UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
(Mark One)
þ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| For the quarterly period ended | May 31, 2005 | |
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| For the transition period from | to |
| Commission File Number: | 1-13484 | |
COHESANT TECHNOLOGIES INC.
| Delaware | 34-1775913 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) | |
| 5845 West 82nd Street, Suite 102, Indianapolis, Indiana | 46278 | |
| (Address of principal executive offices) | (Zip Code) |
| Issuer’s telephone number, including area code | 317-871-7611 | |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.
YESþ NOo
As of June 24, 2005, the Company has 2,695,665 shares of Common Stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format (check one) YESo NOþ
COHESANT TECHNOLOGIES INC.
INDEX
| TABLE OF CONTENTS | PAGE | |||||||
| PART I | ||||||||
| Item 1. | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| Item 2. | 12 | |||||||
| Item 3. | 16 | |||||||
| PART II | ||||||||
| Item 2. | 17 | |||||||
| Item 6. | 17 | |||||||
| Signatures | ||||||||
| EX-31.1: CERTIFICATION | ||||||||
| EX-31.2: CERTIFICATION | ||||||||
| EX-32: CERTIFICATIONS | ||||||||
2
PART I
ITEM 1. FINANCIAL INFORMATION
COHESANT TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEET
| May 31, 2005 | November 30, 2004 | |||||||
| (Unaudited) | ||||||||
| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 5,455,177 | $ | 5,036,582 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $315,470 and $302,000, respectively | 3,564,941 | 3,297,305 | ||||||
| Inventory, net of allowance for obsolete and slow-moving inventory of $203,250 and $187,000, respectively | 3,362,649 | 3,367,947 | ||||||
| Prepaid expenses and other | 217,651 | 272,032 | ||||||
| Deferred tax assets, net | 210,000 | 210,000 | ||||||
| Total Current Assets | 12,810,418 | 12,183,866 | ||||||
| Property, plant and equipment, net | 530,580 | 520,866 | ||||||
| Patents and other intangibles, net | 120,042 | 125,296 | ||||||
| Goodwill | 840,254 | 840,254 | ||||||
| Other noncurrent assets | 1,815 | 1,815 | ||||||
| Total Assets | $ | 14,303,109 | $ | 13,672,097 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||
| Accounts payable | $ | 1,584,333 | $ | 983,798 | ||||
| Accrued salaries, benefits and commissions | 465,081 | 786,713 | ||||||
| Accrued taxes | 447,151 | 240,860 | ||||||
| Dividends payable | — | 347,005 | ||||||
| Other current liabilities | 183,136 | 197,119 | ||||||
| Total Current Liabilities | 2,679,701 | 2,555,495 | ||||||
| Deferred tax liability | 228,200 | 228,200 | ||||||
| Total Liabilities | 2,907,901 | 2,783,695 | ||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock ($.001 par value, 10,000,000 shares authorized and 2,644,752 and 2,613,965 shares issued, respectively) | 2,645 | 2,614 | ||||||
| Additional paid-in capital | 6,539,704 | 6,313,774 | ||||||
| Retained earnings | 4,852,859 | 4,572,014 | ||||||
| Total Shareholders’ Equity | 11,395,208 | 10,888,402 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 14,303,109 | $ | 13,672,097 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
COHESANT TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| May 31, 2005 | May 31, 2004 | |||||||
| NET SALES | $ | 5,702,957 | $ | 5,290,141 | ||||
| COST OF SALES | 3,101,005 | 2,586,538 | ||||||
| Gross profit | 2,601,952 | 2,703,603 | ||||||
| RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES | 212,431 | 275,628 | ||||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 1,767,037 | 1,597,382 | ||||||
| TOTAL OPERATING EXPENSES | 1,979,468 | 1,873,010 | ||||||
| Income from operations | 622,484 | 830,593 | ||||||
| OTHER INCOME: | ||||||||
| Interest income | 28,210 | 5,446 | ||||||
| Other income, net | 5,734 | 5,632 | ||||||
| INCOME BEFORE TAXES | 656,428 | 841,671 | ||||||
| INCOME TAX PROVISION | (249,442 | ) | (312,518 | ) | ||||
| NET INCOME | $ | 406,986 | $ | 529,153 | ||||
| BASIC AND DILUTED EARNINGS PER COMMON SHARE (Note 3) | $ | 0.15 | $ | 0.20 | ||||
| AVERAGE SHARES OF COMMON STOCK OUTSTANDING: | ||||||||
| BASIC | 2,642,835 | 2,587,632 | ||||||
| DILUTED | 2,730,462 | 2,674,499 | ||||||
| CASH DIVIDENDS PER SHARE | $ | 0.135 | $ | — | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
COHESANT TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Six Months Ended | ||||||||
| May 31, 2005 | May 31, 2004 | |||||||
| NET SALES | $ | 9,963,756 | $ | 9,525,591 | ||||
| COST OF SALES | 5,335,960 | 4,740,162 | ||||||
| Gross profit | 4,627,796 | 4,785,429 | ||||||
| RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES | 443,249 | 523,903 | ||||||
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 3,205,680 | 2,985,012 | ||||||
| TOTAL OPERATING EXPENSES | 3,648,929 | 3,508,915 | ||||||
| Income from operations | 978,867 | 1,276,514 | ||||||
| OTHER INCOME: | ||||||||
| Interest income | 50,158 | 10,338 | ||||||
| Other income, net | 10,687 | 14,574 | ||||||
| INCOME BEFORE TAXES | 1,039,712 | 1,301,426 | ||||||
| INCOME TAX PROVISION | (395,091 | ) | (483,773 | ) | ||||
| NET INCOME | $ | 644,621 | $ | 817,653 | ||||
| EARNINGS PER COMMON SHARE (Note 3) | ||||||||
| BASIC | $ | 0.24 | $ | 0.32 | ||||
| DILUTED | $ | 0.24 | $ | 0.31 | ||||
| AVERAGE SHARES OF COMMON STOCK OUTSTANDING: | ||||||||
| BASIC | 2,633,916 | 2,584,779 | ||||||
| DILUTED | 2,733,706 | 2,671,495 | ||||||
| CASH DIVIDENDS PER SHARE | $ | 0.135 | $ | — | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
COHESANT TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| May 31, 2005 | May 31, 2004 | |||||||
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 644,621 | $ | 817,653 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities - | ||||||||
| Depreciation and amortization | 107,132 | 118,803 | ||||||
| Non-cash compensation | 80,916 | 31,155 | ||||||
| Loss on asset disposal | — | 275 | ||||||
| Provision for doubtful accounts | 13,470 | 13,470 | ||||||
| Net change in assets and liabilities- | ||||||||
| Accounts and notes receivable | (281,106 | ) | (451,016 | ) | ||||
| Inventories | (3,253 | ) | (213,310 | ) | ||||
| Prepaid expenses and other | 54,381 | 57,656 | ||||||
| Accounts payable | 600,535 | 361,908 | ||||||
| Other current liabilities | (35,125 | ) | 55,468 | |||||
| Other noncurrent assets | (8,078 | ) | (9,905 | ) | ||||
| Net cash provided by operating activities | 1,173,493 | 782,157 | ||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||||||
| Property and equipment additions | (114,423 | ) | (59,244 | ) | ||||
| Proceeds from sale of property & equipment | 13,370 | — | ||||||
| Net cash used in investing activities | (101,053 | ) | (59,244 | ) | ||||
| CASH FLOWS USED IN FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | 56,935 | 36,125 | ||||||
| Cash dividends paid to stockholders | (710,780 | ) | (645,341 | ) | ||||
| Net cash used in financing activities | (653,845 | ) | (609,216 | ) | ||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 418,595 | 113,697 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 5,036,582 | 3,838,179 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 5,455,177 | $ | 3,951,876 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
COHESANT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Background
Cohesant Technologies Inc. and its subsidiaries (the “Company” or “Cohesant”) are engaged in the design, development, manufacture and sale of specialized dispense equipment systems, replacement parts and supplies used in the operation of the equipment and the design, development, manufacture and sale of specialty coatings.
The Company’s direct, wholly owned subsidiaries, GlasCraft Inc. (“GCI”) and Raven Lining Systems Inc. (“Raven”) sell their products through a network of independent distributors and Certified Applicators in the United States and overseas. Industries served include construction, transportation and marine.
The Company’s executive offices are located in Indianapolis, Indiana with its principal manufacturing, warehouse and distribution facilities located in Indianapolis, Indiana and Tulsa, Oklahoma.
Note 2 — Basis of Presentation
The condensed consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for certain small business issuers. 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 such rules and regulations. However, in the opinion of management of the Company, the condensed consolidated interim financial statements include all adjustments necessary to present fairly the financial information for such periods.
These interim financial statements should be read in conjunction with the Company’s financial statements and the notes thereto included in the November 30, 2004 Annual Report to Shareholders on Form 10-KSB.
The consolidated financial statements include the accounts of the Company and its direct, wholly owned subsidiaries, GCI and Raven. Intercompany accounts and transactions have been eliminated.
Note 3 — Earnings per Share
Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share”, requires dual presentation of basic and diluted earnings per share on the face of the statement of operations. Basic earnings per share is computed by dividing net income available to common
7
COHESANT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
shareholders by the weighted-average number of common shares outstanding for the period. Restricted stock grants are not considered issued and outstanding until vested, but are included in diluted earnings per share. Diluted earnings per share is computed based upon the weighted average shares that would have been outstanding if all dilutive potential common shares would have been converted into shares at the earliest date possible. In determining diluted earnings per share, stock options were included in the calculation as their effect was dilutive. The following is a reconciliation of the numerators and denominators used in computing earnings per share:
| Three Months Ended May 31, | Six Months Ended May 31, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Income available to common stockholders | $ | 406,986 | $ | 529,153 | $ | 644,621 | $ | 817,653 | ||||||||
| Basic earnings per share: | ||||||||||||||||
| Weighted-average number of common shares outstanding | 2,642,835 | 2,587,632 | 2,633,916 | 2,584,779 | ||||||||||||
| Basic earnings per share | $ | 0.15 | $ | 0.20 | $ | 0.24 | $ | 0.32 | ||||||||
| Diluted earnings per share: | ||||||||||||||||
| Weighted-average number of common shares outstanding | 2,642,835 | 2,587,632 | 2,633,916 | 2,584,779 | ||||||||||||
| Stock Options | 81,679 | 84,559 | 90,591 | 84,632 | ||||||||||||
| Restricted Stock | 5,948 | 2,308 | 9,199 | 2,084 | ||||||||||||
| Diluted weighted-average number of common shares outstanding | 2,730,462 | 2,674,499 | 2,733,706 | 2,671,495 | ||||||||||||
| Diluted earnings per share | $ | 0.15 | $ | 0.20 | $ | 0.24 | $ | 0.31 | ||||||||
Note 4 — Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25). The Company has adopted the disclosure-only provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123), as amended by FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Had the company elected to adopt the fair value recognition provisions of FAS 123, pro forma net income and earnings per share would be as follows:
8
COHESANT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 3 Months Ended | 6 Months Ended | |||||||||||||||
| May 31 | May 31 | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Net income, as reported | $ | 406,986 | $ | 529,153 | $ | 644,621 | $ | 817,653 | ||||||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 21,532 | 18,067 | 50,168 | 24,068 | ||||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (34,063 | ) | (32,659 | ) | (75,230 | ) | (53,251 | ) | ||||||||
| Pro forma net income | $ | 394,455 | $ | 514,561 | $ | 619,559 | $ | 788,470 | ||||||||
| Earnings per share: | ||||||||||||||||
| Basic—as reported | $ | 0.15 | $ | 0.20 | $ | 0.24 | $ | 0.32 | ||||||||
| Basic—pro forma | $ | 0.15 | $ | 0.20 | $ | 0.24 | $ | 0.31 | ||||||||
| Diluted—as reported | $ | 0.15 | $ | 0.20 | $ | 0.24 | $ | 0.31 | ||||||||
| Diluted—pro forma | $ | 0.14 | $ | 0.19 | $ | 0.23 | $ | 0.30 | ||||||||
On December 16, 2004, the FASB finalized SFAS No. 123R “Share-Based Payment,” which will be effective for small business issuers at the beginning of the first annual reporting period after December 15, 2005. The new standard will require the Company to expense stock options and the FASB believes the use of a binomial lattice model for option valuation is capable of more fully reflecting certain characteristics of employee share options. The Company has begun a process to analyze how the utilization of a binomial lattice model could impact the valuation of our options.
Note 5 — Revolving Line of Credit
On April 29, 2005, the Company renewed, through May 1, 2006, its $3,500,000 unsecured revolving line of credit facility. This facility accrues interest at the bank’s prime lending rate. Among other restrictions, the credit facility requires that the Company meet certain covenants including financial ratios. As of May 31, 2005, the Company was in compliance with all covenants and did not have a balance outstanding under this facility.
Note 6 — Segment Information
The Company monitors its operations in two business divisions: GCI and Raven. Certain corporate costs are not allocated to the business segments. Financial information for the Company’s business segments as of and for the period ended May 31, 2005 and May 31, 2004 is as follows:
9
COHESANT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three Months Ended | ||||||||||||||||
| May 31, 2005 | GCI | Raven | Corporate | Consolidated | ||||||||||||
| Net Sales | $ | 3,747,846 | $ | 1,955,111 | $ | — | $ | 5,702,957 | ||||||||
| Depreciation and amortization: | 40,603 | 10,487 | 1,809 | 52,899 | ||||||||||||
| Net Income: | 423,183 | 270,186 | (286,383 | ) | 406,986 | |||||||||||
| Identifiable assets: | 5,968,797 | 2,555,069 | 5,779,243 | 14,303,109 | ||||||||||||
| Capital expenditures: | 37,834 | 1,642 | 194 | 39,670 | ||||||||||||
| Three Months Ended | ||||||||||||||||
| May 31, 2004 | GCI | Raven | Corporate | Consolidated | ||||||||||||
| Net Sales | $ | 3,445,320 | $ | 1,844,821 | $ | — | $ | 5,290,141 | ||||||||
| Depreciation and amortization: | 44,761 | 12,963 | 1,933 | 59,657 | ||||||||||||
| Net Income: | 397,211 | 331,704 | (199,762 | ) | 529,153 | |||||||||||
| Identifiable assets: | 5,925,074 | 2,784,932 | 4,223,105 | 12,933,111 | ||||||||||||
| Capital expenditures: | 30,432 | 4,753 | 7,936 | 43,121 | ||||||||||||
| Six Months Ended | ||||||||||||||||
| May 31, 2005 | GCI | Raven | Corporate | Consolidated | ||||||||||||
| Net Sales | $ | 6,692,066 | $ | 3,271,690 | $ | — | $ | 9,963,756 | ||||||||
| Depreciation and amortization: | 80,468 | 22,544 | 4,120 | 107,132 | ||||||||||||
| Net Income: | 721,134 | 409,836 | (486,349 | ) | 644,621 | |||||||||||
| Identifiable assets: | 5,968,797 | 2,555,069 | 5,779,243 | 14,303,109 | ||||||||||||
| Capital expenditures: | 110,313 | 2,717 | 1,393 | 114,423 | ||||||||||||
| Six Months Ended | ||||||||||||||||
| May 31, 2004 | GCI | Raven | Corporate | Consolidated | ||||||||||||
| Net Sales | $ | 6,236,134 | $ | 3,289,457 | $ | — | $ | 9,525,591 | ||||||||
| Depreciation and amortization: | 89,277 | 26,032 | 3,494 | 118,803 | ||||||||||||
| Net Income: | 611,515 | 544,131 | (337,993 | ) | 817,653 | |||||||||||
| Identifiable assets: | 5,925,074 | 2,784,932 | 4,223,105 | 12,933,111 | ||||||||||||
| Capital expenditures: | 39,123 | 12,185 | 7,936 | 59,244 | ||||||||||||
The following table presents percentage of total revenues by region.
| Six Months | Six Months | |||||||||||
| Three Months Ended | Three Months Ended | Ended | Ended | |||||||||
| Region | May 31, 2005 | May 31, 2004 | May 31, 2005 | May 31, 2004 | ||||||||
| United States | 68 | 69 | 67 | 66 | ||||||||
| Europe | 12 | 14 | 11 | 12 | ||||||||
| Asia/Pacific Rim | 10 | 9 | 10 | 12 | ||||||||
| Canada | 5 | 5 | 7 | 6 | ||||||||
| Other | 5 | 3 | 5 | 4 | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
10
COHESANT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 — Contingencies
In November 1999, following the sale of certain assets of the Company’s American Chemical Company (“ACC”) subsidiary, ACC contributed its land and building to Marine Learning Institute (“MLI”), a not-for-profit environmental educational organization. MLI agreed to indemnify the Company to assume any costs arising from or out of the past, present or future environmental condition of the site. Subsequent to the donation of the St. Louis property, the Missouri Attorney General’s office raised questions regarding the status of the contributed land and advised the affected parties that additional clean-up efforts were necessary. MLI advised both the Company and the Missouri Attorney General that, in its opinion, no further clean-up efforts were necessary. Management intends to seek indemnification from MLI for any further clean-up and legal costs. No activity with respect to this matter has occurred in either fiscal year 2004 or to date in fiscal year 2005.
The Company is a party to certain other legal matters arising in the ordinary course of business. Management believes the ultimate disposition of these matters and the matter referred to above will not have a material adverse effect on the Company’s financial position or results of operations.
Note 8 — Shareholders’ Equity
On December 13, 2004, the Compensation Committee of the Board of Directors approved the grant of 7,850 shares of Common Stock, with an aggregate value of $94,200 to an aggregate of 12 key employees, including three executive officers. The grants were based on fiscal 2004 performance. The entire cost of these awards was expensed in the fiscal 2004 period. The issuance was exempt from registration pursuant to section 4(2) of the Securities Act of 1933.
Effective March 22, 2005, the Board of Directors approved the grant of 1,350 shares of Common Stock, with an aggregate value of $9,936, to a new employee. The grant was a restricted award that vests on a cliff basis on March 22, 2012 and may vest earlier according to meeting specific performance measures through March 31, 2006. The value of the grant is being recognized as non cash compensation expense over the vesting period.
Note 9 — Dividends
On May 4, 2005, the Company announced that its Board of Directors approved a semi-annual dividend payment of $0.135 per share. This dividend payment of $363,776 was paid on May 27, 2005 to shareholders of record on May 18, 2005.
11
COHESANT TECHNOLOGIES INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
Results of Operations
Second quarter ended May 31, 2005 as compared to the same period in the prior year.
Net sales for the three months ended May 31, 2005 were $5,702,957 compared to $5,290,141 for the same period of the prior year, an increase of $412,816 or 7.8%. Equipment sales increased $351,048, or 9.4% and Coatings sales increased $61,768, or 4.0%. Net income was $406,986, a $122,167 or 23.1% decrease compared to last year.
Net sales of dispense equipment and spare parts at GCI increased $302,526 or 8.8%. This increase was primarily attributable to 1) strong initial demand for the new Probler P2 dispense gun which spurred sharply increased sales of dispense guns to the foam and coatings market and 2) an increase in sales of dispense systems for the fiberglass reinforced plastics market. GCI also experienced an increase in sales of spare parts and accessories. These sales gains were partially offset by a decrease in sales of polyurethane and coatings dispense systems. Net sales of dispense equipment and parts in the United States increased 9.0% and international dispense equipment and parts net sales increased 8.5%. The increase in international sales was primarily a result of increased sales to the Asia/Pacific Rim, which was partially offset by decreased sales to Europe and Canada.
Specialty coatings net sales at Raven were $1,623,749 compared to $1,561,981 for the comparable period in the prior year, an increase of $61,768 or 3.9%. In addition, Raven had ancillary equipment and parts sales of $331,362 compared to $282,840 for the comparable period last year. Typically, Raven does not sell equipment unless new Certified Applicators needing equipment are added or existing applicators decide to increase capacity by buying additional equipment. Raven added three Certified Applicators during the quarter.
The Company’s gross margin decreased to $2,601,952, or 45.6% of net sales, in the 2005 period from $2,703,603, or 51.1% of net sales, in the 2004 period. The largest portion of this decrease was attributable to special introductory pricing on the new Probler P2 gun and greater than expected manufacturing and component costs for initial runs of this new product. To a lesser extent, the decrease in gross margin dollars and percentage decrease was due to increased raw material costs on the Company’s specialty coatings. Management expects margins to improve on its equipment as introductory pricing expires and as manufacturing and component costs decline on future production runs of the Probler P2.
Operating expenses for the three months ended May 31, 2005 were $1,979,468 compared to $1,873,010 for the same period of the prior year, an increase of $106,458, or 5.7%. This increase was primarily due to increased corporate administrative costs (higher personnel costs), which was partially offset by decreased sales and marketing expenses at both GCI and Raven and decreased research, development and engineering costs at GCI. The decrease in research, development and engineering costs at GCI reflects primarily timing differences and the Company expects its research, development and engineering costs will approximate those of the prior year.
12
COHESANT TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other income, net of other expenses increased $22,866. This increase was primarily attributable to increased interest earned on cash balances.
Six months ended May 31, 2005 as compared to the same period in the prior year.
Net sales for the six months ended May 31, 2005 were $9,963,756 compared to $9,525,591 for the same period of the prior year, an increase of $438,165 or 4.6%. Equipment sales increased $404,725, or 6.1% and Coatings sales increased $33,440, or 1.2%. Net income was $644,621, a $173,032 or 21.2% decrease compared to last year.
Net sales of dispense equipment and spare parts at GCI increased $455,932 or 7.3%. This increase was primarily attributable to 1) strong initial demand for the new Probler P2 dispense gun introduced in the first quarter which spurred sharply increased sales of dispense guns to the foam and coatings market and 2) an increase in sales of dispense systems for the fiberglass reinforced plastics market. GCI also experienced an increase in sales of spare parts and accessories. These sales gains were partially offset by a decrease in sales of polyurethane dispense systems. Net sales of dispense equipment and parts in the United States increased 13.8% and international dispense equipment and parts net sales increased less than 1%. Decreased sales to the Asia/Pacific Rim and Europe were offset by increased sales to Canada and other areas.
Specialty coatings net sales at Raven were $2,879,500 compared to $2,846,060 for the comparable period in the prior year, an increase of $33,440 or 1.2%. In addition, Raven had ancillary equipment and parts sales of $392,190 compared to $443,397 for the comparable period last year. Typically, Raven does not sell equipment unless new Certified Applicators needing equipment are added or existing applicators decide to increase capacity by buying additional equipment. Raven added five Certified Applicators during the period.
The Company’s gross margin decreased to $4,627,796, or 46.5% of net sales, in the 2005 period from $4,785,429, or 50.2% of net sales, in the 2004 period. The largest portion of this decrease was attributable to special introductory pricing on the new Probler P2 gun and greater than expected manufacturing and component costs for initial runs of this new product. To a lesser extent, the decrease in gross margin dollars and percentage decrease was due to increased raw material costs on the Company’s specialty coatings. Management expects margins to improve on its equipment as introductory pricing expires and as manufacturing and component costs decline on future production runs of the Probler P2.
Operating expenses for the six months ended May 31, 2005 were $3,648,929 compared to $3,508,915 for the same period of the prior year, an increase of $140,014, or 4.0%. This increase was primarily due to increased corporate administrative costs (higher personnel costs), which was partially offset by decreased research, development and engineering costs and decreased sales and marketing expenses at GCI. The decrease in research, development and engineering
13
COHESANT TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
costs at GCI reflects primarily timing differences and the Company expects its research, development and engineering costs will approximate those of the prior year.
Other income, net of other expenses increased $35,933. This increase was primarily attributable to increased interest earned on cash balances.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are its cash reserves and availability under the revolving line of credit. At May 31, 2005 the Company has cash and cash equivalents of $5,455,177, net working capital of $10,130,717 and $3,500,000 available under the revolving line of credit.
In the first half of fiscal 2005 cash provided by operations was $1,173,493 compared to $782,157 in the comparable period last year. This increase was due to improved inventory management and a decrease in accounts receivable day’s sales outstanding as well as increased accounts payable balances. Cash used in investing activities increased to $101,053 in the current period from $59,244 in the period ended May 31, 2004. This increase was due to increased spending on capital equipment. Cash used in financing activities was $653,845 in the current period compared to $609,216 in the prior year period. This increase was primarily due to increased dividends paid to shareholders.
On April 29, 2005, the Company renewed, through May 1, 2006, its $3,500,000 unsecured revolving line of credit facility. This facility accrues interest at the bank’s prime lending rate. Among other restrictions, the credit facility requires that the Company meet certain covenants including financial ratios. As of May 31, 2005, the Company was in compliance with all covenants and did not have a balance outstanding under this facility.
The Company does not have any other significant commitments or guarantees, except for rental commitments.
The Company believes that its cash flow from operating activities, existing cash resources and working capital coupled with its bank line will be adequate to meet its capital needs and dividend provisions for the foreseeable future.
Critical Accounting Policies and Estimates
The Company has disclosed those accounting policies and estimates that it considers to be significant in determining the amounts to be utilized for communicating its consolidated financial position, results of operations and cash flows in the notes to its consolidated financial statements.
The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and
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COHESANT TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
accompanying notes. Management continually evaluates the information used to make such estimates as its business and economic environment changes and has discussed these estimates with the Audit Committee of the Board of Directors. Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect the Company’s financial position or results of operations.
The following accounting policies represent the most critical based on management’s analysis due the impact on the Company’s results of operations.
Revenue Recognition.The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Under SAB 104 revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.
For equipment, coatings, and replacement and spare part revenue, the criteria of SAB 104 are generally met upon shipment to its independent distributors, certified applicators, large end users and Original Equipment Manufacturer accounts, at which time title and risks ownership are transferred to these customers. Therefore, revenue is recognized at the time of shipment. The Company does not have any rights of return, customer acceptance, installation or other post-shipment obligations with any of its products. The Company’s pricing is fixed at the time of shipment.
Accounts receivable.The Company evaluates the allowance for doubtful accounts on a periodic basis and reviews any significant customers with delinquent balances to determine future collectability. The determination includes a review of legal issues (such as bankruptcy status), past payment history, current financial and credit reports, and the experience of the credit representative. Allowances are established in the period in which the account is deemed uncollectable or questionable collectability. The Company believes, based on past history and credit policies, that the net accounts receivable are of good quality.
Inventory.The Company’s inventories are valued at the lower of cost or market. Reserves for obsolescence are estimated and based on projected sales volume. Though management considers these balances adequate and proper, changes in sales volumes due to unexpected economic conditions could result in materially different amounts for this item.
Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that the Company’s consolidated financial statements provide a meaningful and fair perspective of the Company. This is not to suggest that other risk factors such as changes in economic conditions, changes in material costs, and others could not adversely impact the Company’s consolidated financial position, results of operations and cash flows in future periods.
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COHESANT TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statement. These risks and uncertainties include, but are not limited to, a slow-down in domestic and international markets for plural component dispensing systems, a reduction in growth of markets for the Company’s epoxy coating systems and customer resistance to Company price increases.
ITEM 3. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Quarterly Report on Form 10-QSB. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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COHESANT TECHNOLOGIES INC.
PART II
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
Effective March 22, 2005, the Board of Directors approved the grant of 1,350 shares of Common Stock, with an aggregate value of $9,936 to a new employee. The grant was a restricted award that vests on a cliff basis on March 22, 2012 and may vest earlier according to meeting specific performance measures through March 31, 2006. The value of the grant is being recognized as non cash compensation expense over the vesting period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibit |
| 31.1 | 302 Certification of Chief Executive Officer | |||
| 31.2 | 302 Certification of Chief Financial Officer | |||
| 32 | 906 Certification of Chief Executive Officer and Chief Financial Officer | |||
| (b) | Reports on Form 8-K | |||
| An 8-K was filed on March 17, 2005 to report earnings for the first quarter ended February 28, 2005 (Items 2.02 and 9.01). | ||||
| An 8-K was filed on May 2, 2005 to report the renewal of its $3,500,000 credit facility through May 1, 2006 (Items 2.03 and 9.01). | ||||
| An 8-K was filed on May 4, 2005 to report a semi-annual dividend payment of $0.135 per share. (Items 8.01 and 9.01). | ||||
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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 there unto duly authorized.
Dated: June 23, 2005
| COHESANT TECHNOLOGIES INC. | ||||||
| BY: | /s/ Morris H. Wheeler | |||||
| Morris H. Wheeler | ||||||
| President & Chief Executive Officer | ||||||
| BY: | /s/ Robert W. Pawlak | |||||
| Robert W. Pawlak | ||||||
| Chief Financial Officer | ||||||
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