UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to____________
Commission File Number: 1-4115
ZENITH ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1996520
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 Milwaukee Avenue, Glenview, Illinois 60025
(Address of principal executive offices) (Zip Code)
(847) 391-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of May 9, 1996, there were 64,225,913 shares of Common Stock, par value
$1 per share, outstanding.
<PAGE>
ZENITH ELECTRONICS CORPORATION
FORM 10-Q
INDEX
Page
Number
--------
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Operations --
Three months ended March 30, 1996 and April 1, 1995 3
Condensed Consolidated Balance Sheets --
March 30, 1996, December 31, 1995 and April 1, 1995 4
Condensed Consolidated Statements of Cash Flows --
Three months ended March 30, 1996 and April 1, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Analysis of Operations 8
Liquidity and Capital Resources 8
Part II. Other Information:
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
Index to Exhibits 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
In Millions, Except Per Share Amounts
Three Months Ended
----------------------
March 30, April 1,
1996 1995
---------- ----------
Net sales $ 237.4 $ 262.1
---------- ----------
Costs, expenses and other:
Cost of products sold 229.3 246.2
Selling, general and
administrative 34.8 29.0
Engineering and research 11.2 11.8
Other operating expense
(income), net (Note 2) (4.1) (4.5)
---------- ----------
Operating income (loss) (33.8) (20.4)
Gain on asset sales, net 0.3 -
Interest expense (3.3) (4.1)
Interest income 1.5 0.2
---------- ----------
Income (loss) before income taxes (35.3) (24.3)
Income taxes - -
---------- ---------
Net Income (loss) $ (35.3) $ (24.3)
========== ==========
Net income (loss) per share of
common stock (Note 3) $ (0.56) $ (0.53)
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
In Millions
March 30, December 31, April 1,
1996 1995 1995
-------- ------------ --------
ASSETS
- ------
Current assets:
Cash $ 79.6 $ 93.2 $ -
Receivables, net of allowance for
doubtful accounts of $3.4, $3.6
and $2.4, respectively 151.1 201.3 179.4
Inventories (Note 4) 217.7 192.2 298.7
Other 9.1 7.8 8.5
-------- ------------ --------
Total current assets 457.5 494.5 486.6
Property, plant and equipment, net 183.6 184.7 178.9
Other 7.7 11.1 14.6
-------- ------------ --------
Total assets $ 648.8 $ 690.3 $ 680.1
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt (Note 5) $ - $ - $ 60.2
Current portion of long-term
debt (Note 5) 15.2 9.0 -
Accounts payable 70.1 71.8 103.6
Income taxes payable 1.2 1.2 0.9
Accrued expenses 124.6 132.4 120.6
-------- ------------ --------
Total current liabilities 211.1 214.4 285.3
Long-term debt (Note 5) 160.6 168.8 182.0
Stockholders' equity:
Preferred stock - - -
Common stock (Note 6) 64.3 63.5 46.8
Additional paid-in capital 444.5 440.0 293.1
Retained earnings (deficit) (230.0) (194.7) (126.6)
Treasury stock (1.7) (1.7) (0.5)
-------- ------------ --------
Total stockholders' equity 277.1 307.1 212.8
-------- ------------ --------
Total liabilities and
stockholders' equity $ 648.8 $ 690.3 $ 680.1
======== ============ ========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
In Millions
Increase (Decrease) in Cash
Three Months Ended
---------------------------
March 30, April 1,
1996 1995
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (35.3) $ (24.3)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Depreciation 8.5 7.8
Employee retirement plan contribution
made in stock 5.3 -
Gain on asset sales, net (0.3) -
Changes in assets and liabilities:
Current accounts 13.3 (42.8)
Other assets 0.4 -
----------- -----------
Net cash used by operating activities (8.1) (59.3)
----------- -----------
Cash flows from investing activities:
Capital additions (7.8) (18.6)
Proceeds from asset sales 4.3 -
----------- -----------
Net cash used by investing activities (3.5) (18.6)
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net - 60.2
Proceeds from issuance of common stock, net - 8.8
Principal payments on long-term debt (2.0) -
----------- -----------
Net cash provided (used) by financing activities (2.0) 69.0
----------- -----------
Decrease in cash (13.6) (8.9)
Cash at beginning of period 93.2 8.9
----------- -----------
Cash at end of period $ 79.6 $ -
=========== ===========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net $ 49.7 $ 27.5
Income taxes, net - (0.3)
Inventories (25.5) (53.5)
Other assets (1.4) 1.4
Accounts payable and accrued expenses (9.5) (17.9)
----------- -----------
Net change in current accounts $ 13.3 $ (42.8)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 0.9 $ 0.9
Income taxes 0.1 -
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
Zenith Electronics Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited condensed consolidated financial statements
("financial statements") have been prepared in accordance with generally
accepted accounting principles and pursuant to the rules and regulations of
the Securities and Exchange Commission. The accuracy of the amounts in the
financial statements is in some respects dependent upon facts that will exist,
and procedures that will be performed by the company, later in the year. In
the opinion of management, all adjustments necessary for a fair presentation of
the financial statements have been included and are of a normal, recurring
nature. For further information, refer to the consolidated financial
statements and notes thereto included in the company's Form 10-K for the year
ended December 31, 1995.
Note 2 - Other operating expense (income)
Royalty income accrued in relation to tuning system patents was $4.6 million
and $3.9 million for the three months ended March 30, 1996 and April 1, 1995,
respectively. These amounts are included in Other Operating Expense (Income).
Note 3 - 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% convertible subordinated
debentures and the 8.5% convertible senior subordinated debentures, are not
presented because the effect of the assumed conversion is antidilutive. The
weighted average number of shares was 63.6 million and 46.0 million for the
three months ended March 30, 1996 and April 1, 1995, respectively.
Note 4 - Inventories
Inventories consisted of the following (in millions):
March 30, December 31, April 1,
1996 1995 1995
---------- ------------ ----------
Raw materials and work-in-process $ 146.5 $ 128.7 $ 183.4
Finished goods 81.6 73.9 124.1
---------- ------------ ----------
228.1 202.6 307.5
Excess of FIFO cost over LIFO cost (10.4) (10.4) (8.8)
---------- ------------ ----------
Total $ 217.7 $ 192.2 $ 298.7
========== ============ ==========
As of March 30, 1996, December 31, 1995 and April 1, 1995, $48.4 million,
$27.8 million and $46.0 million, respectively, of inventories were valued
using the LIFO method.
An actual determination of inventory under the LIFO method can only be made
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Since these estimates are
subject to many factors beyond management's control, interim results are
subject to the final year-end LIFO inventory determination.
Note 5 - Short-term debt and credit arrangements; Long-term debt
The company's Credit Agreement and Term Loan Agreement (the "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. As of March 30, 1996, the ratio of liabilities to
net worth was required to be not greater than 4.00 to 1.0 and was actually 1.34
to 1.0, and net worth was required to be equal to or greater than $245.0
million and was actually $277.1 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 Agreements restrict the amount of capital expenditures by the
company in each fiscal year. For the fiscal years 1996, 1997 and each fiscal
year thereafter, the company is permitted to make capital expenditures (as
defined in the Credit Agreement and Term Loan Agreement) of up to $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 is in the process of negotiating
amendments to these Agreements. There can be no assurance that the
lenders under the Agreements will approve such amendments.
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 Agreements
prohibit 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.
Note 6 - Stockholders' equity
During the first-quarter of 1996 the company issued 782,382 shares of common
stock to its profit-sharing retirement plans to fulfill the 1995 retirement
plan obligation to eligible salaried and non-hourly U.S. employees.
Note 7 - Reclassifications
Certain prior-year amounts have been reclassified to conform with the
presentation currently used.
Note 8 - Related party
On November 8, 1995, LG Electronics, Inc. ("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 56.9 percent of the outstanding common stock as of March 30,
1996.
The following represent the most significant transactions between the company
and LGE during the three months ended March 30, 1996, 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 $4.6 million of these items during the first quarter
of 1996. Sales of products purchased from LGE and its affiliates contributed
$15.8 million to sales.
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 the first
quarter of 1996 by the company to LGE and its affiliates were $3.8 million.
As of March 30, 1996, receivables included $5.5 million from LGE and its
affiliates and accounts payable included $4.7
million to LGE and its affiliates.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The company reported a net loss for the first quarter of 1996 of $35.3 million,
or 56 cents per share, compared with a first-quarter 1995 net loss of $24.3
million, or 53 cents per share.
The loss reflects soft direct-view color television industry conditions in
the quarter, which contributed to lower revenues and selling prices. Total
sales in the quarter decreased by $24.7 million to $237.4 million in 1996 from
$262.1 million in 1995.
Industry direct-view color TV unit sales to dealers declined by more than 9
percent from the first quarter of 1995, but the Zenith brand increased its
domestic color TV market share in the quarter. Sales of color TV picture
tubes to other manufacturers declined significantly due to lower demand.
The company's consumer electronics selling prices were about $11 million
lower in the first quarter of 1996 than in the same period last year. Cost
reductions in the 1996 quarter more than offset the effect of inflationary
cost increases.
Sales of Network Systems products -- set-top boxes and data modems sold
primarily to the cable TV industry -- increased from the first quarter of 1995,
reflecting higher shipments to international markets.
Selling, general and administrative expenses were $34.8 million in the first
quarter of 1996, compared with $29.0 million in the previous year. The 20
percent increase was due in part to increased advertising expense and higher
outside professional fees.
Results for the first quarter include $4.6 million of accrued royalty
revenues from tuning system licenses. These revenues were $3.9 million in
the first quarter of 1995.
Domestic industry color television selling prices in the first quarter of
1996 were substantially lower than a year ago and the industry pricing
environment is not expected to improve during the rest of the year. The
company selectively reduced color TV prices in February 1996 in response to
competitors' pricing actions 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 and inflationary
cost pressures are expected to have a negative impact on the company's
financial results for 1996.
The company has recently announced a series of product initiatives based on
its cable modem and set-top box technologies that contemplate (i) the
licensing of certain technology from DiviCom Inc., for use in development
of digital set-top terminals offering advanced 8-bit graphics and CD-quality
audio capability for wired and wireless video networks; and (ii) the offering
of a cable modem system in cooperation with U.S. Robotics, Inc. that would
allow cable operators with one-way cable systems to provide their subscribers
with Internet access without needing to upgrade their systems to two-way cable
technology. The company also announced an integrated end-to-end solution for
two-way cable operators to provide ultra-high speed data delivery, based on
Zenith cable modems, Microsoft Corporation's Windows NT Public Networks server
software and Cisco Systems internetworking technology. In addition, the
company announced an agreement to collaborate with a privately held software
company, Diba Inc., on interactive television technology that would allow TV
viewers to access the Internet on their television screens.
The company has not yet recognized any revenues from these recently
announced product initiatives and does not anticipate significant revenues from
these initiatives in 1996. Whether the company will achieve significant
revenues or profits from these product initiatives in the near term or ever
will depend largely on market acceptance of the products and the existence of
competitive products. The company expects from time to time in the future to
announce other product initiatives. The ultimate contribution of any such
initiatives to the financial performance of the company will similarly depend
on such factors.
Liquidity and Capital Resources
Cash decreased $13.6 million during the three months ended March 30, 1996.
The decrease consisted of $8.1 million of cash used by operating activities,
$3.5 million of cash used to purchase fixed assets, net of proceeds from
asset sales and $2.0 million of cash used to pay maturities of the Term Loan
Agreement.
During the three months ended March 30, 1996, the $8.1 million of cash used
by operating activities principally funded a $26.8 million net loss as adjusted
for depreciation. This was offset by a $13.3 million change in current
accounts. In addition, the company reduced cash used by operating activities
by issuing common stock to the profit-sharing retirement plans to fulfill the
1995 obligation to salaried employees and some hourly employees. This issuance
increased stockholders' equity by $5.3 million.
During the three months ended March 30, 1996, investing activities used $3.5
million of cash which consisted of capital additions of $7.8 million offset
by $4.3 million of proceeds from asset sales. For the same period of 1995,
capital additions were $18.6 million.
As of March 30, 1996, the company had $79.6 million of cash and had
interest-bearing obligations that consisted of $160.6 million of long-term
debt, the current portion ($9.5 million) of the Term Loan Agreement, the
current portion ($5.8 million) of the Debentures due 2011 and $4.7 million of
extended-term payables with LG Electronics, Inc. The company's long-term debt
is composed of $109.3 million of 6-1/4% Convertible Subordinated Debentures due
2011 that require annual sinking fund payments of $5.8 million beginning in
1997, $24.3 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 ($27.0 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.
The company's Credit Agreement and Term Loan Agreement contain identical
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, the Credit Agreement and the Term Loan Agreement
restrict the amount of capital expenditures by the company in each fiscal
year. (See Note 5 to Condensed Consolidated Financial Statements for further
discussion on the financial covenants.)
Capital additions for the full year 1996 are expected to be about $160
million as the company is planning significant capital investment projects
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. To support
its planned significant capital investment projects during 1996 and 1997, the
company is exploring options for additional financing. Because these planned
capital investment projects would exceed the permitted expenditures allowed
under the Credit Agreement and Term Loan Agreement, the company is in the
process of negotiating 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.
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. However, the company believes that its Credit Agreement,
together with extended-term payables expected to be available from LG
Electronics, Inc. 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to "Item 3. Legal Proceedings" in the company's Annual
Report on Form 10-K for the year ended December 31, 1995, concerning a lawsuit
filed in connection with the company's change to direct-to-retail distribution
seeking approximately $13 million in damages under the Wisconsin Fair
Dealership Law ("WFDL"). In May 1996, a Federal jury in Madison, Wisconsin,
awarded the plaintiff $2.4 million in damages. The company has filed post-
trial motions asking the court to exclude certain portions of the award. The
company expects to appeal the court's decision finding the company liable under
the WFDL.
During the three months ended March 30, 1996, no other reportable events or
material developments occurred with respect to the legal proceedings described
under "Item 3. Legal Proceedings" in the company's Annual Report on Form 10-K
for the year ended December 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(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)
(27) Financial Data Schedule for the three months ended March 30, 1996
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended March 30, 1996.
SIGNATURES
Pursuant to the requirements 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)
Date: May 14, 1996
By: /s/ Richard C. Lueck
-----------------------
Richard C. Lueck
Vice President - Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibits:
(27) Financial Data Schedule for the three months ended March 30, 1996
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