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 June 28, 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 July 31, 1997, there were 66,556,062 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 Six Months Ended
---------------------- ----------------------
June 28, June 29 June 28, June 29,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net sales $ 261.8 $ 282.1 $ 520.9 $ 519.5
---------- ---------- ---------- ----------
Costs, expenses and other:
Cost of products sold 246.0 269.7 492.5 499.0
Selling, general and
administrative 50.0 37.0 78.1 71.8
Engineering and research 10.0 11.7 20.8 22.9
Other operating expense
(income), net (Note 4) (3.1) (5.8) (10.2) (9.9)
Restructuring and other
charges - - - -
---------- ---------- ---------- ----------
Operating income (loss) (41.1) (30.5) (60.3) (64.3)
Gain (loss) on asset sales, net (0.9) - (0.9) 0.3
Interest expense (7.6) (3.6) (13.9) (6.9)
Interest income 0.3 0.9 0.6 2.4
---------- ---------- ---------- ----------
Income (loss) before income taxes (49.3) (33.2) (74.5) (68.5)
Income taxes (credit) - - - -
---------- ---------- ---------- ----------
Net Income (loss) $ (49.3) $ (33.2) $ (74.5) $ (68.5)
========== ========== ========== ==========
Net income (loss) per share of
common stock (Note 5) $ (0.74) $ (0.51) $ (1.12) $ (1.06)
========== ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
In Millions
June 28, December 31, June 29,
1997 1996 1996
-------- ------------ --------
ASSETS
- ------
Current assets:
Cash $ - $ - $ 22.9
Receivables, net of allowance for
doubtful accounts of $--, $6.2
and $3.3, respectively (Note 7) 27.0 208.3 190.8
Inventories (Note 6) 254.0 255.7 257.6
Transferor cerfificates, net of
allowance of $24.5, $-- and $--
respectively (note 7) 90.7 - -
Other 27.7 11.1 9.4
-------- ------------ --------
Total current assets 399.4 475.1 480.7
Property, plant and equipment, net 240.9 278.3 185.7
Other 45.2 11.9 7.5
-------- ------------ --------
Total assets $ 685.5 $ 765.3 $ 673.9
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt (Note 8) $ 23.9 $ 47.0 $ -
Current portion of long-term
debt (Note 8) 14.7 17.8 16.0
Accounts payable (Note 9) 213.6 234.1 107.8
Income taxes payable 0.9 1.3 0.5
Accrued expenses 131.3 150.4 123.8
-------- ------------ --------
Total current liabilities 384.4 450.6 248.1
Long-term liabilities 9.2 - -
Long-term debt (Note 8) 163.8 152.7 158.1
Stockholders' equity:
Preferred stock - - -
Common stock 66.6 66.6 65.9
Additional paid-in capital 500.0 459.4 456.3
Retained earnings (deficit) (436.8) (362.3) (252.8)
Treasury stock (1.7) (1.7) (1.7)
-------- ------------ --------
Total stockholders' equity 128.1 162.0 267.7
-------- ------------ --------
Total liabilities and
stockholders' equity $ 685.5 $ 765.3 $ 673.9
======== ============ ========
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
Six Months Ended
---------------------------
June 28, June 29,
1997 1996
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (74.5) $ (68.5)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Depreciation 16.6 16.8
Employee retirement plan contribution
made in stock - 5.3
Other 0.1 -
Gain on asset sales, net - (0.3)
Changes in assets and liabilities:
Current accounts (14.6) (20.0)
Other assets 0.9 0.6
----------- -----------
Net cash used by operating activities (71.5) (66.1)
----------- -----------
Cash flows from investing activities:
Capital additions (55.6) (18.2)
Proceeds from asset sales 141.6 4.3
----------- -----------
Net cash provided (used) by investing activities 86.0 (13.9)
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net (23.1) -
Proceeds from issuance of long-term debt 45.0 -
Proceeds from issuance of common stock, net 0.6 13.4
Principal payments on long-term debt (37.0) (3.7)
----------- -----------
Net cash provided (used) by financing activities (14.5) 9.7
----------- -----------
Decrease in cash - (70.3)
Cash at beginning of period - 93.2
----------- -----------
Cash at end of period $ - $ 22.9
=========== ===========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net $ 181.3 $ 10.0
Transferor certificates (145.7) -
Income taxes, net (0.4) (0.7)
Inventories 1.7 (55.0)
Other assets (11.1) (1.7)
Accounts payable and accrued expenses (40.4) 27.4
----------- -----------
Net change in current accounts $ (14.6) $ (20.0)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 13.8 $ 6.4
Income taxes 0.5 0.6
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 - 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 continue to negotiate in an attempt to reach a
business solution, litigation has been commenced by both parties in
Brazil; the customer seeking to disavow the liability, and the company
seeking to enforce its rights, including rights over certain inventory which
is the subject of a pledge agreement in favor of the company. The
company has also initiated litigation against this customer in the United
States. As a result, the company recorded a $15.0 million bad debt charge
during the second quarter of 1997 related to this customer. The total
amount of the receivable with this customer was $28.9 million as of June
28, 1997. The $15.0 million charge reflects the company's estimated loss
as of June 28, 1997; however, it is reasonably possible that this estimate
will change in the near future and the potential loss or recovery will
change accordingly.
Note Three - 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 $5.4
million and increased net income per share by 8 cents during the second-
quarter of 1997.
Note Four - Other operating expense (income)
Royalty income accrued in relation to tuning system patents was $4.5
million and $11.2 million for the three and six months ended June 28,
1997, respectively, and $5.0 million and $9.6 million for the three and six
months ended June 29, 1996, respectively. These amounts are included in
Other Operating Expense (Income).
Note Five - Earnings per share
Primary earnings per share are based upon the weighted average number
of shares outstanding and common stock equivalents, if dilutive. Fully
diluted earnings per share, assuming conversion of the 6-1/4% convertible
subordinated debentures and the 8.5% convertible senior subordinated
debentures, are not presented because the effect of the assumed conversion
is antidilutive. The weighted average number of shares was 66.4 million
and 66.5 million for the three and six months ended June 28, 1997,
respectively, and 65.0 million and 64.3 million for the three and six
months ended June 29, 1996, respectively.
Note Six - Inventories
Inventories consisted of the following (in millions):
June 28, December 31, June 29,
1997 1996 1996
---------- ------------ ----------
Raw materials and work-in-process $ 164.7 $ 152.1 $ 165.3
Finished goods 89.3 103.6 92.3
---------- ----------- ----------
Total inventories $ 254.0 $ 255.7 $ 257.6
========== =========== ==========
Note Seven - 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 new three year $200 million trade receivables securitization that
was entered into on April 2, 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 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 Eight 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 Eight - Short-term debt and credit arrangements; Long-term debt
On April 2, 1997, the company obtained new financing commitments
which significantly 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 million credit
facility composed of a $45 million term loan and a $65 million revolving
credit line. This facility replaced the company's previous credit
agreement and term loan with General Electric Capital Corporation. The
term loan requires scheduled quarterly principal payments of $2 million
with a balloon payment of $20 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. 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 June 28, 1997, the
company was in compliance with all these covenants except for the EBITDA
test, which would have been met in the absence of the $15.0 million charge
related to bad debt for a South American customer's receivable. Subsequent
to June 28, 1997, the company received a waiver of this test for the second
quarter of 1997. The company has initiated discussions with the lenders
under the facility to relax certain financial covenants for future periods.
However, there can be no assurance that the lenders will approve an
amendment, if requested by the company. If the company were to be out
of compliance with a financial covenant, it could be required to repay any
amounts then outstanding under the facility or under its other debt
agreements.
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 $140 million as of June 28, 1997, and currently is $165 million,
but can be increased to $200 million, assuming additional bank
commitments. LGE provides support for this facility through a performance
undertaking and a letter of credit.
Also, on April 2, 1997, the company entered into an $87 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 on April 2, 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.
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 Nine - Related party
As of June 28, 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 Eight, the
company has granted options to LG Electronics Inc. to purchase
approximately 3.9 million common shares of the company at an
exercise price of $0.01 per share, excercisable over time.
The following represent the most significant transactions between
the company and LGE during the three and six months ended June 28,
1997 and June 29, 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 $15.6 million and $26.7
million of these items during the three and six months ended June 28,
1997, respectively, and $20.5 million and $31.9 million during the three
and six months ended June 29, 1996, respectively. Sales of products
purchased from LGE and its affiliates contributed $18.5 million and $43.8
million to sales during the three and six months ended June 28, 1997,
respectively, and $27.6 million and $43.4 million during the three and six
months ended June 29, 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 $6.9
million and $13.4 million during the three and six months ended June 28,
1997, respectively, and $5.5 million and $9.3 million during the three and
six months ended June 29, 1996, respectively.
As of June 28, 1997 and June 29, 1996, accounts payable included
$112.1 million and $25.1 million, respectively, 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 $105.5 million and
$25.0 million as of June 28, 1997 and June 29, 1996, respectively. The
company is charged interest on the extended period at negotiated rates.
LGE is providing support for certain financing activities of the
company that were entered into during the quarter ended June 28, 1997.
See Note Eight for further discussion.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The company reported a second-quarter 1997 net loss of $49.3 million, or
74 cents per share, compared with a net loss of $33.2 million, or 51 cents
per share, in the second quarter of 1996. The results reflect the effect of a
$15.0 million bad debt charge, large losses in color picture tube
operations and a $20.3 million decline in revenues.
More than half of the company's loss for the 1997 second quarter
resulted from the company's color picture tube plant in Melrose Park, Ill.
The benefits from new automated processes there have not yet been
realized. In addition, the results for the 1997 quarter include the $15.0
million charge related to a bad debt for a South American customer's
receivable.
Second-quarter sales were $261.8 million in 1997 and $282.1 million
in 1996. The company increased its domestic color TV market share in
key large-screen categories during the quarter. However, in total, the
company's consumer electronics revenues were down, reflecting lower
VCR sales compared to the 1996 quarter.
Sales of Network Systems products - analog set-top boxes and data
modems sold primarily to cable television operators - also were down in
the quarter because of slowing industry-wide demand for analog set-top
boxes as cable operators prepare to launch digital networks.
Sales were negatively impacted as a result of the problem the
company is having with the previously mentioned South American
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.
Selling, general and administrative expenses were $50.0 million in the
second quarter of 1997, compared with $37.0 million in the previous year.
The 35 percent increase was due to the $15.0 million bad debt charge
which reflects the company's estimated loss as of June 28, 1997, however,
it is reasonably possible that this estimate will change in the near future
and the potential loss or recovery will change accordingly.
Results for the second quarter include $4.5 million of accrued royalty
revenues from tuning system licenses. These revenues were $5.0 million
in the second quarter of 1996.
During the second quarter of 1997, the company changed its
accounting policy for most tooling expenditures. The change decreased
tooling costs by $5.4 million and increased net income per share by 8
cents during the second quarter of 1997. Because the company
anticipates that tooling expenditures will decrease during the remainder of
the year, the company does not believe that the impact of this change in
the third and fourth quarters of 1997 will be as large as the second quarter
benefit. (See Note Three to Condensed Consolidated Financial Statements
for further discussion on the accounting change.)
For the first six months of 1997 the company reported a net loss of
$74.5 million, or $1.12 per share, compared with a net loss of $68.5
million, or $1.06 per share for the first six months of 1996. First-half
sales were $520.9 million in 1997 compared with $519.5 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.
Liquidity and Capital Resources
During the six months ended June 28, 1997, $71.5 million of cash was
used by operating activities. This was primarily composed of a $57.9
million net loss, as adjusted for depreciation, and a $14.6 million change
in current accounts. The change in current accounts was primarily
composed of a $184.3 million decrease in receivables, offset by a $148.7
million increase in transferor certificates, a $11.1 million increase in other
assets and a $40.4 million decrease in accounts payable and accrued
expenses.
During the six months ended June 28, 1997, $86.0 million of cash
was provided by investing activities. This was composed of proceeds
from asset sales of $141.6 million, offset by capital additions of $55.6
million. In April 1997, the company received $87 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 $55 million from the sale of
receivables under the new 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 six 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 six months ended June 28, 1997, $14.5 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 with General Electric
Capital Corporation and $23.1 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 June 28, 1997, the company had $308 million of interest-
bearing obligations which consisted of: (i) $109 million of 6-1/4 percent
Convertible Subordinated Debentures due 2011 (the current portion of
which is $6 million), (ii) $24 million aggregate principal amount of 8.5
percent Senior Subordinated Convertible Debentures due 2000 and 2001,
(iii) a $45 million Term Loan with Citicorp (the current portion of which
is $9 million), (iv) $24 million currently payable under a Credit
Agreement with Citicorp, and (v) $106 million of extended-term payables
with LG Electronics Inc.
On April 2, 1997, the company obtained new financing commitments
which significantly 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 commitments is a three-year $110 million credit facility
composed of a $45 million term loan and a $65 million revolving credit
line. This facility replaced the company's previous credit agreement and
term loan with General Electric Capital Corporation. The term loan
requires scheduled quarterly principal payments of $2 million with a
balloon payment of $20 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. As of June 28,
1997, the company was in compliance with all these covenants except for
one, which would have been met in the absence of the $15.0 million
charge related to bad debt for a South American customer's receivable.
Subsequent to June 28, 1997, the company received a waiver of this test
for the second quarter of 1997. The company has initiated discussions
with the lenders under the facility to relax certain financial covenants for
future periods. (See Note Eight to Condensed Consolidated Financial
Statements for further discussion on the financial 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 $140
million as of June 28, 1997, and currently is $165 million, but can be
increased to $200 million, assuming additional bank commitments. LGE
provides support for this facility through a performance undertaking and a
letter of credit.
Additionally on April 2, 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.
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 $142 million of which $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 order to enhance its liquidity, the company is working with both
domestic and foreign financial institutions to obtain additional
lines of credit. In order to obtain these lines, the banks involved
require that LGE provide financial support. LGE has indicated a
willingness to provide such support subject to mutual agreement on a fair
fee for providing such support. In addition, the consent of the lenders
under the $110 million credit facility and the 8.5 percent Senior
Subordinated Convertible Debentures would be required. If the company
is not able to obtain the consent from the lenders under the 8.5 percent
Senior Subordinated Convertible Debentures, it would be required to use
a portion of the proceeds from the lines of credit to defease the covenants
contained in the agreements evidencing the 8.5 percent Senior Subordinated
Convertible Debentures that are currently outstanding.
As part of the refinancing that occurred in April 1997 the company
had agreed to raise an additional $33 million by the end of the third
quarter of 1997 through additional sale-leaseback transactions. The
company anticipates that this requirement will be removed if the above
mentioned lines of credit are obtained. If the lines of credit are not
obtained, or if the requirement is not removed, the company believes that
it would be able to comply with this requirement.
As previously discussed, the company has initiated discussions with
the lenders under the $110 million credit facility to relax certain financial
covenants for future periods. There can be no assurance that the lenders
will relax the financial covenants, and if the company were to be out of
compliance with a financial covenant it could be required to repay any
amounts then outstanding under the facility or under its other debt
agreements.
The company believes that its current financing commitments and the
extended-term payables available from LGE, together with the potential
lines of credit will be adequate to meet its seasonal working
capital, capital expenditure and other requirements during 1997.
However, there can be no assurance that the company will be able to
obtain the lines of credit (and the necessary lender consents), or that the
company will not experience liquidity problems in the future because of
adverse market conditions or other unfavorable events. In the event the
company is not able to obtain the 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
In November 1995 the company entered into a contract with a
customer in Brazil, Diamond Electronics Industria e Comercio, Importado
e Exportacao S.A. and its affiliated companies ("Diamond") to purchase
TVs and TV kits and to assemble and distribute Zenith brand TVs in that
country. In early 1997, Diamond 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 Diamond continue
to negotiate in an attempt to reach a business solution, litigation has been
commenced by both parties in Brazil; Diamond seeking to disavow the
liability, and the company seeking to enforce its rights, including rights
over certain inventory which is the subject of a pledge agreement in favor
of the company. The company has also initiated litigation against
Diamond in the United States. The total receivable owed by Diamond to
the company as of June 28, 1997, is approximately $29 million. (See
Note Two to Condensed Consolidated Financial Statements for further
discussion on the Diamond receivable.)
On April 30, 1997 the United States Environmental Protection
Agency ("EPA") issued a Request for Information pursuant to Section
104(e) of CERCLA to Zenith Electronics Corporation of Pennsylvania
("ZECP") regarding contamination at the Boarhead Farms Superfund Site
in Bridgeton Township, Pennsylvania. Specifically, EPA requested
information regarding waste that may have been generated at ZECP's
former facility in Watsontown, Pennsylvania. EPA advised that it has
recovered at the Boarhead Farms Site, drums of waste from the previous
owner of the Watsontown facility. ZECP responded to EPA's Request for
Information on June 18, 1997; however, based on an initial search of
ZECP's records and internal investigation, ZECP's response to EPA
indicated that it had no record of having generated waste materials that
were disposed at the Boarhead Farms Site. ZECP has an ongoing
obligation to supplement its response to EPA.
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, in the Court of
Chancery, State of Delaware, New Castle County. The suit alleges
breach of fiduciary duties by the directors resulting from the issuance of
the company's stock options to LGE for its support of certain of the
company's recent financing transactions. The suit seeks to void the stock
option grants and to recover unspecified damages and attorney's fees from
the directors and LGE.
During the three months ended June 28, 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 Eight 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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 22, 1997.
(c) At the meeting, the following matters were voted on by security holders:
1. Nine Directors were elected for one year terms and received the
following votes:
Broker
For Withheld Non-Votes
------------ ------------ ------------
T. Kimball Brooker 62,102,095 649,420 0
Ki-Song Cho 62,049,057 702,458 0
Eugene B. Connolly 62,085,681 665,834 0
Robert A. Helman 61,742,812 1,008,703 0
Cha Hong (John) Koo 62,037,411 714,104 0
Hun Jo Lee 62,031,821 719,694 0
Andrew McNally IV 62,101,405 650,110 0
Yong Nam 62,033,226 718,289 0
Peter S. Willmott 62,091,460 660,055 0
2. A proposal by the Board of Directors to approve the Zenith Electronics
Corporation Long-Term Equity Compensation Plan was approved with
59,510,510 shares voted for, 2,867,748 shares voted against, 373,257
shares abstaining. There were no broker non-votes.
3. Arthur Andersen LLP was approved as independent public accountants
to examine the consolidated financial statements of the Company for the year
1997 with 62,308,573 shares voted for, 291,033 shares voted against and
151,909 shares abstaining. There were no broker non-votes
4. A stockholder proposal requesting the Board of Directors to take the
steps necessary to see that following the Annual Meeting an improved
post-meeting report be sent to all shareholders was defeated with
2,827,379 shares voted for, 44,469,162 shares voted against, 564,966 shares
abstaining and 14,890,008 broker non-votes.
5. A stockholder proposal requesting the Board of Directors to institute
a special Executive Compensation Review, and prepare a report available to
shareholders summarizing the results and recommended changes was defeated
with 3,448,581 shares voted for, 43,789,136 shares voted against, 623,790
shares abstaining and 14,890,008 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(18) Letter re change in accounting principle
(27) Financial Data Schedule for the six months ended June 28, 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: August 12, 1997
By: /s/ Roger A. Cregg
---------------------
Roger A. Cregg
Executive Vice President -
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 18
ARTHUR ANDERSON LLP
To: Zenith Electronics Corporation
Re: Form 10-Q Report for the quarterly period ended June 28, 1997
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling
for a letter from a registrant's independent accountants whenever there has
been a change in accounting principle or practice.
We have been informed that, as of March 30, 1997, Zenith Electronics
Corporation (the Company) has changed its accounting method for most
tooling costs. The Company has historically accounted for these tooling
costs by expensing them as incurred. the new method is to defer the
tooling costs over a 20-month period, which the Company believes is an
accurate estimate of the average useful life of its tooling. According to
the management of the Company, this change was made because the
Company believes that the deferral of the costs will more appropriately
match the costs with their period of benefit.
A complete coordinated set of financial and reporting standards for
determining the preferability of accounting principals among acceptable
alternative principles has not been established by the accounting
profession. Thus, we cannot make an objective determination of whether
the change in accounting described in the preceding paragraph is to a
preferable method. However, we have reviewed the pertinent factors,
including those related to financial reporting, in this particular case on a
subjective basis, and our opinion stated below is based on our
determination made in this manner.
We are of the opinion that the Company's change in method of accounting
is to an acceptable alternative method of accounting, which, based upon
the reasons stated for the change and our discussions with you, is also
preferable under the circumstances in this particular case. In arriving at
this opinion, we have relied on the business judgment and business
planning of your management.
We have not audited the application of this change to the financial
statements of any period subsequent to December 31, 1996. Further, we
have not examined and do not express any opinion with respect to your
financial statements for the three months or six months ended June 28,
1997.
Very truly yours,
/s/ Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
Chicago, Illinois
August 12, 1997
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