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 September 27, 1997
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 October 31, 1997, there were 67,024,947 shares of Common Stock,
par value $1 per share, outstanding.
<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 Nine Months Ended
---------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales $ 304.5 $ 340.8 $ 825.4 $ 860.3
---------- ---------- ---------- ----------
Costs, expenses and other:
Cost of products sold 308.3 320.4 800.8 819.4
Selling, general and
administrative 44.6 51.7 122.7 123.5
Engineering and research 10.6 11.7 31.4 34.6
Other operating expense
(income), net (Notes 5 & 6) 5.2 (6.8) (5.0) (16.7)
Restructuring and other
charges - - - -
---------- ---------- ---------- ----------
Operating income (loss) (64.2) (36.2) (124.5) (100.5)
Gain (loss) on asset sales, net 1.1 - 0.2 0.3
Interest expense (7.1) (4.0) (21.0) (10.9)
Interest income - 0.3 0.6 2.7
---------- ---------- ---------- ----------
Income (loss) before income taxes (70.2) (39.9) (144.7) (108.4)
Income taxes (credit) (1.0) 0.3 (1.0) 0.3
---------- ---------- ---------- ----------
Net Income (loss) $ (69.2) $ (40.2) $ (143.7) $ (108.7)
========== ========== ========== ==========
Net income (loss) per share of
common stock (Note 7) $ (1.04) $ (0.61) $ (2.16) $ (1.67)
========== ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
In Millions
Sept. 27, December 31, Sept. 28,
1997 1996 1996
-------- ------------ --------
ASSETS
- ------
Current assets:
Cash $ - $ - $ -
Receivables, net of allowance for
doubtful accounts of $--, $6.2
and $5.3, respectively (Note 9) 17.1 208.3 230.5
Inventories (Note 8) 275.4 255.7 317.5
Transferor cerfificates, net of
allowance of $29.5, $-- and $--,
respectively (Note 9) 102.4 - -
Other 29.0 11.1 8.4
-------- ------------ --------
Total current assets 423.9 475.1 556.4
Property, plant and equipment, net 243.5 278.3 200.8
Other 39.9 11.9 11.5
-------- ------------ --------
Total assets $ 707.3 $ 765.3 $ 768.7
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt (Note 10) $ 25.0 $ 47.0 $ 42.2
Current portion of long-term
debt (Note 10) 14.7 17.8 16.7
Accounts payable (Note 11) 259.3 234.1 177.5
Income taxes payable 0.8 1.3 0.9
Accrued expenses (Note 11) 172.3 150.4 145.1
-------- ------------ --------
Total current liabilities 472.1 450.6 382.4
Long-term liabilities 9.0 - -
Long-term debt (Note 10) 161.6 152.7 155.6
Stockholders' equity:
Preferred stock - - -
Common stock 67.1 66.6 66.6
Additional paid-in capital 505.2 459.4 458.8
Retained earnings (deficit) (506.0) (362.3) (293.0)
Treasury stock (1.7) (1.7) (1.7)
-------- ------------ --------
Total stockholders' equity 64.6 162.0 230.7
-------- ------------ --------
Total liabilities and
stockholders' equity $ 707.3 $ 765.3 $ 768.7
======== ============ ========
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
Nine Months Ended
---------------------------
Sept. 27, Sept. 28,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income (loss) $(143.7) $(108.7)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Depreciation 26.4 26.1
Employee retirement plan contribution
made in stock 4.9 5.3
Other (0.2) 1.3
Gain on asset sales, net (0.2) (0.3)
Changes in assets and liabilities:
Current accounts 32.5 (27.2)
Other assets 1.4 (3.4)
----------- -----------
Net cash used by operating activities (78.9) (106.9)
----------- -----------
Cash flows from investing activities:
Capital additions (68.0) (42.6)
Proceeds from asset sales 161.8 4.3
----------- -----------
Net cash provided (used) by investing activities 93.8 (38.3)
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net (22.0) 42.2
Proceeds from issuance of long-term debt 45.0 -
Proceeds from issuance of common stock, net 1.3 15.3
Principal payments on long-term debt (39.2) (5.5)
----------- -----------
Net cash provided (used) by financing activities (14.9) 52.0
----------- -----------
Decrease in cash - (93.2)
Cash at beginning of period - 93.2
----------- -----------
Cash at end of period $ - $ -
=========== ===========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net $ 191.2 $ (29.7)
Transferor certificates (172.4) -
Income taxes, net (0.5) (0.3)
Inventories (19.7) (114.9)
Other assets (12.4) (0.7)
Accounts payable and accrued expenses 46.3 118.4
----------- -----------
Net change in current accounts $ 32.5 $ (27.2)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 18.9 $ 8.1
Income taxes (8.1) 0.8
Non-cash activity:
Asset and additional paid-in capital recorded
related to guarantee fee $ 39.7 $ -
Liability recorded related to deferred gain on
sale leaseback 10.2 -
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
Zenith Electronics Corporation
--------------------------------
Notes to Condensed Consolidated Financial Statements (Unaudited)
----------------------------------------------------------------
Note One - 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. With the exception of the matters discussed in Note Three,
those adjustments 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, 1996.
Note Two - Subsequent Event
In November 1997 the company entered into a series of new financing
transactions designed to enhance the company's liquidity and financial
flexibility. The company obtained a total of $60.0 million in unsecured and
uncommitted credit facilities through two $30.0 million lines of credit with
Bank of America and the First Chicago NBD. The credit lines are
guaranteed by LG Electronics Inc. ("LGE") for which LGE will receive a
fee in an amount of up to 2 percent of the face amount of the loan, in the
form of cash or the company's equity, subject to the approval of the
Finance Committee of the company's Board of Directors and in the case of
equity, the approval of the company's shareholders. The company granted
liens in favor of LGE on the capital stock of the company's domestic
subsidiaries and on the company's intellectual property (other than tuning
patents, tuning patent royalties and related license agreements) to secure
the guaranties of LGE for borrowings under these credit lines. As a result
of this new financing, the company has called for redemption on
December 5, 1997, its 8.5 percent Senior Subordinated Convertible
Debentures due November 2000. There is currently $23.8 million
principal amount of such debentures outstanding and the redemption price
of such debentures will be 104 percent of such principal amount plus
accrued interest through the redemption date. The company also plans to
call for redemption in January 1998 its 8.5 percent Senior Subordinated
Convertible Debentures due January 2001. There is currently $0.5
million principal amount of such debentures outstanding.
Note Three - Charge for bad debts
In November 1995 the company entered into a contract with a customer in
Brazil to purchase TVs and TV kits and to assemble and distribute Zenith
brand TVs in that country. In early 1997, this customer discontinued
timely payments of its obligations, and sought to renegotiate both the
timing and the amount of the obligations to the company. While the
company and this customer continued to negotiate in an attempt to reach a
business solution, litigation was commenced by both parties in Brazil.
The company had also initiated litigation against this customer in the
United States. As a result, the company recorded a $6.0 million bad debt
charge during the third quarter of 1997 and a $15.0 debt charge during the
second quarter of 1997 related to this customer. The total amount of the
receivable with this customer was $29.6 million as of September 27,
1997. The total 1997 charge of $21.0 million reflects the company's
estimated loss as of September 27, 1997. Subsequent to September 27,
1997, this matter was settled. The agreement provides that the company
will make certain parts and components available to this customer, and
will receive an $11.0 million settlement payable in installments over
eleven months.
Note Four - Change in accounting estimate
During the second quarter of 1997, the company changed its accounting
policy for most tooling expenditures. The old policy was to charge most
tooling expenditures to expense in the period acquired. The new policy is
to defer the tooling charges incurred subsequent to March 29, 1997, over
a 20-month period in order to more appropriately match the costs with
their period of benefit. The accounting policy for picture tube tooling
remains the same, which is to amortize that tooling over a four year
period.
This change was accounted for as a change in accounting estimate
effected by a change in accounting principle and as such will be accounted
for on a prospective basis. The change decreased tooling costs by $2.2
million and $7.6 million for the three and nine months ended September
27, 1997, respectively, and increased net income per share by 3 cents and
11 cents for the three and nine months ended September 27, 1997,
respectively.
Note Five - Other operating expense (income)
Royalty income accrued in relation to tuning system patents was $5.7
million and $16.9 million for the three and nine months ended September
27, 1997, respectively, and $6.6 million and $16.2 million for the three
and nine months ended September 28, 1996, respectively. These amounts
are included in Other Operating Expense (Income).
Note Six - Impairment of long-lived assets
During the third quarter of 1997, the company recorded a charge of $10.0
million related to the impairment of long-lived assets. The charge relates
primarily to (i) assets that will be sold or scrapped as a result of the
company's decision to phase out of its printed circuit board operation, (ii)
assets that will be sold or scrapped as a result of the company's decision
not to develop the proposed large-screen picture tube plant in Woodridge,
IL and (iii) a building in Canada that may be demolished. The amount of
the charge was based on a comparison of the book value of the assets to
their estimated net realizable value. This charge is included in Other
Operating Expense (Income).
Note Seven - 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 Senior
Subordinated Convertible Debentures, are not presented because the effect
of the assumed conversion is antidilutive. The weighted average number
of shares was 66.6 million and 66.5 million for the three and nine months
ended September 27, 1997, respectively, and 66.1 million and 64.9 million
for the three and nine months ended September 28, 1996, respectively.
Eight - Inventories
Inventories consisted of the following (in millions):
Sept. 27, December 31, Sept. 28,
1997 1996 1996
---------- ------------ ----------
Raw materials and work-in-process $ 144.6 $ 152.1 $ 189.7
Finished goods 130.8 103.6 127.8
---------- ----------- ----------
Total inventories $ 275.4 $ 255.7 $ 317.5
========== =========== ==========
Note Nine - Transferor certificates
The Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," in 1996. The new accounting standard
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement was
adopted by the company during the second quarter of 1997 in connection
with the three-year trade receivables securitization that was entered into
in April 1997. Pursuant to the new statement, the trade receivable
securitization was accounted for as a sale of receivables.
Transferor certificates represent the company's retained interest
in the pool of receivables that have been sold by the company to a
special-purpose trust, but have not yet been sold to outside investors in the
commercial paper market via a multi-seller conduit pursuant to the trade
receivables securitization agreement (See Note Ten for further discussion
on the receivable securitization). Transferor certificates are valued at
historical cost not to exceed their net realizable value. This cost
approximates the value of the previous carrying amount (prior to
transfer), allocated between the assets sold and the retained interest, based
on their relative fair values at the date of the transfer, as required by
SFAS No. 125.
Note Ten - Short-term debt and credit arrangements; Long-term debt
In April 1997 the company obtained financing commitments which
enhanced the company's liquidity and are consistent with its strategy to
improve its operating and financial performance.
One of the commitments is a three-year $110.0 million credit
facility composed of a $45.0 million term loan and a $65.0 million
revolving credit line. This facility replaced the company's previous credit
agreement and term loan. The term loan requires scheduled quarterly
principal payments of $2.3 million with a balloon payment of $20.3
million at maturity in 2000. Under the revolving credit line, the maximum
commitment of funds available for borrowing is limited by a defined
borrowing base formula related to eligible inventory. The facility is
secured by the company's inventory, trademarks and tuner patent
royalties, along with the related patents and licenses. Interest on
borrowings is based on market rates.
The facility contains certain covenants that must be met in order
to remain in compliance with the facility, including financial covenants
that must be maintained as of the end of each fiscal quarter. Subsequent
to September 27, 1997, the company amended its credit facility to relax
certain financial covenants. As amended, the financial covenants include
a minimum EBITDA amount, a current ratio test, a funded debt / total
capitalization ratio test, a tuning patent royalties test and a LG Electronics
Inc. ("LGE") payable test. As of September 27, 1997, only the tuning
patent royalties test and the LGE payable test were in effect and the
company was in compliance with both of these covenants.
A second commitment is a three-year trade receivables
securitization which is provided through a Citicorp commercial paper
conduit. The availability of funds under this receivable securitization is
subject to receivables eligibility based on such items as agings,
concentrations, dilution and loss history, subject to a maximum amount
that was $165.0 million as of September 27, 1997, but can be increased to
$200.0 million, assuming additional bank commitments. LGE provides
support for this facility through a performance undertaking and a letter of
credit.
Also, in April 1997 the company entered into an $86.6 million
sale-leaseback transaction whereby the company sold and leased back new
and existing manufacturing equipment in its Melrose Park, Ill., plant and
in its Reynosa and Juarez, Mexico, facilities. The term of the lease is 12
1/2 years and annual payments under the lease will average approximately
$10 million. The company's payment obligations, along with certain
other items under the lease agreement, are fully guaranteed by LGE.
Additionally, in April 1997 the company and LGE entered into an
arrangement whereby certain of the company's accounts payables arising
in the ordinary course of business with LGE will be extended for certain
periods of time with interest being charged on the amounts extended at
negotiated rates.
In return for LGE providing support for the securitizations and
the sale-leaseback transaction and the extended-term payables
arrangement, the company has granted options to LGE to purchase
approximately 3.9 million common shares of the company at an exercise
price of $0.01 per share, excercisable over time. The accounting for these
stock options was based upon their fair value with that fair value being
amortized straight-line over the term of the associated commitments.
Note Eleven - Related party
As of September 27, 1997, LGE and LG Semicon Company, Ltd.,
corporations organized under the laws of the Republic of Korea, owned
36,569,000 shares of common stock of the company which represents 55
percent of the outstanding common stock. As described in Note Ten, the
company has granted options to LGE to purchase approximately 3.9
million common shares of the company at an exercise price of $0.01 per
share, exercisable over time.
The following represent the most significant transactions between
the company and LGE during the three and nine months ended September
27, 1997 and September 28, 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 $38.1 million and $64.8
million of these items during the three and nine months ended September
27, 1997, respectively, and $43.0 million and $77.0 million during the
three and nine months ended September 28, 1996, respectively. Sales of
products purchased from LGE and its affiliates contributed $31.7 million
and $75.5 million to sales during the three and nine months ended
September 27, 1997, respectively, and $52.5 million and $95.9 million
during the three and nine months ended September 28, 1996, respectively.
Product and other sales: The company sells TVs, picture tubes,
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 by the company to LGE and its affiliates were $18.6
million and $32.0 million during the three and nine months ended
September 27, 1997, respectively, and $9.4 million and $18.7 million
during the three and nine months ended September 28, 1996, respectively.
As of September 27, 1997 and September 28, 1996, accounts
payable included $140.2 million and $75.6 million, respectively, payable
to LGE and its affiliates. LGE has agreed to extended payment terms for
certain of the accounts payable to them. The amount of extended
payables was $133.5 million and $72.4 million as of September 27, 1997
and September 28, 1996, respectively. The company is charged interest
on the extended period at negotiated rates.
In August 1997 the company received $30.0 million from LGE
representing payments in advance for 1997 sales from the company to
LGE. The amount was recorded as a liability and as sales are made to
LGE, the liability balance is reduced. As of September 27, 1997, $20.9
million of the liability to LGE remained and is included in accrued
expenses.
LGE is providing support for certain financing activities of the
company that were entered into during the second and fourth quarters of
1997. See Notes Two and Ten for further discussion.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The company reported a third-quarter 1997 net loss of $69.2 million, or
$1.04 per share, compared with a net loss of $40.2 million, or 61 cents
per share, in the third quarter of 1996. More than half of the company's
loss for the 1997 third quarter resulted from charges for bad debts,
inventory revaluation and merchandising programs, as well as one-time
charges related to the phase out of the company's printed circuit board
operation.
Total third-quarter sales were $304.5 million in 1997 compared with
$340.8 million in 1996. Consumer electronics sales declined in the 1997
quarter compared with the same period last year, driven largely by lower
VCR sales. Because of picture tube availability problems, the company's
domestic direct-view color television unit sales declined slightly compared
with the 1996 quarter, but the company gained market share in key large-
screen categories. The company's projection TV sales were up in the
quarter.
Sales of Network Systems products - analog set-top boxes and data
modems sold primarily to cable television operators - also were down in
the third quarter compared with a year ago due to slowing industry-wide
demand for analog set-top boxes as cable operators prepare to launch
digital networks. Industry and the company's shipments of cable modems,
while relatively small, rose in the 1997 quarter.
Sales were negatively impacted as a result of a dispute the company
has had with a Brazilian customer. The company has not shipped to this
customer this year, and as a result the company's international sales have
been lower than expected. In addition, third-quarter 1997 selling, general
and administrative expenses were affected as the company recorded a $6.0
million bad debt charge related to this Brazilian customer's receivable.
For 1997, the company has recorded a total bad debt charge of $21.0
million related to this customer , which reflects the company's estimated
loss as of September 27, 1997. Subsequent to September 27, 1997, this
matter was settled. The agreement provides that the company will make
certain parts and components available to this customer, and will receive
an $11.0 million settlement payable in installments over eleven months.
Selling, general and administrative expenses were $44.6 million in the
third quarter of 1997, compared with $51.7 million in the previous year.
The 14 percent decrease was due mainly to increased expense in the 1996
quarter for executive severance.
During the third quarter of 1997, the company recorded a charge of
$10.0 million related to the impairment of long-lived assets. The charge
relates primarily to (i) assets that will be sold or scrapped as a result of
the company's decision to phase out of its printed circuit board operation,
(ii) assets that will be sold or scrapped as a result of the company's
decision not to develop the proposed large-screen picture tube plant in
Woodridge, IL and (iii) a building in Canada that may be demolished.
Results for the third quarter of 1997 include $5.7 million of accrued
royalty revenues from tuning system licenses. These revenues were $6.6
million in the third quarter of 1996.
Interest expense was $7.1 million in the third quarter of 1997,
compared with $4.0 million in the previous year. The change was mainly
due to (i) interest expense associated with increased levels of interest-
bearing extended-term payables with LGE and (ii) the amortization of the
$39.7 million guarantee fee associated with LGE providing support for
the April 1997 financing transactions.
During the second quarter of 1997, the company changed its
accounting policy for most tooling expenditures. The change decreased
tooling costs by $2.2 million and increased net income per share by 3
cents during the third-quarter of 1997. (See Note Four to Condensed
Consolidated Financial Statements for further discussion on the
accounting change.)
For the first nine months of 1997 the company reported a net loss of
$143.7 million, or $2.16 per share, compared with a net loss of $108.7
million, or $1.67 per share for the first nine months of 1996. Nine-month
sales were $825.4 million in 1997 compared with $860.3 million in 1996.
In 1997, the company is focusing on higher-margin home theater TV
systems, and has launched a multimillion-dollar national advertising
campaign, the company's first in five years. In addition, the company is
scheduled to begin initial shipments of new digital set-top boxes to
telecommunications companies under the multi-year, $1 billion Americast
contract signed in August 1996.
In recent years, the company has announced product initiatives based
on its set-top box and cable modem technologies. The company has not
yet recognized any revenues from these product initiatives. 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.
The company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. An
internal study is currently under way to determine the full scope and
related costs to insure that the company's systems continue to meet its
internal needs and those of its customers. The company will begin to
incur expenses in 1997 to resolve this issue. These expenditures may be
significant and continue through the year 1999.
Liquidity and Capital Resources
During the nine months ended September 27, 1997, $78.9 million of cash
was used by operating activities principally to fund $117.3 million of net
losses from operations as adjusted for depreciation. The change in current
accounts provided $32.5 million of cash and was principally composed of
a $191.2 million decrease in receivables and a $46.3 million increase in
accounts payable and accrued expenses, offset by a $172.4 million
increase in transferor certificates, a $12.4 million increase in other assets
and a $19.7 million increase in inventories. In addition, the company
reduced cash used by operating activities by issuing common stock to the
retirement savings plan to fulfill the 1996 obligation to salaried
employees. This issuance increased stockholders' equity by $4.9 million.
During the nine months ended September 27, 1997, $93.8 million of
cash was provided by investing activities. This was composed of
proceeds from asset sales of $161.8 million, offset by capital additions of
$68.0 million. In April 1997, the company received $86.6 million as it
entered into a sale-leaseback transaction whereby the company sold and
leased back new and existing manufacturing equipment in its Melrose
Park, Ill., plant and in its Reynosa and Juarez, Mexico, facilities. The
term of the lease is 12 1/2 years and annual payments under the lease will
average approximately $10 million. The company's payment obligations,
along with certain other items under the lease agreement, are fully
guaranteed by LGE. In addition, the company received $70.0 million
from the sale of receivables under the three-year trade receivables
securitization which is provided through a Citicorp commercial paper
conduit (see following discussion).
The increased amount of capital expenditures for the first nine months
of 1997 compared to 1996 related to projects primarily in the color
picture tube area, which include new automated production processes and
the addition of new production lines for computer display tubes. The
company anticipates that full year 1997 capital expenditures will be
approximately $90 million.
During the nine months ended September 27, 1997, $14.9 million of
cash was used by financing activities. This was primarily composed of
$37.0 million of cash used to pay off the old term loan and $22.0 million
of reduced borrowings under the company's credit agreement offset by
$45.0 million of borrowings under the company's new term loan.
As of September 27, 1997, the company had outstanding $334.8
million principal amount of interest-bearing obligations which consisted
of: (i) $109.3 million of 6-1/4 percent Convertible Subordinated
Debentures due 2011 (the current portion of which is $5.7 million), (ii)
$24.3 million aggregate principal amount of 8.5 percent Senior
Subordinated Convertible Debentures due 2000 and 2001, (iii) a $42.7
million Term Loan with Citicorp (the current portion of which is $9.0
million), (iv) $25.0 million currently payable under a Credit Agreement
with Citicorp, and (v) $133.5 million of extended-term payables with
LGE.
In April 1997 the company obtained financing commitments which
enhance the company's liquidity and are consistent with its strategy to
improve its operating and financial performance. One of the commitments
was the previously discussed sale-leaseback transaction.
Another of the commitments is a three-year $110.0 million credit
facility composed of a $45.0 million term loan and a $65.0 million
revolving credit line. This facility replaced the company's previous credit
agreement and term loan. The term loan requires scheduled quarterly
principal payments of $2.3 million with a balloon payment of $20.3
million at maturity in the year 2000. Under the revolving credit line, the
maximum commitment of funds available for borrowing is limited by a
defined borrowing base formula related to eligible inventory. The facility
is secured by the company's inventory, trademarks and tuner patent
royalties, along with the related patents and licenses. Interest on
borrowings is based on market rates.
The facility contains certain covenants that must be met in order to
remain in compliance with the facility, including financial covenants that
must be maintained as of the end of each fiscal quarter. Subsequent to
September 27, 1997, the company amended its credit facility to relax
certain financial covenants. As amended, the financial covenants include
a minimum EBITDA amount, a current ratio test, a funded debt / total
capitalization ratio test, a tuning patent royalties test and a LG Electronics
Inc. ("LGE") payable test. As of September 27, 1997, only the tuning
patent royalties test and the LGE payable test were in effect and the
company was in compliance with both of these covenants.
A third commitment is a three-year trade receivables securitization
which is provided through a Citicorp commercial paper conduit. The
availability of funds under this receivable securitization is subject to
receivables eligibility based on such items as agings, concentrations,
dilution and loss history, subject to a maximum amount that was $165.0
million as of September 27, 1997, but can be increased to $200.0 million,
assuming additional bank commitments. LGE provides support for this
facility through a performance undertaking and a letter of credit.
Additionally in April 1997 the company and LGE entered into an
arrangement whereby certain of the company's accounts payables arising
in the ordinary course of business with LGE will be extended for certain
periods of time with interest being charged on the amounts extended at
negotiated rates.
In return for LGE providing support for the securitizations and the
sale-leaseback transaction and the extended-term payables arrangement,
the company has granted options to LGE to purchase approximately 3.9
million common shares of the company at an exercise price of $0.01 per
share, excercisable over time. The accounting for these stock options will
be based upon their fair value with that fair value being amortized
straight-line over the term of the associated commitments.
Upon the closing of the new financing agreements described above,
the company received approximately $142 million of which
approximately $77 million was used to pay off outstanding balances under
the credit agreement and term loan agreement with General Electric
Capital Corporation. The remainder of the funds was used to pay certain
vendors, to pay fees related to the new financing agreements and for
general corporate purposes.
In August 1997 the company received $30.0 million from LGE
representing payments in advance for 1997 sales from the company to
LGE. The amount was recorded as a liability and as sales are made to
LGE, the liability balance is reduced. As of September 27, 1997, $20.9
million of the liability to LGE remained and is included in accrued
expenses.
In November 1997 the company entered into a series of new financing
transactions designed to enhance the company's liquidity and financial
flexibility. The company obtained a total of $60 million in unsecured and
uncommitted credit facilities through two $30 million lines of credit with
Bank of America and the First Chicago NBD. The credit lines are
guaranteed by LGE for which LGE will receive a fee in an amount up to 2
percent of the face amount of the loan, in the form of cash or the
company's equity and subject to the approval of the Finance Committee of
the company's Board of Directors and in the case of equity, the approval
of the company's shareholders. The company granted liens in favor of
LGE on the capital stock of the company's domestic subsidiaries and on
the company's intellectual property (other than tuning patents, tuning
patent royalties and related license agreements) to secure the guaranties of
LGE for borrowings under these credit lines. As a result of this new
financing, the company has called for redemption on December 5, 1997,
its 8.5 percent Senior Subordinated Convertible Debentures due
November 2000. There is currently $23.8 million principal amount of
such debentures outstanding and the redemption price of such debentures
will be 104 percent of such principal amount plus accrued interest through
the redemption date. The company also plans to call for redemption in
January 1998 its 8.5 percent Senior Subordinated Convertible Debentures
due January 2001. There is currently $0.5 million principal amount of
such debentures outstanding.
The company continues to seek additional financing to support its
plans, including additional lines of credit with both domestic and foreign
financial institutions. In order to obtain any additional lines, the banks
involved require that LGE provide financial support. Although LGE has
no obligation to provide additional financial support, it has indicated a
willingness to provide such support subject to mutual agreement on a fair
fee for providing such support.
The company believes (i) that its current financing commitments and
the extended-term payables available from LGE, will be adequate to meet
its seasonal working capital, capital expenditure and other requirements
during the remainder of 1997, and (ii) that its current financing
commitments and the extended-term payables available from LGE,
together with potential additional lines of credit will be adequate to meet
its seasonal working capital, capital expenditure and other requirements
during 1998. However, there can be no assurance that the company will
be able to obtain the additional lines of credit, that the company will not
experience liquidity problems in the future because of adverse market
conditions or other unfavorable events, and that if circumstances require
the company to seek loan covenant waivers or amendments that they will
be obtained. In the event the company is not able to obtain additional
lines of credit, the company would have to seek other sources of liquidity,
if available.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" in February 1997. The new accounting standard
establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or
potential common stock. The statement simplifies the standards for
computing EPS and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. The statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. The statement requires restatement of
all prior-period EPS data presented.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 1, 1997, the United States Environmental Protection
Agency (EPA) issued a notification pursuant to Section 106(a) of
CERCLA to Zenco de Chihuahua ("Zenco"), a wholly owned subsidiary
of the company, regarding contamination at the Rocky Flats Industrial
Park ("RFIP") in Jefferson County, Colorado. Subsequently, the EPA
also added Zenith Electronics Corporation of Texas ("Zenith Texas"), a
wholly owned subsidiary of the company, as a potentially responsible
party. The notification stated that the EPA believes that Zenco and Zenith
Texas are potentially responsible parties as that term is defined in
CERCLA and invited Zenco and Zenith Texas to voluntarily participate in
planned activities to address possible releases at the RFIP site.
Information supplied to the company by the EPA indicates that Zenco
may have contributed wastes at the site. Investigation into the company's
potential liability is still preliminary.
In May, 1997, the company's directors, LG Electronics Inc. and LG
Semicon Company, Ltd. ("LGE") were named as defendants and the
company was named as a nominal defendant in a stockholder derivative
suit entitled Fisher v. Zenith Electronics Corporation. A second derivative
suit entitled Lazar v. Zenith Electronics Corporation has been filed in the
Court of Chancery, State of Delaware, New Castle County, alleging
identical claims of breach of fiduciary duties by the company's directors.
This case has been consolidated with the Fisher case. This suit also seeks
to void the stock options granted to LGE for its support in procuring
financing for the company and also seeks unspecified damages and
attorneys' fees.
During the three months ended September 27, 1997, no other
reportable events or material developments occurred regarding the legal
proceedings of the company that would need to be reported.
Item 2. Changes in Securities
(b) As discussed in Note Ten to the Condensed Consolidated
Financial Statements, the company has obtained new financing
commitments. One of these commitments, the three year credit facility,
prohibits dividend payments on the company's common stock and
preferred stock, if issued, and prohibits the redemption or repurchase of
capital stock.
Item 6. Exhibits and Reports on Form 8-K
(4) First Amendment, effective as of October 29, 1997, to Credit
Agreement dated as of March 31, 1997, among Zenith Electronics
Corporation, Citibank N.A., Citicorp North America, Inc. and the other
lenders named therein
(10) Subordination Agreement, dated as of November 3, 1997, among
Zenith Electronics Corporation, Citicorp North America, Inc. and LG
Electronics Inc.,
(27) Financial Data Schedule for the nine months ended September 27, 1997
(b) Reports on Form 8-K:
None
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: November 11, 1997
By: /s/ Roger A. Cregg
----------------------
Roger A. Cregg
Executive Vice President -
Chief Financial Officer
(Principal Financial Officer)
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Amendment") effective
as of the 29th day of October, 1997, among ZENITH ELECTRONICS CORPORATION,
a Delaware corporation (the "Borrower"), the financial institutions listed
on the signature pages hereof as Lenders (the "Lenders"), CITIBANK, N.A., as
issuing bank (the "Issuing Bank") and CITICORP NORTH AMERICA, INC., as
agent (the "Agent"),
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, the Issuing Bank and the Agent
are parties to that certain Credit Agreement dated as of March 31, 1997 (as
amended, restated supplemented or otherwise modified from time to time,
the "Credit Agreement"); and
WHEREAS, the Borrower has requested that certain terms of the Credit
Agreement be amended, and the Agent, the Issuing Bank and the Lenders
have agreed to the requested amendments on the terms and conditions
set forth herein;
NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration paid by each party to the other, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Amendment to Article 1. Article 1 of the Credit Agreement,
Definitions, is hereby amended by:
(a) adding the following definitions of "Additional Unsecured Debt",
"Availability", "Mortgage", "Series 2000 Debentures", "Series 2001
Debentures", "Series 2011 Debentures" and "Subordination Agreement"
thereto:
"Additional Unsecured Debt" shall mean the unsecured Funded
Debt consisting of revolving credit lines made available to be
borrowed by the Borrower after the Agreement Date but commencing
prior to December 31, 1997, which are provided to the Borrower by
one or more lenders, in an aggregate principal amount not exceeding
$160 million, and on terms and conditions substantially similar to
those set forth on Schedule A attached hereto, and evidenced by
documentation in form and substance, acceptable to the Agent.
"Availability" shall mean at any time of determination,(a) the
average Borrowing Base for the preceding ten (10) Business Day period
minus (b) the average Aggregate Revolving Credit Obligations for the
preceding ten (10) Business Day period.
"Mortgage" shall mean, collectively, any Mortgage and Security
Agreement or similar agreement executed and delivered by the Borrower
or any Material Subsidiary after the Agreement Date, pursuant to which
the Borrower or such Material Subsidiary grants to the Agent a
first priority perfected security interest in and Lien on all of the
Borrower's or such Material Subsidiary's owned real property and
Equipment located in the United States, as the same may be amended,
modified, or supplemented from time to time.
"Series 2000 Debentures" shall mean those certain 8.5% Senior
Subordinated Convertible Debentures issued by the Borrower, due
November 19, 2000 in an aggregate principal amount not exceeding
$55,000,000, and governed by that certain Debenture Purchase Agreement
dated as of November 19, 1993, between the Borrower and the
institutional investor named therein (as amended prior to the
Agreement Date).
"Series 2001 Debentures" shall mean those certain 8.5% Senior
Subordinated Convertible Debentures issued by the Borrower, due
January 18, 2001 in an aggregate principal amount not exceeding
$20,000,000, and governed by that certain Debenture Purchase Agreement
dated as of January 11, 1994, between the Borrower and the
institutional investor named therein (as amended prior to the
Agreement Date).
"Series 2011 Debentures" shall mean those certain 6.25% Convertible
Subordinated Debentures issued by the Borrower, due April 1,
2011 in an aggregate principal amount not exceeding $115,000,000, and
governed by that certain Indenture dated as of April 1, 1986, between
the Borrower and The First National Bank of Boston, as trustee (as
amended prior to the Agreement Date).
"Subordination Agreement" shall have the meaning set forth in
paragraph (j) of the definition of "Permitted Liens" set forth in
Article 1 hereof."
(b) deleting the definitions of "Lease Transactions" and "Subsequent
Lease Transactions" set forth therein in the entirety.
(c) deleting the definitions of "Security Documents" and "Subordinated
Debentures" set forth therein in the entirety and substituting the
following, respectively, in their place:
""Security Documents" shall mean, collectively, the Security
Agreement, the Pledge Agreement, the Assignment of Notes, the
Intellectual Property Security Agreements, the Subsidiary Guaranty,
the Subsidiary Security Agreement, the Mortgage, the Subordination
Agreement, all UCC-1 financing statements and any other document,
instrument or agreement granting Collateral for the Obligations, as
the same may be amended or modified from time to time.
"Subordinated Debentures" shall mean, collectively, (a) the Series
2000 Debentures, (b) the Series 2001 Debentures, and (c) the Series
2011 Debentures."
(d) amending the definition of "Permitted Liens" by deleting
the "and" at the end of paragraph (h) thereof, deleting the period
at the end of paragraph (i) thereof, and substituting "; and" in lieu
of such period, and adding the following paragraph (j) at the end
thereof:
"(j) Liens in favor of LGE on the Capital Stock of the Borrower's
domestic Subsidiaries and on the Intellectual Property (other than the
Tuning Patents, Tuning Patent Royalties and License Agreements), real
estate and Equipment located in the United States of the Borrower and
its Material Subsidiaries securing any guaranty of LGE of the
Additional Unsecured Debt provided such Liens are at all times fully
subordinated to the prior Liens of the Agent (for its benefit and the
benefit of the Lenders) on such assets pursuant to a subordination
agreement (the "Subordination Agreement") in form and substance
satisfactory to the Agent in its sole discretion."
2. Amendment to Section 2.6. Section 2.6(c) of the Credit Agreement,
Other Mandatory Repayments, is hereby amended by deleting subparagraphs
(i) and (ii) thereof in their entirety and substituting the following,
respectively, in their place:
"(i) In the event that after the Agreement Date, the Borrower
shall issue any Capital Stock (other than in connection with the
exercise of employee or LGE stock options), shall sell any of its
assets (other than sales of Inventory in the ordinary course of its
business or pursuant to the Receivables Securitization) or shall
incur any Funded Debt other than the Obligations and other than
the Additional Unsecured Debt, one hundred percent (100%) of the Net
Cash Proceeds received by the Borrower from such issuance, sale or
incurrence shall be paid on the date of receipt of the
proceeds thereof by the Borrower to the Lenders as a mandatory payment
of the Revolving Loans and the Term Loan, on a pro-rata basis. The
payment of the Term Loan due hereunder shall be applied to reduce the
Term Loan quarterly principal installments set forth in Section 2.6(b)
in the inverse order of maturity. The Revolving Loan Commitment shall
be permanently reduced by the amount of the payment of the Revolving
Loans due hereunder, whether or not such payment is made. Nothing in
this Section shall authorize the Borrower to issue any Capital Stock,
sell any assets or incur any Funded Debt except as expressly permitted
by this Agreement.
(ii) INTENTIONALLY OMITTED."
3. Amendment to Section 5.1. Section 5.1 of the Credit Agreement,
Preservation of Existence and Similar Matters, is hereby deleted in its
entirety and the following substituted in its place:
"Section 5.1 Preservation of Existence and Similar Matters. The
Borrower will, and will cause each of the Borrower's Subsidiaries
(other than the Immaterial Subsidiaries and except in connection
with a merger permitted by Section 7.7(e) provided the Agent receives
thirty (30) day's prior written notice of any such merger) to (i)
preserve and maintain their respective existence, rights, franchises,
licenses, and privileges in their respective jurisdiction of
incorporation including, without limitation, all Necessary
Authorizations material to its business, and (ii) qualify and
remain qualified and authorized to do business in each jurisdiction
in which the character of their respective properties or the
nature of their respective business requires such qualification
or authorization."
4. Amendment to Section 5.20. Section 5.20 of the Credit Agreement,
Lease Transactions, is hereby deleted in its entirety and the following
substituted in its place:
"Section 5.20 Minimum Availability. On the tenth (10th)
Business Day after the Borrower's receipt of the initial proceeds of
Additional Unsecured Debt and at all times thereafter, the Borrower
shall maintain Availability of not less than $10,000,000."
5. Amendment to Section 6.6. Section 6.6 of the Credit Agreement, Notice
of Litigation and Other Matters, is hereby amended by deleting paragraph (c)
thereof in its entirety and substituting the following in its place:
"(c) Within (i) one (1) Business Day of the demand by any
lender of any Additional Unsecured Debt for the repayment of all
or any portion of the principal thereof, the Borrower shall
notify the Agent and the Lenders of the occurrence thereof, and
(ii) three (3) Business Days' of the occurrence of any default
(whether or not the Borrower has received notice thereof from any
other Person) on Indebtedness of the Borrower or any Subsidiary of
the Borrower which singly, or in the aggregate exceed $1,000,000,
the Borrower shall notify the Agent and the Lenders of the
occurrence thereof;"
6. Amendment to Section 7.1. Section 7.1 of the Credit Agreement,
Indebtedness, is hereby amended by deleting paragraphs (d) and (g) thereof
in their entirety and substituting the following, respectively, in their
place:
"(d) Indebtedness secured by Permitted Liens described in clause (f)
of the definition of Permitted Liens set forth in Article 1 hereof
and Capitalized Lease Obligations, collectively, not to exceed the
aggregate principal amount of $6,000,000 at any time;
(g) (i) the Additional Unsecured Debt, and (ii) other unsecured
Indebtedness incurred by the Borrower not to exceed $2,000,000 in the
aggregate outstanding from time to time."
7. Amendment to Section 7.7. Section 7.7 of the Credit Agreement,
Liquidation; Change in Ownership, Name, or Year; Disposition or Acquisition
of Assets; Etc., is hereby amended by deleting paragraph (b) thereof in its
entirety and substituting the following in its place:
"(b) Sell, lease, abandon, transfer or otherwise
dispose of, in a single transaction or a series of related
transactions, any assets, property or business except for
the sale of Inventory in the ordinary course of business at
the fair market value thereof and for cash or cash
equivalents and except for physical assets used, consumed
or otherwise disposed of in the ordinary course of
business; provided, however, that (i) the Borrower may
sell or otherwise dispose of assets (other than Collateral)
with a sale value not greater than $1,000,000 in the
aggregate for all such assets that may be sold during any
year if the Net Cash Proceeds from such sale are applied
to the Loans as required by Section 2.6(c), (ii) the
Borrower, Microcircuits and Finance Corp. may sell and
transfer the receivables as set forth in the Receivables
Purchase Agreements and the other Securitization
Documents, and (iii) the Borrower may sell assets in
connection with a sale and leaseback transaction to the
extent permitted by Section 7.15 hereof;"
8. Amendments to Financial Covenants. Article 7 of the Credit Agreement,
Negative Covenants, is hereby amended by deleting Sections 7.8, 7.9, 7.10,
7.11, 7.12 and 7.13 thereof in their entirety and replacing such sections,
respectively, with the following:
"Section 7.8 Minimum EBITDA. The
Borrower shall not permit for the fiscal quarter
ended (a) December 31, 1997, EBITDA for the
immediately preceding three (3) month period to
be less than ($15,000,000), (b) March 31, 1998,
EBITDA for the immediately preceding six (6)
month period to be less than ($23,000,000), (c)
June 30, 1998, EBITDA for the immediately
preceding nine (9) month period to be less than
($23,000,000), and (d) September 30, 1998, and
each fiscal quarter end thereafter, EBITDA for the
immediately preceding twelve (12) month period to
be less than the amount herein below specified for
such period:
Quarter End Amount
----------------------------- ---------------
September 30, 1998 $ - 0-
December 31, 1998 $ 32,000,000
March 31, 1999 $ 125,000,000
June 30, 1999, and thereafter $ 135,000,000
Section 7.9 Current Ratio. The
Borrower shall not as of the fiscal quarter ending
December 31, 1997, and for each fiscal quarter end
thereafter, permit the ratio of (a) Current Assets to
(b) Current Liabilities to be less than the ratio
herein below specified for such period:
Quarter End Ratio
------------------------------ ---------------
December 31, 1997 .75 to 1.00
March 31, 1998 .68 to 1.00
June 30, 1998 .65 to 1.00
September 30, 1998 .70 to 1.00
December 31, 1998 .70 to 1.00
March 31, 1999, and thereafter .85 to 1.00
Section 7.10 Fixed Charge Coverage
Ratio. The Borrower shall not permit for the
quarter ended March 31, 1999, and each calendar
quarter end thereafter, the Fixed Charge Coverage
Ratio for the immediately preceding twelve (12)
month period to be less than 1.50 to 1.00.
Section 7.11 Capital Expenditures. The
Borrower shall not make or incur in the aggregate
any Capital Expenditures, during any fiscal year, in
excess of the amount herein below specified (the
"Permitted Amount") for such year:
Year Permitted Amount
----------------------- ------------------
1997 $100,000,000
1998 $ 51,000,000
1999 $ 60,000,000
2000 $ 30,000,000
; provided, however, the Borrower may make
additional Capital Expenditures during (a) fiscal
year 1998 in an aggregate amount equal to (i) the
Permitted Amount for fiscal year 1997, minus
(ii) the aggregate amount of Capital Expenditures
made in fiscal year 1997, and (b) fiscal year 1999
and fiscal year 2000 in an aggregate amount equal
to (i) (A) the Permitted Amount for the
immediately preceding fiscal year, minus (B) the
aggregate amount of Capital Expenditures made in
the immediately preceding fiscal year, multiplied by
(ii) fifty percent (50%).
Section 7.12 Interest Coverage Ratio.
The Borrower shall not permit for the quarter
ended December 31, 1998, and each calendar
quarter end thereafter, the Interest Coverage Ratio
for the immediately preceding twelve (12) month
period to be less than the ratio herein below
specified for such period:
Quarter End Ratio
------------------------------- ---------------
December 31, 1998 1.00 to 1.00
March 31, 1999, and thereafter 3.00 to 1.00
Section 7.13 Funded Debt/Total
Capitalization Ratio. The Borrower shall not
permit for the fiscal quarter ended December 31,
1997, and each fiscal quarter end thereafter, the
ratio of (a) the sum of (i) Funded Debt plus (ii) the
LGE Payable, to (b) Total Capitalization for the
immediately preceding twelve (12) month period to
exceed the ratio which is herein below specified for
such period:
Quarter End Ratio
--------------------------------- -----------------
December 31, 1997 1.00 to 1.00
March 31, 1998 1.00 to 1.00
June 30, 1998 1.00 to 1.00
September 30, 1998 1.00 to 1.00
December 31, 1998 1.00 to 1.00
March 31, 1999, and thereafter .85 to 1.00"
9. Amendment to Section 7.15. Section 7.15 of the Credit Agreement,
Sales and Leasebacks, is hereby deleted in its entirety and the following
substituted in its place:
"Section 7.15 Sales and Leasebacks. The
Borrower will not enter into and will not permit
any of the Borrower's Subsidiaries to enter into any
arrangement (other than the Salomon Lease
Transaction), directly or indirectly, with any third
party whereby the Borrower or such Subsidiary
shall sell or transfer any property, real or personal,
whether now owned or hereafter acquired, and
whereby the Borrower or such Subsidiary shall
then or thereafter rent or lease as lessee such
property or any part thereof or other property
which the Borrower or such Subsidiary intends to
use for substantially the same purpose or purposes
as the property sold or transferred, unless (i) no
Default or Event of Default exists at the time of
such sale or is caused thereby, (ii) any assets sold
or disposed of in connection with such sale and
leaseback are sold for fair market value and have a
sale value not greater than $50,000,000 in the
aggregate for all such assets sold in connection
with a sale leaseback during any year, and (iii) the
Net Cash Proceeds from such sale are applied to
the Loans as required by Section 2.6(c)."
10. Amendment to Section 7.16. Section 7.16 of the Credit Agreement,
Amendment and Waiver, is hereby deleted in its entirety and the following
substituted in its place:
"Section 7.16 Amendment and Waiver.
The Borrower shall not, without the prior written
consent of the Majority Lenders, enter into any
amendment of, or agree to or accept any waiver
which would adversely affect the rights of the
Agent, the Lenders and the Issuing Banks under
this Agreement or any other Loan Document, of
(a) its certificate of incorporation and by-laws,
(b) the Subordinated Debentures, (c) the
Securitization Documents, or (d) any document
evidencing Additional Unsecured Debt."
11. Amendment to Section 7.19. Section 7.19 of the Credit Agreement,
Prepayments, is hereby deleted in its entirety and the following substituted
in its place:
"Section 7.19 Prepayments. The
Borrower shall not prepay, redeem, defease or
purchase in any manner, or deposit or set aside
funds for the purpose of any of the foregoing,
make any payment in respect of principal of, or
make any payment in respect of interest on, (a) the
LGE Payable; provided, however, that so long as
no Default or Event of Default is then existing or
would be caused thereby, the Borrower may make
current payments of accounts due on the LGE
Payable, and the accrued interest thereon, if the
outstanding aggregate balance of the LGE Payable
remains equal to or greater than the amount
required by Section 7.14(b); and (b) any Funded
Debt (including the Subordinated Debentures),
except the Borrower may (i) make regularly
scheduled payments of principal or interest
required in accordance with the terms of the
instruments governing any Funded Debt permitted
hereunder, (ii)provided no Event of Default then
exists or would be caused thereby, call and redeem
the Series 2000 Subordinated Debentures and call
and redeem or repurchase through a tender offer
the Series 2001 Subordinated Debentures with the
proceeds of Additional Unsecured Debt as required
by Section 8.1(s)(ii), and (iii) make payments with
respect to the Obligations; provided, however, the
Borrower shall not make any payments (whether
with respect to principal, interest, or otherwise) on
the Subordinated Debentures if such payments
would violate the subordination provisions of the
Subordinated Debentures."
12. Amendment to Section 8.1. Section 8.1 of the Credit Agreement,
Events of Default, is hereby amended by deleting the "or" at the end of
paragraph (p) thereof, deleting the period at the end of paragraph (q)
thereof, and substituting "; or" in lieu of such period, and adding
the following paragraphs (r), (s),(t) and (u) at the end thereof:
"(r) Any lender of any Additional
Unsecured Debt shall accelerate such Additional
Unsecured Debt or otherwise demand the
repayment of all or part of the outstanding
principal balance thereof (whether from the
Borrower, LGE or any other obligor thereon);
(s) (i) The Borrower shall not have the
ability to borrow Additional Unsecured Debt in an
aggregate principal amount of $160,000,000 by
December 31, 1997, or (ii) the Borrower shall not
have used a portion of the proceeds of the
Additional Unsecured Debt(x) to redeem and
satisfy in full the Series 2000 Debentures by
December 31, 1997; and (y) to redeem or
repurchase and satisfy in full the Series 2001
Debentures by January 31, 1998;
(t) LGE shall revoke or otherwise
rescind any guaranty of LGE of any Additional
Unsecured Debt or shall contest the validity or
enforceability of the Subordination Agreement; or
(u) The Borrower and the Material
Subsidiaries shall not have each executed and
delivered to the Agent by December 5, 1997, the
Mortgage and all other documents and fixture
filings necessary to grant to the Agent a first
priority perfected security interest in and Lien on
all of the Borrower's and such Material
Subsidiary's real property and Equipment located
in the United States, together with any opinions of
counsel and other documents as may be reasonably
requested by the Agent."
13. Amendment to Section 9.15. Section 9.15 of the Credit Agreement,
Release of Collateral, is hereby amended by deleting clause (ii) of paragraph
(a) thereof in its entirety and replacing such clause (ii) with the following:
"(ii) against any part of the Collateral sold
or disposed of by the Borrower if such sale or
disposition is permitted by Sections 7.7 or 7.15
hereof or is otherwise consented to by the requisite
Lenders for such release as set forth in Section
10.12 hereof, as certified to the Agent by the
Borrower in a certificate of an Authorized Signatory."
14. Amendment to Schedule 7.6. Schedule 7.6 of the Credit Agreement,
"Affiliate Transactions", is hereby deleted in its entirety and replaced
with Schedule 7.6 attached hereto.
15. No Other Amendment. Except for the amendments expressly set forth
above, the text of the Credit Agreement and all other Loan Documents
shall remain unchanged and in full force and effect. The Borrower
acknowledges and expressly agrees that the Lenders reserve the right to,
and do in fact, require strict compliance with all terms and provisions of
the Credit Agreement and the other Loan Documents.
16. Representations and Warranties. The Borrower hereby represents
and warrants in favor of the Agent, the Issuing Bank, and each Lender,
as follows:
(a) the Borrower has the corporate power and
authority (i) to enter into this Amendment, and (ii) to do
all acts and things as are required or contemplated
hereunder to be done, observed and performed by it;
(b) this Amendment has been duly authorized,
validly executed and delivered by one or more authorized
signatories of the Borrower, and constitutes the legal,
valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with its terms;
(c) the execution and delivery of this
Amendment and performance by the Borrower under the
Credit Agreement, as amended hereby, do not and will not
require the consent or approval of any regulatory authority
or governmental authority or agency having jurisdiction
over the Borrower which has not already been obtained,
nor contravene or conflict with the charter documents of
the Borrower, or the provisions of any statute, judgment,
order, indenture, instrument, agreement or undertaking, to
which the Borrower is a party or by which any of its
properties are or may become bound;
(d) as of the date hereof, and after giving effect
to this Amendment (i) no Default or Event of Default
exists under the Credit Agreement or is caused by this
Amendment, and (ii) each representation and warranty set
forth in Article 4 of the Credit Agreement is true and
correct, except (x) to the extent previously fulfilled in
accordance with the terms of the Credit Agreement, as
amended hereby, or (y) to the extent specifically relating
to the Agreement Date;
(e) as of the date hereof, the aggregate
outstanding principal balance of the Series 2001
Debentures is not greater than $550,000.
17. Loan Document. This Amendment shall be deemed to be a Loan Document
for all purposes.
18. Expenses. The Borrower agrees to pay all reasonable expenses of the
Agent incurred in connection with this Amendment, including, without
limitation, all fees and expenses of counsel to the Agent.
19. Counterparts. This Amendment may be executed in multiple counterparts,
each of which shall be deemed to be an original and all of which, taken
together, shall constitute one and the same agreement. Delivery of an
executed counterpart of this Amendment by facsimile transmission shall be as
effective as delivery of a manually executed counterpart hereof.
20 Governing Law. This Amendment shall be deemed to be made pursuant to
the laws of the State of New York with respect to agreements made and to be
performed wholly in the State of New York, and shall be construed, interpreted,
performed and enforced in accordance therewith.
21. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings set forth in the Credit Agreement.
22. Effectiveness. This Amendment shall be effective as of the date first
set forth above upon the Agent's receipt of (i)an amendment fee (for the
account of the Lenders on a pro rata basis) in the amount of one-eighth of
one percent (0.125%) of the Commitments, and (ii) a counterpart hereof duly
executed by the Borrower and the Majority Lenders.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
or caused it to be executed by their duly authorized officers, effective
as of the day and year first written above.
BORROWER: ZENITH ELECTRONICS CORPORATION
By: /s/ Roger A. Cregg
Name: Roger A. Cregg
Its: Executive VP and CFO
AGENT: CITICORP NORTH AMERICA, INC.
By: /s/ Thomas M. Halsch
Name: Thomas M. Halsch
Its: Vice President
ISSUING BANK: CITIBANK, N.A.
By: /s/ Thomas M. Halsch
Name: Thomas M. Halsch
Its: Attorney in Fact
LENDERS: CITICORP USA, INC.
By: /s/ Thomas M. Halsch
Name: Thomas M. Halsch
Its: Attorney in Fact
CONGRESS FINANCIAL CORPORATION
By: /s/ Kenneth G. Donahue
Name: Kenneth G. Donahue
Its: Vice President
BANK BOSTON, N.A., f/k/a The First National Bank of Boston
By:
Name:
Its:
HELLER FINANCIAL, INC.
By: /s/ Tara Hopkins
Name: Tara Hopkins
Its: Assistant Vice President
THE BANK OF NEW YORK COMMERCIAL CORPORATION
By: /s/ Stephen V. Mangiante
Name: Stephen V. Mangiante
Its: Vice President
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skavla
Name: Peter L. Skavla
Its: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael S. Burns
Name: Michael S. Burns
Its: Senior Vice President
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
Name:
Its:
Schedule A - Additional Unsecured Debt
Schedule 7.6 - Affiliate Transactions
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (this
"Agreement") dated as of November 3, 1997, is made and
entered into by and among CITICORP NORTH AMERICA,
INC., as agent for the Issuing Bank and the Lenders (as
hereafter defined) (the "Agent"), LG ELECTRONICS INC., a
corporation organized under the laws of the Republic of Korea
(the "Subordinated Creditor"), and ZENITH ELECTRONICS
CORPORATION, a Delaware corporation (the "Borrower").
All capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Credit Agreement (as
defined below).
W I T N E S S E T H:
WHEREAS, the Borrower, the financial institutions
party thereto from time to time (the "Lenders"), Citibank, N.A.,
as Issuing Bank (the "Issuing Bank"), and Agent are parties to
that certain Credit Agreement dated as of March 31, 1997, as
amended by that certain First Amendment to Credit Agreement
dated as of October 29, 1997 (as amended, restated or otherwise
modified from time to time, the "Credit Agreement"); and
WHEREAS, the Obligations under the Credit Agreement
and the other Loan Documents are secured by the Lien of
Agent, for its benefit and the benefit of the Lenders and the
Issuing Bank, on the Collateral (together with any Liens that
may be granted to Agent, the Issuing Bank or any Lender from
time to time, the "Senior Lien"); and
WHEREAS, at the request of Borrower, Subordinated
Creditor has agreed to guarantee from time to time the
obligations of Borrower under the Additional Unsecured Debt as
more fully set forth in that certain Reimbursement Agreement by
and between Borrower and Subordinated Creditor dated
November 3, 1997 (as amended, restated or otherwise modified
from time to time, and together with each guaranty by
Subordinated Creditor of the Additional Unsecured Debt, the
"Reimbursement Agreement"); and
WHEREAS, Subordinated Creditor has requested that
Borrower grant to Subordinated Creditor a Lien on the Capital
Stock of Borrower's domestic Subsidiaries and on certain
Intellectual Property (other than the Tuning Patents, Tuning
Patent Royalties, and License Agreements), real estate and
Equipment located in the United States of the Borrower and its
Material Subsidiaries (the "Subordinated Creditor Collateral") to
secure the reimbursement obligations of the Borrower under the
Reimbursement Agreement (the Borrower's reimbursement
obligations under the Reimbursement Agreement, together with
all fees to be paid to Subordinated Creditor in connection with
the Reimbursement Agreement and all other amounts which may
from time to time be owing to Subordinated Creditor or any
affiliate of Subordinated Creditor in connection with the
Reimbursement Agreement, the Subordinated Lien, the
Subordinated Debt Documents or the Additional Unsecured
Debt are hereinafter collectively referred to as the "Subordinated
Debt"); and
WHEREAS, as an inducement and a condition precedent
to, and part of the consideration for, Agent's, the Issuing Bank's
and the Lenders' consent to the granting of the Subordinated
Lien and the creation of the Subordinated Debt, Subordinated
Creditor has agreed, among other things, subject to the terms
and provisions of this Agreement, (i) to subordinate the
Subordinated Debt to the Obligations at all times prior to the
Termination Date, (ii) to subordinate any Lien which
Subordinated Creditor has or may have in the future in the
Subordinated Creditor Collateral and any other assets or
property of Borrower or any Subsidiary of Borrower (the
"Subordinated Lien") to the Senior Lien and (iii) to forebear
from foreclosing upon any part of the Collateral or any other
security with respect to the Subordinated Debt or otherwise
exercising any creditor's remedy or taking any action against
Borrower upon any of its obligations to Subordinated Creditor
except as permitted hereby.
NOW, THEREFORE, in consideration of the foregoing
and the mutual covenants herein contained, and for other good
and valuable consideration, it is hereby agreed as follows:
1. Priority of Liens. Notwithstanding anything to the
contrary including without limitation the date, time, manner or
order of perfection or attachment of the security interests and
liens on the Collateral granted by Borrower to either of Agent or
Subordinated Creditor, and notwithstanding the usual
application of the priority provisions of the Uniform Commercial
Code as in effect in any jurisdiction or any other applicable law
or judicial decision of any jurisdiction, or whether Subordinated
Creditor holds possession of all or any part of the Collateral, or
if Agent or Subordinated Creditor is perfected without filing or
possession in any part of the Collateral, the Senior Lien shall be
a first, senior and prior security interest in and lien on the
Collateral, prior in interest and superior to the Subordinated
Lien.
2. Subordination of Subordinated Debt.
(a) As of the date hereof and until the Termination
Date, Subordinated Creditor subordinates any and all claims now
or hereafter owing to it by Borrower under the Subordinated
Debt to any and all claims of Agent, the Issuing Bank and the
Lenders under the Obligations (including, without limitation,
interest or other payments on the Obligations paid or accrued
after the commencement of an Insolvency Proceeding) (as
hereinafter defined), and payment of or for adequate protection
pursuant to any Insolvency Proceeding, and, except as set forth
in paragraph (b) below, agrees that all claims of the Lenders, the
Issuing Bank and Agent shall be paid in full in cash or otherwise
satisfied and the Commitments shall be terminated before any
payment may be made on the Subordinated Debt, whether of
principal or interest or other Indebtedness.
(b) Except as set forth below in this paragraph (b),
Subordinated Creditor agrees not to accept any payment of the
Subordinated Debt nor make any transfer to third parties not
party to this Agreement or take any other action designed to
secure directly or indirectly from Borrower or any other Person
any payment on account of the Subordinated Debt, without the
express, prior written consent of Agent, and, except as set forth
below in this paragraph (b), Subordinated Creditor agrees to pay
over to Agent any funds that may be received by it from
Borrower as a payment on account of the Subordinated Debt at
any time prior to the Termination Date. Subordinated Creditor
further agrees not to sell, assign, transfer or endorse any
Subordinated Debt or Subordinated Lien to anyone except
subject to the terms and conditions of this Agreement.
Notwithstanding anything contained herein to the contrary, (i)
provided no Default or Event of Default then exists or would be
caused thereby, Borrower may (x) make payments of the
Additional Unsecured Debt to the holders thereof, and (y) pay
and Subordinated Creditor may receive payments of fees in
connection with the Reimbursement Agreement to the extent
permitted by Section 7.6 of the Credit Agreement and (ii) in any
Insolvency Proceeding, Subordinated Creditor shall be entitled
to receive and retain its share of any payment, security or other
distribution payable to a class of unsecured creditors on account
of any portion of the Subordinated Debt that is determined to be
an unsecured deficiency claim or by way of subrogation to the
Additional Unsecured Debt.
(c) Subordinated Creditor agrees that the priority of
the Obligations set forth above shall continue during any
insolvency, receivership, bankruptcy, dissolution, liquidation, or
reorganization proceeding, or in any other proceeding, whether
voluntary or involuntary, by or against Borrower, under any
bankruptcy or insolvency law or laws, federal or state relating to
the relief of debtors of any jurisdiction, whether now or hereafter
in effect, and in any out-of-court composition, assignment for
the benefit of any creditor, readjustment of indebtedness,
reorganization, extension or other debt arrangement of any kind
(collectively, "Insolvency Proceeding"). In the event of any
payment, distribution, division or application, partial or
complete, voluntary or involuntary, by operation of law or
otherwise, of all or any part of the property, assets or business of
Borrower, or the proceeds thereof, or any securities of
Borrower, to Subordinated Creditor, by reason of any
liquidation, dissolution or other winding up of Borrower or its
business or by reason of any sale or Insolvency Proceeding, then
any such payment or distribution of any kind or character,
whether in cash, property or securities, which, but for the
subordination provisions of this Section 2, would otherwise be
payable or deliverable upon or in respect of the Subordinated
Debt, shall instead be paid over or delivered directly to Agent,
for application to the payment of the Obligations, to the extent
necessary to make payment of the Obligations remaining unpaid
after giving effect to any concurrent payment or distribution to
Agent, and Subordinated Creditor shall not receive any such
payment or distribution or any benefit therefrom to such extent
until after the Termination Date.
(d) Subject to the provisions of this Agreement,
Agent shall have the sole right to control all aspects of
liquidation of the Collateral and disposition of the proceeds
thereof, including all proceedings pertaining thereto under any
Insolvency Proceeding and the approval of any plan of
reorganization of Borrower thereunder.
3. Negative Covenants. For so long as this
Agreement is in effect, and except as expressly permitted hereby,
(i) Borrower shall not directly or indirectly, make any payment
(other than a payment permitted by paragraph 2(b) hereof and
other than the Lien on the Subordinated Creditor Collateral) on
account of or grant a security interest in, mortgage, pledge,
assign or transfer any properties to secure or satisfy all or any
part of the Subordinated Debt; (ii) Subordinated Creditor shall
not demand, collect or accept from Borrower or any other
Person any payment (other than a payment permitted by
paragraph 2(b) hereof and other than the Lien on the
Subordinated Creditor Collateral) or security on account of the
Subordinated Debt or any part thereof, or accelerate the
maturity of the Subordinated Debt; (iii) Subordinated Creditor
shall not exchange or set off any part of the Subordinated Debt;
(iv) Subordinated Creditor shall not hereafter give any
subordination in respect of the Subordinated Debt or transfer or
assign any of the Subordinated Debt or Subordinated Lien to any
Person other than Agent unless the transferee or assignee thereof
first agrees in writing with Agent to be bound by the terms of
this Agreement; (v) Borrower shall not hereafter issue any
instrument, security or other writing evidencing any part of the
Subordinated Debt, and Subordinated Creditor will not receive
any such writing, except upon the prior written approval of
Agent; (vi) Borrower and Subordinated Creditor shall not
amend, alter or modify any provision of the Reimbursement
Agreement or any document securing or evidencing Borrower's
reimbursement obligations under the Reimbursement Agreement
(collectively, the "Subordinated Debt Documents") without the
prior written consent of Agent; (vii) Subordinated Creditor shall
not commence or join with any other creditors of a Borrower in
commencing any bankruptcy, reorganization, receivership or
insolvency proceeding against Borrower; and (viii) neither
Borrower nor Subordinated Creditor shall otherwise take or
permit any action prejudicial to or inconsistent with Agent's
priority position over Subordinated Creditor that is created by
this Agreement.
4. Forbearance from Exercise of Certain Remedies.
Until the Termination Date and except as permitted in Section
2(b) hereof, Subordinated Creditor shall not (a) take any action
or exercise any remedy against Borrower to enforce the
Subordinated Debt (other than filing a proof of claim, voting on
a plan of reorganization in an Insolvency Proceeding, obtaining
adequate protection of the Subordinated Lien (which shall be
junior to any adequate protection of the Senior Lien) or other
actions necessary to preserve the Subordinated Debt and
Subordinated Lien in an Insolvency Proceeding and not
inconsistent with the provisions of this Agreement); or (b) take
any action or exercise any remedy against any guarantor of or
pledgor securing the Obligations in order to collect any of the
Subordinated Debt; or (c) take any action or exercise any
remedy against the Collateral as a result of any breach or default
under the Subordinated Debt; or (d) commence, or join with any
other creditor of Borrower in commencing, any bankruptcy,
reorganization or Insolvency Proceeding against Borrower; or
(e) take any action or exercise any remedy against any property
or assets of any guarantor of or pledgor securing the
Obligations; or (f) take any action or exercise any remedy with
respect to any securities, equity or otherwise, of Borrower
pledged to Subordinated Creditor. Subordinated Creditor
understands and agrees that Agent shall have the right, but shall
have no obligation, to cure any default under the Subordinated
Debt without the prior written consent of Subordinated
Creditor.
5. Duration and Termination. This Agreement shall
constitute a continuing agreement of subordination, and shall
remain in full force and effect until the earlier of (the
"Termination Date") (a) indefeasible payment in full of the
Obligations and termination of the Commitments, or (b) the final
liquidation, sale or other disposition of all Collateral, and the
receipt of the proceeds thereof by Agent. The Lenders may,
without notice to Subordinated Creditor, extend or continue or
increase the amount of credit and make other financial
accommodations to or for the account of Borrower in reliance
upon this Agreement. The obligations of Subordinated Creditor
under this Agreement shall continue to be effective, or be
reinstated, as the case may be, if at any time any payment in
respect of any Obligations is rescinded or must otherwise be
restored or returned by Agent, the Issuing Bank or any Lender
by reason of any bankruptcy, reorganization, arrangement,
composition or Insolvency Proceeding or as a result of the
appointment of a receiver, intervenor or conservator of, or
trustee or similar officer for, Borrower or any substantial part of
its property, or otherwise, all as though such payment had not
been made.
6. Warranties and Representations of Subordinated
Creditor. Subordinated Creditor hereby represents and warrants
that: (i) it has not relied nor will it rely on any representation or
information of any nature made by or received from Agent
relative to Borrower in deciding to execute this Agreement; (ii)
no part of the Subordinated Debt is evidenced by any instrument
or writing except the Reimbursement Agreement and the
Subordinated Debt Documents; (iii) Subordinated Creditor is the
lawful owner of the Subordinated Debt; (iv) Subordinated
Creditor has not heretofore assigned or transferred any of the
Subordinated Debt, any interest therein or any Collateral or
security pertaining thereto; (v) Subordinated Creditor has not
heretofore given any subordination in respect to the
Subordinated Debt; (vi) it has the corporate power and authority
to enter into this Agreement, and to do all acts and things as are
required or contemplated hereunder to be done, observed and
performed by it; and (vii) this Agreement has been duly
authorized, validly executed and delivered by one or more
authorized signatories of Subordinated Creditor, and constitutes
the legal, valid and binding obligation of Subordinated Creditor,
enforceable against Subordinated Creditor in accordance with its
terms. Subordinated Creditor also represents and warrants to
Agent that true and complete copies of the Subordinated Debt
Documents have been or concurrently herewith are being
furnished to Agent, and that no part of the Subordinated Debt is
evidenced by any other instrument, security or other writing
which has not been or is not concurrently herewith being
furnished to Agent.
7. Subordinated Creditor Waivers. Subordinated
Creditor expressly waives all notices not specifically required
pursuant to the terms of this Agreement whatsoever, and
Subordinated Creditor expressly consents to reliance by Agent,
the Issuing Bank and the Lenders upon the subordination and
other agreements as herein provided. Subordinated Creditor
agrees that neither Agent, the Issuing Bank nor any Lender has
made warranties or representations with respect to the due
execution, legality, validity, completeness or enforceability of
the Loan Documents or the collectibility of the obligations
thereunder, that Agent shall be entitled to manage and
supervise the Loans in accordance with applicable law and its
usual practices, modified from time to time as it deems
appropriate under the circumstances, without regard to the
existence of any rights that Subordinated Creditor may now or
hereafter have in or to any of the Collateral, and that neither
Agent, the Issuing Bank nor any Lender shall have any liability
to Subordinated Creditor for, and Subordinated Creditor
waives any claim which Subordinated Creditor may now or
hereafter have against Agent, the Issuing Bank or any Lender
arising out of, and Subordinated Creditor waives any objection
to, (i) any and all actions which Agent, the Issuing Bank or the
Lenders take or omit to take (including, without limitation,
actions with respect to the creation, perfection or continuation
of liens or security interests in the Collateral or the Senior Lien,
actions with respect to the occurrence of an Event of Default,
actions with respect to the foreclosure upon, sale, release, or
depreciation of, or failure to realize upon, the Collateral and
actions with respect to the collection of any claim for all or any
part of the obligations from any account debtor, guarantor or
any other party) with respect to the Loans, the Loan
Documents or to the collection of the Obligations or the
valuation, use, protection or release of the Collateral and/or
other security for the Obligations, (ii) any motion for relief
from the automatic stay brought by Agent, the Issuing Bank or
any Lender, (iii) the procedures established for, or the terms of,
any foreclosure on, or sale or other liquidation of the
Collateral, (iv) Agent's election, in any proceeding instituted
under Chapter 11 of Title 11 of the United States Code (11
U.S.C. 101 et seq.) (the "Bankruptcy Code"), of the
application of Section 1111 (b)(2) of the Bankruptcy Code,
and/or (v) any borrowing of, or grant of a security interest
under Section 364 of the Bankruptcy Code to Borrower as
debtor-in-possession. Additionally, Subordinated Creditor
acknowledges that any right it may have to receive adequate
protection or an administrative claim priority in connection
with any debtor-in-possession financing, use of cash collateral
or otherwise under the Bankruptcy Code is junior and
subordinate to the rights of Agent, the Issuing Bank and the
Lenders to receive adequate protection and administrative
claim priority.
8. Turnover of Prohibited Transfers. If any payment,
distribution or security, or the proceeds thereof, are received by
Subordinated Creditor on account of or with respect to any of
the Subordinated Debt other than as expressly permitted in
paragraph 2(b) hereof, Subordinated Creditor shall forthwith
deliver same to Agent in the form received (except for the
addition of any endorsement or assignment necessary to effect a
transfer of all rights therein to Agent) for application to the
Obligations or, at Agent's option, Subordinated Creditor shall
pay to Agent the amount thereof on demand. Agent is
irrevocable authorized to supply an required endorsement or
assignment which may have been omitted. Until so delivered,
any such payment, distribution or security shall be held by
Subordinated Creditor in trust for Agent, and shall not be
commingled with other funds or property of Subordinated
Creditor.
9. Proceeds. The order of priority of liens set forth
in Section 1 hereof shall apply to all proceeds of the Collateral,
including, without limitation, any insurance proceeds payable in
the event of loss of, or damage to, the Collateral.
10. Waiver of Marshaling. Subordinated Creditor
agrees that Agent shall have no obligation to marshal any part of
the Collateral or any other property, instruments, documents,
agreements or guaranties before enforcing its rights against the
Subordinated Creditor Collateral or any other Collateral.
Accordingly, the parties hereto agree that Agent may liquidate
the Collateral in any order in its sole discretion.
11. Perfection and Release of Liens. Subordinated
Creditor hereby agrees to execute and deliver such documents,
instruments, lien releases, assignments and financing statements
and do such acts as may be necessary in order for Agent to
establish and maintain a first, valid, prior and perfected security
interest in the Collateral. In the event of any sale or other
disposition of all or any part of the Collateral prior to payment in
full of the Obligations, upon request by Agent, Subordinated
Creditor shall execute releases, assignments, UCC terminations
and other similar agreements that are requested by Agent from
time to time; provided, (i) the Agent also releases its lien on such
Collateral in connection with such sale or disposition, and (ii) the
Subordinated Lien shall continue in any proceeds of the
Subordinated Creditor Collateral subject to the provisions of this
Agreement. Upon payment and satisfaction in full of the
Subordinated Debt, Subordinated Creditor shall cooperate fully
in releasing the Subordinated Lien, if in existence at such time,
promptly upon the request of Agent.
12. No Contest of Security Interest. Subordinated
Creditor shall not contest the validity, perfection or
enforceability of the Senior Lien or any other lien or security
interest granted to Agent, the Issuing Bank or any Lender by
Borrower, or any payment on the Obligations or the allowance
of the Obligations as a senior secured claim, and Subordinated
Creditor agrees to cooperate in the defense of any action
contesting the validity, perfection or enforceability of such liens
or security interests or such payment or allowance. Nothing in
this Agreement shall be construed as in any way limiting a party's
right to enforce the order of priorities of liens and debts set forth
herein as against any other Person. Agent (on its own behalf or
on behalf of the Issuing Bank or the Lenders) shall not contest
the validity, perfection or enforceability of the Subordinated
Lien, or the allowance of the Subordinated Debt, provided such
Subordinated Lien and Subordinated Debt are subordinate and
junior to the Senior Lien and the Obligations, in accordance with
all terms and provisions of this Agreement.
13. Subordination Not Affected, Etc. Nothing in this
Agreement shall be construed as affecting or in any way limiting
the extension of any new or additional financial accommodation
by Agent, the Issuing Bank and the Lenders to Borrower and the
terms and conditions hereof shall apply to such new and
additional financial accommodations. Notwithstanding the
preceding sentence or anything contained in this Agreement to
the contrary, none of the provisions of this Agreement shall be
deemed or construed to constitute a commitment or an
obligation on the part of Agent, the Issuing Bank or any Lender
to make any future loans, advances or other extensions of credit
or financial accommodation to Borrower. Subordinated
Creditor understands and agrees that all accrued interest,
charges, expenses, attorneys' fees and other liabilities and
obligations under the Loan Documents shall constitute part of
the Obligations, and nothing in this Agreement shall be
construed as affecting or in any way limiting any indulgence
granted by Agent, the Issuing Bank or any Lender with respect
to any existing financial accommodation to Borrower. The
subordinations effected, and the rights created, hereby shall not
be affected by (a) any amendment of or any addition of or
supplement to the Loan Documents or any other instrument,
document or agreement relating to the Obligations, (b) any
exercise or non-exercise of any right, power or remedy under or
in respect of the Obligations or the Loan Documents or any
other instrument, document or agreement relating thereto, (c)
the release, sale, exchange or surrender, in whole or in part, of
any part of the Collateral or any additional collateral to which
Agent, the Issuing Bank or any Lender may become entitled, (d)
any release of any guarantor of or pledgor securing the
Obligations or any security for such pledge or guaranty, or (e)
any waiver, consent, release, indulgence, extension, renewal,
modification, delay or other action, inaction or omission in
respect of the Obligations or the Loan Documents or any other
instrument, document or agreement relating thereto or any
security therefor or pledge or guaranty thereof, whether or not
Subordinated Creditor shall have had notice or knowledge of
any of the foregoing and regardless of whether Subordinated
Creditor shall have consented or objected thereto. Any
provision of any document, instrument or agreement evidencing,
securing or otherwise relating to the Subordinated Debt
purporting to limit or restrict in any way Borrower's ability to
enter into any agreement with Agent, the Issuing Bank and the
Lenders to amend or modify any document, instrument or
agreement evidencing, securing or otherwise relating to the
Obligations shall be deemed of no force or effect.
14. Legend. Subordinated Creditor will cause all
agreements, notes, bonds, debentures or other instruments from
time to time evidencing the Subordinated Debt or any part
thereof to contain a specific statement thereon to the effect that
the indebtedness evidenced thereby is subject to the provisions
of this Agreement, and Borrower agrees to the foregoing.
15. Voided Payments. To the extent that Agent
receives any payment on behalf of the Obligations which, within
twelve (12) months of the date of such payment, is subsequently
invalidated, declared to be fraudulent, avoidable or preferential,
set aside or is required to be repaid to a trustee, receiver, the
estate of Borrower or any other party under any bankruptcy act,
state or Federal law, common law or equitable cause (such
payment being hereinafter referred to as a "Voided Payment"),
then to the extent of such Voided Payment that portion of the
Obligations which had been previously satisfied by such Voided
Payment shall be revived and continue in full force and effect as
if such Voided Payment had never been made.
16. Violation of Agreement by Borrower. Borrower
agrees not to make any payment on the Subordinated Debt nor
consent to or participate in any act which is in violation of the
provisions of this Agreement. Borrower agrees that should it
make any payment in contravention of any provision of this
Agreement the maturity of said Obligations may be accelerated
in accordance with the terms of the Credit Agreement.
17. Waiver. Irrespective of the due date of any of the
Subordinated Debt and except as permitted by Section 2(b),
Subordinated Creditor hereby expressly waives any and all rights
to payment by Borrower of the Subordinated Debt prior to the
Termination Date.
18. Immediate Effect. This Agreement shall be
effective immediately upon its execution by each of the parties
hereto, and there are no conditions precedent or subsequent to
the effectiveness of this Agreement.
19. Inducement. As an inducement to, and part of
the consideration for, the consent of the Agent, the Issuing Bank
and the Lenders to the creation of the Subordinated Lien, which
Subordinated Creditor and Borrower acknowledge that Agent,
the Issuing Bank and the Lenders would be unwilling to do
without this Agreement, Subordinated Creditor has agreed,
among other things, (i) to subordinate the Subordinated Debt to
the Obligations as set forth herein, (ii) to subordinate the
Subordinated Lien to the Senior Lien, and (iii) to forebear from
foreclosing upon any part of the Collateral or any other security
with respect to the Subordinated Debt or otherwise exercising
Subordinated Creditor's remedies or taking any action against
Borrower upon any of its obligations to Subordinated Creditor
until the Termination Date.
20. Successors and Assigns; Continuing Effect, etc.
This Agreement is being entered into for the benefit of, and shall
be binding upon, the Issuing Bank, each Lender, Agent,
Subordinated Creditor, Borrower and their respective successors
and assigns. Any Lender may assign or participate out to any
other Person any portion of its interest under the Obligations and
no such assignee or participant shall be required to become a
signatory hereto. Any assignee or transferee of Subordinated
Creditor or Borrower shall execute and deliver to the other
parties hereto an agreement pursuant to which they will become
parties hereto as fully as if they were signatories hereto and
providing for the effectiveness of this Agreement as to such
transferee or assignee and other parties. This Agreement shall
be a continuing agreement, shall be irrevocable and shall remain
in full force and effect until the Termination Date.
21. Notification of Defaults. Borrower shall give
written notice to Agent of a default or an event of default by
Borrower under the Additional Unsecured Debt. Subordinated
Creditor shall give written notice to Agent of a default or an
event of default by Borrower under the Subordinated Debt.
Subordinated Creditor acknowledges that any default by
Borrower under the Subordinated Debt or under the Additional
Unsecured Debt is, automatically, an Event of Default of
Borrower under the Obligations.
22. Notices. Any notices, consents, requests,
demands and other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to be
given to any party or parties (a) upon delivery to the address of
the party or parties set forth below if delivered in person or by
courier or if sent by certified or registered mail (return receipt
requested), or (b) upon dispatch if transmitted by telecopy or
other means of facsimile transmission, in any case to the party or
parties at the telecopy numbers set forth below:
If to Borrower:
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Attn: Manager, Banking and Finance
Telecopy No. (847) 391-8876
If to Subordinated Creditor:
LG Electronics Inc.
20 Yoido-Dong, Youngdeungpo-Ku
Seoul, Korea
Attn: President
Telecopy No. 822-37775304
If to Agent:
Citicorp North America, Inc.
399 Park Avenue
6th Floor- Zone 4
New York, New York 10043
Attn: Mr. Thomas Halsch
Telecopy No. (212) 793-1290
Any party hereto may designate any other address or telecopy
number, as applicable, to which any notices or other
communications shall be given by notice duly given hereunder;
provided, however, that any such notice of other address or
telecopy number shall be deemed to have been given hereunder
only when actually received by the party to which it is addressed.
23. Amendments; Modifications. This Agreement
may not be modified, altered or amended except by an
agreement in writing executed by all of the parties hereto.
24. Cost and Expenses of Enforcement. Borrower
agrees to pay all costs, legal expenses and attorneys' and
paralegals' fees of every kind, paid or incurred by Agent, the
Issuing Bank or any Lender in enforcing its rights hereunder,
including, but not limited to, litigation instituted in a State or
Federal Court, as hereinafter provided (including proceedings
under the United States Bankruptcy Code) or in so enforcing
this Agreement, or in defending against any defense, cause of
action, counterclaim, setoff or cross claim based on any act of
commission or omission by Agent, the Issuing Bank or any
Lender with respect to the Obligations or the Collateral
promptly on demand of Agent.
25. JURISDICTION: SERVICE OF PROCESS.
THE PARTIES HERETO HEREBY IRREVOCABLY AGREE
THAT ALL ACTIONS ARISING DIRECTLY OR
INDIRECTLY AS A RESULT OR IN CONSEQUENCE OF
THIS AGREEMENT SHALL BE INSTITUTED AND
LITIGATED ONLY IN COURTS HAVING SITUS IN NEW
YORK, NEW YORK (OR IN ANY UNITED STATES
BANKRUPTCY COURT WHEREIN ANY CASE OF
BORROWER UNDER THE BANKRUPTCY CODE IS THEN
PENDING), AND HEREBY CONSENT TO THE
EXCLUSIVE JURISDICTION AND VENUE OF ANY
STATE OR FEDERAL COURT LOCATED AND HAVING
ITS SITUS IN SAID CITY AND STATE (OR OF SUCH
BANKRUPTCY COURT). THE PARTIES HERETO
HEREBY WAIVE ANY OBJECTION BASED ON FORUM
NONCONVENIENS, AND HEREBY WAIVE PERSONAL
SERVICE OF ANY AND ALL PROCESS. THE PARTIES
CONSENT THAT ALL SUCH SERVICE OF PROCESS MAY
BE MADE BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO AGENT OR
SUBORDINATED CREDITOR AT THE RESPECTIVE
ADDRESSES SET FORTH HEREIN IN THE MANNER
PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF
COURT, OR OTHERWISE.
26. WAIVER OF DEFENSES; JURY TRIAL.
SUBORDINATED CREDITOR WAIVES EVERY DEFENSE,
CAUSE OF ACTION, COUNTERCLAIM OR SETOFF,
WHICH SUBORDINATED CREDITOR MAY NOW HAVE,
OR HEREAFTER MAY HAVE, TO ANY ACTION BY
AGENT IN ENFORCING THE TERMS AND PROVISIONS
OF THIS AGREEMENT AND RATIFIES AND CONFIRMS
WHATEVER AGENT MAY DO PURSUANT TO THE
TERMS HEREOF AND AGREES THAT AGENT SHALL
NOT BE LIABLE FOR ANY ERRORS OF JUDGMENT OR
MISTAKE OF FACT OR LAW EXCEPT FOR WILLFUL
MISCONDUCT OF AGENT OR BREACH OF THIS
AGREEMENT BY AGENT. AGENT AND
SUBORDINATED CREDITOR, AND EACH ONE OF
THEM, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT
EITHER ONE OF THEM OR ANY MAY HAVE TO TRIAL
BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING
BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT AND ANY
AGREEMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH OR ANY COURSE OF
CONDUCT OR COURSE OF DEALING HEREUNDER, IN
WHICH AGENT AND SUBORDINATED CREDITOR ARE
ADVERSE PARTIES. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE CONSENT OF AGENT, THE
ISSUING BANK AND THE LENDERS TO THE
SUBORDINATED LIEN.
27. Governing Law; Benefit of Agreement. This
Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York. All of the
understandings, agreements, covenants and representations
contained herein are solely for the benefit of Agent, the Issuing
Bank, the Lenders and Subordinated Creditor, and there are no
other Persons who are intended to be benefited in any way
whatsoever by this Agreement.
28. Severability. In the event any one or more of the
provisions contained herein shall for any reason be held to be
invalid, illegal or unenforceable in any respect by a court of
competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and
this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
29. Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an
original, and all of which taken together shall constitute one and
the same instrument.
30. Borrower's Acknowledgment. Borrower hereby
consents to this Agreement, agrees to abide by the terms hereof,
agrees to make no payments or distributions contrary to the
terms and provisions hereof and to do every act and thing
necessary to carry out such terms and provisions.
31. Scope of Agreement. Nothing contained in this
Agreement shall affect or impair or be a waiver of any rights of
LG Electronics Inc. in any capacity other than as the holder of
the Subordinated Debt and the Subordinated Lien.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
AGENT: CITICORP NORTH AMERICA, INC.,
for itself and as Agent for the Lenders and the
Issuing Bank
By: /s/ Thomas Halsch
Its: Vice President
SUBORDINATED LG ELECTRONICS INC.
CREDITOR:
By: /s/ John Koo
Its: President and Chief Executive Officer
BORROWER: ZENITH ELECTRONICS CORPORATION
By: Kevin F. Brindley
Its: Assistant Treasurer
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