Minuteman International, Inc., Gregory J. Rau, Thomas J. Nolan, and David L. Markison
Securities Exchange Act of 1934
Release No. 47894 / May 21, 2003
Accounting and Auditing Enforcement
Release No. 1786 / May 21, 2003
Administrative Proceedings
File No. 3-11131
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In the Matter of MINUTEMAN INTERNATIONAL, INC., Respondents. |
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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDERS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission (Commission) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) against Minuteman International, Inc. (Minuteman or the Company), Gregory J. Rau (G. Rau), Thomas J. Nolan (Nolan), and David L. Markison (Markison) (collectively, Respondents).
II.
In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the Offers) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Orders Pursuant to Section 21C of the Securities Exchange Act of 1934 (Order), as set forth below.
III.
On the basis of this Order and Respondents' Offers, the Commission finds that:
1. Minuteman International, Inc. is an Illinois corporation based in Addison, Illinois. Minuteman's primary business is the manufacture and distribution of commercial and industrial vacuums, hard surface floor care equipment, carpet care products, sweepers, scrubbers and chemical cleaning products. Minuteman's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and has been traded on the NASDAQ National Market since March 1987. During the relevant period, Minuteman filed periodic and other informational reports with the Commission pursuant to Section 13(a) of the Exchange Act.
2. Gregory J. Rau, age 43, is a resident of Sleepy Hollow, Illinois. G. Rau has served as President of Minuteman since January 15, 2000 and CEO since September 22, 2000. Since September 2000, G. Rau has signed all Forms 10-K and 10-Q filings with the Commission. He has also been a director of the Company since April 1999. Since joining Minuteman in 1983, G. Rau has served as Division Manager, Senior Division Manager and Vice President of Sales.
3. Thomas J. Nolan, age 47, is a resident of Palatine, Illinois. Nolan has been the Chief Financial Officer and Treasurer of Minuteman since 1989, and Secretary since 1991. Nolan has also been a director of Minuteman since November 2000. During his employment with Minuteman, Nolan was in charge of Minuteman's accounting practices, responsible for Minuteman's financial statements and has signed all Forms 10-K and 10-Q filings with the Commission.
4. David L. Markison, age 36, is a resident of Brookfield, Illinois. From 1990 to 1998, Markison was accounting manager and then senior accountant for Minuteman. Since 1998, Markison has been the Controller of Minuteman. As Minuteman's Controller, Markison has been responsible for assuring that Minuteman's accounting practices are followed and comply with Generally Accepted Accounting Principles (GAAP), and has had overall responsibility for preparing Minuteman's financial statements, which were filed with the Commission after review and approval by Minuteman's CFO.
Summary
5. Minuteman engaged in improper accounting practices that misstated reported quarterly sales, revenue and income in Minuteman's periodic filings with the Commission from at least 1989 through May 2001. The Company's former CEO, aided by CFO Nolan and Controller Markison, held Minuteman's books open in the first three quarters of a fiscal year in order to record sales that properly should have been recorded in the subsequent quarter. After the death of the former CEO in September 2000, G. Rau, Minuteman's current President and CEO, was aware of the practice and permitted holding the Company's books open for the third quarter of 2000 and the first quarter of 2001. The Company thereby inflated revenues for the first three quarters of each year. The improper accounting did not affect the Company's annual revenue or income.
Minuteman's Improper Revenue Recognition
6. From at least 1989 through May 2001, Minuteman intentionally recognized quarterly revenue from sales occurring in a new quarter in the prior quarter's financial statements. The Company left its sales registers open for several days after a quarter ended and improperly recorded post-period sales in that quarter. For these post-period sales, the sales invoices were falsely dated with the last date of the prior quarter. The date of shipment and invoice processing, however, was after quarter-end. The practice was not followed at year-end.
7. Until his death in late September 2000, Minuteman's former CEO made the decision that quarterly sales for the first three quarters of the year were to be held open. He received daily sales reports, which reflected sales-to-date for the quarter and the year and also reflected the prior year's sales for the same periods. The former CEO then instructed Markison when the quarter's sales registers should be closed and to inform the customer service department. In turn, Markison informed the customer service department when the sales should be cut-off for that quarter.
8. During the days that quarters were held open, sales that were shipped after the quarter-end were backdated with an invoice date of the last business day of the prior quarter so that they would be included in the prior quarter's sales. For each additional day of sales that were improperly dated with the last business day of the quarter, a new daily sales register was generated, which was also backdated.
9. Nolan learned of Minuteman's practice of holding quarterly sales open shortly after he joined the Company in 1989. Before the former CEO's death in September 2000, Nolan did not take part in the decision to hold the quarters open and didn't instruct others to hold the quarters open. Nolan did, however, know that this improper practice was happening and allowed it to continue until June 2001, when it was stopped after an inquiry from the Commission's staff. Similarly, after joining Minuteman in 1990, Markison also learned that Minuteman's quarterly sales were being held open and had been held open since before he joined the Company.
10. Nolan and Markison prepared financial statements that included the additional days of sales that occurred after quarter end for the first three quarters of the year. Markison knew that the additional sales registers he received for the last day of the quarter were backdated because he informed the customer service department how long to continue using the last day of the quarter for the invoice date. Both Nolan and Markison were responsible for ensuring the financial statements they prepared were in conformity with GAAP, however, neither sought to determine the effect of holding the books open on the results reported in Minuteman's financial statements. Nolan signed Minuteman's quarterly and annual filings with the Commission that improperly included the post-period sales for the first three quarters of the year, materially misstating net sales and net income. G. Rau signed Minuteman's quarterly filings for the third quarter of 2000 and first quarter of 2001, and Minuteman's annual filing for 2000, which included materially misstated net sales and net income due to inclusion of post-period sales in the quarterly results.
11. After the death of Minuteman's former CEO, G. Rau was aware of the practice and permitted Minuteman to continue holding the quarterly books open. Nolan followed the practice of holding the sales registers open for a few days after the end of third quarter 2000 and first quarter 2001. At the end of each quarter, Nolan discussed keeping the books open with G. Rau.
12. Nolan believed the books were held open for several days in a new quarter to allow additional sales to be recorded so that salesmen could be paid commissions sooner. Commissions to salesmen were paid on a monthly basis at the end of the following month. In addition, bonuses to salesmen were paid quarterly and annually based on achieving quarterly and annual sales goals. According to Minuteman, the Company allowed some salesmen to achieve their goals and receive bonuses by keeping sales open at the quarter-end.
13. Because of this improper revenue recognition, Minuteman's quarterly and annual filings with the Commission overstated net sales and net income for the first three quarters of the year and understated net sales and income for the fourth quarter of the year. The Company also misstated its sales in press releases discussing quarterly results. Minuteman's overstatements of net sales and net income are summarized in the table below.
Minuteman's Overstatements of Net Sales and Net Income
|
Three months ended |
Overstatement of Net Sales |
%Overstatement of Net Sales |
Overstatement of Net Income |
%Overstatement of Net Income |
|
03/31/2001 |
$1,356,000 |
5.9% |
$245,000 |
23.8% |
|
09/30/2000 |
$1,218,000 |
5.4% |
$268,000 |
20.6% |
|
06/30/2000 |
$748,000 |
3.3% |
$137,000 |
12.3% |
|
03/31/2000 |
$352,000 |
1.5% |
$84,000 |
7.9% |
|
09/30/1999 |
$534,000 |
2.4% |
$136,000 |
10.4% |
|
06/30/1999 |
$977,000 |
4.9% |
$171,000 |
17.7% |
|
03/31/1999 |
$438,000 |
2.2% |
$93,000 |
12.0% |
|
09/30/1998 |
$631,000 |
2.8% |
$151,000 |
11.6% |
|
06/30/1998 |
$195,000 |
1.3% |
$43,000 |
4.6% |
|
03/31/1998 |
$783,000 |
5.1% |
$174,000 |
19.3% |
14. In Minuteman's filings and press releases, management's discussion and analysis of financial condition and results of operations (MD&A) was misleading. First, Minuteman misstated its actual financial results. The Company inflated sales and earnings of the first three quarters at the expense of subsequent quarters. Also, Minuteman made misleading comparisons between quarters. For example, in its Form 10-Q for the first quarter of 2001, the Company originally reported that earnings decreased $0.01 per share as compared to the first quarter of 2000, from $0.30 to $0.29 per share. In fact, Minuteman's earnings decreased $0.05 per share as compared to the same quarter in the prior year, from $0.27 in first quarter 2000 to $0.22 per share in first quarter 2001. In addition, Minuteman made misleading statements about the cause of the reduced earnings in its fourth quarters.
Misrepresentations to Auditors
15. Minuteman's CFO, Nolan, and its CEO, G. Rau, made false statements to the Company's auditors about the practice. Nolan and G. Rau, after becoming CEO in September 2000, signed management representation letters to the Company's auditors after the close of each quarter, which stated that the Company's financial statements were accurate and were prepared in conformity with GAAP, when they knew that this was not correct. Nolan also made the same representation orally during quarterly reviews to audit firm personnel with the knowledge that revenue was recognized that was not in conformity with GAAP.
Minuteman's Discontinuation of the Practice
16. Beginning with the quarter ended June 30, 2001, the quarterly practice of keeping sales open into the next fiscal quarter was halted. Minuteman discontinued this practice after it was notified in June 2001 of the Commission staff's informal inquiry concerning the Company and was asked to produce records related to quarterly revenue recognition and sales cut-off testing.
Minuteman's Restatement of Earnings
17. On August 20, 2001, Minuteman filed its Form 10-Q for the three months ended June 30, 2001. In the filing, the Company restated its consolidated statements of income for the three months ended March 31, 2001, June 30, 2000 and March 31, 2000 and for the six months ended June 30, 2000. According to the filing: "The Company determined that it was necessary to restate these interim results based on a review of the timing of the recording of certain sales transactions which were not consistent with the Company's sales recognition policy. Accordingly, the restatements include the deferral of certain sales from the reporting period in which the sales were originally recorded to the reporting period in which the sales would be properly recorded under the Company's sales recognition policy." Thereafter, on September 17, 2001, Minuteman filed an amended Form 10-Q for the quarter ended March 31, 2001 in which it restated its consolidated balance sheet at March 31, 2001 and its consolidated statements of income and cash flows for the three months ended March 31, 2001 and March 31, 2000. Then, on October 31, 2001, Minuteman filed its Form 10-Q for the quarter ended September 30, 2001 in which it restated its consolidated statements of income and balance sheets for the three months ended September 30, 2000. Subsequently, on December 18, 2001, Minuteman filed restatements of 1999 and 1998 quarterly information.
Violations of the Exchange Act
Minuteman
18. Minuteman filed false and misleading periodic reports with the Commission that misrepresented its financial condition and results of operations. As a result of the conduct described above, Minuteman violated Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder by recognizing revenue from sales of goods which occurred in new quarters in its financial statements for the prior quarters contained in Forms 10-K and 10-Q filed with the Commission from at least 1989 through May 2001. Minuteman violated Section 13(b)(2)(B) of the Exchange Act by failing to maintain an adequate system of internal accounting controls necessary to accurately reflect Minuteman's sales transactions, assets and income from at least 1989 through May 2001. Further, Minuteman violated Rule 13b2-1 by falsifying its books and records through the inclusion of post-period sales. Also, Minuteman violated Section 13(b)(5) of the Exchange Act by knowingly failing to implement a system of internal accounting controls to ensure proper closing of quarterly sales and knowingly falsifying its books, records, and accounts required to be kept pursuant to Section 13(b)(2).
G. Rau
19. As a result of the conduct described above, G. Rau was a cause of Minuteman's violations that misrepresented the Company's financial condition and results of operations. After becoming CEO, G. Rau learned that Minuteman's quarterly books were being held open and its quarterly financial statements were false. However, he permitted Minuteman to continue this practice and signed the Company's filings with the Commission. Accordingly, he was a cause of Minuteman's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. His conduct also violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. G. Rau also violated Rule 13b2-2 by signing management representation letters provided to Minuteman's auditors for the third quarter of 2000 and first quarter of 2001 that falsely stated that the financial statements were prepared in conformity with GAAP, while knowing that the financial statements wrongly included sales occurring after the end of the quarter.
Nolan
20. As a result of the conduct described above, Nolan was a cause of Minuteman's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. His conduct also violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. In addition, he was a cause of the Company's violation of Section 13(b)(2)(B) of the Exchange Act by knowingly failing to devise and maintain requisite systems of internal accounting controls to properly close the quarterly sales. Nolan also violated Rule 13b2-2 under the Exchange Act by signing management representation letters each quarter that falsely stated that the financial statements were prepared in conformity with GAAP, while knowing that the financial statements included revenue that was not in conformity with GAAP.
Markison
21. As a result of the conduct described above, Markison was a cause of Minuteman's violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act and Rule 13a-13 thereunder. Markison participated in practices or directed acts that he knew would result in materially misstated filings with the Commission. He instructed the customer service department to back-date invoices and when to close the books, and prepared Minuteman's financial statements with knowledge that they included post-period sales. During the course of his conduct, Markison violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
Minuteman's Remedial Efforts
In determining to accept the Offers, the Commission considered remedial acts promptly undertaken by Minuteman and cooperation afforded the Commission staff.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondents' Offers.
ACCORDINGLY, IT IS HEREBY ORDERED:
A. Pursuant to Section 21C of the Exchange Act, that Minuteman shall cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.
B. Pursuant to Section 21C of the Exchange Act, that Gregory J. Rau shall cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder.
C. Pursuant to Section 21C of the Exchange Act, that Thomas J. Nolan shall cease and desist from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder.
D. Pursuant to Section 21C of the Exchange Act, that David L. Markison shall cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rule 13a-13 thereunder, and from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
E. Within 90 days of this order, Minuteman shall comply with the following undertakings, as agreed to in its Offer of Settlement:
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1. For at least five years from the date of this Order, Minuteman will employ a Chief Accounting Officer who will review all of its filings with the Commission and will be a financial officer principally responsible for financial reporting. To the extent the Chief Financial Officer has any involvement in financial reporting, the Chief Accounting Officer will have supervisory responsibilities over him. The Chief Accounting Officer, along with the Chief Executive Officer and Chief Financial Officer, will certify Minuteman's financial reports under Sections 302 and 906 of The Sarbanes-Oxley Act of 2002. The certification by the Chief Accounting Officer will include the following legend: "This certification is being provided pursuant to Commission order, dated ______________, 2003, in In the Matter of Minuteman International, Inc., et al., Admin. Proc. File No. ____________." The certifications by the Chief Accounting Officer, Chief Executive Officer and Chief Financial Officer will each include the following legend: "The certification provided by the CAO does not in anyway alter the responsibilities of the CEO and CFO of Minuteman International, Inc. in connection with their certifications provided pursuant to Sections 302 and 906 of The Sarbanes-Oxley Act."
2. Minuteman will 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.
3. Minuteman will engage an auditing firm, other than its regular independent auditor, to conduct quarterly internal audits, and reviews of internal controls, specifically reviewing the recording of quarterly sales for at least two years from the date of this Order. Minuteman shall follow the recommendations made by the auditor in the internal audits. No later than 60 days after the conclusion of the auditor's engagement, Minuteman shall provide a copy of the auditor's findings to the SEC. The findings should be mailed to: U.S. Securities & Exchange Commission, Attention: Jane Jarcho, Assistant Director, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604.
By the Commission.
Jonathan G. Katz
Secretary