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, 2005
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 to Section 12(b) of the Act:
Common Stock, no par value
Securities registered pursuant to 12(g) of the Act: None
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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting common stock of the Registrant (based
upon the last reported sale of the Common Stock at that date by the American
Stock Exchange) held by non-affiliates was $1,896,028 as of November 29, 2005.
The number of shares outstanding of the Registrant's common stock as of November
30, 2005 was 3,984,874 shares of common stock without par value.
Indicate by check whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in connection
with the 2006 Annual Meeting of Shareholders is incorporated by reference into
Part III of this report.
1
THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K CONTAIN CERTAIN
FORWARD-LOOKING STATEMENTS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS
REPORT THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY,"
"WILL," "EXPECT," "BELIEVE," "ANTICIPATE," OR "CONTINUE," THE NEGATIVE OR OTHER
VARIATION THEREOF, OR COMPARABLE TERMINOLOGY, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING UPON
A VARIETY OF FACTORS, INCLUDING CONTINUED MARKET DEMAND FOR THE TYPES OF
PRODUCTS AND SERVICES PRODUCED AND SOLD BY THE COMPANY.
RIVIERA TOOL COMPANY
Annual Report on Form 10-K
November 30, 2005
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 6
Item 3. Legal Proceedings............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders........... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder................................................... 7
Item 6. Selected Financial Data....................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 16
Item 8. Financial Statements and Supplementary Data................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 33
Item 9A. Controls and Procedures....................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............ 33
Item 11. Executive Compensation........................................ 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 33
Item 13. Certain Relationships and Related Transactions................ 33
Item 14. Principal Accountant Fees and Services........................ 33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 34
SIGNATURES.................................................... 35
2
PART I
ITEM 1. BUSINESS
GENERAL
Riviera Tool Company (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 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, Ford Motor Company, General Motors Corporation, Mercedes-Benz
and BMW (the "OEM's") and their suppliers in fiscal years 2003, 2004 and 2005.
YEAR ENDED AUGUST 31,
------------------------------------------
2003 2004 2005
------------ ------------ ------------
CUSTOMER AMOUNT % AMOUNT % AMOUNT %
-------- ------ --- ------ --- ------ ---
Suppliers of Mercedes-Benz ............... $19.2 56% $20.8 84% $ 5.7 29%
BMW ...................................... 0.3 1 -- -- -- --
Suppliers of BMW ......................... 3.0 10 -- -- -- --
DaimlerChrysler AG ....................... 1.9 6 0.2 1 1.4 7
Suppliers of DaimlerChryslerAG ........... 1.0 1 0.3 1 5.0 26
Ford Motor Company ....................... 0.9 1 -- -- -- --
Suppliers of Ford Motor Co. .............. 2.4 7 -- -- -- --
General Motors Corporation ............... 0.5 2 0.9 4 3.4 18
Suppliers of General Motors Corporation .. 0.2 -- 0.5 2 1.6 8
Other manufacturers and their suppliers .. 4.7 16 2.0 8 2.2 12
----- --- ----- --- ----- ---
Total Sales ........................... $34.1 100% $24.7 100% $19.3 100%
The Company was originally incorporated in 1967 and was incorporated in its
present form in 1988, under the laws of the State of Michigan.
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, 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
3
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.
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.
4
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, Ford, 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, Ford, General
Motors, Mercedes-Benz and BMW and their respective tier one suppliers. The
Company maintains relationships with DaimlerChrysler, Ford, General Motors,
Mercedes-Benz and BMW that directly accounted for approximately 25%, in the
aggregate, of the Company's revenues in 2005. For the year ended August 31,
2005, DaimlerChrysler, Ford, General Motors, Mercedes-Benz, BMW and their
respective tier one suppliers accounted for approximately 88%, in the aggregate,
of the Company's revenues. For the year ended August 31, 2004, DaimlerChrysler,
Ford, General Motors, Mercedes-Benz and BMW and their respective tier one
supplier directly accounted for 92%, 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 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 $13.7 million and $2.5 million as of August 31, 2005 and
2004, respectively. The Company expects all August 31, 2005 backlog contracts
will be reflected in sales during the fiscal years ended August 31, 2006 and
2007. 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, Ford, 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.
5
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, Ford, General
Motors, Mercedes-Benz and BMW, which directly accounted for approximately 25%,
in the aggregate, of the Company's revenues in 2005. For the year ended August
31, 2005, DaimlerChrysler, Ford, General Motors, Mercedes-Benz and BMW and their
respective tier one suppliers accounted for approximately 88%, 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 Company believes that it is currently in material
compliance with applicable environmental and health and safety laws and
regulations.
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.
6
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.
On February 14, 2005, Gestamp Alabama ("Gestamp"), the alleged successor to
Oxford Automotive, Inc. ("Oxford") brought a civil action against Riviera in the
Circuit Court for the County of Kent, State of Michigan, seeking a right to
immediate possession of certain tooling for use on Mercedes-Benz automobiles, as
well as unspecified damages. On February 25, 2005, Mercedes-Benz U.S.
International, Inc. ("MBUSI") intervened in and was added to the litigation
aligned as a Plaintiff, and sought virtually identical relief as that sought by
Gestamp. On 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 and is recorded as a
liability of the Company on its August 31, 2005 balance sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year,
covered by this report, to a vote of security holders through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is traded on the American Stock
Exchange ("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. Prior to that date, there was no public market for the Common
Stock. The table below sets forth the high and low sales prices as reported by
AMEX for each period reported.
FISCAL 2004 FISCAL 2005
------------- -------------
PERIOD HIGH LOW HIGH LOW
------ ----- ----- ----- -----
1st quarter............. $5.10 $1.04 $2.60 $1.75
2nd quarter............. $5.70 $1.01 $2.05 $0.85
3rd quarter............. $4.99 $1.75 $1.69 $1.02
4th quarter............. $3.70 $2.81 $1.55 $0.85
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 3,984,874
shares of Common Stock outstanding.
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.
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):
7
WEIGHTED AVERAGE
OPTION PLAN SHARES EXERCISE PRICE
----------- ------- ----------------
1996 STOCK OPTION PLAN, AS AMENDED
Outstanding at end of year, August 31, 2002 110,000 $ 4.83
======= ======
Fiscal Year Ended August 31, 2003
- Stock options granted............................ -- --
------- ------
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
======= ======
1998 KEY EMPLOYEE STOCK OPTION PLAN
Outstanding at end of year, August 31, 2002..... 107,000 $ 5.20
======= ======
Fiscal Year Ended August 31, 2003
- Stock options forfeited.......................... (2,000) $ 3.75
- Stock options forfeited.......................... (2,000) $6.625
------- ------
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
======= ======
8
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 and the Financial Statements and related Notes contained herein. All
amounts are in thousands, except per share data.
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------------------
STATEMENT OF OPERATIONS DATA: 2001 2002 2003 2004 2005
----------------------------- ------- ------- ------- ------- -------
Sales ............................................... $12,047 $14,050 $34,084 $24,689 $19,274
Gross profit (loss) ................................. (3,062) (630) 3,377 (5,349) 2,292
Income (loss) from operations ....................... (4,712) (2,289) 1,687 (7,363) (498)
Interest expense .................................... 725 653 779 872 1,643
Other expense ....................................... 5 59 8 6 361
Income (loss) before income taxes ................... (5,442) (3,002) 900 (8,241) (2,502)
Income tax expense (benefit) ........................ (1,538) -- -- -- --
------- ------- ------- ------- -------
Net income (loss) available for common shares ....... $(3,904) $(3,002) $ 900 $(8,241) $(2,502)
======= ======= ======= ======= =======
Basic and diluted earnings (loss) per common share .. $ (1.16) $ (.89) $ .27 $ (2.18) $ (.65)
======= ======= ======= ======= =======
Basic and diluted common shares outstanding ......... 3,379 3,379 3,379 3,774 3,835
OTHER DATA :
Depreciation and amortization expense ............... $ 1,952 $ 1,913 $ 1,840 $ 1,758 $ 1,673
AS OF AUGUST 31,
-----------------------------------------------
BALANCE SHEET DATA: 2001 2002 2003 2004 2005
------------------- ------- ------- ------- ------- -------
Working Capital (Deficit) ................ $ 5,176 $(3,513) $ 7,762 $(6,954) $ 1,539
Total Assets ............................. 25,146 24,984 33,751 27,898 21,217
Current Portion of Long-Term Debt ........ 1,876 3,855 639 15,735 3,288
Revolving Line of Credit ................. 3,143 6,500 5,982 9,850 6,535
Long-term Debt, less current portion ..... 3,384 -- 2,418 -- 2,335
Common Stockholders' Equity .............. 14,812 11,810 12,710 5,780 3,982
The following table is derived from the Company's Statement of Operations and
sets forth, for the periods indicated, selected operating data as a percentage
of sales.
FISCAL YEAR ENDED AUGUST 31,
--------------------------------
STATEMENT OF OPERATIONS DATA: 2001 2002 2003 2004 2005
----------------------------- ---- ---- ---- ---- ----
Sales .......................................... 100% 100% 100% 100% 100%
Gross Profit (Loss) ............................ (25) (4) 10 (22) 12
Income (Loss) from Operations .................. (39) (16) 5 (30) (2)
Interest Expense ............................... 6 5 2 3 9
Other Expense .................................. -- -- -- -- 2
Income (Loss) before Income Taxes .............. (45) (21) 3 (33) (13)
Income Tax Expense (Benefit) ................... (13) -- -- -- --
--- --- --- --- ---
Net Income (Loss) available for common shares .. (32%) (21%) 3% (33%) (13%)
=== === === === ===
OTHER DATA:
Depreciation and amortization expense .......... 16% 14% 5% 7% 9%
9
QUARTERLY FINANCIAL DATA
The following is a condensed summary of quarterly results of operations for
2003, 2004 and 2005 (in thousands, except per share data):
NET INCOME BASIC AND DILUTED
/(LOSS) ----------------------
AVAILABLE EARNINGS
GROSS OPERATING FOR (LOSS) COMMON
PROFIT/ INCOME/ COMMON PER SHARES
PERIOD SALES (LOSS) (LOSS) SHARES SHARE OUTSTANDING
------ ------- ------- --------- ---------- -------- -----------
2003: First ....... $ 4,339 $ 293 $ (29) $ (189) $ (.06) 3,379
Second ...... 8,304 869 453 231 .07 3,379
Third ....... 9,919 1,093 587 391 .12 3,379
Fourth ...... 11,522 1,121 676 467 .14 3,379
------- ------- ------- ------- ------ -----
Total .... $34,084 $ 3,376 $ 1,687 $ 900 $ .27 3,379
======= ======= ======= ======= ====== =====
2004 First ....... $ 8,311 $ 850 $ 446 $ 238 $ .07 3,379
Second ...... 8,293 840 335 212 .06 3,379
Third ....... 7,597 867 387 239 .06 3,774
Fourth ...... 488 (7,906) (8,531) (8,930) (2.37) 3,774
------- ------- ------- ------- ------ -----
Total .... $24,689 $(5,349) $(7,363) $(8,241) $(2.18) 3,774
======= ======= ======= ======= ====== =====
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
======= ======= ======= ======= ====== =====
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements. For this purpose, any statements contained in this report that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," or "continue," the negative or other
variation thereof, or comparable terminology, are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending upon
a variety of factors, including continued market demand for the types of
products and services produced and sold by the Company.
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, Ford Motor Company,
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
10
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.
- Net book value 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. This review
is performed using estimated future cash flows. If the carrying value
of a long-lived asset is considered to be impaired, an impairment
charge is recorded for the amount that the carrying value of the
long-lived asset exceeds its fair value.
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) becomes effective at the beginning of our fiscal year ending
August 31, 2006. We expect that the impact of adopting SFAS No. 123 (R) will not
be material.
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 2005, the Company sustained
a loss from operations of $498,282 and a net loss of $2,502,248. This loss
resulted in an accumulated deficit of $13,148,735 as of August 31, 2005. These
factors, among other things, raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The Company believes that the revolving line of credit and the funds generated
from operations, will be sufficient to cover anticipated cash needs through
fiscal 2006. However, depending on 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
11
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.
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 2004
REVENUE.
Total revenue decreased from approximately $24.7 million in 2004 to $19.3
million in 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.
The Company's backlog of awarded contracts, which are all believed to be firm,
was approximately $13.7 million and $2.5 million as of August 31, 2005 and 2004,
respectively, an increase of 448%. The Company expects all backlog contracts
will be reflected in sales during fiscal years ending August 31, 2006 and 2007.
COST OF GOODS SOLD.
Cost of goods sold decreased from $30.0 million for 2004 to $17.0 million for
2005 and, as a percent of sales, decreasing from 122% for 2004 to 88% for 2005.
Direct costs (materials and labor) decreased by $12.3 million, from $20.6
million for 2004 to $8.3 million for 2005. Engineering expense decreased by $0.2
million from $2.4 million for 2004 to $2.2 million for 2005. Lastly, of the cost
of goods sold, manufacturing overhead decreased by $0.5 million from $7.0
million for 2004 to $6.5 million for 2005. Additional details of these changes
in cost of sales for 2004 and 2005 are as follows:
- Direct materials expense decreased from $4.2 million for 2004 to $2.8
million for 2005 and as a percent of sales from 17% to 15%. This
decrease was largely due to lower contract material requirements
during 2005 as compared to 2004. During 2005, the Company's contract
mix included an increase in die component machining work for the OEMs.
Such contacts have lower direct material requirements as compared to
construction contracts as the materials are supplied by the customer.
Outside services expense decreased from $9.7 million for 2004 to $0.4
million for 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 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 2004 to
$5.0 million for 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 2004 to 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 2004 to 17% for 2005. Overtime expense decreased 30% or
$0.7 million, from $2.3 million for 2004 to $1.6 million for 2005 and,
as a percent of sales, decreasing from 9% for 2004 to 8% for 2005.
- Engineering expense decreased from $2.4 million, or 10% of sales, for
2004 to $2.2 million, or 11% of sales, for 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 2005 as
compared to $7.0 million or 28% of sales for 2004. During 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
12
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 2005.
SELLING AND ADMINISTRATIVE EXPENSE.
Selling and administrative expense for 2005 increased to $2.8 million or 15% of
sales, from $2.0 million or 8% of sales in 2004. This increase was largely a
result of the Company incurring an additional $0.7 million in legal and
professional fees during 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.
INTEREST EXPENSE.
Interest expense increased from $0.9 million for 2004 to $1.6 million for 2005.
During the first three quarters of 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
2004 to prime plus 4% in 2005) as well as an additional $0.1 million in
forbearance fees during 2005.
OTHER EXPENSE - SUBORDINATED DEBT FINANCING COSTS.
During the third quarter of 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 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.
FISCAL 2004 COMPARED TO FISCAL 2003
REVENUE.
Total revenue decreased from approximately $34 million in 2003 to $25 million in
2004, a decrease of 28%. This decrease was a result of the Company completing
its significant tooling programs for a major European automaker for a sports
utility vehicle and a new "crossover" vehicle to be manufactured in the United
States. The Company's customer for these vehicles is the Tier 1 supplier to
Mercedes-Benz for these particular vehicles. During the fourth quarter of 2004,
the Company had significant difficulties in completing the contracts, which had
a severe negative effect on revenue, cost of sales, and related earnings. The
Company, due to many various circumstances, incurred significant cost overruns
on many of the parts under the contracts. Many of these cost overruns involve
customer timing changes, material specification changes and the Company
outsourcing the completion of many dies to meet customer deadlines. All of the
aforementioned issues resulted in the Company incurring approximately $4.0
million in additional outsourcing costs and $3.5 million in additional labor
costs. The Company accrued $5.2 million of estimated losses on these contracts
and others as of August 31, 2004. The outsourcing costs were incurred as a
result of the Company having certain "bottlenecks" in its production. These
bottlenecks were a result of changes to material specifications combined with an
increase in the number of engineering changes required. The material
specification changes involved customer changes from a grade of steel the
Company had previous experience with to a new grade of high-strength steel
which, not only had the Company had no experience working with, was also new to
the customer. As a result of this new material, the Company could not simulate
the flow of the steel in the dies. Due to the lack of historical data as to the
material flow, the Company, in some cases, had to re-cut the dies up to eight
times to get the part within specifications with this material. This created
capacity constraints in the Company's machining and tryout areas. As a result of
these constraints, the customer required that the Company utilize specified
outside die shops to complete certain dies, which were constructed internally.
The customer decided that the Company's internal capacity had become
overburdened as a result of the rework being performed by the Company to obtain
part specifications with the new high-strength steel. Had the Company not
outsourced this work, the customer may have cancelled the contracts and charged
the Company for all of the added costs incurred. In addition, the customer may
have discontinued the scheduled progress payments, which would have caused
severe cash-flow problems for the Company. Management took the position that by
outsourcing this work directly, the added costs were better controlled and
prevented potential cash-flow difficulties.
Despite the aforementioned fourth quarter problems, the Company did realize an
overall profit on these two programs. The total amount of revenue on these
contracts was $43.0 million with a net margin of $0.2 million.
13
COST OF GOODS SOLD.
Cost of goods sold decreased from $30.7 million for 2003 to $30.0 million for
2004. However, as a percent of sales, cost of goods sold increased from 90% for
2003 to 122% for 2004. Direct costs (materials and labor) decreased by $0.8
million, from $21.4 million for 2003 to $20.6 million for 2004. Engineering
expense remained consistent at $2.4 million for both 2003 and 2004. Lastly, of
the cost of goods sold, manufacturing overhead remained consistent at $7.0
million for 2004 versus $6.9 million for 2003. Additional details of these
changes in cost of sales for 2003 and 2004 are as follows:
- Direct materials expense decreased from $6.4 million for 2003 to $4.2
million for 2004 and as a percent of sales from 19% to 17%. This
decrease was largely due to lower contract material requirements
during 2004 as compared to 2003. Outside services expense increased
from $9.4 million for 2003 to $9.7 million for 2004 and increased as a
percent of sales from 27% to 39%. Of the outsourced services expense
for 2004, approximately $4.0 million of the $9.7 million was in excess
of amounts estimated for certain jobs and created extensive cost
overruns on those particular jobs as described in the aforementioned
Revenue section.
- Direct labor expense increased from $5.7 million for 2003 to $6.7
million for 2004 and as a percent of sales, direct labor increased
from 17% to 27%. This change was a result of the Company incurring a
4% increase in direct labor hours, from 304,000 hours in 2003 to
318,000 in 2004. Of the total direct labor expense, regular or
straight time increased by $0.7 million and as a percent of sales
increased from 11% for 2003 to 18% for 2004. Overtime expense
increased from $1.9 million for 2003 to $2.3 million for 2004 and as a
percent of sales increased from 6% for 2003 to 9% for 2004. The
Company incurred added labor costs of approximately $3.5 million
related to the construction and buy-off difficulties noted above.
SELLING AND ADMINISTRATIVE EXPENSE.
Selling and administrative expense for 2004 increased by $0.3 million to $2.0
million as compared to $1.7 million for 2003. As a percent of sales, selling and
administrative expense increased from 5% for 2003 to 8% for 2004. This largely
consisted of increases of $141,000 in administrative and sales salaries, $79,000
in State of Michigan Single Business Tax, $50,000 in deferred compensation
expense and $38,000 in public company expenses.
INTEREST EXPENSE.
Interest expense increased from $0.8 million for 2003 to $0.9 million for 2004.
This increase was largely due to the Company incurring additional interest
expense related to issuance of $3.0 million subordinated debt during the fourth
quarter of 2004.
FISCAL 2005:
FEDERAL INCOME TAX.
The Company's effective income tax rates were 0% for the years ended August 31,
2003, 2004 and 2005. The Company had approximately $164,000 of alternative
minimum tax credits as of August 31, 2005, the use of which does not expire, and
federal net operating loss carryforwards of $7,304,000, which expire, if unused,
in fiscal 2022, 2023 and 2025. The Company has a valuation allowance of
$3,737,000 and $4,615,000 at August 31, 2004 and 2005, respectively, for net
deferred tax assets, which may not ultimately be realized.
LIQUIDITY AND CAPITAL RESOURCES.
For the fiscal year ended August 31, 2005, the Company's cash flow generated
from operating activities was $3.5 million. This largely resulted from a
decrease of $7.8 million in accounts receivable, net of allowance for
uncollectible accounts receivable, a $2.2 million increase in contracts in
process and a $1.4 million decrease in accounts payable. From investing
activities, the Company incurred $0.2 million in additions to property, plant
and equipment and a $0.6 million decrease in other assets consisting largely of
debt financing costs, which were expensed prior to the scheduled amortization
due to retirement of the related debt. The Company used net cash in financing
activities of $3.6 million. The cash used in financing activities included the
Company's May 17, 2005 new senior financing with gross proceeds of $9.2 million.
The Company applied $4.3 million to retire its previous senior debt facility
with Comerica Bank, $3.2 million to retire its subordinated debt with
Hillstreet, and $0.5 million in fees to Laurus (new lender). The net remaining
funds, $1.2 million, were utilized for general working capital purposes.
Subsequent to this financing, the Company has borrowed $2.5 million under the
Convertible Revolving Working Capital Credit Line to finance the increase in its
contracts in process.
14
On May 17, 2005, the Company entered into a new senior loan facility agreement
with Laurus as evidenced by the Agreements. Pursuant to these Agreements, the
Company received a Term Loan in the aggregate principal amount of $3.2 million
as well as a Revolving Credit Facility with a maximum availability of $10.0
million. Each of the Term Loan and any loans under the Revolving Facility shall
be convertible by Laurus into shares of the Company's common stock at a rate of
$1.66 per share. In addition, as part of the agreement, the Company issued an
option to purchase 650,000 shares of its Common Stock at an exercise price of
$.01.
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 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 2006. 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.
The table below presents our significant contractual obligations as of August
31, 2005:
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------- ---------- ----------- ---------- ----------
Debt(1) ................. $12,755,555 $3,430,704 $ 9,324,851 $ -- $ --
Operating Lease ......... 15,192,322 988,298 2,052,467 2,154,899 9,996,658
Deferred Compensation ... 42,160 42,160 -- -- --
Capital Lease ........... 12,703 7,367 5,336 -- --
----------- ---------- ----------- ---------- ----------
Total Obligations .... $28,002,740 $4,468,529 $11,382,654 $2,154,899 $9,996,658
----------- ---------- ----------- ---------- ----------
(1) Interest obligations on the outstanding debt facilities are generally
variable in nature. The Company's fixed interest rate obligations apply to
debt totaling $1,008,124.
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.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following table provides information on the Company's debt as of August 31,
2005 and 2004 that are sensitive to changes in interest rates.
AS OF AMOUNT
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
AS OF AMOUNT
AUGUST 31, 2004 OUTSTANDING MATURITY DATE
--------------- ----------- -------------
REVOLVING WORKING CAPITAL CREDIT LINE:
- Variable rate revolving credit line at an interest
rate of prime rate plus 4% (as of November 17, 2004, an
effective rate of 9%)...................................... $9,849,532 Debt retired May 17, 2005
NOTE PAYABLE TO BANKS:
- At an interest rate of prime plus 4.25% (as of
November 17, 2004, an effective rate of 9.25%)............. $1,400,000 Debt retired May 17, 2005
- At an interest rate of prime plus 4.25% (as of
November 17, 2004, an effective rate of 9.25%)............. $ 435,100 Debt retired May 17, 2005
16
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 sheets of Riviera Tool Company (the
"Company") as of August 31, 2005 and 2004, and the related statements of
operations, common stockholders' equity and cash flows for each of the three
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 2004, and the results of its operations and its cash flows for each of the
three 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, at August 31, 2005, 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
17
Riviera Tool Company
Balance Sheets
AUGUST 31
---------------------------
NOTE 2004 2005
---- ------------ ------------
ASSETS
Current Assets
- Cash................................................................. $ 1,200 $ 239,475
- Accounts receivable, net............................................. 13,075,285 5,232,138
- Costs in excess of billings on contracts in process.................. 4 669,143 2,844,444
- Inventories.......................................................... 5 238,301 236,437
- Prepaid expenses and other current assets............................ 235,203 453,597
------------ ------------
Total current assets................................................ 14,219,132 9,006,094
- Property, plant and equipment, net................................... 6 12,328,746 10,902,845
- Perishable tooling................................................... 726,704 708,319
- Other assets......................................................... 623,635 599,344
------------ ------------
Total assets........................................................ $ 27,898,217 $ 21,216,599
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- Current portion of long-term debt.................................... 7 $ 15,742,669 $ 3,287,510
- Accounts payable..................................................... 4,908,893 3,517,578
- Accrued liabilities.................................................. 521,193 661,833
------------ ------------
Total current liabilities........................................... 21,172,755 7,466,921
- Long-term and subordinated debt, net of unamortized discount......... 7 12,703 8,870,045
- Accrued lease expense................................................ 9 740,894 897,885
- Deferred compensation................................................ 10 166,474 --
- Deferred interest.................................................... 25,500 --
------------ ------------
Total liabilities................................................... 22,118,326 17,234,851
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 -- 3,774,346 shares at August 31, 2004
and 3,984,874 at August 31, 2005.................................... 16,426,378 17,130,483
- Retained deficit..................................................... (10,646,487) (13,148,735)
------------ ------------
Total common stockholders' equity................................... 5,779,891 3,981,748
------------ ------------
Total liabilities and stockholders' equity....................... $ 27,898,217 $ 21,216,599
============ ============
See Notes to Financial Statements
18
Riviera Tool Company
Statements of Operations
YEAR ENDED AUGUST 31
---------------------------------------
2003 2004 2005
----------- ----------- -----------
Sales ................................................. $34,084,111 $24,689,221 $19,273,505
Cost of sales ......................................... 30,707,447 30,038,654 16,981,201
----------- ----------- -----------
Gross profit (loss) ................................... 3,376,664 (5,349,433) 2,292,304
Selling and administrative expenses ................... 1,689,192 2,013,594 2,790,586
----------- ----------- -----------
Income (loss) from operations ......................... 1,687,472 (7,363,027) (498,282)
Other income (expense):
- Interest expense ................................. (779,074) (871,900) (1,643,299)
- Other ............................................ (8,348) (6,551) (15,469)
- Subordinated debt financing costs ................ -- -- (345,198)
----------- ----------- -----------
Total other expense, net .............................. (787,422) (878,451) (2,003,966)
Income (loss)-- before income tax benefit ............. 900,050 (8,241,478) (2,502,248)
----------- ----------- -----------
Income tax benefit .................................... -- --
----------- ----------- -----------
Net income (loss) available for common shares ......... $ 900,050 $(8,241,478) $(2,502,248)
=========== =========== ===========
Basic and diluted earnings (loss) per common share .... $ 0.27 $ (2.18) $ (.65)
----------- ----------- -----------
Weighted-Average Basic and diluted common shares
outstanding ........................................ 3,379,609 3,774,346 3,835,750
See Notes to Financial Statements
19
Riviera Tool Company
Statements of Common Stockholders' Equity
COMMON STOCK TOTAL
----------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
--------- ----------- ------------ ------------
Balance -- August 31, 2002 ... 3,379,609 $15,115,466 $ (3,305,059) $11,810,407
========= =========== ============ ===========
- Net income .............. -- -- 900,050 900,050
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
========= =========== ============ ===========
See Notes to Financial Statements
20
Riviera Tool Company
Statements of Cash Flows
YEAR ENDED AUGUST 31
---------------------------------------
2003 2004 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ...................................................... $ 900,050 $(8,241,478) $(2,502,248)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
- Depreciation and amortization ........................................ 1,839,801 1,757,862 1,673,470
- Issuance of options .................................................. -- -- 104,000
Decrease (increase) in assets:
- Accounts receivable .................................................. (4,110,964) (6,065,246) 7,843,147
- Costs in excess of billings on contracts in process .................. (8,220,320) 11,539,523 (2,175,301)
- Inventories .......................................................... 2,010 10,258 1,864
- Perishable tooling ................................................... (69,116) (108,982) 18,385
- Prepaid expenses and other current assets ............................ (109,830) 58,940 (218,394)
Increase (decrease) in liabilities:
- Accounts payable ..................................................... 3,325,775 (111,662) (1,391,315)
- Accrued outsourced contracts payable ................................. 5,903,930 (5,903,930) --
- Accrued lease expense ................................................ (12,275) 100,204 156,991
- Accrued liabilities .................................................. (35,045) 85,297 140,690
- Deferred compensation ................................................ -- 166,475 (166,474)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES ................... (585,984) (6,712,739) 3,484,815
CASH FLOWS FROM INVESTING ACTIVITIES
- (Increase) decrease in other assets .................................. (22,138) (298,437) 603,732
- Purchases of property, plant and equipment ........................... (414,211) (1,040,319) (247,569)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............................ (436,349) (1,338,756) 356,163
CASH FLOWS FROM FINANCING ACTIVITIES
- Proceeds from issuance of convertible term debt ...................... -- -- 3,200,000
- Proceeds from issuance of convertible revolving note ................. -- -- 6,534,727
- Proceeds from overformula note ....................................... -- -- 2,000,000
- Debt issue costs ..................................................... -- -- (579,491)
- Net borrowings (repayments) on revolving credit line ................. (517,640) 3,867,172 (9,849,532)
- Proceeds from issuance of long-term debt ............................. -- 435,100 --
- Principal payments on long-term debt ................................. (797,770) (606,059) (1,877,646)
- Proceeds from issuance of subordinated debt .......................... -- 3,000,000 --
- Repayment of subordinated debt ....................................... -- -- (3,000,000)
- Increase/ (decrease) of capital lease ................................ -- 20,070 (7,366)
- Deferred interest .................................................... -- 25,500 (25,500)
- Proceeds from sale of common stock ................................... -- 1,310,912 2,105
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES ................... (1,315,410) 8,052,695 (3,602,703)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ........................................ (2,337,743) 1,200 238,275
----------- ----------- -----------
Cash -- beginning of year .............................................. 2,337,743 -- 1,200
Cash -- end of year .................................................... $ -- $ 1,200 $ 239,475
=========== =========== ===========
Interest paid .......................................................... $ 788,496 $ 481,900 $ 1,414,728
See Notes to Financial Statements
21
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, Ford
Motor Company, General Motors Corporation, Mercedes-Benz, 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 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.
ACCOUNTS RECEIVABLE.
As of August 31, 2004 and 2005, the Company had a $0 and $153,124 reserve
for estimated uncollectible accounts receivable, and had $162,795 and
$84,365 of unbilled accounts receivable (completed contracts for which
revenue earned exceeds amounts billed), respectively.
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 useful life of the asset
for financial reporting purposes as follows:
22
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 5-20
- 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 2003, 2004
and 2005.
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company reviews long-lived assets for impairment if changes in
circumstances or the occurrence of events suggest the remaining value may
not be recoverable. An asset is deemed impaired and written down to its
fair value if estimated related total future undiscounted cash flows are
less than its book (carrying) value. The Company, in performing its
evaluation of long-lived assets for impairment, utilized 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 650,000 in the period ended August 31, 2005.
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
23
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)
as of August 31, 2003, 2004 and 2005.
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)
becomes effective at the beginning of our fiscal year ending August 31,
2006. We expect that the impact of adopting SFAS No. 123 (R) will not be
material.
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 2005, the Company sustained
a loss from operations of $498,282 and a net loss of $2,502,248. This loss
resulted in an accumulated deficit of $13,148,735 as of August 31, 2005. These
factors, among other things, raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The Company believes that the revolving line of credit and the funds generated
from operations, will be sufficient to cover anticipated cash needs through
fiscal 2006. However, depending on Company's primary lenders' willingness to
extend the due date of the overadvance facility as well as the level of future
sales, terms of such sales, financial performance and cash flow of existing
contracts such financing may not be sufficient to support operations. Therefore,
the Company may be required to seek additional sources of funding.
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 the annual sales,
in the particular year presented, of the Company (in 000's):
24
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- SALES TO MAJOR CUSTOMERS - CONTINUED
AUGUST 31
---------------------------------------------
CUSTOMER 2003 % 2004 % 2005 %
-------- ------- --- ------- --- ------- ---
- General Motors ...... $ 450 1% $ 938 4% $ 3,425 18%
- L+W Engineering ..... -- -- -- -- 2,429 13%
- DaimlerChrysler AG .. 1,925 6% 209 1% 1,372 7%
- Oxford Automotive ... 19,152 56% 18,640 75% 1,022 5%
- Others .............. 12,557 37% 4,902 20% 11,026 57%
------- --- ------- --- ------- ---
Total Sales ........ $34,084 100% $24,689 100% $19,274 100%
======= === ======= === ======= ===
Outstanding account receivables from three of these customers represented
approximately 90 percent and 60 percent at August 31, 2004 and 2005 of the total
accounts receivable, respectively.
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
balance sheet.
NOTE 4 -- COSTS AND BILLINGS ON CONTRACTS IN PROCESS
Costs and billings on contracts in process are as follows:
AUGUST 31
------------------------
2004 2005
----------- ----------
- Costs incurred on contracts in process under the
percentage-of-completion method ..................... $22,265,744 $7,042,817
- Estimated net gross loss ............................... (4,250,000) (25,000)
----------- ----------
Total ................................................. 18,015,744 7,017,817
- Less progress payments received and billings to date ... 17,586,991 4,173,373
- Plus costs incurred on contracts in process under the
completed contract method ........................... 240,390 --
----------- ----------
Costs in excess of billings on contracts in process ... $ 669,143 $2,844,444
=========== ==========
Included in estimated gross loss for 2004 and 2005 are contracts with estimated
losses accrued of $5,190,491 and $190,430, respectively.
NOTE 5 -- INVENTORIES
Inventories consist of the following:
AUGUST 31
-------------------
2004 2005
-------- --------
- Raw material stock ......... $140,513 $122,933
- Small tools and supplies ... 97,788 113,504
-------- --------
Total ..................... $238,301 $236,437
======== ========
25
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
AUGUST 31
-------------------------
2004 2005
----------- -----------
- Leasehold improvements ..................... $ 1,367,908 $ 1,489,302
- Office furniture and fixtures .............. 169,129 174,524
- Machinery and equipment .................... 23,080,863 23,135,344
- Computer equipment and software ............ 2,788,489 2,854,788
- Transportation equipment ................... 109,782 109,782
----------- -----------
Total cost ................................ 27,516,171 27,763,740
- Accumulated depreciation and amortization .. 15,187,425 16,860,895
----------- -----------
Property, plant and equipment, net ........ $12,328,746 $10,902,845
=========== ===========
- Depreciation & amortization expense ........ $ 1,757,862 $ 1,673,470
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 2004 2005
--------- ---------- ----------
CONVERTIBLE REVOLVING NOTE
- The convertible revolving working capital credit
line is collateralized by substantially all assets
of the Company and provides for borrowing, subject
to certain collateral requirements, up to $10
million. The credit line is due May 17, 2008, and
bears interest, payable monthly, at 1.25% above
prime rate (as of August 31, 2005, an effective rate
of 8.0%)............................................... $ -- $6,534,727
OVERFORMULA
- The overadvance loan is due January 31, 2006 and
bears interest at prime rate plus 1.25% (as of
August 31, 2005, an effective rate of 8.0%)............ -- 2,000,000
REVOLVING WORKING CAPITAL CREDIT LINE
- The credit line was repaid on May 17, 2005........... 9,849,532 --
SECURED CONVERTIBLE TERM NOTE
- The convertible term note, payable in monthly
installments of $96,969.70 commencing September 1,
2005, plus interest at prime rate plus 4%, (as of
August 31, 2005, an effective rate of 10.75%)
commencing June 1, 2005, due May 17, 2008.............. -- 3,200,000
NOTES PAYABLE TO BANK
- Note payable to bank repaid on May 17, 2005.......... 1,835,100 --
26
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- LONG-TERM AND SUBORDINATED DEBT - CONTINUED
AUGUST 31,
-------------------------
DEBT TYPE 2004 2005
--------- ----------- -----------
- Subordinated note payable to bank, payable in monthly installments of
$31,000, including interest at 11%, due January 1, 2008 ............... 1,050,670 1,008,124
SUBORDINATED DEBT
- Subordinated note payable repaid on May 17, 2005 ....................... 3,000,000 --
OTHER
- Other .................................................................. 20,070 12,704
----------- -----------
Total debt ............................................................ 12,755,555 15,755,372
----------- -----------
Less: long-term portion of unamortized debt discount .................. -- 598,000
Less: current portion of long-term debt and unamortized
debt discount ................................................... 15,742,669 3,287,510
----------- -----------
Long-term debt, net of unamortized discount ........................ $ 12,703 $ 8,870,045
=========== ===========
On May 17, 2005, the Company executed a new senior loan facility agreement with
Laurus Master Fund LTD. ("Laurus"). Under such financing, the Company entered
into a Securities Purchase Agreement and a Security Agreement (collectively, the
"Agreements"). Pursuant to these agreements, the Company received a Secured
Convertible Term Loan (the "Term Loan") in the aggregate principal amount of
$3.2 million as well as a Revolving Credit Note (the "Revolving Facility") with
a maximum availability of $10.0 million. The Agreement is subject to certain
restrictions and various covenants, including a borrowing base formula of ninety
percent of eligible accounts receivable and fifty percent of the lesser of
work-in-process inventory or $5 million. The Term Loan monthly installments may
be paid in Company common stock if the average closing price of the Company's
common stock for five trading days prior to due date is greater or equal to 115%
of the fixed conversion price ($1.66) and the amount of such conversion does not
exceed 25% of the aggregate trading dollar volume of the Company's common stock
for the period of 22 trading days immediately preceding such amortization date.
The Revolving Facility shall be convertible by Laurus into shares of the
Company's common stock at a rate of $1.66 per share. In addition, the Company
issued an option to purchase 650,000 shares of its Common Stock at an exercise
price of $.01.
Laurus has agreed that it shall not convert either the Term Loan or any loans
under the Revolving Facility into shares of the Company's Common Stock in
amounts that would cause it to obtain an aggregate beneficial ownership of the
Company's Common Stock exceeding 4.99% at any given time (or 19.99% in the event
such limitation is suspended upon the occurrence of an "event of default" under
any of the Agreements or any other transaction agreements). The Company and
Laurus agreed to customary terms and conditions including, but not limited to,
the filing of a registration statement within 60 days from the date of the
Agreements of shares of the Company's Common Stock issuable (i) upon exercise of
the Option, (ii) upon conversion of the Term Loan, and (iii) upon conversion of
up to $2.0 million under the Revolving Facility. The Company has an obligation
to register an additional $2.0 million under the Revolving Facility upon
issuance by the Company of an additional note evidencing such indebtedness.
The Company used the proceeds from the Term Loan, Revolving Facility and
Overformula to extinguish, in full, its indebtedness owed to Comerica Bank, its
former secured lender, and The HillStreet Fund II, L.P., its subordinated
secured lender, as well as for general working capital purposes. In connection
with the transactions described herein, Laurus received fees and was reimbursed
by the Company for its expenses in the aggregate amount of $510,200.
The Company, in issuing an option for 650,000 shares at $.01 per share,
triggered price protection in relationship to previously issued warrants. Under
the previous warrant agreements, if the Company issued warrants or options
27
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- LONG-TERM AND SUBORDINATED DEBT - CONTINUED
below the strike price, the exercise price of the outstanding warrants would
adjust to the lower exercise price. The Company had previous warrants for
315,792 shares of common stock with 157,896 shares priced at an exercise price
of $5.07 per share and 157,896 priced at $5.53 per share. Of these warrants,
210,528 shares were exercised during 2005.
Effective November 10, 2005, the company received a waiver of noncompliance with
Section 3 of its security agreement with its lender such that the overadvance
loan shall not trigger an event of default and extending the overadvance loan
through January 31, 2006.
Minimum scheduled principal payments on long-term debt to maturity as of August
31, 2005, are as follows:
FISCAL YEAR ENDED AUGUST 31, AMOUNT
---------------------------- -----------
- 2006 ........................... $ 3,430,704
- 2007 ........................... 1,445,612
- 2008 ........................... 7,713,710
- 2009 ........................... 165,529
- 2010 ........................... --
-----------
Total ......................... $12,755,555
===========
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
------------------
2003 2004 2005
---- ---- ----
- Current expense ................. $-- $-- $--
- Deferred expense (benefit) ...... -- -- --
--- --- ---
Income tax expense (benefit) ... $-- $-- $--
The difference between the federal statutory tax rate and the Company's
effective rate was:
AUGUST 31
------------------
2003 2004 2005
---- ---- ----
- Federal statutory tax rate ...... 34% (34%) (34%)
- Effect of valuation allowance ... (36%) 34% 34%
- Other items ..................... 2% -- --
--- --- ---
Effective tax rate ............. -- -- --
The details of the net deferred tax liability are as follows:
AUGUST 31
-------------------------
2004 2005
----------- -----------
Deferred tax liabilities:
- Depreciation ............................................. $(3,323,376) $(3,287,537)
----------- -----------
Deferred tax assets:
- Alternative minimum tax credit carryforward .............. 160,978 164,288
- Accrued lease expense .................................... 251,904 305,281
- Deferred compensation and other items .................... 136,255 128,867
- Net operating loss carryforward .......................... 6,510,818 7,303,721
----------- -----------
Total deferred tax assets ............................... 7,059,955 7,902,157
- Valuation allowance recognized for deferred tax assets ... (3,736,579) (4,614,620)
----------- -----------
Net deferred tax liability .............................. $ -- $ --
28
The net operating loss carryforward arising in fiscal 2002, 2004 and 2005 will
expire, if unused, in fiscal 2022, 2024 and 2025, respectively.
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 9 -- OPERATING LEASES
On June 26, 2003, the Company renegotiated its operating lease for its
manufacturing and office facilities. The new noncancellable lease began November
1, 2003 and 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 year ended
August 31, 2003, the cash payments made exceeded the lease expense by $35,045.
For the years ended August 31, 2004 and 2005, the lease expense exceeded the
cash payments by $100,204 and $156,990, respectively. The Company has various
operating leases, including the noncancellable operating lease noted above, for
facilities that expire during the next 15 years. Rent expense under these leases
for the years ended August 31, 2003, 2004 and 2005 amounted to $1,120,250,
$1,098,955, and $1,155,522, respectively.
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, 2005.
LEASE
YEAR ENDED AUGUST 31, PAYMENTS
--------------------- -----------
- 2006 ............................... $ 988,298
- 2007 ............................... 1,013,135
- 2008 ............................... 1,039,332
- 2009 ............................... 1,064,351
- 2010 ............................... 1,090,548
- 2011 and after ..................... 9,996,658
-----------
Total minimum payments required ... $15,192,322
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. The plan, as
established, allows for discretionary contributions as determined annually by
the Company's Board of Directors. No discretionary contribution was made for the
years-ended August 31, 2003, 2004, and 2005. The Company also matches and
contributes up to 15 percent of the employees' contributions, up to 2% of an
employee's annual wage. Effective January 1, 2002, the Company, until further
notice, 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, upon the earlier of death or
termination of executive's employment with the Company on or after attainment of
age 65, the Company shall pay to the executive, his heirs and assignees a
retirement benefit equal to $50,000 per year for five years. The retirement
benefit will commence on the first day of the second month following the death
or termination of his employment with the Company on or after attainment of age
65. The retirement benefit shall continue with four additional payments of
$50,000 each. Death of the executive after the commencement of payments shall
not reduce or eliminate subsequent payments due. At the time of retirement, the
Company had a key-man life insurance policy for $250,000 on such executive.
During fiscal 2005, the Company transferred such policy to the retired
individual based upon a value of $100,000. In addition, the Company paid
$107,840 during fiscal 2005 to such retiree and is scheduled to retire the
remaining liability of $42,160 in fiscal 2006.
29
RIVIERA TOOL COMPANY
NOTES TO FINANCIAL STATEMENTS
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 option grant and the
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.
As permitted by SFAS No. 123, "Accounting for Stock-based Compensation," the
Company continues to apply the provisions of Accounting Principles Board Opinion
No. 25, which recognizes compensation expense under the intrinsic value method.
The compensation cost, estimated under the fair value-based method defined in
SFAS No. 123, was not significant.
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):
WEIGHTED AVERAGE
OPTION PLAN SHARES EXERCISE PRICE
----------- ------- ----------------
1996 STOCK OPTION PLAN, AS AMENDED
Outstanding at end of year, August 31, 2002 ... 110,000 $ 4.83
======= ======
Fiscal Year Ended August 31, 2003
- Stock options granted .......................... -- --
------- ------
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
======= ======
1998 KEY EMPLOYEE STOCK OPTION PLAN
Outstanding at end of year, August 31, 2002 ... 107,000 $ 5.20
======= ======
Fiscal Year Ended August 31, 2003
- Stock options forfeited ........................ (2,000) $ 3.75
- Stock options forfeited ........................ (2,000) $6.625
------- ------
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
======= ======
30
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 the 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 the 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 price to the broker of the transaction.
Inc 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 above issued warrants. Such price protection was to expire in September
of 2005.Under the warrant agreements, if the Company issued warrants or options
below the strike price ($5.07 and $5.53), the exercise price of the outstanding
warrants would adjust to the lower exercise price. Of these warrants, 210,528
shares were exercised during 2005.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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-15d, 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, 2005, 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 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.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information with respect to Directors, Executive Officers, Beneficial Owners and
the Company's Code of Ethics may be found under the captions "Directors and
Executive Officers" and "Section 16(A) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders to be held January 11, 2006 (the "2005 Proxy Statement") and such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Directors and Executive Officers Compensation may be
found under the captions "Compensation of Directors and Executive Officers" in
the Company's 2005 Proxy Statement and such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters may be found under the captions
"Executive Compensation," and "Director Compensation" in the Company's 2005
Proxy Statement and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions is
contained under the captions "Executive Compensation," "Ownership of Company
Stock," and "Compensation Committee Interlocks and Insider Participation" in the
Company's 2005 Proxy Statement and such information is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to Principal Accountant Fees and Services is contained
under the captions "Independent Public Accountants" in the Company's 2005 Proxy
Statement and such information is incorporated herein by reference.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(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. Exhibits
10(ii): First Amendment to Loan documents dated November 28, 2005
between Registrant and Fifth Third Bank.
10(jj): Omnibus Amendment dated October 14, 2005 between Registrant
and Laurus Master Fund Ltd.
21 Subsidiaries - None
23 Consent of Deloitte Touche LLP
31.1 Written Statement of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 Sec. 302
31.2 Written Statement of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 Sec. 302
32 Written Statements of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 Sec. 906
(b) Reports on Form 8-K
None
33
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 30, 2005 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 30th day of November, 2005, 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
-------------------------------------
James V. Gillette, Director
34
Exhibit Index
Exhibit No. Description
----------- -----------
10(ii): First Amendment to Loan documents dated November 28, 2005 between
Registrant and Fifth Third Bank.
10(jj): Omnibus Amendment dated October 14, 2005 between Registrant and
Laurus Master Fund Ltd.
23 Consent of Deloitte Touche LLP
31.1 Written Statement of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 Sec. 302
31.2 Written Statement of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 Sec. 302
32 Written Statements of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 Sec. 906