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, 2005
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 Identification No.)
incorporation or organization)
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
There were 4,090,138 shares of the Registrant's common stock outstanding as of
July 14, 2005.
PART I
FINANCIAL INFORMATION
INDEX
Page No.
Item 1. Financial Statements
Balance Sheets as of May 31, 2005 and August 31, 2004............................................. 3
Statements of Operations for the Three and Nine Months Ended May 31, 2005 and 2004................ 4
Statements of Cash Flows for the Three and Nine Months Ended May 31, 2005 and 2004................ 5
Notes to Financial Statements..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 15
Item 4. Controls and Procedures........................................................................... 15
PART II
OTHER INFORMATION
INDEX
Item 1. Legal Proceedings................................................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................................................. 17
Signatures........................................................................................ 18
Exhibits.......................................................................................... 19
2
RIVIERA TOOL COMPANY
FINANCIAL STATEMENTS
BALANCE SHEETS
--------------------------------------------
MAY 31, AUGUST 31,
ASSETS 2005 2004
------------------- -------------------
CURRENT ASSETS NOTE (UNAUDITED) (AUDITED)
---- ------------------- -------------------
Cash............................................................ $ 369,612 $ 1,200
Accounts receivable............................................. 2,616,969 13,075,285
Costs in excess of billings on contracts in process............. 2 3,405,159 669,143
Inventories..................................................... 238,301 238,301
Prepaid expenses and other current assets....................... 515,907 235,203
------------------- -------------------
Total current assets.................................. 7,145,948 14,219,132
PROPERTY, PLANT AND EQUIPMENT, NET................................ 3 11,299,806 12,328,746
PERISHABLE TOOLING................................................ 734,130 726,704
OTHER ASSETS...................................................... 599,344 623,635
------------------- -------------------
Total assets.......................................... $ 19,779,228 $ 27,898,217
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................... 4 $ 3,593,996 $ 15,742,669
Accounts payable................................................ 3,868,442 4,908,893
Accrued liabilities............................................. 731,546 521,193
------------------- -------------------
Total current liabilities............................. 8,193,984 21,172,755
LONG-TERM DEBT, NET OF UNAMORITZED DISCOUNT....................... 4 5,957,718 12,703
ACCRUED LEASE EXPENSE............................................. 810,770 740,894
DEFERRED COMPENSATION............................................. -- 166,474
DEFERRED INTEREST................................................. -- 25,500
------------------- -------------------
Total liabilities..................................... 14,962,472 22,118,326
------------------- -------------------
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 - 4,090,138 at May 31, 2005 and
3,774,346 shares at August 31, 2004.......................... 17,131,536 16,426,378
Retained deficit................................................ (12,314,780) (10,646,487)
------------------- -------------------
Total stockholders' equity............................ 4,816,756 5,779,891
------------------- -------------------
Total liabilities and stockholders' equity........................ $ 19,779,228 $ 27,898,217
=================== ===================
See notes to financial statements
3
RIVIERA TOOL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
----------------------------- -----------------------------
MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004
------------ ------------ ------------ ------------
SALES ............................................... $ 4,687,278 $ 7,596,931 $ 14,220,838 $ 24,200,591
COST OF SALES ....................................... 4,106,830 6,729,645 12,297,177 21,642,926
------------ ------------ ------------ ------------
GROSS PROFIT ...................................... 580,448 867,286 1,923,661 2,557,665
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........................... 660,103 479,920 2,106,934 1,389,060
------------ ------------ ------------ ------------
(LOSS)/INCOME FROM OPERATIONS .................... (79,655) 387,366 (183,273) 1,168,605
INTEREST EXPENSE .................................... 391,737 148,782 1,139,822 480,008
SUBORDINATED DEBT FINANCING COSTS ................... 304,424 -- 345,198 --
------------ ------------ ------------ ------------
TOTAL INTEREST AND OTHER EXPENSE ................. 696,161 148,782 1,485,020 480,008
------------ ------------ ------------ ------------
(LOSS)/INCOME BEFORE INCOME TAXES ................... (775,816) 238,584 (1,668,293) 688,597
------------ ------------ ------------ ------------
INCOME TAXES ........................................ -- -- -- --
------------ ------------ ------------ ------------
NET (LOSS)/INCOME AVAILABLE FOR
COMMON SHARES ...................................... $ (775,816) $ 238,584 $ (1,668,293) $ 688,597
============ ============ ============ ============
BASIC AND DILUTED (LOSS)/INCOME PER COMMON SHARE .... $ (.20) $ .06 $ (.44) $ .18
============ ============ ============ ============
BASIC AND DILUTED COMMON SHARES OUTSTANDING ......... 3,807,527 3,774,346 3,785,569 3,774,346
============ ============ ============ ============
See notes to financial statements
4
RIVIERA TOOL COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
---------------------------- ----------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income ............................................ $ (775,816) $ 238,584 $ (1,668,293) $ 688,597
Adjustments to reconcile net (loss)/income to net cash
from operating activities:
Depreciation and amortization ............................ 427,701 421,599 1,283,103 1,264,798
(Increase) decrease in assets:
Accounts receivable ................................... 311,319 (7,171,218) 10,458,316 (5,051,668)
Costs in excess of billings on contracts in process .. (833,342) 3,124,750 (2,736,016) 3,843,404
Perishable tooling .................................... 23,614 (35,697) (7,426) (41,071)
Prepaid expenses and other current assets ............. 337,272 49,741 298,787 (163,822)
Increase (decrease) in liabilities:
Accounts payable ...................................... (617,115) 853,652 (1,040,451) 314,709
Accrued outsourced contracts payable .................. -- (3,557,595) -- (2,913,209)
Accrued lease expense ................................. 23,292 25,050 69,876 75,150
Accrued liabilities ................................... 67 54,602 326,353 373,288
Deferred compensation ................................. -- -- (166,474) --
------------ ------------ ------------ ------------
Net cash (used in)/provided by operating activities ............ $ (1,103,008) $ (5,996,532) $ 6,817,775 $ (1,609,824)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in other assets .......................... (55,163) -- 24,291 (22,462)
Additions to property, plant and equipment ................... (7,074) (529,610) (254,163) (820,833)
------------ ------------ ------------ ------------
Net cash used in investing activities .......................... $ (62,237) $ (529,610) $ (229,872) $ (843,295)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible term 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 credit line ..................... (2,595,878) -- (9,849,532) --
Repayment of bank term debt .................................. (1,589,777) -- (1,835,100) --
Repayment of subordinated debt ............................... (3,000,000) -- (3,000,000) --
Increase/(decrease) of capital lease ......................... (1,984) 14,449 (5,853) 14,449
Deferred interest ............................................ (141,500) -- (141,500) --
Net borrowings (repayments) on revolving credit line ......... -- 5,354,637 -- 1,565,460
Principal payments on notes payables ......................... -- (153,776) (42,300) (436,422)
Sale of common stock ......................................... 3,158 1,310,912 3,158 1,310,912
------------ ------------ ------------ ------------
Net cash provided by/(used in) financing activities ............ $ 1,325,655 6,526,222 $ (6,219,491) $ 2,454,399
------------ ------------ ------------ ------------
NET INCREASE/(DECREASE) IN CASH ................................ $ 160,410 $ 80 $ 368,412 $ 1,280
============ ============ ============ ============
CASH - Beginning of Period ..................................... 209,202 1,200 1,200 --
------------ ------------ ------------ ------------
CASH - End of Period ........................................... $ 369,612 $ 1,280 $ 369,612 $ 1,280
============ ============ ============ ============
See notes to financial statements
5
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements (the "Financial
Statements") of Riviera Tool Company (the "Company") have been prepared by the
Company 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
United States of America.
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 in
the United States of America. These Financial Statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Form 10-K, as amended, for the fiscal year ended August 31, 2004.
The results of operations for the nine-month period ended May 31, 2005, may not
be indicative of the results to be expected for the full year.
The accompanying 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 2004, the Company
sustained a loss from operations of $7,363,027 and a net loss of $8,241,478.
This loss resulted in an accumulated deficit of $10,646,487 as of August 31,
2004. Further, the Company was not in compliance with the covenants of its
long-term loan agreement with Comerica Bank causing our debt to be classified as
current in the financial statements. Our agreement was extended to December 31,
2004. This long-term indebtedness was replaced by new credit facilities provided
by Laurus Master Fund, Ltd. ("Laurus"). 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
We believe that the new credit facilities and the funds generated from
operations will be sufficient to cover anticipated cash needs through fiscal
2005. However, depending on the level of future sales, terms of such sales,
financial performance and cash flow of existing contracts, such financing may
not be sufficient to support ongoing operations. Therefore, we may be required
to seek additional sources of funding.
Basic (loss) earnings per share ("EPS") excludes dilution and is computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by increasing the weighted
average number of shares outstanding by the dilutive effect, if any, of the
issuance of common stock for options outstanding under the 1996 Incentive
Employee Stock Option Plan, as amended, 1998 Key Employee Stock Option Plan,
convertible debt and the other non-employee options. Weighted average shares
issuable upon the exercise of stock options that were not included in the (loss)
earnings per share calculations were 3,776,727 in the three-month and nine-month
periods ended May 31, 2005.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment if changes in circumstances
or the occurrence of events suggest the remaining value may not be recoverable.
An asset is deemed impaired and written down to its fair value if estimated
related total future undiscounted cash flows are less than its book (carrying)
value. The Company, in performing its evaluation of long-lived assets for
impairment, utilized undiscounted cash flows based on the assets estimated
remaining useful lives. In developing the projections, the Company estimated
revenues for each year and estimated resulting margins based upon various
assumptions including future market pricing trends and historical financial
costs. The analysis concluded that the estimated total undiscounted future cash
flows were in excess of the carrying value of long-lived assets. Had the
analysis concluded that the total undiscounted future cash flows were below the
carrying value, an impairment charge of the difference between the carrying
value and the lower of the total discounted cash flows or fair value would have
been recorded.
6
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2005
NOTE 2 - COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
MAY 31, AUGUST 31,
2005 2004
------------ ------------
Costs incurred on contracts in process under the percentage of
completion method .................................................. $ 6,382,762 $ 22,265,744
Estimated gross profit/(loss) ...................................... 50,000 (4,250,000)
------------ ------------
Total ...................................................... 6,432,762 18,015,744
Less progress payments received and progress billings to date ...... 3,030,424 17,586,991
Plus costs incurred on contracts in process
under the completed contract method ................................ 2,821 240,390
------------ ------------
Costs in excess of billings on contracts in process ................ $ 3,405,159 $ 669,143
============ ============
Included in estimated gross profit/(loss) for May 31, 2005 and August 31, 2004
are jobs with losses accrued of $133,077 and $5,190,491, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
MAY 31, AUGUST 31,
2005 2004
----------- -----------
Leasehold improvements ........................... $ 1,489,302 $ 1,367,908
Office furniture and fixtures .................... 174,524 169,129
Machinery and equipment .......................... 23,135,345 23,080,863
Construction in Process .......................... 10,405 --
Computer equipment and software .................. 2,850,976 2,788,489
Transportation equipment ......................... 109,782 109,782
----------- -----------
Total cost .................................. 27,770,334 27,516,171
Accumulated depreciation and amortization ........ 16,470,528 15,187,425
----------- -----------
Net carrying amount ......................... $11,299,806 $12,328,746
=========== ===========
NOTE 4 - LONG-TERM DEBT
The Company's long-term debt, which is subject to certain covenants discussed
below, consists of the following:
MAY 31, AUGUST 31,
2005 2004
---------- ----------
CONVERTIBLE REVOLVING NOTE
--------------------------
The convertible revolving working capital credit line is collateralized by
substantially all assets of the Company and provides for borrowing, subject to
certain collateral requirements, up to $10 million. The credit line is due May
17, 2008, and bears interest, payable monthly, at 1.25% above prime rate
(as of May 31, 2005, an effective rate of 7.25%) ................................... $4,031,000 $ --
7
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2005
NOTE 4 - LONG-TERM DEBT -CONTINUED
OVERFORMULA
-----------
The overadvance loan is due September 14, 2005 and bears interest,
at prime rate plus 1.25%, (as of May 31, 2005, an effective rate of 7.25%) .......... 2,000,000 --
REVOLVING WORKING CAPITAL CREDIT LINE
-------------------------------------
The credit line was repaid on May 17, 2005 .......................................... -- 9,849,532
SECURED CONVERTIBLE TERM NOTE
-----------------------------
The convertible term note, payable in monthly installments of $96,969.70
commencing September 1, 2005, plus interest at prime rate plus 4%, (as of May
31, 2005, an effective rate of 10%) commencing June 1, 2005, due May 17, 2008 ....... 3,200,000 --
NOTES PAYABLE TO BANK
---------------------
Note payable to bank repaid on May 17, 2005 ......................................... -- 1,835,100
Subordinated note payable to bank, payable in monthly installments of
$31,000, including interest at 11%, due January 1, 2008 ............................. 1,008,124 1,050,670
SUBORDINATED DEBT
-----------------
Subordinated note payable repaid on May 17, 2005 .................................... -- 3,000,000
OTHER
-----
Other ............................................................................... 14,590 20,070
----------- -----------
Total debt ............................................................... 10,253,714 15,755,372
Less unamortized debt discount ........................................... 702,000 --
Less current portion of long-term debt ................................... 3,593,996 15,742,669
----------- -----------
Long-term debt -- Net .................................................... $ 5,957,718 $ 12,703
=========== ===========
The Company was not in compliance with it's tangible net worth covenant of the
note payable to bank and therefore has classified the debt as current.
On May 17, 2005, the Company executed a new senior loan facility agreement.
Under such financing, The Company entered into a Securities Purchase Agreement
and a Security Agreement (collectively, the "Agreements"). Pursuant to these
agreements, the Company received a Term Loan in the aggregate principal amount
of $3.2 million as well as a Revolving Credit Facility with a maximum
availability of $10.0 million. The Agreement is subject to certain restrictions
and various covenants, including a borrowing base formula of ninety percent of
eligible accounts receivable and fifty percent of the lesser of work-in-process
inventory or $5 million. The Term Loan monthly installments may be paid in
Company common stock if the average closing price of the Company's common stock
for five trading days prior to due date is greater or equal to 115% of the fixed
conversion price ($1.66) and the amount of such conversion does not exceed 25%
of the aggregate trading dollar volume of the Company's common stock for the
period of 22 trading days immediately preceding such amortization date. The
Revolving Facility shall be convertible by Laurus into shares of the Company's
common stock at a rate of $1.66 per share. In addition, the Company issued an
option to purchase 650,000 shares of its Common Stock at an exercise price of
$.01 per share as part of the Agreement.
Laurus has agreed that it shall not convert either the Term Loan or any loans
under the Revolving Facility into shares of the Company's Common Stock in
amounts that would cause it to obtain an aggregate beneficial ownership of the
Company's Common Stock exceeding 4.99% at any given time (or 19.99% in the event
such limitation is suspended upon the occurrence of an "event of default" under
any of the Agreements or any other transaction agreements or upon 65 day advance
notice by Laurus). The Company and Laurus agreed to customary terms and
conditions including, but not limited to, the filing of a registration statement
within 60 days from the date of the Agreements of shares of the Company's Common
Stock issuable (i) upon exercise of the Option, (ii) upon conversion of the Term
Loan, and (iii) upon conversion of up to $2.0 million under the Revolving
Facility. The Company has an obligation to register an additional $2.0 million
under the Revolving Facility upon issuance by the Company of an additional note
evidencing such indebtedness.
8
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 2005
NOTE 4 - LONG-TERM DEBT -CONTINUED
The Company used the proceeds from the Term Loan, Revolving Facility and
Overformula to extinguish, in full, its indebtedness owed to Comerica Bank, its
former secured lender, and The HillStreet Fund II, L.P., its subordinated
secured lender, as well as for general working capital purposes. In connection
with the transactions described herein, Laurus received fees and was reimbursed
by the Company for its expenses in the aggregate amount of $510,200.
The Company, in issuing an option for 650,000 shares at $.01 per share,
triggered price protection in relationship to previously issued warrants. Under
the previous warrant agreements, if the Company issued warrants or options below
the strike price, the exercise price of the outstanding warrants would adjust to
the lower exercise price. The Company had previous warrants for 315,792 shares
of common stock with 157,896 shares priced at an exercise price of $5.07 per
share and 157,896 priced at $5.53 per share. These warrants were exercised
during the third quarter.
NOTE 5 - CONTINGENCIES
The Company is a plaintiff and defendant in litigation regarding its contract
with Mercedes Benz and Gestamp USA, as well as certain of the Company's
suppliers. The Company does not believe any contingent assets or liability is
deemed necessary at this point in time.
9
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 Statements of Operations as a percentage of sales.
For The Three Months For The Nine Months
Ended Ended
---------------------- ---------------------
May 31, May 31, May 31, May 31,
2005 2004 2005 2004
-------- -------- -------- --------
SALES ................................................. 100.0% 100.0% 100.0% 100.0%
COST OF SALES ......................................... 87.6% 88.6% 86.5% 89.4%
-------- -------- -------- --------
GROSS PROFIT ....................................... 12.4% 11.4% 13.5% 10.6%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ........... 14.1% 6.3% 14.8% 5.7%
-------- -------- -------- --------
(LOSS)/INCOME FROM OPERATIONS ...................... (1.7%) 5.1% (1.3%) 4.9%
TOTAL INTEREST AND OTHER EXPENSE ...................... 14.9% 2.0% 10.4% 2.0%
-------- -------- -------- --------
(LOSS)/INCOME FROM INCOME TAXES ....................... (16.6%) 3.1% (11.7%) 2.9%
-------- -------- -------- --------
INCOME TAXES .......................................... -- -- -- --
-------- -------- -------- --------
NET (LOSS)/INCOME .................................. (16.6%) 3.1% (11.7%) 2.9%
======== ======== ======== ========
FORWARD-LOOKING STATEMENTS; 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.
10
BASIS OF PRESENTATION
The accompanying 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 2004, the Company
sustained a loss from operations of $7,363,027 and a net loss of $8,241,478.
This loss resulted in an accumulated deficit of $10,646,487 as of August 31,
2004. Further, the Company was not in compliance with the covenants of its
long-term loan agreement with Comerica Bank causing our debt to be classified as
current in the financial statements. Our agreement was extended to December 31,
2004. This long-term indebtedness was replaced by the credit facilities provided
by Laurus. 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.
We believe that the new credit facilities and the funds generated from
operations, will be sufficient to cover anticipated cash needs through fiscal
2005. However, depending on the 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, we may be required to seek
additional sources of funding.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment if changes in circumstances
or the occurrence of events suggest the remaining value may not be recoverable.
An asset is deemed impaired and written down to its fair value if estimated
related total future undiscounted cash flows are less than its book (carrying)
value. The Company, in performing its evaluation of long-lived assets for
impairment, utilized undiscounted cash flows based on the assets estimated
remaining useful lives. In developing the projections, the Company estimated
revenues for each year and estimated resulting margins based upon various
assumptions including future market pricing trends and historical financial
costs. The analysis concluded that the estimated total undiscounted future cash
flows were in excess of the carrying value of long-lived assets. Had the
analysis concluded that the total undiscounted future cash flows were below the
carrying value, an impairment charge of the difference between the carrying
value and the lower of the total discounted cash flows or fair value would have
been recorded.
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2005 TO THE THREE MONTHS ENDED MAY
31, 2004.
REVENUES - Revenues for the three months ended May 31, 2005 totaled $4.7 million
as compared to $7.6 million for the three months ended May 31, 2004, a decrease
of $2.9 million or 38%. This was a result of the Company beginning the third
quarter of 2005 with a contract backlog of $10.0 million as compared to a $16.6
million contract backlog in 2004, a decrease of 40%. This lower backlog resulted
in the Company incurring a 28% decrease in direct labor hours during the third
quarter of 2005 when compared to 2004 and bringing about the decrease in third
quarter revenues.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $11.0 million and $7.6 million as of May 31, 2005 and 2004,
respectively. The Company expects all backlog contracts will be reflected in
sales during fiscal years ending August 31, 2005 and 2006.
COST OF SALES - Cost of goods sold decreased from $6.7 million for the third
quarter of fiscal 2004 to $4.1 million for 2005 and, as a percent of sales,
decreased from 88.6% for 2004 to 87.6% for 2005. Direct costs (materials and
labor) decreased by $2.5 million, from $4.3 million for 2004 to $1.8 million for
2005. Engineering expense increased by $65,000 from $530,000 for 2004 to
$595,000 for 2005. Lastly, of the cost of goods sold, manufacturing overhead
decreased by $145,000 from $1.83 million for 2004 to $1.68 million for 2005.
Additional details of these changes in cost of sales for the third quarter of
fiscal 2004 and 2005 are as follows:
o Direct materials expense decreased from $763,000 for 2004 to
$660,000 for 2005, however, increased as a percent of sales from 10% to
14%. The dollar decrease was largely due to lower contract volume
requirements and backlog mix during 2005 as compared to 2004. Outside
services expense decreased from $1.9 million for 2004 to $94,000 for
2005 and as a percent of sales from 25.5% to 2.0%. This decrease was
largely due to the
11
Company incurring expense related to its outsourced contracts during
the third quarter of 2004. The balance of the outside services expense
decrease was due to lower sales volumes and corresponding decreases in
outsourcing certain machining, die patterns, laser cutting, heat treat
and outside design services.
o Direct labor expense decreased from $1.7 million for 2004 to
$1.1 million for 2005. However, as a percent of sales, direct labor
increased from 22.0% to 23.5%. This change was a result of the Company
incurring a 28% decrease in direct labor hours, from 82,000 hours in
2004 to 59,000 in 2005. Of the total direct labor expense, regular or
straight time decreased by $269,000 however as a percent of sales,
increased from 13.7% for 2004 to 16.4% for 2005 resulting from lower
sales volume. Overtime expense decreased from $632,000 for 2004 to
$303,000 for 2005 and as a percent of sales, from 8.3% for 2004 to 6.5%
for 2005.
o Engineering expense increased from $531,000, 7.0% of sales,
for 2004 to $596,000, 12.7% of sales, for 2005. This was due to the
Company's increased engineering requirements necessary to fulfill the
design and project management portions of the Company's current
contract backlog.
o Manufacturing overhead was $1.68 million or 35.8% of sales
for 2005 as compared to $1.8 million or 24.1% of sales for 2004. During
2005, decreases in manufacturing overhead were largely due to a $60,000
decrease in payroll tax expense, a $49,000 decrease in manufacturing
supplies expense, a $24,000 decrease in utilities expense and a $20,000
decrease in medical insurance premiums. Although manufacturing overhead
expense decreased the increase of 11.7%, as a percent of sales, was due
to the decrease in sales volumes.
SELLING AND ADMINISTRATIVE EXPENSE - Selling and administrative expense
increased from $480,000 for the third quarter of 2004 to $660,000 for 2005. As a
percent of sales, selling and administrative expense increased from 6.3% for
2004 to 14.1% for 2005 due to the lower sales volume and increase in certain
professional advisory fees of $222,000. The increase in professional and legal
expenses related to the Company's 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 third quarter of 2005, such expenses totaled
approximately $158,000. This increase was offset by decreases of $22,000 in
public company expense and $20,000 in the State of Michigan Single Business tax.
INTEREST AND OTHER EXPENSE - Interest expense increased from $149,000 for 2004
to $696,000 for 2005. This increase was largely due to the Company's increased
debt levels during the third quarter of 2005 as compared to 2004 at higher
interest rates. In addition, during the third quarter of 2005, the Company
retired the $3.0 million subordinated debt incurred during the fourth quarter of
2004. This subordinated debt was paid prior to scheduled retirement and the
Company expensed approximately $304,000 of fees and expenses during the third
quarter of 2005. These fees and costs were originally paid and capitalized and
were being amortized over the original repayment amortization of six years.
12
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2005 TO THE NINE MONTHS ENDED MAY
31, 2004.
REVENUES - Revenues for the nine months ended May 31, 2005 totaled $14.2 million
as compared to $24.2 million for the nine months ended May 31, 2004, a decrease
of 41%. This was a result of the Company beginning the fiscal 2005 with a
contract backlog of $2.4 million as compared to $26.6 million contract backlog
in 2004, a decrease of 91%. This lower backlog resulted in the Company incurring
approximately 186,000 shop floor hours as compared to 243,000 during the same
period of 2004, a decrease of 57,000 hours or 23%.
COST OF SALES - Cost of goods sold decreased from $21.6 million for the nine
months ended May 31, 2004 to $12.3 million for the nine months ended May 31,
2005, and as a percent of sales, cost of goods sold decreased from 89.4% for
2004 to 86.5% for 2005. Direct costs (materials and labor) decreased by $8.7
million, from $14.4 million for 2004 to $5.7 million for 2005. Engineering
expense decreased by $320,000 from $1.9 million for 2004 to $1.6 million for
2005. Lastly, of the cost of goods sold, manufacturing overhead decreased by
$300,000 from $5.3 million for 2004 to $5.0 million for 2005. Additional details
of these changes in cost of sales for the nine months ended May 31, 2004 and May
31, 2005 are as follows:
o Direct materials expense decreased from $3.5 million to $1.5
million for the first three quarters of 2004 and 2005, respectively.
The decrease was largely due to lower contract volume requirements and
backlog mix during 2005 as compared to 2004. Outside services expense
decreased from $6.0 million for 2004 to $0.5 million for 2005 and as a
percent of sales decreased from 24.9% to 3.7%. This decrease was
largely due to the Company outsourcing certain manufacturing processes
in an attempt to meet customer delivery dates while incorporating a
high number of customer engineering changes to the tooling during the
first nine months of 2004. These services largely consist of machining
and laser cutting services.
o Direct labor expense decreased from $4.9 million for 2004 to
$3.6 million for 2005 however, as a percent of sales, direct labor
expense increased from 20.4% to 25.7% as a result of lower revenues.
The dollar change was a result of the Company incurring a 23% decrease
in direct labor hours, from 243,000 hours in 2004 to 186,000 in 2005.
Of the total direct labor expense, regular or straight time decreased
by $757,000 however, as a percent of sales, increased from 13.0% for
2004 to 16.8% for 2005. Overtime expense decreased from $1.8 million
for 2004 to $1.3 million for 2005, as a percent of sales, increasing
from 7.4% for 2004 to 8.8% for 2005
o Engineering expense decreased from $1.9 million for 2004 to
$1.6 million for 2005 however, as a percent of sales, engineering
expense increased from 7.8% to 11.0% as a result of lower revenues. The
dollar decrease was due to the Company lowering the level of
engineering personnel staffing required to fulfill the design and
project management portions of contracts during the nine months of 2005
as compared to 2004.
o Manufacturing overhead was $5.3 million or 22.0% of sales
for 2004 as compared to $5.0 million or 35.4% of sales for 2005. During
2005, decreases in manufacturing overhead were largely due to a
$133,000 decrease in manufacturing supplies expense, a $94,000 decrease
in payroll tax expense and a $75,000 decrease in medical insurance
premiums. These decreases were offset by a $30,000 increase in
utilities expense. Although manufacturing overhead expense decreased,
the increase of approximately 13.4% of manufacturing overhead, as a
percent of sales, was largely due to the decrease in sales volumes.
SELLING AND ADMINISTRATIVE EXPENSE -. Selling and administrative expense
increased from $1.4 million for the first three quarters of 2004 to $2.1 million
for 2005. As a percent of sales, selling and administrative expense increased
from 5.7% for 2004 to 14.8% for 2005. During 2005, increases in selling and
administrative expense were largely due to a $680,000 increase in legal and
professional expense, a $60,000 increase in travel expenses, a $39,000 increase
in sales salaries and $14,000 in bad debt expense. These increases were offset
by a $39,000 decrease in State of Michigan Single Business Tax expense and a
$31,000 decrease in public company expenses.
13
The increase in professional and legal expenses related to the Company's primary
lender requiring the Company to retain the services of a consulting company and
the lender's legal counsel at the Company's expense. Through the third quarter,
such expenses totaled approximately $511,000. The remaining increases in legal
and professional expenses were incurred in regards to the Company's litigation.
INTEREST AND OTHER EXPENSE - Interest expense increased from $480,000 for 2004
to $1.5 million for 2005. This increase was largely due to the Company's
increased debt levels during 2005 as compared to 2004 at higher interest rates.
In addition, during the third quarter of 2005, the Company retired the $3.0
million subordinated debt incurred during the fourth quarter of 2004. This
subordinated debt was paid prior to scheduled retirement and the Company
expensed approximately $304,000 of fees and expenses during 2005. These fees and
costs were originally capitalized and being amortized over the original
repayment amortization.
FEDERAL INCOME TAXES - For the nine months ended May 31, 2005, the Company
recorded a valuation allowance of approximately $440,000 to reduce its deferred
tax assets resulting from income tax benefit. For the three months ended May 31,
2005, the Company recorded an increase in the deferred tax asset valuation
allowance of approximately $136,000 to offset the income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended May 31, 2005, the Company's cash flow from
operating activities was $6.8 million. This largely resulted from a decrease of
$10.5 million in accounts receivable, a $2.7 million increase in contracts in
process and a $1.0 million decrease in accounts payable. From investing
activities, the Company incurred an increase in other assets (cash surrender
value of life insurance policies) of $24,000 and $254,000 in additions to
property, plant and equipment. The Company used net cash from financing
activities of $4.5 million. The cash from financing activities included the
Company securing new senior financing with gross proceeds of $9.2 million. The
Company applied $4.3 million to retire its previous senior debt facility with
Comerica Bank, $3.2 million to retire its subordinated debt with Hillstreet, and
$0.5 million in fees to Laurus. The net remaining funds, $1.2 million, was
utilized for general working capital purposes.
The Company believes that the revolving line of credit and the funds generated
from operations, will be sufficient to cover anticipated cash needs through
fiscal 2005. However, depending on the level of future sales, and the terms of
such sales, an expanded credit line or other financial instruments may be
necessary to finance increases in trade accounts receivable and contracts in
process. The Company believes it will be able to obtain such expanded credit
line and/or other financing, if required.
On May 17, 2005, the Company entered into a new senior loan facility agreement
with Laurus as evidenced by the Agreements. Pursuant to these Agreements, the
Company received a Term Loan in the aggregate principal amount of $3.2 million
as well as a Revolving Credit Facility with a maximum availability of $10.0
million. Each of the Term Loan and any loans under the Revolving Facility shall
be convertible by Laurus into shares of the Company's common stock at a rate of
$1.66 per share. In addition, as part of the agreement, the Company issued an
option to purchase 650,000 shares of its Common Stock at an exercise price of
$.01 per share.
The Company, in issuing an option for 650,000 shares at $.01 per share,
triggered price protection provisions in previously issued warrants. Under the
previous warrant agreements, if the Company issued warrants or options below the
strike price of the warrants the exercise price of the outstanding warrants
would adjust to the lower exercise price. The Company had previous warrants for
315,792 shares of common stock with 157,896 shares priced at an exercise price
of $5.07 per share and 157,896 priced at $5.53 per share.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information on the Company's debt as of May 31,
2005 and August 31, 2004 that are sensitive to changes in interest rates.
AMOUNT
MAY 31, 2005: OUTSTANDING MATURITY DATE
------------- ----------- -------------
CONVERTIBLE REVOLVING NOTE:
--------------------------------------------------
o Variable rate revolving credit line at an interest rate of
prime rate plus 1.25% (as of May 31, 2005, an effective rate of
7.25%) $4,031,000 May 18, 2008
SECURED CONVERTIBLE TERM NOTE:
------------------------------
o At an interest rate of prime plus 4.00% (as of May 31, 2005, an
effective rate of 10%) $3,200,000 May 18, 2008
OVERFORMULA:
------------------------
o At an interest rate of prime plus 1.25% (as of May 31, 2005, an
effective rate of 7.25%) $2,000,000 September 14, 2005
AUGUST 31, 2004:
----------------
REVOLVING WORKING CAPITAL CREDIT LINE:
--------------------------------------
o Variable rate revolving credit line at an interest rate of
prime rate plus 4% (as of November 17, 2004, an effective rate of Debt retired
9%) $9,849,532 May 17, 2005
NOTE PAYABLE TO BANKS:
----------------------
o At an interest rate of prime plus 4.25% (as of November 17, Debt retired
2004, an effective rate of 9.25%) $1,400,000 May 17, 2005
o At an interest rate of prime plus 4.25% (as of November 17, Debt retired
2004, an effective rate of 9.25%) $435,100 May 17, 2005
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.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gestamp Alabama, et al v Riviera, et al
On February 14, 2005, Gestamp Alabama ("Gestamp"), the alleged successor to
Oxford Automotive, Inc. ("Oxford") brought a civil action against Riviera in the
Circuit Court for the County of Kent, State of Michigan, Case No. 05-01520-CK,
seeking a right to immediate possession of certain tooling for use on
Mercedes-Benz automobiles ( "the Tooling"), as well as unspecified damages. On
February 25, 2005, Mercedes-Benz U.S. International, Inc. ("MBUSI") intervened
in and was added to the litigation aligned as a Plaintiff, and sought virtually
identical relief as that sought by Gestamp. On February 25, 2005, a hearing was
scheduled on Gestamp's motion for immediate possession ("the Motion"). Shortly
before the hearing on the Motion, the parties reached an agreement that the
Motion would be resolved on the following terms: (1) MBUSI would pay Riviera by
wire transfer the sum of $3,375,000 without prejudice to the rights of any of
the parties with respect to any claims asserted in the litigation; (2) Riviera
would permit MBUSI to take possession of the Tooling that was the subject of the
Motion; (3) Riviera would execute a bill of sale for the Tooling; (4) MBUSI and
Gestamp would earmark up to $500,000.00, over which they would retain complete
control, to pay the legitimate claims asserted by Riveria's sub-contractors or
trade creditors incurred in connection with work performed by Riviera on Oxford,
Gestamp or MBUSI's work, without prejudice to the rights of the parties to
assert any of the claims in the litigation; and (5) upon reasonable notice to
Riviera, MBUSI would be entitled to immediate possession and use of other tools,
dies, component parts and related accessories that Riviera has used to make
MBUSI parts.
The obligations set forth above have been fulfilled, and certain creditors have
been paid portions of the $500,000 earmarked by MBUSI and Gestamp.
Riviera has denied any further entitlement to relief by Gestamp and MBUSI in its
responsive pleadings, and has asserted a counter-claim for damages for work that
Riviera has done for MBUSI or Oxford for which payment has not been received.
The damages sought by Riviera include recovery of additional sums that are due
and owing to Riviera's sub-contractors or trade creditors in connection with
this work, which amounts to approximately $3 million.
One of Riviera's sub-contractors, Eclipse Tool and Die, Inc. ("Eclipse"), was
also named as a defendant in this action. Eclipse has filed a crossclaim against
Riviera and counterclaims against Gestamp and Mercedes seeking recovery of
approximately $900,000 for work that it performed for Riviera, Oxford and MBUSI.
Eclipse is also seeking to exercise lien rights, but that will have no effect on
Riviera.
Another of Riviera's sub-contractors, True Industrial Corporation ("True"), was
also named as a defendant in this action. True has filed a crossclaim against
Riviera and counterclaims against Gestamp and Mercedes seeking recovery of
approximately $409,000 for work that it performed for Riviera, Oxford and MBUSI.
True is also seeking to exercise lien rights, but that will have no effect on
Riviera.
Another of Riviera's sub-contractors, Ronart Tool Company was also a named
defendant in this action. Ronart's claim has been fully satisfied by MBUSI and
it is expected that Ronart will be dismissed from the litigation. The case is in
the early stages, and the parties have not yet conducted any discovery.
Subsequent to May 31, 2005, the Company reached a preliminary settlement with
MBUSI and Gestamp whereas the above litigation will be resolved without
significant adverse effect to the Company.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Principal Executive Officer Certification
31.2 Principal Financial Officer Certification
32 Written Statement of the Chief Executive Officer and
Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350 Sec. 906
(b) Reports on Form 8-K:
Current Report on Form 8 K, dated May 18, 2005, relating to Item
1.01, Entry into a Material Definitive Agreement, Item 1.02,
Termination of a Material Definitive Contract, Item 2.03, Creation
of a Direct Financial Obligation or an Obligation under an Off
Balance Sheet Arrangement of a Registrant, Item 2.04, Triggering
Events That Accelerate or Increase a Direct Financial Obligation or
an Obligation under an Off Balance Sheet Arrangement and Item 3.02,
Unregistered Sales of Equity Securities.
17
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 15, 2005
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)
18
Exhibit Index
Exhibit No. Description
----------- -----------
31.1 Principal Executive Officer Certification
31.2 Principal Financial Officer Certification
32 Written Statement of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Sec. 906
19