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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, 2004
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 3,774,346 shares of the Registrant's common stock outstanding as of
July 15, 2004.
1
Page No.
PART I
FINANCIAL INFORMATION
INDEX
Item 1. Financial Statements
Balance Sheets as of May 31, 2004 and August 31, 2003............................................. 3
Statements of Operations for the Three and Nine Months Ended May 31, 2004 and 2003................ 4
Statements of Cash Flows for the Three and Nine Months Ended May 31, 2004 and 2003................ 5
Notes to Financial Statements..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 11
Item 4. Controls and Procedures........................................................................... 11
PART II
OTHER INFORMATION
INDEX
Item 1. Legal Proceedings................................................................................. 12
Item 5 Other Information................................................................................. 12
Item 6. Exhibits and Reports on Form 8 - K................................................................ 12
Signatures........................................................................................ 13
Certifications.................................................................................... 57
Exhibits.......................................................................................... 14
2
RIVIERA TOOL COMPANY
FINANCIAL STATEMENTS
BALANCE SHEETS
MAY 31, AUGUST 31,
2004 2003
------------------- -------------------
NOTE (UNAUDITED) (AUDITED)
---- ------------------- -------------------
ASSETS
CURRENT ASSETS
Cash.................................................................... $ 1,280 $ --
Accounts receivable..................................................... 12,061,707 7,010,039
Costs in excess of billings on contracts in process..................... 2 8,365,262 12,208,666
Inventories............................................................. 248,559 248,559
Prepaid expenses and other current assets............................... 457,965 294,143
------------------- -------------------
Total current assets.......................................... 21,134,773 19,761,407
PROPERTY, PLANT AND EQUIPMENT, NET........................................ 3 12,602,324 13,046,289
PERISHABLE TOOLING........................................................ 658,793 617,722
OTHER ASSETS.............................................................. 347,660 325,198
------------------- -------------------
Total assets.................................................. $ 34,743,550 $ 33,750,616
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt....................................... 4 $ 667,176 $ 638,756
Accounts payable........................................................ 5,335,263 5,020,554
Accrued outsourced contracts payable.................................... 2,990,721 5,903,930
Accrued liabilities..................................................... 809,184 435,896
------------------- -------------------
Total current liabilities..................................... 9,802,344 11,999,136
LONG-TERM DEBT............................................................ 4 9,500,951 8,400,333
CAPITAL LEASE............................................................. 14,449 --
ACCRUED LEASE EXPENSE..................................................... 715,840 640,690
------------------- -------------------
Total liabilities............................................. 20,033,584 21,040,159
------------------- -------------------
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 - 3,774,346 at May 31, 2004 and
3,379,609 shares at August 31, 2003.................................. 16,426,378 15,115,466
Retained deficit........................................................ (1,716,412) (2,405,009)
------------------- -------------------
Total stockholders' equity.................................... 14,709,966 12,710,457
------------------- -------------------
Total liabilities and stockholders' equity................................ $ 34,743,550 $ 33,750,616
=================== ===================
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, 2004 MAY 31, 2003 MAY 31, 2004 MAY 31, 2003
--------------- -------------- --------------- -----------------
SALES................................................... $ 7,596,931 $ 9,919,178 $ 24,200,591 $ 22,561,901
COST OF SALES........................................... 6,729,645 8,826,409 21,642,926 20,306,338
--------------- -------------- --------------- -----------------
GROSS PROFIT...................................... 867,286 1,092,769 2,557,665 2,255,563
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............................. 479,920 505,935 1,389,060 1,244,540
--------------- -------------- --------------- -----------------
INCOME FROM OPERATIONS............................ 387,366 586,834 1,168,605 1,011,023
TOTAL INTEREST AND OTHER EXPENSE.................. 148,782 195,735 480,008 577,490
--------------- -------------- --------------- -----------------
INCOME BEFORE INCOME TAXES ............................. 238,584 391,099 688,597 433,533
--------------- -------------- --------------- -----------------
INCOME TAXES ........................................... -- -- -- --
--------------- -------------- --------------- -----------------
NET INCOME AVAILABLE FOR
COMMON SHARES.......................................... $ 238,584 $ 391,099 $ 688,597 $ 433,533
=============== ============== =============== ==================
BASIC AND DILUTED INCOME
PER COMMON SHARE........................................ $ 06 $ .12 $ .18 $ .13
=============== ============== =============== ==================
BASIC AND DILUTED
COMMON SHARES OUTSTANDING............................... 3,774,346 3,379,609 3,774,346 3,379,609
=============== ============== =============== ==================
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,
2004 2003 2004 2003
--------------- -------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 238,584 $ 391,099 $ 688,597 $ 433,533
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization....................... 421,599 460,482 1,264,798 1,381,446
(Increase) decrease in assets:
Accounts receivable.............................. (7,171,218) 4,825,325 (5,051,668) (1,994,606)
Costs in excess of billings on contracts in
process......................................... 3,124,750 (5,440,988) 3,843,404 (2,897,601)
Perishable tooling............................... (35,697) (34,650) (41,071) (68,295)
Prepaid expenses and other current assets........ 49,741 20,061 (163,822) (173,157)
Increase (decrease) in liabilities:
Accounts payable................................. 853,652 196,871 314,709 1,667,985
Accrued outsourced contracts payable............. (3,557,595) 1,925,174 (2,913,209) 3,030,889
Accrued lease expense............................ 25,050 (8,761) 75,150 (26,284)
Accrued liabilities.............................. 54,602 397,135 373,288 481,860
--------------- -------------- -------------- ---------------
Net cash provided by/(used in) operating activities....... $ (5,996,532) $ 2,731,748 $ (1,609,824) $ 1,835,770
--------------- -------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in other assets................................ -- -- (22,462) (22,138)
Additions to property, plant and equipment.............. (529,610) (121,706) (820,833) (182,052)
--------------- -------------- -------------- ---------------
Net cash used in investing activities..................... $ (529,610) $ (121,706) $ (843,295) $ (204,190)
--------------- -------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit line.... 5,354,637 (2,454,658) 1,565,460 (7,337,271)
Increase in capital lease............................... 14,449 -- 14,449 --
Issuance of debt........................................ -- -- -- 3,367,948
Principal payments on notes payable to bank ............ (153,776) (155,384) (436,422) --
Sale of common stock.................................... 1,310,912 -- 1,310,912 --
--------------- -------------- -------------- ---------------
Net cash provided by/(used in) financing activities....... $ 6,526,222 $ (2,610,042) $ 2,454,399 $ (3,969,323)
--------------- -------------- -------------- ---------------
NET INCREASE/(DECREASE) IN CASH........................... $ 80 -- $ 1,280 $ (2,337,743)
CASH - Beginning of Period................................ 1,200 -- -- 2,337,743
--------------- -------------- -------------- ---------------
--
CASH - End of Period...................................... $ 1,280 -- $ 1,280 $ --
=============== ============== ============== ===============
See notes to financial statements
5
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2004
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 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
December 1, 2003, for the fiscal year ended August 31, 2003.
The results of operations for the nine-month period ended May 31, 2004, may not
be indicative of the results to be expected for the full year.
NOTE 2 - COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
MAY 31, AUGUST 31,
2004 2003
---------------------- ------------------
Costs incurred on contracts in process under the percentage of
completion method..................................................... $ 35,398,349 $ 26,836,205
Estimated gross profit................................................. 3,000,000 3,000,000
---------------------- ------------------
Total.......................................................... 38,398,349 29,836,205
Less progress payments received and progress billings to date.......... (30,134,723) (17,627,539)
Plus costs incurred on contracts in process under the completed
contract method....................................................... 101,636 --
---------------------- ------------------
Costs in excess of billings on contracts in process.................... $ 8,365,262 $ 12,208,666
====================== ==================
Included in estimated gross profit for May 31, 2004 and August 31, 2003 are jobs
with losses accrued of $2,881,387 and $532,665, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
MAY 31, AUGUST 31,
2004 2003
------------------ --------------------
Leasehold improvements.................................................... $ 1,367,908 $ 1,367,908
Office furniture and fixtures............................................. 168,286 164,417
Machinery and equipment................................................... 22,818,242 22,369,833
Construction in Process................................................... 492,720 160,195
Computer equipment and software........................................... 2,387,610 2,351,580
Transportation equipment.................................................. 61,919 61,919
------------------ --------------------
Total cost........................................................... 27,296,685 26,475,852
Accumulated depreciation and amortization................................. 14,694,361 13,429,563
------------------ --------------------
Net carrying amount.................................................. $ 12,602,324 $ 13,046,289
================== ====================
6
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
MAY 31, 2004
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,
2004 2003
--------------- -----------------
REVOLVING WORKING CAPITAL CREDIT LINE
The 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 $12.5 million. The agreement requires a commitment fee of
..25% per annum on the average daily unused portion of the revolving credit line.
The credit line is due December 1, 2006, and bears interest, payable monthly, at
1.0% above the bank's prime rate (as of May 31, 2004 and August 31, 2003,
an effective rate of 5.0%)...................................................... $ 7,547,820 $ 5,982,360
NOTES PAYABLE TO BANKS
Note payable to bank, payable in monthly installments of $33,334, plus
interest at the bank's prime rate plus 1.25% (as of May 31, 2004 and August
31, 2003, an effective rate of 5.25%), due December 1, 2007..................... 1,466,667 1,766,667
Subordinated note payable to bank, payable in monthly installments of
$31,000, including interest at 11%, due January 1, 2008......................... 1,153,640 1,290,062
--------------- -----------------
Total debt........................................................... 10,168,127 9,039,089
Less current portion of long-term debt............................... 667,176 638,756
--------------- -----------------
Long-term debt -- Net................................................ $ 9,500,951 $ 8,400,333
=============== =================
On June 16, 2004, the Company executed a new loan agreement with its primary
lender. Under such agreement the Revolving Line of Credit was increased from
$10.0 million to $12.5 million. In addition, the Company received a $500,000
Non-Revolving Capital Equipment Note. Under the new loan agreement, the Company
is required to maintain certain levels of Tangible Effective Net Worth, Debt to
Tangible Net Worth and Debt Service Coverage. At May 31, 2004, the Company was
in compliance with these new covenants.
NOTE 5 - SUBSEQUENT EVENT
On July 9, 2004, the Company entered into a Subordinated Loan and Security
Agreement with The Hillstreet Fund II, LP. The Company received $3.0 million in
subordinated debt, due and payable by June 30, 2010. Interest shall be payable
quarterly commencing September 30, 2004 at an interest rate of 14% per annum. In
addition, the Company will accrue 6% interest, compounded quarterly, which shall
be due and payable upon the maturity of the loan principal. Principal shall be
payable in quarterly installments of $250,000 commencing September 30, 2007
until June 30, 2010.
NOTE 6 - STOCKHOLDERS INVESTMENT
On March 16, 2004, the Company entered into a Securities Purchase Agreement
("SPA") with four accredited investors. The Company issued a total of 394,737
shares of unregistered Common Stock for $1,500,000 ($3.80 per share), plus
Series B warrants for the purchase of up to 263,158 additional shares of Common
Stock at $3.80 per share, for a potential additional investment of $1,000,000.
The Series B Warrants are exercisable commencing March 16, 2004 through the
earlier of the six-month anniversary of the earlier of the date of the effective
registration statement or September 16, 2005. Additionally, the investors
received Series A warrants providing 80% coverage of the initial 394,737 shares,
with an exercise price of $5.07 per share for the first half of the warrants,
and $5.53 for the
7
second half. The Company received net proceeds at the closing in the amount of
$1,480,000, after deducting certain legal fees and expenses reimbursed to
Bluegrass. The Company paid a finder's fee of $105,000 and issued warrants to
purchase 10,000 shares with an exercise price of $5.07 per share and warrants to
purchase 10,000 shares with an exercise price of $5.53 per share to Granite
Financial Group, Inc. as a fee in connection with the transaction. The funds
received under the SPA were used for working capital and debt reduction.
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,
2004 2003 2004 2003
-------- ------- ------- -------
SALES.................................................. 100.0% 100.0% 100.0% 100.0%
COST OF SALES.......................................... 88.6% 89.0% 89.4% 90.0%
----- ----- ----- -----
GROSS PROFIT.............................. 11.4% 11.0% 10.6% 10.0%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE............ 6.3% 5.1% 5.7% 5.5%
----- ----- ----- -----
INCOME FROM OPERATIONS................... 5.1% 5.9% 4.9% 4.5%
TOTAL INTEREST EXPENSE ................................ 2.0% 2.0% 2.0% 2.6%
----- ----- ----- -----
INCOME BEFORE INCOME TAXES............................. 3.1% 3.9% 2.9% 1.9%
----- ----- ----- -----
INCOME TAXES .......................................... -- -- -- --
----- ----- ----- -----
NET INCOME................................. 3.1% 3.9% 2.9% 1.9%
===== ===== ===== =====
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
8
OF FACTORS, INCLUDING CONTINUED MARKET DEMAND FOR THE TYPES OF PRODUCTS AND
SERVICES PRODUCED AND SOLD BY THE COMPANY.
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2004 TO THE THREE MONTHS ENDED MAY
31, 2003.
REVENUES - Revenues for the quarters ended May 31, 2003 and May 31, 2004 totaled
$9.9 million and $7.6 million, respectively, a decrease of $2.3 million or 23%.
The Company is near completion of significant tooling programs for both the
Mercedes-Benz M Class sports utility vehicle and a new "crossover" vehicle.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $7.6 million and $26.1 million as of May 31, 2004 and May 31,
2003, respectively. The Company expects all backlog contracts will be reflected
in sales during fiscal years ending August 31, 2004 and 2005. The Company
continues to see a general "softness" in the overall domestic automotive tooling
industry. The Company believes that such conditions should improve in the fourth
quarter of fiscal 2004 and the first two quarters of 2005 as a result of recent
increased quoting activities. Such tooling programs may have been delayed for
many reasons including continued styling changes, production related issues as
well as the effects of the global automotive supply chain on the awarding of
contracts. The Company continues to be optimistic and is aggressively pursuing
available tooling contracts.
COST OF SALES - Total cost of goods sold was $6.7 million for the third quarter
of fiscal 2004 and $8.8 million for fiscal 2003, and as a percent of sales
decreased slightly from 89.0% for 2003 to 88.6% for 2004. Direct costs
(materials and labor) decreased by $2.0 million, from $6.4 million for 2003 to
$4.4 million for 2004. As a percent of sales, direct costs decreased from 64.8%
in 2003 to 57.5% in 2004. Engineering expense decreased by $129,000 from
$660,000 for 2003 to $531,000 for 2004. Lastly, manufacturing overhead increased
by $100,000 from $1.7 million for 2003 to $1.8 million for 2004. As a percent of
sales, manufacturing overhead expense increased from 17.5% in 2003 to 24.1% in
2004 as a result of lower revenue levels to absorb fixed manufacturing overhead
expense. Additional details of these changes in cost of sales for the third
quarters of fiscal 2003 and 2004 are as follows:
- Direct materials expense decreased from $1.9 million for the third
quarter of 2003 to $763,000 for 2004 and as a percent of sales, decreased
from 19.2% to 10.0%. This decrease was a result of lower material
requirements for current tooling contracts. Outside services expense
decreased from $2.8 million for 2003 to $1.9 million for 2004 and as a
percent of sales from 28.4% to 25.5%. This decrease was largely due to the
Company incurring $734,000 less in expense related to its outsourced
revenue in the third quarter of 2004. The balance of the outside services
expense decreased from $448,000 to $301,000 as a result of the Company
outsourcing less of certain manufacturing processes in the third quarter
of 2004.
- Direct labor expense remained consistent at $1.7 million for 2003
and 2004 and as a percent of sales increased from 17.2% to 22.0%. During
the third quarter of 2004 the Company incurred a 1% decrease in direct
labor hours, from 83,000 hours in 2003 to 82,000 in 2004. Of the total
direct labor expense, regular or straight time decreased by $25,000
however as a percent of sales it increased from 10.7% for 2003 to 13.7%
for 2004. Overtime expense decreased slightly from $644,000 for 2003 to
$632,000 for 2004 however, as a percent of sales, increased from 6.5% for
2003 to 8.3% for 2004.
- Engineering expense decreased from $660,000 for 2003 to $531,000 for
2004. As a percent of sales, engineering expense increased from 6.7% to
7.0% as a result of lower revenue levels in 2004 to absorb engineering
expense overhead.
- Manufacturing overhead was $1.7 million or 17.5% of sales for 2003
as compared to $1.8 million or 24.1% of sales for 2004. During 2004,
increases in manufacturing overhead were largely due to increases in
supervision and indirect labor expense, medical insurance premiums and
payroll tax expense.
9
SELLING AND ADMINISTRATIVE EXPENSE - Selling and administrative expense
decreased slightly from $506,000 for the third quarter of 2003 to $480,000 for
2004. As a percent of sales, selling and administrative expense increased from
5.1% for 2003 to 6.3% for 2004. The largest selling and administrative expense
decreases were in director's fees and liability insurance.
INTEREST EXPENSE - Interest expense decreased from $196,000 for 2003 to $149,000
for 2004. This decrease was largely due to the lower levels of debt during the
comparative periods.
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2004 TO THE NINE MONTHS ENDED MAY
31, 2003.
REVENUES - Revenues for the nine months ended May 31, 2004 totaled $24.2 million
as compared to $22.6 million for the nine months ended May 31, 2003, an increase
of 7%. This increase is due the Company being in the final phase of completion
on two significant tooling programs.
The Company continues to see a general "softness" in the overall domestic
automotive tooling industry. The Company believes that such conditions should
improve in the fourth quarter of fiscal 2004 and the first two quarters of 2005
as a result of recent increased quoting activities. Such tooling programs may
have been delayed for many reasons including continued styling changes,
production related issues as well as the effects of the global automotive supply
chain on the awarding of contracts. The Company continues to be optimistic and
is aggressively pursuing available tooling contracts. For the nine months ended
May 31, 2004, the Company had incurred approximately 247,000 shop floor hours as
compared to 213,000 during the same period of 2003, an increase of 34,000 hours
or 16%.
COST OF SALES - Cost of goods sold increased from $20.3 million for the nine
months ended May 31, 2003 to $21.6 million for the nine months ended May 31,
2004, however as a percent of sales decreased slightly from 90.0% for 2003 to
89.4% for 2004. Direct costs (materials and labor) increased by $890,000
million, from $13.5 million for 2003 to $14.4 million for 2004. Engineering
expense increased by $200,000 from $1.7 million for 2003 to $1.9 million for
2004. Lastly, manufacturing overhead increased by $300,000 from $5.0 million for
2003 to $5.3 million for 2004. Additional details of these changes in cost of
sales for the nine months ended May 31, 2003 and May 31, 2004 are as follows:
- Direct materials expense decreased from $4.1 million to $3.5 million
for the first three quarters of 2003 and 2004, respectively. Outside
services expense increased from $5.3 million for 2003 to $6.0 million for
2004 and as a percent of sales from 23.5% to 24.8%. This increase was
largely due to the Company outsourcing certain manufacturing processes
during the first two quarters of 2004 in an attempt to meet customer
delivery dates while incorporating a high number of customer engineering
changes to the tooling.
- Direct labor expense increased from $4.2 million for 2003 to $4.9
million for 2004 and as a percent of sales increased from 18.4% to 20.4%.
This change was a result of the Company incurring a 16% increase in direct
labor hours, from 213,000 hours in 2003 to 247,000 in 2004. Of the total
direct labor expense, regular or straight time increased by $444,000 and
as a percent of sales from 12.0% for 2003 to 13.0% for 2004. Overtime
expense increased from $1,448,000 for 2003 to $1,785,000 for 2004 and as a
percent of sales, increased from 6.4% for 2003 to 7.4% for 2004 as a
result of the Company attempting to meet customer delivery dates while
incorporating a high number of customer engineering changes to the
tooling.
- Engineering expense increased from $1.7 million, 7.6% of sales, for
2003 to $1.9 million, 7.8% of sales, for 2004. This increase was due to
the Company's level of engineering personnel staffing required to fulfill
the design and project management portions of contracts.
- Manufacturing overhead was $5.0 million or 22.3% of sales for 2003
as compared to $5.3 million or 22.0% of sales for 2004. During 2004,
increases in manufacturing overhead were largely due to increases in
supervision and indirect labor expense, medical insurance premiums and
increases in payroll tax expense.
10
SELLING AND ADMINISTRATIVE EXPENSE - Selling and administrative expense
increased from $1.2 million for the first three quarters of 2003 to $1.4 million
for 2004. As a percent of sales, selling and administrative expense increased
from 5.5% for 2003 to 5.7% for 2004. The largest selling and administrative
expense increases were in salaries and wages and State of Michigan Single
Business Tax expense.
INTEREST EXPENSE - Interest expense decreased from $577,000 for 2003 to $480,000
for 2004. This decrease was largely due to the lower levels of debt during the
comparative periods.
FEDERAL INCOME TAXES
For the three and nine months ended May 31, 2004, the Company recorded a
reduction in the valuation allowance of approximately $81,000 and $234,000,
respectively, to offset the income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended May 31, 2004, the Company's cash used in operating
activities was $1.6 million. This largely resulted from an increase of $5.0
million in receivables and a $3.8 million decrease in contracts in process. From
investing activities, the Company incurred an increase in other assets (cash
surrender value of life insurance policies) of $22,000 and $821,000 in additions
to property, plant and equipment. The Company received net cash from financing
activities of $2.5 million. The cash from financing activities included the
Company receiving $1.3 million through the sale of common stock and borrowed
$1.5 million on it's revolving line of credit while reducing it's long-term debt
by $436,000.
The Company believes that the unused portion of the increased revolving bank
working capital credit line, receipt of progress payments from the Company's
major customer, equity raised during the third quarter and subordinated debt
issued subsequent to the quarter end as well as funds generated from operations
should 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, an evaluation was carried out under the supervision, and with the
participation of the Company's management, including the Chief Executive Officer
(the "CEO") and Chief Financial Officer ("CFO"), of the effectiveness and design
of disclosure controls and procedures used to prepare consolidated financial
statements. Based on that evaluation, the CEO and CFO have concluded the
disclosure controls and procedures designed to ensure that information required
to be disclosed by the Company in reports filed or to be filed with the SEC are
adequate and are operating in an effective manner. While the CEO and CFO believe
that the Company's existing disclosure controls and procedures have been
effective to accomplish its objectives, the CEO and CFO intend to examine,
refine and formalize our disclosure controls and procedures and monitor ongoing
developments.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the most recent evaluation.
Notwithstanding the foregoing, there can be no assurance that the
Company's disclosure controls and procedures will detect or uncover all failures
of persons within the Company to disclose material information otherwise
required to be set forth in the Company's periodic reports.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 2004 the Company received a summons from the U.S. Bankruptcy
Court, Northern District of Illinois regarding National Steel Corporation, which
filed for Chapter XI Bankruptcy on March 6, 2002. The National Steel Corporation
Trust brings this action in an attempt to collect certain purported preferential
transfers made to the Company total $207,710.
ITEM 5. OTHER INFORMATION
On June 16, 2004, the Company executed a new loan agreement with its
primary lender. Under such agreement the existing financing was extended to
December 1, 2007 and the Revolving Line of Credit was increased from $10.0
million to $12.5 million. In addition, the Company received a $500,000
Non-Revolving Capital Equipment Note. Under the new loan agreement, the Company
is required to maintain certain levels of Tangible Effective Net Worth, Debt to
Tangible Net Worth and Debt Service Coverage. At May 31, 2004, the Company was
in compliance with these new covenants.
On July 9, 2004, the Company entered into a Subordinated Loan and Security
Agreement with The Hillstreet Fund II, LP. The Company received $3.0 million in
subordinated debt, due and payable by June 30, 2010. Interest shall be payable
quarterly commencing September 30, 2004 at an interest rate of 14% per annum. In
addition, the Company will accrue 6% interest, compounded quarterly, which shall
be due and payable upon the maturity of the loan principal. Principal shall be
payable in quarterly installments of $250,000 commencing September 30, 2007
until June 30, 2010.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Securities Purchase Agreement, dated March 16, 2004
(Incorporated by reference as Exhibit 10.4 to Registrant's
Registration Statement on Form S-3 (File No. 333-114955) filed
with the Commission on April 28, 2004)
10.2 Registration Rights Agreement, dated March 16, 2004
(Incorporated by reference as Exhibit 10.1 to Registrant's
Registration Statement on Form S-3 (File No. 333-114955) filed
with the Commission on April 28, 2004)
10.3 Form of Series A Warrant, dated March 16, 2004 (Incorporated
by reference as Exhibit 10.2 to Registrant's Registration
Statement on Form S-3 (File No. 333-114955) filed with the
Commission on April 28, 2004)
10.4 Form of Series B Warrant, dated March 16, 2004 (Incorporated
by reference as Exhibit 10.3 to Registrant's Registration
Statement on Form S-3 (File No. 333-114955) filed with the
Commission on April 28, 2004)
10.5 Third Amendment to Line of Credit and Term Loan Agreement,
dated July 9, 2004, with Comerica Bank
10.6 Second Amendment to Line of Credit and Term Loan Agreement
(including Capital Equipment Note), dated June 16, 2004, with
Comerica Bank
10.7 Subordinated Loan and Security Agreement, dated July 10, 2004,
with The Hillstreet Fund II, LP
10.8 Subordinated Note due June 30, 2010, dated July 10, 2004, with
The Hillstreet Fund II, LP
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 March 22, 2004, relating to
private placement and filed with the Commission on March 24, 2004.
12
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, 2004
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)
13