) |
||
|
Accumulated other comprehensive loss |
|
(155,000 |
) |
(265,000 |
) |
||
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Total shareholders’ equity |
|
40,745,000 |
|
40,116,000 |
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||
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Total liabilities and shareholders’ equity |
|
$ |
56,499,000 |
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$ |
55,200,000 |
|
See accompanying notes to condensed consolidated financial statements.
3
MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
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Three Months Ended |
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Six Months Ended |
|
||||||||
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|
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June 30, 2003 |
|
June 30, 2002 |
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June 30, 2003 |
|
June 30, 2002 |
|
||||
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Net sales |
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$ |
19,258,000 |
|
$ |
19,918,000 |
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$ |
37,892,000 |
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$ |
39,179,000 |
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|
|
|
|
|
|
|
|
|
|
|
||||
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Cost of sales |
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13,382,000 |
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13,872,000 |
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26,462,000 |
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27,564,000 |
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||||
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|
|
|
|
|
|
|
|
|
|
||||
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Gross profit |
|
5,876,000 |
|
6,046,000 |
|
11,430,000 |
|
11,615,000 |
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||||
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|
|
|
|
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|
||||
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Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
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Selling |
|
3,527,000 |
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3,433,000 |
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6,979,000 |
|
6,835,000 |
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||||
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General and administrative |
|
1,216,000 |
|
1,184,000 |
|
2,347,000 |
|
2,341,000 |
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||||
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|
|
|
|
|
|
|
|
|
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||||
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Total operating expenses |
|
4,743,000 |
|
4,617,000 |
|
9,326,000 |
|
9,176,000 |
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||||
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|
|
|
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|
|
|
|
|
|
||||
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Income from operations |
|
1,133,000 |
|
1,429,000 |
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2,104,000 |
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2,439,000 |
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||||
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|
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|
|
|
|
|
|
|
|
||||
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Other income (expense): |
|
|
|
|
|
|
|
|
|
||||
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Interest income |
|
2,000 |
|
15,000 |
|
9,000 |
|
40,000 |
|
||||
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Interest expense |
|
(24,000 |
) |
(385,000 |
) |
(223,000 |
) |
(430,000 |
) |
||||
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Other, net |
|
(9,000 |
) |
9,000 |
|
(10,000 |
) |
18,000 |
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||||
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|
|
|
|
|
|
|
|
|
|
||||
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Total other expense |
|
(31,000 |
) |
(361,000 |
) |
(224,000 |
) |
(372,000 |
) |
||||
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|
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|
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|
|
|
|
|
|
||||
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Income before income taxes |
|
1,102,000 |
|
1,068,000 |
|
1,880,000 |
|
2,067,000 |
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||||
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|
|
|
|
|
|
|
|
|
|
||||
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Provision for income taxes |
|
448,000 |
|
416,000 |
|
753,000 |
|
806,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
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Net income |
|
$ |
654,000 |
|
$ |
652,000 |
|
$ |
1,127,000 |
|
$ |
1,261,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
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Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
||||
|
• Basic |
|
3,582,009 |
|
3,575,721 |
|
3,581,227 |
|
3,574,939 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
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• Diluted |
|
3,587,245 |
|
3,587,245 |
|
3,587,245 |
|
3,587,245 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
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Net income per common share - basic and diluted |
|
$ |
0.18 |
|
$ |
0.18 |
|
$ |
0.31 |
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
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|
||||
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Dividends per share of common stock |
|
$ |
0.09 |
|
$ |
0.09 |
|
$ |
0.18 |
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$ |
0.18 |
|
See accompanying notes to condensed consolidated financial statements.
4
MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended |
|
||||
|
|
|
June 30, 2003 |
|
June 30, 2002 |
|
||
|
OPERATING ACTIVITIES |
|
|
|
|
|
||
|
Net income |
|
$ |
1,127,000 |
|
$ |
1,261,000 |
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
||
|
Depreciation |
|
751,000 |
|
850,000 |
|
||
|
Compensation earned under restricted stock plan |
|
36,000 |
|
36,000 |
|
||
|
Deferred income taxes |
|
46,000 |
|
(9,000 |
) |
||
|
Derivative financial instrument |
|
(42,000 |
) |
134,000 |
|
||
|
Other |
|
(13,000 |
) |
(12,000 |
) |
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
Accounts receivable and due from affiliates |
|
(5,046,000 |
) |
(1,794,000 |
) |
||
|
Inventories |
|
(1,127,000 |
) |
(59,000 |
) |
||
|
Prepaid expenses and refundable income taxes |
|
432,000 |
|
(61,000 |
) |
||
|
Accounts payable, accrued expenses and income taxes payable |
|
1,307,000 |
|
972,000 |
|
||
|
|
|
|
|
|
|
||
|
Net cash (used in) provided by operating activities |
|
(2,529,000 |
) |
1,318,000 |
|
||
|
|
|
|
|
|
|
||
|
INVESTING ACTIVITIES |
|
|
|
|
|
||
|
Purchases of property, plant and equipment, net |
|
(282,000 |
) |
(302,000 |
) |
||
|
Maturities of short-term investments |
|
3,600,000 |
|
900,000 |
|
||
|
|
|
|
|
|
|
||
|
Net cash provided by investing activities |
|
3,318,000 |
|
598,000 |
|
||
|
|
|
|
|
|
|
||
|
FINANCING ACTIVITIES |
|
|
|
|
|
||
|
Dividends paid |
|
(644,000 |
) |
(643,000 |
) |
||
|
Payment of current maturity of long-term debt |
|
(750,000 |
) |
(750,000 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used in financing activities |
|
(1,394,000 |
) |
(1,393,000 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of foreign exchange rate changes |
|
123,000 |
|
16,000 |
|
||
|
|
|
|
|
|
|
||
|
(Decrease) increase in cash and cash equivalents |
|
(482,000 |
) |
539,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents at beginning of period |
|
1,307,000 |
|
416,000 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents at end of period |
|
$ |
825,000 |
|
$ |
955,000 |
|
See accompanying notes to condensed consolidated financial statements.
5
MINUTEMAN INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Basis of Presentation
The Consolidated Balance Sheet as of June 30, 2003 and the Consolidated Statements of Income and Cash Flows for the three and six months ended June 30, 2003 in the opinion of the Company, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, the results of operations and cash flows, as of and for the periods then ended. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted, pursuant to Securities and Exchange Commission rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed Financial Statements be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2002. The results of operations for fiscal 2003 interim periods are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2003.
Note 2—Inventories
It is the Company’s policy to take an annual physical inventory, in conjunction with the preparation of the annual financial statements. At times, other than year-end, it is necessary to estimate the breakdown of raw materials, work-in-process, and finished goods inventories. The estimate for the period ended June 30, 2003, and the components of the December 31, 2002 inventories, based on the physical count, both primarily on a LIFO basis, were as follows:
|
|
|
June 30, 2003 |
|
December 31, 2002 |
|
||
|
Finished goods |
|
$ |
6,402,000 |
|
$ |
6,227,000 |
|
|
Work in process |
|
10,836,000 |
|
9,306,000 |
|
||
|
Raw materials |
|
4,751,000 |
|
5,442,000 |
|
||
|
|
|
21,989,000 |
|
20,975,000 |
|
||
|
Less LIFO reserve |
|
(2,006,000 |
) |
(2,119,000 |
) |
||
|
Total at LIFO cost |
|
$ |
19,983,000 |
|
$ |
18,856,000 |
|
Note 3—Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of the diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Note 4—Line of Credit
The Company has an unsecured line of credit with a financial institution, which expires May 31, 2004. Under the terms of this facility the Company may borrow up to $5 million on terms mutually agreeable to the Company and financial institution. There are no requirements for compensating balances or restrictions of any kind involved in this arrangement. At June 30, 2003 there were no borrowings outstanding.
6
Note 5—Derivative Financial Instruments
The Company recognizes all derivative financial instruments, such as interest rate swap contracts in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risks. Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective and designated as hedges, are recorded in other comprehensive income net of tax. Changes in fair values of derivatives not qualifying as hedges are reported as interest expense. The fair market value of the interest rate swap at June 30, 2003 and December 31, 2002 is classified as a non-current liability on the condensed consolidated balance sheets.
In the second quarter of 2003, the Company recorded the change in the fair market value of its interest rate swap as interest expense. The pretax effect of adjusting the interest rate swap to market in the second quarter of 2003 was a reduction to expense of $116,000.
Note 6—Comprehensive Income
The components of comprehensive income are as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, 2003 |
|
June 30, 2002 |
|
June 30, 2003 |
|
June 30, 2002 |
|
||||
|
Net income |
|
$ |
654,000 |
|
$ |
652,000 |
|
$ |
1,127,000 |
|
$ |
1,261,000 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Foreign currency translation adjustments |
|
71,000 |
|
18,000 |
|
123,000 |
|
16,000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Amortization to income of cumulative effect of change in accounting for derivatives net of income tax benefit of $4,000 |
|
(8,000 |
) |
(7,000 |
) |
(13,000 |
) |
(13,000 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Comprehensive income |
|
$ |
717,000 |
|
$ |
663,000 |
|
$ |
1,237,000 |
|
$ |
1,264,000 |
|
Note 7—Restricted Stock Plan
On April 18, 2000 the shareholders approved the Minuteman 2000 Restricted Stock Plan, (“Restricted Stock Plan”), which is designed to attract and retain the services of key management employees by providing such persons with a proprietary interest in the Company through the granting of Company common stock. The maximum number of shares of Company common stock available for issuance is 150,000 shares. At June 30, 2003 and 2002 there were 131,140 shares available to be granted. As of June 30, 2003 and 2002, awards with respect to 18,860 shares have been granted.
On May 1, 2003 the shareholders approved an amendment to the Restricted Stock Plan changing the vesting period for any future award to a period not to exceed two years. At the sole discretion of the Company, an award of restricted stock may be awarded to an eligible employee based upon certain conditions and restrictions including, but not limited to, past and continued service with the Company, achievement of specific business objectives, superior work performance, and other measurements of individual or Company performance. In the event that an employee is terminated (except due to retirement, death or total disability) prior to the end of the vesting period, the non-vested portion of the award will be forfeited. However, in the event of an employee’s retirement, death or total disability, or a change in control of the Company, the award shall immediately become fully vested. Shares granted under the plan are recorded at fair market value on the date of grant with a corresponding charge to shareholders’ equity
7
representing the unearned portion of the award. The unearned portion is amortized as compensation expense ($36,000 in the first six months of 2003 and 2002) on a straight-line basis over the related vesting period. At June 30, 2003, 5,894 shares were issued as they were fully vested.
Note 8—Commitments and Contingencies
Legal Matters
In May 2003, the Company entered into an Offer of Settlement without admitting or denying the United States Securities and Exchange Commission (the “SEC”) findings related to the November 2001 formal order of investigation. The settlement resulted in the issuance by the SEC of an administrative order that the Company cease and desist from committing or causing violations of certain of the antifraud, books and records, internal controls and reporting provisions of the federal securities laws.
The SEC order requires the Company to comply with undertakings to employ a Chief Accounting Officer for five years, implement written internal procedures concerning quarterly sales, and hire an additional auditing firm to conduct quarterly internal audits and reviews of internal controls for quarterly sales for two years. In addition, the Company is required to adopt and implement written internal procedures to review documentation from quarterly sales recorded to ensure revenue is recognized in accordance with generally accepted accounting principles.
In related proceedings, the SEC also entered cease and desist orders against Gregory J. Rau, Thomas J. Nolan and David L. Markison, the President, the Chief Financial Officer and Treasurer and the Controller, respectively, of the Company from committing or causing any violations of certain provisions of the federal securities laws.
The Company is subject to various proceedings, lawsuits and other claims related to labor, product and other matters. Included among these lawsuits are product liability claims seeking compensation for property damage, lost profits or other relief, including, in some cases, punitive damages. The Company disputes these claims and intends to defend the lawsuits vigorously. A determination of the amount of reserves required, if any, for each of these contingencies is made after careful analysis by the Company. The reserves may change in the future due to new developments in each matter or changes in approach in resolving these claims. While the Company believes that these contingencies will not have a material adverse effect on the financial condition of the Company, there can be no assurance that they will be resolved in a manner that does not materially adversely affect the Company.
Note 9—Guarantees
Performance Guarantees
The Company is party to financing agreements between leasing companies and distributors. The agreements contain repurchase provisions, whereby the Company will, upon default of the customer, repurchase the equipment from the leasing companies. The terms of the guarantees are related to the standard equipment lease terms. The maximum potential amount of future payments the Company could be required to make under these guarantees at June 30, 2003 is $40,000.
The Company has arranged for the issuance of a letter of credit related to a customer contract. The letter of credit expires on May 1, 2004, but will be automatically extended for additional consecutive one-year terms if it is not cancelled. The maximum potential amount of future payments the Company could be required to make under this guarantee at June 30, 2003 is $50,000.
8
Warranties
The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s warranty liability is affected by product failure rates, material usage and costs incurred in correcting a product failure. Should actual product failure rates, material usage or costs differ from the Company’s estimates, revisions to the estimated warranty liability may be required.
Changes in the Company’s warranty liability during the period was as follows:
|
Description |
|
Balance at Beginning of Period |
|
Charged to Costs and Expenses(1) |
|
Deductions (2) |
|
Balance at End of Period |
|
||||
|
For the three months ended March 31, 2003 |
|
|
|
|
|
|
|
|
|
||||
|
Accrued warranties |
|
$ |
817,000 |
|
$ |
107,000 |
|
$ |
137,000 |
|
$ |
787,000 |
|
|
For the three months ended June 30, 2003 |
|
|
|
|
|
|
|
|
|
||||
|
Accrued warranties |
|
$ |
787,000 |
|
$ |
37,000 |
|
$ |
107,000 |
|
$ |
717,000 |
|
(1) — Provision for warranty liability.
(2) — Warranty claims processed.
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements. The preparation of these financial statements is based upon the selection and application of significant accounting policies, which requires management to make significant estimates and judgments that affect the amounts reported in these financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Accounting Policies and Critical Accounting Estimates
The Company believes the following are the actual accounting policies that affect its more significant judgments and estimates used in the preparation of consolidated financial statements.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, when title and risk of ownership passes, the sales price is fixed or determinable, and collectibility is reasonably assured. Generally, these criteria are met at the time product is shipped. Provision is made at the time the related revenue is recognized for discounts and allowances, estimated cost of product warranties, bad debts and rebates.
Accounts Receivable
The Company performs ongoing credit evaluations of its customer base and maintains allowances for doubtful accounts related to estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory
The Company is required to state its inventories at lower of cost or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Warranties
The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s warranty obligation is affected by product failure rates, material usage and costs incurred in correcting a product failure. Should actual product failure rates, material usage or costs differ from the Company’s estimates, revisions to the estimated warranty liability may be required.
Income Taxes
The Company currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of our deferred tax assets is principally dependent upon our achievement of projected future taxable income. Judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these deferred tax asset balances.
Intangible Assets
Intangible assets were primarily recorded as the result of the November 1998 PowerBoss acquisition. The Company has concluded that these assets are not impaired at December 31, 2002 in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”.
10
The determination of whether these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances.
Inflation
Although the Company cannot accurately determine the precise effect of inflation on operations, the Company does not believe inflation has had a material effect on sales or results of operations.
Forward-Looking Statements
This report contains not only historical information, but also forward-looking statements which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Statements that are not historical are forward-looking and reflect expectations about the Company’s future performance. In addition, forward-looking statements may be made orally or in press releases, conferences, reports, on the Company’s web site, or otherwise, in the future by the Company or on our behalf. The Company has tried to identify such statements by using words such as “expect”, “foresee”, “looking ahead”, “anticipate”, “estimate”, “believe”, “should”, “intend”, and similar expressions to identify forward-looking statements.
Forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Actual future results may differ materially from those discussed in forward-looking statements. These uncertainties include factors that affect all businesses operating in a global market as well as matters specific to the Company. The following are some of the factors that could cause the Company’s financial condition to differ materially from what the Company has anticipated in forward-looking statements: the effectiveness of operating and technology initiatives and advertising and promotional efforts, as well as changes in: global and local business and economic conditions; currency exchange and interest rates; labor and other operating costs; political or economic instability in local markets; disruptions from outbreak of hostilities, war or terrorists’ attacks; competition; customer preferences; effects of unanticipated materially adverse litigation or product claims; unexpected product failures or non-acceptance of new products by the market; legislation and governmental regulation; and accounting policies and practices. The foregoing list of important factors is not exclusive.
Results of Operations
Net Sales and Earnings
Net sales were $19,258,000 in the second quarter of 2003, compared to $19,918,000 in the second quarter of 2002 a decrease of $660,000 or 3.3%. Domestic sales were down 5% on reduced demand from the Company’s domestic dealers, as well as a reduction in volume from chemical sales. Industrial product sales showed a slight increase of 2.3%. International sales for the second quarter of 2003 were $4,196,000, an increase of 3.8% over the second quarter of 2002. Excluding foreign currency exchange effects, international sales were down 2.8%. Gross profit dollars decreased 2.8% in the second quarter of 2003 from the comparable prior year period due to the decline in sales. Net income for the second quarter of 2003 was $654,000 or $0.18 per common share, an increase of 0.3% from the prior year’s second quarter. The increase in net income was primarily due to a reduction in interest expense of $116,000 related to the change in fair market value of the derivative financial instrument compared with the second quarter of 2002 where interest expense included a charge of $228,000 related to the change in fair market value of the derivative financial instrument. This $344,000 quarter over quarter benefit related to the derivative financial instrument offset the decrease in sales volume and higher selling, general and administrative costs.
11
Net sales for the first six months of fiscal year 2003 were $37,892,000 a decrease of 3.3% over the first six months of fiscal year 2002. The slowdown in the domestic market place continues to impact the Company. Domestic sales were lower by 7.1%, including a decrease of 9% from the commercial product line. Domestic industrial sales were lower by 1.6% and domestic chemical sales declined by 2.8%. The decline in net sales was partially attributed to revenues from one-time U.S. Postal Service orders for biohazard vacuums in the first quarter of 2002 that were not repeated in the first quarter of 2003. International sales for the first six months of fiscal year 2003 increased by 10.2% compared to the first six months of fiscal year 2002. Sales in Europe and Canada benefited from favorable foreign exchange rates. International sales of commercial and industrial product lines for the first six months of 2003 increased 13.5% and 16.1%, respectively compared to the first six months of 2002. Excluding foreign currency exchange effects, international commercial product sales increased 2.7%. Gross profit dollars decreased 1.6% for the first six months of 2003 from the comparable prior year period due to the decline in sales. Net income for the first six months of 2003 was $1,127,000 or $0.31 per common share, a decrease of 10.6% from the comparable prior year period. The decrease in net income was primarily due to lower sales volume and higher selling, general and administrative costs partially offset by lower interest expense related to the change in fair market value of the derivative financial instrument.
Operating Expenses
Selling expenses in the second quarter of 2003 were $3,527,000 an increase of 2.7% from the second quarter of 2002. Higher health insurance costs, bad debt expense, auto lease costs, expenses related to the Netherlands warehouse relocation, sales promotion expense and temporary service fees contributed to the increase in selling expenses quarter over quarter. General and administrative expenses in the second quarter of 2003 increased 2.7% compared to the second quarter of 2002. The increase was primarily related to higher payroll, health insurance costs and general liability insurance.
Selling expenses for the first six months of 2003 were $6,979,000 an increase of 2.1% from the comparable period in 2002. Higher health insurance costs, bad debt expense, auto lease costs, expenses related to the Netherlands warehouse relocation, sales promotion expense and temporary service fees contributed to the increase in selling expenses during the period. General and administrative expenses in the first six months of 2003 remained relatively flat compared to the first six months of 2002. Higher payroll, health insurance costs and general liability insurance were primarily offset by a decrease in professional fees.
Other Income/Expense
In the second quarter of 2003 interest income was $2,000 compared to $15,000 in the second quarter of 2002. The decrease was a result of declining interest rates and a decrease in the short-term investment balance.
For the first six months of 2003 interest income was $9,000 compared to $40,000 for the comparable period of 2002. The decrease was a result of declining interest rates and a decrease in the short-term investment balance.
The Company incurred interest expense, related principally to debt obligations, of $24,000 and $385,000 for the quarter ended June 30, 2003 and 2002 respectively. Included in the interest expense for the second quarter of 2003 is income of of $116,000 related to the change in fair market value of the derivative financial instrument. In the second quarter of 2002 interest expense included a charge of $228,000 related to the change in fair market value of the derivative financial instrument.
Interest expense for the first six months of fiscal year 2003 was $223,000 and $430,000 in the comparable prior year period. In 2003 the income related to the derivative financial instrument for the first six months was $64,000 compared to a charge of $112,000 in 2002.
12
Income Taxes
The effective income tax rate was approximately 40% for the second quarter of 2003 and 39% for the second quarter of 2002.
The effective income tax rate was approximately 40% for the first six months of 2003 and 39% for the first six months of 2002.
Liquidity, Capital Resources and Financial Condition
The Company had working capital of $35.9 million and $35.5 million at June 30, 2003 and December 31, 2002, respectively. This represented a current ratio of 5.5 for the second quarter of 2003 and 6.3 at December 31, 2002.
Cash, cash equivalents and short-term investments represented 6.0% and 17.5% of this working capital at June 30, 2003 and December 31, 2002, respectively. The decrease in the first six months of 2003 from December 31, 2002, was due primarily to purchases of inventory and an increase in accounts receivable.
At June 30, 2003, and December 31, 2002 the Company had shareholders’ equity of $40.7 million and $40.1 million, respectively, which when compared to total liabilities represented an equity to liability ratio of 2.6 and 2.7, respectively.
During the first six months of 2003 and 2002, the Company used $2.5 million and provided $1.3 million, respectively in cash flows from operating activities, which represents the Company’s principal source of cash. During the first six months of 2003, cash used in operating activities resulted from the changes in operating working capital, primarily an increase in inventory levels and an increase in accounts receivable which is primarily a result of extended payment terms associated with sales promotion programs.
Cash provided by investing activities was $3.3 million in the first six months of fiscal year 2003, an increase of $2.7 million from the comparable period in 2002. Capital expenditures remained relatively constant period over period. The improvement was primarily related to an increase in maturities of short-term investments in the first six months of 2003 compared to the first six months of 2002.
Cash used in financing activities was $1.4 million in the first six months of 2003 and 2002. Financing activities consisted of dividend payments and payments of current maturities of long-term debt.
The Company has sufficient capital resources to meet business and liquidity needs as they arise. The Company has an unsecured line of credit with a financial institution, which expires May 31, 2004. Under the terms of this facility the Company may borrow up to $5 million on terms mutually agreeable to the Company and financial institution. There are no requirements for compensating balances or restrictions of any kind involved in this arrangement. At June 30, 2003 there were no borrowings outstanding. The Company foresees no unusual future events that will materially change the foregoing summary.
Legal Matters
The Company is subject to various proceedings, lawsuits and other claims related to labor, product and other matters. Included among these lawsuits are product liability claims seeking compensation for
13
property damage, lost profits or other relief, including, in some cases, punitive damages. The Company disputes these claims and intends to defend the lawsuits vigorously. A determination of the amount of reserves required, if any, for each of these contingencies is made after careful analysis by the Company. The reserves may change in the future due to new developments in each matter or changes in approach in resolving these claims. While the Company believes that these contingencies will not have a material adverse effect on the financial condition of the Company, there can be no assurance that they will be resolved in a manner that does not materially adversely affect the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Currently these earnings and foreign currency translation adjustments have not been material to the overall financial results of the Company.
The Company has also entered into an interest rate swap agreement to obtain a fixed interest rate on variable rate debt to reduce certain exposures to interest rate fluctuations. In the event that a counterparty fails to meet the terms of the interest rate swap agreement, the Company’s exposure is limited to the interest rate differential. The Company manages the credit risk of counterparties by dealing only with institutions that the Company considers financially sound. The Company considers the risk of nonperformance to be remote.
Item 4. Controls and Procedures
(a) Evaluation and controls and procedures.
As of the end of the period covered by this report, the Company’s Chief Executive Officer, its Chief Financial Officer and its Chief Accounting Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act). Based on their evaluation, they have concluded that the Company’s disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company is made known to them by others within the Company, particularly during the period in which this quarterly report was prepared.
(b) Changes in internal controls.
During the period covered by this report, there have been no changes to our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
14
MINUTEMAN INTERNATIONAL, INC.
AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders:
On May 1, 2003, the Annual Shareholder’s Meeting was held, at which time the following were voted on and approved:
1. Proposal I, the election of directors for 2003, with the number of votes cast for each director being set forth after his name:
|
|
|
Votes |
|
||
|
Name |
|
For |
|
Withheld |
|
|
Gregory J. Rau |
|
3,432,646 |
|
120,320 |
|
|
Eckart Kottkamp |
|
3,432,646 |
|
120,320 |
|
|
Roger B. Parsons. |
|
3,441,656 |
|
111,310 |
|
|
Frank R. Reynolds |
|
3,427,346 |
|
125,620 |
|
|
James C. Schrader, Jr. |
|
3,432,346 |
|
120,620 |
|
|
Thomas J. Nolan |
|
3,441,856 |
|
111,110 |
|
|
Richard J. Wood |
|
3,441,656 |
|
111,310 |
|
2. Proposal II, an amendment to the Minuteman 2000 Restricted Stock Plan. Votes cast were as follows:
|
Votes |
|
||||
|
For |
|
Against |
|
Abstain |
|
|
3,265,326 |
|
148,140 |
|
139,500 |
|
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
|
Exhibit Number |
|
Description |
|
Material Contracts |
|
|
|
10.1 |
|
Amended Minuteman 2000 Restricted Stock Plan |
|
10.2 |
|
Amendment to employment agreement between Minuteman International, Inc. and Gregory J. Rau |
|
10.3 |
|
Union agreement between Minuteman International, Inc. and Sign, Display, Pictorial Artists and Allied Workers |
|
|
|
|
|
Certifications |
|
|
|
31.1 |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.3 |
|
Certification of the Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.3 |
|
Certification of the Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
15
(b) Reports on Form 8-K:
1. The Company filed a report on Form 8-K on May 9, 2003 pursuant to Item 9, “Regulation FD Disclosure” (intended to be furnished under Item 12) announcing first quarter 2003 earnings and a quarterly dividend.
2. The Company filed a report on Form 8-K on May 22, 2003 pursuant to Item 5, “Other Events” announcing that the Company has agreed to a settlement with the Securities and Exchange Commission related to revenue recognition practices in periodic reports filed with the SEC.
16
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.
MINUTEMAN INTERNATIONAL, INC.
|
/s/ Gregory J. Rau |
|
August 12, 2003 |
|
|
Gregory J. Rau |
Date |
||
|
President, Chief Executive Officer and Director |
|
||
|
|
|
||
|
|
|
||
|
/s/ Thomas J. Nolan |
|
August 12, 2003 |
|
Thomas J. Nolan |
Date |
||
|
Chief
Financial Officer, |
|
||
|
|
|
||
|
|
|
||
|
/s/ James A. Berg |
|
August 12, 2003 |
|
James A. Berg |
Date |
||
|
Chief Accounting Officer |
|
||
17