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, 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 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 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 4,400,458 shares of the Registrant's common stock outstanding as
of January 22, 2007.
1
PART I
FINANCIAL INFORMATION
INDEX
Page No.
--------
Item 1. Financial Statements
Balance Sheets as of November 30, 2006 and August 31, 2006.. 3
Statements of Operations for the Three Months Ended November
30, 2006 and 2005........................................ 4
Statements of Cash Flows for the Three Months Ended November
30, 2006 and 2005........................................ 5
Notes to 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.. 15
Item 4. Controls and Procedures..................................... 15
PART II
OTHER INFORMATION
Item 1A. Risk Factors................................................ 16
Item 6. Exhibits.................................................... 16
Signatures.................................................. 16
Certifications
Exhibits
2
RIVIERA TOOL COMPANY
FINANCIAL STATEMENTS
BALANCE SHEETS
NOVEMBER 30, AUGUST 31,
NOTE 2006 2006
---- ------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
- Cash.................................................................. $ 509,551 $ 161,179
- Accounts receivable, net.............................................. 9,086,783 10,488,082
- Costs in excess of billings/(billings in excess of costs) on
contracts in process............................................... 2 224,222 (105,711)
- Inventories........................................................... 249,962 249,962
- Prepaid expenses and other current assets............................. 319,583 330,361
------------ ------------
Total Current Assets............................................... 10,390,101 11,123,873
- Property, Plant and Equipment, net.................................... 3 9,072,246 9,438,948
- Perishable Tooling.................................................... 542,431 610,048
- Other Assets.......................................................... 379,029 370,052
------------ ------------
Total Assets....................................................... $ 20,383,807 $ 21,542,921
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
- Current portion of long-term debt..................................... 4 $ 2,884,038 $ 1,757,631
- Accounts payable...................................................... 3,801,526 4,745,328
- Accrued liabilities................................................... 697,850 533,929
------------ ------------
Total Current Liabilities.......................................... 7,383,414 7,036,088
- Long-Term and Subordinated Debt, net of Unamortized Discount.......... 4 9,791,088 11,002,033
- Accrued Lease Expense................................................. 1,013,216 995,084
- Other Long-Term Liabilities........................................... 16,386 16,386
------------ ------------
Total Liabilities.................................................. 18,204,104 19,050,391
PREFERRED STOCK
- Preferred stock - no par value,
$100 mandatory redemption value:
Authorized - 5,000 shares, Issued and outstanding - no shares...... -- --
- Preferred stock - no par value,
Authorized - 200,000 shares
Issued and outstanding - no shares................................. -- --
COMMON STOCKHOLDERS' EQUITY
- Common stock - No par value:
Authorized - 9,785,575 shares
Issued and outstanding - 4,400,458 and 4,257,601 shares as of
November 30 and August 31, 2006, respectively...................... 17,330,483 17,280,483
- Retained deficit...................................................... (15,150,780) (14,787,953)
------------ ------------
Total Stockholders' Equity......................................... 2,179,703 2,492,350
------------ ------------
Total Liabilities and Stockholders' Equity......................... $ 20,383,807 $ 21,542,921
============ ============
See notes to financial statements
3
RIVIERA TOOL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED NOVEMBER 30
-----------------------
2006 2005
---------- ----------
SALES........................................ $4,307,796 $6,063,185
COST OF SALES................................ 3,641,172 5,467,385
---------- ----------
GROSS PROFIT........................... 666,624 595,800
SELLING AND ADMINISTRATIVE EXPENSES.......... 593,180 565,577
---------- ----------
INCOME FROM OPERATIONS................. 73,444 30,223
OTHER EXPENSE
- Interest expense........................ 436,368 464,918
- Other (income) expense.................. (97) 6,655
---------- ----------
TOTAL OTHER EXPENSE....................... 436,271 471,573
LOSS BEFORE INCOME TAXES............... (362,827) (441,350)
---------- ----------
INCOME TAXES................................. -- --
---------- ----------
NET LOSS AVAILABLE FOR COMMON SHARES... $ (362,827) $ (441,350)
========== ==========
BASIC AND DILUTED LOSS PER COMMON SHARE...... $ (.09) $ (.11)
========== ==========
WEIGHTED-AVERAGE BASIC AND DILUTED
COMMON SHARES OUTSTANDING................. 4,292,826 3,984,874
========== ==========
See notes to financial statements
4
RIVIERA TOOL COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED NOVEMBER 30,
------------------------
2006 2005
---------- -----------
OPERATING ACTIVITIES
Net loss........................................................................... $ (362,827) $ (441,350)
Adjustments to reconcile net loss to net cash from/(used in) operating activities:
- Depreciation and amortization................................................. 395,634 419,890
- Debt discount amortization.................................................... 58,500 22,750
(Increase) decrease in assets:
- Accounts receivable........................................................... 1,401,299 (2,398,952)
- Costs in excess of billings on contracts in process........................... (329,933) 1,128,561
- Perishable tooling............................................................ 67,617 4,800
- Prepaid expenses and other current assets..................................... 10,778 71,414
Increase (decrease) in liabilities:
- Accounts payable.............................................................. (943,802) 414,756
- Accrued lease expense......................................................... 18,132 12,513
- Accrued liabilities........................................................... 163,921 8,236
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................... $ 479,319 $ (757,382)
---------- -----------
INVESTING ACTIVITIES
- Increase (decrease) in other assets........................................... (8,977) 36,017
- Purchases of property, plant and equipment.................................... (28,932) (28,105)
---------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES $ (37,909) $ 7,912
---------- -----------
FINANCING ACTIVITIES
- Net borrowings (repayments) on revolving credit line.......................... (920,053) 1,103,256
- Net borrowings (repayments) on overformula.................................... 1,000,000 --
- Principal payments on secured convertible term note and note payable to bank.. (195,728) (313,659)
- Payments on capital lease..................................................... (2,048) (1,917)
- Proceeds from other financing................................................. 24,791 --
---------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES...................... $ (93,038) $ 787,680
---------- -----------
NET INCREASE IN CASH.................................................. $ 348,372 $ 38,210
========== ===========
CASH - Beginning of Period......................................................... 161,179 239,475
---------- -----------
CASH - End of Period............................................................... $ 509,551 $ 277,685
========== ===========
See notes to financial statements
5
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2006
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, 2006, for the fiscal year ended August
31, 2006.
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 2006, the Company
sustained a net loss of $1,639,218. This loss resulted in an accumulated deficit
of $14,787,953 as of August 31, 2006. 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, overadvance facility and
the funds generated from operations, should be sufficient to cover anticipated
cash needs through fiscal 2007. 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,
2006 may not be indicative of the results to be expected for the full year.
Basic earnings per share ("EPS) excludes dilution and is computed by dividing
earnings/(loss) available to common stockholders by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised. 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 831,000 in the quarter ended November 30, 2006.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes", which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements,
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for our fiscal year ended August 31, 2007,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on its financial statements.
6
NOTE 2 - COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
NOVEMBER 30, AUGUST 31,
2006 2006
------------ -----------
Costs incurred on contracts in process under the percentage-of-
completion method ............................................ $13,061,827 $12,981,159
Estimated gross profit (loss) ................................... 950,000 675,000
----------- -----------
Total ........................................................ 14,011,827 13,656,159
Less progress payments received and progress billings to date ... 13,787,605 13,761,870
----------- -----------
COSTS IN EXCESS OF BILLINGS ON CONTRACTS IN PROCESS ....... $ 224,222 $ (105,711)
=========== ===========
Included in estimated gross profit (loss) for November 30, 2006 and August 31,
2006 are jobs with losses accrued of $661,525 and $480,658, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
NOVEMBER 30, AUGUST 31,
CATEGORY 2006 2006
-------- ------------ -----------
- Leasehold improvements ...................... $ 1,152,036 $ 1,338,712
- Office furniture and fixtures ............... 110,157 104,313
- Machinery and equipment ..................... 21,053,910 21,696,157
- Computer equipment and software ............. 1,145,628 1,264,779
- Transportation equipment .................... 58,114 102,036
----------- -----------
Total cost ............................... 23,519,845 24,505,997
- Accumulated depreciation and amortization ... 14,447,599 15,067,049
----------- -----------
PROPERTY, PLANT AND EQUIPMENT ............ $ 9,072,246 $ 9,438,948
=========== ===========
NOTE 4 - LONG-TERM DEBT
The Company's long-term debt consists of the following:
NOVEMBER 30, AUGUST 31,
DEBT TYPE 2006 2006
--------- ------------ -----------
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 $11 million.
The credit line is due May 17, 2008, and
bears interest, payable monthly, at prime
rate plus 1.25% (as of November 30, 2006, an
effective rate of 8.25%) .................... $ 8,877,185 $ 9,797,238
7
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2006
NOTE 4 - LONG-TERM DEBT - CONTINUED
NOVEMBER 30, AUGUST 31,
DEBT TYPE 2006 2006
--------- ------------ -----------
OVERFORMULA
- The overadvance loan is due June 30, 2007 and
bears interest at prime rate plus 1.25% (as
of November 30, 2006, an effective rate of
8.25%) ...................................... 1,550,000 550,000
SECURED CONVERTIBLE TERM NOTE
- The convertible term note is due May 17, 2008
and is payable in monthly installments of
$96,970 commencing September 1, 2005, plus
interest at prime rate plus 4%, (as of
November 30, 2006, an effective rate of
11.25%) ..................................... 1,745,455 2,036,364
NOTES PAYABLE TO BANK
- Subordinated note payable to bank is due
January 1, 2008 and is payable in monthly
installments of $31,000, including interest
at 11% ...................................... 816,158 770,977
OTHER
- Other ....................................... 27,578 4,835
----------- -----------
Total debt ....................................... 12,901,376 13,159,414
----------- -----------
Less: unamortized debt discount .................. 341,250 399,750
Less: current portion of long-term debt and
unamortized debt discount ..................... 2,884,038 1,757,631
----------- -----------
LONG-TERM DEBT, NET OF UNAMORTIZED
DISCOUNT ................................ $ 9,791,088 $11,002,033
=========== ===========
On May 17, 2005, the Company entered into a new senior loan facility with Laurus
Master Fund LTD. ("Laurus"). In connection with 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 $11.0 million. The
Revolving Facility is convertible by Laurus into shares of the Company's common
stock at a rate of $1.66 per share. The Agreements are 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 conversion date. In
addition, the Company issued an option to purchase 650,000 shares of its Common
Stock at an exercise price of $.01. The Company recorded the cost of this option
as debt discount. The debt discount was determined by calculating the difference
between the closing price of the stock on May 17, 2005 (the date of the option
issuance) and the option exercise price of $.01 per share. The closing price on
May 17, 2005 was $.93 per share, thus the total debt discount of the option was
$702,000. The debt discount is being amortized over the term of the financing.
During the first quarter of fiscal 2006 and 2007 the Company recorded $22,750
and $58,500 in debt discount expense, respectively.
Laurus has agreed that it will 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
8
upon the occurrence of an "event of default" under any of the 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.
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.
On September 1, 2006, the Company agreed to convert $50,000 of principal of its
Convertible Note Payable into 142,857 shares of common stock at a conversion
rate of $.35 per share.
On October 31, 2006, the Company amended and restated the Overadvance Side
Letter Agreement with Laurus. Under the original Overadvance Side Letter
Agreement, dated May 17, 2005, the Company received a loan in excess of the
formula amount allowable under the Revolving Facility totaling $2.3 million. As
of August 31, 2006, the Company had lowered the overformula loan balance to
$550,000. Under the October 31, 2006 amended agreement, such amount was
increased to $1,550,000 and will expire June 30, 2007.
As of November 31, 2006, the Company was in non-compliance with its Notes
Payable to Bank for delinquent payments. As this note payable is subordinate to
the Convertible Revolving Note, Overformula and Secured Convertible Term Note
there is no acceleration clause under which they can accelerate payment. As
such, the debt is recorded as long-term, net of current portion of long-term
debt.
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.
9
For The Three
Months Ended
November 30
--------------
2006 2005
----- -----
SALES ......................................... 100.0% 100.0%
COST OF SALES ................................. 84.5% 90.2%
----- -----
GROSS PROFIT ............................ 15.5% 9.8%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ... 13.8% 9.3%
----- -----
INCOME FROM OPERATIONS .................. 1.7% 0.5%
INTEREST EXPENSE ........................... 10.1% 7.7%
OTHER EXPENSE .............................. -- 0.1%
----- -----
TOTAL OTHER EXPENSE ..................... 10.1% 7.8%
LOSS BEFORE INCOME TAX EXPENSE ................ (8.4%) (7.3%)
INCOME TAX EXPENSE ............................ -- --
----- -----
NET LOSS ................................ (8.4%) (7.3%)
===== =====
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's Financial Statements. These financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require the use of
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. The accounting policies that may involve
a higher degree of judgment, estimates and complexity include revenue
recognition using percentage of completion estimates and the assessment of asset
impairments. The Company uses the following methods and assumptions in its
estimates.
- Revenue recognition - The Company recognizes revenue on time and material
contracts utilizing the completed-contract method. Revenue is recognized on
all other contracts utilizing the percentage-of-completion method. Under
the completed-contract method, the contract is considered complete when all
costs except for insignificant items have been incurred and the project has
been approved by the customer. Under the percentage-of-completion method,
estimated contract earnings are based on total estimated contract profits
multiplied by the ratio of labor hours incurred to total estimated labor
hours on the contract. Provisions for total estimated losses on contracts
in process are recognized in the period such losses are determined. Changes
in job performance, conditions and estimated profitability may result in
revisions to costs and income and are recognized in the period such
revisions are determined.
- 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 carrying value may not be recoverable. This review is
performed using estimated future undiscounted cash flows. If the carrying
value of a long-lived asset is considered to be impaired, an impairment
charge is recorded for the amount that the carrying value of the long-lived
asset exceeds its fair value.
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
10
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, 2006, for the fiscal year ended August 31, 2006.
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 2006, the Company
sustained a net loss of $1,639,218. This loss resulted in an accumulated deficit
of $14,787,953 as of August 31, 2006. 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, overadvance and the
funds generated from operations, should be sufficient to cover anticipated cash
needs through fiscal 2007. 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, 2006 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, 2006.
REVENUES
FIRST QUARTER ENDED PERCENT
------------------- INCREASE/ INCREASE/
REVENUE 2005 2006 (DECREASE) (DECREASE)
------- -------- -------- ---------- ----------
Total Revenue ..... $ 6.1m $ 4.3m $ (1.8)m (30%)
Contract Backlog .. $ 12.9m $ 3.9m $ (9.0m) (70%)
Shop Floor Hours .. 72,800 61,700 (11,100) (15%)
Revenues for the three months ended November 30, 2006 totaled $4.3 million as
compared to $6.1 million for the three months ended November 30, 2005, a
decrease of $1.8 million or 30%. This decrease was a result of the Company
having a lower contract backlog at the start of the first quarter of 2006 as
compared to 2005. The Company experienced a total of 61,700 shop floor hours for
the first quarter of 2006 as compared to 72,800 in the first quarter of 2005, a
decrease of 15%.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $3.9 million and $12.9 million as of November 30, 2006 and
2005, respectively. The Company expects all backlog contracts will be reflected
in sales during fiscal year ending August 31, 2007.
The Company believes the domestic tooling industry continues to be unstable, as
does the overall domestic automotive industry. With the prevalence of global
sourcing and related pricing pressure issues, uncertainty to the domestic
tooling industry will continue. These issues in conjunction with delayed new
model developments have contributed to the Company's decreased backlog and
related revenues. The Company recently has seen an increase in domestic quoting
activity, which may result in future orders.
COST OF SALES
11
FIRST QUARTER
ENDED PERCENT
-------------- INCREASE/ INCREASE/
COST OF GOODS SOLD 2005 2006 (DECREASE) (DECREASE)
------------------ ----- ------ ---------- ----------
Direct Costs .............. $3.2m $1.5m $(1.7)m (53%)
Engineering Expense ....... $0.6m $0.4m $(0.2)m (33%)
Manufacturing Overhead .... $1.7m $1.7m $ -- --
---- ---- ----- ----
Total Cost of Goods Sold .. $5.5m $3.6m $(1.9)m (33%)
==== ==== ===== ====
Cost of goods sold decreased from $5.5 million for the first quarter of fiscal
2006 to $3.6 million for 2007 and, as a percent of sales, decreased from 90% for
2006 to 85% for 2007. Gross margin increased to 15% for 2007 from 10% for 2006.
This 5 percent change in gross margin was impacted by a number of factors
including volume and the mix of projects from the comparable quarter in the
prior year and, changes in estimated costs to complete on projects in process.
Direct costs (materials and labor) decreased by $1.7 million, from $3.2 million
for 2006 to $1.6 million for 2007. Engineering expense increased by $133,000
from $540,000 for 2006 to $407,000 for 2007. Lastly, of the cost of goods sold,
manufacturing overhead decreased by $37,000 from $1.71 million for 2006 to $1.67
million for 2007. Additional details of these changes in cost of sales for the
first quarters of fiscal 2006 and 2007 are as follows:
- Direct materials expense decreased from $1.3 million for 2006 to $0.3
million for 2007 and decreased as a percent of sales from 21% to 6%. This
decrease was largely due to lower contract volume requirements and the mix
of contracts. During the first quarter of 2007, much of the contracts in
process were in the later stage of completion as compared to 2006 and
resulted in lower direct material requirements and expense. Outside
services expense decreased from $585,000 for 2006 to $117,000 for 2007 and
as a percent of sales from 9% to 3%, respectively. This decrease was
largely due to the Company contracts during 2007 being at a stage of
completion whereas less outside machining, die patterns, laser cutting and
heat treat services were required.
- Direct labor expense decreased from $1.3 million for 2006 to $1.2 million
for 2007 however, as a percent of sales, increasing from 22% to 27%. This
change was a result of the Company incurring a $1.8 million decrease in
revenues while direct labor expense decreased by only $145,000. Of the
total direct labor expense, regular or straight time decreased by $34,000
however as a percent of sales, increased from 14% for 2006 to 19% for 2007.
Overtime expense decreased from $475,000 for 2006 to $364,000 for 2007,
however as a percent of sales, remained consistent at 8%.
- Engineering expense increased from $540,000, 9% of sales, for 2006 to
$407,000, 9% of sales, for 2007. This decrease was due to the Company's
decrease in awarded contracts and backlogs, and the resulting decrease in
the number of engineering personnel necessary to fulfill the design and
project management portions of the Company's current contract backlog.
- Manufacturing overhead was $1.71 million or 28% of sales for 2006 as
compared to $1.68 million or 39% of sales for 2007. During 2007, decreases
in manufacturing overhead were largely due to a $34,000 decrease in
perishable tool expense and a $31,000 decrease in manufacturing supplies
expense. These decreases were offset by increases of $11,000 in utilities
expense, $9,000 maintenance supplies and machinery repairs, $8,000 in
general, health and workers compensation insurance expense and $8,000 in
building rent expense.
SELLING AND ADMINISTRATIVE EXPENSE
FIRST QUARTER ENDED PERCENT
SELLING ABD ADMINISTRATIVE ------------------- INCREASE/ INCREASE/
EXPENSE 2005 2006 (DECREASE) (DECREASE)
-------------------------- -------- -------- ---------- ----------
Selling & Administrative
Expense................ $566,000 $593,000 $27,000 4.8%
12
Selling and administrative expense increased from $566,000 for the first quarter
of 2006 to $593,000 for 2007. As a percent of sales, selling and administrative
expense increased from 9% for 2006 to 14% for 2007. The largest selling and
administrative expense increases included $26,000 in travel expenses and $21,000
in legal and professional expense. These increases were offset by decreases of
$14,000 in public company and director fee expense, $6,000 in 401(K) expense, as
well as decreases in office supplies expense, office salaries expense and
payroll tax expenses.
INTEREST EXPENSE
FIRST QUARTER ENDED PERCENT
------------------- INCREASE/ INCREASE/
INTEREST EXPENSE 2005 2006 (DECREASE) (DECREASE)
---------------- -------- -------- ---------- ----------
Interest Expense... $465,000 $436,000 $(29,000) (6%)
Interest expense decreased from $465,000 for 2006 to $436,000 for 2007. This
decrease was largely due to the Company's mix of debt during the first quarter
of 2007 as compared to 2006. The Company's higher interest debt during the first
quarter of 2007 was lower than the same period of 2006. Offsetting this
decreased interest expense, the Company incurred increased debt discount expense
during the first quarter of 2007 as compared to 2006. During the first quarter
of 2007, the Company recorded $58,500 in debt discount expense versus $22,750 in
2006.
The following table illustrates the Company's total long-term debt on a
quarterly basis during fiscal 2007 and fiscal 2006.
(PERFORMANCE GRAPH)
2006 2007
------- -------
Nov. 30 $13,566 $12,901
Feb. 28 $14,568
May 31 $14,138
Aug. 31 $13,159
Weighted-Average $13,858
13
FEDERAL INCOME TAXES
For the three months ended November 30, 2006, the Company recorded a valuation
allowance of approximately $123,000 to offset the income tax benefit utilizing a
34% statutory tax rate. 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 year ended August 31, 2007, the Company anticipates
utilizing a 34% statutory tax rate in establishing its provision for income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
FIRST QUARTER ENDED
LIQUIDITY AND CAPITAL --------------------
RESOURCES 2005 2006
--------------------- --------- --------
Cash Flow From/(Used in):
- Operations ............. $(757,382) $479,319
- Investing Activities ... $ 7,912 $(37,909)
- Financing Activities ... $ 787,680 $(93,038)
During the three months ended November 30, 2006, the Company's cash from
operating activities was $479,000. This largely resulted from decreases of $1.4
million in account receivables and $164,000 in accrued liabilities offset an
increase of $330,000 in contracts in process and a decrease of $944,000 in
accounts payable. The Company utilized a portion of its cash from operating
activities by decreasing overall debt by $93,000.
The Company believes that the revolving line of credit and the funds generated
from operations, should be sufficient to cover anticipated cash needs through
fiscal 2007. However, depending on the Company's primary lenders 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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information on the Company's debt as of November
30, 2006 and August 31, 2006 that are sensitive to changes in interest rates.
AMOUNT MATURITY
AS OF NOVEMBER 30, 2006 OUTSTANDING DATE
----------------------- ----------- -------------
CONVERTIBLE REVOLVING NOTE:
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%).................. $8,877,185 May 17, 2008
SECURED CONVERTIBLE TERM NOTE:
At an interest rate of prime plus 4.00% (as of
November 30, 2005, an effective rate of 11.25%).... $1,745,455 May 17, 2008
OVERFORMULA:
At an interest rate of prime plus 1.25% (as of
November 30, 2005, an effective rate of 8.25%).... $1,550,000 June 30, 2007
AMOUNT MATURITY
AS OF AUGUST 31, 2006 OUTSTANDING DATE
--------------------- ----------- -------------
CONVERTIBLE REVOLVING NOTE:
Variable rate revolving credit line at an interest
rate of prime rate plus 1.25% (as of August 31,
2006, an effective rate of 9.5%)................... $9,797,238 May 18, 2008
SECURED CONVERTIBLE TERM NOTE:
At an interest rate of prime plus 4.00% (as of
August 31, 2006, an effective rate of 12.25%)...... $2,036,364 May 18, 2008
OVERFORMULA:
At an interest rate of prime plus 1.25% (as of
August 31, 2006, an effective rate of 9.5%)........ $ 550,000 June 30, 2007
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15e, and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") as of the end of the period covered by this report.
Based upon such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting: There were no changes in
the Company's internal control over financial reporting during the Company's
first fiscal quarter ended November 30, 2006, that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
The Company is not currently an accelerated or large accelerated filer and is
not currently subject to the internal control reporting requirements under
Section 404 of the Sarbanes-Oxley Act until its fiscal year ended August 31,
2008. The Company has begun documentation of processes for its internal controls
and will comply with Section 404 as required.
15
PART II. OTHER INFORMATION
ITEM 1A: RISK FACTORS
In addition to the information set forth in this report, you should carefully
consider the factors discussed in "Risk Factors" in Part I, Item 1A of the
Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2006,
which could materially affect the Company's business, financial condition and/or
operating results. The risks described in the Company's Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that the Company currently
deems to be immaterial also may materially adversely affect the Company's
business, financial condition and/or operating results.
ITEM 6. EXHIBITS
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
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 22, 2007
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)
16
Exhibit Index
EXHIBIT NO. DESCRIPTION
----------- -----------
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