UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file no. 001-12673
RIVIERA TOOL COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-2828870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5460 Executive Parkway S.E., Grand Rapids, Michigan 49512
(Address of principal executive offices) (Zip Code)
(616) 698-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
There were 4,257,601 shares of the Registrant's common stock outstanding as of
July 14, 2006.
PART I
FINANCIAL INFORMATION
INDEX
Page No.
--------
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of May 31, 2006 and
August 31, 2005............................................. 3
Condensed Statements of Operations for the Three Months and
Nine Months Ended May 31, 2006 and May 31, 2005............. 4
Condensed Statements of Cash Flows for the Three Months and
Nine Months Ended May 31, 2006 and May 31, 2005............. 5
Notes to Condensed Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 13
Item 4. Controls and Procedures..................................... 13
PART II
OTHER INFORMATION
INDEX
Item 1A. Risk Factors................................................ 14
Item 5. Other Information........................................... 17
Item 6. Exhibits.................................................... 17
Signatures.................................................. 17
Certifications
Exhibits
2
RIVIERA TOOL COMPANY
FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
MAY 31, AUGUST 31,
2006 2005
NOTE (UNAUDITED) (AUDITED)
---- ------------ ------------
ASSETS
CURRENT ASSETS
Cash................................................. $ 18,900 $ 239,475
Accounts receivable, net............................. 9,036,878 5,232,138
Costs in excess of billings on contracts in process.. 2 2,926,447 2,844,444
Inventories.......................................... 236,437 236,437
Prepaid expenses and other current assets............ 391,587 453,597
------------ ------------
Total current assets........................... 12,610,249 9,006,091
PROPERTY, PLANT AND EQUIPMENT, NET...................... 3 9,822,687 10,902,845
PERISHABLE TOOLING...................................... 610,016 708,319
OTHER ASSETS............................................ 463,986 599,344
------------ ------------
Total assets................................... $ 23,506,938 $ 21,216,599
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt..................... 4 $ 3,436,496 $ 3,287,510
Accounts payable...................................... 4,492,764 3,517,578
Accrued liabilities................................... 790,046 661,833
------------ ------------
Total current liabilities...................... 8,719,306 7,466,921
LONG-TERM AND SUBORDINATED DEBT, NET OF
UNAMORTIZED DISCOUNT................................. 4 10,242,865 8,870,045
ACCRUED LEASE EXPENSE................................... 970,784 897,885
------------ ------------
Total liabilities.............................. 19,932,955 17,234,851
------------ ------------
PREFERRED STOCK - no par value, $100 mandatory
redemption value:
Authorized - 5,000 shares Issued and outstanding -
no shares......................................... -- --
STOCKHOLDERS' EQUITY:
Preferred stock - no par value, Authorized - 200,000
shares Issued and outstanding - no shares......... -- --
Common stock - No par value:
Authorized - 9,785,575 shares Issued and
outstanding - 4,257,601 shares and 3,984,874
shares as of May 31, 2006 and August 31, 2005,
respectively................................... 17,280,483 17,130,483
Retained deficit..................................... (13,706,500) (13,148,735)
------------ ------------
Total stockholders' equity..................... 3,573,983 3,981,748
------------ ------------
Total liabilities and stockholders' equity.............. $ 23,506,938 $ 21,216,599
============ ============
See notes to condensed financial statements
3
RIVIERA TOOL COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
----------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
---------- ---------- ----------- -----------
SALES .............................. $6,136,378 $4,687,278 $19,152,162 $14,220,838
COST OF SALES ...................... 4,957,607 4,106,830 16,410,546 12,297,177
---------- ---------- ----------- -----------
GROSS PROFIT .................... 1,178,771 580,448 2,741,616 1,923,661
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 670,472 660,103 1,834,002 2,106,934
---------- ---------- ----------- -----------
INCOME/(LOSS) FROM OPERATIONS ... 508,299 (79,655) 907,614 (183,273)
OTHER EXPENSE
INTEREST EXPENSE ............. 431,408 391,737 1,321,210 1,139,822
OTHER EXPENSE ................ 58,500 304,424 144,168 345,198
---------- ---------- ----------- -----------
TOTAL OTHER EXPENSE ............. 489,908 696,161 1,465,378 1,485,020
INCOME/(LOSS) BEFORE INCOME TAXES .. 18,391 (775,816) (557,764) (1,668,293)
---------- ---------- ----------- -----------
INCOME TAXES ....................... -- -- -- --
---------- ---------- ----------- -----------
NET INCOME/(LOSS) .................. $ 18,391 $ (775,816) $ (557,764) $(1,668,293)
========== ========== =========== ===========
BASIC AND DILUTED INCOME/(LOSS)
PER COMMON SHARE ................ $ -- $ (.20) $ (.13) $ (.44)
========== ========== =========== ===========
WEIGHTED-AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING ....... 4,257,601 3,807,527 4,152,706 3,785,569
========== ========== =========== ===========
See notes to condensed financial statements
4
RIVIERA TOOL COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) .......................................... $ 18,390 $ (775,816) $ (557,764) $(1,668,293)
Adjustments to reconcile net income/(loss) to net cash From
operating activities:
Depreciation and amortization ........................... 471,489 427,701 1,414,467 1,283,103
(Increase) decrease in assets:
Accounts receivable .................................. (1,040,564) 311,319 (3,804,740) 10,458,316
Costs in excess of billings on contracts in process .. 70,156 (833,342) (82,003) (2,736,016)
Perishable tooling ................................... 75,016 23,614 98,303 (7,426)
Prepaid expenses and other current assets ............ (21,365) 337,272 62,010 298,787
Increase (decrease) in liabilities:
Accounts payable ..................................... 486,046 (617,115) 975,186 (1,040,451)
Accrued lease expense ................................ 47,873 23,292 72,899 69,876
Accrued liabilities .................................. (30,654) 67 128,213 326,353
Deferred compensation ................................ -- -- -- (166,474)
----------- ----------- ----------- -----------
Net cash provided by/(used in) operating activities ........... $ 76,387 $(1,103,008) $(1,693,429) $ 6,817,775
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease/(increase) in other assets ........................ 49,670 (55,163) 135,358 24,291
Deletions/(additions) to property, plant and equipment ..... (55,260) (7,074) (111,262) (254,163)
----------- ----------- ----------- -----------
Net cash provided by/(used in) investing activities ........... $ (5,590) $ (62,237) $ 24,096 $ (229,872)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit line ....... 69,750 -- 2,395,523 --
Proceeds from sale common of stock ......................... -- 3,158 150,000 3,158
Deferred interest .......................................... -- (141,500) -- (141,500)
Principal payments on notes payable/overformula ............ (375,327) -- (1,090,912) (42,300)
Proceeds from issuance of convertible debt ................. -- 3,200,000 -- 3,200,000
Proceeds from issuance of convertible revolving note ....... -- 4,031,127 -- 4,031,127
Proceeds from overformula note ............................. -- 2,000,000 -- 2,000,000
Debt issuance costs ........................................ -- (579,491) -- (579,491)
Repayments of bank revolving note .......................... -- (2,595,878) -- (9,849,532)
Repayments of bank term debt ............................... -- (1,589,777) -- (1,835,100)
Repayments of subordinated debt ............................ -- (3,000,000) -- (3,000,000)
Decrease of capital lease .................................. (1,983) (1,984) (5,853) (5,853)
----------- ----------- ----------- -----------
Net cash provided by/(used in) financing activities ........... $ (446,124) $ 1,325,655 $ 1,448,758 $(6,219,491)
----------- ----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH ............................... $ (375,327) $ 160,410 $ (220,575) $ 368,412
CASH - Beginning of Period .................................... 394,227 209,202 239,475 1,200
----------- ----------- ----------- -----------
CASH - End of Period .......................................... $ 18,900 $ 369,612 $ 18,900 $ 369,612
=========== =========== =========== ===========
See notes to condensed financial statements
5
RIVIERA TOOL COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
MAY 31, 2006
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements (the
"Financial Statements") of Riviera Tool Company (the "Company") have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the Financial Statements do
not include all the information and footnotes normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles.
In the opinion of management, the Financial Statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
such information in accordance with generally accepted accounting principles.
The Financial Statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Form 10-K dated
November 30, 2005, for the fiscal year ended August 31, 2005.
The Financial Statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. During fiscal 2005, the Company sustained a loss
from operations of $498,282 and a net loss of $2,502,248. This loss resulted in
an accumulated deficit of $13,148,735 as of August 31, 2005. These factors,
among other things, raise substantial doubt about the Company's ability to
continue as a going concern. For the three-month and nine-month periods ended
May 31, 2006, the Company had net income of $18,390 and a net loss of $557,764,
respectively. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
The Company believes that the revolving line of credit and the funds generated
from operations, will be sufficient to cover anticipated cash needs for the
foreseeable future. However, depending on the Company's level of future sales,
terms of such sales, financial performance and cash flow of existing contracts
such financing may not be sufficient to support operations. Therefore, the
Company may be required to seek additional sources of funding.
The results of operations for the three-month and nine-month periods ended May
31, 2006 may not be indicative of the results to be expected for the full year.
NOTE 2 - COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
MAY 31, AUGUST 31,
2006 2005
----------- ----------
Costs incurred on contracts in process under the
percentage of completion method ...................... $12,995,257 $7,042,817
Estimated gross profit/(loss) ........................... 444,000 (25,000)
----------- ----------
Total ................................................ 13,439,257 7,017,817
Less progress payments received and progress billings
to date .............................................. 10,512,810 4,173,373
----------- ----------
Costs in excess of billings on contracts in process .. $ 2,926,447 $2,844,444
=========== ==========
Included in estimated gross profit as of May 31, 2006 and August 31, 2005, are
jobs with losses accrued of $659,516 and $190,430, respectively.
6
RIVIERA TOOL COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
MAY 31, 2006
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
MAY 31, AUGUST 31,
CATEGORY 2006 2005
-------- ----------- -----------
Leasehold improvements .......................... $ 1,923,740 $ 1,489,302
Office furniture and fixtures ................... 99,931 174,524
Machinery and equipment ......................... 21,109,657 23,135,344
Computer equipment and software ................. 1,255,233 2,854,788
Transportation equipment ........................ 102,036 109,782
----------- -----------
Total cost ................................... 24,490,597 27,763,740
Less Accumulated depreciation and amortization .. 14,667,910 16,860,895
----------- -----------
Net carrying amount .......................... $ 9,822,687 $10,902,845
=========== ===========
NOTE 4 - LONG-TERM AND SUBORDINATED DEBT
Long-term and Subordinated debt consists of the following:
MAY 31, AUGUST 31,
DEBT TYPE 2006 2005
--------- ----------- -----------
CONVERTIBLE REVOLVING NOTE
The convertible revolving working capital credit
line is collateralized by substantially all
assets of the Company and provides for
borrowings, subject to certain collateral
requirements, up to $11 million. The credit line
is due May 17, 2008, and bears interest, payable
monthly, at 1.25% above prime rate (as of May 31,
2006, an effective rate of 9.25%)................ $8,930,250 $6,534,727
OVERFORMULA
The overadvance loan is payable in monthly
installments of $191,667 commencing April 1,
2006, plus interest at 1.25% above prime rate (as
of May 31, 2006, an effective rate of 9.25%), due
April 1, 2007.................................... 2,000,000 2,000,000
SECURED CONVERTIBLE TERM NOTE
The convertible term note is payable in monthly
installments of $96,970, plus interest at prime
rate plus 4%, (as of May 31, 2006, an effective
rate of 12%), due May 17, 2008................... 2,327,273 3,200,000
7
RIVIERA TOOL COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
MAY 31, 2006
NOTE 4 - LONG-TERM AND SUBORDINATED DEBT - CONTINUED
MAY 31, AUGUST 31,
DEBT TYPE 2006 2005
--------- ----------- -----------
NOTES PAYABLE TO BANK
Subordinated note payable to bank, payable in
monthly installments of $31,000, including
interest at 11%, due January 1, 2008............. 873,237 1,008,124
OTHER
Other............................................... 6,851 12,704
----------- -----------
Total long-term and subordinated debt............ 14,137,611 12,755,555
----------- -----------
Less: unamortized debt discount.................. 458,250 598,000
Less: current portion of long-term debt and
unamortized debt discount..................... 3,436,496 3,287,510
----------- -----------
Long-term and subordinated debt, net of
unamortized discount.......................... $10,242,865 $ 8,870,045
=========== ===========
On December 9, 2005, the Company agreed to convert $150,000 of principal of its
Convertible Term Note into 272,727 shares of common stock at a conversion rate
of $.55 per share. Under such conversion, the Company was not required to pay
the Convertible Term Note monthly installment for January 2006 ($96,970) with
the balance ($53,030) being applied towards the February payment.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of the
Company's unaudited Statement of Operations as a percentage of sales.
For The Three For The Nine
Months Ended Months Ended
----------------- -----------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
------- ------- ------- -------
SALES ........................................ 100.0% 100.0% 100.0% 100.0%
COST OF SALES ................................ 80.8% 87.6% 85.7% 86.5%
----- ----- ----- -----
GROSS PROFIT .............................. 19.2% 12.4% 14.3% 13.5%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE .. 10.9% 14.1% 9.6% 14.8%
----- ----- ----- -----
INCOME/(LOSS) FROM OPERATIONS ............. 8.3% (1.7%) 4.7% (1.3%)
OTHER EXPENSE
INTEREST EXPENSE .......................... 7.0% 7.5% 6.9% 7.9%
OTHER EXPENSE ............................. 1.0% 7.4% 0.8% 2.5%
----- ----- ----- -----
TOTAL INTEREST AND OTHER EXPENSE ............. 8.0% 14.9% 7.7% 10.4%
INCOME/(LOSS) BEFORE INCOME TAXES ............ 0.3% (16.6%) (3.0%) (11.7%)
INCOME TAXES ................................. -- -- -- --
----- ----- ----- -----
NET INCOME/(LOSS) ......................... 0.3% (16.6%) (3.0%) (11.7%)
===== ===== ===== =====
FORWARD-LOOKING STATEMENT; RISKS AND UNCERTAINTIES
CERTAIN INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND OTHER
MATERIALS FILED OR TO BE FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION CONTAIN CERTAIN STATEMENTS THAT MAY BE CONSIDERED FORWARD-LOOKING.
FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"BELIEVE," "ANTICIPATE," "UNDERSTANDING," OR "CONTINUE," THE NEGATIVE OR OTHER
VARIATION THEREOF, OR COMPARABLE TERMINOLOGY, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. IN ADDITION, FROM TIME TO TIME, THE COMPANY MAY
RELEASE OR PUBLISH FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL
DEVELOPMENTS AND SIMILAR MATTERS. THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 PROVIDES A SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. IN ORDER TO
COMPLY WITH THE TERMS OF THE SAFE HARBOR, THE COMPANY NOTES THAT A VARIETY OF
FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER
MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE
COMPANY'S FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY
DEPENDING UPON A VARIETY OF FACTORS, INCLUDING CONTINUED MARKET DEMAND FOR THE
TYPES OF PRODUCTS AND SERVICES PRODUCED AND SOLD BY THE COMPANY.
9
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2006 TO THE THREE MONTHS ENDED MAY
31, 2005.
REVENUES - Revenues for the three months ended May 31, 2006 totaled $6.1 million
as compared to $4.7 million for the three months ended May 31, 2005, an increase
of $1.4 million or 30%. This was a result of the Company beginning the third
quarter of 2006 with a contract backlog of $11.2 million as compared to a $10.1
million contract backlog in 2005, an increase of 11%. This increased backlog
resulted in the Company experiencing a 21% increase in direct labor hours during
the third quarter of 2006, as compared to 2005, resulting in an increase in
third quarter revenues.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $9.2 million and $11 million as of May 31, 2006 and May 31,
2005 respectively. The Company expects all backlog contracts to be reflected in
sales during fiscal years ending August 31, 2006 and 2007.
COST OF SALES - Cost of goods sold increased from $4.1 million for the third
quarter of fiscal 2005 to $5.0 million for 2006 however as a percent of sales,
decreased from 87.6% for 2005 to 80.8% for 2006. Direct costs (materials and
labor) increased by $800,000, from $1.8 million for 2005 to $2.6 million for
2006. Engineering expense decreased by $64,000 from $596,000 for 2005 to
$532,000 for 2006. Lastly, of the cost of goods sold, manufacturing overhead
increased by $100,000 from $1.7 million for 2005 to $1.8 million for 2006.
Additional details of these changes in cost of sales for the third quarter of
fiscal 2005 and 2006 are as follows:
- Direct materials expense remained at $0.5 million for 2006 and as a
percent of sales decreasing from 14.1% in 2005 to 10.9%. The decrease
in percent of sales was largely due to higher contract volume
requirements and related revenues. Outside services expense increased
from $0.1 million for 2005 to $0.5 million for 2006 and as a percent
of sales from 2.0% to 8.2%. This was largely due to the Company
incurring expenses related to its outsourced revenue during the third
quarter of 2006. The balance of the outside services expense decrease
was due to higher sales volumes and corresponding increases in
outsourcing certain design services.
- Direct labor expense increased from $1.1 million for 2005 to $1.5
million for 2006 and as a percent of sales from 22.8% to 24.2%. This
change was a result of the Company incurring a 21% increase in direct
labor hours, from 59,000 hours in 2005 to 71,500 in 2006. Of the total
direct labor expense, regular or straight time increased by $211,000
however decreased a percent of sales from 16.4% for 2005 to 16.0% for
2006. Overtime expense increased from $303,000 for 2005 to $503,000
for 2006 and as a percent of sales from 6.4% for 2005 to 8.2% for
2006.
- Engineering expense decreased from $596,000, 12.7% of sales, for 2005
to $532,000, 8.7% of sales, for 2006. This was due to the Company's
maintaining lower project management personnel during 2006 as compared
to 2005.
- Manufacturing overhead was $1.7 million or 35.9% of sales for 2005 as
compared to $1.8 million or 28.9% of sales for 2006. During 2006,
increases in manufacturing overhead were largely due to a $37,000
increase in payroll taxes, a $23,000 increase in medical insurance
expense, a $22,000 increase in perishable tooling expense, a $14,000
increase in utilities expense and an $11,000 increase in indirect
labor. These were offset by a decrease of $30,000 in depreciation
expense. The increase of approximately 6.0% of manufacturing overhead
was largely due to the increase in sales volumes.
10
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense increased
slightly from $660,000 for the third quarter of 2005 to $670,000 for 2006. As a
percent of sales, selling and administrative expense decreased from 14.1% for
2005 to 10.9% for 2006. This decrease was a result of higher sales volume and
decreases in certain professional advisory fees. The largest selling and
administrative expense increases included $73,000 in bad debt expense, $71,000
in public company expenses and $25,000 in the State of Michigan Single Business
tax. These increases were offset by a decrease of $140,000 in professional and
legal fees expense and $7,000 in insurance expense.
The decrease in professional and legal expenses related to the Company's former
primary lender requiring the Company to retain the services of a consulting
company and the lender's legal counsel at the Company's expense during the
second quarter of 2005. During the third quarter of 2005, such expenses totaled
approximately $158,000.
INTEREST EXPENSE. Interest expense increased from $348,000 for the third quarter
of 2005, to $431,000 for 2006. This increase was largely due to the Company's
increased debt levels during the third quarter of 2006 as compared to 2005. For
the third quarter of 2006, the Company utilized $76,387 of cash in operating
activities as compared to utilizing cash of $1,103,008 in 2005 (financed with
borrowings on revolving line of credit).
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2006 TO THE NINE MONTHS ENDED MAY
31, 2005.
REVENUES - Revenues for the nine months ended May 31, 2006 totaled $19.1 million
as compared to $14.2 million for the nine months ended May 31, 2005, an increase
of $4.9 million or 35%. This was a result of the Company beginning fiscal 2006
with a contract backlog of $13.7 million as compared to $2.4 million in 2005, an
increase of 471%. This increased backlog resulted in the Company incurring
approximately 217,000 shop floor hours in 2006 as compared to 186,000 during the
same period of 2005, an increase of 31,000 hours or 17%.
COST OF SALES - Cost of goods sold increased from $12.3 million for the nine
months ended May 31, 2005 to $16.4 million for the nine months ended May 31,
2006 however, as a percent of sales, cost of goods sold decreased from 86.5% for
2005 to 85.7% for 2006. Direct costs (materials and labor) increased by $3.8
million, from $5.7 million for 2005 to $9.5 million for 2006. Engineering
expense increased by $45,000 from $1.55 million for 2005 to $1.6 million for
2006. Lastly, of the cost of goods sold, manufacturing overhead increased by
$300,000 from $5.0 million for 2005 to $5.3 million for 2006. Additional details
of these changes in cost of sales for the nine months ended May 31, 2005 and May
31, 2006 are as follows:
- Direct materials expense increased from $1.5 million to $3.2 million
for the first three quarters of 2005 and 2006, respectively. The
increase in direct materials was a result of increased contract
backlog and revenues in 2006. Outside services expense increased from
$0.5 million for 2005 to $2.0 million for 2006 and as a percent of
sales from 3.7% to 10.4%. The increase in outside services is a result
of the Company placing or subcontracting certain construction portions
of contracts to other suppliers.
- Direct labor expense increased from $3.6 million for 2005 to $4.3
million for 2006 however, as a percent of sales, direct labor expense
decreased from 25.6% to 22.3%. This change was a result of the Company
incurring a 17% increase in direct labor hours, from 186,000 hours in
2005 to 217,000 in 2006. Of the total direct labor expense, regular or
straight time increased by $342,000 however, as a percent of sales, it
decreased from 16.8% for 2005 to 14.3% for 2006. Overtime expense
increased from $1.3 million for 2005 to $1.5 million for 2006, as a
percent of sales, decreasing from 8.8% for 2005 to 8.0% for 2006.
- Engineering expense increased from $1.5 million, 11.0% of sales, for
2005 to $1.6 million, 8.4% of sales, for 2006. This increase was due
to the Company increasing the level of engineering personnel staffing
required to fulfill the design and project management portions of
contracts.
- Manufacturing overhead was $5.0 million or 35.4% of sales for 2005 as
compared to $5.3 million or 27.6% of sales for 2006. During 2006,
increases in manufacturing overhead were largely due to a $106,000
increase in manufacturing supplies expense, a $65,000 increase in
supervisor salaries and indirect labor expense, a $52,000 increase in
perishable tooling expense, a $52,000 increase in medical insurance
premiums, a $42,000 increase
11
in payroll tax expense and a $40,000 increase in utilities expense.
These increases were offset by a $92,000 decrease in depreciation
expense.
SELLING AND ADMINISTRATIVE EXPENSE - Selling and administrative expense
decreased from $2.1 million for the first three quarters of 2005 to $1.8 million
for 2006. As a percent of sales, selling and administrative expense decreased
from 14.8% for 2005 to 9.6% for 2006. During 2006, increases in selling and
administrative expense were largely due to an $156,000 increase in public
company expenses, a $65,000 increase in the State of Michigan Single Business
tax, a $59,000 increase in bad debt expense and a $38,000 increase in director
fees expense. These increases were offset by a $523,000 decrease in legal and
professional expenses, a $30,000 decrease in travel expenses and a $40,000
decrease in supervisor salaries expense.
The decrease in professional and legal expenses related to the Company's former
primary lender requiring the Company to retain the services of a consulting
company and the lender's legal counsel at the Company's expense during 2005.
During the first three quarters of 2005, such expenses totaled approximately
$511,000.
INTEREST EXPENSE - Interest expense increased from $1.1 million for 2005 to $1.3
million for 2006. This increase was largely due to the Company's increased debt
levels during the first three quarters of 2006 as compared to 2005. For the
first three quarters of 2006, the Company utilized $1.7 million of cash in
operating activities (financed with borrowings on revolving line of credit) as
compared to generating cash of $6.8 million in 2005 (utilized to reduce
revolving line of credit).
FEDERAL INCOME TAXES - For the nine months ended May 31, 2006, the Company
recorded a valuation allowance of approximately $190,000 to reduce its deferred
tax assets resulting from income tax benefit. For the three months ended May 31,
2006, the Company recorded a decrease in the deferred tax asset valuation
allowance of approximately $6,000 to offset the income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES - During the nine-month period ended May 31,
2006 the Company's cash used in operating activities was $1.7 million. This
largely resulted from an increase of $3.8 million in account receivables and a
$1.1 million increase in accounts payable and accrued liabilities. From
investing activities, the Company incurred a decrease in other assets of
$135,000 and utilized $111,000 for additions to property, plant and equipment.
The Company financed its increase in working capital requirements with $2.4
million of borrowings on its revolving line of credit, net of $1.0 million
utilized to reduce other debt (of which $150,000 was term debt, which was
converted to common stock).
The Company believes that the revolving line of credit and the funds generated
from operations will be sufficient to cover anticipated cash needs for the
foreseeable future. However, depending on the Company's level of future sales,
terms of such sales, financial performance and cash flow of existing contracts,
such financing may not be sufficient to support operations. Therefore, the
Company may be required to seek additional sources of funding.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information on the Company's debts that are
sensitive to changes in interest rates.
AMOUNT
AS OF MAY 31, 2006: OUTSTANDING MATURITY DATE
------------------- ----------- -------------
CONVERTIBLE REVOLVING NOTE:
Variable rate revolving credit line at an interest
rate of prime rate plus 1.25% (as of May 31, 2006,
an effective rate of 9.25%)....................... $8,930,250 May 17, 2008
SECURED CONVERTIBLE TERM NOTE:
At an interest rate of prime plus 4.00% (as of May
31, 2006, an effective rate of 9.25%)............. $2,327,273 May 17, 2008
OVERFORMULA:
At an interest rate of prime plus 1.25% (as of May
31, 2006, an effective rate of 12%)............... $2,000,000 April 1, 2007
The Company is exposed to market risk from changes in interest rates on its debt
obligations. The Company does not currently use any derivative financial
instruments to manage its interest rate risk
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on such evaluation,
our principal executive officer and principal financial officer have concluded
that as of such date, our disclosure controls and procedures were designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were
effective.
Changes in Internal Control Over Financial Reporting. There was no change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the period covered by
this Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
13
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
The Company faces a number of significant risks and uncertainties in connection
with its operations. The Company's results of operations and financial condition
could be materially affected by the factors described below. While each risk is
described separately, some risks are inter-related and it is possible that
certain risks could trigger the applicability of other risks described below.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us may also impair our
operations and business.
If we do not successfully address any of the risks described below, there could
be a material adverse effect on our financial condition, operating results and
business, and the trading price of our common stock may decline. We cannot
assure you that we will successfully address these risks.
WE HAVE A HISTORY OF OPERATING LOSSES, ANTICIPATE INCURRING LOSSES FOR THE
FORESEEABLE FUTURE AND MAY NEVER BECOME PROFITABLE.
For the fiscal year ending August 31, 2005, we had an operating loss of
approximately $2,502,000. For each of the quarterly periods ending November 30,
2005 and February 28, 2006, we had operating losses of approximately $441,000
and $135,000, respectively. For the three-month and nine-month periods ended May
31, 2006, the Company had net income of $18,391 and net loss of $557,764,
respectively.
The report of the Company's auditors with respect to their examination of the
Company's financial statements for the year ended August 31, 2005 contains an
explanatory paragraph relating to the preparation of the Company's financial
statements on a "going concern" basis, and states that, the Company was not in
compliance with its loan agreements, has suffered recurring losses from
operations and has a retained deficit, that raise a substantial doubt about the
Company's ability to continue as a going concern. At August 31, 2005 and May 31,
2006, we had an accumulated deficit of approximately $13,149,000 and
$13,706,000, respectively. While our management has addressed the conditions
which have left substantial doubt about our ability to continue as a going
concern, there is no certainty that we will be successful in implementing any of
the plans of management to restore us to profitability or to otherwise ensure
that we will be able to continue as a going concern.
SHAREHOLDERS MAY SUFFER DILUTION FROM THE EXERCISE OF EXISTING OPTIONS, WARRANTS
AND CONVERSION RIGHTS.
Our common stock may become diluted if warrants and options to purchase our
common stock are exercised or additional shares are issued upon conversion
pursuant to conversion rights by the Company's Senior Lender, Laurus Master
Fund, Ltd. ("Laurus"). The number of shares of our common stock that can
currently be purchased upon exercise of warrants is 10,000, upon exercise of
options is 831,000 (650,000 of these options are those granted to Laurus) and
pursuant to conversion rights is 3,132,531. Under the terms of our Agreements
with Laurus, the number of shares to be obtained upon exercise of options or
pursuant to conversion rights held by Laurus cannot exceed the number of shares
that, when combined with all other shares of common stock and securities then
owned by Laurus, would result in Laurus owning more than 4.99% of our
outstanding common stock at any given point of time (or 19.99% in the event that
such limitation is suspended upon the occurrence of an "event of default" under
any of the Agreements or any other transaction agreements).
These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrations under the Securities
Act, or an exemption such as Rule 144 under the Securities Act, may have a
dilutive effect on the market price of our common stock.
THE INABILITY TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE ON ACCEPTABLE
TERMS COULD DELAY US FROM EXECUTING OUR BUSINESS PLAN OR PREVENT US FROM DOING
SO ENTIRELY.
14
We expect to need additional capital in the future to fund our operations,
finance investments in equipment and corporate infrastructure, expand our
domestic and global sub-supplier network, increase the range of services we
offer and respond to competitive pressures and perceived opportunities. Cash
flow from operations and cash on hand may not be sufficient to cover our
operating expenses and capital investment needs. We cannot assure you that
additional financing will be available on terms acceptable to us, if at all. A
failure to obtain additional funding could prevent us from making expenditures
that are needed to allow us to grow or maintain our operations. Increases in
business can temporarily reduce our working capital due to cash flow lags.
If we raise additional funds by selling equity securities, the relative equity
ownership of our existing investors could be diluted or the new investors could
obtain terms more favorable than previous investors. If we raise additional
funds through debt financing, we could incur significant borrowing costs. The
failure to obtain additional financing when required could result in us being
unable to grow as required to maintain profitable operations.
WE HAVE SIGNIFICANT OUTSTANDING INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS.
In order to finance our operations we have incurred indebtedness. Our credit
facility with Laurus is secured by substantially all of our assets. In addition
to certain limited financial covenants, our credit facility restricts our
ability to incur additional indebtedness or to pledge our assets. As of May 31,
2006, we are in compliance with all of the terms of our credit facility with
Laurus. There can be no assurance, however, that we will be able to comply with
the terms of this credit facility in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 9 for
additional information on our outstanding indebtedness.
Our business is subject to all of the risks associated with substantial
leverage, including the risk that available cash may not be adequate to make
required payments. Our ability to satisfy outstanding debt obligations from cash
flow will be dependent upon our future performance and will be subject to
financial, business and other factors, many of which will be beyond our control.
In the event that we do not have sufficient cash resources to satisfy our
repayment obligations, we would be in default, which would have a material
adverse effect on our business. To the extent that we are required to use cash
resources to satisfy interest payments to the holders of outstanding debt
obligations, we will have fewer resources available for other purposes. There is
no assurance that we will not increase our leverage in the future, whether as a
result of operational or financial performance, acquisition or otherwise.
OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE ONE OR MORE OF OUR MOST
SIGNIFICANT CUSTOMERS WHICH COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON US.
A significant portion of our revenues are concentrated among a few large
customers. For the year ended August 31, 2005, our largest customer represented
approximately $3.4 million or 18% of total revenue, while the next three largest
customers represented approximately $4.8 million or 25% of total revenue. Our
three largest customers represented 84% and 63% of total revenue for each of the
fiscal years ended 2005 and 2004, respectively. For the three and nine months
ended May 31, 2006, our three largest customers represented approximately 60%
and 52%, respectively, of total revenues. The loss of any of the foregoing
customers could have a significant adverse impact on us.
THERE IS NO ASSURANCE THAT WE WILL REMAIN LISTED ON AN ACTIVE TRADING MARKET.
Although our common stock is quoted on the American Stock Exchange ("Amex"),
there can be no assurance that we will, in the future, be able to meet all the
requirements for continued quotation thereon. Amex recently approved a plan
submitted by the Company to regain compliance with its continued listing
requirements by August 9, 2007. Although the Company believes it can achieve its
plan, there can be no assurance that it can successfully do so. In the absence
of an active trading market or if our common stock cannot be traded on the
American Stock Exchange, our common stock could instead be traded on the
Electronic Bulletin Board or in the Pink Sheets. In such event, the liquidity
and stock price in the secondary market may be adversely affected. In addition,
in the event our common stock was delisted, broker-dealers have certain
regulatory burdens imposed upon them, which may discourage broker-dealers from
effecting transactions in our common stock, further limiting the liquidity of
our common stock.
OUR STOCK PRICE IS VOLATILE.
15
Our stock price, like that of other small cap companies, is subject to
significant volatility because of factors such as quarterly variations in our
operating results, changes in revenue or earnings estimates by the investment
community and speculation in the press or investment community. In addition, our
stock price is affected by unfavorable global economic and market conditions. If
such conditions deteriorate, our stock price could decline.
WE DEPEND ON OUR SENIOR MANAGEMENT, THE LOSS OF WHOM WOULD HAVE AN ADVERSE
IMPACT ON US.
We presently are dependent upon the executive abilities of our President and
Chief Executive Officer, Kenneth K. Rieth, our Chief Financial Officer, Peter C.
Canepa, and our other executive officers. Our business and operations to date
chiefly have been implemented under the direction of these individuals, who
presently are, and in the future will be, responsible for the implementation of
our anticipated plans and programs. The loss or unavailability of the services
of one or more of our principal executives would have an adverse effect on us.
Given our present financial condition, we may encounter difficulty in our
ability to recruit and ultimately hire any replacement or additional executive
officers having similar background, experience and qualifications as those of
our current executive officers.
THE MARKETS SERVED BY US ARE HIGHLY CYCLICAL AND OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED AS A RESULT OF GENERAL ECONOMIC AND MARKET
CONDITIONS.
We are subject to the effects of general global economic and market conditions.
The automotive industry is highly cyclical and dependent on consumer spending.
Economic factors adversely affecting automotive production and consumer spending
could adversely impact our business. If economic and market conditions
deteriorate, our business, results of operations or financial condition could be
materially adversely affected. An economic downturn may also impact
substantially leveraged companies, such as ourselves, more than similarly
situated companies with less leverage.
LABOR INTERRUPTIONS COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Within the automotive supply industry substantially all of the hourly employees
of the OEMs and many Tier I suppliers are represented by labor unions, and work
pursuant to collective bargaining agreements. The failure of any of our
significant customers to reach agreement with a labor union on a timely basis,
resulting in either a work stoppage or strike, could have an adverse impact on
our business.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF WAR OR ACTS
OF TERRORISM.
Terrorist acts or acts of war may cause damage or disruption to our employees,
facilities, customers and partners, which could have a material adverse effect
on our business, results of operations or financial condition. Such conflicts
may also cause damage or disruption to transportation and communication systems
and to our ability to manage logistics in such an environment, including receipt
of materials and distribution of products.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATION WHICH COULD HAVE AN ADVERSE IMPACT ON
US.
We are subject to the requirements of federal, state and local environmental and
occupational health and safety laws and regulations. Although we have made and
will continue to make expenditures to comply with environmental requirements,
these requirements are constantly evolving, and it is impossible to predict
whether compliance with these laws and regulations may have a material adverse
effect on us in the future. If a release of hazardous substances occurs on or
from our property or from any of our disposals at offsite disposal locations, or
if contamination is discovered at any or our current or former properties, we
may be held liable, and the amount of such liability could be material.
16
ITEM 5. OTHER INFORMATION
The Company recently reported a number of matters relating to its change in
certifying accountant and compliance with the continued listing requirements of
the Amex. Such matters were disclosed on Form 8-K below and are incorporated by
reference.
NONE
ITEM 6. EXHIBITS
Exhibits:
31.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 906
31.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 906
32 Written Statement of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Sec. 302
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 14, 2006
Riviera Tool Company
/s/ Kenneth K. Rieth
----------------------------------------
Kenneth K. Rieth
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter C. Canepa
----------------------------------------
Peter C. Canepa
Chief Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
31.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 906
31.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 906
32 Written Statement of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Sec. 302