ITEM 1. BUSINESS
GENERAL
Larizza Industries, Inc., an Ohio Corporation, was incorporated in November 1982. Unless the context otherwise requires, all references to the "Company" in this Form 10-K refer to Larizza Industries, Inc. and its consolidated subsidiaries. The Company's principal executive offices are located at 201 West Big Beaver Road, Columbia Center, Suite 1040, Troy, Michigan 48084, and its telephone number is (810) 689-5800.
The Company designs and manufactures high-quality, plastic-based components and systems utilized in the interiors of automobiles, light trucks, sport utility vehicles and mini-vans. The Company's product line ranges from injection molded plastic components, such as sidewall trim, air outlet assemblies and cupholders, to highly complex systems, such as complete instrument panels and door panels.
The Company has eight automotive parts manufacturing facilities, of which five are in Michigan and three are in Ontario, Canada. The Company believes these facilities provide significant capacity for expansion of its core automotive interior plastics business without a proportional increase in investments in fixed assets.
On March 11, 1994, the Company's lenders converted $47,000,000 of principal and $9,254,000 of accrued interest into 8,283,040 shares of common stock. The conversion reduced long-term debt, accrued interest and deferred gain on debt restructure on the Company's balance sheet as of March 11, 1994 by $47,000,000, $9,254,000, and $3,324,000, respectively, and increased shareholders' equity by $59,578,000.
On May 6, 1994, the Company signed a $50,000,000 credit facility agented by Bank of America Illinois (formerly Continental Bank, N.A.). The initial borrowing of $36,000,000 consisted of $35,600,000 used to repay existing indebtedness and $400,000 used to pay various loan fees and expenses. This debt refinancing resulted in the recognition of the remaining deferred gain on debt restructure which was recorded as an extraordinary gain. See Note 6 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report.
On October 20, 1994, the Company acquired Hughes Plastics, Inc., a designer and manufacturer of air outlets and instrument panel components for the automotive industry. Hughes Plastics, Inc. is located in St. Joseph, Michigan. See Note 2 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report.
During the fourth quarter of 1994, the Company was awarded contracts by Ford to manufacture instrument panel components for the Ford Taurus, Mercury Sable and Ford Econoline. The Ford Econoline business started in the fourth quarter of 1994 and the Ford Taurus and Mercury Sable start in production in 1995. The Company anticipates further opportunities to quote on instrument panel components for Ford.
INDUSTRY OVERVIEW
The Company markets its products primarily to automotive original equipment manufacturers ("automotive OEMs") and automotive OEM suppliers in the North American automotive industry. The North American market for new automobiles, light trucks, sport utility vehicles and mini-vans is cyclical with demand strongly influenced by the overall strength of the North American economies. Sales volumes have fluctuated due to such factors as the general condition of the economy, inflationary expectations and interest rates on consumer credit. Within the automotive industry, certain trends have developed which will affect the future growth opportunities for automotive OEM suppliers such as the Company.
Increased outsourcing by automotive OEMs. Increasingly, automotive OEMs have shifted the procurement of components from internal divisions to external suppliers. This trend in outsourcing has developed because external suppliers generally have lower cost structures and shorter development lead times than captive suppliers. The Company believes outsourcing will benefit external suppliers by providing a major source of potential growth.
Consolidation of the automotive OEM supplier base. Because of ever increasing competition among the automotive OEMs, supplier standards are frequently upgraded. The automotive OEMs are requiring their suppliers to meet increasingly stringent standards for quality, cost and full-service capabilities, including design, engineering and product management support. The continuation of this trend has resulted in reducing the number of suppliers and has created opportunities for suppliers which can meet these increasingly stringent standards. The Company expects to take advantage of this trend.
Increasing consumer attention to interior styling. Consumers have become increasingly sensitive to automobile passenger compartment styling. This styling includes the texture and esthetic appeal of an automobile's interior components, including door handles and dashboards, as well as functional performance of elements such as cupholders and air outlets. Heightened attention to the design of these components has increased the need for automotive OEM suppliers to produce higher quality components with enhanced features and has created opportunities for suppliers, such as the Company, capable of providing components which appeal to consumers. In addition, as the exterior styling of automobiles is increasingly driven by the need to meet demanding engineering specifications for aerodynamic performance, product differentiation can be most easily achieved by enhancing interior comfort and styling.
Increased North American production by transplant automotive OEMs. The share of North American automotive production provided by foreign automotive manufacturers has increased from 1990 to 1994. Increasingly, these transplants are under political and economic pressure to purchase a greater percentage of their components from domestic suppliers. The Company currently supplies Honda with door panels used in the Honda Civic and Nissan with various components used in the Nissan Quest.
PRODUCTS
The Company's products are used in the interior of vehicles and range from injection molded plastic components to highly complex systems. The Company's products include injection molded plastic components, such as sidewall trim, air outlet assemblies, cupholders, substrates and door panels, and compression molded plastic components, such as window trim and van engine covers which provide a structural protective cover for engines. The Company also manufactures padded products such as armrests and headrests. The Company intends to expand its product line and increase sales of systems which, because of their greater complexity and higher labor content, produce higher profit margins.
The Company manufactures products using a variety of processes, including injection molding, compression molding, rotocast molding, vacuum forming and polyurethane foaming. The Company also performs secondary operations such as hot stamping, heat staking and the application of paint, vinyl, carpet and other decorative components.
The extensive manufacturing capabilities of the Company enable it to produce highly complex systems, such as instrument panels and door panels. For door panels, the Company injection molds the plastic substrate, which serves as the foundation, manufactures and attaches the armrest and upper door panel, attaches vinyl, carpet, speaker grilles and electrical switches and applies paint or other decorative finishes where needed.
The Company has engineering and design capabilities which permit the Company to work closely with its customers in the development of new components and systems and the redesign of existing components and systems. The Company has a number of patents and patents pending covering products developed and designed internally.
CUSTOMERS
The Company sells its products primarily to automotive OEMs. The Company's principal customers are various divisions of General Motors, Chrysler, Ford and Honda. The following table reflects the Company's net sales to each of its principal customers for the year ended December 31, 1994. The loss or significant reduction of business with any of these customers could have a material adverse impact on the Company.
The Company is a supplier on a variety of automobile, light truck, sport utility vehicle and mini-van models. The following table lists the major models for which the Company currently produces components or systems:
The Company has been selected as the sole-source supplier for certain components and systems on the 1996 Chevrolet Corsica, Beretta and Cavalier, Pontiac Grand Am, General Motors "M" vans (Astro and Safari) and full-size vans, Ford "F" Truck, and Honda Civic, the 1997 Chevrolet Lumina APV, Corsica and Beretta, Pontiac Trans Sport and Grand Prix, Buick Regal and Park Avenue, and Cadillac DeVille and Concours, and the 1998 Chrysler "LH" cars (the Chrysler New Yorker, LHS and Concorde, the Dodge Intrepid and the Eagle Vision).
Each of the Company's principal customers has chosen the Company to be the exclusive supplier of various components and systems for certain models of automobiles, light trucks, sport utility vehicles or mini-vans. For example, the Company is the exclusive supplier of interior sidewall trim for the Chevrolet Lumina, instrument panels for the General Motors Rally/Vandura, sidewall trim for the Ford Crown Victoria, door panels for the Jeep Grand Cherokee and door panels for the Honda Civic manufactured in North America.
The Company's business tends to reflect the seasonal business cycle of the domestic automotive industry. Normally, production declines during the model changeover period in the third quarter of each year. Production generally increases in the fourth quarter, with maximum production experienced during the first and second quarters.
The Company believes that Ford and Chrysler are reducing the number of their direct suppliers, and that Ford has selected several suppliers to act as integrators of complete automobile interiors. The Company believes that it is in Chrysler's and Ford's reduced supplier base for instrument panel components, but it is not part of Ford's group of integrators. The Company is, however, supplying one of the Ford integrators, and it is attempting to obtain subcontracting work from other integrators, but there can be no assurance that the Company will be successful in its efforts.
BUSINESS STRATEGY
The Company's goal is to increase its sales of highly complex systems supplied to the automotive OEMs as well as to other major automotive suppliers. To accomplish this goal, the Company follows a business strategy based upon the following elements:
Maintain High Quality Reputation
The Company believes the numerous quality awards it has received from its principal customers evidence the Company's historical success in implementing its business strategy by delivering the quality, service and price required by its customers. To date, certain of the Company's plants have received top quality awards from its customers, including the Chrysler "QE", Ford "Q1" and the General Motors "TFE" awards. In addition, the Company received General Motors' "Worldwide Supplier of the Year" award for 1994, 1993 and 1992. This award was given to one of General Motors' decorative injection molded parts suppliers in each of the last three years in recognition of excellence in quality, service and price. The Company believes that there are over 100 General Motors decorative injection molded parts suppliers in North America.
Lean Manufacturing Improvements
The Company applies a "lean manufacturing" philosophy designed to reduce manufacturing costs by eliminating waste in its operations through active employee participation. By empowering employees and giving them more autonomy and responsibility for decisions affecting day-to-day operations, the Company believes that it has improved product quality while reducing operating costs.
As a result of implementing a strategy that incorporates this philosophy, the Company believes that it has positioned itself as a low cost producer of the products that it manufactures.
Provide Increased Engineering and Design
Over the past several years, the automotive OEMs have increasingly relied upon their suppliers to provide engineering and design support early in the development cycle of a new vehicle. As a result, the Company has developed engineering and design capabilities which permit the Company to work closely with its customers in the development of new components and systems and the redesign of existing components and systems. The Company has a number of patents and patents pending relating to products developed and designed internally.
Just-In-Time Delivery/Line Sequencing Advantage
The Company works closely with its customers to reduce their inventory costs. For example, it has developed a "line sequencing" system in which engine covers, instrument panels and door panels are produced and sequenced for shipment in the same color sequence as the interiors of the customers' vehicles in which the engine covers, instrument panels and door panels will be installed. This reduces the customers' overhead costs by eliminating the need to store large quantities of components with various options and colors. The "line sequencing" system is a further development of the "just-in-time" system in which the Company integrates its delivery schedules with its customers so that components are delivered "just in time" for installation into the customers' products.
As an example, the Company has manufactured and sequenced over 2.0 million door panels under one contract for a customer without any quality or sequencing rejections, even though there are approximately 75 variations in the color and options relating to that program. The Company believes that its ability to produce and sequence products for its customers provides it with a cost advantage in bidding on certain contracts.
Strategic Acquisitions in Core Business
The Company may consider the acquisition of successful companies engaged in the Company's core plastics business if the Company believes the acquisition will further its goal of increasing its market penetration through expanding its product line, manufacturing capabilities or customer base. While the Company believes the opportunities may become available as a result of the automotive OEMs reducing their supplier bases, there are no negotiations for such acquisitions at present and there can be no assurance that any acquisitions will be completed.
MARKETING
The Company sells its products directly to its customers under sales contracts which are obtained primarily through competitive bidding. The Company's marketing personnel maintain regular contact with its various customers' engineers and purchasing agents. The Company coordinates its marketing efforts through a sales office in Troy, Michigan, which employs full-time marketing representatives and also uses independent manufacturers' representatives.
Suppliers are generally selected to produce components and systems two to four years in advance of commencement of production of a new or redesigned model. The Company typically receives a purchase order to supply the customer's entire requirement for a given product. The actual number of products sold by the Company under a purchase order is dependent upon the number of vehicles produced by the customer in which the product is incorporated. Accordingly, the Company is unable to state a firm order backlog.
Historically, most customer purchase orders have provided for supplying the customer's requirements for a model year and may be canceled by the customer at any time, although, it has been the Company's experience that such purchase orders are typically renewed until the product is redesigned or eliminated in a model change. In certain cases, customers will issue long-term purchase orders which provide for supplying the customer's requirements for the life of a component or system. Such purchase orders typically require annual price reductions which reflect expected efficiency gains in the manufacturing process.
COMPETITION
Automotive components and systems such as those produced by the Company are supplied by a large number of manufacturers. As a result, manufacturers tend to have relatively small market shares, and the Company believes that no supplier or group of suppliers has a dominant position in the market for any of the Company's products. The Company's competitors include manufacturers having both greater and lesser size and financial resources than the Company. Certain manufacturing operations of automotive OEMs directly compete with the Company.
In general, the Company competes in its markets on the basis of quality, price, customer service, design and engineering capability and reputation with the customer.
RAW MATERIALS
The principal raw material used by the Company is plastic resins. The Company's principal suppliers of resins include The Dow Chemical Co., A. Schulman, Inc. and General Electric Corporation. The Company believes that it has adequate supplies of raw material available from reliable sources for the level of production presently anticipated.
PATENTS, TRADEMARKS AND LICENSES
The Company has a number of patents and patents pending, trademarks and a license. The Company believes that although its patents and patents pending, trademarks and license have some value in the manufacturing and marketing of certain products, their loss would not have a material adverse effect on the Company's business.
EMPLOYEES
The Company's continuing operations had 1,894 full-time employees as of January 31, 1995. These consisted of 143 salaried and 763 hourly personnel in the United States and 163 salaried and 825 hourly personnel in Canada. As of January 31, 1995, 1,486 of the Company's employees were represented by various labor unions under collective bargaining agreements expiring on various dates through August 1998. Certain of such agreements, covering an aggregate of 1,048 employees, expire prior to the end of 1995. There can be no assurance that such agreements will be successfully negotiated and renewed before they expire. The Company has never experienced a work stoppage and considers its employee relations to be good.
ENVIRONMENTAL
Compliance with federal, state and local laws and regulations governing the discharge of material into the environment and noise levels is not expected to have a material effect upon the Company.
GENERAL NUCLEAR
General Nuclear Corporation, a subsidiary of the Company located in Hempfield, Pennsylvania, manufactures high-precision valves, valve components and specialized fasteners for the cooling systems of nuclear reactors used in United States Navy nuclear submarines and aircraft carriers. These products are machined and fabricated from stainless steel, iconel, monel, stellite, aluminum and other metals and metal alloys.
General Nuclear Corporation has been accounted for as a discontinued operation since December 31, 1990, when the Company adopted a plan to dispose of General Nuclear Corporation. General Nuclear Corporation's revenues in 1994 were approximately $3.8 million, but such revenues are not included in the Company's net sales in its financial statements. General Nuclear is being held for sale by the Company.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Information regarding the Company's operations by geographic area is set forth in Note 12 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report.
ITEM 2.
ITEM 2. PROPERTIES
The manufacturing operations of the Company are conducted in the following facilities:
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(1) Lease expires in October 2001, and may be renewed for seven years at the Company's option. Company has an option to purchase at any time during the initial term of the lease.
(2) Facility is no longer in operation and is held for sale.
(3) Lease expires in March 2000.
(4) Lease expires in April 2003.
(5) Lease expires in January 1997.
Owned properties are subject to mortgages under Credit Agreements with lenders (see Note 6 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report).
The Company believes that all of its properties, machinery and equipment are well maintained and suitable and adequate for the business of the Company as presently conducted. The Company believes that it has a significant amount of open capacity due, in part, to the elimination of waste resulting from its "lean manufacturing" strategy.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, the Company is not a party to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the American Stock Exchange under the symbol LII. Information regarding the last sale prices per share of the Company's common stock on the American Stock Exchange for each quarterly period of 1994 and 1993 is set forth below.
PRICE OF COMMON STOCK
SHAREHOLDERS
As of February 15, 1995, there were approximately 212 record holders of the Company's common stock.
DIVIDENDS
It is the policy of the Company's Board of Directors to retain all earnings for the operation and expansion of the Company's business for the foreseeable future, and the Company does not currently intend to pay cash dividends on its common stock. The Company has not paid any dividends in the last three years. The Company is restricted from paying dividends under Credit Agreements with its lenders (see Note 6 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, listed in Item 14 of this Report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," set forth in Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto of the Company listed in Item 14 of this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items in the consolidated statements of operations expressed as a percentage of net sales:
Year Ended December 31, 1994 vs. Year Ended December 31, 1993
The Company's net sales for 1994 were $169.3 million compared to $148.3 million for 1993, representing an increase of 14.2 percent. This increase in net sales resulted from increased production levels of vehicles in which the Company's products are used, new programs launched during the third quarter of 1994 and the acquisition of Hughes Plastics, Inc. on October 20, 1994, which resulted in $2.7 million of additional sales in 1994. The Chrysler Jeep Grand Cherokee door program is scheduled to end in the third quarter of 1995. However, sales are expected to increase in 1995 as a result of the full year impact of new programs started in 1994, the acquisition of Hughes Plastics, Inc. and new instrument panel component business for the Ford Taurus and Mercury Sable expected to begin production in the third quarter of 1995.
Gross profit for 1994 was $35.5 million compared to $32.6 million for 1993, representing an increase of 8.8 percent. This increase in gross profit is a result of higher sales. The gross profit margin decreased to 20.9 percent in 1994 compared to 22.0 percent in 1993. This decrease in gross profit margins resulted primarily from losses incurred at Hughes Plastics, Inc. The Company expects this operation to become profitable during 1995. During the last half of 1994, the Company began experiencing inflationary pressures with respect to raw material costs, particularly plastic resins. This had a minor impact on margins in 1994; however, if the Company is not able to pass these increased costs on to its customers, 1995 margins could be impacted negatively.
Operating income in 1994 was $22.0 million compared to $21.1 million in 1993, representing an increase of 4.4 percent. This increase in operating income resulted from increased gross profit offset partially by increased selling, general and administrative costs. Operating income as a percentage of net sales was 13.0 percent in 1994 compared to 14.2 percent in 1993.
Selling, general and administrative expenses were $13.4 million in 1994 compared to $11.5 million in 1993. Selling expenses were up by $0.9 million as a result of increased sales and general and administrative costs were up by $1.0 million as a result of costs associated with the filing of a registration statement which was subsequently withdrawn and a refinancing of the Company's remaining debt, as well as generally higher expenses.
Interest expense for 1994 was $3.5 million compared to $6.5 million for 1993. This reduction in interest expense resulted primarily from the conversion of $47.0 million in principal amount of debt, plus the related accrued interest, into common stock on March 11, 1994.
Income tax expense for 1994 was $5.1 million compared to $2.1 million for 1993. The effective tax rate increased to 26.7 percent in 1994 from 14.3 percent in 1993 as a result of the Canadian net operating loss carryforwards being fully utilized during 1993.
During 1994, the Company completed a debt refinancing which resulted in the recognition of the remaining deferred gain on debt restructure. This resulted in an extraordinary gain of $2.4 million being recorded in 1994.
Year Ended December 31, 1993 compared with Year Ended December 31, 1992
The Company's net sales for 1993 were $148.3 million compared to $111.3 million for 1992, representing an increase of 33.2 percent. This increase in net sales resulted largely from increased sales of door panels for the Chrysler Jeep Grand Cherokee which was launched in the first quarter of 1992, as well as the launching during the third quarter of 1992 of new programs to supply door panels for the Honda Civic manufactured in Marysville, Ohio and instrument panel components for the Mercury Villager and Nissan Quest.
Gross profit for 1993 was $32.6 million compared to $19.3 million for 1992, representing an increase of 69.2 percent. This increase in gross profit is a result of higher sales and higher gross profit margins. The gross profit margin increased to 22.0 percent in 1993 compared to 17.3 percent in 1992. This increase in gross profit margins resulted from higher sales being spread over fixed overhead costs and operating improvements at certain of the Company's facilities.
Operating income in 1993 was $21.1 million compared to $8.3 million in 1992, representing an increase of 153.1 percent. This increase in operating income resulted from increased gross profit offset slightly by increased selling, general and administrative costs. Operating income as a percentage of net sales was 14.2 percent in 1993 compared to 7.5 percent in 1992.
Selling, general and administrative expenses were $11.5 million in 1993 compared to $10.9 million in 1992. Selling, general and administrative expenses for 1993 include professional expenses relating to a proposed acquisition by the Company that was not consummated. The 5.2 percent increase in selling, general and administrative expenses in 1993 was less than the 33.2 percent increase in net sales for the same period because general and administrative expenses are primarily fixed costs. Selling, general and administrative expenses as a percentage of net sales were 7.8 percent in 1993 compared to 9.8 percent in 1992.
Interest expense for 1993 was $6.5 million compared to $7.1 million for 1992. This reduction in interest expense resulted primarily from lower borrowing levels. Interest expense was reduced by $1.3 million and $1.4 million of amortization of deferred gain on debt restructure in 1993 and 1992, respectively.
During 1993, the Company's Canadian net operating loss carryforwards were fully utilized resulting in an income tax provision for 1993 of $2.1 million.
During the first quarter of 1992, the Company extinguished long-term debt in the amount of $906,000 for a cash payment of $195,000 resulting in a gain of $711,000 which is recorded as an extraordinary gain.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash position increased by $0.2 million during 1994. Cash provided by operating activities was $19.0 million. Cash in the amount of $6.1 million was used for capital expenditures, primarily for machinery and equipment purchases and upgrades. Capital expenditures in 1995 are projected to be slightly higher than they were in 1994 as a result of new programs being launched in 1995 and 1996.
During 1994, the Company acquired Hughes Plastics, Inc., for a purchase price of $5.3 million including liabilities assumed, net of cash acquired and had net debt repayments of $7.3 million.
At December 31, 1994, the Company had $8.5 million available under its line of credit, plus, if certain conditions are met, an additional $7.0 million available for tooling and capital expenditure loans. For a description of the Company's credit facilities, see Note 6 of the Notes to Consolidated Financial Statements listed in Item 14 of this Report.
On March 11, 1994, the Company's lenders converted $47.0 million of principal and $9.3 million of accrued interest into 8.3 million shares of common stock, representing 37.5 percent of the Company's outstanding common stock after such conversion. This conversion reduced long-term debt, accrued interest and deferred gain on debt restructure on the Company's balance sheet as of the date of the conversion by $47.0 million, $9.3 million and $3.3 million, respectively, and increased shareholders' equity by $59.6 million.
The Company's primary needs for liquidity during 1995 will be to support its working capital needs, debt service requirements and capital expenditure requirements. The Company believes that cash generated by operations plus amounts available under its credit facilities will be adequate to fund its cash requirements for 1995.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data of the Company are described in Item 14 of this Report and follow the signature page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, if filed no later than April 30, 1995, for the 1995 Annual Meeting of Shareholders, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the Proxy Statement (except for the information under the heading "Board Compensation Committee Report on Executive Compensation" or "Performance Graph"), if filed no later than April 30, 1995, for the 1995 Annual Meeting of Shareholders, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, if filed no later than April 30, 1995, for the 1995 Annual Meeting of Shareholders, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the Proxy Statement, if filed no later than April 30, 1995, for the 1995 Annual Meeting of Shareholders, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
1. Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits
Each management contract or compensatory plan or arrangement in the following list is identified with an asterisk before the exhibit number.
3(i) Amended Articles of Incorporation (5)
3(ii) Amended Code of Regulations (1)
4.1 Specimen of Common Stock (1)
4.2 Loan Agreements, see Exhibits 10.10(a) through 10.11(g) (2), 10.15(a) and 10.15(b)
9 Voting Trust Agreement among Larizza Industries, Inc., Ronald T. Larizza and Edward L. Sawyer, Jr., dated as of December 20, 1991 (4)
9.1 Amended and Restated Voting Trust Agreement among Larizza Industries, Inc., Ronald T. Larizza and the shareholders signing the agreement, dated as of May 4, 1994 (9)
9.1(a) Amendment to Voting Trust Agreement among Larizza Industries, Inc., Ronald T. Larizza and Edward L. Sawyer, Jr., dated as of March 11, 1994 (10)
*10.1(a)(1) Promissory Note dated as of December 31, 1993, in the amount of $1,468,827 from Ronald T. Larizza to Larizza Industries, Inc., which replaces a note, dated December 31, 1991 (8)
*10.1(a)(2) Promissory Note dated as of December 31, 1993, in the amount of $667,250 from Edward L. Sawyer, Jr. to Larizza Industries, Inc., which replaces the note, dated December 31, 1991 (8)
10.2 Asset Sale and Purchase Agreement, dated as of May 6, 1994, between Manchester Plastics, Ltd. and Larizza Industries, Inc. (9)
10.3(c)(4) Lease between Mortall Realty Company and Dynamic Industries of Michigan Incorporated, dated March 1, 1983 (2)
10.4(a) Lease between ALBA, Inc. and Manchester Plastics, Inc., dated April 1, 1990 (3)
10.5 Lease among Louis V. Buzzitta, Catherine F. Buzzitta and Hughes Plastics, Inc., dated October 20, 1994, incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30,
10.6 Lease between Ronita Properties Limited, Larizza Industries, Inc. and Manchester Plastics, Ltd., dated as of March 23, 1993 (7)
10.6(a) Lease Amending Agreement between Ronita Properties Limited, Larizza Industries, Inc. and Manchester Plastics, Ltd., dated as of June 25, 1993 (8)
10.6(b) Lease Amending Agreement between Ronita Properties Limited, Larizza Industries, Inc. and Manchester Plastics, Ltd., dated as of February 17, 1994 (8)
10.7(c) Lease dated December 29, 1986, between Sochacki Realty Partners and General Nuclear Corporation (1)
10.8(a) Amended and Restated Marketing, Selling, Administrative and Management Services Agreement, dated as of May 6, 1994, between Larizza Industries, Inc. and Manchester Plastics, Ltd. (9)
*10.9(a)(1) Reverse Split-Dollar Agreement between Larizza Industries, Inc. and Edward Wells dated as of April 22, 1993 (6)
*10.9(a)(2) Reverse Split-Dollar Agreement between Larizza Industries, Inc. and Terence C. Seikel dated as of April 22, 1993 (6)
*10.9(a)(3) Agreement between Larizza Industries, Inc. and Steven J. Lebowski, trustee of the Larizza Family Irrevocable Trust, dated as of April 22, 1993 (6)
*10.9(a)(4) Collateral Assignment made by Steven J. Lebowski, trustee of the Larizza Family Irrevocable Trust to Larizza Industries, Inc. dated as of April 22, 1993 (6)
*10.9(a)(5) Agreement between Larizza Industries, Inc. and Steven J. Lebowski, trustee of the Larizza Family Irrevocable Trust, dated as of April 22, 1993 (6)
*10.9(a)(6) Collateral Assignment made by Steven J. Lebowski, trustee of the Larizza Family Irrevocable Trust to Larizza Industries, Inc. dated as of April 22, 1993 (6)
*10.9(b) Stock Incentive Plan for Key Employees (1)
*10.9(c) Consulting Agreement, dated as of June 15, 1994 between Larizza Industries, Inc. and The Edgewater Group, Inc. (12)
*10.9(d) Finders Agreement, dated as of June 15, 1994, between Larizza Industries, Inc. and The Edgewater Group, Inc. (12)
*10.9(e) Employment Agreement, dated as of April 21, 1994, between Larizza Industries, Inc. and Ronald T. Larizza (11)
10.10(a) Credit Agreement, dated as of May 6, 1994, among Larizza Industries, Inc., various financial institutions and Continental Bank N.A. (9)
10.10(a)(1) First Amendment to Credit Agreement, dated as of June 2, 1994, among Larizza Industries, Inc., various financial institutions and Continental Bank N.A. (12)
10.10(a)(2) Second Amendment to Credit Agreement, dated as of October 19, 1994, among Larizza Industries, Inc., various financial institutions and Bank of America Illinois (13)
10.10(a)(3) Third Amendment to Credit Agreement, dated as of November 4, 1994, among Larizza Industries, Inc., various financial institutions and Bank of America Illinois
10.10(b) Note, dated as of May 6, 1994, in the principal amount of $35,000,000 from Larizza Industries, Inc. to Continental Bank N.A. (9)
10.10(b)(1) Note, dated as of June 15, 1994, in the principal amount of $24,500,000 from Larizza Industries, Inc. to Continental Bank N.A. (12)
10.10(b)(2) Note, dated as of June 15, 1994, in the principal amount of $10,500,000 from Larizza Industries, Inc. to The First National Bank of Boston (12)
10.10(b)(3) Note, dated as of August 31, 1994, in the principal amount of $17,375,000 from Larizza Industries, Inc. to Continental Bank N.A. (13)
10.10(b)(4) Note, dated as of August 31, 1994, in the principal amount of $6,950,000 from Larizza Industries, Inc. to Sanwa Business Credit Corporation (13)
10.10(c) Security Agreement, dated as of May 6, 1994, between Larizza Industries, Inc. and Continental Bank N.A. (9)
10.10(d) Company Pledge Agreement, dated as of May 6, 1994, between Larizza Industries, Inc. and Continental Bank N.A. (9)
10.10(e) Form of Mortgage, Deed of Trust, Assignment of Leases and Rents, Security Agreement and Financing Statement, dated as of May 6, 1994, between Larizza Industries, Inc., and Continental Bank N.A. covering properties located in Manchester, Ann Arbor, Homer and Willamston, Michigan (9)
10.11(a) Credit Agreement, dated as of May 6, 1994, among Manchester Plastics, Ltd., various financial institutions and Continental Bank N.A (9)
10.11(a)(1) First Amendment to Credit Agreement, dated as of June 2, 1994, among Manchester Plastics, Ltd., various financial institutions and Continental Bank N.A. (12)
10.11(b) Note, dated as of May 6, 1994, in the principal amount of $15,000,000 from Manchester Plastics, Ltd. to Continental Bank N.A. (9)
10.11(b)(1) Note, dated as of June 15, 1994, in the principal amount of $10,500,000 from Manchester Plastics, Ltd. to Continental Bank N.A. (12)
10.11(b)(2) Note, dated as of June 15, 1994, in the principal amount of $4,500,000 from Manchester Plastics, Ltd. to The First National Bank of Boston (12)
10.11(b)(3) Note, dated as of August 31, 1994, in the principal amount of $7,031,250 from Manchester Plastics, Ltd. to Continental Bank N.A. (13)
10.11(b)(4) Note, dated as of August 31, 1994, in the principal amount of $2,812,500 from Manchester Plastics, Ltd. to Sanwa Business Credit Corporation (13)
10.11(c) General Security Agreement, dated as of May 6, 1994, between Manchester Plastics, Ltd. and Continental Bank N.A. (9)
10.11(d) Demand Debenture, dated as of May 6, 1994, from Manchester Plastics, Ltd. to Continental Bank N.A. (9)
10.11(e) Debenture Pledge Agreement, dated as of May 6, 1994, between Manchester Plastics, Ltd. and Continental Bank N.A. (9)
10.11(f) Patent Security Agreement, dated as of May 6, 1994, between Manchester Plastics, Ltd. and Continental Bank N.A. (9)
10.11(g)(1) Charge/Mortgage of Land, dated as of May 6, 1994, from Manchester Plastics, Ltd. to Continental Bank N.A. concerning Gananoque and Stratford, Ontario properties (9)
10.11(g)(2) Charge/Mortgage of Land, dated as of May 6, 1994, from Manchester Plastics, Ltd. to Continental Bank N.A. concerning Scarborough, Ontario lease (9)
10.14 Agreement, dated as of March 4, 1994, among Larizza Industries, Inc., Internationale Nederlanden (U.S.) Capital Corporation and Oppenheimer & Co., Inc., concerning expenses of the public offering (8)
10.15 Stock Purchase Agreement, dated October 13, 1994, among Larizza Industries,Inc., and Diane M. Buzzitta Trust, Phillip F. Wood, Trustee, Diane M. Buzzitta, Louis V. Buzzitta, Joseph T. Buzzitta and James V. Buzzitta, LVB Industries, Inc. and Hughes Plastics, Inc. (13)
10.15(a) Guarantee, dated as of October 21, 1994, by Hughes Plastics, Inc., in favor of Bank of America Illinois and other Banks (13)
10.15(b) Security Agreement, dated as of October 21, 1994, between Hughes Plastics, Inc. and Bank of America Illinois (13)
10.15(c) Subordinated Note, dated as of October 20, 1994, in the amount of $1,200,000 from Larizza Industries, Inc. to Louis V. Buzzitta (13)
10.15(d) Subordinated Note, dated as of October 20, 1994, in the amount of $500,000 from Larizza Industries, Inc. to Louis V. Buzzitta (13)
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick
24 Powers of Attorney
27 Financial Data Schedule
(b) Reports on Form 8-K filed during Fourth Quarter:
None.
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate section of this Report.
(d) Financial Statement Schedules:
Not applicable ___________________________ Key to Footnotes:
(1) Incorporated by reference from the same exhibit number to Amendment No. 1 to the Company's Registration Statement on Form S-1 (file no. 33-15198), filed with the Securities and Exchange Commission on July 28, 1987.
(2) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1987.
(3) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1991.
(4) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1991.
(5) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1992.
(6) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1993.
(7) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1993.
(8) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1993.
(9) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1994.
(10) Incorporated by reference from the same exhibit number to the Company's Registration Statement on Form S-1 (file no. 33-52641), filed with the Securities and Exchange Commission on March 11, 1994.
(11) Incorporated by reference from exhibit number 10.9(c) to Amendment No. 3 to the Company's Registration Statement on Form S-1 (file no. 33-52641), filed with the Securities and Exchange Commission on May 2, 1994.
(12) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended September 30, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LARIZZA INDUSTRIES, INC.
By: /s/ Terence C. Seikel ------------------------------ March 13, 1995 Terence C. Seikel Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Independent Auditors' Report
The Shareholders and Board of Directors Larizza Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Larizza Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Larizza Industries, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 8 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
Detroit, Michigan February 9, 1995
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1994 and 1993 (In thousands, except share data)
See accompanying notes to consolidated financial statments.
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1994, 1993 and 1992 (In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
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LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit) Years ended December 31, 1994, 1993 and 1992 (In thousands)
See accompanying notes to consolidated financial statements.
- 24 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1994, 1993 and 1992 (In thousands)
See accompanying notes to consolidated financial statements.
- 25 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Larizza Industries, Inc. and its wholly owned subsidiaries ("Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Foreign Currency Translation
The Company translates the foreign currency financial statements of its Canadian operations by translating balance sheet accounts at the exchange rate prevailing at year-end and income statement accounts at the average exchange rate for the year. Gains or losses resulting from translating foreign currency financial statements are recorded in a separate component of shareholders' equity (deficit). Gains or losses resulting from foreign currency transactions are included in net earnings.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining lease terms or estimated useful lives of the improvements. Amortization of capitalized leases is included with depreciation expense. Property, plant and equipment held for sale are stated at their estimated net realizable value, and accordingly, are no longer depreciated.
(e) Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over the fair value of net assets of acquired companies at the dates of acquisition. Goodwill is amortized on a straight-line basis over 30 years. Net goodwill was $5,763,000 and $1,486,000 at December 31, 1994 and 1993, respectively, and accumulated amortization was $496,000 and $408,000 at December 31, 1994 and 1993, respectively.
Other intangibles represents an intangible asset recorded in conjunction with SFAS No. 87, Employers' Accounting for Pensions, as discussed in Note 9.
- 26 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
(f) Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for deferred income taxes.
The provision for income taxes includes federal and foreign income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The Company has not provided for federal income taxes on the undistributed earnings of its Canadian subsidiary because they are reinvested and not expected to be remitted to the parent company.
(g) Income Per Share of Common Stock
Primary income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.
On a fully diluted basis, both net income and shares outstanding are adjusted to assume the conversion of the convertible term loan of $47,000,000 plus accrued interest into 8,283,040 shares of common stock at the beginning of the period. To adjust net income for 1994 and 1993, interest expense of $791,000 and $4,174,000, respectively, related to the convertible term loan, less $144,000 and $694,000, respectively, of amortization of deferred gain on debt restructure, was added back into income. Such conversion was not dilutive during the year ended December 31, 1992.
(h) Cash and Cash Equivalents/Consolidated Statements of Cash Flows
The Company considers highly liquid investments with a maturity at the time of purchase of three months or less to be cash equivalents.
(i) Pensions and Post Retirement Benefit Plans
The Company has three defined benefit pension plans covering certain of its salaried and hourly employees. Pension expense is determined pursuant to the provisions of SFAS No. 87, Employers' Accounting for Pensions. Benefits are based upon either employee years of service and compensation or stated dollar amounts per years of service. Contributions to the plans are based upon the recommendation of the Company's actuaries, and past service costs are funded over 15 years. Contributions are intended to provide not only for benefits for service to date, but also for those expected to be earned in the future.
The Company does not currently provide medical benefits to retirees.
- 27 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(2) Acquisition
On October 20, 1994, the Company purchased all of the outstanding stock of LVB Industries, Inc., and then merged LVB Industries, Inc., into its wholly-owned subsidiary Hughes Plastics, Inc. The approximate purchase price of $5,289,000, including liabilities assumed and net of cash acquired, is subject to adjustment and exceeded the fair value of the net assets acquired by $4,450,000. The acquisition has been accounted for by the purchase method of accounting, and accordingly, the results of Hughes Plastics, Inc., have been included in the consolidated operating results since the date of acquisition.
The following unaudited pro forma consolidated results of operations gives effect to the acquisition of LVB Industries, Inc., as though it happened January 1, 1993. This pro forma information is not necessarily indicative of what would have occurred had the acquisition taken place at the beginning of 1993.
(3) Discontinued Operations
Effective on December 31, 1990, the Company adopted a plan to divest General Nuclear Corporation, a wholly-owned subsidiary, operating in the defense industry. General Nuclear, which is being held for sale, has been accounted for as a discontinued operation in the accompanying consolidated financial statements and its net assets have been written down to their estimated net realizable value. The sales of General Nuclear were $3,831,000, $3,323,000, and $3,860,000 in 1994, 1993 and 1992, respectively.
- 28 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(3) Discontinued Operations, Continued
At December 31, 1994 and 1993, the composition of the net current and net noncurrent assets of the discontinued operations is as follows:
(4) Inventories
The components of inventories are as follows:
(5) Property, Plant and Equipment
Property, plant and equipment is comprised of:
- 29 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(5) Property, Plant and Equipment, Continued
Included in property, plant and equipment in 1994 and 1993 is a building held for sale with a net book value of $400,000.
Included in property, plant and equipment in 1994 are assets under a capitalized lease obligation with a cost of $1,395,000 and accumulated amortization of $315,000.
(6) Long-term Debt and Conversion
Long-term debt is summarized as follows:
On March 11, 1994, the holders of the convertible term loan converted $47,000,000 in principal and $9,254,000 of accrued interest related to the convertible term loan into 8,283,040 shares of common stock. The conversion reduced long-term debt, accrued interest and deferred gain on debt restructure on the Company's balance sheet as of March 11, 1994 by $47,000,000, $9,254,000 and $3,324,000, respectively, and increased common stock by $59,578,000.
On May 6, 1994, the Company signed a $50,000,000 credit facility agented by Bank of America Illinois (formerly Continental Bank N.A.). The initial borrowing of $36,000,000 consisted of $35,600,000 used to repay existing indebtedness and $400,000 used to pay various loan fees and expenses.
- 30 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(6) Long-term Debt and Conversion, Continued
The new facility includes a $27,000,000 revolving line of credit for the Company, of which $17,750,000 was outstanding on December 31, 1994, and an $8,000,000 revolving line of credit for tooling and capital equipment for the Company, of which $1,000,000 was outstanding at December 31, 1994. The amount available under the $27,000,000 line of credit is reduced by $250,000 at the end of each quarter in 1994 (beginning June 30, 1994) and $1,250,000 at the end of each subsequent quarter during the term of the loan. Both lines of credit expire May 6, 1997. Interest on the loans is based on Eurodollar rates or the bank's reference rate, plus a margin which can vary each quarter based on specified financial covenants. The margins at December 31, 1994 were 1.75 percent for Eurodollar loans and 0 percent for reference rate loans. The weighted average interest rate at December 31, 1994 was 7.66 percent. The line of credit also requires the Company to pay a commitment fee of .375 percent a year on the average unused amount of the facility. Interest and the commitment fee are payable quarterly, or in the case of Eurodollar loans on their due date, but not less often than quarterly. The revolving line of credit is also available for letters of credit in amounts not to exceed $2,000,000. The Bank issued a $500,000 (Canadian) letter of credit securing checking account overdrafts. Both lines of credit are secured by all of the assets of the Company including the stock of its subsidiaries and the assets of Hughes Plastics, Inc.
In addition, the new facility includes a $15,000,000 term loan to Manchester Plastics, Ltd., the Company's Canadian subsidiary, secured by all of its assets, of which $13,125,000 was outstanding on December 31, 1994. The loan is payable in four quarterly installments of $937,500 from June 30, 1994, through March 31, 1995, with the balance due May 7, 1999. Interest on the loan is based on Eurodollar rates or the bank's reference rate, plus a margin which varies each quarter based on Manchester Plastics' net worth. The margins at December 31, 1994 were 3.50 percent for Eurodollar loans and 1.75 percent for reference rate loans. The weighted average interest rate at December 31, 1994 was 9.26 percent. Interest is payable quarterly, or in the case of Eurodollar loans on their due date, but not less often than quarterly.
The loans to the Company and to Manchester Plastics, Ltd., contain various covenants, the most restrictive of which include limits on the disposition of properties, limits on capital expenditures, maintenance of certain financial levels and ratios and restrictions on additional indebtedness and on the payment of dividends. The Company was in compliance with all such covenants at December 3l, 1994, and expects to be in compliance throughout 1995.
Accrued interest of $8,821,000 which was owed to the banks on December 23, 1991 was unconditionally forgiven by the banks. This amount was recorded as a deferred gain on debt restructure. During 1994, 1993 and 1992 $368,000, $1,342,000 and $1,382,000, respectively, of deferred gain on debt restructure was amortized and netted against interest expense. On May 6, 1994, when the Company refinanced its debt, the remaining deferred gain on debt restructure of $2,405,000 was recorded as an extraordinary gain.
During 1992, the Company extinguished long-term debt in the amount of $906,000 for a cash payment of $195,000 resulting in a gain of $711,000 which is recorded as an extraordinary gain.
- 31 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(6) Long-term Debt and Conversion, Continued
Aggregate principal payments due on long-term debt for the next five years are as follows: 1995 - $1,875,000; 1996 - $1,500,000; 1997 - $17,250,000; 1998 - $0; 1999 - $11,250,000.
(7) Leases
The Company leases a portion of its operating facilities and equipment. Aggregate future minimum lease payments under all noncancelable leases at December 31, 1994, are as follows:
Rent expense for operating leases amounted to $1,344,000, $1,305,000 and $1,209,000 in 1994, 1993 and 1992, respectively.
(8) Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The statement requires the use of the asset and liability approach for financial accounting and reporting for income taxes. Financial statements for prior years have not been restated as the cumulative effect of the accounting change had no impact.
Income (loss) before income tax provision and extraordinary gain is as follows:
- 32 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(8) Income Taxes, Continued
The income tax provision (benefit) before extraordinary gain is summarized as follows:
A reconciliation between the provision for income taxes before extraordinary gain and income taxes on such income calculated at the United States statutory rate of 35 percent for 1994 and 1993, and 34 percent for 1992 is as follows:
- 33 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(8) Income Taxes, Continued
The tax effected temporary differences and United States net operating and capital loss carryforwards which give rise to deferred tax assets and liabilities at December 31, 1994 and 1993 are summarized as follows:
A valuation allowance has been recognized to offset the deferred tax assets related to operations in the United States due to the uncertainty of realizing the benefit of the United States net operating loss and capital loss carryforwards and deductible temporary differences in the future. The net change in the valuation allowance from $11,348,000 at December 31, 1993 to $8,546,000 at December 31, 1994 was a decrease of $2,802,000 which related primarily to the reversal of the temporary difference provided for interest forgiveness income in 1993.
At December 31, 1994, the Company has net operating loss carryforwards of $7,500,000 for United States income tax purposes, which expire from 2005 to 2009. Net operating loss carryforwards for Canadian tax purposes of $9,400,000 at December 31, 1992, were fully utilized in 1993 to reduce Canadian taxable income. As a result of the Hughes Plastics, Inc. acquisition, there is an estimated $2,400,000 of net operating loss carryforwards subject to the separate return limitation year provisions. In addition, the Company has capital loss carryforwards for United States tax purposes of $15,400,000 which expire in 1996.
- 34 -
LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(9) Employee Pension Plans
The Company has three defined benefit pension plans covering certain of its salaried and hourly employees. In accordance with SFAS No. 87, Employers' Accounting for Pensions, the Company recorded a minimum pension liability of $1,653,000 and $1,296,000 at December 31, 1994 and 1993, respectively. This liability represents the excess of unfunded accumulated benefit obligations over accrued pension cost. The minimum liability was offset by an intangible asset which is amortized on a straight line basis over 16 years. There was no effect on net income.
The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993:
Net periodic pension costs for the years ended December 31, 1994 and 1993, are:
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LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(10) Related Party Transactions
Notes receivable from principal shareholders include $2,264,000 and $2,136,000 of interest-bearing notes due from principal shareholders at December 31, 1994 and 1993, respectively. During 1993, notes receivable from principal shareholders were replaced with new notes. These new notes bear interest at 5.97% and are payable in annual installments beginning in 1996. Interest charged by the Company to principal shareholders was $128,000, $155,000 and $141,000 in 1994, 1993 and 1992, respectively.
Amounts charged to the Company by a prior director of the Company for sales commissions were $2,420,000, $2,173,000 and $1,380,000 during 1994, 1993 and 1992, respectively. Amounts paid by the Company to a certain director for consulting services were $340,000, $50,000 and $50,000 during 1994, 1993 and 1992, respectively.
(11) Litigation
The Company and its consolidated subsidiaries have various pending lawsuits and claims. In the opinion of management, the ultimate liabilities resulting from such lawsuits and claims will not materially affect the consolidated financial position of the Company.
(12) Segment and Geographic Information
The Company operates in the automotive industry, where it designs and manufactures plastic-based components and systems used in the interiors of automobiles, light trucks, sport utility vehicles and mini-vans.
Net sales to major customers are as follows:
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LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(12) Segment and Geographic Information, Continued
Information about the Company's operations by geographic area is as follows:
The Company holds some degree of credit risk due to the concentration of trade accounts receivable due from major customers. Receivables from these customers at December 31, 1994 and 1993 approximate the same percent of total receivables as aggregate sales to these customers bear to total sales. Transfers between geographic areas and export sales are immaterial. Identifiable assets are those used in the operation of each geographic area. Corporate assets consist primarily of cash, prepaid expenses, transportation equipment and notes receivable from officers.
(13) Stock Incentive Plan
The 1987 Stock Incentive Plan authorizes the granting of incentive and nonqualified stock options, stock appreciation rights and restricted shares of common stock. Participation in the Plan is limited to employees, including officers and directors of the Company. Under the Plan, a maximum of 200,000 shares of common stock may be made the subject of options, stock appreciation rights or restricted stock grants.
The per share purchase price of the common stock under options is determined by the Compensation Committee and, in the case of incentive stock options, must be at least 100 percent (110 percent in the case of 10 percent shareholders) of the fair market value of one share of common stock on the date of grant of such option. Stock appreciation rights may either be granted independently or in conjunction with the grant of a stock option. Each stock option or appreciation right shall be exercisable at any such time as may be determined by the Compensation Committee at the time of grant. Each option and appreciation right shall expire not more than ten years from the date of grant.
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LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(13) Stock Incentive Plan, Continued
Under the Plan, the Compensation Committee may also grant shares of restricted stock to participants. The Compensation Committee shall establish the restricted period at the time the shares are awarded. The shares of restricted stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered during the restricted period.
On December 31, 1994, no options were outstanding and 200,000 shares were available for grant.
(14) Quarterly Data (Unaudited)
Summarized quarterly financial data for 1994 and 1993 are as follows:
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LARIZZA INDUSTRIES, INC., AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(14) Quarterly Data (Unaudited), Continued
- 39 -
EXHIBITS
________________ Key to Footnotes
(1) Incorporated by reference from the same exhibit number to Amendment No. 1 to the Company's Registration Statement on Form S-1 (file no. 33-15198), filed with the Securities and Exchange Commission on July 28, 1987.
(2) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1987.
(3) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1991.
(4) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1991.
(5) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1992.
(6) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1993.
(7) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1993.
(8) Incorporated by reference from the same exhibit number to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1993.
(9) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended March 31, 1994.
(10) Incorporated by reference from the same exhibit number to the Company's Registration Statement on Form S-1 (file no. 33-52641), filed with the Securities and Exchange Commission on March 11, 1994.
(11) Incorporated by reference from exhibit number 10.9(c) to Amendment No. 3 to the Company's Registration Statement on Form S-1 (file no. 33-52641), filed with the Securities and Exchange Commission on May 2, 1994.
(12) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated by reference from the same exhibit number to the Company's Form 10-Q for the quarter ended September 30, 1994.