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, 2004

 

Commission File Number 0-15582

 

MINUTEMAN INTERNATIONAL, INC.

(Exact name of registrant, as specified in its charter)

 

 

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 30, 2004 was 3,586,068.

 

 

MINUTEMAN INTERNATIONAL, INC.
AND SUBSIDIARIES

 

FORM 10-Q

 

For the Quarter Ended June 30, 2004

 

TABLE OF CONTENTS

 

Part I Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)
	Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II Other Information
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

2

 

PART I. FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		Unaudited June 30, 2004			Audited December 31, 2003
ASSETS
Current assets:
Cash & cash equivalents		$	998,000		$	836,000
Short-term investments		1,700,000			5,800,000
Accounts receivable, less allowances of $1,588,000 in 2004 and $1,339,000 in 2003		23,018,000			18,136,000
Due from affiliates		28,000			19,000
Inventories		18,464,000			17,190,000
Prepaid expenses		589,000			403,000
Deferred income taxes		897,000			778,000
Total current assets		45,694,000			43,162,000
Property, plant and equipment, at cost		25,724,000			25,379,000
Accumulated depreciation		(18,848,000		)	(18,158,000		)
Net property, plant and equipment		6,876,000			7,221,000
Intangible assets, net of amortization of $1,066,000 in 2004 and 2003		5,201,000			5,201,000
Other assets		490,000			—
Total assets		$	58,261,000		$	55,584,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	1,500,000		$	1,500,000
Accounts payable		4,049,000			2,552,000
Accrued expenses		3,712,000			3,384,000
Income taxes payable		922,000			108,000
Total current liabilities		10,183,000			7,544,000
Long-term debt, less current maturities		5,250,000			6,000,000
Derivative financial instrument		265,000			444,000
Deferred income taxes		723,000			603,000
Total liabilities		16,421,000			14,591,000
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock, no par value; 10,000,000 shares authorized; 3,586,068 and 3,580,173 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		6,584,000			6,596,000
Retained earnings		35,472,000			34,594,000
Unearned restricted stock		—			(16,000		)
Accumulated other comprehensive loss		(216,000		)	(181,000		)
Total shareholders’ equity		41,840,000			40,993,000
Total liabilities and shareholders’ equity		$	58,261,000		$	55,584,000

 

See accompanying notes to condensed consolidated financial statements.

 

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MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net sales		$	21,067,000		$	19,258,000		$	40,877,000		$	37,892,000
Cost of sales		14,182,000			13,382,000			28,089,000			26,462,000
Gross profit		6,885,000			5,876,000			12,788,000			11,430,000
Operating expenses:
Selling		3,827,000			3,527,000			7,523,000			6,979,000
General and administrative		1,395,000			1,216,000			2,714,000			2,347,000
Total operating expenses		5,222,000			4,743,000			10,237,000			9,326,000
Income from operations		1,663,000			1,133,000			2,551,000			2,104,000
Other income (expense):
Interest income		—			2,000			2,000			9,000
Interest expense		126,000			(24,000		)	(31,000		)	(223,000		)
Other, net		36,000			(9,000		)	11,000			(10,000		)
Total other income (expense)		162,000			(31,000		)	(18,000		)	(224,000		)
Income before income taxes		1,825,000			1,102,000			2,533,000			1,880,000
Provision for income taxes		751,000			448,000			1,010,000			753,000
Net income		$	1,074,000		$	654,000		$	1,523,000		$	1,127,000
Weighted average number of common shares outstanding
• Basic		3,586,068			3,582,009			3,586,068			3,581,227
• Diluted		3,586,068			3,587,245			3,586,068			3,587,245
Net income per common share - basic and diluted		$	0.30		$	0.18		$	0.42		$	0.31
Dividends per share of common stock		$	0.09		$	0.09		$	0.18		$	0.18

 

See accompanying notes to condensed consolidated financial statements.

 

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MINUTEMAN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30, 2004			June 30, 2003
OPERATING ACTIVITIES
Net income		$	1,523,000		$	1,127,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		690,000			751,000
Compensation earned under restricted stock plan		16,000			36,000
Deferred income taxes		1,000			46,000
Derivative financial instrument		(179,000		)	(42,000		)
Other		(25,000		)	(13,000		)
Changes in operating assets and liabilities:
Accounts receivable and due from affiliates		(4,891,000		)	(5,046,000		)
Inventories		(1,274,000		)	(1,127,000		)
Prepaid expenses and refundable income taxes		(186,000		)	432,000
Accounts payable, accrued expenses and income taxes payable		2,639,000			1,307,000
Net cash used in operating activities		(1,686,000		)	(2,529,000		)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net		(345,000		)	(282,000		)
Maturities of short-term investments		4,100,000			3,600,000
Net cash provided by investing activities		3,755,000			3,318,000
FINANCING ACTIVITIES
Dividends paid		(645,000		)	(644,000		)
Payment of current maturity of long-term debt		(750,000		)	(750,000		)
Other assets		(490,000		)	—
Net cash used in financing activities		(1,885,000		)	(1,394,000		)
Effect of foreign exchange rate changes		(22,000		)	123,000
Increase (decrease) in cash and cash equivalents		162,000			(482,000		)
Cash and cash equivalents at beginning of period		836,000			1,307,000
Cash and cash equivalents at end of period		$	998,000		$	825,000

 

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 Condensed Consolidated Balance Sheet as of June 30, 2004 and the Condensed Consolidated Statements of Income and Cash Flows for the three and six months ended June 30, 2004 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, 2003.  The results of operations for fiscal 2004 interim periods are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2004.

 

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, 2004, and the components of the December 31, 2003 inventories, based on the physical count, both primarily on a LIFO basis, were as follows:

 

		June 30, 2004			December 31, 2003
Finished goods		$	7,880,000		$	7,116,000
Work in process		7,662,000			7,219,000
Raw materials		5,017,000			4,935,000
		20,559,000			19,270,000
Less LIFO reserve		(2,095,000		)	(2,080,000		)
Total at LIFO cost		$	18,464,000		$	17,190,000

 

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 credit facility with LaSalle Bank National Association.  Under the terms of this facility the Company may borrow up to $5 million under a revolving loan facility and has borrowed $14,000,000 under a term loan facility.  At June 30, 2004 there were no borrowings outstanding under the revolving line of credit and $6,750,000 in principal outstanding under the term loan facility.  There are no

 

6

 

requirements for compensating balances involved in this arrangement.  The revolving facility expires May 31, 2005.  The term loan is repayable in semi-annual installments of $750,000, with the final remaining balance being due on June 30, 2011.

 

On July 8, 2004, the Company and the lender entered into an amendment to the credit facility pursuant to which, among other things, the lender committed, subject to the satisfaction of certain conditions, including the closing of the merger of a wholly owned subsidiary of Hako-Werke International GmbH (“Hako-Werke International”), a limited liability entity organized under the laws of Germany with and into the Company becoming effective, (i) to make a supplemental term loan to the Company in the amount of the difference between $17,500,000 and the then outstanding principal balance of the term loan to fund the Company’s portion of the merger consideration as described above and (ii) to modify the financial covenants under the facility to, in part, take account of the merger.  The maturity date and installment amounts for the term loan (as increased by the supplemental term loan) pursuant to the amendment remain unchanged, although the amortization schedule will be slightly modified.  If the merger does not become effective, the foregoing provisions would not become effective.

 

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, 2004 and December 31, 2003 is classified as a non-current liability on the condensed consolidated balance sheets.

 

In the second quarter of 2004, the Company recorded the change in the fair market value of its interest rate swap as interest expense. The effect of adjusting the interest rate swap to market in the second quarter of 2004 was a reduction to expense of $240,000, resulting in a $142,000 (net of $98,000 in tax) benefit to net income.

 

Note 6—Comprehensive Income

 

The components of comprehensive income are as follows:

 

		Three Months Ended						Six Months Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income		$	1,074,000		$	654,000		$	1,523,000		$	1,127,000
Foreign currency translation adjustments		(24,000		)	71,000			(22,000		)	123,000
Amortization to income of cumulative effect of change in accounting for derivatives net of income tax benefit of $4,000		(7,000		)	(7,000		)	(13,000		)	(13,000		)
Comprehensive income		$	1,043,000		$	718,000		$	1,488,000		$	1,237,000

 

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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, 2004 and 2003 there were 131,140 shares available to be granted.  As of June 30, 2004, awards with respect to 17,683 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 representing the unearned portion of the award.  The unearned portion is amortized as compensation expense ($16,000 and $36,000 in the first six months of 2004 and 2003, respectively) on a straight-line basis over the related vesting period. At June 30, 2004, 17,683 shares were issued as they were fully vested.

 

Note 8—Commitments and Contingencies

 

Legal Matters

 

The Company is subject to various proceedings, lawsuits and other claims related to labor, products and other matters.  Included among these lawsuits are product liability claims seeking compensation for property damage, lost profits or other alleged damages, including in some cases, punitive damages.  The Company intends to vigorously defend the claims asserted against it in the pending litigation.

 

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 assurances that the matters will be resolved in a manner that will not 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, 2004 is $55,000.

 

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 were as follows:

 

Description		Balance at Beginning of Period			Charged to Costs and Expenses(1)			Deductions (2)			Balance at End of Period
For the six months ended June 30, 2004
Accrued warranties		$	610,000		$	432,000		$	383,000		$	659,000

 

(1) — Provision for warranty liability.

(2) — Warranty claims processed.

 

Note 10— Subsequent Events

 

On July 8, 2004, the Company announced that it had entered into an Agreement and Plan of Merger, dated as of July 8, 2004 (the “Merger Agreement”), with Hako-Werke International that beneficially owns approximately 68% of the Company’s common stock. The Merger Agreement provides for the merger of a wholly owned subsidiary of Hako-Werke International with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Hako-Werke International. If the merger becomes effective, Company shareholders who do not exercise dissenters’ rights under applicable law would receive $13.75 in cash (without interest), subject to any applicable withholding taxes, in exchange for each cancelled share of Company common stock. Consummation of the merger is subject to certain conditions, including the approval of the Company’s shareholders.  A $490,000 deferred asset for costs related to the merger with Hako-Werke International was recorded in the second quarter of 2004 and is reflected as other assets on the accompanying condensed consolidated balance sheet. The deferred asset will be reclassed as a reduction to equity when the merger transaction is completed.

 

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 and Allowance for Doubtful Accounts

 

The Company carries its accounts receivable at their face amounts less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions and based on a history of write-offs and collections. The Company’s policy is to generally not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payments have not been received within agreed upon invoice terms.

 

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

 

10

 

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, 2003 in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”.

 

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 Company believes that forward-looking statements made by it are based upon reasonable expectations. However, no assurances can be given that the actual results will not differ materially from those contained in such forward-looking statements. 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

 

Results of Operations

 

Net Sales and Earnings

 

Net sales were $21,067,000 in the second quarter of 2004, compared to $19,258,000 in the second quarter of 2003 a increase of $1,809,000 or 9.4%. Domestic sales increased 3.9% from the prior year quarter, including an increase of 13.6% from industrial product sales and slight increases from commercial and chemical product sales. International sales for the second quarter of 2004 increased 29.6% over the second quarter of 2003. International sales of commercial and industrial product lines for the first quarter of 2004 increased 42.4% and 24.7%, respectively compared to the first quarter of 2003.Excluding foreign currency exchange effects, total international sales increased 27.5%.

 

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Gross profit as a percent to sales increased 2.2% in the second quarter of 2004 from the comparable prior year period due to a favorable product mix from industrial customers, a one time price adjustment from one of the Company’s suppliers and a 2% decrease in overhead costs.

 

Net income for the second quarter of 2004 was $1,074,000 or $0.30 per common share, an increase of 64.2% from the prior year’s second quarter. The increase in net income was primarily due to increased revenues, an after-tax reduction in interest expense of $142,000 related to the change in fair market value of the derivative financial instrument compared with the second quarter of 2003 where interest expense included an after-tax reduction of $68,000 related to the change in fair market value of the derivative financial instrument.

 

Net sales for the first six months of fiscal year 2004 were $40,877,000 an increase of 7.9% over the first six months of fiscal year 2003. Domestic sales increased 4%, including an increase of 8.6% from the commercial product line. Domestic industrial sales were lower by 6.6% and domestic chemical sales declined by 4.9% from the comparable prior year period.  International sales for the first six months of fiscal year 2004 increased by 22.4% compared to the first six months of fiscal year 2003. International sales of commercial and industrial product lines for the first six months of 2004 increased 28.6% and 22.7%, respectively compared to the first six months of 2003.  Excluding foreign currency exchange effects, total international sales increased 17.6%.

 

Gross profit as a percent of sales increased 1.1% for the first six months of 2004 from the comparable prior year period due to a favorable product mix from industrial customers and a one time price adjustment from one of the Company’s suppliers.

 

Net income for the first six months of 2004 was $1,523,000 or $0.42 per common share, an increase of  35.1% from the comparable prior year period. The increase in net income was primarily due to increased revenues, an after-tax reduction in interest expense of $121,000 related to the change in fair market value of the derivative financial instrument compared with the first six months of 2003 which included an after-tax reduction of $38,000 related to the change in fair market value of the derivative financial instrument in interest expense.

 

Operating Expenses

 

Selling expenses in the second quarter of 2004 were $3,827,000 an increase of 8.5% from the second quarter of 2003. Higher payroll costs, travel expense and sales promotion expense contributed to the increase in selling expenses quarter over quarter.

 

General and administrative expenses in the second quarter of 2004 were $1,395,000 an increase of 14.7% compared to the second quarter of 2003. The increase was primarily related to higher costs for payroll, travel, temporary service fees and casualty insurance.

 

Selling expenses for the first six months of 2004 were $7,523,000 an increase of 7.8% from the comparable period in 2003. Higher payroll, health insurance costs, travel expense, freight costs and sales promotion expense contributed to the increase in selling expenses during the period.

 

General and administrative expenses in the first six months of 2004 were $2,714,000 an increase of 15.6% from the comparable period in 2003. The increase is primarily due to higher payroll, travel, temporary service fees, legal and professional fees and casualty insurance

 

Other Income/Expense

 

Other income in the second quarter of 2004 increased $193,000 from the prior year quarter primarily due to a decrease in interest expense.

 

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Other expense in the first six months of 2004 decreased $206,000 from the prior year period primarily due to a decrease in interest expense.

 

The Company incurred interest expense, related principally to debt obligations, of $115,000 and $140,000 for the quarter ended June 30, 2004 and 2003 respectively.  Included in the interest expense for the second quarter of 2004 is income of $230,000 related to the change in fair market value of the derivative financial instrument and income of $11,000 related to amortization of cumulative effect of change in accounting for the derivative, resulting in net interest income of $126,000.  In the second quarter of 2003 interest expense included income of $105,000 related to the change in fair market value of the derivative financial instrument and income of $11,000 related to amortization of cumulative effect of change in accounting for the derivative, resulting in net interest expense of $24,000.

 

Interest expense for the first six months of fiscal year 2004 was $232,000 and $287,000 in the comparable prior year period. Included in interest expense for the first six months of 2004 is income of $179,000 related to the change in fair market value of the derivative financial instrument and income of $22,000 related to amortization of cumulative effect of change in accounting for the derivative, resulting in net interest expense of $31,000. In the first six months of 2003 interest expense included income of $42,000 related to the change in fair market value of the derivative financial instrument and income of $22,000 related to amortization of cumulative effect of change in accounting for the derivative, resulting in net interest expense of $223,000.

 

Income Taxes

 

The effective income tax rate was approximately 41% for the second quarter of 2004 and 2003.

 

The effective income tax rate was approximately 40% for the first six months of 2004 and 2003.

 

Liquidity, Capital Resources and Financial Condition

 

The Company had working capital of $35.5 million at June 30, 2004 and $35.6 million at December 31, 2003. This represented a current ratio of 4.5 at June 30, 2004 and 5.7 at December 31, 2003.

 

Cash, cash equivalents and short-term investments represented 7.6% and 18.6% of this working capital at June 30, 2004 and December 31, 2003, respectively.  The decrease in the first six months of 2004 from December 31, 2003, was due primarily to purchases of inventory and an increase in accounts receivable.

 

At June 30, 2004, and December 31, 2003 the Company had shareholders’ equity of $41.8 million and $41.0 million, respectively, which when compared to total liabilities represented an equity to liability ratio of 2.5 and 2.8, respectively.

 

During the first six months of 2004 and 2003, the Company used $1.7 million and $2.5 million, respectively in cash flows from operating activities, which represents the Company’s principal source of cash. During the first six months of 2004, 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 due to increased revenue.

 

Cash provided by investing activities was $3,755,000 in the first six months of fiscal year 2004, an increase of $437,000 from the comparable period in 2003. The increase is due to the increase in maturities of short-term investments in the first six months of 2004 compared to the first six months of 2003, partially offset by a $63,000 increase in capital expenditures.

 

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Cash used in financing activities was $1.9 million and $1.4 million in the first six months of 2004 and 2003, respectively.  Financing activities consisted of dividend payments, payments of current maturities of long-term debt and $490,000 for costs related to the merger with Hako-Werke International.

 

The Company has sufficient capital resources to meet business and liquidity needs as they arise.  The Company has an unsecured credit facility with LaSalle Bank National Association.  Under the terms of this facility the Company may borrow up to $5 million under a revolving loan facility and has borrowed $14,000,000 under a term loan facility.  At June 30, 2004 there were no borrowings outstanding under the revolving line of credit and $6,750,000 in principal outstanding under the term loan facility.  There are no requirements for compensating balances involved in this arrangement.  The revolving facility expires May 31, 2005.  The term loan is repayable in semi-annual installments of $750,000, with the final remaining balance being due on June 30, 2011.

 

On July 8, 2004, the Company and the lender entered into an amendment to the credit facility pursuant to which, among other things, the lender committed, subject to the satisfaction of certain conditions, including the closing of the merger of a wholly owned subsidiary of Hako-Werke International with and into the Company becoming effective, (i) to make a supplemental term loan to the Company in the amount of the difference between $17,500,000 and the then outstanding principal balance of the term loan to fund the Company’s portion of the merger consideration as described above and (ii) to modify the financial covenants under the facility to, in part, take account of the merger.  The maturity date and installment amounts for the term loan (as increased by the supplemental term loan) pursuant to the amendment remain unchanged, although the amortization schedule will be slightly modified.  If the merger does not become effective, the foregoing provisions would not become effective.

 

Legal Matters

 

The Company is subject to various proceedings, lawsuits and other claims related to labor, products and other matters.  Included among these lawsuits are product liability claims seeking compensation for property damage, lost profits or other alleged damages, including in some cases, punitive damages.  The Company intends to vigorously defend the claims asserted against it in the pending litigation.

 

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 assurances that the matters will be resolved in a manner that will not adversely affect the Company.

 

See Part II Item 1 Legal Proceedings for additional information.

 

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.

 

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Item 4. 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-15(e) under the Securities Exchange Act of 1934, as amended).  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 for which this quarterly report was prepared.

 

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.

 

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MINUTEMAN INTERNATIONAL, INC.
AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is subject to various proceedings, lawsuits and other claims related to labor, products and other matters.  Included among these lawsuits are product liability claims seeking compensation for property damage, lost profits or other alleged damages, including in some cases, punitive damages.  The Company intends to defend vigorously the claims asserted against it in the pending litigation.

 

Complaints or counterclaims in the following lawsuits are pending against the Company in connection with one of the Company’s floor coating products:  Minuteman International, Inc. vs. AM-PM Cleaning Corp., filed in 2002 in the Waltham District Court, Middlesex County, Massachusetts; Overland Supply, Inc. v. Multi Clean, Inc., filed on July 17, 2002 in the Superior Court, Providence, Rhode Island; Matthews & Sons Floors, Inc. v. Minuteman International, Inc. filed on May 7, 2003 in the Superior Court, New Hanover County, North Carolina; Nyeco, Inc. Floor Technologies, LLC, Learning Foundation of Wilmington, Inc. v. Jeff Cohen, d/b/a Custom Tattoo Co. v. Minuteman International, Inc. et al., filed on May 7, 2003 in the Superior Court, New Hanover County, North Carolina; Bill Tate d/b/a Precision Clear floor Care v. Minuteman International, Inc., filed on July 2, 2003 in the District Court, Garfield County, Oklahoma; and Staples, Inc. v. Overland Supply, Inc., Minuteman International, Inc., Multi Clean, Inc., filed on July 18, 2003 in the Superior Court, Middlesex County, Massachusetts.  In general, the plaintiffs seek damages allegedly caused by or resulting from use of the floor coating product.  The Nyeco case is a putative class action but no determination has been made that it may proceed as a class action.  Discovery is in the early stages.  Answers to interrogatories filed by certain of the plaintiffs in the cases through the second quarter of 2004 allege property and other damages aggregating approximately $10 million (exclusive of punitive damages).

 

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 assurances that the matters will be resolved in a manner that will not adversely affect the Company.

 

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Item 6.  Exhibits and Reports on Form 8-K

 

(a)   Exhibit Index:

 

Exhibit Number		Description
Material Contracts
10.1		Agreement and Plan of Merger, dated as of July 8, 2004, among Minuteman International, Inc., Hako-Werke International GmbH, and MMAN Acquisition Corp.
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

 

(b)         Reports on Form 8-K:

 

1.               The Company filed a report on Form 8-K on May 7, 2004 pursuant to Item 12, “Results of Operations and Financial Condition,” announcing earnings for the quarter ended March 31, 2004 and a quarterly dividend.

 

2.               The Company filed a report on Form 8-K on July 9, 2004 pursuant to Item 5, “Other Events,” announcing that it had entered into an Agreement and Plan of Merger , dated as of July 8, 2004, with Hako-Werke International, the beneficial owner of approximately 68% of the Company’s common stock, and MMAN Acquisition Corp.

 

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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.

 

MINUTEMAN INTERNATIONAL, INC.

 

 

/s/ Gregory J. Rau		August 2, 2004
Gregory J. Rau		Date
President, Chief Executive Officer and Director
/s/ Thomas J. Nolan		August 2, 2004
Thomas J. Nolan		Date
Vice President, Chief Financial Officer, Secretary, Treasurer and Director
/s/ James A. Berg		August 2, 2004
James A. Berg		Date
Chief Accounting Officer

 

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