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 November 30, 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes No [X]
Indicate by check whether the registrant is a shell company (as defined in 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
January 16, 2006.
1
PART I
FINANCIAL INFORMATION
INDEX
Page No.
Item 1. Financial Statements
Balance Sheets as of November 30, 2005 and August 31, 2005........................................ 3
Statements of Operations for the Three Months Ended November 30, 2005 and 2004.................... 4
Statements of Cash Flows for the Three Months Ended November 30, 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........................................ 13
Item 4. Controls and Procedures........................................................................... 13
PART II
OTHER INFORMATION
INDEX
Item 4. Submission of Matters to a Vote of Security Holders............................................... 14
Item 5. Other Information ............................................................................... 14
Item 6. Exhibits and Reports on Form 8 - K................................................................ 14
Signatures........................................................................................ 15
Certifications
Exhibits
2
RIVIERA TOOL COMPANY
FINANCIAL STATEMENTS
BALANCE SHEETS
--------------------------------------------
NOVEMBER 30, AUGUST 31,
ASSETS 2005 2005
------ --------------------- ---------------------
CURRENT ASSETS NOTE (UNAUDITED)
-------------- ---- ---------------------
Cash.................................................................... $ 277,685 $ 239,475
Accounts receivable, net................................................ 7,631,090 5,232,138
Costs in excess of billings on contracts in process..................... 2 1,715,883 2,844,444
Inventories............................................................. 236,437 236,437
Prepaid expenses and other current assets............................... 382,183 453,597
----------------- -----------------
Total current assets.......................................... 10,243,278 9,006,091
PROPERTY, PLANT AND EQUIPMENT, NET........................................ 3 10,533,810 10,902,845
PERISHABLE TOOLING........................................................ 703,519 708,319
OTHER ASSETS.............................................................. 563,327 599,344
----------------- -----------------
Total assets.................................................. $ 22,043,934 $ 21,216,599
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Current portion of long-term debt....................................... 4 $ 3,206,186 $ 3,287,510
Accounts payable........................................................ 3,932,334 3,517,578
Accrued liabilities..................................................... 670,069 661,833
----------------- -----------------
Total current liabilities..................................... 7,808,589 7,466,921
LONG-TERM AND SUBORDINATED DEBT, NET OF UNAMORTIZED DISCOUNT.............. 4 9,784,549 8,870,045
ACCRUED LEASE EXPENSE..................................................... 910,398 897,885
----------------- -----------------
Total liabilities............................................. 18,503,536 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 - 3,984,874 shares as of November 30
and August 31, 2005.................................................. 17,130,483 17,130,483
Retained deficit........................................................ (13,590,085) (13,148,735)
----------------- -----------------
Total stockholders' equity.................................... 3,540,398 3,981,748
----------------- -----------------
Total liabilities and stockholders' equity................................ $ 22,043,934 $ 21,216,599
================= =================
See notes to financial statements
3
RIVIERA TOOL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30
----------------------------------
2005 2004
------------- ---------------
SALES............................................................................. $ 6,063,185 $ 4,552,551
COST OF SALES..................................................................... 5,467,385 4,038,460
------------- ---------------
GROSS PROFIT...................................................................... 595,800 514,091
SELLING AND ADMINISTRATIVE EXPENSES............................................... 565,577 579,341
------------- ---------------
PROFIT (LOSS) FROM OPERATIONS..................................................... 30,223 (65,250)
OTHER EXPENSE
INTEREST EXPENSE............................................................... 464,918 393,163
OTHER EXPENSE.................................................................. 6,655 6,227
------------- ---------------
TOTAL OTHER EXPENSE......................................................... 471,573 399,390
LOSS BEFORE INCOME TAX EXPENSE.................................................... (441,350) (464,640)
------------- ---------------
INCOME TAX EXPENSE................................................................ -- --
------------- ---------------
NET LOSS AVAILABLE FOR COMMON SHARES.............................................. $ (441,350) $ (464,640)
============= ===============
BASIC AND DILUTED INCOME/(LOSS) PER COMMON SHARE.................................. $ (.11) $ (.12)
============= ===============
WEIGHTED-AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING........................................................ 3,984,874 3,774,346
============= ===============
See notes to financial statements
4
RIVIERA TOOL COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
-------------------------------------------
2005 2004
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $ (441,350) $ (464,640)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization.................................... 419,890 427,701
(Increase) decrease in assets:
Accounts receivable........................................... (2,398,952) 3,717,570
Costs in excess of billings on contracts in process........... 1,128,561 (806,568)
Perishable tooling............................................ 4,800 (54,150)
Prepaid expenses and other current assets..................... 71,414 27,737
Increase (decrease) in liabilities:
Accounts payable.............................................. 414,756 (992,895)
Accrued lease expense......................................... 12,513 23,292
Accrued liabilities........................................... 8,236 119,263
------------------ ------------------
Net cash (used in) provided by operating activities.................... $ (780,132) $ 1,997,310
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase (decrease) in other assets.................................. 36,017 (20,546)
Additions to property, plant and equipment........................... (28,105) (230,283)
------------------ ------------------
Net cash provided by (used in) investing activities.................... $ 7,912 $ (250,829)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit line................. 1,103,256 (747,696)
Principal payments on notes payable to bank
and non-revolving equipment line of credit.......................... (292,826) (162,468)
Deferred interest.................................................... -- 45,912
------------------ ------------------
Net cash provided by (used in) financing activities.................... $ 810,430 $ (864,252)
------------------ ------------------
NET INCREASE IN CASH................................................... $ 38,210 $ 882,229
------------------ ------------------
CASH - Beginning of Period............................................. 239,475 1,200
------------------ ------------------
CASH - End of Period................................................... $ 277,685 $ 883,429
================== ==================
See notes to financial statements
5
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 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, 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 have been prepared and
reflect all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly such information in accordance with generally
accepted accounting principles. These 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 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 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. 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 through
fiscal 2006. However, depending on Company's primary lenders' willingness to
extend the due date of the overadvance facility as well as 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,
the Company may be required to seek additional sources of funding.
The results of operations for the three-month period ended November 30, 2005 may
not be indicative of the results to be expected for the full year.
6
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
NOTE 2 - COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
NOVEMBER 30, AUGUST 31,
2005 2005
-------------------- ------------------
Costs incurred on contracts in process under the percentage-of-
completion method...................................................... $ 10,283,200 $ 7,042,817
Estimated gross profit (loss).......................................... 130,000 (25,000)
-------------------- ------------------
Total.......................................................... 10,413,200 7,017,817
Less progress payments received and progress billings to date.......... 8,697,317 4,173,373
-------------------- ------------------
Costs in excess of billings on contracts in process........... $ 1,715,883 $ 2,844,444
==================== ==================
Included in estimated gross profit (loss) for November 30, 2005 and August 31,
2005 are jobs with losses accrued of $171,529 and $190,430, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
NOVEMBER 30, AUGUST 31,
CATEGORY 2005 2005
-------- ------------------ ------------------
Leasehold improvements.......................................................... $ 1,489,302 $ 1,489,302
Office furniture and fixtures................................................... 178,019 174,524
Machinery and equipment......................................................... 23,146,502 23,135,344
Construction in Process......................................................... 7,500 --
Computer equipment and software................................................. 2,860,740 2,854,788
Transportation equipment........................................................ 109,782 109,782
------------------ ------------------
Total cost................................................................. 27,791,845 27,763,740
Less Accumulated depreciation and amortization.................................. 17,258,035 16,860,895
------------------ ------------------
Net carrying amount........................................................ $ 10,533,810 $ 10,902,845
================== ==================
7
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
NOTE 4 - LONG-TERM DEBT
The Company's long-term debt consists of the following:
NOVEMBER 30, AUGUST 31,
DEBT TYPE 2005 2005
-------------------------------------------------------------------------- ----------- -------------
CONVERTIBLE REVOLVING NOTE
o 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 $11 million. The credit line is due
May 17, 2008, and bears interest, payable monthly, at 1.25% above prime rate (as
of November 30, 2005, an effective rate of 8.25%)............................... $ 7,637,983 $ 6,534,727
OVERFORMULA
o The overadvance loan is due January 31, 2006 and bears interest at prime rate
plus 1.25% (as of November 30, 2005, an effective rate of 8.25%)................ 2,000,000 2,000,000
SECURED CONVERTIBLE TERM NOTE
o 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
November 30, 2005, an effective rate of 11.25%), due May 17, 2008............... 2,909,091 3,200,000
NOTES PAYABLE TO BANK
o Subordinated note payable to bank, payable in monthly installments of
$31,000, including interest at 11%, due January 1, 2008......................... 1,008,124 1,008,124
OTHER
o Other........................................................................ 10,787 12,704
----------- -------------
Total debt..................................................... 13,565,985 12,755,555
----------- -------------
Less: unamortized debt discount................................ 575,250 598,000
Less: current portion of long-term debt and unamortized
debt discount........................................ 3,206,186 3,287,510
----------- -------------
Long-term debt, net of unamortized discount...... $ 9,784,549 $ 8,870,045
=========== =============
The Subordinated note payable to bank principal balance did not amortize during
the first quarter of 2005. This was a result of the Company being prohibited
from making payments on the subordinated debt from November, 2004 until August,
2005 when payments were resumed. As a result, those payments made subsequent to
this period were applied to accrued interest and late fees prior to principal.
On May 17, 2005, the Company executed a new senior loan facility agreement with
Laurus Master Fund LTD. ("Laurus"). 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 Secured
Convertible Term Loan (the "Term Loan") in the aggregate principal amount of
$3.2 million as well as a Revolving Credit Note (the "Revolving 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
8
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.
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). 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.
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. Of these warrants, 210,528 shares
were exercised during fiscal 2005.
On October 14, 2005, the Company executed an Omnibus Amendment to the Security
Agreement dated May 17, 2005, whereas the Revolving Credit Note, with a maximum
availability of $10.0 million, was increased to $11.0 million.
Effective November 10, 2005, the Company received a waiver of noncompliance with
Section 3 of its security agreement with its lender such that the overadvance
loan shall not trigger an event of default and extending the overadvance loan
through January 31, 2006.
On December 9, 2005, Riviera Tool Company (the "Company") entered into an
Omnibus Amendment with Laurus Master Fund, Ltd. ("Laurus"), amending the term
"Fixed Conversion Price" with respect to the Convertible Term Note (the "Term
Note"), dated as of May 17, 2005, by the Company in favor of Laurus in the
aggregate principal amount of $3,200,000 issued pursuant to the terms of the
Securities Purchase Agreement, dated as of May 17, 2005, between the Company and
Laurus. The term "Fixed Conversion Price," with respect solely to the Term Note,
was amended as follows:
The initial Fixed Conversion Price means $1.66; provided, however, that
in respect of the first $150,000 of aggregate principal amount (the
"Initial Converted Amount") of the Term Note converted into shares of
the Company's common stock, the Fixed Conversion Price in respect of
such Initial Converted Amount (and the interest and fees associated
therewith to the extent converted) shall be equal to $0.55.
A prospectus supplement relating to the prospectus, dated August 3, 2005 (File
No. 33-126659), of the Company was filed with the Commission on December 9, 2005
reflecting such amended terms.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of the
Company's Statement of Operations as a percentage of sales.
For The Three Months Ended
November 30
------------- --- -------------
2005 2004
------------- -------------
SALES................................................................... 100.0% 100.0%
COST OF SALES........................................................... 90.2% 88.7%
------------- -------------
GROSS PROFIT............................................... 9.8% 11.3%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE............................. 9.3% 12.7%
------------- -------------
INCOME/(LOSS) FROM OPERATIONS............................. 0.5% (1.4%)
INTEREST EXPENSE...................................................... 7.7% 8.7%
OTHER EXPENSE......................................................... 0.1% 0.1%
------------- -------------
TOTAL OTHER EXPENSE ........................................... 7.8% 8.8%
LOSS BEFORE INCOME TAX EXPENSE.......................................... (7.3%) (10.2%)
INCOME TAX EXPENSE...................................................... -- --
------------- -------------
NET LOSS.................................................... (7.3%) (10.2%)
============= =============
10
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 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.
These 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 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 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. 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 through
fiscal 2006. However, depending on Company's primary lenders' willingness to
extend the due date of the overadvance facility as well as 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,
the Company may be required to seek additional sources of funding.
The results of operations for the three-month period ended November 30, 2005 may
not be indicative of the results to be expected for the full year.
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2005
TO THE THREE MONTHS ENDED NOVEMBER 30, 2004.
REVENUES - Revenues for the three months ended November 30, 2005 totaled $6.1
million as compared to $4.6 million for the three months ended November 30,
2004, an increase of $1.5 million or 33%. This increase was a result of the
Company having a higher contract backlog at the start of the first quarter of
2005 as compared to 2004. The Company experienced a total of 72,800 shop floor
hours for the first quarter of 2005 as compared to 61,400 in the first quarter
of 2004, an increase of 18%.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $12.9 million and $4.6 million as of November 30, 2005 and
2004, respectively. The Company expects all backlog contracts will be reflected
in sales during fiscal years ending August 31, 2006 and 2007.
11
COST OF SALES - Cost of goods sold increased from $4.0 million for the first
quarter of fiscal 2005 to $5.5 million for 2006 and, as a percent of sales,
increased from 89% for 2005 to 90% for 2006. Gross margin decreased to 10% for
2006 from 11% for 2005. This 1 percent change in gross margin was impacted by a
number of factors including the mix of projects from the comparable quarter in
the prior year, changes in estimated costs to complete on projects in process,
the accelerated recognition of all estimated losses on projects with negative
margins, and the number of new projects released during the quarter. Direct
costs (materials and labor) increased by $1.3 million, from $1.9 million for
2005 to $3.2 million for 2006. Engineering expense increased by $85,000 from
$456,000 for 2005 to $540,000 for 2006. Lastly, of the cost of goods sold,
manufacturing overhead increased by $54,000 from $1.66 million for 2005 to $1.7
million for 2006. Additional details of these changes in cost of sales for the
first quarters of fiscal 2005 and 2006 are as follows:
o Direct materials expense increased from $0.4 million for 2005 to $1.3
million for 2006 and increased as a percent of sales from 9% to 21%. This
increase was largely due to increased contract volume requirements and
backlog mix during 2006 as compared to 2005. Outside services expense
increased from $259,000 for 2005 to $585,000 for 2006 and as a percent of
sales from 6% to 9%. This increase was largely due to the Company
experiencing higher sales volumes and corresponding increases in
outsourcing certain machining, die patterns, laser cutting and heat treat.
o Direct labor expense remained consistent at $1.3 million for 2005 and
2006. However, as a percent of sales, direct labor decreased from 28% to
22%. This change was a result of the Company incurring a 33% increase in
revenues while direct labor expense increased by $61,000. Of the total
direct labor expense, regular or straight time increased by $54,000 however
as a percent of sales, decreased from 17% for 2005 to 14% for 2006.
Overtime expense increased from $467,000 for 2005 to $475,000 for 2006,
however as a percent of sales, decreased from 10% for 2005 to 8% for 2006.
o Engineering expense increased from $456,000, 10% of sales, for 2005 to
$540,000, 9% of sales, for 2006. This increase was due to the Company's
increase in awarded contracts and the resulting increase in the number of
engineering personnel necessary to fulfill the design and project
management portions of the Company's current contract backlog.
o Manufacturing overhead was $1.66 million or 36% of sales for 2005 as
compared to $1.71 million or 28% of sales for 2006. During 2006, increases
in manufacturing overhead were largely due to a $40,000 increase in
indirect labor expense, a $34,000 increase in manufacturing supplies
expense and a $22,000 increase in supervision salaries expense. These
increases were offset by decreases of $31,000 in depreciation expense and
$13,000 in machinery repairs and maintenance.
SELLING AND ADMINISTRATIVE EXPENSE - Selling and administrative expense
decreased from $579,000 for the first quarter of 2005 to $566,000 for 2006. As a
percent of sales, selling and administrative expense decreased from 13% for 2005
to 9% for 2006. The largest selling and administrative expense increases
included $40,000 in public company expenses, $20,000 in State of Michigan Single
Business Tax expense. These increases were offset by decreases of $40,000 in
travel expense, $18,000 in legal and professional expense, $14,000 in office and
supervision wages and $14,000 in bad debt expense.
INTEREST EXPENSE - Interest expense increased from $393,000 for 2005 to $465,000
for 2006. This increase was largely due to the Company's increased debt levels
during the first quarter of 2006 as compared to 2005.
FEDERAL INCOME TAXES - For the three months ended November 30, 2005, the Company
recorded a valuation allowance of approximately $150,000 to offset the income
tax benefit. For the three months ended November 30, 2004, the Company recorded
a valuation allowance of approximately $158,000 to offset the income tax
benefit.
LIQUIDITY AND CAPITAL RESOURCES - During the three months ended November 30,
2005, the Company's cash used in operating activities was $780,000. This largely
resulted from a increase of $2.4 million in account receivables, a $1.1 million
decrease in contracts in process and a $415,000 increase in accounts payable.
The Company financed its increase in working capital with $1.1 million of
borrowings on its revolving line of credit, net of $293,000 used to reduce other
debt.
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 2006. However, depending on the Company's primary lenders
12
willingness to extend the due date of the overformula facility as well as 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, the Company may be required to seek additional sources of
funding.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information on the Company's debt as of November
30, 2005 and August 31, 2005 that are sensitive to changes in interest rates.
AMOUNT
AS OF NOVEMBER 30, 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 November 30, 2005, an effective rate
of 8.25%) $ 7,637,983 May 17, 2008
SECURED CONVERTIBLE TERM NOTE:
o At an interest rate of prime plus 4.00% (as of November 30,
2005, an effective rate of 11.25%) $ 2,909,091 May 17, 2008
OVERFORMULA:
o At an interest rate of prime plus 1.25% (as of November 30,
2005, an effective rate of 8.25%) $ 2,000,000 January 31, 2006
AS OF AUGUST 31, 2005
---------------------
CONVERTIBLE REVOLVING NOTE:
o Variable rate revolving credit line at an interest rate of
prime rate plus 1.25% (as of August 31, 2005, an effective rate
of 8.0% $ 6,534,727 May 17, 2008
SECURED CONVERTIBLE TERM NOTE:
o At an interest rate of prime plus 4.00% (as of August 31,
2005, an effective rate of 10.75%) $ 3,200,000 May 17, 2008
OVERFORMULA:
o At an interest rate of prime plus 1.25% (as of August 31,
2005, an effective rate of 8.0%) $ 2,000,000 January 31, 2006
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the Company's common
shareholders at its annual shareholders meeting on January 11, 2006.
The following directors were elected to serve until the meeting of shareholders
in 2007 and 2008, as indicated, and until their successors are elected and
qualified (amounts shown in parentheses represent the number of votes cast for,
against or withheld, and abstentions, respectively):
(i) Kenneth K. Rieth (3,817,126/66,969) (Term expiring 2008)
(ii) James V. Gillette (3,848,526/35,569) (Term expiring 2008)
(iii) Dr. Jay S. Baron (3,855,706/28,389) (Term expiring 2007)
The following director of the Company shall continue to serve until the annual
meeting of shareholders in the year indicated parenthetically and until his
successor is elected and qualified:
o J. Dann Engels (2006)
ITEM 5. OTHER INFORMATION
On December 9, 2005, Riviera Tool Company (the "Company") entered into an
Omnibus Amendment with Laurus Master Fund, Ltd. ("Laurus"), amending the term
"Fixed Conversion Price" with respect to the Convertible Term Note (the "Term
Note"), dated as of May 17, 2005, by the Company in favor of Laurus in the
aggregate principal amount of $3,200,000 issued pursuant to the terms of the
Securities Purchase Agreement, dated as of May 17, 2005, between the Company and
Laurus. The term "Fixed Conversion Price," with respect solely to the Term Note,
was amended as follows:
The initial Fixed Conversion Price means $1.66; provided, however, that
in respect of the first $150,000 of aggregate principal amount (the
"Initial Converted Amount") of the Term Note converted into shares of
the Company's common stock, the Fixed Conversion Price in respect of
such Initial Converted Amount (and the interest and fees associated
therewith to the extent converted) shall be equal to $0.55.
A prospectus supplement relating to the prospectus, dated August 3, 2005 (File
No. 33-126659), of the Company was filed with the Commission on December 9, 2005
reflecting such amended terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
(b) Reports on Form 8-K:
File Date Item
--------- ----
December 12, 2005 1.01 Entry into a Material Definitive Agreement.
14
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: January 17, 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)
15
Exhibit Index
Exhibit no. Description of Exhibit
31.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Sec. 302
31.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Sec. 302
32 Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 906