UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-12673
RIVIERA TOOL COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2828870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5460 EXECUTIVE PARKWAY SE
GRAND RAPIDS, MI 49512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 698-2100
Securities registered pursuant Name of Exchange on which
to Section 12(b) of the Act: Title of Each Class Registered
------------------------------ ------------------- -------------------------
Common Stock, no American Stock Exchange
par value
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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).
large accelerated filer [ ] accelerated filer [ ] Non-accelerated filer [X]
Indicate by check whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of February 28, 2006, the registrant's most recently completed second fiscal
quarter, the aggregate market value of the voting common stock of the Registrant
(computed by reference to the closing price of $.68 on the American Stock
Exchange on such date) held by non-affiliates was $2,335,102.
The number of shares outstanding of the Registrant's common stock as of November
29, 2006 was 4,400,458 shares of common stock without par value.
1
RIVIERA TOOL COMPANY
Annual Report on Form 10-K
November 29, 2006
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business........................................................ 3
Item 1A. Risk Factors.................................................... 8
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity Securities... 11
Item 6. Selected Financial Data......................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 24
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 41
Item 9A. Controls and Procedures......................................... 41
Item 9B. Other Information............................................... 41
PART III
Item 10. Directors, Executive Officers and Corporate Governance.......... 41
Item 11. Executive Compensation.......................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................. 46
Item 13. Certain Relationships and Related Transactions and Director
Independence.................................................... 46
Item 14. Principal Accounting Fees and Services.......................... 47
PART IV
Item 15. Exhibits, Financial Statement Schedules......................... 49
SIGNATURES...................................................... 50
2
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain information included, or incorporated by reference in this Annual
Report on Form 10-K and other materials filed or to be filed by Riviera Tool
Company ("Riviera" or the "Company") with the Securities and Exchange Comission
("SEC") contain statements that may be considered forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. In some cases,
you can identify these statements by forward-looking words such as "may,"
"might," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," and the negative of these
terms and other comparable terminology. These forward-looking statements, which
are subject to known and unknown risks, uncertainties and assumptions about the
Company, may include projections of the Company's future financial performance
based on the Company's growth strategies and anticipated trends in the Company's
business. These statements are only predictions based on the Company's current
expectations and projections about future events. There are important factors
that could cause the Company's actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements. In particular, you should consider the numerous risks and
uncertainties outlined in Item 1A.,"Risk Factors."
These risks and uncertainties are not exhaustive. Other sections of this
Annual Report on Form 10-K may include additional factors which could adversely
impact the Company's business and financial performance. Moreover, the Company
operates in a very competitive and rapidly changing environment. New risks and
uncertainties emerge from time to time, and it is not possible for the Company's
management to predict all risks and uncertainties, nor can the Company assess
the impact of all factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Although the Company believes the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, level of activity, performance or achievements. Moreover, neither the
Company nor any other person assumes responsibility for the accuracy or
completeness of any of these forward-looking statements. You should not rely
upon forward-looking statements as predictions of future events. The Company is
under no duty to update any of these forward-looking statements after the date
of this Annual Report on Form 10-K, nor to conform the Company's prior
statements to actual results or revised expectations, and the Company does not
intend to do so.
Forward-looking statements include, but are not limited to, statements about:
- the Company's business strategies and investment policies,
- the Company's possible or assumed future results of operations
and operating cash flows,
- the Company's financing plans and the availability of short-term
borrowing,
- the Company's competitive position,
- potential growth opportunities available to the Company,
- the recruitment and retention of the Company's managing directors
and employees,
- the Company's expected levels of compensation,
- the Company's potential operating performance, achievements,
productivity improvements, efficiency and cost reduction efforts,
- the likelihood of success and impact of litigation,
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- the Company's expected tax rates,
- the Company's expectations with respect to the economy,
securities markets, the market for mergers and acquisitions
activity, the market for asset management activity and other
industry trends,
- the benefits to the Company resulting from the effects of
separation and recapitalization transactions and additional
financing transactions,
- the effects of competition on the Company, and
- the impact of future legislation and regulation on the Company.
OVERVIEW
Riviera Tool Company is a designer and manufacturer of large scale, complex
stamping die systems used to form sheet metal parts. Most of the stamping die
systems sold by the Company are used in the production of automobile and truck
body parts such as roofs, hoods, fenders, doors, door frames, structural
components and bumpers. The following table sets forth the Company's sales (in
millions) and percentage of total sales by major customers, DaimlerChrysler,
General Motors Corporation, Mercedes-Benz and Peterbuilt (the "OEMs") and their
suppliers in fiscal 2004, 2005 and 2006.
YEAR ENDED AUGUST 31,
------------------------------------------
2004 2005 2006
------------ ------------ ------------
CUSTOMER AMOUNT % AMOUNT % AMOUNT %
------------------------------------------- ------ --- ------ --- ------ ---
Suppliers of Mercedes-Benz ................ $20.8 84% $ 5.7 29% $ 3.6 15%
DaimlerChrysler AG ........................ 0.2 1 1.4 7 1.7 7
Suppliers of DaimlerChryslerAG ............ 0.3 1 5.0 26 6.9 29
General Motors Corporation ................ 0.9 4 3.4 18 0.2 1
Suppliers of General Motors Corporation ... 0.5 2 1.6 8 1.7 7
Suppliers of Peterbuilt ................... -- -- -- -- 6.0 25
Other manufacturers and their suppliers ... 2.0 8 2.2 12 3.9 16
----- --- ----- --- ----- ---
Total Sales ............................ $24.7 100% $19.3 100% $24.0 100%
===== === ===== === ===== ===
The Company was originally incorporated in 1967 and was incorporated in its
present form, a "C" Corporation, in 1988, under the laws of the State of
Michigan and maintains a website at www.rivieratool.com.
The Company uses a fiscal year, which ends on August 31. References to
fiscal years 2004, 2005 and 2006 in this document refer to fiscal years ended
August 31, 2004, August 31, 2005, and August 31, 2006, respectively. This Annual
Report on form 10-K may also include "forward-looking statements" which refer to
fiscal years subsequent to the historical financial positions and results of
operations contained herein. References to future fiscal years also apply to the
August 31 year-end.
INDUSTRY TRENDS
The principal factor affecting tooling demand is the level of capital
spending on manufacturing equipment for use in the production of new products or
models and, in the Company's case, predominantly the automotive industry. The
market for U.S. produced tooling has both cyclical and structural factors that
create tooling product demand.
The cyclical factors are associated with the consumer demand levels as well
as capital spending in various end-use sectors. Generally, tooling sales are
less dependent on the level of automotive unit sales, but are more dependent on
the introduction of new and updated product designs into the marketplace. The
introduction of a new automotive model creates a demand for new tooling. This
new tooling then creates the product parts that are assembled into the new
models. Some slight variations in the production platform, such as changes to
the drive train of an automobile,
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may involve no new tooling but may entail slight modifications in existing
tooling in order to allow the production of components with these minor
modifications. For the most part, the vast majority of new models require
completely new tooling.
The structural factors affecting automotive tooling demand include the OEMs
trend to shorter product cycles (30-36 month product cycle) as well as
compressed tooling lead times (9-12 months). Additionally, the implementation of
globalized manufacturing strategies, including the increasing competitiveness of
foreign toolmakers as well as the capture of domestic industry production share
by offshore-based firms, affect domestic automotive tooling demand.
PRODUCTS AND SERVICES
Dies. The Company's dies are used in the high-speed production of sheet
metal stamped parts and assemblies. Production of such parts is a multiple step
process involving a series of dies. Typically, the first die is used to cut the
appropriate size metal blank from a sheet or coil of steel. The next die draws
the metal blank into its primary shape and subsequent dies are used to bend
edges or corners, create flanges, trim-off excess metal and pierce assembly
holes. A customer usually orders only one series of dies for each separate part.
Normally, the dies do not require replacement due to usage because the life of
well-maintained dies is sufficient to carry production to the point when styling
changes dictate production of new dies. The dies manufactured by the Company
generally include automation features, adding to the complexity of design and
construction. These automation features facilitate rapid introduction and
removal of the work piece or raw material into and out of the die, thereby
increasing production speeds and reducing labor cost for part manufacturers.
Engineering of Product and Process. As the OEMs continue their efforts to
reduce lead times of new model launches, the Company produces concurrently,
rather than sequentially, many of its tool designs and manufacturing processes.
In certain instances, before the final design by the customer is complete, the
Company already has ordered many of the raw materials, such as steel, and may
have begun various machining operations. Typically, the Company will receive
part data or descriptions in the form of electronic files, which the customer
wants the Company to use in developing a tool to produce that part. The tool
design is then created by the Company, utilizing computer aided-design ("CAD")
software. The Company then utilizes computer software that simulates the
metal-forming process within the die. This simulation data is then utilized in
final die design to reduce the need for expensive and time-consuming reworking
of the die during the tryout process. Upon completion of tool design, the
Company develops the computer programs (computer-aided-manufacturing ("CAM")
software) which drive the cutter paths on the machine tools. These machine tools
fabricate many components for the tool. A variety of machine tools are utilized
to cut and polish the various parts and surfaces of the tool, including the
Company's high-speed machining centers and 5-axis machining centers, all of
which are computer-numerically-controlled ("CNC"). The process of utilizing
high-speed CNC machining centers reduces the traditional requirement for
expensive and time-consuming hand finishing. After the tool components are
produced or purchased, they are assembled and fitted together.
Prototype Tooling and Parts. Prototype tooling and parts are utilized
during the design phase of new models. The automobile manufacturers validate the
fit and function of the respective components and assemblies and the
repeatability of the respective production processes using these tools. The
parts manufactured from prototype tools are also often used in crash testing.
Typically, prototype tools associated with the primary metal forming
operations are manufactured from an alloy casting or mild steel and subsequently
machined using the mathematical database and related CNC programs. After
machining, the prototype tools are assembled and tested to validate the
integrity and repeatability of the final manufacturing process. The results of
the validation process are incorporated into the mathematical database, which
will then be used to manufacture the final production tools. After testing the
primary forming operations, prototype parts are manufactured using special
means, such as computerized laser-cutting machines, to trim off excess scrap and
to incorporate various slots and holes. These parts are then sent to the
automobile manufacturers for further testing and evaluation. The results of this
testing and evaluation may require the incorporation of additional design and
manufacturing process modifications prior to construction of the production
tooling.
5
MANUFACTURING
The manufacturing process starts when the Company is awarded a tooling
contract. The engineering process commences when an electronic "model" of the
part to be produced is transmitted to the Company as a mathematical database or
electronic files. Company engineers use the mathematical database to generate
computer-aided die designs and die face cutter path programs. These cutter path
programs are used by the machine tools to manufacture the inner workings of the
die. Most material is removed and the cutting is done by CNC machine tools,
which utilize the computer-generated cutter path programs to cut and polish the
various parts of the tool. After the tool components are produced or purchased,
they are assembled and fitted together. Finally, after the die is constructed,
the Company produces a "tryout" or run of parts. These parts are then evaluated
statistically for process repeatability and dimensional validation on the
Company's coordinate measuring machine. During this automated validation
process, the tool is statistically compared to the mathematical database.
On average, 10 months elapse from the time the Company is awarded a
contract until the final set of dies is shipped to the customer.
QS 9000/TE CERTIFICATION
The Company is certified under the Tooling and Equipment Supplement ("TE
Supplement") QS-9000 and ISO-9000 Quality Standards. The TE Supplement/QS-9000
standard was developed jointly by DaimlerChrysler, and General Motors to
establish a single set of quality requirements for their tooling suppliers. ISO
9000 is an international quality standard for all industries.
The TE Supplement has become the international standard of all quality
systems in the tooling industry, designed to ensure that systems are in place to
prevent defects from occurring in the design, manufacturing and validation
phases of our processes. The Company, by receiving the TE Supplement/QS-9000
certification, has demonstrated that its quality systems are in place to meet
customer requirements.
RAW MATERIALS
The steel, castings and other components utilized by the Company in the
manufacturing process are available from many different sources, and the Company
is not dependent on any single source. The Company typically purchases its raw
materials on a purchase order basis as needed and has generally been able to
pass any increase in steel cost to its customers. The Company has been able to
obtain adequate supplies of raw materials for its operations.
MARKETING AND SALES
The Company's marketing emphasis is on DaimlerChrysler, General Motors,
Mercedes-Benz, Peterbuilt Truck and their respective tier one suppliers. The
Company maintains relationships with DaimlerChrysler, General Motors,
Mercedes-Benz and Peterbuilt Truck that directly accounted for approximately 8%,
in the aggregate, of the Company's revenues in 2006. For the year ended August
31, 2006, DaimlerChrysler, General Motors, Mercedes-Benz, Peterbuilt Truck, and
their respective tier one suppliers accounted for approximately 84%, in the
aggregate, of the Company's revenues. For the year ended August 31, 2005,
DaimlerChrysler, General Motors, Mercedes-Benz and Peterbuilt Truck, and their
respective tier one supplier directly accounted for 88%, in the aggregate, of
the Company's revenues.
The Company typically sells its tooling systems to either OEMs directly or
to manufacturers of products under contract with such OEMs (tier one suppliers).
Sales efforts are conducted primarily by the Company's Vice President of Sales,
President, senior management, and project management personnel. Frequent contact
is made with domestic and foreign automobile manufacturers, their purchasing
agents, and platform managers and tier one suppliers. Typically, the Company's
sales process begins when a package or request for quotation is received from
the tier one supplier or OEM. Generally, the Company recommends process and
design changes to improve the cost and quality of a product. The Company
maintains a computer database with historical information regarding dies it has
previously manufactured. This database assists the Company in quoting prices for
dies and enables it to respond to most quotation requests quickly and
accurately. If a customer decides to accept the Company's quotation, a
6
purchase order is issued subject to price adjustments for engineering changes as
requested by the customer. Bids generally are awarded based on technological
capability, price, quality and past performance.
BACKLOG AND SEASONALITY
The Company's backlog of awarded contracts, which are all believed to be
firm, was approximately $5.8 million and $13.7 million as of August 31, 2006 and
2005, respectively. The Company expects all August 31, 2006 backlog contracts
will be reflected in sales no later than fiscal years ending August 31, 2007 and
2008. The Company's sales of stamping dies do not follow a seasonal pattern;
however, the timing of new model introductions and existing model restyling
tooling programs are dependent on DaimlerChrysler, General Motors,
Mercedes-Benz, BMW and their respective introduction of new models.
COMPETITION
Large, complex automotive stamping dies are manufactured primarily by three
supplier groups: a) domestic independent tool and die manufacturers, b) foreign
independent tool and die manufacturers, and c) captive or in-house tool and die
shops owned and operated by OEMs.
The independent tool and die manufacturer industry has significant barriers
to entry, which can reduce competition in the large-scale die market. These
barriers include the highly capital intensive and technically complex
requirements of the industry. Additionally, attracting and retaining employees
skilled in the use of advanced design and manufacturing technology is a
multi-year process. A new competitor most likely would lack much of the
credibility and historical customer relationships that take years to develop.
The OEMs maintain in-house, captive tool and die capacity in order to meet
a portion of their needs. General Motors, for example, maintains the largest
captive capacity and, based on estimates from various trade publications,
supplies an estimated 75-80% of its own die construction needs. Ford produces
approximately 50% and DaimlerChrysler 25% of their own respective needs.
Independent suppliers, like the Company, tend to have a competitive advantage
over the OEMs' in-house die shops due to the OEMs' higher cost structure.
With the advent of simultaneous engineering in the automobile industry,
proximity of the OEMs' design engineers may effect the placement of the die
manufacturer. However, foreign competition may have certain advantages over
domestic die manufacturers including lower capital costs, currency exchange
advantages, government assistance and lower labor costs.
SIGNIFICANT CUSTOMERS
The Company maintains relationships with DaimlerChrysler, General Motors,
Mercedes-Benz and Peterbuilt, which directly accounted for approximately 8%, in
the aggregate, of the Company's revenues in 2006. For the year ended August 31,
2006, DaimlerChrysler, General Motors, Mercedes-Benz, and Peterbuilt and their
respective tier one suppliers accounted for approximately 59%, in the aggregate,
of the Company's revenues.
EMPLOYEES
The Company's work force consists of approximately 140 full-time employees,
of which approximately 30 are managerial and engineering personnel. The balance
consists of hourly employees engaged in manufacturing and indirect labor
support. Included among these hourly workers are approximately 70 skilled
tradesmen who are either journeymen tool and die makers or machinists. None of
the Company's employees are covered by a collective bargaining agreement. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good. The Company has a discretionary contribution 401(K)
plan. The Company has no pension liabilities arising from any defined benefit
plan.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations concerning
emissions to the air, discharges to waterways, and generation, handling,
storage, transportation, treatment and disposal of waste materials. The Company
also is subject to other Federal and state laws and regulations regarding health
and safety issues. The
7
Company believes that it is currently in material compliance with applicable
environmental and health and safety laws and regulations.
ITEM 1A. RISK FACTORS
In addition to factors mentioned elsewhere in this Form 10-K or previously
disclosed in our SEC filings, including our reports on Form 10-Q and Form 8-K,
the factors disclosed below, among others, could cause actual results to differ
materially from those contemplated by the forward-looking statements, and future
results could differ materially from historical performance. The Company
undertakes no obligation to revise the forward-looking statements contained in
this Form 10-K to reflect events after the date of this Form 10-K.
WE HAVE A HISTORY OF OPERATING LOSSES, ANTICIPATE INCURRING LOSSES FOR THE
FORESEEABLE FUTURE AND MAY NEVER BECOME PROFITABLE.
For the fiscal years ended August 31, 2006 and 2005, we had operating losses of
approximately $1,639,000 and $2,502,000, respectively. The report of our
auditors with respect to their examination of our financial statements for the
fiscal year ended August 31, 2006 contains an explanatory paragraph relating to
the preparation of our financial statements on a "going concern" basis, and
states that we have suffered losses from operations and have a retained deficit
that raise substantial doubt about our ability to continue as a going concern.
At August 31, 2006 and 2005, we had accumulated deficits of approximately
$14,788,000 and $13,149,000, respectively. While our management is addressing
conditions which have left substantial doubt about our ability to continue as a
going concern, there is no certainty that we will be successful in implementing
any of the plans of management to restore us to profitability or to otherwise
ensure that we will be able to continue as a going concern.
SHAREHOLDERS MAY SUFFER DILUTION FROM THE EXERCISE OF EXISTING OPTIONS, WARRANTS
AND CONVERSION RIGHTS.
Our common stock may become diluted if warrants and options to purchase our
common stock are exercised or additional shares are issued upon conversion
pursuant to conversion rights by our Senior Lender, Laurus Master Fund, Ltd.
("Laurus"). The number of shares of our common stock that can currently be
purchased upon exercise of warrants is 10,000, upon exercise of options is
831,000 (650,000 of these options are those granted to Laurus) and pursuant to
conversion rights is 2,463,934. Under the terms of our Agreements with Laurus,
the number of shares to be issued upon exercise of options or pursuant to
conversion rights held by Laurus cannot exceed the number of shares that, when
combined with all other shares of common stock and securities then owned by
Laurus, would result in Laurus owning more than 4.99% of our outstanding common
stock at any given point of time (or 19.99% in the event that such limitation is
suspended upon the occurrence of an "event of default" under any of the
transaction agreements between the Company and Laurus).
These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrations under the Securities
Act, or an exemption such as Rule 144 under the Securities Act, may have a
dilutive effect on the market price of our common stock. The terms upon which we
will be able to obtain additional equity capital could also be adversely
affected.
THE INABILITY TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE ON ACCEPTABLE
TERMS COULD DELAY US FROM EXECUTING OUR BUSINESS PLAN OR PREVENT US FROM DOING
SO ENTIRELY.
We expect to need additional capital in the future to fund our operations,
finance investments in equipment and corporate infrastructure, expand our
domestic and global sub-supplier network, increase the range of services we
offer and respond to competitive pressures and perceived opportunities. Cash
flow from operations and cash on hand may not be sufficient to cover our
operating expenses and capital investment needs. We cannot assure you that
additional financing will be available on terms acceptable to us, if at all. A
failure to obtain additional funding could prevent us from making expenditures
that are needed to allow us to grow or maintain our operations.
WE HAVE SIGNIFICANT OUTSTANDING INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS.
8
In order to finance our operations we have incurred indebtedness. Our credit
facility with Laurus is secured by substantially all of our assets. In addition
to certain limited financial covenants, our credit facility restricts our
ability to incur additional indebtedness or to pledge our assets. As of August
31, 2006, we are in compliance with all of the terms of our credit facility with
Laurus. There can be no assurance, however, that we will be able to comply with
the terms of this credit facility in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
information on our outstanding indebtedness.
Our business is subject to all of the risks associated with substantial
leverage, including the risk that available cash may not be adequate to make
required payments. Our ability to satisfy outstanding debt obligations from cash
flow will be dependent upon our future performance and will be subject to
financial, business and other factors, many of which will be beyond our control.
In the event that we do not have sufficient cash resources to satisfy our
repayment obligations, we would be in default, which would have a material
adverse effect on our business. To the extent that we are required to use cash
resources to satisfy interest payments to the holders of outstanding debt
obligations, we will have fewer resources available for other purposes. There is
no assurance that we will not increase our leverage in the future, whether as a
result of operational or financial performance, acquisition or otherwise.
AN INCREASE IN INTEREST RATES WOULD INCREASE THE COST OF SERVICING OUR DEBT AND
COULD REDUCE OUR PROFITABILITY.
Borrowings under our credit facility with Laurus bear or will bear interest at
variable rates and expose us to interest rate risk. If interest rates increase,
whether due to an increase in market interest rates or an increase in our own
cost of borrowing, our debt service obligations for our variable rate
indebtedness would increase even though the amount of borrowings remained the
same, and our net income could be materially adversely affected. As of August
31, 2006, our total outstanding debt of approximately $13.1 million included
interest rate sensitive debt of approximately $12.4 million, which had a
weighted average interest rate of approximately 12.4% per annum.
OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE ONE OR MORE OF OUR MOST
SIGNIFICANT CUSTOMERS WHICH COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON US.
A significant portion of our revenues are concentrated among a few large
customers. For the fiscal year ended August 31, 2006, our largest customer
represented approximately $6.0 million or 25% of total revenue, while the next
three largest customers represented approximately $10.4 million or 43% of total
revenue. Our three largest customers represented 61% and 84% of total revenue
for each of the fiscal years ended 2006 and 2005, respectively. The loss of any
of these customers could have a significant adverse impact on us.
THERE IS NO ASSURANCE THAT WE WILL REMAIN LISTED ON AN ACTIVE TRADING MARKET.
Although our common stock is quoted on the American Stock Exchange ("Amex"),
there can be no assurance that we will, in the future, be able to meet all the
requirements for continued quotation thereon. Amex approved a plan submitted by
us to regain compliance with our continued listing requirements by August 9,
2007. Although we believe we can achieve our plan, there can be no assurance
that we can successfully do so. In the absence of an active trading market or if
our common stock cannot be traded on the Amex, our common stock could instead be
traded on the Electronic Bulletin Board or on the Pink Sheets. In such event,
the liquidity and stock price in the secondary market may be adversely affected.
In addition, in the event our common stock was delisted, broker-dealers have
certain regulatory burdens imposed upon them, which may discourage
broker-dealers from effecting transactions in our common stock, further limiting
the liquidity of our common stock.
OUR STOCK PRICE IS VOLATILE.
Our stock price, like that of other small cap companies, is subject to
significant volatility because of factors such as quarterly variations in our
operating results, changes in revenue or earnings estimates by the investment
community and speculation in the press or investment community. In addition, our
stock price is affected by unfavorable global economic and market conditions. If
such conditions deteriorate, our stock price could decline.
WE DEPEND ON OUR SENIOR MANAGEMENT, THE LOSS OF WHOM WOULD HAVE AN ADVERSE
IMPACT ON US.
9
We presently are dependent upon the executive abilities of our President and
Chief Executive Officer, Kenneth K. Rieth, our Chief Financial Officer, Peter C.
Canepa, and our other executive officers. Our business and operations to date
chiefly have been implemented under the direction of these individuals, who
presently are, and in the future will be, responsible for the implementation of
our anticipated plans and programs. The loss or unavailability of the services
of one or more of our principal executives would have an adverse effect on us.
Given our present financial condition, we may encounter difficulty in our
ability to recruit and ultimately hire any replacement or additional executive
officers having similar background, experience and qualifications as those of
our current executive officers.
THE MARKETS SERVED BY US ARE HIGHLY CYCLICAL AND OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED AS A RESULT OF GENERAL ECONOMIC AND MARKET
CONDITIONS.
We are subject to the effects of general global economic and market conditions.
The automotive industry is highly cyclical and dependent on consumer spending.
Economic factors adversely affecting automotive production and consumer spending
could adversely impact our business. If economic and market conditions
deteriorate, our business, results of operations or financial condition could be
materially adversely affected. An economic downturn may also impact
substantially leveraged companies, such as ourselves, more than similarly
situated companies with less leverage.
LABOR INTERRUPTIONS COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Within the automotive supply industry substantially all of the hourly employees
of the OEMs and many Tier I suppliers are represented by labor unions, and work
pursuant to collective bargaining agreements. The failure of any of our
significant customers to reach agreement with a labor union on a timely basis,
resulting in either a work stoppage or strike, could have an adverse impact on
our business.
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF WAR OR ACTS
OF TERRORISM.
Terrorist acts or acts of war may cause damage or disruption to our employees,
facilities, customers and partners, which could have a material adverse effect
on our business, results of operations or financial condition. Such conflicts
may also cause damage or disruption to transportation and communication systems
and to our ability to manage logistics in such an environment, including receipt
of materials and distribution of products.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATION, WHICH COULD HAVE AN ADVERSE IMPACT
ON US.
We are subject to the requirements of federal, state and local environmental and
occupational health and safety laws and regulations. Although we have made and
will continue to make expenditures to comply with environmental requirements,
these requirements are constantly evolving, and it is impossible to predict
whether compliance with these laws and regulations may have a material adverse
effect on us in the future. If a release of hazardous substances occurs on or
from our property or from any of our disposals at offsite disposal locations, or
if contamination is discovered at any or our current or former properties, we
may be held liable, and the amount of such liability could be material.
10
ITEM 2. PROPERTIES
The Company's facility is located in Grand Rapids, Michigan, and consists
of approximately 177,000 square feet of space, of which 28,000 square feet is
utilized for office, engineering and employee service functions. Constructed in
1989, the facility is leased with a lease term expiring in 2018. The facility
lease provides for annual payments of $944,847 plus an escalation of base rent
of approximately $.14 per square foot. The Company has an option to renew this
lease for an additional ten-year term at a rate based upon the then prevailing
market rates for similar properties. The Company believes its facilities are
modern, well maintained, adequately insured and suitable for their present and
intended uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation matters in the ordinary course
of its business. No such pending matters, individually or in the aggregate, if
adversely determined, are believed by management to be material to the business
or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There we no matters submitted to a vote of any of the Company's security
holders, through the solicitation of proxies or otherwise, during the fourth
quarter of our fiscal year ended August 31, 2006.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock ("Common Stock") is traded on the Amex under the
symbol RTC. The Common Stock commenced trading on the AMEX on March 7, 1997,
through an initial public offering of the Company's Common Stock. The table and
chart below sets forth the high and low sales prices as reported by AMEX for
each period reported.
FISCAL 2005 FISCAL 2006
------------- -------------
PERIOD HIGH LOW HIGH LOW
--------------- ----- ----- ----- -----
1st quarter.... $2.60 $1.75 $0.96 $0.50
2nd quarter.... $2.05 $0.85 $1.00 $0.51
3rd quarter.... $1.69 $1.02 $0.83 $0.53
4th quarter.... $1.55 $0.85 $0.68 $0.41
11
\
STOCK PRICE CHART- FISCAL 2005 AND 2006
(PERFORMANCE GRAPH)
1Q 2005 2Q 2005 3Q 2005 4Q 2005 1Q 2006 2Q 2006 3Q 2006 4Q 2006
------- ------- ------- ------- ------- ------- ------- -------
HIGH CLOSING PRICE $2.60 $2.05 $1.69 $1.55 $0.96 $1.00 $0.83 $0.68
LOW CLOSING PRICE $1.75 $0.85 $1.02 $0.85 $0.50 $0.51 $0.53 $0.41
QUARTER CLOSING PRICE $2.45 $1.28 $1.12 $0.93 $0.50 $0.63 $0.53 $0.44
As of November 18, 2005, there were 40 holders of record of the Company's
Common Stock. The number of holders of record of the Company's Common Stock on
October 31, 2005 was computed by a count of record holders. The Company has
4,400,458 shares of Common Stock outstanding as of November 29, 2006.
The Company has not historically paid cash dividends on its Common Stock.
The payment of Common Stock cash dividends is within the discretion of the
Company's Board of Directors, with prior written consent of its primary lender;
however, in view of the current working capital needs and in order to finance
future growth, it is unlikely that the Company will pay any cash dividends on
its Common Stock in the foreseeable future.
OPTION PLAN
A summary of the status of the Option Plan and Key Option Plan during the
years presented is as follows:
EQUITY COMPENSATION PLAN INFORMATION
The Company's 1996 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and approved by the stockholders on October 31, 1996. Under
the Option Plan, 250,000 shares of Common Stock were reserved for issuance and
are intended to qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended. Stock options granted to Company personnel under the
option plan are at exercise prices equal to the market value of the stock on the
date of grant. The options vest one year from the date of option grant and
recipients must be employed by the Company at the time of exercise.
The Company's 1998 Key Employee Stock Option Plan (the "Key Option Plan")
was adopted by the Board of Directors and approved by the stockholders on
December 16, 1998. Under the Key Option Plan, 200,000 shares of Common Stock
were reserved for issuance and do not qualify as incentive stock options under
the Internal Revenue Code of 1986, as amended. Stock options granted to Company
personnel and Directors under the option plan are at exercise prices equal to
the market value of the stock on the date of grant. The options vest one year
from the date of option grant and recipients must be employed by the Company at
the time of exercise.
12
A summary of the status of the Option Plan and Key Option Plan during the
years' presented is as follows (no stock options were granted previous to fiscal
1999 under the 1996 Stock Option Plan and the 1998 Key Employee Stock Option
Plan):
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
----------------------------------- -------------------- -------------------- --------------------
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS:
1996 Stock Option Plan, as amended 80,000 shares $4.83 per share 170,000 shares
1998 Key Employee Stock Option Plan 101,000 shares $5.20 per share 99,000 shares
-------------- --------------- --------------
Total 181,000 shares $5.05 per share 269,000 shares
============== =============== ==============
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7) and the Financial Statements (Item 8) and related Notes
contained herein. All amounts are in thousands, except per share data.
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------------------
STATEMENT OF OPERATIONS DATA: 2002 2003 2004 2005 2006
---------------------------------------------------- ------- ------- ------- ------- -------
Sales............................................... $14,050 $34,084 $24,689 $19,274 $24,041
Gross profit (loss)................................. (630) 3,377 (5,349) 2,292 2,704
Income (loss) from operations....................... (2,289) 1,687 (7,363) (498) 278
Interest expense.................................... 653 779 872 1,643 1,913
Other expense....................................... 59 8 6 361 4
Income (loss) before income taxes................... (3,002) 900 (8,241) (2,502) (1,639)
Income taxes........................................ -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) available for common shares....... $(3,002) $ 900 $(8,241) $(2,502) $(1,639)
======= ======= ======= ======= =======
Basic and diluted earnings (loss) per common share.. $ (.89) $ .27 $ (2.18) $ (.65) $ (.39)
======= ======= ======= ======= =======
Basic and diluted common shares outstanding......... 3,379 3,379 3,774 3,835 4,258
OTHER DATA:
Depreciation and amortization expense............... $ 1,913 $ 1,840 $ 1,758 $ 1,673 $ 1,848
AS OF AUGUST 31,
-----------------------------------------------
BALANCE SHEET DATA: 2002 2003 2004 2005 2006
--------------------------------------- ------- ------- ------- ------- -------
Working Capital (Deficit) ............. $(3,513) $ 7,762 $(6,954) $ 1,539 $ 4,088
Total Assets .......................... 24,984 33,751 27,898 21,217 21,543
Current Portion of Long-Term Debt ..... 3,855 639 15,735 3,288 1,758
Revolving Line of Credit .............. 6,500 5,982 9,850 6,535 9,797
Long-term Debt, less current portion .. -- 2,418 -- 2,335 1,205
Common Stockholders' Equity ........... 11,810 12,710 5,780 3,982 2,492
The following table sets forth, for the periods indicated, selected operating
data as a percentage of sales.
FISCAL YEAR ENDED AUGUST 31,
--------------------------------
STATEMENT OF OPERATIONS DATA: 2002 2003 2004 2005 2006
------------------------------------------------ ---- ---- ---- ---- ----
Sales .......................................... 100% 100% 100% 100% 100%
Gross profit (loss) ............................ (4) 10 (22) 12 11
Income (loss) from operations .................. (16) 5 (30) (2) 1
Interest expense ............................... 5 2 3 9 8
Other expense .................................. -- -- -- 2 --
Income (loss) before income taxes .............. (21) 3 (33) (13) (7)
Income taxes ................................... -- -- -- -- --
--- --- ---- ---- ---
Net income (loss) available for common shares .. (21%) 3% (33%) (13%) (7%)
=== === ==== ==== ===
OTHER DATA:
Depreciation and amortization expense .......... 14% 5% 7% 9% 7%
14
QUARTERLY FINANCIAL DATA
The following is a condensed summary of quarterly results of operations for
fiscal 2005 and 2006 (in thousands, except per share data):
BASIC AND DILUTED
NET LOSS -------------------
GROSS OPERATING AVAILABLE LOSS COMMON
PROFIT INCOME FOR COMMON PER SHARES
PERIOD SALES (LOSS) (LOSS) SHARES SHARE OUTSTANDING
----------------- ------- ------ --------- ---------- ----- -----------
2005: First ..... $ 4,553 $ 514 $ (65) $ (465) $(.12) 3,774
Second .... 4,981 829 (38) (428) (.11) 3,774
Third ..... 4,687 580 (80) (776) (.20) 3,807
Fourth .... 5,053 369 (315) (833) (.22) 3,836
------- ------ ----- ------- ----- -----
Total .. $19,274 $2,292 $(498) $(2,502) $(.65) 3,836
======= ====== ===== ======= ===== =====
2006: First ..... $ 6,063 $ 596 $ 30 $ 441 $(.11) 3,984
Second .... 6,953 967 369 (135) (.03) 4,258
Third ..... 6,136 1,179 508 18 -- 4,258
Fourth .... 4,889 38 (629) (1,081) (.25) 4,258
------- ------ ----- ------- ----- -----
Total .. $24,041 $2,704 $ 278 $(1,639) $(.39) 4,258
======= ====== ===== ======= ===== =====
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company is a designer and manufacturer of large scale, complex stamping
die systems used to form sheet metal parts. Most of the stamping die systems,
sold by the Company, are used in the high-speed production of automobile and
truck body parts such as doors, frames, structural components and bumpers. A
majority of the Company's sales are to DaimlerChrysler, General Motors
Corporation, Mercedes-Benz, BMW and their tier one suppliers of sheet metal
stamped parts and assemblies.
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-
15
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.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share-Based
Payments" that will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the grant
date fair value of the equity or liability instruments issued. In addition,
liability awards will be re-measured each reporting period. Compensation costs
will be recognized over the period that an employee provides services in
exchange for the award. SFAS No. 123 (R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation", and supercedes Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
SFAS No. 123 (R) became effective on September 1, 2005 and the adoption of this
standard did not have a material effect on the Company's financial statements.
Under the modified prospective method transition of SFAS 123R, compensation
costs related to any non-vested portion of stock option awards outstanding at
the adoption date are based on the grant date fair value of those awards. Since
all stock options previously granted under the Company's plans were fully vested
prior to August 31, 2002, there are no deferred compensation costs resulting
from stock options to be accounted for on a prospective basis. There were no
further stock options issued for all years presented.
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.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During fiscal year 2005, the
Company sustained a loss from operations of $498,282 and a net loss of
$2,502,248 resulting in an accumulated deficit of $13,148,735. For fiscal 2006,
the Company realized income from operations of $278,265 and a net loss of
$1,639,218 resulting in an accumulated deficit of $14,787,953. 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 2007. However, depending on the Company's level of future sales, terms of
such sales, financial performance and cash flow of existing contracts, such
financing may not be sufficient to support operations. Therefore, the Company
may be required to seek additional sources of funding.
IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets for impairment if changes in circumstances or the
occurrence of events suggest the remaining value may not be recoverable. An
asset is deemed impaired and written down to its fair value if estimated related
total future undiscounted cash flows are less than its book (carrying) value. In
performing our evaluation of long-lived assets for impairment, we utilized
undiscounted cash flows based on the assets estimated remaining useful lives. In
developing the projections, we estimated revenues for each year and estimated
resulting margins based upon various assumptions including future market pricing
trends and historical financial costs. The analysis concluded that the estimated
total undiscounted future cash flows were in excess of the carrying value of
long-lived assets. Had the analysis concluded that the total undiscounted future
cash flows been below the carrying value, an impairment charge of the difference
between the carrying value and the lower of the total discounted cash flows or
fair value would have been recorded.
16
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the Notes thereto included elsewhere
herein.
FISCAL 2005 COMPARED TO FISCAL 2006
REVENUE
FISCAL YEAR ENDED PERCENT
-------------------- INCREASE/ INCREASE/
2005 2006 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
Total Revenue ...... $ 19.3 m $ 24.0 m $ 4.7 m 24%
Contract Backlog ... $ 13.7 m $ 5.8 m $ (7.9) m (58%)
Shop Floor Hours ... 249,000 297,000 48,000 19%
Total revenue increased from approximately $19.3 million in 2005 to $24.0
million in fiscal 2006, an increase of 24%. This was a result of the Company
experiencing a strong contract backlog of $13.7 million as of August 31, 2005,
which resulted in an increase of 19% in shop floor hours and increased revenues
in fiscal 2006.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $5.8 million and $13.7 million as of August 31, 2006 and 2005,
respectively, a decrease of 58%. The decrease in backlog is a result of the OEMs
delaying new model releases as well as the tooling industry global
competitiveness and resulting contract pricing pressures. The Company expects
all backlog contracts will be reflected in sales during fiscal years ending
August 31, 2007 and 2008.
COST OF GOODS SOLD
FISCAL YEAR ENDED PERCENT
----------------- INCREASE/ INCREASE/
2005 2006 (DECREASE) (DECREASE)
----- ----- ---------- ----------
Direct Costs .............. $ 8.3 m $12.4 m $ 4.1 m 49%
Engineering Expense ....... $ 2.2 m $ 2.1 m $(0.1) m (5%)
Manufacturing Overhead .... $ 6.5 m $ 6.8 m $ 0.3 m 5%
----- ----- ----- ---
Total Cost of Goods Sold .. $17.0 m $21.3 m $ 4.3 m 25%
===== ===== ===== ===
Due to the increase in total revenue cost of goods sold increased from $17.0
million for fiscal 2005 to $21.3 million for fiscal 2006 and, as a percent of
sales, increasing from 88% for fiscal 2005 to 89% for fiscal 2006. Direct costs
(materials and labor) increased by $4.1 million, from $8.3 million for fiscal
2005 to $12.4 million for fiscal 2006. Engineering expense slightly decreased by
$0.1 million from $2.2 million for fiscal 2005 to $2.1 million for fiscal 2006.
Lastly, of the cost of goods sold, manufacturing overhead increased by $0.3
million from $6.5 million for fiscal 2005 to $6.8 million for fiscal 2006.
Additional details of these changes in cost of sales for fiscal 2005 and fiscal
2006 are as follows:
- Direct materials expense increased from $2.8 million for 2005 to $4.2
million for fiscal 2006 and as a percent of sales from 15% to 18%.
This increase was largely due to higher contract material requirements
during fiscal 2006 as compared to fiscal 2005. Outside services
expense increased from $0.4 million for fiscal 2005 to $2.3 million
for fiscal 2006 and as a percent of sales from 2% to 9% due to
increased revenue volumes and related outsourced components of the
manufacturing process
17
- Direct labor expense increased by 18% from $5.0 million for fiscal
2005 to $5.9 million for fiscal 2006 however, as a percent of sales,
decreased from 26% to 25%. This change was a result of the Company
incurring a 19% increase in direct labor hours, from 249,000 hours in
fiscal 2005 to 297,000 in fiscal 2006. Of the total direct labor
expense, regular or straight time increased 15% or $0.5 million
however, as a percent of sales, decreased from 17% for fiscal 2005 to
16% for fiscal 2006. Overtime expense increased 9% or $0.2 million,
from $1.6 million for fiscal 2005 to $1.8 million for fiscal 2006
however, as a percent of sales, remained consistent at 8%.
- Engineering expense decreased from $2.2 million, or 11% of sales, for
fiscal 2005 to $2.1 million, or 9% of sales, for fiscal 2006. This
decrease was largely as a result of a $90,000 decrease in engineering
and project management salaries expense.
- Manufacturing overhead expense for fiscal 2006 increased to $6.8
million or 28% of sales, from $6.5 million or 34% of sales in fiscal
2005. During fiscal 2006, increases in manufacturing overhead were
largely attributed to increases of $150,000 in labor and payroll tax
expenses, $85,000 in manufacturing supplies expense, $74,000 in health
and workers compensation insurance expense, $59,000 in utilities
expense, $45,000 in perishable tool expense and $19,000 in building
maintenance and supplies expense. These increases were offset by
decreases of $89,000 in facility rent expense and $88,000 in
depreciation expense. The decrease of approximately 5% of
manufacturing overhead, as a percent of sales, was largely due to
increased overhead absorption resulting from higher sales volumes in
fiscal 2006.
SELLING AND ADMINISTRATIVE EXPENSE
FISCAL YEAR ENDED PERCENT
----------------- INCREASE/ INCREASE/
2005 2006 (DECREASE) (DECREASE)
---- ---- ---------- ----------
Selling & Administrative Expense .. $2.8 m $2.4 m $0.4 m 14%
Selling and administrative expense for fiscal 2006 decreased to $2.4 million or
10% of sales, from $2.8 million or 15% of sales in fiscal 2005. This decrease
was largely a result of the Company incurring $0.7 million in legal and
professional fees during fiscal 2005 as a result of the Company's former primary
lender, Comerica Bank, requiring the Company to retain the services of a
consulting company and reimburse the lender's legal counsel during fiscal 2005.
Such expenses totaled approximately $0.5 million. The remaining decreases in
Selling and Administrative expense include a $44,000 decrease in bad debt
expense, $40,000 decrease in officer and office salaries and a $29,000 decrease
in lodging and travel expense. These decreases were offset by increases of
$184,000 in public company and directors fees expense and $27,000 in the State
of Michigan Single Business Tax expense.
INTEREST EXPENSE
FISCAL YEAR ENDED PERCENT
----------------- INCREASE/ INCREASE/
2005 2006 (DECREASE) (DECREASE)
---- ---- ---------- ----------
Interest Expense .................. $1.6 m $1.9 m $0.3 m 19%
Interest expense increased from $1.6 million for fiscal 2005 to $1.9 million for
fiscal 2006. This increase was due to increase in total weighted average
long-term debt being higher in fiscal 2006 as compared to fiscal 2005. However,
for the first three quarters of fiscal 2005, the Company was in default of its
then bank covenants and incurred default rates under such agreements which
offset the lower debt levels as compared to fiscal 2006. On a weighted-average
effective rate basis, the Company incurred a rate of 13.9% in fiscal 2005 as
compared to 12.3% in fiscal 2006. In addition, interest expense includes debt
discount amortization expense of $198,250 for fiscal 2006 as
18
compared to $104,000 in fiscal 2005. The following table illustrates the
Company's total long-term debt on a quarterly basis during fiscal 2006 and
fiscal 2005.
TOTAL LONG TERM DEBT
(BAR CHART)
2005 2006
------- -------
NOV. 30 $14,827 $13,566
FEB. 28 $ 8,210 $14,568
MAY 31 $10,254 $14,138
AUG. 31 $12,755 $13,159
WEIGHTED-AVERAGE $11,512 $13,858
FISCAL 2004 COMPARED TO FISCAL 2005
REVENUE
FISCAL YEAR ENDED PERCENT
------------------- INCREASE/ INCREASE/
REVENUE 2004 2005 (DECREASE) (DECREASE)
------------------------------- -------- -------- ---------- ----------
Total Revenue.................. $ 24.7 m $ 19.3 m $ (5.4) m (22%)
Contract Backlog............... $ 2.5 m $ 13.7 m $ 11.2 m 448%
-------- -------- -------- ---
Shop Floor Hours............... 318,000 249,000 (69,000) (22%)
======== ======== ======== ===
Total revenue decreased from approximately $24.7 million in fiscal 2004 to $19.3
million in fiscal 2005, a decrease of 22%. This decrease was a result of the
Company experiencing a low contract backlog of $2.5 million as of August 31,
2004, which resulted in a decrease of 22% in shop floor hours and lower sales in
fiscal 2005.
COST OF GOODS SOLD
FISCAL YEAR ENDED PERCENT
------------------- INCREASE/ INCREASE/
COST OF GOODS SOLD 2004 2005 (DECREASE) (DECREASE)
------------------------------- -------- -------- ---------- ----------
Direct Costs................... $20.6 m $ 8.3 m $(12.3) m (60%)
Engineering Expense............ $ 2.4 m $ 2.2 m $ (0.2) m (8%)
Manufacturing Overhead......... $ 7.0 m $ 6.5 m $ (0.5) m (7%)
----- ----- ------ ----
Total Cost of Goods Sold....... $30.0 m $17.0 m $ (13) m (43%)
===== ===== ====== ====
19
Cost of goods sold decreased from $30.0 million for fiscal 2004 to $17.0 million
for fiscal 2005 and, as a percent of sales, decreasing from 122% for fiscal 2004
to 88% for fiscal 2005. Direct costs (materials and labor) decreased by $12.3
million, from $20.6 million for fiscal 2004 to $8.3 million for fiscal 2005.
Engineering expense decreased by $0.2 million from $2.4 million for fiscal 2004
to $2.2 million for fiscal 2005. Lastly, of the cost of goods sold,
manufacturing overhead decreased by $0.5 million from $7.0 million for fiscal
2004 to $6.5 million for fiscal 2005. Additional details of these changes in
cost of sales for fiscal 2004 and fiscal 2005 are as follows:
- Direct materials expense decreased from $4.2 million for fiscal 2004
to $2.8 million for fiscal 2005 and as a percent of sales from 17% to
15%. This decrease was largely due to lower contract material
requirements during fiscal 2005 as compared to fiscal 2004. During
fiscal 2005, the Company's contract mix included an increase in die
component machining work for the OEMs. Such contracts have lower
direct material requirements as compared to construction contracts, as
materials are supplied by our customer. Outside services expense
decreased from $9.7 million for fiscal 2004 to $0.4 million for fiscal
2005 and as a percent of sales from 39% to 2%. This decrease was
largely due to the Company incurring $7.2 million of expense related
to its outsourced projects in fiscal 2004. The balance of the outside
services expense was due to lower sales volumes and internalizing of
certain machining work, which was historically outsourced.
- Direct labor expense decreased by 26% from $6.7 million for fiscal
2004 to $5.0 million for fiscal 2005 and, as a percent of sales,
decreasing from 27% to 26%. This change was a result of the Company
incurring a 22% decrease in direct labor hours, from 318,000 hours in
fiscal 2004 to fiscal 249,000 in 2005. Of the total direct labor
expense, regular or straight time decreased 24% or $1.1 million and,
as a percent of sales, decreased from 18% for fiscal 2004 to 17% for
fiscal 2005. Overtime expense decreased 30% or $0.7 million, from $2.3
million for fiscal 2004 to $1.6 million for fiscal 2005 and, as a
percent of sales, decreasing from 9% for fiscal 2004 to 8% for fiscal
2005.
- Engineering expense decreased from $2.4 million, or 10% of sales, for
fiscal 2004 to $2.2 million, or 11% of sales, for fiscal 2005. This
decrease was largely as a result of a $0.2 million decrease in
engineering salaries and related payroll taxes expense.
- Manufacturing overhead was $6.5 million or 34% of sales for fiscal
2005 as compared to $7.0 million or 28% of sales for fiscal 2004.
During fiscal 2005, decreases in manufacturing overhead were largely
attributed to decreases of $154,000 in labor and payroll tax expenses,
$148,000 in manufacturing supplies expense, $86,000 in health and
workers compensation insurance expense, $77,000 in depreciation
expense and $52,000 in building maintenance and supplies expense. The
increase of approximately 6% of manufacturing overhead, as a percent
of sales, was largely due to lower overhead absorption resulting from
lower sales volumes in fiscal 2005.
SELLING AND ADMINISTRATIVE EXPENSE
FISCAL YEAR ENDED PERCENT
SELLING & ADMINISTRATIVE ------------------- INCREASE/ INCREASE/
EXPENSE 2004 2005 (DECREASE) (DECREASE)
------------------------------- -------- -------- ---------- ----------
Selling & Administrative
Expense..................... $2.0 m $2.8 m $0.8 m 40%
Selling and administrative expense for fiscal 2005 increased to $2.8 million or
15% of sales, from $2.0 million or 8% of sales in fiscal 2004. This increase was
largely a result of the Company incurring an additional $0.7 million in legal
and professional fees during fiscal 2005. The largest increase related to the
Company's former primary lender, Comerica Bank, requiring the Company to retain
the services of a consulting company and reimburse the lender's legal counsel.
Such expenses totaled approximately $0.5 million. The remaining increases in
legal and professional expenses were incurred in regards to the Company's
litigation, refinancing and S-1 filing.
20
INTEREST EXPENSE
FISCAL YEAR ENDED PERCENT
------------------- INCREASE/ INCREASE/
INTEREST EXPENSE 2004 2005 (DECREASE) (DECREASE)
------------------------------- -------- -------- ---------- ----------
Interest Expense............... $0.9 m $1.6 m $0.7 m 78%
Interest expense increased from $0.9 million for fiscal 2004 to $1.6 million for
fiscal 2005. During the first three quarters of fiscal 2005 the Company was
under a Forbearance Agreement with its then primary lender - Comerica Bank.
Under such agreement the Company was charged a higher interest rate on its debt
(from prime plus 1.25% in fiscal 2004 to prime plus 4% in 2005) as well as an
additional $0.1 million in forbearance fees during fiscal 2005.
The following table illustrates the Company's total long-term debt on a
quarterly basis during fiscal 2005 and fiscal 2004.
TOTAL LONG TERM DEBT
(BAR CHART)
2004 2005
------- --------
NOV. 30 $ 4,712 $14,827
FEB. 28 $ 4,967 $ 8,210
MAY 31 $10,168 $10,254
AUG. 31 $15,755 $12,755
WEIGHTED-AVERAGE $ 8,901 $11,512
OTHER EXPENSE -SUBORDINATED DEBT FINANCING COSTS
During the third quarter of fiscal 2005, the Company retired its $3.0 million
subordinated debt with Hillstreet Capital. This subordinated debt was paid prior
to the scheduled retirement and resulted in the Company expensing approximately
$0.3 million of debt issuance costs during fiscal 2005. These debt issuance
costs were originally capitalized at the time of the transaction (fiscal 2004)
and were being amortized over the original repayment schedule.
21
FISCAL 2006:
FEDERAL INCOME TAX
The Company's effective income tax rate was 0% for the years ended August 31,
2004, 2005 and 2006. The Company had approximately $164,000 of alternative
minimum tax credits as of August 31, 2006, the use of which does not expire, and
federal net operating loss carryforwards of $7,915,000, which expire, if unused,
commencing fiscal 2022 through fiscal 2026. The Company has a valuation
allowance of $4,615,000 and $4,964,000 at August 31, 2005 and 2006,
respectively, for net deferred tax assets, which may not ultimately be realized.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED
LIQUIDITY AND CAPITAL ------------------------
RESOURCES 2005 2006
---------------------------- ------------ ---------
Cash Flow From/(Used in):
- Operations.............. $ 3,484,815 $(734,785)
- Investing Activities.... $ 356,163 $ 102,630)
- Financing Activities.... $(3,602,703) $ 553,859
For the fiscal year ended August 31, 2006, the Company's cash flow utilized in
operating activities was $735,000. This mainly resulted from an increase of
$5.25 million in accounts receivable, net of allowance for uncollectible
accounts receivable, partially offset by $2.95 million decrease in contracts in
process and a $1.2 million increase in accounts payable. From investing
activities, the Company incurred $127,000 in additions to property, plant and
equipment and a $229,000 increase in other assets. The Company's net cash from
financing activities was $554,000. The cash from financing activities included
additional borrowings under its Revolving Line of Credit of $3.3 million. These
funds from financing activities were partially offset by reductions of debt of
$2.7 million.
On May 17, 2005, the Company entered into a new senior loan facility agreement
with Laurus. In connection with this facilty, the Company received a Term Loan
in the aggregate principal amount of $3.2 million as well as a Revolving Credit
Facility with a maximum availability of $10.0 million. Each of the Term Loan and
any loans under the Revolving Facility are convertible by Laurus into shares of
the Company's common stock at a rate of $1.66 per share. In addition, as part of
the agreement, the Company issued an option to purchase 650,000 shares of its
Common Stock at an exercise price of $.01.
The Company, in issuing an option for 650,000 shares at $.01 per share,
triggered price protection provisions in previously issued warrants. Under the
previous warrant agreements, if the Company issued warrants or options below the
strike price of the warrants, the exercise price of the outstanding warrants
would adjust to the lower exercise price. The Company had previous warrants for
315,792 shares of common stock with 157,896 shares priced at an exercise price
of $5.07 per share and 157,896 priced at $5.53 per share. During 2005, certain
warrant holders exercised such warrants at the adjusted price of $.01 per share
and the Company issued an additional 210,528 shares of common stock.
The Company believes that the revolving line of credit and the funds generated
from operations, will be sufficient to cover anticipated cash needs through
fiscal 2007. Subsequent to fiscal 2006, the Company received an additional $1.0
million overformula from Laurus bringing the total overformula to $1.5 million.
This additional overformula is available to be drawn by the Company as required.
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.
22
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The table below presents our significant contractual obligations as of August
31, 2006:
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
----------- ----------- ----------- ---------- -----------
Long-term obligations(1)... $15,616,485 $1,609,389 $14,007,096 $ -- $ --
Operating Lease............ 15,202,605 998,712 3,116,817 3,355,827 7,731,249
Capital Lease.............. 4,835 4,835 -- -- --
----------- ---------- ----------- ---------- ----------
Total Obligations $30,823,925 $2,612,936 $17,123,913 $3,355,827 $7,731,249
=========== ========== =========== ========== ==========
(1) Includes interest on both fixed and variable-rate long-term obligations.
The interest associated with variable-rate obligations is based on interest
rates in effect at August 31, 2006. The contractual amounts to be paid on
variable-rate obligations are impacted by changes in market interest rates,
which could have a material effect on the contractual amounts to be paid.
INFLATION.
The Company has no long-term, fixed price supply contracts. Although the average
set of dies takes approximately ten months from inception to shipment, any
significant direct material costs are incurred at the beginning of the die
manufacturing process. Historically, the Company has been able to reflect
increases in the prices of labor and material in its selling prices, however
under current industry pricing pressures, the Company is unsure if this will
continue to be the case in the future.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following table provides information on the Company's debt as of August
31, 2006 and 2005 that are sensitive to changes in interest rates.
AMOUNT
AS OF AUGUST 31, 2006 OUTSTANDING MATURITY DATE
------------------------------------------------------- ----------- ----------------
CONVERTIBLE REVOLVING NOTE:
- Variable rate revolving credit line at an
interest rate of prime rate plus 1.25% (as of
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 January 31, 2006
AMOUNT
AS OF AUGUST 31, 2005 OUTSTANDING MATURITY DATE
------------------------------------------------------- ----------- ----------------
CONVERTIBLE REVOLVING NOTE:
- 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 18, 2008
SECURED CONVERTIBLE TERM NOTE:
- At an interest rate of prime plus 4.00% (as of
August 31, 2005, an effective rate of 10.75%)... $3,200,000 May 18, 2008
OVERFORMULA:
- 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
24
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Riviera Tool Company
Grand Rapids, Michigan
We have audited the accompanying balance sheet of Riviera Tool Company as of
August 31, 2006, and the related statements of operations, common stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Riviera Tool Company as of
August 31, 2006, and the results of its operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a retained deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN LLP
November 29, 2006
25
Board of Directors and Stockholders
Riviera Tool Company
Grand Rapids, Michigan
We have audited the accompanying balance sheet of Riviera Tool Company (the
"Company") as of August 31, 2005, and the related statements of operations,
common stockholders' equity and cash flows for each of the two years in the
period ended August 31, 2005. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Riviera Tool Company as of August 31, 2005,
and the results of its operations and its cash flows for each of the two years
in the period ended August 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Riviera
Tool Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has significant current debt, was not in
compliance with certain terms of its debt agreements, and had losses from
operations and a retained deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
November 30, 2005
26
RIVIERA TOOL COMPANY
BALANCE SHEETS
AUGUST 31
---------------------------
NOTE 2005 2006
---- ------------ ------------
ASSETS
Current Assets
- Cash .......................................................... $ 239,475 $ 161,179
- Accounts receivable, net ...................................... 5,232,138 10,488,082
- Costs in excess of billings/(billings in excess of
costs) on contracts in process ............................. 4 2,844,444 (105,711)
- Inventories ................................................... 5 236,437 249,962
- Prepaid expenses and other current assets ..................... 453,597 330,361
------------ ------------
Total current assets ....................................... 9,006,094 11,123,873
- Property, plant and equipment, net ............................ 6 10,902,845 9,438,948
- Perishable tooling ............................................ 708,319 610,048
- Other assets .................................................. 599,344 370,052
------------ ------------
Total assets ............................................... $ 21,216,599 $ 21,542,921
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- Current portion of long-term debt ............................. 7 $ 3,287,510 $ 1,757,631
- Accounts payable .............................................. 3,517,578 4,745,328
- Accrued liabilities ........................................... 661,833 533,929
------------ ------------
Total current liabilities .................................. 7,466,921 7,036,088
- Long-term and subordinated debt, net of unamortized discount .. 7 8,870,045 11,002,033
- Accrued lease expense ......................................... 9 897,885 995,084
- Other long-term liabilities ................................... -- 16,386
------------ ------------
Total liabilities .......................................... 17,234,851 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 -- 9,798,575 shares
Issued and outstanding -- 3,984,874 and 4,257,601 at
August 31, 2005 and 2006, respectively ..................... 17,130,483 17,280,483
- Retained deficit .............................................. (13,148,735) (14,787,953)
------------ ------------
Total common stockholders' equity ............................. 3,981,748 2,492,530
------------ ------------
Total liabilities and stockholders' equity ................. $ 21,216,599 $ 21,542,921
============ ============
See Notes to Financial Statements
27
RIVIERA TOOL COMPANY
STATEMENTS OF OPERATIONS
YEAR ENDED AUGUST 31
---------------------------------------
2004 2005 2006
----------- ----------- -----------
Sales ..................................... $24,689,221 $19,273,505 $24,041,337
Cost of sales ............................. 30,038,654 16,981,201 21,337,441
----------- ----------- -----------
Gross profit (loss) ....................... (5,349,433) 2,292,304 2,703,896
Selling and administrative expenses ....... 2,013,594 2,790,586 2,425,631
----------- ----------- -----------
Income (loss) from operations ............. (7,363,027) (498,282) 278,265
Other income (expense):
- Interest expense ................... (871,900) (1,643,299) (1,913,064)
- Other .............................. (6,551) (15,469) (4,418)
- Subordinated debt financing costs .. -- (345,198) --
----------- ----------- -----------
Total other expense, net .................. (878,451) (2,003,966) (1,917,483)
Loss before income taxes .................. (8,241,478) (2,502,248) (1,639,218)
----------- ----------- -----------
Income taxes .............................. -- -- --
----------- ----------- -----------
Net loss available for common shares ...... $(8,241,478) $(2,502,248) $(1,639,218)
=========== =========== ===========
Basic and diluted loss per common share ... $ (2.18) $ (.65) $ (.39)
----------- ----------- -----------
Weighted-Average basic and diluted common
shares outstanding ..................... 3,774,346 3,835,750 4,257,601
See Notes to Financial Statements
28
RIVIERA TOOL COMPANY
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
----------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
--------- ----------- ------------ -------------
Balance -- August 31, 2003 ......... 3,379,609 $15,115,466 $ (2,405,009) $12,710,457
========= =========== ============ ===========
- Sale of Common Stock ........ 394,737 1,310,912 -- 1,310,912
- Net loss .................... -- -- (8,241,478) (8,241,478)
========= =========== ============ ===========
Balance -- August 31, 2004 ......... 3,774,346 $16,426,378 $(10,646,487) $ 5,779,891
========= =========== ============ ===========
- Sale of Common Stock ........ 210,528 2,105 -- 2,105
- Issuance of Options ......... -- 702,000 -- 702,000
- Net loss .................... -- -- (2,502,248) (2,502,248)
--------- ----------- ------------ -----------
Balance -- August 31, 2005 ......... 3,984,874 $17,130,483 $(13,148,735) $ 3,981,748
========= =========== ============ ===========
- Conversion of Term Debt to
Common Stock ................ 272,727 150,000 -- 150,000
- Net loss .................... -- -- (1,639,218) (1,639,218)
--------- ----------- ------------ -----------
Balance -- August 31, 2006 ......... 4,257,601 $17,280,483 $(14,787,953) $ 2,492,530
========= =========== ============ ===========
See Notes to Financial Statements
29
RIVIERA TOOL COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31
---------------------------------------
2004 2005 2006
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss .................................................. $(8,241,478) $(2,502,248) $(1,639,218)
Adjustments to reconcile net loss to net cash from
(used in) operating activities:
- Depreciation and amortization ......................... 1,757,862 1,673,470 1,848,014
- Debt discount amortization............................. -- 104,000 198,250
Decrease (increase) in operating assets:
- Accounts receivable ................................... (6,065,246) 7,843,147 (5,255,944)
- Costs in excess of billings on contracts in process ... 11,539,523 (2,175,301) 2,950,155
- Inventories ........................................... 10,258 1,864 (13,525)
- Perishable tooling .................................... (108,982) 18,385 (159,184)
- Prepaid expenses and other current assets ............. 58,940 (218,394) 123,236
Increase (decrease) in operating liabilities:
- Accounts payable ...................................... (111,662) (1,391,315) 1,227,750
- Accrued outsourced contracts payable .................. (5,903,930) -- --
- Accrued lease expense ................................. 100,204 156,991 97,199
- Accrued liabilities ................................... 85,297 140,690 (127,904)
- Deferred compensation ................................. 166,475 (166,474) --
- Other long-term liabilities ........................... -- -- 16,386
----------- ----------- -----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES ..... (6,712,739) 3,484,815 (734,785)
INVESTING ACTIVITIES
- (Increase) decrease in other assets ................... (298,437) 603,732 229,292
- Purchases of property, plant and equipment ............ (1,040,319) (247,569) (126,662)
----------- ----------- -----------
CASH FLOWS FROM (USED) IN INVESTING ACTIVITIES ..... (1,338,756) 356,163 102,630
FINANCING ACTIVITIES
- Proceeds from issuance of convertible term debt ....... -- 3,200,000 --
- Proceeds from issuance of convertible revolving note .. -- 6,534,727 --
- Proceeds from/(reduction in) overformula note ......... -- 2,000,000 (1,450,000)
- Debt issue costs ...................................... -- (579,491) --
- Net borrowings (repayments) on revolving credit line .. 3,867,172 (9,849,532) 3,262,511
- Proceeds from issuance of long-term debt .............. 435,100 -- --
- Principal payments on long-term debt .................. (606,059) (1,877,646) (1,250,783)
- Proceeds from/(repayment) of subordinated debt ........ 3,000,000 (3,000,000) --
- Increase/ (decrease) of capital lease ................. 20,070 (7,366) (7,869)
- Deferred interest ..................................... 25,500 (25,500) --
- Proceeds from sale of common stock .................... 1,310,912 2,105 --
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES ..... 8,052,695 (3,602,703) 553,859
----------- ----------- -----------
INCREASE (DECREASE) IN CASH ........................ 1,200 238,275 (78,296)
----------- ----------- -----------
Cash -- beginning of year ................................. -- 1,200 239,475
Cash -- end of year ....................................... $ 1,200 $ 239,475 $ 161,179
=========== =========== ===========
Interest paid ............................................. $ 481,900 $ 1,414,728 $ 1,800,217
Conversion of term debt to common stock ................... $ -- $ -- $ 150,000
See Notes to Financial Statements
30
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS.
Riviera Tool Company (the "Company") designs, develops and manufactures
custom and complex large scale metal stamping die systems used in the
high-speed production of sheet metal stamped parts and assemblies for the
automotive industry. These systems are mainly sold to DaimlerChrysler,
General Motors Corporation, Mercedes-Benz, Peterbuilt Trucks, BMW and their
tier one suppliers of sheet metal stamped parts and assemblies.
USE OF ESTIMATES.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Although
management believes the estimates are reasonable, actual results could
differ from those estimates.
SIGNIFICANT ESTIMATES.
The most significant estimates made by the Company are in the determination
and recognition of revenue on contracts in process. Management's best
estimates of costs to complete are based on costs incurred, engineers' cost
projections, experience with customers or particular die systems and other
analyses. Although management's estimates are not expected to materially
change in the near term, the costs the Company could ultimately incur could
differ from the amounts estimated.
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 and revenue is recognized when
all costs 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.
Amounts billed to customers for shipping and handling are included in net
sales, while shipping and handling costs incurred by the Company are
included in cost of sales.
ACCOUNTS RECEIVABLE.
Accounts receivable obligations are due under normal trade terms. The
Company reviews a customer's credit history before extending credit and
in most cases files liens on tools sold to customers.
Management reviews accounts receivable periodically to determine if any
amounts will potentially be uncollectible. Any amounts that are determined
are included in the estimated uncollectible accounts receivable. As of
August 31, 2005 and 2006, the Company had a $153,124 for estimated
uncollectible accounts receivable, and had $84,365 and $142,171 of unbilled
accounts receivable (completed contracts for which revenue earned exceeds
amounts billed), respectively. Although the estimated uncollectible
accounts receivable is based on management's knowledge of current events
and actions it may take in the future, the estimate may ultimately differ
from actual results.
INVENTORIES.
Inventories are recorded at the lower of cost (first-in, first-out method)
or market.
PROPERTY, PLANT AND EQUIPMENT.
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful life of
the asset as follows:
31
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PROPERTY, PLANT AND EQUIPMENT - CONTINUED
ASSET USEFUL LIVES
-------------------------------------- ------------
- Leasehold Improvements............ 7-20
- Office Furniture and Fixtures..... 3-10
- Machinery and Equipment........... 5-20
- Computer Equipment and Software... 3-20
- Transportation Equipment.......... 5-10
Expenditures for maintenance and repairs are charged to expense as
incurred. The Company capitalizes interest cost associated with
construction in process. There was no capitalized interest in 2004, 2005
and 2006.
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company reviews long-lived assets for impairment if changes in
circumstances or the occurrence of events suggest the remaining value may
not be recoverable. An asset is deemed impaired and written down to its
fair value if estimated related total future undiscounted cash flows are
less than its book (carrying) value. The Company, in performing its
evaluation of long-lived assets for impairment, utilized financial
projections for five future years including total undiscounted cash flow.
The analysis concluded that the estimated total undiscounted future cash
flows were in excess of the carrying value of long-lived assets. Had the
analysis concluded that the total undiscounted future cash flows been below
the carrying value, an impairment charge of the difference between the
carrying value and the lower of the total discounted cash flows or fair
value would have been recorded.
PERISHABLE TOOLING.
Perishable tools are generally used up over five years, reported at cost as
non-current assets in the balance sheet and amortized evenly over their
useful lives.
INCOME TAXES.
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future. Such
deferred income tax asset and liability computations are based upon enacted
tax laws and rates applicable to periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets
and liabilities.
EARNINGS PER SHARE.
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 year ended August 31, 2006.
STOCK-BASED COMPENSATION.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation," and as
permitted by this standard, will continue to apply the recognition and
measurement principles prescribed under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", to its stock-based
compensation (see Note 10). No stock-based compensation cost is
32
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION - CONTINUED.
reflected in net income (loss), as all options granted under its plan had
an exercise price equal to the market value of the underlying common stock
on the date of grant. Had the Company applied the fair value recognition
principles of SFAS No. 123, there would be no impact on net income (loss)
for the years ended August 31, 2004, 2005 and 2006.
BUSINESS SEGMENT REPORTING.
Based on the nature of its operations and products, the Company considers
its business to be a single operating segment.
NEW ACCOUNTING STANDARDS.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share-Based
Payments" that will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the grant
date fair value of the equity or liability instruments issued. In addition,
liability awards will be re-measured each reporting period. Compensation costs
will be recognized over the period that an employee provides services in
exchange for the award. SFAS No. 123 (R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation", and supercedes Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
SFAS No. 123 (R) became effective on September 1, 2005 andthe adoption of this
standard did not have a material effect on the Company's financial statements.
Under the modified prospective method transition of SFAS 123R, compensation
costs related to any non-vested portion of stock option awards outstanding at
the adoption date are based on the grant date fair value of those awards. Since
all stock options previously granted under the Company's plans were fully vested
prior to August 31, 2002, there are no deferred compensation costs resulting
from stock options to be accounted for on a prospective basis. There were no
further stock options issued for all years presented.
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.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During fiscal year 2005, the
Company sustained a loss from operations of $498,282 and a net loss of
$2,502,248 resulting in an accumulated deficit of $13,148,735. For fiscal 2006,
the Company realized income from operations of $278,265 and a net loss of
$1,639,218 resulting in an accumulated deficit of $14,787,953. 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 2007. However, depending on the Company's level of future sales, terms of
such sales, financial performance and cash flow of existing contracts, such
financing may not be sufficient to support operations. Therefore, the Company
may be required to seek additional sources of funding.
33
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- SALES TO MAJOR CUSTOMERS
The nature of the Company's business is such that a limited number of customers
comprise a majority of its business in any given year, even though the specific
customers will differ from year to year. The following table summarizes the
Company's sales to customers that represent more than 10% of annual sales in the
particular year presented (in 000's):
AUGUST 31
---------------------------------------------
CUSTOMER 2004 % 2005 % 2006 %
------------------------------- ------- --- ------- --- ------- ---
- General Motors ............ $ 938 4% $ 3,425 18% $ 210 1%
- Imperial Fabricators ...... -- -- -- -- 5,961 25%
- L+W Engineering ........... -- -- 2,429 13% 3,797 16%
- Magna (and subsidiaries) .. -- -- -- -- 4,760 20%
- Checker Motors ............ -- -- -- -- 1,839 7%
- DaimlerChrysler AG ........ 209 1% 1,372 7% 1,737 7%
- Oxford Automotive ......... 18,640 75% 1,022 5% -- --
- Others .................... 4,902 20% 11,026 57% 5,737 24%
------- --- ------- --- ------- ---
Total Sales ............. $24,689 100% $19,274 100% $24,041 100%
======= === ======= === ======= ===
Outstanding accounts receivable from three of these customers represented
approximately 60 percent at August 31, 2005 and 2006 of the total accounts
receivable.
During the year ended August 31, 2005, Gestamp Alabama ("Gestamp"), the alleged
successor to Oxford Automotive, Inc. ("Oxford"), and Mercedes-Benz U.S.
International, Inc. ("MBUSI") brought a civil action against the Company. On
August 1, 2005, the Company reached a Settlement Agreement and Mutual Release
with Gestamp and MBUSI. Under such settlement, Gestamp and MBUSI paid certain
claims against the Company by its' subcontactors and the Company has agreed to
provide certain services to Gestamp and MBUSI over the next three years. The
value of such services total $1.8 million which was accrued and expensed in
fiscal 2004 and is recorded as a liability of the Company on its August 31, 2005
and 2006 balance sheets.
NOTE 4 -- COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
AUGUST 31
------------------------
2005 2006
---------- -----------
- Costs incurred on contracts in process under the
percentage-of-completion method .................... $7,042,817 $12,981,159
- Estimated net gross profit/(loss) ..................... (25,000) 675,000
---------- -----------
Total .............................................. 7,017,817 13,656,159
- Less progress payments received and billings to date .. 4,173,373 13,761,870
---------- -----------
Costs/(Billings)in excess of billings/(Costs) on
contracts in process ............................ $2,844,444 $ (105,711)
Included in estimated gross profit/(loss) for 2005 and 2006 are contracts with
estimated loss accrued of $190,430 and $480,658, respectively.
34
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- INVENTORIES
Inventories consist of the following:
AUGUST 31
-------------------
2005 2006
-------- --------
- Raw material stock........ $122,933 $138,839
- Small tools and supplies.. 113,504 111,123
-------- --------
Total................... $236,437 $249,962
======== ========
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
AUGUST 31
-------------------------
2005 2006
----------- -----------
- Leasehold improvements................. $ 1,489,302 $ 1,338,712
- Office furniture and fixtures.......... 174,524 104,313
- Machinery and equipment................ 23,135,344 21,696,157
- Computer equipment and software........ 2,854,788 1,264,779
- Transportation equipment............... 109,782 102,036
----------- -----------
Total cost ......................... 27,763,740 24,505,997
- Accumulated depreciation and
amortization........................ 16,860,895 15,067,049
----------- -----------
Property, plant and equipment, net... $10,902,845 $ 9,438,948
=========== ===========
NOTE 7 -- LONG-TERM AND SUBORDINATED DEBT
The Company's long-term and subordinated debt, which is subject to certain
covenants discussed below, consists of the following:
AUGUST 31,
-----------------------
DEBT TYPE 2005 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 $10 million. The
credit line is due May 17, 2008, and
bears interest, payable monthly, at
prime rate plus 1.25% (as of August 31,
2006, an effective rate of 9.5%)....... $6,534,727 $9,797,238
OVERFORMULA
- The overadvance loan is due February 1,
2007 and bears interest at prime rate
plus 1.25% (as of August 31, 2006, an
effective rate of 9.5%)................ 2,000,000 550,000
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 August 31,
2006, an effective rate of 12.25%)..... 3,200,000 2,036,364
35
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- LONG-TERM AND SUBORDINATED DEBT - CONTINUED
AUGUST 31,
-------------------------
DEBT TYPE 2005 2006
----------------------------------------------- ----------- -----------
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%.................. 1,008,124 770,977
OTHER
- Other...................................... 12,704 4,835
----------- -----------
Total debt.............................. 12,755,555 13,159,414
----------- -----------
Less: unamortized debt discount......... 598,000 399,750
Less: current portion of long-term
debt and unamortized debt discount... 3,287,510 1,757,631
----------- -----------
Long-term debt, net of
unamortized discount........... $ 8,870,045 $11,002,033
=========== ===========
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 $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 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 conversion date. In addition, the Company issued
an option to Laurus for the purchase of 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 fiscal 2006 and 2005, the Company recorded $192,250 and $104,000 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 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.
In conjunction with the May 17, 2005 senior loan facility agreement, the Company
issued options to purchase 650,000 shares at $.01 per share. The issuance of the
650,000-share option triggered a price protection clause related to the Series A
Warrants. Under the Series A Warrant agreements, if the Company issued warrants
or options below the strike price ($5.07 and $5.53), the exercise price of the
outstanding Series A Warrants would adjust to the lower exercise price ($.01 per
share). 210,528 warrants were exercised during 2005 at a price of $.01 per
share.
On December 9, 2005, the Company agreed to convert $150,000 of Principal of its
Convertible Note Payable into 272,727 shares of common stock at a conversion
rate of 4.55 per share. In addition, 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.
36
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- LONG-TERM AND SUBORDINATED DEBT - CONTINUED
Minimum scheduled principal payments on long-term debt to maturity as of August
31, 2006, are as follows:
FISCAL YEAR ENDED AUGUST 31, AMOUNT
---------------------------- -----------
- 2007.................... $ 1,441,631
- 2008.................... 11,522,756
- 2009.................... 195,027
- 2010.................... --
- 2011.................... --
-----------
Total................ $13,159,414
-----------
The estimated fair value of the Company's notes payable approximates its
carrying amount.
NOTE 8 -- FEDERAL INCOME TAXES
The provision for federal income taxes is as follows:
AUGUST 31
------------------
2004 2005 2006
---- ---- ----
- Current expense......... $-- $-- $--
- Deferred expense........ -- -- --
--- --- ---
Income tax expense... $-- $-- $--
=== === ===
The difference between the federal statutory tax rate and the Company's
effective rate was:
AUGUST 31
--------------------
2004 2005 2006
---- ---- ----
- Federal statutory tax rate...... 34% (34%) (34%)
- Effect of valuation allowance... (34%) 34% 34%
--- --- ---
Effective tax rate........... -- -- --
=== === ===
The details of the net deferred tax liability are as follows:
AUGUST 31
-------------------------
2005 2006
----------- -----------
Deferred tax liabilities:
- Depreciation.................................. $(3,287,537) $(3,391,000)
----------- -----------
Deferred tax assets:
- Alternative minimum tax credit carryforward... 164,288 164,288
- Accrued lease expense......................... 305,281 272,000329
- Deferred compensation and other items......... 128,867 808,
- Net operating loss carryforward............... 7,303,721 7,111,000
----------- -----------
Total deferred tax assets.................. 7,902,157 8,355,288
- Valuation allowance recognized for net
deferred tax assets....... (4,614,620) (4,964,288)
----------- -----------
Net deferred tax liability................. $ -- $ --
=========== ===========
The net operating loss carryforwards will expire, if unused, commencing fiscal
2022 through fiscal 2006.
37
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 9 -- OPERATING LEASES
The Company leases its manufacturing and office facilities under a
noncancellable operating lease that expires on October 31, 2018. The agreement
provides for annual lease payments plus an escalation of approximately $.14 per
square foot for the lease term. The Company has an option to renew this lease
for an additional 10-year term at a rate based upon the then prevailing market
rates for similar-type properties. Generally accepted accounting principles
require that rent expense related to this type of lease be recognized ratably
over the term of the lease. The difference between the rent payments made and
the amount of expense recognized has been recorded as accrued lease expense (a
liability). For the years ended August 31, 2004, 2005 and 2006, the cash
payments made exceeded the lease expense by $100,204, $156,990 and $97,199,
respectively. The Company has various operating leases, including the
noncancellable operating lease noted above, that expire during the next 15
years. Rent expense under these leases for the years ended August 31, 2004, 2005
and 2006 amounted to $1,098,955, $1,155,522, and $1,066,603, respectively.
On March 31, 2006, the Company entered into a sublease with another company for
space in the Company's facility. The agreement commenced March 31, 2006 and
expires on March 31, 2009. The agreement provides for annual lease payments
ranging from $63,000 to $65,545.
The following is a schedule of future minimum rent payments required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of August 31, 2006.
LEASE
YEAR ENDING AUGUST 31, PAYMENTS
----------------------------------------- -----------
- 2007................................. $ 1,013,135
- 2008................................. 1,039,332
- 2009................................. 1,064,351
- 2010................................. 1,090,548
- 2011................................. 1,083,925
- 2012 and after....................... 9,996,528
-----------
Total minimum payments required... $15,287,819
===========
NOTE 10 -- RETIREMENT PLANS
The Company has a profit-sharing plan that covers substantially all employees.
The plan includes a 401(k) deferred-compensation option and a Company matching
contribution. The plan allows for discretionary Company contributions as
determined annually by the Company's Board of Directors. No discretionary
contributions were made for the years-ended August 31, 2004, 2005, and 2006.
Effective January 1, 2002, the Company suspended its matching share of the
employees' contribution.
The Company has an Executive Deferred Compensation Plan with an officer who
retired December 31, 2004. Under the plan, the Company will pay to the retired
individual, his heirs and assignees a retirement benefit equal to $50,000 per
year for five years. At the time of retirement, the Company had a key-man life
insurance policy for $250,000 on the executive. During fiscal 2005, the Company
transferred the policy to the retired individual based upon a value of $100,000.
In addition, the Company paid $107,840 during fiscal 2005 and the remaining
liability of $42,160 in fiscal 2006.
NOTE 11 -- STOCK OPTION PLANS
The Company's 1996 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and approved by the stockholders on October 31, 1996. Under
the Option Plan, 250,000 shares of Common Stock were reserved for issuance and
are intended to qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended. Stock options granted to Company personnel under the
Option Plan are at exercise prices equal to the market value of the stock on the
date of grant. The options vest one year from the date of grant and recipients
must be employed by the Company at the time of exercise.
38
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 11 -- STOCK OPTION PLANS - CONTINUED
The Company's 1998 Key Employee Stock Option Plan (the "Key Option Plan") was
adopted by the Board of Directors and approved by the stockholders on December
16, 1998. Under the Key Option Plan, 200,000 shares of Common Stock were
reserved for issuance and do not qualify as incentive stock options under the
Internal Revenue Code of 1986, as amended. Stock options granted to Company
personnel and Directors under the Key Option Plan are at exercise prices equal
to the market value of the stock on the date of grant. The options vest one year
from the date of grant and recipients must be employed by the Company at the
time of exercise.
A summary of the status of the Option Plan and Key Option Plan during the years'
presented is as follows:
WEIGHTED AVERAGE
1996 STOCK OPTION PLAN, AS AMENDED SHARES EXERCISE PRICE
---------------------------------------------- ------- ----------------
Outstanding at end of year, August 31, 2003 110,000 $ 4.83
======= ======
Fiscal Year Ended August 31, 2004
- Stock options granted .................... -- --
------- ------
Outstanding at end of year, August 31, 2004 110,000 $ 4.83
======= ======
Fiscal Year Ended August 31, 2005
- Stock options forfeited................... (10,000) $6.625
- Stock options forfeited................... (20,000) $ 3.75
------- ------
Outstanding at end of year, August 31, 2005 80,000 $ 4.83
======= ======
Fiscal Year Ended August 31, 2006
- Stock options granted..................... -- --
------- ------
Outstanding at end of year, August 31, 2006 80,000 $ 4.83
======= ======
1998 KEY EMPLOYEE STOCK OPTION PLAN
Outstanding at end of year, August 31, 2003 103,000 $ 5.20
======= ======
Fiscal Year Ended August 31, 2004
- Stock options granted..................... -- --
------- ------
Outstanding at end of year, August 31, 2004 103,000 $ 5.20
======= ======
Fiscal Year Ended August 31, 2005
- Stock options forfeited................... (1,000) $ 3.75
- Stock options forfeited................... (1,000) $6.625
------- ------
Outstanding at end of year, August 31, 2005 101,000 $ 5.20
======= ======
Fiscal Year Ended August 31, 2006
- Stock options granted/(forfeited)......... -- --
------- ------
Outstanding at end of year, August 31, 2006 101,000 $ 5.20
======= ======
39
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 12 -- WARRANTS AND OPTION
On March 16, 2004, the Company sold 394,737 shares of common stock in a private
placement with four accredited investors for $1,500,000. In connection with this
purchase, the Company issued Series A Warrants for eighty percent warrant
coverage of the initial shares purchased (315,792 shares) with half of such
warrants having an exercisable price of 110% of the average of the 20
consecutive Closing Prices immediately prior to March 16, 2004 (exercise price
of $5.07 per share) and the other half with an exercise price of 120% of the
average of the 20 consecutive Closing Prices immediately prior to March 16, 2004
(exercise price of $5.53 per share). Such Series A Warrants are exercisable for
five years commencing six months from the Closing date. In addition, the Company
issued Series A Warrants to purchase up to 20,000 shares of common stock at the
same terms to the broker of the transaction.
In conjunction with the May 17, 2005 senior loan facility agreement, the Company
issued options to purchase 650,000 shares at $.01 per share. The issuance of the
650,000-share option triggered a price protection clause related to the Series A
Warrants. Under the Series A Warrant agreements, if the Company issued warrants
or options below the strike price ($5.07 and $5.53), the exercise price of the
outstanding Series A Warrants would adjust to the lower exercise price ($.01 per
share). 210,528 warrants were exercised during 2005 at a price of $.01 per
share. The remaining warrants for 125,792 shares, which were not exercised,
expired during fiscal 2006.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Deloitte & Touche LLP had been the public accounting firm retained by the
Company since 1999 and resigned on January 13, 2005. Riviera and Deloitte agreed
that the resignation was not the result of any disagreement between the Company
and Deloitte & Touche, LLP on matters of accounting principles, practices,
financial statement disclosure, auditing scope or procedure. On February 14,
2006, the Company appointed BDO Seidman, LLP as the Company's new independent
registered public accounting firm for fiscal year ended August 31, 2006.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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
fourth fiscal quarter ended August 31, 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 next fiscal year, which will end
on August 31, 2007. The Company has begun documentation of processes for its
internal controls and will comply with Section 404 as required.
ITEM 9B. OTHER INFORMATION
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our present Directors and Executive Officers are as follows:
COMMITTEES OF THE BOARD
OF DIRECTORS
CLASS OF BOARD OF ---------------------------------
POSITION DIRECTOR DIRECTORS AUDIT COMPENSATION GOVERNANCE
-------------------------------- -------- --------- ----- ------------ ----------
Kenneth K. Rieth............. Chairman, C.E.O III CHAIRMAN
James V. Gillette............ Director III X CHAIR X CHAIR
Dr. Jay S. Baron............. Director II X X CHAIR X
J. Dann Engels............... Director I X X X X
Peter C. Canepa.............. C.F.O, Treasurer, Secretary
Thomas J. Winters............ Vice President of Sales
Brian Rieth.................. Vice President & General Manager
There are no family relationships among any of the directors or executive
officers of the Company with the exception of Brian Rieth whose compensation is
based upon an arms-length transaction upon prevailing salaries for similar
positions within the industry.
Set forth below is each Director and Executive Officer's name and the year in
which he first became a Director, and a brief account of the business experience
of each Director and Executive Officer during the past five years
41
DIRECTORS:
KENNETH K. RIETH DIRECTOR SINCE 1980 AGE 47
Mr. Rieth has been Chief Executive Officer and President of Riviera Tool
Company since 1980.
DR. JAY S. BARON DIRECTOR SINCE 2002 AGE 41
Dr. Jay S. Baron has been a Director of Riviera Tool Company since October
of 2002. Dr. Baron holds a Ph.D. and Master's Degree in Industrial and
Operations Engineering. Dr. Baron currently is President and Chief
Executive Officer of the Center for Automotive Research. Previously, Dr.
Baron was the Manager of Manufacturing Systems for the University of
Michigan's OSAT department
JAMES V. GILLETTE DIRECTOR SINCE 2004 AGE 51
Mr. Gillette has been a Director of Riviera Tool Company since January of
2004. Mr. Gillette currently is Director of Supplier Analysis of CSM
Worldwide, a provider of specialized global automotive industry advice to
commercial and investment banks, private equity firms, investment analysts
and others. Previously, Mr. Gillette spent thirteen years as vice president
of automotive forecasting at IRN, Inc.
J. DANN ENGELS DIRECTOR SINCE 2005 AGE 50
Mr. Engels has been a Director of Riviera Tool Company since January of
2005. Mr. Engels holds Bachelor degrees in Letters and Engineering
Industrial and Operations Engineering. In addition, he holds Masters'
Degrees in both Mechanical Engineering and Industrial and Operations
Engineering. Mr. Engels is the founder and director of Global Rush, an
international automotive parts and tooling sourcing strategist, Optiprise,
a lean manufacturing consulting business, and ISC Software, a materials
handling software developer.
EXECUTIVE OFFICERS:
PETER C. CANEPA AGE 48
Mr. Canepa has been Chief Financial Officer, Secretary and Treasurer of the
Company since March of 1994.
THOMAS J. WINTERS AGE 65
Mr. Winters has been Vice President of Sales of the Company since June of
1996.
BRIAN RIETH AGE 44
Mr. Rieth has been Vice President and General Manager of the Company since
August of 2001.
DIRECTOR COMPENSATION
Directors who are employees of Riviera Tool Company receive no additional
compensation for serving on the board of directors. On an annual basis, a
non-employee director receives a fee of $5,000.
COMMITTEES OF THE BOARD AND MEETINGS
The Board held four meetings during the fiscal year ended August 31, 2006.
All directors attended at least 75% of the meetings of the Board during fiscal
2006. Our Board has an Audit Committee, a Compensation Committee and a
Nominating/Corporate Governance Committee.
The Audit Committee, which presently consists of Messrs. Gillette, Baron
and Engels held five meetings during fiscal 2006. All members attended at least
80% of the meetings. In the event a member was unable to participate in any
given meeting, the Chairman of the Audit Committee briefed, in full, such
absentee member as to the discussion at such meeting. The Audit Committee
reviews and satisfies itself as to the adequacy of the structure of our
financial organization and as to the proper implementation of our financial
reporting and accounting policies. Mr. Gillette serves as Chairman of the Audit
Committee, and our Board has determined that Mr. Gillette is an "Audit Committee
financial expert" as defined in Item 401 of Regulation S-K. We believe that each
of our Audit Committee members is financially sophisticated and able to read and
understand our financial statements. A copy of the Audit Committee Charter is
attached as Exhibit 14.3 on the Company's Annual Report on Form 10K.
42
The Compensation Committee, which presently consists of Messrs. Gillette,
Baron and Engels and makes recommendations to the Board as to salaries, bonuses,
and other forms of compensation for our Chief Executive Officer, other executive
officers, and other members of senior management. Dr. Baron serves as Chairman
of the Compensation Committee. During fiscal 2006 the Compensation Committee
held no meetings. A copy of the Compensation Committee Charter is attached as
Exhibit 14.4 on the Company's Annual Report on Form 10K.
Our Nominating/Corporate Governance Committee, which consists of Messrs.
Gillette, Baron and Engels, is responsible for identifying and evaluating
nominees for director and for recommending the nominees for election at our
Annual Meeting of Stockholders. During fiscal 2006, the Nominating/Corporate
Governance Committee held one meeting. Mr. Gillette serves as Chairman of the
Nominating/Corporate Governance Committee. Each of the members of the
Nominating/Corporate Governance Committee is independent as defined by Section
803 to the AMEX Company Guide. The Nominating/Corporate Governance Committee
recommend for nomination the director nominee set forth in this Proxy Statement.
In evaluating the suitability of individuals for Board membership, our
Nominating/Corporate Governance Committee takes into account many factors,
including whether the individual meets requirements for independence; the
individual's general understanding of the various disciplines relevant to the
success of a publicly-traded company; the individual's understanding of our
businesses and markets; the individual's professional expertise and educational
background; and other factors that promote diversity of views and experience.
Our Nominating/Corporate Governance Committee evaluates each individual in the
context of our Board as a whole, with the objective of recommending a group of
directors that can best perpetuate the success of the business and represent
stockholder interests through the exercise of sound judgment, using its
diversity of experience. In determining whether to recommend a director for
re-election, our Nominating/Corporate Governance Committee considers a
director's past attendance at meetings and participation in, and contributions
to, the activities of the Board. Our Nominating/Corporate Governance Committee
has not established any specific minimum qualification standards for nominees to
our Board, although from time to time our Board may identify certain skills or
attributes (e.g., financial experience and investment advisory and sub-advisory
management experience) as being particularly desirable to help meet specific
Company needs that have arisen. Our Nominating/Corporate Governance Committee
does not distinguish between nominees recommended by stockholders and other
nominees.
In identifying potential candidates for Board membership, the
Nominating/Corporate Governance Committee relies on suggestions and
recommendations from Board members, management and others. The
Nominating/Corporate Governance Committee may also retain search firms to assist
it in identifying potential candidates for director, gathering information about
the background and experience of such candidates and acting as an intermediary
with such candidates. Currently, no such firms have been retained. A copy of the
Corporate Governance Committee Charter is attached as Exhibit 14.2 on the
Company's Annual Report on Form 10K.
CORPORATE GOVERNANCE
We monitor regulatory developments and review our policies, processes and
procedures in the area of corporate governance to respond to such developments.
As part of those efforts, we review federal laws affecting corporate governance,
as well as rules adopted by the U.S. Securities and Exchange Commission and
AMEX.
CODE OF ETHICS AND BUSINESS CONDUCT
The Board has adopted a Code of Ethics and Business Conduct ("Code of
Ethics") that applies to all of our employees, officers and directors. Our Code
of Ethics constitutes our "code of ethics" within the meaning of Section 406 of
the Sarbanes-Oxley Act and the "code of conduct" under AMEX Rules. A copy of the
Code of Ethics is attached as Exhibit 14.1 on the Company's Annual Report on
Form 10K.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information about the compensation of the
Company's Chief Executive Officer and three other most highly compensated
officers at fiscal years ended August 31, 2004, 2005, and 2006. The additional
table provides detailed information about the employees' stock options.
43
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION SECURITIES
------------------------------- ----------------------
OTHER INCENTIVE ALL OTHER
NAME AND PRINCIPAL ANNUAL STOCK RESTRICTED COMPENSATION
POSITION YEAR SALARY BONUS(1) COMP. (2) OPTIONS STOCK (3)
------------------------ ---- -------- -------- --------- --------- ---------- ------------
KENNETH K. RIETH........ 2006 $250,000 $ -- $-- $-- $-- $1,500
President, CEO and 2005 $250,000 $ -- $-- $-- $-- $1,500
Chairman 2004 $250,000 $ -- $-- $-- $-- $1,500
BRIAN RIETH............. 2006 $175,000 $ -- $-- $-- $-- $ --
Vice President & General 2005 $175,000 $ -- $-- $-- $-- $ --
Manager 2004 $147,000 $20,000 $-- $-- $-- $ --
PETER C. CANEPA......... 2006 $160,000 $ -- $-- $-- $-- $2,650
Secretary, Treasurer and 2005 $140,000 $20,000 $-- $-- $-- $2,495
CFO 2004 $140,000 $ -- $-- $-- $-- $ 515
THOMAS J. WINTERS....... 2006 $140,000 $ -- $-- $-- $-- $ --
Vice President of Sales 2005 $140,000 $ -- $-- $-- $-- $ --
2004 $140,000 $ -- $-- $-- $-- $ --
(1) Does not include any value that might be attributable to job-related
personal benefits, the annual value of which has not exceeded the lesser of
10% of annual salary plus bonus or $50,000 for each executive officer.
(2) The Named Executives each received certain perquisites, the aggregate value
of which did not exceed, as to any Named Executive in any of the last three
fiscal years, the lesser of $50,000 or 10% of such Named Executive's annual
salary and bonus.
(3) Compensation consisted of the dollar value of insurance premiums paid by
the Company with respect to a life insurance policy on behalf of the Named
Executive Officer.
OPTION GRANTS TABLE
No stock options were granted during fiscal year ended August 31, 2006.
OPTION EXERCISES TABLE
The following table provides information on the value of options held by
each of the executive officers of the Company at August 31, 2006 measured in
terms of the closing price of the Company's Common Shares on that day. There
were no options exercised by any officer during the year.
OPTION EXERCISES TABLE
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED OPTIONS IN-THE-
ON VALUE OPTIONS/SARS AT AUGUST MONEY OPTIONS AT
NAME AND PRINCIPAL POSITION EXERCISE REALIZED 31, 2006 EXERCISABLE AUGUST 31, 2006
------------------------------------- -------- -------- ---------------------- --------------------
(shares)
Kenneth K. Rieth - President,
C.E.O. & Chairman................. -- -- 100,000(1) $ 0
Peter C. Canepa - Secretary,
Treasurer and CFO................. -- -- 30,000(2) $ 0
Thomas J. Winters
Vice President of Sales........... -- -- 30,000(2) $ 0
Brian Rieth,
Vice President of Manufacturing... -- -- -- --
(1) On November 2, 1998, Mr. Rieth was granted a stock option for 50,000
shares, exercisable at $6.625 per share under the 1998 Key Employee Stock
Option Plan, expiring November 2, 2008. On November 24, 2000, Mr. Rieth was
granted a stock option for 50,000 shares, exercisable at $3.75 per share
after November 24, 2000 and expires November 2, 2009.
44
(2) On November 2, 1998, Messrs. Winters and Canepa were granted stock options
for 10,000 shares each, exercisable at $6.625 per share under the 1996
Incentive Employee Stock Option Plan, as amended, expiring November 2,
2008. On November 24, 2000, Messrs. Winters and Canepa were granted stock
options for 20,000 shares each, exercisable at $3.75 per share after
November 24, 2000 and expire November 2, 2009.
The Company has shares available for future issuance under the above equity
compensation plans as of August 31, 2006 as follows:
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS
------------------------------------- -------------------- -------------------- -----------------------
EQUITY COMPENSATION PLANS APPROVED BY
SECURITY HOLDERS:
1996 Stock Option Plan, as amended 80,000 shares $4.83 per share 170,000 shares
1998 Key Employee Stock Option Plan 101,000 shares $5.20 per share 99,000 shares
-------------- --------------- --------------
Total 181,000 shares $5.05 per share 269,000 shares
============== =============== ==============
COMPENSATION COMMITTEE REPORT
The duty of the Committee is to recommend to the Board of Directors the
remuneration arrangements for Kenneth K. Rieth, President and Chief Executive
Officer of the Company, as well as grant stock options under the Company's 1996
Incentive Stock Option Plan, as amended, and the 1998 Key Employee Stock Option
Plan. The Company's Board of Directors has given Mr. Rieth the authority to set
the compensation for senior management.
COMPENSATION PROGRAMS
BASE SALARY: The Committee reviews each officer's salary annually. In
determining appropriate salary levels, consideration is given to scope of
responsibility, experience, Company and individual performance as well as pay
practices of other companies relating to executives with similar responsibility.
In addition, with respect to the base salary of Mr. Rieth, the Compensation
Committee has acknowledged the longevity of Mr. Rieth's service to the Company
and its belief that Mr. Rieth is an excellent representative of the Company
within the industry. In assessing Mr. Rieth's compensation, the committee
engaged an independent firm to perform a review of his proposed compensation.
Upon completion of such review, the Board of Directors established Mr. Rieth's
base salary on April 25, 2003. This base compensation consists of a regular
payroll payment of $250,000 per year plus an annual bonus equal to 3.5% of the
Company's income from operations before such bonus expense. Messrs. Canepa
received a base salary of $160,000 for fiscal 2006.
BONUS AWARDS: The Company's officers may be considered for annual cash bonuses,
which are awarded to recognize and reward corporate and individual performance
based on meeting specified goals and objectives. The plan in effect for fiscal
2005 for Mr. Rieth did not provide a bonus to Mr. Rieth. In determining a bonus
to Mr. Rieth, the Committee reviews compensation levels and financial results
available to it for chief executive officers for similarly sized companies as
well as those located near the Company's headquarters. Mr. Rieth recommends to
the Committee Mr. Canepa's bonus based on his review of corporate and his
individual performances as well as the performance bonus the management team
awards to employees of the Company other than Messrs. Canepa and Rieth.
STOCK OPTION: Under the Company's 1996 Incentive Stock Option Plan, as amended,
stock options may be granted to the Company's key employees including Messrs.
Rieth and Canepa. The number of options granted is determined by the subjective
evaluation of the person's ability to influence the Company's long-term growth
and profitability. For fiscal 2006, no stock options were issued under such
plan.
45
Under the Company's 1998 Key Employee Stock Option Plan, stock options may
be granted to the Company's key employees and directors including Messrs. Rieth,
Baron, Engels, Gillette and Canepa. The number of options granted is determined
by the subjective evaluation of the person's ability to influence the Company's
long-term growth and profitability. For fiscal 2005, no stock options were
issued under such plan.
Stock options are granted with an exercise price equal to the market price of
the Common Shares on the date of grant. Since the value of an option bears a
direct relationship to the Company's stock price, it is an effective incentive
for employees to create value for shareholders. The Committee therefore views
stock options as an important component of its future compensation policy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the beneficial
ownership of the Company's common stock as of November 29, 2006 with respect to
(i) each stockholder known by the Company to be the beneficial owner of 5% of
the Company's common stock: (ii) each of the Company's directors; (iii) each
Executive Officer or Significant Employee listed in the Summary Compensation
Table under the heading "Executive Compensation" and (iv) all directors and
executive officers as a group. On the table, 4,400,458 shares of common stock
were issued and outstanding. Unless otherwise indicated, all persons named as
beneficial owners of common stock have sole voting power and sole investment
power with respect to the shares indicated as beneficially owned.
BENEFICIAL OWNERSHIP TABLE
COMMON PERCENTAGE OF
SHARES TOTAL COMMON
NAMED EXECUTIVE, DIRECTOR, BENEFICIALLY SHARES OF THE
BENEFICIAL HOLDER OR IDENTITY OF GROUP OWNED COMPANY
------------------------------------------------- ------------ -------------
Kenneth K. Rieth, Director ...................... 767,116 17.4%
J. Dann Engels, Director ........................ -- --
Dr. Jay S. Baron, Director ...................... -- --
James V. Gillette, Director ..................... 1,000 *
Peter C. Canepa, Executive ...................... 35,512(2) 0.8
Thomas J. Winters, Executive .................... 20,000(2) 0.5
Brian Rieth, Executive .......................... -- --
------- ----
ALL NAMED EXECUTIVES AND DIRECTORS AS A
GROUP (7 PERSONS) ............................ 823,628 18.7%
------- ----
(1) Prior to August 3, 2006, Riviera Holding Company, 100% owned by Kenneth K.
Rieth, President and CEO of Riviera Tool Company, owned 667,116 shares of
the Common Shares of Riviera Tool Company. On August 3, 2006, Riviera
Holding Company was liquidated. The only assets held by Riviera Holding
Company were 667,116 shares of Riviera Tool Company. Such stock was
distributed to Kenneth K. Rieth in exchange of all the outstanding stock of
Riviera Holding Company held by Mr. Rieth. In addition, amount includes
100,000 shares, which Mr. Rieth has the right to acquire through exercise
of stock options granted under the 1998 Key Employee Stock Option Plan.
(2) Amount includes 20,000 and 30,000 shares of which Mr. Winters and Mr.
Canepa, respectively, each have the right to acquire through exercise of a
stock option grant under the 1996 Incentive Stock Option Plan.
* Beneficial ownership of less than 0.1% of the class.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
46
Section 16(a) of the Securities Exchange Act of 1934 requires Riviera's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities, file reports of ownership
on Forms 3,4,and 5 with the SEC. Officers, directors and beneficial owners of
greater than 10% of the Company's Common Shares are required by the SEC's
regulations to furnish the Company with copies of all Forms 3, 4 and 5 forms
they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file reports on Form 5 for the fiscal year ended August 31,
2006, the Company believed that all its officers, directors and beneficial
owners of greater than ten percent of the Company's Common Shares have filed all
reports applicable to them with respect to transactions during the fiscal year
ended August 31, 2006.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee during fiscal year ended 2006
were J. Dann Engels, James V. Gillette and Dr. Jay S. Baron. Neither Messrs.
Engels, Gillette nor Dr. Baron were ever an officer or employee of the Company
or any of its subsidiaries, and none of them had any relationship requiring
disclosure by the Company under Item 404 of Regulation S-K for the fiscal year
ended 2006.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our by-laws provide for a broad right for indemnification for any person
who is or was involved in any manner in any threatened, pending, or completed
investigation, claim, action, suit, or proceeding by reason of the fact that the
person had agreed to become a director, officer, employee, or agent of our
company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
informed that in the opinion of the Commission this type of indemnification is
against public policy as expressed in the Act and is, therefore unenforceable.
In the event that a claim for indemnification against liabilities arising under
the Securities Act (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by any
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of the submitted issue.
BOARD MEMBER INDEPENDENCE
The Board of Directors has affirmatively determined, by resolution of the
Board of Directors as a whole, that the following directors have no direct or
indirect material relationship with the Company and satisfy the requirements to
be considered "independent" in accordance with the rules of the American Stock
Exchange: Messrs. James V. Gillette, Dr. Jay S. Baron and J. Dann Engels. As a
result, each of the Audit Committee, the Compensation Committee and the
Corporate Governance Committee is comprised entirely of independent directors,
as determined by the Board.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee has appointed BDO Seidman, L.L.P. ("Seidman") as the
independent registered public accounting firm of our Company for the fiscal year
ending August 31, 2007.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee or any member designated by the Audit Committee
Chairman, approves in advance all audit and any non-audit service rendered by
Seidman to Riviera. Any member to whom such authority is delegated shall report
any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Seidman does not provide any business consulting or other non-audit services to
the Company.
47
All audit, audit-related and tax services performed by our independent
registered public accounting firm which required pre-approval, as defined in our
Audit Committee's policies and procedures, were pre-approved. Services other
than audit, review, or attest services, which did not require pre-approval
pursuant to those policies were brought to the attention of the Audit Committee
and approved prior to the completion of the audit by the Chairman of our Audit
Committee in accordance with SEC rules and regulations.
AUDIT FEES
Deloitte & Touche LLP had been the public accounting firm retained by the
Company since 1999 and resigned on January 13, 2005. Riviera and Deloitte agreed
that the resignation was not the result of any disagreement between the Company
and Deloitte & Touche, LLP on matters of accounting principles, practices,
financial statement disclosure, auditing scope or procedure. On February 14,
2006, the Company appointed BDO Seidman, LLP as the Company's new independent
registered public accounting firm for fiscal year ended August 31, 2006.
BDO Seidman LLP's fees for professional services total $139,000 for the
year ended August 31, 2006 out of a total of $159,980 in fees paid for
professional services to all accounting firms. BDO Seidman LLP fees for
professional services included the following:
- Audit Fees - BDO Seidman LLP fees relating to the year ended August
31, 2006 audit and quarterly reviews were $125,000. BDO Seidman LLP
fees relating to the review of the Form S-1 filed on August 11, 2006
was $4,000.
- Audit-related Fees - BDO Seidman LLP fees relating to the audit of the
Company's profit-sharing plan were $10,000.
- There were no fees paid to BDO Seidman LLP for tax services or for any
other services not described above.
48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
(a) The following documents are filed as a part of this report:
1. Financial Statements - The Financial Statements of Riviera Tool
Company in Item 8 hereof are filed as part of this Annual Report on
Form 10-K.
2. Financial Statement Schedules - All Financial Statement Schedules are
omitted because they are not required or applicable, or the required
information is shown in the Financial Statements or the notes thereto.
3. Exhibits
10.1 Security Agreement between Laurus Master Fund, Ltd. and Riviera
Tool Company dated May 17, 2005 (Incorporated by reference to the
Company's current report filed on form 8-K filed May 17, 2005)
10.2 Registration Rights Agreement between Laurus Master Fund, Ltd.
and Riviera Tool Company, dated May 17, 2005 (Incorporated by
reference to the Company's current report filed on form 8-K filed
May 17, 2005)
10.3 Master Security Agreement between Laurus Master Fund, Ltd. and
Riviera Tool Company dated May 17, 2005 (Incorporated by
reference to the Company's current report filed on form 8-K filed
May 17, 2005)
10.4 Securities Purchase Agreement between Laurus Master Fund, Ltd.
and Riviera Tool Company dated May 17, 2005 (Incorporated by
reference to the Company's current report filed on form 8-K filed
May 17, 2005)
10.5 Secured Convertible Minimum Borrowing Note dated May 17, 2005
(Incorporated by reference to the Company's current report filed
on form 8-K filed May 17, 2005)
10.6 Option Agreement dated May 17, 2005 (Incorporated by reference to
the Company's current report filed on form 8-K filed May 17,
2005)
10.7 Secured Revolving Note dated May 17, 2005(Incorporated by
reference to the Company's current report filed on form 8-K filed
May 17, 2005)
10.8 Secured Convertible Term Note dated May 18, 2005 (Incorporated by
reference to the Company's current report filed on form 8-K filed
May 17, 2005)
10.9 Amended and Retated Overadvance Side Letter between Registrant
and Laurus Master Fund, Ltd. dated October 30, 2006*
14.1 Code of Business Conduct and Ethics*
14.2 Governance Committee Charter*
14.3 Audit Committee Charter*
14.4 Compensation Committee Charter*
21 Subsidiaries - None
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of BDO Seidman LLP*
31.1 Written Statement of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 Sec. 302*
32 Written Statements of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 Sec. 906*
* Filed herewith.
49
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
Dated: November 29, 2006 RIVIERA TOOL COMPANY
By: /s/ Kenneth K. Rieth
------------------------------------
Kenneth K. Rieth,
Chief Executive Officer
and
By: /s/ Peter C. Canepa
------------------------------------
Peter C. Canepa,
Chief Financial Officer,
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 29th day of November, 2006, by the following
persons on behalf of the Company and in the capacities indicated.
/s/ Jay S. Baron /s/ Kenneth K. Rieth
------------------------------------- ----------------------------------------
Jay S. Baron, Director Kenneth K. Rieth, C.E.O, Director
/s/ James V. Gillette /s/ J, Dann Engels
------------------------------------- ----------------------------------------
James V. Gillette, Director J, Dann Engels, Director
50
EXHIBIT INDEX
EX. NO. DESCRIPTION
10.9 Amended and Retated Overadvance Side Letter between Registrant and
Laurus Master Fund, Ltd. dated October 30, 2006*
14.1 Code of Business Conduct and Ethics*
14.2 Governance Committee Charter*
14.3 Audit Committee Charter*
14.4 Compensation Committee Charter*
21 Subsidiaries - None
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of BDO Seidman LLP*
31.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 Sec. 302*
32 Written Statements of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 Sec. 906*
* Filed herewith.
51