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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995 Commission File Number 1-4115
Zenith Electronics Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-1996520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Milwaukee Avenue, Glenview, Illinois 60025-2493
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (847) 391-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock, $1 par value, New York Stock Exchange
and associated purchase rights Chicago Stock Exchange
Basel, Geneva and Zurich, Switzerland
Stock Exchange
6 1/4 % Convertible Subordinated New York Stock Exchange
Debentures, due 2011
Securities registered pursuant to Section 12(g) of the Act: None
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 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 (1) has filed all reports
required to be filed of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
The aggregate market value of the registrant's Common Stock held by
non-affiliates based on the New York Stock Exchange closing price on
March 1, 1996, was $180,123,535.
As of March 1, 1996, there were 63,437,742 shares of Common Stock,
par value $1 per share outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement dated March 18,
1996, are incorporated by reference into Part III of this report.
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<PAGE>
ZENITH ELECTRONICS CORPORATION
FORM 10-K
INDEX
Page
Number
------
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 5
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
EXECUTIVE OFFICERS OF THE REGISTRANT 8
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 9
Item 6. SELECTED FINANCIAL DATA 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
Item 11. EXECUTIVE COMPENSATION 15
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 15
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 16
SIGNATURES 20
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS 22
<PAGE>
PART I
ITEM 1. BUSINESS
The company was founded in 1918 and has been a leader in consumer
electronics, first in radio and later in monochrome and color television
and other video products. The company's operations involve a dominant
industry segment, the design, development, and manufacture and
marketing of video products (including color TV sets and other consumer
products) along with parts and accessories for such products. These
products, along with purchased VCRs, are sold principally to retail
dealers in the United States and Canada and to retail dealers and
wholesale distributors in other foreign countries. The company also sells
directly to buying groups, private label customers and customers in the
lodging, health care and rent-to-own industries. The company's video
products also include color picture tubes that are produced for and sold to
other manufacturers and Network Systems products, such as cable and
telecommunication set-top devices, interactive TV and data
communication products which are sold primarily to cable TV operators
and other commercial users of these products.
The company has sold or downsized its non-core business
activities. The company sold its monochrome video monitor business in
1993 and its power supply business in 1994. Its activities in color video
monitors sold to computer manufacturers ceased in 1995 and its activities
in high-security electronic equipment have been discontinued.
The company has incurred losses in all but one of the years since
1985. These results reflected the cumulative effect of frequent and
significant color TV price reductions during the 1980s and 1990s, and
also reflected earlier recessionary conditions in the United States. In
addition, the company has invested significant amounts in engineering and
research in recent years, which amounts have been expensed as incurred.
On November 8, 1995, a change in control of the company
occurred, in which LG Electronics, Inc., a corporation organized under the
laws of the Republic of Korea ("LGE"), purchased shares of the company
pursuant to a combined tender offer and purchase of newly issued shares
of common stock from the company. After giving effect to the
transactions, LGE is the beneficial owner of 36,569,000 shares of
common stock of the company which represents approximately 57.7
percent of the outstanding common stock.
Raw Materials
Many materials, such as copper, plastic, steel, wood, glass, aluminum and
zinc, are essential to the business. Adequate sources of supply exist for
these materials.
Patents
The company is licensed under a number of patents which are of
importance to its business, and holds numerous patents. The company
has patents and patent applications for numerous high-definition TV
("HDTV") related inventions. To the extent these inventions are
incorporated into the HDTV standard to be adopted by the Federal
Communications Commission, the company expects to receive royalties
from these patents. In addition, royalties have been and may be received
from these patents for non-HDTV applications as well. In addition, major
manufacturers of TV sets and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses
expire in 2003). Based on 1995 U.S. industry unit sales levels and
technology, more than $25 million in annual royalty income is expected
through the licensing period. While in the aggregate its patents and
licenses are valuable, the business of the company is not materially
dependent on them.
Seasonal Variations in Business
Sales of the company's consumer electronics products are generally at a
higher level during the second half of the year. Sales of consumer
electronics products typically increase in the fall, as the summer vacation
season ends and people spend more time indoors with the new fall
programming on TV and during the Christmas holiday season. During
1995, 1994 and 1993, 57 percent, 59 percent and 54 percent, respectively,
of the company's net sales were recorded in the second half of the year and
approximately 30 percent of the company's net sales were recorded in the
fourth quarter of each of the three years ended December 31, 1995.
Major Customer
Sales to a single customer amounted to $172.1 million (14 percent of total
sales) in 1995 and $180.8 million (12 percent of total sales) in 1994. No
other customer accounted for 10 percent or more of net sales.
Competitive Conditions
Competitive factors in North America include price, performance, quality,
variety of products and features offered, marketing and sales capabilities,
manufacturing costs, and service and support. The company believes it
competes well with respect to each of these factors.
The company's major product areas, including the color TV
market, are highly competitive. The company's major competitors are
significantly larger foreign-owned companies, generally with greater
worldwide TV volume and overall resources. In efforts to increase market
share or achieve higher production volumes, the company's competitors
have aggressively lowered their selling prices in the past several years.
Research and Development
During 1995 expenditures for company-sponsored engineering and
research relating to new products and services and to improvements of
existing products and services amounted to $43.6 million. Amounts
expended in 1994 and 1993 were $45.4 million and $47.8 million,
respectively.
Environmental Matters
Compliance with Federal, State and local environmental protection
provisions is not expected to have a material effect on capital
expenditures, earnings or the competitive position of the company.
Further information regarding environmental compliance is set forth under
Item 3 of this report.
Number of Employees
At the end of December 1995, the company employed approximately
18,100 people, of whom approximately 13,100 are hourly workers
covered by collective bargaining agreements. Approximately 4,600 of the
company's employees are located in the Chicago, Illinois, area, of whom
approximately 3,000 are represented by unions. Approximately 13,200 of
the company's employees are located in Mexico, of whom approximately
10,100 are represented by unions. Mexican labor contracts expire every
two years and wages are renegotiated annually or more frequently under
rapid devaluation or high inflation periods. The company believes that its
relations with its employees are good.
Financial Information about Foreign and Domestic Operations and Export Sales
The North American Free Trade Agreement ("NAFTA"), which took
effect on January 1, 1994, significantly reduced duty costs in 1995 and
1994. NAFTA also improved the company's ability to compete against
imports in North America and increased sales of the company's color TV
sets in Canada and in Mexico during 1994 and in Canada during 1995.
Information regarding foreign operations is included in "Note Six
- - Geographic Segment Data" on page 29 of this report. Export sales are
less than 10% of consolidated net sales.
The company's product lines are dependent on the continuing
operations of the company's manufacturing and assembly facilities located
in Mexico.
ITEM 2. PROPERTIES
The company utilizes a total of approximately 5.6 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.
Square Feet
Location Nature of Operation (in millions)
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Domestic:
- -------------------
Chicago, Illinois Six locations - production of 2.2
(including suburban color picture tubes, parts and
locations) service; engineering and research,
marketing and administration
activities; and assembly of
electronic components
(.6 million square feet is
leased by the company)
Fort Worth, Roanoke, Seven locations - warehouses / offices .9
El Paso, McAllen, (.8 million square feet is leased by
Brownsville and Dallas, the company)
Texas; Douglas, Arizona
Foreign:
- ------------------
Mexico Twelve manufacturing and warehouse 2.4
locations - production of plastic
and wooden cabinets for color
television, sub-assembly production
of television chassis, tuners and
other components and final assembly
of color television and Network
Systems products
Canada Two locations - distribution of .1
Consumer Electronics products
Taiwan One location - purchasing office -
----------
Total 5.6
==========
The company's facilities are suitable and adequate to meet current
and anticipated requirements. None of the real property owned by the
company is mortgaged
ITEM 3. LEGAL PROCEEDINGS
The company is involved in various legal actions, environmental matters,
and other proceedings relating to a wide range of matters that are
incidental to the conduct of its business. The company believes, after
reviewing such matters with the company's counsel, that any liability
which may ultimately be incurred with respect to these matters is not
expected to have a material effect on either the company's consolidated
financial position or results of operations.
In October 1989, the U.S. Environmental Protection Agency
("EPA") filed a civil action against certain generator and owner/operator
defendants under the Comprehensive Environmental Response,
Compensation, and Liabilities Act of 1980 ("CERCLA"), seeking
reimbursement for the EPA's response costs in connection with an
environmental cleanup at a site known as Moyer Landfill located at
Collegeville, Pennsylvania. One of the original defendants to the EPA
case brought a third party action for contribution against a number of
third party defendants, including Ford Electronics and Refrigeration
Corporation ("FERCO"). FERCO sought $600,000 in contribution from
the company on the ground that FERCO is being held liable in part
because it hauled certain waste from the company's former Lansdale,
Pennsylvania picture tube plant. The company recently entered into an
agreement with FERCO and agreed to contribute $300,000 toward a
settlement with the federal government and the Commonwealth of
Pennsylvania, subject to negotiation of an acceptable consent decree.
Numerous lawsuits against major computer and peripheral
equipment manufacturers are pending in the U.S. District Court, Eastern
District of New York, the U.S. District Court of New Jersey and the New
York State courts, as well as other federal courts. These lawsuits seek
several billion dollars in damages from various defendants for repetitive
stress injuries claimed to have been caused by the use of word processor
equipment. The company has been named as a defendant in twenty-seven
of these cases which relate to keyboards allegedly manufactured by the
company for its former subsidiary, Zenith Data Systems Corporation.
Plaintiffs in the company's cases seek to recover $31 million actual and
$321 million punitive damages from the company. The company believes
it has meritorious defenses to the cases.
The company was served with summons and complaint in an
action entitled Linn-Faysville Aquifer Preservation Association, et al v.
Republic Waste Industries, Inc., et al. No. C-4430-95F, filed August 31,
1995, in the state court, Hidalgo County, Texas. The suit alleges that the
company and others had contaminated groundwater that has the potential
to enter and contaminate an aquifer by, in the case of the company and
several of the other defendants, dumping hazardous wastes from their
maquiladoras at a landfill in Edinberg, Texas. Plaintiffs are an
association and a number of individuals. Defendants are the
owner/operators of the landfill and alleged "dumpers." Unspecified
damages are sought for a variety of alleged harms to persons and
property. In addition, the plaintiffs seek the cleanup and closing of the
landfill. Discovery is ongoing. A trial date has not yet been set.
On June 27, 1995, the EPA sent a letter notifying the company
that it was one of the potentially responsible parties under Section 107(a)
of CERCLA, with respect to the North Penn Area Seven Superfund Site
in Lansdale, Montgomery County, Pennsylvania. Hazardous substances
consisting of volatile organic material ("VOM") were discovered in the
aquifer. The company does not believe that it has contributed to the
contamination. At this time, the company has no knowledge of the extent
of the contamination or the cost of cleanup.
In June 1992, the company retained an environmental consultant
to conduct a survey of its air emission sources and to test for VOM
emissions at its picture tube facility in Melrose Park, Illinois. The survey
disclosed that the company needed certain additional operating permits
from the Illinois EPA relating to air emission sources and needed to
comply with certain federal and state air quality regulations regarding
VOM emissions. The company promptly reported the results of the
survey to the Illinois EPA and to the EPA. The company retained an
environmental engineering firm to complete installation of pollution
control equipment to address the emissions. The capital costs for
installing appropriate capture and control equipment was $600,000 and
the company installed the equipment in 1995. In 1995, the Illinois
Attorney General sent the company a penalty demand for $1.4 million,
which demand was subsequently reduced to $660,000. The company is
contesting the penalty.
On December 6, 1995, the company received notice that it has
been named as a third-party defendant in a contribution action entitled SC
Holdings, Inc. v. A.A.A. Realty Co., et al, U.S. District Court, District of
New Jersey, Civil Action No. 95-947(GEB), filed November 30, 1995.
The company is one of over 100 parties involved in this litigation. The
litigation concerns the Cinnaminson Groundwater Contamination Site
located in the Township of Cinnaminson in Burlington County, New
Jersey. The site is a former sanitary landfill. The EPA has designated the
site a "Superfund" site and has placed the site on the National Priorities
List. Very little information is available at this time. However, there is
an allegation that the company disposed of 40 drums of solvents at the
site. The facility that allegedly generated the solvents was not identified.
The company has answered the complaint and is attempting to obtain
more specific information from third-party plaintiffs.
In 1994, the company notified its 15 independent distributors of
its intent to change to direct-to-retail distribution on a nationwide basis
during 1995. In February 1995, one of the independent distributors filed
suit challenging the company's right to discontinue the distributorship
relationship and alleging that it had been damaged by certain of the
company's practices. The lawsuit sought injunctive relief, actual damages
of $8 million and punitive damages of $20 million. In October 1995
summary judgment dismissing the case on all counts was entered. The
plaintiff has filed notice of appeal. Another suit arising in connection with
this change in distribution was filed in April 1995 by another independent
distributor. The lawsuit seeks approximately $13 million in damages
under the Wisconsin Fair Dealership Law. In January 1996 the court
denied the company's motion for summary judgment and granted the
plaintiff's motion for summary judgment, finding the company is liable. A
jury trial setting the amount of the plaintiff's damages, if any, is expected
in April 1996.
In July 1995, plaintiff Gwynne L. Horwits, SEP IRA, filed a
purported class action in the Court of Chancery of the State of Delaware
in and for New Castle County against the company, its directors and LG
Electronics Inc. (LGE) alleging that the company's directors breached
their fiduciary duties and failed to exercise loyalty, good faith, due care
and complete disclosure toward the company and the stockholders of the
company in connection with the LGE acquisition of a controlling interest
in the company. The company, the members of the board of directors, and
LGE denied, and continue to deny, that they committed any violations of
law or breaches of duty as alleged in the complaint, but entered a
memorandum of understanding and a stipulation of settlement solely
because a proposed settlement would eliminate the burden and expense of
further litigation and facilitated the consummation of the proposed
transaction with LGE. In agreeing to disclose additional information, the
company does not admit the materiality of that information or that the
materials previously filed with the Securities and Exchange Commission
were in any way deficient. In connection with the proposed settlement, it
is anticipated that counsel for the plaintiff will apply to the court for an
aggregate award of attorneys' fees and expenses in an amount not to
exceed $300,000. As a condition of settlement, the company has agreed
to pay plaintiff's counsel the amount awarded by the court, up to
$300,000. Before the proposed settlement is finally approved by the
court, notice of the proposed terms and conditions of the settlement will be
mailed to all members of any class certified by the court, who will be
afforded an opportunity to opt out of and object to the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders of the company was held on November
7, 1995, to approve a Stock Purchase Agreement, dated as of July 17,
1995, between the company and LG Electronics, Inc., a corporation
organized under the laws of the Republic of Korea ("LGE"), and the
transactions contemplated thereby, including LGE's tender offer to
purchase from the company's stockholders up to 18,619,000 shares of
common stock at a purchase price of $10 per share and the issuance and
sale by the company to LGE of 16,500,000 shares of common stock at a
purchase price of $10 per share (collectively, the "Transaction").
Following the Transaction, LGE beneficially owns approximately
57.7 percent of all issued and outstanding shares of common stock of
the company.
The holders of 27,819,334 shares of the company's common
stock entitled to vote were present in person or represented by proxy at the
meeting, constituting 59.28 percent of the total shares issued and
outstanding and entitled to vote at the meeting. The holders voted as
follows: 26,482,083 shares voted For, 979,297 shares voted Against and
357,954 shares Abstaining. There were no broker non-votes.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Office Held Age
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Richard C. Lueck Acting Chief Accounting Officer and Vice 52
President, Controller, since 1995. Joined
Zenith in 1995 following a 28-year career
with IBM where he held a variety of financial
and operational management positions.
Gerald M. McCarthy Executive Vice President, Sales and Marketing, 54
and President, Zenith Sales Company, since
1993 and 1983, respectively. During 30-year
Zenith career, has held a variety of sales and
marketing positions.
Willard C. McNitt Acting Chief Financial Officer since 1995, 47
and Vice President, Treasurer since 1989.
Joined Zenith from Gould Inc., where he held
a variety of financial and treasury positions
including Vice-President-Treasurer.
Albin F. Moschner President and Chief Executive Officer, since 43
1995. Joined Zenith in 1991 as Senior Vice
President of Operations and was named President
and Chief Operating Officer in 1993. Previously
Chief Operating Officer at ETA Systems, Control
Data Corp.'s supercomputer subsidiary, and Chief
Operating Officer for Tricord Systems Inc. During
a 14-year career at IBM, served in a variety of
engineering and manufacturing positions.
Philip S. Thompson Senior Vice President, Operations since 1994. 46
Previously Vice President of Operations, Product
Development and Manufacturing for Pitney-Bowes'
Monarch Marking Systems division from 1993 to 1994.
For 21 years prior to that he was with IBM where
he held a variety of engineering, manufacturing
and general management positions.
Richard F. Vitkus Senior Vice President, General Counsel since 1994. 56
Secretary since 1995. Previously Senior Vice
President, General Counsel, and Director of
Corporate Development at Vanstar Corporation
(formerly ComputerLand Corporation) from 1991
to 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The New York Stock Exchange is the principal United States market in
which the company's common stock is traded. The number of
stockholders of record was 15,119 as of March 1, 1996. No dividends
were paid to stockholders during the two years ended December 31, 1995.
The high and low price range for the company's common stock by
quarter for the past two years is included in the Unaudited Quarterly
Financial Information on page 36 of this report.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data
In millions, except per share amounts
1995 1994 1993 1992 1991
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Results of operations:
Net sales $ 1,273.9 $ 1,469.0 $ 1,228.2 $ 1,243.5 $ 1,321.6
Pre-tax income (loss) (100.1) (14.5) (97.0) (121.8) (51.4)
Net income (loss) (92.4) (14.2) (97.0) (105.9) (51.6)
Financial position:
Total assets $ 690.3 $ 653.6 $ 559.4 $ 578.6 $ 686.9
Long-term debt 168.8 182.0 170.0 149.5 149.5
Stockholders' equity 307.1 228.3 152.4 210.1 308.8
Per share of common stock (primary and fully diluted):
Net income (loss) $ (1.88) $ (.34) $ (3.01) $ (3.59) $ (1.79)
Book value per share $ 4.84 $ 5.00 $ 4.25 $ 6.94 $ 10.60
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The statements of consolidated operations summarize operating results for
the last three years. This section of Management's Discussion and
Analysis highlights the main factors affecting the changes in operating
results during the three-year period.
Revenues
Sales were $1,274 million in 1995, a decrease of 13 percent
from 1994. Sales in 1994 were $1,469 million, an increase of 20 percent
over 1993 sales of $1,228 million.
The company's core business - the development, manufacture
and distribution of a broad range of products for the delivery of video
entertainment - is composed of two major product areas, Consumer
Electronics (which includes color picture tube operations) and Network
Systems.
In Consumer Electronics, the color TV market remains extremely
competitive. Consumer Electronics sales decreased 14 percent in 1995
from 1994 primarily due to lower selling prices, soft domestic demand for
direct-view color TV sets, reduced VCR revenues (partially due to a
change in distribution method) and significantly lower color TV unit sales
in Mexico, due to the December 1994 devaluation of the Mexican peso.
Price competition continued during 1995 forcing the company to
reduce color TV prices by $66 million from 1994 to maintain sales
volumes and market share. The company expects continued erosion in
domestic color TV selling prices during 1996 mainly due to persisting
competition for market share and excess industry inventories. This price
competition may continue to adversely affect the company's performance.
As a result of soft industry conditions during 1995, particularly
during the traditionally strong fourth quarter, domestic industry color TV
unit sales to dealers (including projection television) decreased by 4
percent to 26.2 million units (following increases of 10 percent to 27.4
million units in 1994 and 11 percent to 25.0 million units in 1993). While
it remains one of the top three U.S. color TV brands, the company's
market share declined slightly during 1995 due to slow shipments early in
the first quarter caused by start-up problems associated with a new
finished-goods warehouse. The company expects that industry color TV
unit sales to dealers will continue to decline somewhat in 1996.
In Mexico, the company's and industry TV sales to dealers were
curtailed in 1995 due to devaluation of the peso. The value of the peso
appears to have stabilized, and management expects a gradual recovery in
demand for color TV sets in Mexico.
The North American Free Trade Agreement (NAFTA), which
took effect on January 1, 1994, helped to increase sales of the company's
color TV sets in Canada and in Mexico during 1994 and in Canada during
1995.
During 1994, Consumer Electronics sales increased by 25 percent
over 1993, due primarily to higher unit volume and despite lower product
pricing of $46 million. The company's unit sales increase in 1994 was
significantly higher than the industry growth rate, indicating a rise in
market share. The company's sales increases were especially strong in key
industry growth categories, such as projection and large-screen TV
models and TV-VCR combination products. The company's sales growth
in VCRs in 1994 exceeded the industry's sales growth rate of 6 percent.
In color picture tube operations, NAFTA contributed to continued
strong demand for the company's domestically-produced color picture
tubes. Sales of picture tubes to other manufacturers increased 33 percent
in 1995 from 1994, and the number of units sold was up 29 percent. Sales
of picture tubes increased 20 percent in 1994 from 1993, and the number
of units sold was up 12 percent.
In Network Systems, which includes the design and manufacture
of set-top boxes and data modems sold primarily to the cable TV industry,
sales increased 12 percent in 1995 from 1994, reflecting the continuing
strength of the industry and the popularity of the company's high-
performance analog set-top units. Sales also were aided by a multi-
million-dollar agreement with the Malaysian pay television operation
Mega TV to provide as many as 200,000 wireless cable decoders. The
company anticipates that the analog set-top market will continue to grow
in 1996.
During 1994, Network Systems sales increased by 38 percent
over 1993, reflecting benefits of reorganization and new product
development, as well as an improved industry environment.
Sales of non-core products, primarily power supplies and display
monitors, decreased by 77 percent in 1995 from 1994, to less than 1
percent of total sales. These businesses were phased out or sold during
1994, although the company continued to manufacture power supplies for
the purchaser of the magnetics business until April 1995.
During 1994, sales of non-core products decreased by 72 percent
over 1993 as the company eliminated non-core operations. During the
year, production of both monochrome and color monitors ceased.
Costs and Expenses
In light of the company's net losses, the competitive
environment and inflationary cost pressures, the company has undertaken
major cost reduction programs in each of the last three years, generating
savings of approximately $75 million in 1995, $40 million in 1994 and
$75 million in 1993. These programs included cost control and profit
improvement initiatives; design, manufacturing, logistics and distribution
improvements; and business consolidations. The company continues to
seek ongoing additional cost reduction opportunities; however, there can
be no assurance that any such cost reductions will be achieved. The
Mexican peso devaluation, which began in December 1994, lowered peso-
denominated costs - including wages and salaries, utilities, supplies and
materials - by approximately $36 million in 1995. In addition, NAFTA
regulations reduced duty costs by $19 million in 1994 over 1993. These
cost savings were offset by inflationary increases for purchased material
and labor costs (Mexican labor contracts expire every two years and
wages are renegotiated annually or more frequently under rapid
devaluation or high inflation periods). These inflationary increases totaled
$43 million in 1995, $22 million in 1994 and $20 million in 1993.
Selling, general and administrative expenses were $118 million in
1995, $117 million in 1994 and $93 million in 1993. These expenses as a
percent of revenues were 9 percent in 1995 and 8 percent in 1994 and
1993. In 1995, as compared to 1994, the amount of these expenses was
constant but the decline in sales caused the ratio to increase. In 1994, as
compared to 1993, these expenses increased primarily due to increased
advertising costs in the United States and Mexico in support of the higher
sales volume.
Amounts that the company spends each year on engineering and
research relating to new products and services and to improvements of
existing products and services are expensed as incurred. These amounts
were $44 million in 1995, $45 million in 1994 and $48 million in 1993.
These expenses as a percentage of revenues were 3 percent in 1995 and
1994, and 4 percent in 1993.
Other Operating Expense (Income)
Other operating expense (income) is primarily composed of royalty
income received from manufacturers of TV sets and VCRs who have taken
licenses under some of the company's U.S. tuning system patents. Royalty
income from tuning system patents was $26 million in 1995, $28 million
in 1994 and $26 million in 1993. Also included in Other operating
expense (income) are foreign exchange gains and losses. These amounts
have traditionally not been material, but in 1994 the company recorded $4
million of foreign exchange gain, mainly as a result of the Mexican peso
devaluation.
Restructuring and Other Charges
During 1995, the company recorded $22 million of Restructuring and other
charges. The main component of this was a second-quarter charge of
$18 million primarily to restructure its core Consumer Electronics and
Network Systems business. The charge was primarily composed of provisions
made in anticipation of cash expenditures that were paid in the
second half of 1995 or will be paid in the first half of 1996. The major
elements of the restructuring related to severance expenses ($10 million)
associated with employment reductions (mostly in the company's U.S.
salaried workforce) and costs associated with realigned distribution
activities ($3 million) as the company changed to direct-to-retail
distribution on a nationwide basis. The remaining charges related to
other non-recurring items, including certain environmental, legal and other
regulatory matters, along with trade receivable write-offs (primarily for
accounts in Mexico as a result of the peso devaluation). The reduction in
the salaried workforce, together with other initiatives, are expected to
reduce annual costs by about $20 million.
The remainder of the 1995 charges related to fourth-quarter
charges totaling $4 million that were incurred as a consequence of the LG
Electronics, Inc. (LGE) purchase of common stock.
During 1993, the company recorded $31 million of Restructuring
and other charges. This was driven by a fourth-quarter charge primarily to
restructure certain product areas and re-engineer its core business. The
restructuring affected computer monitors and magnetics, product areas
that were phased out or sold in 1994. Major elements of this charge were
the non-cash writedown of fixed assets and inventory ($23 million) as well
as re-engineering and severance costs ($6 million) that were substantially
paid during 1994. As expected, the restructuring actions reduced 1994
compensation expense by approximately $10 million and reduced
depreciation expense by approximately $4 million. No material changes
have occurred or are anticipated in these programs or in the estimated
costs or benefits of the programs.
Gain (Loss) on Asset Sales
In 1995, the company realized a loss of $2 million related to various
property sale transactions. During 1994 the company realized a gain of $11
million on asset sales, including more than 3 million square feet of excess
plant and office space, 98 acres of vacant land, and assets related to the
magnetics business. There were no material property sales during 1993.
Interest Expense
The $4 million increase in interest expense in 1995 resulted
from higher funding requirements (at higher interest rates) for
company operations. To assist in funding these requirements, the company
entered into a $40 million Term Loan Agreement in May 1995. Interest
expense between 1994 and 1993 was relatively constant.
Income Taxes
In 1995, the company recorded an income tax credit of $8 million
(including interest) that related to a tax refund due the company as
a result of certain foreign tax credit issues in audits of prior years. Due
to the company's continuing losses there have been essentially no provisions
made for income taxes during the last three years.
Net Income
As a result of the factors described above, net losses were $92
million in 1995, $14 million in 1994 and $97 million in 1993.
Corresponding losses per share were $1.88 in 1995, $.34 in 1994 and
$3.01 in 1993.
Market prices for color TV sets in the beginning of 1996 were
substantially lower than a year ago and pricing is not expected to improve
during the rest of the year. The company selectively reduced color TV
prices in February 1996 in order to maintain market share. Although the
company continues to seek more than $75 million in additional cost
reduction opportunities for 1996, the decline in color TV pricing along
with inflationary cost pressures are expected to have a negative impact on
the company's financial results for 1996.
CASH FLOWS
- ----------
The statements of consolidated cash flows reflect the changes in cash for
the last three years by classifying transactions into three major categories;
Operating, Investing and Financing activities.
Operating Activities
A principal use of the company's liquidity is the cash used by
operating activities which consists of the company's net loss
as adjusted for non-cash operating items and the changes in current assets
and liabilities such as receivables, inventories and payables.
In 1995, $33 million of cash was used by operating activities
principally to fund $59 million of net losses from operations as adjusted
for depreciation and a loss on asset sales. A decrease in current accounts
provided $22 million of cash and was principally composed of a $53
million decrease in inventories offset by a $38 million decrease in
accounts payable and accrued expenses. The decreases in inventories and
accounts payable were due in part to lower levels of color TV production
caused by lower sales levels. Inventories also were reduced as a result of
process improvements implemented during 1995.
In 1994, $42 million of cash was used by operating activities
primarily to fund a $52 million change in current accounts offset by $4
million in net income from operations as adjusted for depreciation and
gains on the sales of assets. The change in current accounts was composed
primarily of a $46 million increase in receivables (due to higher sales) and
a $43 million increase in inventories (due mainly to increased levels of
color television production in support of higher sales), partially offset by a
$40 million increase in accounts payable and accrued expenses. In
addition, the company reduced cash used by operating activities by issuing
common stock to the profit-sharing retirement plans to fulfill the 1994
obligation to salaried employees and some hourly employees. This
issuance increased stockholders' equity by $6 million.
In 1993, $28 million of cash was used by operating activities
principally to fund $45 million of net losses from operations as adjusted
for depreciation and fixed asset writedowns as a part of restructuring. A
decrease in current accounts provided $3 million of cash and was
composed of a $15 million decrease in receivables offset by an $8 million
increase in inventories and a $4 million decrease in accounts payable and
accrued expenses. The decrease in receivables was due to lower sales.
Also, the company reduced cash used by operating activities by issuing
common stock to the profit-sharing retirement plans to fulfill both the
1992 obligation to salaried employees and the 1993 obligation to salaried
employees and some hourly employees. These issuances increased
stockholders' equity by $15 million.
Investing Activities
The principal recurring investing activity is the addition of
property, plant and equipment. These expenditures are primarily
for equipment and tooling related to product improvements, more
efficient production methods and replacement for normal wear. In
1995, investing activities used $49 million of cash which consisted of
capital additions of $52 million offset by $3 million of proceeds from
asset sales. In 1994, investing activities used $32 million of cash which
consisted of capital additions of $59 million offset by $27 million of
proceeds from asset sales. In 1993, investing activities used $26 million of
cash for capital additions.
The level of capital additions in 1995 was consistent with the
additions in 1994. Capital additions in 1995 included a new production
line for projection TV picture tubes in the company's Juarez, Mexico,
plant and new industrial robotics to perform labor-intensive production
processes in the company's Melrose Park, Illinois, plant. Capital additions
in 1994 were higher than in 1993 due to investments in plastic injection
molding operations in Reynosa, Mexico, modernization of a mill room in
Juarez, and process re-engineering activities throughout the Consumer
Electronics business.
The company is planning significant capital investment projects
during 1996 and 1997, primarily in the color picture tube area, which
include the expansion of production capacity for color TV picture tubes,
new automated production processes and the addition of new production
lines for computer display tubes and color picture tubes for large-screen
direct-view color TV sets.
Financing Activities
Financing activities provided cash of $167 million in 1995, $62
million in 1994 and $69 million in 1993. The 1995 increase
in cash provided was due to the company selling $171 million of common
stock to investors, principally the sale at $10 per share of 16.5 million
shares to LGE in November. In addition, the company sold 1.3 million
shares to investors under a shelf registration statement for 6.5 million
shares of common stock. Cash was also provided during 1995 as the
company entered into a Term Loan Agreement for $40 million. Cash was
used during 1995 as the company repurchased $43 million principal
amount of its 8.5% Convertible Senior Subordinated Debentures due 2000
and 2001, at par plus accrued interest. This repurchase resulted from the
exercise by certain holders of the debentures of the right to require
repurchase of all or a portion of the debentures following a change of
control of the company, which occurred upon the purchase of a
controlling interest in the company by LGE.
In 1994, financing activities provided $62 million of cash which
included $84 million provided from sales of the company's common stock
and $12 million from the sale of 8.5% Senior Subordinated Convertible
Debentures due 2001. This was offset by $35 million of cash used to
redeem the company's outstanding 12-1/8% Notes due January 1995 at a
redemption price equal to par value (plus accrued interest).
In 1993, financing activities provided $69 million of cash which
included $55 million provided from the sale of 8.5% Senior Subordinated
Convertible Debentures due 2000 and $24 million provided from sales of
the company's common stock. This was offset by $10 million of cash used
to repay borrowings under the company's Credit Agreement.
FINANCIAL CONDITION
- -------------------
As of December 31, 1995, the company had $93 million of cash and had
interest-bearing obligations that consisted of $169 million of long-term
debt, the current portion ($9 million) of the Term Loan Agreement and $9
million of extended-term payables with LGE. The company's long-term
debt is composed of $115 million of 6-1/4% Convertible Subordinated
Debentures due 2011 that require annual sinking fund payments of $5.8
million beginning in 1997, $24 million aggregate principal amount of
8.5% Senior Subordinated Convertible Debentures due 2000 and 2001,
and the long-term portion of the Term Loan Agreement ($30 million). The
Term Loan Agreement requires scheduled quarterly principal payments
over the life of the loan with a balloon payment of $17 million due on the
termination date of the loan, June 30, 1998.
In November 1995, the company entered into a Second Amended
and Restated Credit Agreement and a First Amended and Restated Term
Loan Agreement. These agreements replaced similar agreements with the
same group of lenders and were amended as a result of the purchase by
LGE, of a controlling interest in the company. These agreements contain
restrictive financial covenants that must be maintained as of the end of
each fiscal quarter, including a liabilities to net worth ratio and a
minimum net worth amount. In addition, these agreements restrict the
amount of capital expenditures by the company in each fiscal year. The
Amendments increased the required minimum net worth as of December
31, 1995 and for each quarter thereafter and also improved the interest
rate and interest rate options.
The maximum commitment of funds available for borrowing
under the Credit Agreement is $110 million, but is limited by a defined
borrowing base formula related to eligible receivables and eligible
inventory. The Credit Agreement terminates on June 30, 1998 at which
time all outstanding indebtedness thereunder would have to be refinanced.
As of December 31, 1995, no borrowings were outstanding under the
Credit Agreement in keeping with the seasonal nature of the company's
working capital needs.
As discussed in Investing Activities, the company is planning
significant capital investment projects over the next two years. The
company is exploring options for additional financing that will be required
to support these projects. Because these planned capital investment
projects would exceed the permitted expenditures allowed under the Credit
Agreement and Term Loan Agreement, the company will need to seek
amendments to these agreements. There can be no assurance that the
company will be able to find the additional financing required to support
these projects nor can there be any assurance that the lenders under the
Credit Agreement and Term Loan Agreement will approve amendments, if
requested by the company.
Although the company believes that its Credit Agreement,
together with extended-term payables expected to be available from LGE
and the company's efforts to obtain other financing sources, will be
adequate to meet its seasonal working capital, capital expenditure and
other requirements during 1996, there can be no assurance that the
company will not experience liquidity problems in the future because of
adverse market conditions or other unfavorable events.
FASB ACTIONS
- ------------
The Financial Accounting Standards Board (FASB) issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," in March 1995. The new accounting
standard (which is effective beginning in 1996) requires that long-lived
assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The new accounting standard also requires that long-lived
assets to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The company has not yet quantified the impact,
if any, on the consolidated financial position or results of operations of the
company as a result of the new standard.
FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," in October 1995. The new accounting standard will
require the company to value all stock-based compensation based on the
estimated fair value at the grant date and spread the deemed cost over the
vesting period. The standard permits a choice of whether to charge
operations or disclose the calculated cost, as pro forma information. The
new standard requires disclosure, beginning in 1996 of the deemed cost
effective with 1995 grants. The company has not yet quantified its cost or
determined its method of compliance with the new standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of
Part IV (page 16) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated herein by reference from
the sections entitled "Election of Directors" and "Board and Committee
Meetings and Directors' Compensation" from the company's definitive
Proxy Statement, copies of which were electronically transmitted to the
Commission via EDGAR. See also the list of the company's executive
officers and related information under "Executive Officers of the
Registrant" at the end of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the sections entitled "Board and
Committee Meetings and Directors' Compensation", "Summary
Compensation Table", "Employment Agreements", "Termination and
Change of Control Agreements", "Option/SAR Grants in 1995",
"Aggregated Option/SAR Exercises in 1995 and Year-End Option/SAR
Values" and "Pension Plan Table" from the company's definitive Proxy
Statement, copies of which were electronically transmitted to the
Commission via EDGAR.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the sections entitled "LGE Change in
Control", "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management" from the company's definitive
Proxy Statement, copies of which were electronically transmitted to the
Commission via EDGAR.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the sections entitled "Nominees for
Election as Directors" and "Related Party Transactions" from the
company's definitive Proxy Statement, copies of which were electronically
transmitted to the Commission via EDGAR.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) 1. The following Consolidated Financial Statements of Zenith
Electronics Corporation, the Report of Independent Public Accountants,
and the Unaudited Quarterly Financial Data are included in this report on
pages 23 through 36:
Statements of Consolidated Operations and Retained Earnings -
Years ended December 31, 1995, 1994 and 1993
Consolidated Balance Sheets - December 31, 1995 and 1994
Statements of Consolidated Cash Flows -
Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Unaudited Quarterly Financial Information
(a) 2. The following consolidated financial statement schedule for Zenith
Electronics Corporation is included in this report on page 38:
Schedule II - Valuation and Qualifying Accounts
The Report of Independent Public Accountants on Financial Statement
Schedule is included in this report on page 37.
All other schedules for which provision is made in Regulation S-X
of the Securities and Exchange Commission, are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
3. Exhibits:
(3a) Restated Certificate of Incorporation of the company, as amended
(incorporated by reference to Exhibit 3(a) to the company's Annual
Report on Form 10-K for the year ended December 31, 1992)
(3b) Certificate of Amendment to Restated Certificate of Incorporation
of the company dated May 4, 1993 (incorporated by reference to
Exhibit 4(l) of the company's Quarterly Report on Form 10-Q for the
quarter ended April 3, 1993)
(3c) By-Laws of the company, as amended (incorporated by reference
to Exhibit 3 to the company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995)
(4a) Indenture dated as of April 1, 1986 between Zenith Electronics
Corporation and The First National Bank of Boston as Trustee
with respect to the 6-1/4% Convertible Subordinated Debentures due
2011 (incorporated by reference to Exhibit 1 of the company's
Quarterly Report on Form 10-Q for the quarter ended March 30, 1991)
(4b) Debenture Purchase Agreement dated as of November 19, 1993
with the institutional investors named therein (incorporated by
reference to Exhibit 4(a) of the company's Current Report on Form 8-K
dated November 19, 1993)
(4c) Amendment No. 1 dated November 24, 1993 to the Debenture
Purchase Agreement dated as of November 19, 1993 with the
institutional investor named therein (incorporated by reference to
Exhibit 4(a) of the company's Current Report on Form 8-K dated
November 24, 1993)
(4d) Amendment No. 2 dated as of January 11, 1994 to the Debenture
Purchase Agreement dated as of November 19, 1993 (incorporated by
reference to Exhibit 4(c) of the company's Current Report on Form
8-K dated January 11, 1994)
(4e) Debenture Purchase Agreement dated as of January 11, 1994
with the institutional investor named therein (incorporated by
reference to Exhibit 4(a) of the company's Current Report on Form
8-K dated January 11, 1994)
(4f) Stockholder Rights Agreement, dated as of October 3, 1986
(incorporated by reference to Exhibit 4c of the company's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1991)
(4g) Amendment, dated April 26, 1988, to Stockholder Rights
Agreement (incorporated by reference to Exhibit 4(d) of the
company's Quarterly Report on Form 10-Q for the quarter ended
April 3, 1993)
(4h) Amended and Restated Summary of Rights to Purchase Common
Stock (incorporated by reference to Exhibit 4(e) of the company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1993)
(4i) Amendment, dated July 7, 1988, to Stockholder Rights
Agreement (incorporated by reference to Exhibit 4(f) of the company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1993)
(4j) Agreement, dated May 23, 1991, among Zenith Electronics
Corporation, The First National Bank of Boston and Harris Trust and
Savings Bank (incorporated by reference to Exhibit 1 of Form 8 dated
May 30, 1991)
(4k) Amendment, dated May 24, 1991, to Stockholder Rights
Agreement (incorporated by reference to Exhibit 2 of Form 8 dated
May 30, 1991)
(4l) Agreement, dated as of February 1, 1993, among Zenith
Electronics Corporation, The Bank of New York and Harris Trust and
Savings Bank (incorporated by reference to Exhibit 1 of Form 8 dated
March 25, 1993)
(4m) Amendment, dated July 17, 1995, to Stockholder Rights
Agreement (incorporated by reference to Exhibit 4 of the
company's Current Report on Form 8-K dated July 17, 1995)
(4n) Second Amended and Restated Credit Agreement, dated as of
November 6, 1995, with General Electric Capital Corporation, as
agent and lender, and the other lenders named (incorporated by
reference to Exhibit 4g of the company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995)
(4o) First Amended and Restated Term Loan Agreement, dated as of
November 6, 1995, with General Electric Capital Corporation, as
agent and lender, and the other lenders named (incorporated by
reference to Exhibit 4i of the company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995)
*(10a) 1987 Zenith Stock Incentive Plan (as amended) (incorporated by
reference to Exhibit A of the company's definitive Proxy Statement
dated March 13, 1992)
*(10b) Form of Amended and Restated Employment Agreement with
Gerald M. McCarthy, Albin F. Moschner, Kell B. Benson and
Michael J. Kaplan (incorporated by reference to Exhibit 2 of the
company's Report on Form 10-K for the year ended December 31,
1990)
*(10c) Retirement and Consulting Agreement, dated as of April 10,
1995, with Jerry K. Pearlman (incorporated by reference to Exhibit
10a of the company's Quarterly Report on Form 10-Q for the quarter
ended April 1, 1995)
*(10d) Form of Supplemental Agreement with Gerald M. McCarthy,
Albin F. Moschner and Kell B. Benson (incorporated by reference to
Exhibit 10q of the company's Report on Form 10-K for the year ended
December 31, 1991)
*(10e) Addendum Number Two to Supplemental Letter Agreement,
dated as of April 4, 1995, with Albin F. Moschner (incorporated by
reference to Exhibit 10b of the company's Quarterly Report on Form
10-Q for the quarter ended April 1, 1995)
*(10f) Addendum Number Two to Supplemental Letter Agreement,
dated as of April 4, 1995, with Gerald M. McCarthy (incorporated
by reference to Exhibit 10c of the company's Quarterly Report on Form
10-Q for the quarter ended April 1, 1995)
*(10g) Form of Addendum Number Two to Supplemental Letter Agreement
with Kell B. Benson (incorporated by reference to Exhibit 10d
of the company's Quarterly Report on Form 10-Q for the quarter
ended April 1, 1995)
*(10h) Form of Employee Stock Option Agreement (incorporated by reference
to Exhibit 10e of the company's Quarterly Report on Form 10-Q
for the quarter ended April 1, 1995)
*(10i) Amendment to Employee Stock Option Agreement between the
company and Jerry K. Pearlman (incorporated by reference to
Exhibit 10f of the company's Quarterly Report on Form 10-Q for the
quarter ended April 1, 1995)
*(10j) Letter Agreement, dated October 21, 1991, with Albin F. Moschner
(incorporated by reference to Exhibit 10u of the company's
Report on Form 10-K for the year ended December 31, 1991)
*(10k) Form of Indemnification Agreement with Officers and Directors
(incorporated by reference to Exhibit 8 of the company's Report on
Form 10-K for the year ended December 31, 1989)
*(10l) Form of Directors 1989 Stock Units Compensation Agreement
with T. Kimball Brooker (1000 units) (incorporated by reference to
Exhibit 9 of the company's Report on Form 10-K for the year ended
December 31, 1989)
*(10m) Form of Directors 1990 Stock Units Compensation Agreement
with T. Kimball Brooker, Andrew McNally IV and Peter S.
Willmott (1000 units each) (incorporated by reference to Exhibit 6
of the company's Report on Form 10-K for the year ended December 31,
1990)
*(10n) Form of Directors 1991 Stock Units Compensation Agreement with
T. Kimball Brooker, Andrew McNally IV and Peter S. Willmott
(1,000 units each) (incorporated by reference to Exhibit 10d of
the company's Quarterly Report on Form 10-Q for the quarter ended
June 29, 1991)
*(10o) Form of Amendment, dated as of July 24, 1991, to Directors
Stock Units Compensation Agreements for 1990 and 1991
(incorporated by reference to Exhibit 10e of the company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 1991)
*(10p) Directors Retirement Plan and form of Agreement (incorporated
by reference to Exhibit 10 of the company's Report on Form 10-K
for the year ended December 31, 1989)
*(10q) Form of Amendment, dated as of July 24, 1991, to Directors
Retirement Plan and form of Agreement (incorporated by reference to
Exhibit 10f of the company's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1991)
*(10r) Supplemental Executive Retirement Income Plan effective as of
January 1, 1994
*(10s) Supplemental Salaried Profit Sharing Retirement Plan effective as
of January 1, 1994
(10t) Stock Purchase Agreement dated July 17, 1995, between Zenith
Electronics Corporation and LG Electronics, Inc. (incorporated by
reference to Exhibit 2 of the company's Report on Form 8-K dated July
17, 1995)
(21) Subsidiaries of the company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule for the Year ended December 31, 1995
* Represents a management contract, compensation plan or arrangement.
(b) Reports on Form 8-K
A report on Form 8-K dated October 19, 1995, was filed by the
company stating under Item 5 that on October 19, 1995, the company
issued a press release announcing third-quarter 1995 results.
A report on Form 8-K dated December 21, 1995, was filed by the
company stating under Item 5 that on December 21, 1995, the company
repurchased $42.7 million principal amount of its 8.5 percent Convertible
Senior Subordinated Debentures due 2000 and 2001, at par plus accrued
interest, of which an aggregate of $67 million principal amount had been
previously outstanding. This repurchase resulted from the right of such
holders to require repurchase of all or a portion of the debentures
following a change of control of the company, which change of control
occurred upon the purchase of a controlling interest in the company by
LG Electronics, Inc. and its affiliate LG Semicon Ltd., on November 8,
1995.
(c) and (d) Exhibits and Financial Statement Schedules
Certain exhibits and financial statement schedules required by this portion
of Item 14 are filed as a separate section of this report.
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.
ZENITH ELECTRONICS CORPORATION
(Registrant)
By: /s/ Albin F. Moschner
------------------------------
Albin F. Moschner
President and Chief Executive Officer
Date: March 20, 1996
------------------------
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.
Signatures Title Date
- -----------------------------------------------------------------------------
/s/ T. Kimball Brooker Director March 20, 1996
- ----------------------------- ---------------
T. Kimball Brooker
/s/ Ki-song Cho Director March 20, 1996
- ----------------------------- ---------------
Ki-song Cho
/s/ Eugene B. Connolly Director March 20, 1996
- ----------------------------- ---------------
Eugene B. Connolly
/s/ Cha Hong (John) Koo Director March 28, 1996
- ----------------------------- ---------------
Cha Hong (John) Koo
/s/ Hun Jo Lee Director March 20, 1996
- ----------------------------- ---------------
Hun Jo Lee
/s/ Andrew McNally IV Director March 28, 1996
- ----------------------------- --------------
Andrew McNally IV
/s/ Albin F. Moschner Director, President and March 20, 1996
- ---------------------------- Chief Executive Officer ---------------
Albin F. Moschner (Principal Executive Officer)
/s/ Yong Nam Director March 27,1996
- ----------------------------- --------------
Yong Nam
/s/ Peter S. Willmott Director March 20, 1996
- ----------------------------- --------------
Peter S. Willmott
/s/ Nam K. Woo Director March 28, 1996
- ----------------------------- ---------------
Nam K. Woo
/s/ Richard C. Lueck Vice President, Controller March 20, 1996
- ----------------------------- and Acting Chief Accounting --------------
Richard C. Lueck Officer
(Principal Accounting Officer)
/s/ Willard C. McNitt Vice President - Finance March 20, 1996
- ----------------------------- and Acting Chief Financial --------------
Willard C. McNitt Officer
(Principal Financial Officer)
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
Page
Number
------
Consolidated Financial Statements 23
Notes to Consolidated Financial Statements 26
Report of Independent Public Accountants 35
Unaudited Quarterly Financial Data 36
Report of Independent Public Accountants on Financial Statement
Schedule 37
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 38
Exhibits:
(21) Subsidiaries of the company 39
(23) Consent of Independent Public Accountants 40
(27) Financial Data Schedule for the Year ended December
31, 1995 41
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Operations and Retained Earnings
- -----------------------------------------------------------
In millions, except per share amounts
Year Ended December 31
------------------------------------
1995 1994 1993
------------------------------------
Revenues
Net sales $1,273.9 $1,469.0 $1,228.2
------------------------------------
Costs, Expenses and Other
Cost of products sold 1,201.6 1,350.2 1,163.9
Selling, general and administrative 117.5 117.1 92.5
Engineering and research 43.6 45.4 47.8
Other operating expense (income), net
(Notes 1 and 7) (30.1) (33.6) (25.2)
Restructuring and other charges
(Note 4) 21.6 - 31.0
------------------------------------
Income
Operating income (loss) (80.3) (10.1) (81.8)
Gain (loss) on asset sales,
net (Note 9) (1.7) 11.0 -
Interest expense (19.9) (15.9) (15.5)
Interest income 1.8 .5 .3
------------------------------------
Income (loss) before income taxes (100.1) (14.5) (97.0)
Income taxes (credit) (Note 5) (7.7) (.3) -
------------------------------------
Net income (loss) $ (92.4) $ (14.2) $ (97.0)
====================================
Per Share
Income (loss) per common share
(Note 1) $ (1.88) $ (.34) $ (3.01)
====================================
Retained Earnings
Balance at beginning of year $ (102.3) $ (88.1) $ 8.9
Net income (loss) (92.4) (14.2) (97.0)
------------------------------------
Retained earnings (deficit) at
end of year $ (194.7) $ (102.3) $ (88.1)
====================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Balance Sheets
- -----------------------------
In millions
December 31
------------------
1995 1994
------------------
Assets
- -------
Current Assets
Cash (Note 1) $ 93.2 $ 8.9
Receivables, net of allowance for doubtful
accounts of $3.6 and $3.1 201.3 206.9
Inventories (Note 8) 192.2 245.2
Other 7.8 9.9
------------------
Total current assets 494.5 470.9
Noncurrent Assets
Property, plant and equipment, net (Note 9) 184.7 168.1
Other (Note 1) 11.1 14.6
------------------
Total assets $ 690.3 $ 653.6
==================
Liabilities and Stockholders' Equity
- -------------------------------------
Current Liabilities
Current portion of long-term debt (Note 11) $ 9.0 $ -
Accounts payable (Note 10) 71.8 114.1
Compensation and retirement benefits (Note 14) 30.8 24.8
Product warranties 28.4 35.6
Co-op advertising and merchandising programs 29.9 27.3
Income taxes payable 1.2 1.2
Other accrued expenses 43.3 40.3
------------------
Total current liabilities 214.4 243.3
Noncurrent Liabilities
Long-term debt (Note 11) 168.8 182.0
Stockholders' Equity
Preferred stock, $1 par value; 8,000,000
shares authorized; none outstanding - -
Common stock, $1 par value; 150,000,000
shares authorized; 63,542,922 and 45,698,372
shares issued 63.5 45.7
Additional paid-in capital 440.0 285.4
Retained earnings (deficit) (194.7) (102.3)
Cost of 105,181 and 21,000 common
shares in treasury (1.7) (.5)
--------------------
Total stockholders' equity (Note 12) 307.1 228.3
--------------------
Total liabilities and stockholders' equity $ 690.3 $ 653.6
====================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Statements of Consolidated Cash Flows
- ---------------------------------------
In millions
Increase (Decrease) in Cash
Year Ended December 31
-----------------------------
1995 1994 1993
-----------------------------
Cash Flows from Operating Activities
Net income (loss) $(92.4) $(14.2) $(97.0)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation 32.1 28.8 35.4
Write down of fixed assets as a part of
restructuring (Note 4) - - 16.2
Employee retirement plan contribution in stock - 6.0 14.6
(Gain) loss on asset sales, net 1.7 (11.0) -
Other .5 (.2) .2
Changes in assets and liabilities:
Current accounts 21.5 (52.1) 3.4
Other assets 3.4 .6 (1.0)
-----------------------------
Net cash used by operating activities (33.2) (42.1) (28.2)
-----------------------------
Cash Flows from Investing Activities
Capital additions (51.9) (58.9) (26.1)
Proceeds from asset sales 2.9 27.5 .4
-----------------------------
Net cash used by investing activities (49.0) (31.4) (25.7)
-----------------------------
Cash Flows from Financing Activities
Short-term borrowings, net - - (10.1)
Proceeds from issuance of long-term debt 40.0 12.0 55.0
Proceeds from issuance of common stock, net 170.7 84.1 24.0
Principal payments on long-term debt (44.2) (34.5) -
-----------------------------
Net cash provided by financing activities 166.5 61.6 68.9
-----------------------------
Cash
Increase (decrease) in cash 84.3 (11.9) 15.0
Cash at beginning of year 8.9 20.8 5.8
-----------------------------
Cash at end of year $ 93.2 $ 8.9 $ 20.8
=============================
Changes in Current Assets and Liabilities
Increase (decrease) in cash attributable to changes in:
Receivables, net $ 10.2 $(45.5) $ 15.2
Income taxes, net (6.0) (.2) .8
Inventories 53.0 (42.7) (8.3)
Other assets 2.2 (3.8) .1
Accounts payable and accrued expenses (37.9) 40.1 (4.4)
-----------------------------
Net change in current accounts $ 21.5 $(52.1) $ 3.4
=============================
Supplemental Disclosure
Supplemental disclosure of cash flow information-
Cash paid (refunded) during the period for:
Interest $ 20.6 $ 17.6 $ 15.0
Income taxes (.1) (.1) (1.2)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Notes to Consolidated Financial Statements
- --------------------------------------------
Note One - Significant Accounting Policies: Principles of
consolidation: The consolidated financial statements include the accounts
of Zenith Electronics Corporation and all domestic and foreign
subsidiaries (the company). All significant intercompany balances and
transactions have been eliminated.
Use of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Statements of consolidated cash flows: The company considers
time deposits, certificates of deposit and all highly liquid investments
purchased with an original maturity of three months or less to be cash.
Inventories: Inventories are stated at the lower of cost or market.
Costs are determined for all inventories except picture tube inventories
using the first-in, first-out (FIFO) method. Picture tube inventories are
valued using the last-in, first-out (LIFO) method.
Properties and depreciation: Additions of plant and equipment
with lives of eight years or more are depreciated by the straight-line
method over their useful lives. Accelerated methods are used for
depreciation of virtually all other plant and equipment items, including
high technology equipment that may be subject to rapid economic
obsolescence.
Property held for disposal is stated at the lower of cost or
estimated net realizable value. As of December 31, 1995, and 1994, $3.4
million and $4.6 million, respectively, of property held for disposal was
included in Other noncurrent assets and included certain facilities and land
no longer used in the company's operations.
Most tooling expenditures are charged to expense in the year
acquired, except for picture tube tooling, which is amortized over four
years. Certain production fixtures are capitalized as machinery and
equipment.
Rental expenses under operating leases were $15.3 million, $13.6
million and $9.0 million in 1995, 1994 and 1993, respectively.
Commitments for lease payments in future years are not material.
The company capitalizes interest on major capital projects. Such
interest has not been material.
Engineering, research, product warranty and other costs:
Engineering and research costs are expensed as incurred. Estimated costs
for product warranties are provided at the time of sale based on
experience factors. The costs of co-op advertising and merchandising
programs are also provided at the time of sale.
Foreign currency: The company uses the U.S. dollar as the
functional currency for all foreign subsidiaries. Foreign exchange gains
and losses are included in Other operating expense (income) and netted to
a $3.6 million gain in 1994. These amounts were not material in 1995 and
1993.
Earnings per share: Primary earnings per share are based upon
the weighted average number of shares outstanding and common stock
equivalents, if dilutive. Fully diluted earnings per share, assuming
conversion of the 6 1/4 percent convertible subordinated debentures and
the 8.5 percent convertible senior subordinated debentures, are not
presented because the effect of the assumed conversion is antidilutive. The
number of shares used in the computation were 49.2 million, 42.0 million
and 32.3 million in 1995, 1994 and 1993, respectively.
Note Two - Financial Results and Liquidity: The company has
incurred net losses of $92.4 million, $14.2 million and $97.0 million in
1995, 1994 and 1993, respectively. For many years the company's major
competitors, many with greater resources, have aggressively lowered their
selling prices in an attempt to increase market share. Although the
company has benefited from cost reduction programs, these lower color
television prices together with inflationary cost increases have more than
offset such cost reduction benefits.
The company's Credit Agreement (see Note Ten) expires on June
30, 1998. The maximum commitment of funds available for borrowing
under the Credit Agreement is $110 million, but is limited by a defined
borrowing base formula related to eligible receivables and eligible
inventory.
The company is planning significant capital investment projects
during 1996 and 1997, primarily in the color picture tube area, which
include the expansion of production capacity for color TV picture tubes,
new automated production processes and the addition of new production
lines for computer display tubes and color picture tubes for large-screen
direct-view color TV sets. The company is exploring options for
additional financing that will be required to support these projects.
Because these planned capital investment projects would exceed the
permitted expenditures allowed under the Credit Agreement and Term
Loan Agreement, the company will need to seek amendments to these
agreements. There can be no assurance that the company will be able to
find the additional financing required to support these projects nor can
there be any assurance that the lenders under the Credit Agreement and
Term Loan Agreement will approve amendments, if requested by the
company.
Although the company believes that its Credit Agreement,
together with extended-term payables expected to be available from LG
Electronics, Inc. (LGE) and the company's efforts to obtain other
financing sources, will be adequate to meet its seasonal working capital,
capital expenditure and other requirements during 1996, there can be no
assurances that the company will not experience liquidity problems in the
future because of adverse market conditions or other unfavorable events.
Note Three - Related Party: On November 8, 1995, LGE purchased
18,619,000 shares of common stock of the company pursuant to LGE's
tender offer at $10.00 per share, and purchased 16,500,000 newly issued
shares of common stock from the company at $10.00 per share. After
giving effect to such transactions, LGE beneficially owns 36,569,000
shares of common stock, which represents approximately 57.7 percent of
the outstanding common stock.
LGE is a leading international brand-name manufacturer of five
main groups of products: televisions; audio and video equipment; home
appliances; computers and office automation equipment; and other
products, including video displays, telecommunication products and
components, and magnetic media.
Because LGE owns a majority of the issued and outstanding
common stock, it effectively controls the outcome of any matter requiring
action by a majority of the company's stockholders, including the election
of a majority of the company's directors and any future change in control
of the company.
The following represent the most significant transactions between
the company and LGE during 1995, all of which, in the opinion of
management, were made at an arms-length basis:
Product purchases: In the ordinary course of business, the
company purchases VCRs, TV-VCR combinations and components from
LGE and its affiliates. The company purchased $87.2 million of these
items in 1995. Sales of products purchased from LGE and its affiliates
contributed $92.5 million to sales and $5.3 million to gross margin in
1995.
Product and other sales: The company sells CRT tubes and
yokes and other manufactured subassemblies to LGE and its affiliates at
prices that equate to amounts charged by the company to its major
customers. Sales in 1995 by the company to LGE and its affiliates were
$31.7 million with a contribution of $2.8 million to gross margin.
Technical agreements: The company and LGE are currently
operating under several technology agreements and licenses, including:
LGE engineering support for HDTV development and related technical
and intellectual property; technology and patent licenses to LGE to
develop FTM products; and agreements granting LGE the right to use the
company's patents on TV tuners. LGE's net payment in 1995 to the
company under these agreements and licenses was $1.1 million.
As of December 31, 1995, receivables included $7.7 million from
LGE and its affiliates and accounts payable included $8.9 million to LGE
and its affiliates.
Note Four - Restructuring and Other Charges: During the fourth
quarter of 1995, the company recorded charges totaling $3.6 million that
were incurred as a consequence of the LGE purchase of common stock as
described in Note Three.
During the second quarter of 1995, the company recorded a
charge of $18.0 million primarily to restructure its core Consumer
Electronics and Network Systems business. The major elements of the
restructuring related to severance expenses associated with employment
reductions, primarily in the company's U.S. salaried workforce and costs
associated with realigned distribution activities as the company changed to
direct-to-retail distribution on a nationwide basis. The remaining charges
related to other non-recurring items, including certain environmental, legal
and other regulatory matters, along with trade receivable write-offs
(primarily for accounts in Mexico as a result of the December 1994 peso
devaluation).
During the fourth quarter of 1993, the company recorded a charge
of $31.0 million primarily to restructure certain product areas and re-
engineer its core business. The restructuring affected computer monitors
and magnetics, product areas that were phased out or sold in 1994. The
fourth-quarter charge was primarily for non-cash fixed asset and
inventory write-downs, as well as severance costs, and was designed to
reduce fixed costs and operating expenses.
Note Five - Income Taxes: The components of income taxes (credit)
were:
Year Ended December 31
---------------------------
In millions 1995 1994 1993
- --------------------------------------------------------------------------
Currently payable (refundable):
Federal $ (7.8) $ (.5) $ (.1)
State .1 .2 .1
---------------------------
Total income taxes (credit) $ (7.7) $ (.3) $ -
===========================
The $7.7 million income tax credit in 1995 included a $7.5
million tax refund (including interest) due the company as a result of
certain foreign tax credit issues in audits of prior years.
The statutory federal income tax rate and the effective tax rate are
compared below:
Year Ended December 31
---------------------------
1995 1994 1993
- --------------------------------------------------------------------------
Statutory federal income tax rate (35.0)% (35.0)% (35.0)%
State income taxes, net .1 .7 .1
Foreign tax effects 1.5 21.9 .5
Tax benefits not recognized
subject to future realization 33.5 13.4 34.5
Net operating loss carryback / refund (8.4) (3.2) (.1)
--------------------------
Effective tax rate (8.3)% (2.2)% - %
==========================
Deferred tax assets (liabilities) are comprised of the following:
Year Ended December 31
--------------------------
In millions 1995 1994
- -------------------------------------------------------------------------
Loss carryforwards $163.8 $154.7
Inventory valuation 23.8 21.1
Product warranty 11.1 15.2
Co-op advertising 2.5 1.5
Merchandising 5.4 6.8
Other 14.6 17.5
-------------------------
Deferred tax assets 221.2 216.8
-------------------------
Depreciation (17.5) (13.9)
Employee benefits (.7) (.6)
Other (14.7) (18.4)
-------------------------
Deferred tax liabilities (32.9) (32.9)
-------------------------
Valuation allowance (188.3) (183.9)
-------------------------
Net deferred tax assets $ - $ -
=========================
The valuation allowance was established since the realization of
these assets cannot be reasonably assured, given the company's recurring
losses.
As of December 31, 1995, the company had $412.2 million of
total net operating loss carryforwards (NOLs) available for federal
income tax purposes (which expire from 2004 through 2010) and unused
tax credits of $3.6 million (which expire from 2000 through 2002).
The stock purchase by LGE described in Note Three created an
"ownership change" of the company for federal income tax purposes, with
the effect that the company's annual usage of its NOLs will be limited to
approximately $27 million, which represents the product of (i) a tax-
exempt rate of return announced monthly by the Internal Revenue Service
(5.75 percent for ownership changes occurring in the month of November
1995) and (ii) the value of the company immediately before the ownership
change, as determined under applicable tax regulations. This limitation,
appropriately modified, will also apply to the company's utilization of
most of its tax credit carryovers. The effect of this annual limit will
depend upon the generation of sufficient taxable income in the future and
certain other factors.
Note Six - Geographic Segment Data: The company's operations
involve a dominant industry segment the design, development,
manufacture and distribution of video products, including color TV sets,
VCRs and other consumer electronics products, color picture tubes, cable
TV products and parts and accessories for these products.
Financial information, summarized by geographic area, is as
follows:
Year Ended December 31
---------------------------
In millions 1995 1994 1993
- -------------------------------------------------------------------------
Net sales to unaffiliated customers:
Domestic companies $1,212.7 $1,365.2 $1,158.8
Foreign companies 61.2 103.8 69.4
----------------------------
Total net sales $1,273.9 $1,469.0 $1,228.2
============================
Income (loss) before income taxes:
Domestic companies $ (96.1) $ (8.4) $ (97.6)
Foreign companies (4.0) (6.1) .6
----------------------------
Total income (loss) before income taxes $ (100.1) $ (14.5) $ (97.0)
============================
Identifiable assets:
Domestic companies $ 538.1 $ 503.2 $ 448.6
Foreign companies 152.2 150.4 110.8
----------------------------
Total identifiable assets $ 690.3 $ 653.6 $ 559.4
============================
Foreign operations consist of manufacturing and sales
subsidiaries in Mexico, a distribution subsidiary in Canada and a
purchasing office in Taiwan. Sales to affiliates are principally accounted
for at amounts based on local costs of production plus a reasonable
return.
Sales to a single customer amounted to $172.1 million (14
percent) in 1995 and $180.8 million (12 percent) in 1994. No other
customer accounted for 10 percent or more of net sales.
Note Seven - Other Operating Expense (Income): Major
manufacturers of TVs and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses
expire in 2003). Royalty income related to the tuning system patents was
$25.9 million, $27.9 million and $25.7 million in 1995, 1994 and 1993,
respectively, and is included in Other operating expense (income).
Note Eight - Inventories: Inventories consisted of the following:
December 31
--------------------------
In millions 1995 1994
- ------------------------------------------------------------------------
Raw materials and work-in-process $128.7 $156.2
Finished goods 73.9 97.8
--------------------------
202.6 254.0
Excess of FIFO cost over LIFO cost (10.4) (8.8)
--------------------------
Total inventories $192.2 $245.2
==========================
As of December 31, 1995 and 1994, inventories of $27.8 million
and $25.0 million, respectively, were valued using the LIFO method.
Note Nine - Property, Plant and Equipment: Property, plant and
equipment consisted of the following:
December 31
--------------------------
In millions 1995 1994
- ------------------------------------------------------------------------
Land $ 3.9 $ 3.9
Buildings 126.5 126.6
Machinery and equipment 591.0 584.5
--------------------------
721.4 715.0
Less accumulated depreciation (536.7) (546.9)
--------------------------
Total property, plant and equipment, net $184.7 $168.1
==========================
During 1994 the company recorded $11.0 million of net gain on
asset sales. Included in this amount is a $5.4 million gain on the sale of a
warehouse in Northlake, Illinois, and a $3.6 million gain on the sale of
vacant land adjacent to its Glenview, Illinois, headquarters. The company
also sold a facility in Lenexa, Kansas, its power supply business, a
facility in Chicago, Illinois, and a facility in Springfield, Missouri.
Note Ten - Short-term Debt and Credit Arrangements: The company
entered into a Second Amended and Restated Credit Agreement dated as
of November 6, 1995, with a lending group led by General Electric
Capital Corporation, for working capital purposes. The Credit Agreement
replaced a similar credit agreement with the same group of lenders.
Borrowings under the Credit Agreement, similar to the former
agreement, are secured by accounts receivable, inventory, general
intangibles and trademarks of the company. The Credit Agreement is
scheduled to expire on June 30, 1998. The maximum commitment of
funds available for borrowing under the Credit Agreement is $110 million,
but is limited by a defined borrowing base formula related to eligible
receivables and eligible inventory. Net proceeds arising from material
asset transactions will result in a partial reduction in the maximum
commitment of the lenders thereunder. Interest on borrowings is based on
market rates with a commitment fee of 3/8 percent per annum payable
monthly on the unused balance of the facility. As of December 31, 1995,
no borrowings were outstanding under the Credit Agreement.
The Credit Agreement contains restrictive financial covenants that
must be maintained as of the end of each fiscal quarter, including a
liabilities to net worth ratio and a minimum net worth amount. As of
December 31, 1995, the ratio of liabilities to net worth was required to be
not greater than 3.50 to 1.0 and was actually 1.25 to 1.0, and net worth
was required to be equal to or greater than $251.0 million and was
actually $307.1 million. At the end of each fiscal quarter through April 4,
1998, the liabilities to net worth ratio is required to be maintained at 4.00
to 1.0, and minimum net worth is required to be $245.0 million. The
Credit Agreement restricts the amount of capital expenditures by the
company in each fiscal year. For the fiscal years 1995, 1996, 1997 and
each fiscal year thereafter the company is permitted to make capital
expenditures (as defined in the Credit Agreement) of up to $80.0 million,
$142.0 million, $87.0 million and $60.0 million, respectively. As the
company plans to undertake capital investment projects that would exceed
the permitted expenditures, the company will need to seek an amendment
to the Credit Agreement. There can be no assurance that the lenders under
the Credit Agreement will approve an amendment, if requested by the
company.
In addition, there are restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets,
mergers and additional borrowings, along with limitations on liens. The
Credit Agreement prohibits dividend payments on the company's common
stock, restricts dividend payments on any of its preferred stock, if issued,
and prohibits the redemption or repurchase of stock.
Borrowings and interest rates on short-term debt were:
Year Ended December 31
---------------------------
In millions 1995 1994 1993
- -------------------------------------------------------------------------
Maximum month-end borrowings $69.5 $60.4 $66.4
Average daily borrowings 37.2 26.3 35.0
Weighted average interest rate 10.5% 9.1% 8.1%
Contracts with LGE permit the company to elect interest-bearing
extended-payment terms. As of December 31, 1995 and 1994, $8.8
million and $19.1 million, respectively, of these obligations were
outstanding and included in Accounts payable.
Note Eleven - Long-term Debt: The components of long-term debt were:
December 31
-------------------------
In millions 1995 1994
- --------------------------------------------------------------------------
6 1/4 percent convertible subordinated
debentures due 2011 $115.0 $115.0
8.5 percent senior subordinated
convertible debentures due 2000 23.8 55.0
8.5 percent senior subordinated
convertible debentures due 2001 .5 12.0
Term Loan 38.5 -
-----------------------
177.8 182.0
Less current portion 9.0 -
-----------------------
Total long-term debt $168.8 $182.0
=======================
The company entered into a First Amended and Restated Term
Loan Agreement dated as of November 6, 1995, with a lending group led
by General Electric Capital Corporation. The Term Loan replaced a
similar term loan agreement with the same group of lenders. The Term
Loan was in the initial principal amount of $40 million, and requires
scheduled quarterly principal payments over the life of the loan with a
balloon payment of $17.5 million due on the termination date of the loan,
June 30, 1998, and additional mandatory prepayment in certain events.
The borrowing under the Term Loan Agreement is secured by the tuning
system patent license agreements of the company and a second security
interest in the accounts receivable, inventory, general intangibles and
trademarks of the company. The Term Loan Agreement contains the same
financial covenants and other restrictions that are contained in the Credit
Agreement (see Note Ten). Interest on the borrowing is based on market
rates.
The 6 1/4 percent convertible subordinated debentures are
unsecured general obligations, subordinate in right of payment to certain
other debt obligations, and are convertible into common stock at $31.25
per share. Terms of the debenture agreement include annual sinking-fund
payments of $5.8 million beginning in 1997. The debentures are
redeemable at the option of the company, in whole or in part, at specified
redemption prices at par or above.
The 8.5 percent debentures due 2000 and 2001 are unsecured
general obligations, subordinate in right of payment to certain other debt
obligations, and are convertible into shares of common stock at an initial
conversion price of $9.76 per share and $10.00 per share, respectively.
The debentures due 2000 and 2001 are redeemable at the option of the
company, in whole or in part, at any time on or after November 19, 1997
and January 18, 1998, respectively, at specified redemption prices at par
or above.
On December 21, 1995, the company repurchased $42.7 million
principal amount of the 8.5 percent debentures, at par plus accrued
interest. This repurchase resulted from the exercise by certain holders of
the debentures of the right to require repurchase of all or a portion of the
debentures following a change of control of the company, which occurred
upon the purchase of a controlling interest in the company by LGE.
The fair value of long-term debt is $130.6 million as of December
31, 1995, as compared to the carrying amount of $168.8 million. The fair
value of the 6 1/4 percent convertible subordinated debentures is based on
the quoted market price from the New York Stock Exchange. The fair
value of the 8.5 percent convertible senior subordinated debentures is
based on the quoted price obtained from third party financial institutions.
The fair value of the Term Loan approximates the carrying value as
interest on the loan is based on market rates. Currently, the company's
Credit Agreement and Term Loan Agreement would not allow the
company to extinguish the long-term debt through purchase and thereby
realize the gain.
Note Twelve - Stockholders' Equity: Changes in stockholders' equity
accounts are shown below:
Additional
Common Paid-in Treasury
In millions Stock Capital Shares
- -----------------------------------------------------------------------------
Balance, December 31, 1992 $30.3 $171.4 $(.5)
Sales of common stock 3.4 19.8 -
Stock issued for benefit plans 2.0 12.6 -
Stock issued for stock options .1 .6 -
Other .1 .7 -
------------------------------------
Balance, December 31, 1993 35.9 205.1 (.5)
Sales of common stock 8.6 71.2 -
Stock issued for benefit plans .6 5.4 -
Stock issued for stock options .5 3.6 -
Other .1 .1 -
------------------------------------
Balance, December 31, 1994 45.7 285.4 (.5)
Sales of common stock 17.8 152.6 -
Stock issued for stock options - .3 -
Other - 1.7 (1.2)
------------------------------------
Balance, December 31, 1995 $63.5 $440.0 $(1.7)
====================================
In November 1995, the Company sold 16.5 million shares of
authorized but unissued shares of common stock to LGE for a price of
$10 per share. See Note Three for further discussion.
During 1995, 1994 and 1993 the company sold 1.3 million
shares, 8.6 million shares and 3.4 million shares, respectively, of
authorized but unissued shares of common stock to investors under
registration statements that had been filed with the Securities and
Exchange Commission.
Pursuant to a Rights Agreement (as amended), a "right" entitling
the holder thereof to purchase under certain conditions, one-half of one
share of common stock at an exercise price of $37.50, subject to
adjustment, was distributed with respect to each outstanding share of
common stock in 1986, and with respect to each additional share of
common stock that has become outstanding since then.
The rights will become exercisable upon the earlier to occur of (i)
the 10th day after a public announcement that a third party has become
the beneficial owner of 25 percent or more of the outstanding common
stock (an "acquiring person") or (ii) the 10th day after the commencement
of, or the announcement of an intention to commence, an offer the
consummation of which would result in a third party beneficially owning
25 percent or more of the common stock.
In the event any person becomes an acquiring person, each holder
of a right (other than the acquiring person) will thereafter have the right to
receive upon exercise that number of shares of common stock having a
market value of two times the exercise price of the right. The rights, which
have no voting rights, expire in 1996. The rights may be redeemed at the
option of the company at any time prior to such time as any person
becomes an acquiring person. Under certain conditions and following a
stockholder vote, the rights shall be redeemed by the company. In either
case, the redemption price will be $.05 per right, subject to adjustment.
The Rights Agreement also provides that under certain
circumstances at any time after any person has become an acquiring
person, the Board of Directors may exchange the rights (other than rights
owned by such person) in whole or in part, for common stock at an
exchange ratio of one-half of a share of common stock per right, subject
to adjustment. In connection with the LGE transaction, LGE is not
considered to be a third party.
At the company's Annual Meeting of Stockholders in April 1995,
the stockholders voted to amend the company's Restated Certificate of
Incorporation to increase the authorized common stock of the company
from 100,000,000 shares to 150,000,000 shares.
At the company's Annual Meeting of Stockholders in May 1993,
the stockholders approved the authorization of 8 million shares of
preferred stock of which none are issued or outstanding as of December
31, 1995. The Board of Directors of the company is authorized to issue
the preferred stock from time to time in one or more series and to
determine all relevant terms of each such series, including but not limited
to the following (i) whether and upon what terms, the shares of such series
would be redeemable; (ii) whether a sinking fund would be provided for
the redemption of the shares of such series and, if so, the terms thereof;
and (iii) the preference, if any, to which shares of such series would be
entitled in the event of voluntary or involuntary liquidation of the
company.
Note Thirteen - Stock Options and Awards: The 1987 Stock Incentive
Plan authorizes the granting of incentive and non-qualified stock options,
restricted stock awards and stock appreciation rights to key management
personnel. The purchase price of shares under option is the market price
of the shares on the date of grant. Options expire 10 years from the date
granted.
Transactions in 1995 and 1994 are summarized below:
1995 1994
- ----------------------------------------------------------------------------
Options outstanding at January 1 2,021,449 1,981,005
Options granted 738,650 615,250
Options exercised (38,350) (529,132)
Options canceled or expired (145,450) (45,674)
------------------------------
Options outstanding at December 31 2,576,299 2,021,449
==============================
Options exercisable at December 31 1,577,174 1,238,049
Shares available for grant at December 31 1,268,755 900,156
Option prices per share:
Outstanding at January 1 6 3/8 - 13 6 3/8 - 9 3/4
Granted 7 1/8 - 7 3/4 8 3/4 - 13
Exercised 6 3/4 - 8 3/8 6 3/8 - 9 3/4
Canceled or expired 6 7/8 - 9 3/4 6 7/8 - 9 3/4
Outstanding at December 31 6 3/8 - 13 6 3/8 - 13
The company had 9,339 and 189,108 restricted stock awards
issued and outstanding as of December 31, 1995 and 1994, respectively.
The market value of the restricted shares is deferred in the additional paid-
in capital account and is generally amortized over the years the
restrictions lapse. The 1995 decrease was caused primarily by restrictions
being lifted as a consequence of the change in control of the company.
Total compensation expense in 1995 and 1994, related to these awards,
was not material.
Note Fourteen - Retirement Plans and Employee Benefits: Virtually
all employees in the United States and Canada are eligible to participate in
noncontributory profit-sharing retirement plans after completing one full
year of service. The plans provide for a minimum annual contribution of 6
percent of employees' eligible compensation. Contributions above the
minimum could be required based upon profits in excess of a specified
return on net worth. Profit-sharing contributions were $8.8 million, $9.7
million and $9.7 million in 1995, 1994 and 1993, respectively. The 1994
and 1993 contributions were partially funded through the issuance of
approximately 547,000 and 1,021,000 shares, respectively, of the
company's common stock.
Employees in Mexico are covered by government-mandated plans,
the costs of which are accrued by the company.
Benefits payable to employees when they leave the company other
than by reason of retirement did not have a material effect on the financial
statements of the company, nor is it expected to have a material effect on
future results of operations.
Note Fifteen - Contingencies: The company is involved in various legal
actions, environmental matters, patent claims, and other proceedings
relating to a wide range of matters that are incidental to the conduct of its
business. In addition, the company remains liable for certain retained
obligations of a discontinued business, principally income and other taxes
prior to the closing of the sale.
In 1994, the company notified its 15 independent distributors of
its intent to change to direct-to-retail distribution on a nationwide basis
during 1995. In February 1995, one of the independent distributors filed
suit challenging the company's right to discontinue the distributorship
relationship and alleging that it had been damaged by certain of the
company's practices. The lawsuit sought injunctive relief, actual damages
of $8 million and punitive damages of $20 million. In October 1995
summary judgment dismissing the case on all counts was entered. The
plaintiff has filed notice of appeal. Another suit arising in connection with
this change in distribution was filed in April 1995 by another independent
distributor. The lawsuit seeks approximately $13 million in damages
under the Wisconsin Fair Dealership Law. In January 1996 the court
denied the company's motion for summary judgment and granted the
plaintiff's motion for summary judgment, finding the company is liable. A
jury trial setting the amount of the plaintiff's damages, if any, is expected
in April 1996.
The company believes, after reviewing such matters and
consulting with the company's counsel, that any liability that may
ultimately be incurred with respect to all of the above matters is not
expected to have a material effect on either the company's consolidated
financial position or results of operations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Zenith Electronics Corporation:
We have audited the accompanying consolidated balance sheets of Zenith
Electronics Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related statements of consolidated
operations and retained earnings and cash flows for each of the three years
in the period ended December 31, 1995. 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 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 misstatement. 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 Zenith
Electronics Corporation and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
------------------------
Arthur Andersen LLP
Chicago, Illinois
February 21, 1996
UNAUDITED QUARTERLY FINANCIAL INFORMATION
In millions, except per share amounts
<TABLE>
<CAPTION>
1995 Quarters Ended 1994 Quarters Ended
--------------------------------------------------------------------------------
Dec. 31(1) Sept. 30(2) July 1(3) April 1 Dec. 31 Oct. 1 July 2 April 2
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $394.7 $332.5 $284.6 $262.1 $453.5 $419.4 $299.0 $297.1
Gross margin 21.3 29.4 8.0 13.6 32.0 37.1 28.9 20.8
Net income (loss) (24.6) 1.8 (45.3) (24.3) (3.3) 9.4 (8.4) (11.9)
Per share of common stock (primary and fully diluted):
Net income (loss) $ (.45) $ .04 $ (.97) $ (.53) $ (.07) $ .21 $ (.20) $ (.32)
New York Stock Exchange market price per share:
High 8 7/8 9 1/4 8 1/2 12 1/8 14 1/8 12 1/8 10 1/2 13 1/2
Low 6 5/8 7 1/4 6 7/8 7 1/2 10 5/8 8 5/8 8 1/4 7
End of quarter 6 7/8 8 5/8 7 3/8 7 3/4 11 5/8 11 3/8 8 5/8 9 3/4
<FN>
(1) Includes $3.6 million of Restructuring and other charges.
(2) Includes $7.5 million of Income tax credits.
(3) Includes $18.0 million of Restructuring and other charges.
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders of Zenith Electronics Corporation:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Zenith
Electronics Corporation's annual report to stockholders included in this
Form 10-K, and have issued our report thereon dated February 21, 1996.
Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The financial statement schedule listed in
Item 14 (a) 2 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Chicago, Illinois
February 21, 1996
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(Amounts in millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged Balance at
Reserves and allowances beginning to costs Charged to end of
deducted from asset accounts of period & expenses other accts. Deductions period
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended December 31, 1995 $ 3.1 $ .8 $ - $ .3 (1) $ 3.6
===================================================================
Year Ended December 31, 1994 $ 2.5 $ 1.4 $ - $ .8 (1) $ 3.1
===================================================================
Year Ended December 31, 1993 $ 2.7 $ 1.8 $ - $ 2.0 (1) $ 2.5
===================================================================
Valuation allowance for deferred tax assets:
Year Ended December 31, 1995 $183.9 $ 4.4 $ - $ - $188.3
===================================================================
Year Ended December 31, 1994 $179.2 $ 4.7 $ - $ - $183.9
===================================================================
Year Ended December 31, 1993 $134.5 $ 44.7 $ - $ - $179.2
===================================================================
<FN>
(1) Uncollectible accounts written off, net of recoveries.
</TABLE>
EXHIBIT (21)
ZENITH ELECTRONICS CORPORATION SUBSIDIARIES
State or Other
Jurisdiction of Incorporation
- -----------------------------------------------------------------------------
Cableproductos de Chihuahua, S.A. de C.V. Mexico
Electro Partes de Matamoros, S.A. de C.V. Mexico
Interocean Advertising Corporation New York
Interocean Advertising Corporation of California California
Interocean Advertising Corporation of Illinois Illinois
Productos Magneticos de Chihuahua, S.A. de C.V. Mexico
Partes de Television de Reynosa, S.A. de C.V. Mexico
Radio Componentes de Mexico, S.A. de C.V. Mexico
Telson, S.A. de C.V. Mexico
Zenco de Chihuahua, S.A. de C.V. Mexico
Zenith Distributing Corporation of Illinois Illinois
Zenith Distributing Corporation-Midstates Kansas
Zenith Distributing Corporation of New England Delaware
Zenith Distributing Corporation of New York New York
Zenith Distributing Corporation-Southeast Delaware
Zenith Distributing Corporation-West California
Zenith Distributing Corporation of Arizona Arizona
Zenith Electronics Corporation of Pennsylvania Pennsylvania
Zenith Electronics Corporation of Texas Texas
Zenith Electronics (Europe) Limited England
Zenith Electronics (Ireland) Limited Ireland
Zenith Electronics (Pacific) Ltd. Hong Kong
Zenith Electronics Universal Sales Corporation Delaware
Zenith/Inteq, Inc. Delaware
Zenith Microcircuits Corporation Delaware
Zenith Radio Canada Ltd/Zenith Radio Canada Ltee Canada
Zenith Taiwan Corporation Taiwan
Zenith Video Tech Corporation Delaware
Zenith Video Tech Corporation-Florida Delaware
Zentrans, Inc. Delaware
also
Zenith Foreign Sales Corporation Guam (Dormant)
* All subsidiaries are wholly-owned by Zenith Electronics Corporation except
for Radio Componentes de Mexico, S.A. de C.V. which is a wholly-owned
subsidiary of Cableproductos de Chihuahua S.A. de C.V.
EXHIBIT (23)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
of our reports dated February 21, 1996, included in this Form 10-K for the
year ended December 31, 1995, into (i) the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-15643 and 33-11295 and
(ii) the Prospectus constituting part of the Registration Statement on
Form S-3 (No. 33-56889).
/s/ Arthur Andersen LLP
-------------------------
Arthur Andersen LLP
Chicago, Illinois
March 29, 1996
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<PERIOD-END> DEC-31-1995
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0
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<SALES> 1,274
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<INCOME-TAX> (8)
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<NET-INCOME> (92)
<EPS-PRIMARY> (1.88)
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