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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-4115
ZENITH ELECTRONICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 36-1996520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1000 MILWAUKEE AVENUE, GLENVIEW, ILLINOIS 60025-2493
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 391-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $1 PAR VALUE AND ASSOCIATED PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
BASEL, GENEVA AND ZURICH,
SWITZERLAND STOCK EXCHANGE
6 1/4% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011 NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY STATEMENTS INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12
MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90
DAYS. YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES BASED ON THE NEW YORK STOCK EXCHANGE CLOSING PRICE ON MARCH 18,
1998, WAS $220,564,685.
AS OF MARCH 18, 1998, THERE WERE 67,525,447 SHARES OF COMMON STOCK, PAR VALUE $1
PER SHARE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED APRIL 1998 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
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PART I
ITEM 1. BUSINESS
The company was founded in 1918 and has been a leader in consumer
electronics, first in radio and later in monochrome and color television and
other video products. The company's operations involve a dominant industry
segment, the design, development, manufacture and marketing of video products
(including color TV sets and other consumer products) along with parts and
accessories for such products. These products, along with purchased VCRs, are
sold principally to retail dealers in the United States and to retail dealers
and wholesale distributors in other foreign countries. The company also sells
directly to buying groups, private label customers and customers in the lodging,
health care and rent-to-own industries. The company's video products also
include color picture tubes that are produced for and sold to other
manufacturers and Network Systems products which include digital and analog
set-top boxes and cable modems, interactive TV and data communication products
which are sold primarily to cable TV operators, telecommunications companies and
other commercial users of these products.
The company has incurred losses in all but one of the years since 1985.
These results reflected the cumulative effect of frequent and significant color
TV price reductions during the 1980s and 1990s, and also reflected earlier
recessionary conditions in the United States. In addition, the company has
invested significant amounts in engineering and research in recent years, which
amounts have been expensed as incurred.
The company has been developing a broad operational and financial
restructuring plan. See the Outlook section of Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
information.
In November 1995, a change in control of the company occurred, in which LG
Electronics Inc. and LG Semicon Company, Ltd., corporations organized under the
laws of the Republic of Korea ("LGE"), purchased shares of the company pursuant
to a combined tender offer and purchase of newly issued shares of common stock
from the company. As of December 31, 1997, LGE owned 36,569,000 shares of common
stock of the company, which represents 55 percent of the outstanding common
stock.
Raw Materials
Many materials, such as copper, plastic, steel, wood, glass, aluminum and
zinc, are essential to the business. Adequate sources of supply exist for these
materials.
Patents
The company holds many patents and is licensed under a number of patents
which are of importance to its business. The company has patents and patent
applications for numerous high definition television and digital TV ("DTV")
related inventions. To the extent these inventions are incorporated into the DTV
standard adopted by the Federal Communications Commission, the company expects
to receive royalties from these patents. In addition, royalties have been and
may be received from these patents for non-DTV applications as well. Major
manufacturers of TV sets and VCRs agreed during 1992 to take licenses under some
of the company's U.S. tuning system patents. Based on 1997 U.S. industry unit
sales levels and technology, more than $25 million in annual royalty income is
expected through the life of these patents, the last of which expire in 2003.
While in the aggregate its patents and licenses are valuable, the business of
the company is not materially dependent on them.
Seasonal Variations in Business
Sales of the company's consumer electronics products are generally at a
higher level during the second half of the year. Sales of consumer electronics
products typically increase in the fall, as the summer vacation season ends and
people spend more time indoors with the new fall programming on TV and during
the Christmas holiday season. During each of the last three years, approximately
55 percent of the company's net sales were recorded in the second half of the
year and approximately 30 percent of the company's net sales were recorded in
the fourth quarter of the year.
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Major Customers
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million
(11 percent) in 1996. No other customer accounted for 10 percent or more of net
sales.
Competitive Conditions
Competitive factors in North America include price, performance, quality,
brand strength and reputation, variety of products and features offered,
marketing and sales capabilities, manufacturing costs, and service and support.
The company believes it competes well with respect to each of these factors.
The company's major product areas, including the color TV market, are
highly competitive. The company's major competitors are significantly larger,
100 percent foreign-owned companies, generally with greater worldwide TV volume
and overall resources. In efforts to increase market share or achieve higher
production volumes, the company's major competitors have aggressively lowered
their selling prices in the past several years.
Research and Development
During 1997 expenditures for company-sponsored research and engineering
relating to new products and services and to improvements of existing products
and services were $42.9 million. Research and engineering expenditures were
$46.7 million in 1996 and $43.5 million in 1995.
Environmental Matters
Compliance with federal, state and local environmental protection
provisions is not expected to have a material effect on capital expenditures,
earnings or the competitive position of the company. Further information
regarding environmental compliance is set forth under Item 3 of this report.
Number of Employees
At December 31, 1997, the company employed approximately 11,400 people, of
whom approximately 7,800 are hourly workers covered by collective bargaining
agreements. At December 31, 1996, the company employed approximately 15,900
people, of whom approximately 11,300 were hourly workers covered by collective
bargaining agreements.
At December 31, 1997, approximately 3,600 of the company's employees are
located in the Chicago, Illinois, area, of whom approximately 2,400 are
represented by unions. Approximately 7,500 of the company's employees are
located in Mexico, of whom approximately 5,400 are represented by unions.
Mexican labor contracts expire every two years and wages are renegotiated
annually or more frequently under rapid devaluation or high inflation periods.
The company pays competitive salaries, wages and benefits and believes that it
has good relations with its employees.
Financial Information about Foreign and Domestic Operations and Export Sales
Information regarding foreign operations is included in Note Nine to the
company's Consolidated Financial Statements. Export sales are less than 10% of
consolidated net sales.
The company's product lines are dependent on the continuing operations of
the company's manufacturing and assembly facilities located in Mexico.
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ITEM 2. PROPERTIES
The company utilizes a total of approximately 5.2 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.
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SQUARE FEET
LOCATION NATURE OF OPERATION (IN MILLIONS)
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DOMESTIC:
Chicago, Illinois.................... Five locations -- production of color picture 1.9
(including suburban locations) tubes, parts and service; engineering and
research, marketing and administration activities;
and assembly of electronic components (.4 million
square feet is leased by the company)
Fort Worth, El Paso, McAllen,........ Nine locations -- warehouses/offices (.8 million .9
Brownsville and Dallas, Texas; square feet is leased by the company)
Douglas, Arizona; Huntsville,
Alabama; Ontario and San Jose,
California
FOREIGN:
Mexico............................... Four locations (twelve manufacturing and warehouse 2.4
buildings) -- production of plastic and wooden
cabinets for color television, sub-assembly
production of television chassis, tuners and other
components and final assembly of color television
and Network Systems products
Taiwan............................... One location -- purchasing office --
---
Total 5.2
===
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The company's facilities are suitable and adequate to meet current and
anticipated requirements. Mortgages exist on domestic real property as
collateral for certain of the company's financing agreements. See the Outlook
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations for further information.
ITEM 3. LEGAL PROCEEDINGS
The company is involved in various legal actions, environmental matters,
and other proceedings relating to a wide range of matters that are incidental to
the conduct of its business. The company believes, after reviewing such matters
with the company's counsel, that any liability which may ultimately be incurred
with respect to these matters is not expected to have a material effect on
either the company's consolidated financial position or results of operations.
Litigation
In May 1997, the company's directors and 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. The suit alleges breach of
fiduciary duties by the directors resulting from the issuance of stock options
to LGE to purchase company stock for its support of certain of the company's
financing transactions. The suit seeks to void the stock option grants and to
recover unspecified damages and attorneys' fees from the directors and LGE. A
second derivative suit entitled Lazar v. Zenith Electronics Corporation was also
filed in May 1997 alleging identical claims of breach of fiduciary duties by the
company's directors and requesting the identical relief as sought in the Fisher
case. Both cases were filed in the Court of Chancery, New Castle County,
Delaware. Both cases are currently inactive.
Lawsuits against major computer and peripheral equipment manufacturers are
pending in the U.S. District Court, Eastern District of New York, the U.S.
District Court of New Jersey and the New York State
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courts, as well as other federal courts. These lawsuits seek several billion
dollars in damages from various defendants for repetitive stress injuries
claimed to have been caused by the use of word processor equipment. The company
had been named as a defendant in twenty-seven of these cases which relate to
keyboards allegedly manufactured or designed by the company for its former
subsidiary, Zenith Data Systems Corporation, which the company sold in 1989. Of
the twenty-seven cases originally filed, only four remain pending against the
company. The company believes it has meritorious defenses to these cases. All
the other cases have been dismissed without payment of any damages by the
company.
In 1994, the company notified its 15 independent distributors of its intent
to change to direct-to-retail distribution on a nationwide basis during 1995. A
suit arising in connection with this change in distribution was filed in April
1995 by an independent distributor. The lawsuit sought approximately $13 million
in damages under the Wisconsin Fair Dealership Law. In January 1996 the court
denied the company's motion for summary judgment and granted the plaintiff's
motion for summary judgment, finding the company liable. A jury trial on damages
was held in May 1996, and the jury awarded the plaintiff $2.37 million. The
company has appealed the judgment, contesting both the summary judgment finding
of liability and the damages awarded and is awaiting the appellate court's
decision.
Environmental Litigation
The company was sued in 1995 as one of several defendants who, the
plaintiffs allege, disposed of waste and, as such, may have contributed to the
contamination of an aquifer in Hidalgo County, Texas. The matter, entitled
Linn-Faysville Aquifer Preservations Association, et al. V. Republic Waste
Industries, Inc., seeks unspecified damages and injunctive relief. The company
is currently in settlement negotiations.
The company has been named as one of several dozen defendants in a tort
suit filed on behalf of several hundred plaintiffs. The suit alleges exposure to
various chemicals linked to a former television manufacturing plant in Texas.
The case entitled Aaron v. Akzo et al., No. D-0157586, 136(th) Judicial District
Court, Jefferson City, Texas, was filed on November 30, 1997.
Environmental
The company and/or one of its subsidiaries are currently named as
Potentially Responsible Parties ("PRP"s) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), as a
generator of allegedly hazardous waste disposed of at seven contaminated sites
in the United States. These are: the Rocky Flats Industrial Park Superfund Site
in Jefferson County, Colorado, the Liquid Dynamics Superfund Site in Chicago,
Illinois, the Midwest Solvent Recovery Superfund Sites in Gary, Indiana, the
Galaxy/Spectron, Inc. Superfund Site in Elkton, Maryland, the Master Metals
Superfund Site in Cleveland, Ohio, the North Penn Area 7 Superfund Site in
Lansdale, Pennsylvania and the Boarhead Farms Superfund Site in Bridgeton
Township, Pennsylvania.
Based on information available to the company at this time, the company
believes its share of liability at each of these Sites (other than North Penn &
Boarhead) will not be material. At the North Penn and Boarhead sites, no cost
estimates are available nor has liability been imposed. In addition to these 7
sites, the company is awaiting the finalization of a Consent Decree that it will
enter into with the United States of America regarding the Moyer Landfill matter
in Collegeville, Pennsylvania. Under the Consent Decree, the company will
resolve its alleged liability for hazardous wastes disposed of at Moyer Landfill
for $300,000.
Events in 1997 include the following:
In a letter dated August 13, 1997, the United States Environmental
Protection Agency ("US EPA") gave notice to the Zenco de Chihuahua and,
subsequently, Zenith Electronics Corporation of Texas, wholly-owned subsidiaries
of the company (the "company") of their alleged liability as PRPs at the Rocky
Flats Industrial Park Superfund Site under CERCLA. The US EPA issued an order to
perform a "Non-Time Critical Removal" and established the framework for an
investigation. The total cost to perform the investigation is currently
estimated not to exceed $850,000 of which the company paid $42,500 in 1997 and
is obligated to pay an additional $42,500 in 1998. In the event the
investigation costs exceed $850,000, the
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company may be required to contribute an additional sum equal to 10% of the such
excess costs. No allocation has been established for future response costs. In
addition, the liability for US EPA past costs and any remedial work that may be
required has not been determined.
On September 17, 1997 the US EPA served the company with a General Notice
of Potential Liability pursuant to Section 107(a) of CERCLA with regard to the
Liquid Dynamics, Inc., Superfund Site in Chicago, Illinois. The US EPA advised
PRPs that it would perform a preliminary investigation. No costs have been
incurred to date. US EPA advised the PRPs that it believes the entire Liquid
Dynamics portion of the investigation will not exceed $200,000. Future US EPA
response costs incurred performing the investigation and the cost of any
remedial work have not yet been determined but will be allocated among the
members of the PRP group. However, based on information currently available, the
company believes it will be allocated a significant share of the cost of
investigation and future response costs, if any.
The Master Metals, Inc. Superfund site (the "Site") is located in
Cleveland, Ohio. The company received notice from US EPA in 1996 that it was
identified as a PRP under CERCLA and would be held responsible for a portion of
the clean up costs associated with the Site. A PRP group was formed to conduct
Phase I remedial activities which the company joined and contributed $24,936 out
of the total amount of $1,700,000 assessed to finance the estimated cost of
conducting the Phase I remedial activities. This was an interim allocation based
on the estimated cost of conducting the Phase I remedial activities. At this
early stage, the estimated cost of Phase II remedial activities is not expected
to exceed a total amount of $500,000 which will be allocated among the PRP group
in accordance with the previously established allocation.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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NAME OFFICE HELD AGE
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Michael Ahn.................... Former acting President of Consumer Electronics Division 49
from November 1997 to February 1998. Senior Vice President
of Operations from July 1996 to October 1997. President OEM
Sales Division from 1991 to 1995, LG Electronics U.S.A.,
Inc.
Ramesh G. Amin................. Former President, Consumer Electronics Division, from 54
December 1996 to October 1997. Previously Senior Vice
President, Display Products Group at Sony for seven years.
Roger A. Cregg................. Former Executive Vice President, Chief Financial Officer, 41
from May 1996 to December 1997. Chief Financial Officer at
Sweetheart Cup Company from 1990 to 1996.
Robert N. Dangremond........... Acting Chief Financial Officer since December 1997. 55
Principal with Jay Alix & Associates, a consulting and
accounting firm specializing in corporate restructurings and
turnaround activities, since August 1989. Previously,
beginning in August 1995, Mr. Dangremond has held the
position of interim Chief Executive Officer and President of
Forstmann & Company, Inc. and was Chairman of the Board,
President and Chief Executive Officer of AM International,
Inc. from February 1993 to September 1994.
Jeffrey P. Gannon.............. President and Chief Executive Officer, since January 1998. 47
Previously held a variety of senior positions at General
Electric during a 24-year career, including Corporate Vice
President, International Business Development from October
1997 to January 1998 and President & Chief Executive Officer
of General Electric Lighting's Asia Pacific Operations from
1994 to 1997.
John M. Renfro................. Senior Vice President, Human Resources, since March 1998. 38
Previously, Vice President Human Resources and
Administration, Ameritech Corporation, Small Business
Service from 1996 to 1998. Vice President, Human Resources,
Asia-Pacific, Latin America and Africa, Dun and Bradstreet
Corporation, 1993 to 1996.
Richard F. Vitkus.............. Senior Vice President, General Counsel since 1994. Secretary 58
since 1995. Previously Senior Vice President, General
Counsel, and Director of Corporate Development at Vanstar
Corporation (formerly ComputerLand Corporation) from 1991 to
1994.
Peter S. Willmott.............. Former President and Chief Executive Officer from November 60
1996 to January 1998. Chairman, MacFrugal's Bargains
Close-outs Inc., from 1990 to 1997; Chairman and Chief
Executive Officer, Willmott Services, Inc., from 1989 to
1997.
Dennis R. Winkleman............ Former Vice President, Human Resources, from March 1996 to 47
October 1997. Director, Human Resources, Case Corporation
from 1990 to 1996.
Nam K. Woo..................... Former Executive Vice President and acted as Chief Operating 48
Officer from October 1997 to January 1998. Senior Managing
Director LG Electronics, Inc. since 1997. President of North
American Operations and LG Electronics U.S.A., Inc. 1994 to
1997.
</TABLE>
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The New York Stock Exchange is the principal United States market in which
the company's common stock is traded. The number of stockholders of record was
11,488 as of March 18, 1998. No dividends were paid to stockholders during the
two years ended December 31, 1997.
The high and low price range for the company's common stock by quarter for
the past two years is included in the Unaudited Quarterly Financial Information.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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Results of operations:
Net sales........................... $1,173.1 $1,287.9 $1,273.9 $1,469.0 $1,228.2
Pre-tax income (loss)............... (300.2) (177.8) (98.5) (14.8) (93.2)
Net income (loss)................... (299.4) (178.0) (90.8) (14.5) (93.2)
Financial position:
Total assets........................ $ 527.7 $ 765.3 $ 700.7 $ 662.4 $ 568.5
Long-term debt...................... 132.8 152.7 168.8 182.0 170.0
Stockholders' equity (deficit)...... (85.3) 162.0 317.5 237.1 161.5
Per share of common stock:
Net income (loss)................... $ (4.49) $ (2.73) $ (1.85) $ (.35) $ (2.89)
Book value (deficit)................ (1.27) 2.44 5.00 5.19 4.50
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The statements of consolidated operations summarize operating results for
the last three years. This section of Management's Discussion and Analysis
highlights the main factors affecting the changes in operating results during
the three-year period.
REVENUES. Sales in 1997 were $1,173 million down nine percent from 1996
sales of $1,288 million. Sales in 1996 increased one percent as compared to 1995
sales of $1,274 million.
The company's core business -- the development, manufacture and
distribution of a broad range of products for the delivery of video
entertainment -- is composed of two major product areas, Consumer Electronics
(which includes color picture tube operations) and Network Systems.
In Consumer Electronics, the color TV market remains extremely competitive.
Price competition continued during 1997 and 1996 forcing the company to reduce
color TV prices in each year to maintain sales volumes and market share. This
price competition may continue to adversely affect the company's performance.
Consumer Electronics sales decreased seven percent in 1997 from 1996
primarily due to soft demand for direct-view color TV sets (particularly during
the traditionally strong fourth quarter) and lower VCR sales. In addition, sales
continued to be negatively impacted as the company suffered delays in production
of new high-margin Consumer Electronics products. Because of picture tube
availability problems, the company's domestic direct-view color television unit
sales declined compared with 1996, but the company gained market share in key
large-screen categories. The industry color TV unit sales to dealers (including
projection television) decreased by four percent in 1997 to 24.5 million units
(following a decrease of three percent to
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25.5 million units in 1996 and a decrease of four percent to 26.2 million units
in 1995). The Zenith brand remains one of the top three U.S. color TV brands.
Sales in 1997 were negatively impacted as a result of a dispute the company
had with a Brazilian customer. The company shipped dramatically less to this
customer during 1997, and as a result the company's international sales have
been lower than expected.
Consumer Electronics sales increased three percent in 1996 from 1995,
driven largely by higher VCR sales. The company's domestic direct-view color
television unit sales in 1996 were flat compared with 1995, while industry color
TV unit sales to dealers declined. As a result, the company's market share
increased slightly during 1996. The industry color TV unit sales to dealers
(including projection televisions) decreased by three percent to 25.5 million
units in 1996 (following a decrease of four percent to 26.2 million units in
1995 and an increase of ten percent to 27.4 million units in 1994).
Sales in 1996 were negatively impacted as the company suffered delays in
production of new high-margin Consumer Electronics products.
In Network Systems, which includes the design and manufacture of digital
and analog set-top boxes, along with data modems sold primarily to cable
television operators, 1997 sales were down significantly compared with 1996 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 still relatively small, rose during 1997. During 1996, the
company signed a multi-year agreement with the Americast programming venture to
provide digital set-top boxes to a consortium of telecommunications companies.
Initial shipments under this contract began in 1997. Network Systems 1996 sales
were down significantly compared with 1995 for the reasons discussed above.
COSTS AND EXPENSES. In light of the company's net losses, the competitive
environment and inflationary cost pressures, the company has undertaken major
cost reduction programs in each of the last three years. These programs included
cost control and profit improvement initiatives; design, manufacturing,
logistics and distribution improvements; and business consolidations. The
company continues to seek ongoing additional cost reduction opportunities.
The 1997 results included large losses in color picture tube operations
along with significant charges related to inventory valuation (approximately $44
million) and bad debts (approximately $25 million) which are significantly
higher that last year. The large losses in the company's color picture tube
plant resulted from high operating costs and performance difficulties associated
with new product start-up and new automated production processes. These product
and process problems created a large amount of rework inventory that
necessitated significant charges for excess and obsolete inventory. These items
combined to negatively impact the company's gross margin. The charges for bad
debts affected selling, general and administrative expenses and are discussed
below.
The 1996 results also included significant charges. The majority of these
charges related to selling, general and administrative expenses, but a
significant amount of the charges were included in costs of products sold and
negatively impacted the company's gross margin. The charges included in costs of
products sold were primarily associated with inventories (particularly
write-offs of excess and obsolete inventory), and also included charges for
hourly employees severance.
Selling, general and administrative expenses were $178 million in 1997,
$168 million in 1996 and $129 million in 1995. These expenses as a percent of
revenues were 15 percent in 1997, 13 percent in 1996 and 10 percent in 1995. The
increase in 1997, as compared to 1996, was primarily the result of a $21 million
bad debt charge related to a dispute the company had with a Brazilian customer.
See Note Four to the company's Consolidated Financial Statements for further
information. The increase in 1996, as compared to 1995, was the result of the
unusual charges which included severance charges for salaried employees
(including executive severance), consulting fees and provisions for bad debts.
Amounts that the company spends each year on engineering and research
relating to new products and services and to improvements of existing products
and services are expensed as incurred. These amounts were
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$43 million in 1997, $47 million in 1996 and $44 million in 1995. These expenses
as a percentage of revenues were approximately 4 percent in each year during the
three years ended December 31, 1997.
OTHER OPERATING EXPENSE (INCOME). Other Operating Expense (Income) contains
royalty income received from manufacturers of TV sets and VCRs who have taken
licenses under some of the company's U.S. tuning system patents. Royalty income
from tuning system patents was $26 million in 1997, $27 million in 1996 and $26
million in 1995. Also included in Other operating expense (income) are foreign
exchange gains and losses. These amounts have traditionally not been material.
In 1997, Other Operating Expense (Income) was significantly impacted as the
company recorded $64 million in charges for asset impairments. As required by
Statement of Financial Accounting Standards (FAS) No. 121, long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
During the fourth quarter of 1997, an impairment was recognized for the Consumer
Electronics business since the future undiscounted cash flows of assets were
estimated to be insufficient to recover their related carrying values. As such,
the company recognized an expense of $54 million and established a valuation
reserve for the write-down of the excess carrying value over fair market value.
The fair market value used in determining the impairment loss was based upon
management and third party valuations.
Also in accordance with FAS 121, certain long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell.
During the third quarter of 1997, the company recorded a charge of $10 million
related to the impairment of certain long-lived assets to be disposed of. 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,
Illinois and (iii) a building in Canada that was sold in December 1997.
The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the company's estimates of the
recoverability of long-lived assets and the fair value will change. See the
Outlook section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.
RESTRUCTURING AND OTHER CHARGES. There were no Restructuring and Other
Charges during 1997, however, if the company executes its business plan for
1998, significant restructuring charges are expected to be incurred during 1998.
See the Outlook section of Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information.
During the fourth quarter of 1996, the company recorded $9 million of
restructuring charges. The restructuring was composed of $5 million of charges
related to severance costs associated with employment reductions (mostly in the
company's U.S. salaried workforce) and $4 million of charges associated with the
shutdown of the company's wholly-owned Canadian distributor. Substantially all
of the provisions are related to cash expenditures that were made during 1997.
During 1995, the company recorded $22 million of restructuring and other
charges. The main component of this was a second-quarter charge of $18 million
primarily to restructure its core Consumer Electronics and Network Systems
business. The charge was mainly comprised of provisions made in anticipation of
cash expenditures that were paid in the second half of 1995 or in the first half
of 1996. The major elements of the restructuring related to severance expenses
($10 million) associated with employment reductions (mostly in the company's
U.S. salaried workforce) and costs associated with realigned distribution
activities ($3 million) as the company changed to direct-to-retail distribution
on a nationwide basis. The remaining charges related to other non-recurring
items, including certain environmental, legal and other regulatory matters, and
trade receivable write-offs (primarily for accounts in Mexico as a result of the
peso devaluation).
The remainder of the 1995 charges related to fourth-quarter charges
totaling $4 million that were incurred as a consequence of the LGE purchase of
common stock.
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INTEREST EXPENSE. Interest expense was $26 million in 1997, $15 million in
1996 and $20 million in 1995. The increased amounts in 1997 and 1995, when
compared to 1996, resulted from higher funding requirements for company
operations. To assist in funding these requirements, the company entered into
various financing transactions.
INCOME TAXES. Due to the company's continuing losses, provisions made for
income taxes during the last three years have not been material. In 1995, the
company recorded an income tax credit of $8 million (including interest) that
related to a tax refund due the company as a result of certain foreign tax
credit issues in audits of prior years.
NET INCOME. As a result of the factors described above, net losses were
$299 million in 1997, $178 million in 1996 and $91 million in 1995.
Corresponding per share losses were $4.49 in 1997, $2.73 in 1996 and $1.85 in
1995.
In recent years, the company has announced product initiatives based on its
digital set-top box and cable modem technologies. The company has not yet
recognized any significant 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.
Cash Flows
The statements of consolidated cash flows reflect the changes in cash for
the last three years by classifying transactions into three major categories;
Operating, Investing and Financing activities.
OPERATING ACTIVITIES. A principal use of the company's liquidity is the
cash used by operating activities which consists of the company's net loss as
adjusted for non-cash operating items and the changes in current assets and
liabilities such as receivables, inventories and payables.
In 1997, $25 million of cash was used by operating activities principally
to fund $193 million of net losses from operations as adjusted for depreciation,
charges for asset impairments and losses on asset sales. The change in current
accounts provided $149 million of cash and was principally composed of a $187
million decrease in receivables and a $90 million decrease in inventories,
offset by a $111 million increase in transferor certificates. The decrease in
receivables and the increase in transferor certificates were mainly due to the
receivable securitization agreement with Citicorp being put in place during 1997
which accounts for transactions under this agreement as the sale of receivables.
The net effect of the decrease in receivables and the increase in transferor
certificates was a decrease of $76 million which was primarily related to the
lower sales levels, particularly in the fourth quarter of 1997, the $21 million
bad debt charge related to a dispute the company had with a Brazilian customer,
and the sale of receivable to outside investors under the receivable
securitization agreement. The decrease in inventories was related to reduced
amounts of purchases in anticipation of the lower fourth quarter sales. In
addition, the company reduced cash used by operating activities by issuing
common stock to the retirement savings plans to fulfill the 1996 obligation to
salaried employees. This issuance increased stockholders' equity by $5 million.
In 1996, $24 million of cash was used by operating activities principally
to fund $143 million of net losses from operations as adjusted for depreciation.
The change in current accounts provided $116 million of cash and was principally
composed of a $180 million increase in accounts payable and accrued expenses
offset by a $53 million increase in inventories and a $8 million increase in
receivables. The increase in accounts payable and accrued expenses was mainly
due to increased amounts of accounts payable, composed of (i) contracts with LGE
which permit the company to elect interest-bearing extended-payment terms ($107
million at December 31, 1996, and $9 million at December 31, 1995) and (ii) all
other accounts payable ($110 million at December 31, 1996 and $63 million at
December 31, 1995). The increase in the LGE extended payables is due to a
lengthening of the terms, while the increase in the other accounts payable is
due mainly to the increased levels of inventory. In addition, the company
reduced cash used by operating activities by issuing
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<PAGE> 12
common stock to the profit-sharing retirement plans to fulfill the 1995
obligation to salaried employees and some hourly employees. This issuance
increased stockholders' equity by $5 million.
In 1995, $33 million of cash was used by operating activities principally
to fund $57 million of net losses from operations as adjusted for depreciation
and a loss on asset sales. The change in current accounts provided $20 million
of cash and was principally composed of a $51 million decrease in inventories
offset by a $38 million decrease in accounts payable and accrued expenses. The
decreases in inventories and accounts payable were due in part to lower levels
of color TV production caused by lower sales levels. Inventories also were
reduced as a result of process improvements implemented during 1995.
INVESTING ACTIVITIES. The principal recurring investing activity is the
addition of property, plant and equipment. These expenditures are primarily for
equipment and tooling related to product improvements, more efficient production
methods and replacement for normal wear. Beginning in 1997, another major
investing activity became the distribution of investor certificates that were
generated under the receivable securitization with Citicorp.
In 1997, investing activities provided $21 million of cash, which consisted
of $188 million of proceeds from asset sales offset by capital additions of $83
million and the distribution of $84 million of investor certificates. The
proceeds from asset sales were primarily composed of $95 million of cash
received from the sale of receivables (sold via the receivable securitization
with Citicorp) and $87 million of cash received in connection with a
sale-leaseback transaction whereby the company sold and leased back new and
existing manufacturing equipment in its Melrose Park, Illinois, picture tube
plant and in its Reynosa and Juarez, Mexico, facilities. Capital additions in
1997 included expenditures 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.
In 1996, investing activities used $125 million of cash, which consisted of
capital additions of $129 million offset by $4 million of proceeds from asset
sales. The level of capital additions in 1996 was significantly higher other
years primarily to support the expansion and modernization of the company's
Melrose Park, Illinois, picture tube plant, and its Chihuahua, Mexico, plant for
digital set-top boxes.
In 1995, investing activities used $49 million of cash, which consisted of
capital additions of $52 million offset by $3 million of proceeds from asset
sales. Capital additions in 1995 included a new production line for projection
TV picture tubes in the company's Juarez, Mexico, plant and new industrial
robotics to perform labor-intensive production processes in the Melrose Park,
Illinois, picture tube plant.
The company is planning a significant reduction in capital investment
projects during 1998.
FINANCING ACTIVITIES. In 1997, financing activities provided $4 million of
cash, which included $45 million provided as a result of borrowings under the
company's new term loan, $25 million of increased borrowings under the company's
short-term debt agreements and $1 million provided from sales of the company's
common stock to employees of the company via the exercise of previously issued
stock options. This was offset by $31 million of cash used to pay off the old
term loan, $24 million of cash used to redeem the 8.5 percent Senior
Subordinated Convertible Debentures due November 2000, $7 million of cash used
to pay maturities of the new term loan and $6 million of cash used to pay
maturities of the 6 1/4 percent Convertible Subordinated Debentures due 2011.
In 1996, financing activities provided $55 million of cash, which included
$47 million provided as a result of borrowings under the company's credit
agreement and $15 million provided from sales of the company's common stock to
employees of the company via the exercise of previously issued stock options.
This was offset by $7 million of cash used to pay maturities of the Term Loan.
The 1995 increase in cash provided was due to the company selling $171
million of common stock to investors, principally the sale at $10 per share of
16.5 million shares to LGE in November. In addition, the company sold 1.3
million shares to investors under a shelf registration statement. Cash also was
provided during 1995 as the company entered into a Term Loan Agreement for $40
million. Cash was used during 1995 as the company repurchased $43 million
principal amount of its 8.5% Convertible Senior Subordinated
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<PAGE> 13
Debentures due 2000 and 2001, at par plus accrued interest. This repurchase
resulted from the exercise by certain holders of the debentures of the right to
require repurchase of all or a portion of the debentures following a change of
control of the company, which occurred upon the purchase of a controlling
interest in the company by LGE.
Financial Condition
As of December 31, 1997, the company had $364 million of interest-bearing
obligations which consisted of: (i) $144 million of extended-term payables with
LGE, (ii) $109 million of 6 1/4 percent Convertible Subordinated Debentures due
2011 (the current portion of which is $6 million), (iii) $72 million currently
payable under various unsecured and uncommitted credit facilities, (iv) a $38
million Term Loan with Citicorp (the current portion of which is $9 million),
(v) $1 million aggregate principal amount of 8.5 percent Senior Subordinated
Convertible Debentures due 2001 which are classified as current as they were
redeemed subsequent to December 31, 1997.
In April 1997, the company obtained several financing commitments. 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
replaces the company's previous credit agreement and term loan. 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, domestic fixed assets, stock of the
company's subsidiaries and tuner patent royalties, along with the related
patents, licenses and other general intangibles. 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. During 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
an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, 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 million as of December 31, 1997, 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. This trade receivable securitization was accounted for as a
sale of receivables.
Also, in April 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, Illinois, picture tube 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. The lease of the manufacturing
equipment was accounted for as an operating lease.
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.
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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, exercisable over
time. The accounting for these stock options is based upon their fair value with
that fair value being amortized straight-line over the term of the associated
commitments.
In August 1997 the company received $30 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 were made to LGE, the liability balance was
reduced. As of December 31, 1997, $1 million of the liability to LGE remained
and is included in accrued expenses.
Between November 1997 and February 1998 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 $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), First Chicago NBD ($30 million), Societe Generale ($20
million) and Credit Agricole ($30 million). 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
financing, the company redeemed, in December 1997, its 8.5 percent Senior
Subordinated Convertible Debentures due November 2000. There was $24 million
principal amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The company also called for redemption, in January,
1998 its 8.5 percent Senior Subordinated Convertible Debentures due January
2001. There was $1 million principal amount of such debentures outstanding.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. The term of the facility is
one year from the date of the first borrowing, subject to LGE's right to demand
repayment at anytime after June 30, 1998. Repayment is due in full at the end of
the term. The facility is secured by liens on certain of the company's assets
and is subject to certain terms and conditions.
Outlook
Since joining the company in January 1998, the new Chief Executive Officer,
along with the rest of the company's management team has been developing a broad
operational and financial restructuring plan. A broad outline of that plan has
been presented to the company's Board of Directors in March 1998. The plan,
which is designed to leverage the company's brand, distribution and technology
strengths, includes reducing costs, outsourcing of certain components and
products, disposition of certain assets and capitalizing on the company's
patented digital television technologies. Restructuring costs must be incurred
to implement the plan.
Despite its negative cash flow, the company has been able to secure
financing to support its operations to date, based on credit support from LGE.
Between November 1997 and February 1998, the company (with the guarantee of LGE)
entered into a series of new lending agreements with commercial lenders for
unsecured lines of credit totaling more than $100 million, all of which has been
drawn as of March 31, 1998.
Going forward, significant amounts of additional cash will be needed to pay
the restructuring costs to implement the proposed business plan and to fund
losses until the company has returned to profitability. Based on management's
proposed plan, the company estimates that at least $225 million would be
required to fund
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the company's restructuring costs and operations through the end of 1998 and
that additional amounts could be required thereafter.
While there is no assurance that funding will be available to execute the
plan, the company is continuing to seek financing to support its turnaround
efforts and is exploring a number of alternatives in this regard. LGE has agreed
to provide up to $45 million in additional funding for one year from the date of
the first borrowing, subject to LGE's right to demand repayment at anytime after
June 30, 1998, and is secured by certain assets of the company. The company
believes that this additional short-term financing, along with its current
credit facilities, will be sufficient to support the company's liquidity
requirements through June 30, 1998, depending on operating results and the level
of continued trade support. In addition, the company is engaged in ongoing
discussions with LGE concerning the company's business plan, and LGE is
considering whether to provide additional long-term financial support. However,
LGE has no obligation to do so. Any such support by LGE would be subject to a
number of conditions, including the operating results of the company,
third-party consents, Republic of Korea regulatory approvals and other
conditions. No decision has been made at this time by LGE or the company
regarding additional financial support, and there can be no assurance that any
additional financial support will be forthcoming from LGE.
In the absence of long-term financial support from LGE, there can be no
assurance that additional financing can be obtained from conventional sources.
Management is exploring alternatives that include seeking strategic investors,
lenders and/or technology partners, selling substantial company assets or
pursuing other transactions that could result in diluting LGE to a less than
majority position. There can be no assurance that management's efforts in this
regard will be successful.
To implement the proposed business plan and to fund associated
restructuring costs and operating losses, the company will be required to
restructure certain of its outstanding debt and other financing arrangements
(See Notes Six, Fourteen, Fifteen and Sixteen to the company's Consolidated
Financial Statements for a description of certain debt and financing
arrangements.) A number of alternatives, including out-of-court and in-court
financial restructurings, are being considered. Management believes that, under
any restructuring scenario, the company's common stock would likely be subject
to massive dilution as a result of the conversion of debt to equity or
otherwise. There can be no assurances as to what value, if any, would be
ascribed to the common stock in a restructuring. In addition, the company's
subordinated debentures could suffer substantial impairment in a restructuring.
Due to a number of uncertainties, many of which are outside the control of the
company, there can be no assurance that the company will be able to consummate
any operational or financial restructuring.
The company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1997
financial statements. The paragraph states that the company's recurring losses
and negative working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.
Existing credit facilities are not expected to be sufficient to cover
liquidity requirements after June 30, 1998, and the company is currently facing
the prospect of not having adequate funds to operate its business. There can be
no assurance that additional credit facilities can be arranged or that any
long-term restructuring alternative can be successfully initiated or implemented
by June 30, 1998, in which case the company may be compelled to pursue a
bankruptcy filing in the absence of a proposed or pre-approved financial
restructuring. The company will be required to obtain waivers under its
financing arrangements for periods subsequent to June 30, 1998 and the lenders
thereunder are under no obligation to provide such waivers.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, lenders, stockholders and employees will continue to be key to the
company's future success.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain Statements in this Annual Report on Form 10-K, such as statements
regarding the company's strategies, plans, objectives and expectations are
forward-looking statements that involve known and unknown risks, uncertainties
and other factors which may cause the actual results of the company or of its
efforts to execute a business and financial restructuring to be materially
different from any future results expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions, both in the United States and other countries in which
the company sells its products and from which the company obtains supplies; the
effect of competition in the markets served by the company; required approvals
of the Republic of Korea for additional financing, if any, that LGE may desire
to extend to the company; the availability and terms of financing from LGE or
other financing sources to fund the company's operating losses, restructuring
charges and the other costs and expenses of its new business plan; the
willingness of existing creditors to continue to forbear from enforcing
available rights and remedies and to grant additional waivers of potential
defaults and to agree to the terms of any proposed financial restructuring.
Given these uncertainties, stockholders and debtholders are cautioned not to
place undue reliance on any forward-looking statement contained herein. The
company disclaims any obligation to update such factors or forward-looking
statements or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein or to reflect future events or
developments.
Readiness for the Year 2000
The company is currently evaluating its computer-based systems, facilities
and products to determine whether they are "Year 2000 Ready." The company is
employing a combination of internal resources and outside consultants to
coordinate and implement it's Year 2000 Readiness initiatives. The company has
established a company-wide Year 2000 Task Force, led by the company's technology
group, with representation from its major business segments, to evaluate and
address Year 2000 issues. The Year 2000 Task Force's responsibilities include,
without limitation, (i) conducting an evaluation of the company's computer-based
systems, facilities and products (and those of the dealers, vendors and other
third-parties with which the company does business) to determine their Year 2000
Readiness, (ii) coordinating the replacement and/or upgrade of non-compliant
systems as necessary, (iii) promoting the company-wide awareness of Year 2000
issues through education and training, and (iv) developing, and overseeing the
implementation of all of the company's other Year 2000 Readiness initiatives.
While the company is working to achieve Year 2000 Readiness, it makes no
assurance that it will successfully achieve all of its goals.
In 1997, the company spent approximately $2 million on software and
hardware upgrades and replacements in connection with its Year 2000 transition
and has budgeted an additional $2 million for 1998. Most of the costs incurred
in addressing Year 2000 issues are expected to be expensed as incurred, in
compliance with generally accepted accounting principles. The company continues
to evaluate the estimated costs associated with its Year 2000 Readiness efforts.
While the Year 2000 transition efforts will involve additional costs, at this
time, the company has not yet determined the full cost of the necessary
modifications necessary to address all Year 2000 issues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Item 14 of
Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated herein by reference from
the sections entitled "Election of Directors" and "Board and Committee Meetings
and Directors' Compensation" from the company's definitive Proxy Statement,
copies of which will be electronically transmitted to the Commission via EDGAR.
See also the list of the company's executive officers and related information
under "Executive Officers of the Registrant" at the end of Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the sections entitled "Board and Committee
Meetings and Directors' Compensation", "Summary Compensation Table", "Employment
Agreements", "Option/SAR Grants in 1997" and "Aggregated Option/SAR Exercises in
1997 and year-end Option/SAR Values" from the company's definitive Proxy
Statement, copies of which will be electronically transmitted to the Commission
via EDGAR.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the sections entitled "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" from the
company's definitive Proxy Statement, copies of which will be electronically
transmitted to the Commission via EDGAR.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the sections entitled "Nominees for Election
as Directors" and "Related Party Transactions" from the company's definitive
Proxy Statement, copies of which will be electronically transmitted to the
Commission via EDGAR.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following Consolidated Financial Statements of Zenith
Electronics Corporation, the Report of Independent Public Accountants, and the
Unaudited Quarterly Financial Data are included in this report:
Statements of Consolidated Operations and Retained Earnings -- Years
ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets -- December 31, 1997 and 1996
Statements of Consolidated Cash Flows -- Years ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Unaudited Quarterly Financial Information
(a) 2. The following consolidated financial statement schedule for Zenith
Electronics Corporation is included in this report:
Schedule II -- Valuation and Qualifying Accounts
The Report of Independent Public Accountants on Financial Statement
Schedule is included in this report.
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All other schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission, are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
3. Exhibits:
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<S> <C>
(3a) Restated Certificate of Incorporation of the company, as
amended (incorporated by reference to Exhibit 3(a) to the
company's Annual Report on Form 10-K for the year ended
December 31, 1992)
(3b) Certificate of Amendment to Restated Certificate of
Incorporation of the company dated May 4, 1993 (incorporated
by reference to Exhibit 4(l) of the company's Quarterly
Report on Form 10-Q for the quarter ended April 3, 1993)
(3c) By-Laws of the company, as amended
(4a) Credit Agreement dated as of March 31, 1997, among Zenith
Electronics Corporation, Citibank N.A., Citicorp North
America, Inc. and the other lenders named (incorporated by
reference to Exhibit 4f to the company's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1997)
(4b) 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
(incorporated by reference to Exhibit 4 to the company's
Quarterly Report on Form 10-Q or the quarter ended September
27, 1997)
(4c) Second Amendment, effective as of December 31, 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
(4d) Indenture dated as of April 1, 1986 between Zenith
Electronics Corporation and The First National Bank of
Boston as Trustee with respect to the 6 1/4% Convertible
Subordinated Debentures due 2011 (incorporated by reference
to Exhibit 1 of the company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1991)
*(10a) 1987 Zenith Stock Incentive Plan (as amended) (incorporated
by reference to Exhibit A of the company's definitive Proxy
Statement dated March 13, 1992)
*(10b) Form of Indemnification Agreement with Officers and
Directors (incorporated by reference to Exhibit 8 of the
company's Report on Form 10-K for the year ended December
31, 1989)
*(10c) Form of Directors 1989 Stock Units Compensation Agreement
with T. Kimball Brooker (1,000 units) (incorporated by
reference to Exhibit 9 of the company's Report on Form 10-K
for the year ended December 31, 1989)
*(10d) Form of Directors 1990 Stock Units Compensation Agreement
with T. Kimball Brooker, Andrew McNally IV and Peter S.
Willmott (1000 units each) (incorporated by reference to
Exhibit 6 of the company's Report on Form 10-K for the year
ended December 31, 1990)
*(10e) Form of Directors 1991 Stock Units Compensation Agreement
with T. Kimball Brooker, Andrew McNally IV and Peter S.
Willmott (1,000 units each) (incorporated by reference to
Exhibit 10d of the company's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1991)
*(10f) Form of Amendment, dated as of July 24, 1991, to Directors
Stock Units Compensation Agreements for 1990 and 1991
(incorporated by reference to Exhibit 10e of the company's
Quarterly Report on Form 10-Q for the quarter ended June 29,
1991)
*(10g) Directors Retirement Plan and form of Agreement
(incorporated by reference to Exhibit 10 of the company's
Report on Form 10-K for the year ended December 31, 1989)
*(10h) Form of Amendment, dated as of July 24, 1991, to Directors
Retirement Plan and form of Agreement (incorporated by
reference to Exhibit 10f of the company's Quarterly Report
on Form 10-Q for the quarter ended June 29, 1991)
</TABLE>
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<TABLE>
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*(10i) Supplemental Executive Retirement Income Plan effective as
of January 1, 1994 (incorporated by reference to Exhibit
10ab to the company's Annual Report on Form 10-K for the
year ended December 31, 1994)
*(10j) Restated and Amended Zenith Salaried Retirement Savings Plan
*(10k) Long-Term Equity Compensation Plan (incorporated by
reference on Form S-8 filed June 6, 1997)
*(10l) Form of Employee Stock Option Agreement (incorporated by
reference to Exhibit 10e of the company's Quarterly Report
on Form 10-Q for the quarter ended April 1, 1995)
*(10m) Form of Employee Stock Option Agreement, Long-Term Equity
Compensation Plan
(10n) Stock Purchase Agreement dated July 17, 1995, between Zenith
Electronics Corporation and LG Electronics, Inc.
(incorporated by reference to Exhibit 2 of the company's
Report on Form 8-K dated July 17, 1995)
*(10o) Employment Agreement, dated January 1, 1997, between Roger
A. Cregg and Zenith Electronics Corporation (incorporated by
reference to Exhibit 10p to the company's Annual Report on
Form 10-K for the year ended December 31, 1996)
*(10p) Employment Agreement, dated January 1, 1997, between Richard
F. Vitkus and Zenith Electronics Corporation (incorporated
by reference to Exhibit 10q to the company's Annual Report
on Form 10-K for the year ended December 31, 1996)
*(10q) Employment Agreement, dated January 1, 1997, between Peter
S. Willmott and Zenith Electronics Corporation (incorporated
by reference to Exhibit 10r to the company's Annual Report
on Form 10-K for the year ended December 31, 1996)
*(10r) Employment Agreement, dated January 1, 1997, between Dennis
R. Winkleman and Zenith Electronics Corporation
(incorporated by reference to Exhibit 10s to the company's
Annual Report on Form 10-K for the year ended December 31,
1996)
(10s) Agreement between Jay Alix & Associates and Zenith
Electronics Corporation, as amended
(10t) Receivables Purchase Agreement dated as of March 31, 1997,
among Zenith Electronics Corporation and Zenith Finance
Corporation (incorporated by reference to Exhibit 10a to the
company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997)
(10u) Letter amendment, dated October 15, 1997, to Receivables
Purchase Agreement dated as of March 31, 1997, among Zenith
Electronics Corporation and Zenith Finance Corporation and
to Zenith Trade Receivable Master Trust Pooling and
Servicing Agreement dated as of March 31, 1997, among Zenith
Finance Corporation, Zenith Electronics Corporation and
Bankers Trust Company
(10v) Receivables Purchase Agreement dated as of March 31, 1997,
among Zenith Microcircuits Corporation and Zenith Finance
Corporation (incorporated by reference to Exhibit 10b to the
company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997)
(10w) Zenith Trade Receivable Master Trust Pooling and Servicing
Agreement dated as of March 31, 1997, among Zenith Finance
Corporation, Zenith Electronics Corporation and Bankers
Trust Company (incorporated by reference to Exhibit 10c to
the company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997)
(10x) Lease Agreement dated as of March 26, 1997, by and among
Fleet National Bank and Zenith Electronics Corporation
(incorporated by reference to Exhibit 10d to the company's
Quarterly Report on Form 10-Q for the quarter ended March
29, 1997)
(10y) Lease Agreement dated as of March 26, 1997, by and among
Fleet National Bank and Zenith Electronics Corporation of
Texas (incorporated by reference to Exhibit 10e to the
company's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1997)
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
(10z) Participation Agreement dated as of March 26, 1997, by and
among Zenith Electronics Corporation, General Foods Credit
Corporation, Fleet National Bank and other lenders named,
and First Security Bank, National Association (incorporated
by reference to Exhibit 10f to the company's Quarterly
Report on Form 10-Q for the quarter ended March 29, 1997)
(10aa) Participation Agreement dated as of March 26, 1997, by and
among Zenith Electronics Corporation of Texas, General Foods
Credit Corporation, Fleet National Bank and other lenders
named, and First Security Bank, National Association
(incorporated by reference to Exhibit 10g to the company's
Quarterly Report on Form 10-Q for the quarter ended March
29, 1997)
(10ab) Financial Support Agreement as of March 31, 1997, between LG
Electronics Inc. and Zenith Electronics Corporation
(incorporated by reference to Exhibit 10h to the company's
Quarterly Report on Form 10-Q for the quarter ended March
29, 1997)
(10ac) Subordination Agreement, dated as of November 3, 1997, among
Zenith Electronics Corporation, Citicorp North America, Inc.
and LG Electronics Inc., (incorporated by reference to
Exhibit 10 to the company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1997)
*(10ad) Performance Optimization Plan Agreement, dated April 7,
1997, between Richard F. Vitkus and Zenith Electronics
Corporation
(18) Letter re change in accounting principle (incorporated by
reference to Exhibit 18 to the company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1997)
(21) Subsidiaries of the company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule for the Year ended December 31, 1997
</TABLE>
- -------------------------
* Represents a management contract, compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
(c) and (d) Exhibits and Financial Statement Schedules
Certain exhibits and financial statement schedules required by this portion
of Item 14 are filed as a separate section of this report.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZENITH ELECTRONICS CORPORATION
(Registrant)
By: /s/ JEFFREY P. GANNON
------------------------------------
Jeffrey P. Gannon
President and Chief Executive
Officer
Date: March 31, 1998
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ T. KIMBALL BROOKER Director March 31, 1998
- ------------------------------------------------
T. Kimball Brooker
/s/ KI-SONG CHO Director March 31, 1998
- ------------------------------------------------
Ki-song Cho
/s/ EUGENE B. CONNOLLY Director March 31, 1998
- ------------------------------------------------
Eugene B. Connolly
/s/ ROBERT A. HELMAN Director March 31, 1998
- ------------------------------------------------
Robert A. Helman
/s/ CHA HONG (JOHN) KOO Director March 31, 1998
- ------------------------------------------------
Cha Hong (John) Koo
/s/ SEUNG PYEONG KOO Director March 31, 1998
- ------------------------------------------------
Seung Pyeong Koo
/s/ HUN JO LEE Director March 31, 1998
- ------------------------------------------------
Hun Jo Lee
/s/ ANDREW MCNALLY IV Director March 31, 1998
- ------------------------------------------------
Andrew McNally IV
/s/ YONG NAM Director March 31, 1998
- ------------------------------------------------
Yong Nam
/s/ PETER S. WILLMOTT Director March 31, 1998
- ------------------------------------------------
Peter S. Willmott
/s/ NAM WOO Director March 31, 1998
- ------------------------------------------------
Nam Woo
/s/ ROBERT N. DANGREMOND Acting Chief Financial Officer March 31, 1998
- ------------------------------------------------ (Principal Financial Officer)
Robert N. Dangremond
/s/ LAWRENCE D. PANOZZO Director of Corporate Accounting March 31, 1998
- ------------------------------------------------ and Planning
Lawrence D. Panozzo (Principal Accounting Officer)
</TABLE>
21
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Unaudited Quarterly Financial Data
Report of Independent Public Accountants on Financial Statement Schedule
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts
Exhibits:
<TABLE>
<S> <C>
(3c) By-Laws of the company, as amended
(4c) Second Amendment, effective as of December 31, 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
(10j) Restated and Amended Zenith Salaried Retirement Savings Plan
(10m) Form of Employee Stock Option Agreement, Long-Term Equity
Compensation Plan
(10s) Agreement between Jay Alix & Associates and Zenith
Electronics Corporation, as amended
(10u) Letter amendment, dated October 15, 1997, to Receivables
Purchase Agreement dated as of March 31, 1997, among Zenith
Electronics Corporation and Zenith Finance Corporation and
to Zenith Trade Receivable Master Trust Pooling and
Servicing Agreement dated as of March 31, 1997, among Zenith
Finance Corporation, Zenith Electronics Corporation and
Bankers Trust Company
(10ad) Performance Optimization Plan Agreement, dated April 7,
1997, with Richard F. Vitkus
(21) Subsidiaries of the company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule for the Year ended December 31, 1997
</TABLE>
22
<PAGE> 23
CONSOLIDATED FINANCIAL STATEMENTS
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Net sales................................................. $1,173.1 $1,287.9 $1,273.9
-------- -------- --------
Costs, Expenses and Other
Cost of products sold..................................... 1,180.5 1,257.0 1,188.8
Selling, general and administrative (Note Four)........... 178.3 167.8 128.8
Engineering and research.................................. 42.9 46.7 43.5
Other operating expense (income), net
(Notes One, Three and Ten)............................. 42.4 (26.3) (30.1)
Restructuring and other charges (Note Seven).............. -- 9.3 21.6
-------- -------- --------
Income
Operating income (loss)................................... (271.0) (166.6) (78.7)
Gain (loss) on asset sales, net........................... (4.6) 0.3 (1.7)
Interest expense.......................................... (25.5) (15.1) (19.9)
Interest income........................................... 0.9 3.6 1.8
-------- -------- --------
Income (loss) before income taxes......................... (300.2) (177.8) (98.5)
Income taxes (credit) (Note Eight)........................ (0.8) 0.2 (7.7)
-------- -------- --------
Net income (loss)...................................... $ (299.4) $ (178.0) $ (90.8)
======== ======== ========
Per Share
Income (loss) per common share (Note Eighteen)............ $ (4.49) $ (2.73) $ (1.85)
======== ======== ========
Retained Earnings (Deficit)
Balance at beginning of year.............................. $ (362.3) $ (184.3) $ (93.5)
Net income (loss)......................................... (299.4) (178.0) (90.8)
-------- -------- --------
Retained earnings (deficit) at end of year............. $ (661.7) $ (362.3) $ (184.3)
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE> 24
ZENITH ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash (Note One)........................................... $ -- $ --
Receivables, net of allowance for doubtful accounts of $--
and $6.2............................................... 21.7 208.3
Inventories (Note Eleven)................................. 165.5 255.7
Transferor Certificates (Note Twelve)..................... 99.7 --
Other..................................................... 26.3 11.1
------- -------
Total current assets................................... 313.2 475.1
Noncurrent Assets
Property, plant and equipment, net (Note Thirteen)........ 171.1 278.3
Other (Note Six).......................................... 43.4 11.9
------- -------
Total assets...................................... $ 527.7 $ 765.3
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt (Note Fifteen)............................ $ 72.0 $ 47.0
Current portion of long-term debt (Note Sixteen).......... 15.3 17.8
Accounts payable.......................................... 91.3 109.6
Accounts payable to related party (Note Six).............. 145.9 124.5
Compensation and retirement benefits (Note Nineteen)...... 41.2 43.2
Product warranties........................................ 18.3 32.1
Co-op advertising and merchandising programs.............. 30.6 20.5
Income taxes payable...................................... 0.7 1.3
Other accrued expenses.................................... 51.6 54.6
------- -------
Total current liabilities.............................. 466.9 450.6
Noncurrent Liabilities
Long-term liabilities (Note Six).......................... 17.0 --
Long-term debt (Note Sixteen)............................. 132.8 152.7
Stockholders' Equity
Preferred stock, $1 par value; 8,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $1 par value; 150,000,000 shares authorized;
67,130,628 and 66,564,119 shares issued................ 67.1 66.6
Additional paid-in capital................................ 507.3 459.4
Retained earnings (deficit)............................... (661.7) (362.3)
Cost of 105,181 common shares in treasury................. (1.7) (1.7)
------- -------
Total stockholders' equity (Note Seventeen)............ (89.0) 162.0
------- -------
Total liabilities and stockholders' equity........ $ 527.7 $ 765.3
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
<PAGE> 25
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)......................................... $(299.4) $(178.0) $(90.8)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation......................................... 38.0 35.0 32.1
Charge for asset impairment.......................... 63.7 -- --
Employee retirement plan contribution in stock....... 4.9 5.3 --
(Gain) loss on asset sales, net...................... 4.6 (.3) 1.7
Charge for donated services.......................... 2.2 -- --
Other................................................ .5 1.6 .5
Changes in assets and liabilities:
Current accounts................................... 149.4 116.4 19.9
Other assets....................................... 3.6 (3.9) 3.4
Other liabilities.................................. 7.6 -- --
------- ------- ------
Net cash used by operating activities..................... (24.9) (23.9) (33.2)
------- ------- ------
Cash Flows from Investing Activities
Capital additions......................................... (82.5) (129.0) (51.9)
Proceeds from asset sales................................. 187.7 4.3 2.9
Distribution of Investor Certificates..................... (84.0) -- --
------- ------- ------
Net cash provided (used) by investing activities.......... 21.2 (124.7) (49.0)
------- ------- ------
Cash Flows from Financing Activities
Short-term borrowings, net................................ 25.0 47.0 --
Proceeds from issuance of long-term debt.................. 45.0 -- 40.0
Proceeds from issuance of common stock, net............... 1.1 15.7 170.7
Principal payments on long-term debt...................... (67.4) (7.3) (44.2)
------- ------- ------
Net cash provided by financing activities................. 3.7 55.4 166.5
------- ------- ------
Cash
Increase (decrease) in cash............................... -- (93.2) 84.3
Cash at beginning of year................................. -- 93.2 8.9
------- ------- ------
Cash at end of year....................................... $ -- $ -- $ 93.2
======= ======= ======
Changes in Current Assets and Liabilities
Increase (decrease) in cash attributable to changes in:
Receivables, net..................................... 186.6 $ (7.5) $ 10.2
Transferor Certificates.............................. (110.7) -- --
Income taxes, net.................................... (0.6) .1 (6.0)
Inventories.......................................... 90.2 (53.1) 51.4
Other assets......................................... (9.7) (3.3) 2.2
Accounts payable and accrued expenses................ (6.4) 180.2 (37.9)
------- ------- ------
Net change in current accounts..................... $ 149.4 $ 116.4 $ 19.9
======= ======= ======
Supplemental Disclosure
Supplemental disclosure of cash flow information --
Cash paid (refunded) during the period for:
Interest................................................ $ 24.8 $ 14.1 $ 20.6
Income taxes............................................ (9.3) .9 (.1)
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 -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE -- SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation: The consolidated financial statements include
the accounts of Zenith Electronics Corporation and all domestic and foreign
subsidiaries (the company). All significant intercompany balances and
transactions have been eliminated.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Statements of consolidated cash flows: The company considers time deposits,
certificates of deposit and all highly liquid investments purchased with an
original maturity of three months or less to be cash.
Inventories: Inventories are stated at the lower of cost or market. Costs
are determined for all inventories using the first-in, first-out (FIFO) method.
Properties and depreciation: Property, plant and equipment is stated at
cost. Additions of machinery and equipment with lives of eight years or more are
depreciated by the straight-line method over their useful lives, which range
between 8 to 12 years. Accelerated methods are used for depreciation of all
other machinery and equipment items, including high technology equipment that
may be subject to rapid economic obsolescence. Useful lives for these items
range from 4 to 5 years. Additions of buildings are depreciated by the
straight-line method over their useful lives, which range from 10 to 33 years.
Property held for disposal is reported at the lower of carrying amount or
fair value, less cost to sell, and is included in Other noncurrent assets. This
property includes certain facilities and land no longer used in the company's
operations.
Rental expenses under operating leases were $20.7 million, $12.8 million,
and $15.3 million in 1997, 1996 and 1995, respectively. The 1997 increase in
rental expense was due to the sale-leaseback transaction that was entered into
in April 1997. See Note Fourteen for additional information on the
sale-leaseback transaction.
The company capitalizes interest on major capital projects. The company
capitalized $4.1 million and $2.3 million of interest in 1997 and 1996,
respectively. The amount was not material in 1995.
Engineering, research, product warranty and other costs: Engineering and
research costs are expensed as incurred. Estimated costs for product warranties
are provided at the time of sale based on experience factors. The costs of co-op
advertising and merchandising programs are also provided at the time of sale.
Foreign currency: The company uses the U.S. dollar as the functional
currency for all foreign subsidiaries. Foreign exchange gains and losses are
included in Other operating expense (income) and were not material in 1997, 1996
and 1995.
Stock options: During 1996, the company adopted Statement of Financial
Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation".
The accounting standard requires the company to value all stock-based
compensation based on the estimated fair value at the grant date and spread the
deemed cost over the vesting period. The standard permits a choice of whether to
charge operations or disclose the calculated cost, as pro forma information. The
company has chosen to disclose the calculated cost, as pro forma information
(see Note Seventeen).
Impairment of Long-lived Assets: The company periodically assesses whether
events or circumstances have occurred that may indicate the carrying value of
its long-lived assets may not be recoverable. When such events or circumstances
indicate the carrying value of an asset may be impaired, the company uses an
estimate of the future undiscounted cash flows to be derived from the remaining
useful life of the asset to assess whether or not the asset is recoverable. If
the future undiscounted cash flows to be derived over the life of the asset do
not exceed the asset's net book value, the company recognizes an impairment loss
for the amount by
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which the net book value of the asset exceeds its estimated fair market value.
See Note Three for additional information.
NOTE TWO -- FINANCIAL RESULTS AND LIQUIDITY:
The company has incurred net losses of $299.4 million, $178.0 million, and
$90.8 million in 1997, 1996 and 1995, respectively. For many years the company's
major competitors, many with greater resources, have aggressively lowered their
selling prices in an attempt to increase market share. Although the company has
benefited from cost reduction programs, these lower color television prices
together with inflationary cost increases have more than offset such cost
reduction benefits.
Since joining the company in January 1998, the new Chief Executive Officer,
along with the rest of the company's management team has been developing a broad
operational and financial restructuring plan. A broad outline of that plan has
been presented to the company's Board of Directors in March 1998. The plan,
which is designed to leverage the company's brand, distribution and technology
strengths, includes reducing costs, outsourcing of certain components and
products, disposition of certain assets and capitalizing on the company's
patented digital television technologies. Restructuring costs must be incurred
to implement the plan.
Despite its negative cash flow, the company has been able to secure
financing to support its operations to date, based on credit support from LGE.
Between November 1997 and February 1998, the company (with the guarantee of LGE)
entered into a series of new lending agreements with commercial lenders for
unsecured lines of credit totaling more than $100 million, all of which has been
drawn as of March 31, 1998.
Going forward, significant amounts of additional cash will be needed to pay
the restructuring costs to implement the proposed business plan and to fund
losses until the company has returned to profitability. Based on management's
proposed plan, the company estimates that at least $225 million would be
required to fund the company's restructuring costs and operations through the
end of 1998 and that additional amounts could be required thereafter.
While there is no assurance that funding will be available to execute the
plan, the company is continuing to seek financing to support its turnaround
efforts and is exploring a number of alternatives in this regard. LGE has agreed
to provide up to $45 million in additional funding for one year from the date of
the first borrowing, subject to LGE's right to demand repayment at anytime after
June 30, 1998, and is secured by certain assets of the company. The company
believes that this additional short-term financing, along with its current
credit facilities, will be sufficient to support the company's liquidity
requirements through June 30, 1998, depending on operating results and the level
of continued trade support. In addition, the company is engaged in ongoing
discussions with LGE concerning the company's business plan, and LGE is
considering whether to provide additional long-term financial support. However,
LGE has no obligation to do so. Any such support by LGE would be subject to a
number of conditions, including the operating results of the company,
third-party consents, Republic of Korea regulatory approvals and other
conditions. No decision has been made at this time by LGE or the company
regarding additional financial support, and there can be no assurance that any
additional financial support will be forthcoming from LGE.
In the absence of long-term financial support from LGE, there can be no
assurance that additional financing can be obtained from conventional sources.
Management is exploring alternatives that include seeking strategic investors,
lenders and/or technology partners, selling substantial company assets or
pursuing other transactions that could result in diluting LGE to a less than
majority position. There can be no assurance that management's efforts in this
regard will be successful.
To implement the proposed business plan and to fund associated
restructuring costs and operating losses, the company will be required to
restructure certain of its outstanding debt and other financing arrangements
(See Notes Six, Fourteen, Fifteen and Sixteen for a description of certain debt
and financing arrangements.) A number of alternatives, including out-of-court
and in-court financial restructurings, are being considered.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that, under any restructuring scenario, the company's common
stock would likely be subject to massive dilution as a result of the conversion
of debt to equity or otherwise. There can be no assurances as to what value, if
any, would be ascribed to the common stock in a restructuring. In addition, the
company's subordinated debentures could suffer substantial impairment in a
restructuring. Due to a number of uncertainties, many of which are outside the
control of the company, there can be no assurance that the company will be able
to consummate any operational or financial restructuring.
The company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1997
financial statements. The paragraph states that the company's recurring losses
and negative working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.
Existing credit facilities are not expected to be sufficient to cover
liquidity requirements after June 30, 1998, and the company is currently facing
the prospect of not having adequate funds to operate its business. There can be
no assurance that additional credit facilities can be arranged or that any
long-term restructuring alternative can be successfully initiated or implemented
by June 30, 1998, in which case the company may be compelled to pursue a
bankruptcy filing in the absence of a proposed or pre-approved financial
restructuring. The company will be required to obtain waivers under its
financing arrangements for periods subsequent to June 30, 1998 and the lenders
thereunder are under no obligation to provide such waivers.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, lenders, stockholders and employees will continue to be key to the
company's future success.
NOTE THREE -- IMPAIRMENT OF LONG-LIVED ASSETS:
During the fourth quarter of 1997, an impairment was recognized for the
Consumer Electronics business since the future undiscounted cash flows of assets
were estimated to be insufficient to recover their related carrying values. As
such, the company recognized an expense of $53.7 million and established a
valuation reserve for the write-down of the excess carrying value over fair
market value. The fair market value used in determining the impairment loss was
based upon management and third party valuations, including estimates of
potential environmental liabilities. This FAS 121 charge is included in Other
operating expense (income).
During the third quarter of 1997, the company recorded a charge of $10.0
million related to the impairment of certain long-lived assets to be disposed
of. 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, Illinois and (iii) a building in Canada that was sold in December
1997. The amount of the charge is included in Other operating expense (income).
The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the company's estimates of the
recoverability of long-lived assets and the fair value will change. See Note Two
for additional information.
NOTE FOUR -- 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
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
litigation against this customer in the United States. In late 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. As a result of the above
problems, the company recorded a $21.3 million bad debt charge during 1997
related to this customer, which reflects the company's estimated loss as of
December 31, 1997. The bad debt charge affected the transferor certificate
valuation allowance.
NOTE FIVE -- ACCOUNTING CHANGES:
During 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 will be
accounted for on a prospective basis. The change decreased tooling expense by
$8.9 million, and decreased the loss per share by $.13 in 1997.
Effective January 1, 1996, the company changed its inventory costing method
for its picture tube inventories from LIFO to FIFO. There has been a strategic
marketing shift in the company toward selling more larger-screen television sets
and less smaller-screen sets. The picture tubes for the smaller-screen
television sets are manufactured by the company and have been costed using LIFO.
It is expected that the LIFO picture tube inventory pool will decrease and this
decrease would create a LIFO liquidation resulting in a poor matching of current
costs with current revenues. As a result, the company believes that the FIFO
method is preferable as it will provide a more appropriate and consistent
matching of costs against revenues. This change in accounting had no material
impact on quarterly results and as a result, quarterly information is not
restated. The effect of this change in accounting principle was to reduce the
net loss reported for 1996 by $2.7 million, or $.04 per share, The change has
been applied to prior years by retroactively restating the financial statements.
The effect of this change for 1995 was to reduce the net loss reported by $1.6
million, or $.03 per share.
NOTE SIX -- RELATED PARTY:
In November 1995, a change in control of the company occurred, in which LGE
purchased shares of the company pursuant to a combined tender offer and purchase
of newly issued shares of common stock from the company. As of December 31,
1997, LGE owned 36,569,000 shares of common stock of the company which
represents 55 percent of the outstanding common stock. Because LGE owns a
majority of the issued and outstanding common stock, it effectively controls the
outcome of any matter requiring action by a majority of the company's
stockholders, including the election of a majority of the company's directors
and any future change in control of the company.
LGE is a leading international brand-name manufacturer of five main groups
of products: televisions; audio and video equipment; home appliances; computers
and office automation equipment; and other products, including video displays,
telecommunication products and components, and magnetic media. The following
represent the most significant transactions between the company and LGE during
1997 and 1996.
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 $93.3 million and $128.8 million of these items in 1997
and 1996, respectively. Sales of products purchased from LGE and its affiliates
contributed $112.3 million and $141.4 million to sales in 1997 and 1996,
respectively, and $19.0 million and $12.6 million to gross margin in 1997 and
1996, respectively.
Equipment purchases: The company purchased approximately $40 million of
production machinery and equipment from LGE during 1997 and 1996. The machinery
and equipment related primarily to new production lines in the company's picture
tube plant for the manufacture of computer display tubes.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in 1997 and 1996
by the company to LGE and its affiliates were $55.1 million and $29.4 million,
respectively.
In December 1996, the company closed its wholly-owned Canadian distributor
and sold the remaining inventory to LGE at book value. The company entered into
a Distributor Agreement with an LGE subsidiary whereby LGE will be the Canadian
distributor for the company. During 1997, the company entered into a similar
agreement with an LGE subsidiary in Mexico to sell the company's product in
Mexico.
Technical agreements: The company and LGE are currently operating under
several technology agreements and licenses, including: LGE engineering support
for HDTV development and related technical and intellectual property; technology
and patent licenses to LGE to develop flat tension mask products; and agreements
granting LGE the right to use the company's patents on TV tuners. LGE's payment
in 1997 and 1996 to the company under these agreements and licenses was $.6
million and $1.0 million, respectively.
Service Assistance: In 1997, employees of LGE provided certain services to
the company for which LGE was not compensated. These donated services were
valued at $2.2 million and the accounting treatment was to recognize the value
of these expenses in the company's income statement and in additional paid-in
capital. In 1996, employees of LGE provided certain services to the company for
which LGE was not compensated. The value of these services was not material in
1996.
In 1997, employees of LGE provided certain services to the company that
were covered under service agreements. The company's payments and payable to LGE
for such services totaled $4.8 million.
Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45 million. The term
of the facility is one year from the date of the first borrowing, subject to
LGE's right to demand repayment at anytime after June 30, 1998. Repayment is due
in full at the end of the term. The facility is secured by liens on certain of
the company's assets and is subject to certain terms and conditions.
In September 1997, the company and LGE entered into an High Definition TV
Receiver Project Agreement. As called for in the agreement, the company received
$4.5 million from LGE toward funding for the project. In return, LGE will
receive a percentage of applicable royalties the company anticipates receiving
until such time as LGE has received $4.5 million. The $4.5 million is included
in Long-term liabilities.
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 were made to LGE, the liability balance was
reduced. As of December 31, 1997, $.6 million of the liability to LGE remained
and is included in Other accrued expenses.
In April 1997, the company and LGE entered into an arrangement whereby the
company's accounts payables arising in the ordinary course of business to LGE
would be extended for certain periods of time. Prior to April 1997, the
company's accounts payables arising in the ordinary course of business to LGE
were extended for certain periods of time, but no formal arrangement was in
place. The amount of extended payables was $144.3 million and $106.8 million as
of December 31, 1997 and 1996, respectively. The company is charged interest on
the extended period at negotiated rates.
In return for LGE providing support for certain financing activities of the
company entered into in April 1997, the company 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 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. The related deferred
financing charge, net of amortization, is recorded as follows: $30.1 million in
Noncurrent other assets and $5.1 million in Current other assets.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and 1996, accounts payable included $145.9 million
and $124.5 million, respectively, to LGE and its affiliates. The amount of
receivables from LGE and its affiliates was not material as of December 31, 1997
and 1996.
The company currently leases space from an LGE subsidiary in (i)
Huntsville, Alabama, for its Parts & Service group, (ii) Ontario, California,
for a warehouse and (iii) San Jose, California, for its Network Systems group.
NOTE SEVEN -- RESTRUCTURING AND OTHER CHARGES:
During the fourth quarter of 1996, the company recorded $9.3 million of
restructuring charges. The restructuring was composed of $5.2 million of charges
related to severance costs associated with employment reductions (mostly in the
company's U.S. salaried workforce) and $4.1 million of charges associated with
the shutdown of the company's wholly-owned Canadian distributor. Substantially
all of the provisions were related to cash expenditures made during 1997.
During the fourth quarter of 1995, the company recorded charges totaling
$3.6 million that were incurred as a consequence of the LGE purchase of common
stock as described in Note Six. During the second quarter of 1995, the company
recorded a charge of $18.0 million primarily to restructure its core Consumer
Electronics and Network Systems business. The major elements of the
restructuring related to severance expenses associated with employment
reductions, primarily in the company's U.S. salaried workforce and costs
associated with realigned distribution activities as the company changed to
direct-to-retail distribution on a nationwide basis. The remaining charges
related to other non-recurring items, including certain environmental, legal and
other regulatory matters, along with trade receivable write-offs (primarily for
accounts in Mexico as a result of the December 1994 peso devaluation).
NOTE EIGHT -- INCOME TAXES:
The components of income taxes (credit) were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Currently payable (refundable):
Federal................................................ $ .1 $-- $(7.8)
State.................................................. (.9) .2 .1
---- --- -----
Total income taxes (credit)............................ $(.8) $.2 $(7.7)
==== === =====
</TABLE>
The $7.7 million income tax credit in 1995 included a $7.5 million tax
refund (including interest) due the company as a result of certain foreign tax
credit issues in audits of prior years. The company received this tax refund
during 1997.
The statutory federal income tax rate and the effective tax rate are
compared below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................... (35.0)% (35.0)% (35.0)%
State income taxes, net............................... -- -- .1
Foreign tax effects................................... 2.2 1.0 1.5
Tax benefits not recognized subject to future
realization......................................... 32.8 34.0 33.5
Net operating loss carryback/refund................... -- -- (8.4)
----- ----- -----
Effective tax rate.................................... (--)% (--)% (8.3)%
===== ===== =====
</TABLE>
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Loss carryforwards......................................... $ 353.5 $ 228.2
Inventory valuation........................................ 22.6 23.8
Transferor certificate valuation reserve................... 14.6 --
PP&E valuation reserve..................................... 22.9 --
Product warranty........................................... 9.4 11.5
Co-op advertising.......................................... 3.7 6.3
Merchandising.............................................. 2.6 3.8
Other...................................................... 35.6 38.0
------- -------
Deferred tax assets................................... 464.9 311.6
------- -------
Depreciation............................................... 3.4 (6.6)
Other...................................................... (1.3) 5.5
------- -------
Deferred tax liabilities.............................. 2.1 (1.1)
------- -------
Valuation allowance........................................ (467.0) (310.5)
------- -------
Net deferred tax assets............................... $ -- $ --
======= =======
</TABLE>
The valuation allowance was established since the realization of these
assets cannot be reasonably assured, given the company's recurring losses.
As of December 31, 1997, the company had $835.6 million of total net
operating loss carryforwards (NOLs) available for federal income tax purposes
(which expire from 2004 through 2011) and unused tax credits of $3.9 million
(which expire from 2000 through 2002).
The stock purchase by LGE described in Note Six created an "ownership
change" of the company for federal income tax purposes, with the effect that the
company's annual usage of its NOLs will be limited to approximately $27 million,
which represents the product of (i) a tax-exempt rate of return announced
monthly by the Internal Revenue Service (5.75 percent for ownership changes
occurring in the month of November 1995) and (ii) the value of the company
immediately before the ownership change, as determined under applicable tax
regulations. This limitation applies to approximately $481 million of the
company's available NOL carryovers, which represents the losses generated prior
to the "ownership change". The company's remaining loss carryovers are not
subject to this limitation. In addition, this limitation, appropriately
modified, will also apply to the company's utilization of most of its tax credit
carryovers. The effect of this annual limit will depend upon the generation of
sufficient taxable income in the future and certain other factors.
NOTE NINE -- GEOGRAPHIC SEGMENT DATA:
The company's operations involve a dominant industry segment -- the design,
development, manufacture and distribution of video products, including color TV
sets, VCRs and other consumer electronics products, color picture tubes, cable
TV products and parts and accessories for these products.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Domestic companies........................... $1,144.9 $1,221.4 $1,212.7
Foreign companies............................ 28.2 66.5 61.2
-------- -------- --------
Total net sales.............................. $1,173.1 $1,287.9 $1,273.9
======== ======== ========
Income (loss) before income taxes:
Domestic companies........................... $ (195.3) $ (171.5) $ (94.5)
Foreign companies............................ (4.9) (6.3) (4.0)
-------- -------- --------
Total income (loss) before income taxes...... $ (300.2) $ (177.8) $ (98.5)
======== ======== ========
Identifiable assets:
Domestic companies........................... $ 405.1 $ 615.5 $ 548.5
Foreign companies............................ 122.6 149.8 152.2
-------- -------- --------
Total identifiable assets.................... $ 527.7 $ 765.3 $ 700.7
======== ======== ========
</TABLE>
Foreign operations consist of manufacturing and sales subsidiaries in
Mexico, a distribution subsidiary in Canada (which was closed in December 1996)
and a purchasing office in Taiwan. Sales to affiliates are principally accounted
for at amounts based on local costs of production plus a reasonable return.
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million
(11 percent) in 1996. No other customer accounted for 10 percent or more of net
sales.
NOTE TEN -- OTHER OPERATING EXPENSE (INCOME):
Major manufacturers of TVs and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses expire in
2003). Royalty income related to the tuning system patents was $26.0 million,
$26.6 million, and $25.9 million in 1997, 1996 and 1995, respectively, and is
included in Other operating expense (income). See Note Three for further
discussion on Other operating expense (income).
NOTE ELEVEN -- INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Raw materials and work-in-process......................... $ 96.9 $152.1
Finished goods............................................ 68.6 103.6
------ ------
Total inventories......................................... $165.5 $255.7
====== ======
</TABLE>
NOTE TWELVE -- TRANSFEROR CERTIFICATES:
The Financial Accounting Standards Board issued FAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
in 1996. The 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
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 saleable receivables that have been sold by the company to a
special-purpose trust, but can not or 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. Outside investors hold investor
certificates which evidence their ownership of a portion of the assets contained
in the special multi-purpose trust. 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 FAS 125.
NOTE THIRTEEN -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Land....................................................... $ 2.7 $ 9.9
Buildings.................................................. 147.9 135.5
Machinery and equipment.................................... 640.9 696.6
------- -------
791.5 842.0
Less accumulated depreciation.............................. (562.0) (563.7)
Less valuation reserve..................................... (58.4) --
------- -------
Total property, plant and equipment, net................... $ 171.1 $ 278.3
======= =======
</TABLE>
At December 31, 1997, the company reclassed $8.7 million of property
pending disposal out of Property, Plant and Equipment into Other Noncurrent
Assets. Included in this amount is $6.0 million of land, which is the primary
reason for the 1997 decrease in land, when compared to 1996.
NOTE FOURTEEN -- SALE LEASEBACK TRANSACTION:
In April 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 result of the sale was a $10.2 million gain for
the company, which was deferred and is being amortized over the 12 1/2 year
lease term
The related lease is being accounted for as an operating lease. The rental
expense under this lease in 1997 was $8.1 million. The minimum lease payments
required by the lease over the next five years are as follows (in million):
<TABLE>
<S> <C>
Year ending December 31:
1998................................................. $ 12.3
1999................................................. 10.6
2000................................................. 9.6
2001................................................. 9.7
2002................................................. 9.7
Thereafter........................................... 78.6
------
Total minimum lease payments......................... $130.5
======
</TABLE>
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's payment obligations, along with certain other items under the
lease agreement are fully guaranteed by LGE (see discussion in Note Six). The
sale-leaseback agreement contains financial penalties which would be triggered
if the company was to terminate the lease early.
NOTE FIFTEEN -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS:
In April 1997, the company obtained a $65 million revolving credit line
with Citicorp. This facility replaces the company's previous credit agreement
with General Electric Capital Corporation. 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, domestic fixed assets, stock of the company's
subsidiaries and tuner patent royalties, along with the related patents,
licenses and other general intangibles. Interest on borrowings is based on
market rates.
The credit line 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. During 1997, the company
amended the 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 an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. In addition, there are
restrictions regarding investments, acquisitions, guaranties, transactions with
affiliates, sales of assets, mergers and additional borrowings, along with
limitations on liens. The credit agreement prohibits dividend payments on the
company's common stock, restricts dividend payments on any of its preferred.
Between November 1997 and February 1998 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 $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), the First Chicago NBD ($30 million), Societe Generale
($20 million) and Credit Agricole ($30 million). As of December 31, 1997, a
total of $72.0 million was outstanding under these credit lines.
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.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. See Note Six for further
discussion.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Maximum month-end borrowings........................... $72.0 $72.6 $69.5
Average daily borrowings............................... 26.4 18.3 37.2
Weighted average interest rate......................... 9.1% 8.8% 10.5%
</TABLE>
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN -- LONG-TERM DEBT:
The components of long-term debt were:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
6 1/4 percent convertible subordinated debentures due
2011...................................................... $109.3 $115.0
8.5 percent senior subordinated convertible debentures due
2000...................................................... -- 23.8
8.5 percent senior subordinated convertible debentures due
2001...................................................... .5 .5
Term Loan................................................... 38.3 31.5
------ ------
148.1 170.5
Less current portion........................................ 15.3 17.8
------ ------
Total long-term debt................................... $132.8 $152.7
====== ======
</TABLE>
The 6 1/4 percent convertible subordinated debentures are unsecured general
obligations, subordinate in right of payment to certain other debt obligations,
and are convertible into common stock at $31.25 per share. Terms of the
debenture agreement include annual sinking-fund payments of $5.8 million
beginning in April 1997 and provisions which could result in the acceleration of
their payment in the event the company is in default on provisions of other debt
agreements. The debentures are redeemable at the option of the company, in whole
or in part, at specified redemption prices at par or above.
In December 1997 the company redeemed the 8.5 percent Senior Subordinated
Convertible Debentures due November 2000. There was $23.8 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The loss on extinguishment of this debt was not
material.
The 8.5 percent debentures due 2001 are unsecured general obligations,
subordinate in right of payment to certain other debt obligations, and are
convertible into shares of common stock at an initial conversion price of $10.00
per share. Subsequent to December 31, 1997, the company redeemed the 8.5 percent
Senior Subordinated Convertible Debentures due January 2001. There was $.5
million principal amount of such debentures outstanding and the redemption price
of such debentures was 104 percent of such principal amount plus accrued
interest through the redemption date. The loss on extinguishment of this debt
was not material.
In April 1997 the company entered into a $45 million term loan with
Citicorp. This facility replaces the company's previous credit term loan with
General Electric Capital Corporation. The term loan requires scheduled quarterly
principal payments of $2.3 million with a balloon payment of $20.3 million at
maturity. The facility is secured by the company's inventory, domestic fixed
assets, stock of the company's subsidiaries and tuner patent royalties, along
with the related patents, licenses and other general intangibles. Interest on
borrowings is based on market rates.
The term loan 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. During 1997, the company
amended the 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
an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. The long-term portion of
the term loan has been classified in the accompanying balance sheet based on the
company's intention to seek additional waivers or amendments for any future
noncompliance prior to the expiration of the March 1998 waiver in June 1998 that
extent to a period subsequent to January 1, 1999. There are no assurances that
such waivers or amendments will be granted.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the term loan contains restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets, mergers
and additional borrowings, along with limitations on liens. The term loan
prohibits dividend payments on the company's common stock and restricts dividend
payments on any of its preferred stock.
The fair value of long-term debt is $90.8 million as of December 31, 1997,
as compared to the carrying amount of $132.8 million. The fair value of the
6 1/4 percent convertible subordinated debentures is based on the quoted market
price from the New York Stock Exchange. The fair value of the 8.5 percent
convertible senior subordinated debentures is based on the quoted price obtained
from third party financial institutions. The fair value of the term loan
approximates the carrying value as interest on the loan is based on market
rates. As of December 31, 1997, the company's credit agreement and term loan
would not allow the company to extinguish the long-term debt through purchase
and thereby realize the gain.
NOTE SEVENTEEN -- STOCKHOLDERS' EQUITY:
Changes in stockholders' equity accounts are shown below:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL SHARES
------ ---------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, December 31, 1994.................... $45.7 $285.4 $ (.5)
Sales of common stock....................... 17.8 152.6 --
Stock issued for stock options.............. -- .3 --
Other....................................... -- 1.7 (1.2)
----- ------ -----
Balance, December 31, 1995.................... 63.5 440.0 (1.7)
Stock issued for benefit plans................ .8 4.5 --
Stock issued for stock options................ 1.9 13.9 --
Other....................................... .4 1.0 --
----- ------ -----
Balance, December 31, 1996.................... 66.6 459.4 (1.7)
Stock issued for benefit plans................ .5 4.4 --
Stock issued for stock options................ .1 1.0 --
Paid in capital -- LGE guarantee.............. -- 39.7 --
Paid in capital -- LGE services............... -- 2.2 --
Other......................................... (.1) .6 --
----- ------ -----
Balance, December 31, 1997.................... $67.1 $507.3 $(1.7)
===== ====== =====
</TABLE>
During 1997, the company entered into certain transactions with LGE that
effected paid in capital. These transaction dealt with the granting of stock
options and donated services. See Note Six for further discussion on these
items.
During 1996, the company sold 1.9 million shares of authorized but unissued
common stock to employees of the company via the exercise of previously issued
stock options. During 1995, the company sold 16.5 million shares of authorized
but unissued common stock to LGE for a price of $10 per share (see Note Six for
further discussion). Also during 1995 the company sold 1.3 million shares of
authorized but unissued shares of common stock to investors under registration
statements that had been filed with the Securities and Exchange Commission.
The company has authorized 8 million shares of preferred stock of which
none are issued or outstanding as of December 31, 1997. The Board of Directors
of the company is authorized to issue the preferred stock from time to time in
one or more series and to determine all relevant terms of each such series,
including but not limited to the following (i) whether and upon what terms, the
shares of such series would be redeemable; (ii) whether a sinking fund would be
provided for the redemption of the shares of such series and, if so, the
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms thereof; and (iii) the preference, if any, to which shares of such series
would be entitled in the event of voluntary or involuntary liquidation of the
company.
NOTE EIGHTEEN -- STOCK OPTIONS AND AWARDS:
Stock Options: The 1987 Stock Incentive Plan, which expired in April 1997,
and the Long Term Equity Compensation Plan, approved by the company's
shareholders in May 1997, authorize the granting of incentive and non-qualified
stock options and restricted stock awards to key management personnel. The
purchase price of shares under option is the market price of the shares on the
date of grant. Options expire 10 years from the date granted. The company
accounts for employee stock options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value of options at their grant dates consistent with the
method of FAS 123, the company's net income (loss) and earnings (loss) per share
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss):
As reported.................................. $(299.4) $(178.0) $(90.8)
Pro forma.................................... (301.1) (179.1) (92.5)
Earnings (loss) per share:
As reported.................................. $ (4.49) $ (2.73) $(1.85)
Pro forma.................................... (4.52) (2.75) (1.88)
</TABLE>
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of the pro forma cost to be expected in future years.
A summary of the status of the company's outstanding stock options at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
NON-EMPLOYEES EMPLOYEES
------------------ ------------------------------------------------------------
1997 1997 1996 1995
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at January
1............................ -- $ -- 968 $ 9.92 2,588 $ 8.25 2,027 $8.66
Options granted................ 3,965 0.01 952 11.10 456 12.54 738 7.16
Options exercised.............. -- -- (154) 7.80 (1,889) 8.33 (38) 7.69
Options canceled............... -- -- (260) 11.20 (187) 9.30 (139) 8.66
----- ----- ----- ------ ------ ------ ----- -----
Options outstanding at December
31........................... 3,965 $0.01 1,506 $10.66 968 $ 9.91 2,588 $8.25
===== ===== ===== ====== ====== ====== ===== =====
Options exercisable at December
31........................... 793 $0.01 486 $ 9.05 427 $ 8.27 2,081 $8.34
Shares available for grant at
December 31.................. N/A 1,340 1,329 1,269
</TABLE>
The non-employee stock options were granted to LGE during 1997. See Note
Six for further discussion.
Of the employee options outstanding at December 31, 1997, 516,300 had
exercise prices between $6.25 and $10.69, with a weighted average exercise price
of $8.30 and a weighted average remaining contractual life of 6.52 years. The
remaining 989,500 had exercise prices between $11.00 and $14.75, with a weighted
average exercise price of $11.90 and a weighted average remaining contractual
life of 9.05 years.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model, using the following assumptions;
weighted average risk-free interest rates of 5.76 percent, 6.25 percent and 6.83
percent for grants in 1997,1996, and 1995, respectively; zero expected dividend
yields, and expected volatility of 43.69 percent for 1997 and 62.35 percent for
years 1996 and 1995. A 3.5 year estimated life was used for all employee grants.
The weighted average fair value of employee options granted during 1997, 1996
and 1995 was $11.16, $13.93 and $7.16, respectively.
Restricted stock awards: The company had 234,500 and 270,090 restricted
stock awards issued and outstanding as of December 31, 1997 and 1996,
respectively. The market value of the restricted shares is deferred in the
additional paid-in capital account and is generally amortized over the years the
restrictions lapse. The 1996 increase in restricted stock was caused by
issuances to new members of the company's management. Total compensation expense
in 1997 and 1996, related to these awards, was not material.
NOTE NINETEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS:
Virtually all employees in the United States are eligible to participate in
noncontributory defined contribution retirement plans after completing one full
year of service. The plans provide for an annual minimum contribution of between
3 and 6 percent of employees' eligible compensation, based partially on
employees' contribution to the plans. Contributions above the minimum could be
required based upon profits in excess of a specified return on net worth.
Retirement plan expenses were $7.8 million, $8.6 million, $8.8 million and in
1997, 1996 and 1995, respectively. The company's 1997 contribution to the
retirement plans will be made during 1998. The company's 1996 and 1995
contributions to the retirement plans were partially funded through the issuance
of approximately 466,535 and 782,000 shares, respectively, of the company's
common stock.
Employees in Mexico are covered by government-mandated plans, the costs of
which are accrued by the company.
Benefits payable to employees when they leave the company other than by
reason of retirement did not have a material effect on the financial statements
of the company.
NOTE TWENTY -- EARNINGS PER SHARE:
In accordance with FAS 128, "Earnings Per Share", the company computed
earnings per share by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the year. Diluted earnings (loss)
per share, assuming conversion of the 6 1/4 percent convertible subordinated
debentures, the 8.5 percent Senior Subordinated Convertible Debentures due 2001
and outstanding stock options are not presented because the effect of the
assumed conversion is antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss).............................. $(299.4) $(178.0) $(90.8)
Weighted average common shares outstanding..... 66.6 65.2 49.2
Earnings per share............................. $ (4.49) $ (2.73) $(1.85)
</TABLE>
NOTE TWENTY ONE -- CONTINGENCIES:
The company is involved in various legal actions, environmental matters,
patent claims, and other proceedings relating to a wide range of matters that
are incidental to the conduct of its business. In addition, the company remains
liable for certain retained obligations of a discontinued business, principally
income and other taxes prior to the closing of the sale. Furthermore, the
company has been named as a defendant in certain cases which relate to keyboards
allegedly manufactured or designed by the company for the discontinued business.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994, the company notified its 15 independent distributors of its intent
to change to direct-to-retail distribution on a nationwide basis during 1995. A
suit arising in connection with this change in distribution was filed in April
1995 by an independent distributor. The lawsuit sought approximately $13 million
in damages under the Wisconsin Fair Dealership Law. In January 1996 the court
denied the company's motion for summary judgment and granted the plaintiff's
motion for summary judgment, finding the company liable. A jury trial on damages
was held in May 1996, and the jury awarded the plaintiff $2.37 million. The
company has appealed the judgment, contesting both the summary judgment finding
of liability and the damages awarded and is awaiting the appellate court's
decision.
The company believes that, after reviewing such matters with the company's
counsel, any liability that may ultimately be incurred with respect to these
matters is not expected to have a material effect on either the company's
consolidated financial position or results of operations.
40
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Zenith Electronics Corporation:
We have audited the accompanying consolidated balance sheets of Zenith
Electronics Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related statements of consolidated operations and
retained earnings and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zenith
Electronics Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As discussed in Note
Two to the financial statements, the Company has suffered recurring losses from
operations and has negative working capital that raises substantial doubt about
the ability to continue as a going concern. Management's plans in regards to
these matters are also described in Note Two. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As explained in Note Five to the financial statements, the Company changed
its methods of accounting for tooling costs in 1997, and picture tube
inventories in 1996.
/s/ ARTHUR ANDERSEN LLP
- ---------------------------------------------
Arthur Andersen LLP
Chicago, Illinois
March 27, 1998
41
<PAGE> 42
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1997 QUARTERS ENDED 1996 QUARTERS ENDED
---------------------------------------------- ----------------------------------------------
DEC. 31,(1) SEPT. 27, JUNE 28, MARCH 29, DEC. 31,(2) SEPT. 28, JUNE 29, MARCH 30,
----------- --------- -------- --------- ----------- --------- -------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 347.7 $304.5 $261.8 $259.1 $427.6 $340.8 $282.1 $237.4
Gross margin.................... (32.0) (3.8) 15.8 12.6 (10.0) 20.4 12.4 8.1
Net income (loss)............... (155.7) (69.2) (49.3) (25.2) (69.3) (40.2) (33.2) (35.3)
Per share of common stock:
Net income (loss)............. $ (2.32) $(1.04) $ (.74) $ (.38) $(1.05) $ (.61) $ (.51) $ (.56)
New York Stock Exchange market price per share:
High.......................... 10 1/4 12 15/16 13 1/8 12 1/2 16 5/8 17 1/2 25 3/4 7 1/2
Low........................... 5 1/8 9 3/4 9 5/8 9 10 1/4 8 1/8 6 1/8 5 7/8
End of quarter................ 5 7/16 9 13/16 11 15/16 10 1/8 10 7/8 15 5/8 12 1/8 6 5/8
</TABLE>
- -------------------------
(1) Includes $53.7 million of charges for asset impairment.
(2) Includes $9.3 million of Restructuring and other charges.
42
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders of Zenith Electronics Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Zenith Electronics Corporation included
in this Form 10-K, and have issued our report thereon dated March 27, 1998. Our
report on the basic consolidated financial statements includes an explanatory
paragraph with respect to the Company's ability to continue as a going-concern
as discussed in Note Two to the financial statements. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The financial statement schedule listed in Item 14 (a) 2 is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
- ---------------------------------------------
Arthur Andersen LLP
Chicago, Illinois
March 27, 1998
43
<PAGE> 44
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------- ---------- ------------------------------- ---------- ----------
ADDITIONS
BALANCE AT ------------------------------- BALANCE AT
RESERVES AND ALLOWANCES BEGINNING CHARGED TO CHARGED TO END OF
DEDUCTED FROM ASSET ACCOUNTS OF PERIOD COSTS & EXPENSES OTHER ACCTS. DEDUCTIONS PERIOD
---------------------------- ---------- ---------------- ------------ ---------- ----------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year Ended December 31, 1997......... $ 6.2 $ -- $ -- $6.2(1) $ --
====== ====== ==== ==== ======
Year Ended December 31, 1996......... $ 3.6 $ 5.2 $ -- $2.6(2) $ 6.2
====== ====== ==== ==== ======
Year Ended December 31, 1995......... $ 3.1 $ .8 $ -- $ .3(2) $ 3.6
====== ====== ==== ==== ======
Valuation allowance for deferred tax
assets:
Year Ended December 31, 1997......... $310.5 $156.5 $ -- $ -- $467.0
====== ====== ==== ==== ======
Year Ended December 31, 1996......... $188.3 $122.2 $ -- $ -- $310.5
====== ====== ==== ==== ======
Year Ended December 31, 1995......... $183.9 $ 4.4 $ -- $ -- $188.3
====== ====== ==== ==== ======
</TABLE>
- -------------------------
(1) Amount sold under accounts receivable securitization agreement.
(2) Uncollectable accounts written off, net of recoveries.
44
<PAGE> 1
EXHIBIT 3(C)
AMENDED AND RESTATED
BY-LAWS
OF
ZENITH ELECTRONICS CORPORATION
EFFECTIVE AS OF APRIL 23, 1997
ARTICLE I
Offices
Section 1. The registered office in the State of Delaware shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
Meetings of Stockholders
Section 1. All meetings of the stockholders for the election of directors
shall be held at such place, either within or without the State of Delaware, as
may be fixed from time to time by the board of directors. Meetings of
stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof
Section 2. An annual meeting of stockholders shall be held for the purpose
of electing directors and transacting such other business as may properly be
brought before the meeting. The date of the annual meeting shall be determined
by the board of directors.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
thereat not less than twenty nor more than sixty days before the date of the
meeting. At an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (a) by or at the
direction of the board of directors or (b) by any stockholder of the
corporation who complies with the notice procedures set forth in this Section
3. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing
to the secretary of the corporation. Except as otherwise provided in
Regulation 14A under the Securities Exchange Act of 1934, as amended, to be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than sixty days nor
more than ninety days prior to the meeting; provided, however, that in the
event that less than seventy-five days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made. A stockholder's
notice to the secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting
1
<PAGE> 2
(a) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (c) the number of shares of common
stock of the corporation which are beneficially owned by the stockholder and
(d) any material interest of the stockholder in such business. Notwithstanding
anything in these by-laws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 3. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 3, and
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city, town or village where the meeting
is to be held and which place shall be specified in the notice of the meeting,
or, if not specified, at the place where said meeting is to be held, and the
list shall be produced and kept at the time and place of the meeting during the
whole time thereof, and subject to the inspection of any stockholder who may be
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the Chairman or president and shall be called
by the secretary at the direction of a majority of the board of directors or at
the request in writing of stockholders owning at least a majority of the entire
capital stock of the corporation issued and outstanding and entitled to vote.
Section 6. Written notice of a special meeting of stockholders, stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called, shall be given to each stockholder entitled to vote
thereat, not less than ten nor more than sixty days before the date fixed for
the meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2
<PAGE> 3
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or
of the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of incorporation
and subject to statutory provisions relating to the fixing of record dates,
each stockholder shall at every meeting of the stockholders be entitled to
one vote in person or by proxy for each share of the capital stock having
voting power held by such stockholder, but no proxy shall be voted on after
three years from its date, unless the proxy provides for a longer period.
Section 11. Any action required to be taken at a meeting of the
stockholders, or any other action which may be taken at a meeting of the
stockholders may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by stockholders having not less than
the minimum number of votes that would be necessary to authorize or to take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
ARTICLE III
Directors
Section 1. The board of directors shall consist of the number of directors
as determined from time to time by resolution of the board. The directors
shall be elected at the annual meeting of the stockholders as provided in
Section 2 of Article II, except as provided in Section 2 of this Article III,
and each director elected shall hold office until his successor is elected and
qualified or until his earlier resignation or removal. Directors need not be
residents of the state of Delaware or stockholders of this corporation.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, and the directors so
chosen shall hold office until their successors are duly elected and shall
qualify, unless sooner displaced.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these by-laws directed or required to
be exercised or done by the stockholders.
Section 4. The board of directors at its first meeting after each annual
meeting of stockholders shall choose a Chairman from among the directors. The
Chairman shall act as Chairman of all meetings of stockholders and of the board
of directors. The Chairman shall from time to time report to the board of
directors all matters within his knowledge which the interest of the
corporation may require be brought to its notice. If the Chairman of the Board
is not elected, or if elected, is not present, the President or, in the absence
of the President, a Vice Chairman (who is also a member of the board and, if
more than one, in the order designated by the board of directors or, in the
absence of such designation, in the order of their election), if any, or if no
such Vice Chairman is present, a director chosen by a majority of the directors
present, shall act as chairman at meetings of stockholders and of the board of
directors.
3
<PAGE> 4
Section 5. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 6. The first meeting of each newly elected board of directors
shall be held immediately following and at the place of the annual meeting of
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event such meeting is not held at such time and
place, the meeting may be held at such other time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
Section 7. Regular meetings of the board of directors shall be held at
such time and at such place as shall from time to time be determined by
resolution of the board. Written notice of each regular meeting of directors
stating the place, date and time, shall be given to each director at least five
(5) days before such meeting.
Section 8. Special meetings of the board and meetings of any committee of
the board may be called by the Chairman on one day notice to each director or
committee member, either by telephone, mail, facsimile or telegram; special
meetings of the board of directors shall be called by the Chairman or secretary
in like manner and on like notice on the written request of two directors.
Section 9. At all meetings of the board a majority shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be
present at any meeting of the board of directors the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 10. Any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing, or writings are filed with the minutes of
proceedings of the board or committee.
Section 11. Members of the board of directors, or any committee designated
by the board of directors, may participate in a meeting of the board of
directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 12. The board of directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of two or more of the directors of the corporation, which, to the extent
provided in the resolution and to the extent permitted by Delaware Law, shall
have and may exercise the powers of the board of directors in the management of
the business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the board of directors.
4
<PAGE> 5
Section 13. Each committee shall report to the board of directors on the
actions taken at its meetings, but need not keep regular minutes thereof unless
required to do so by the board of directors.
Section 14. There shall be an Executive Committee of the board of
directors of the corporation. The board of directors shall, at its first
meeting after the annual meeting of stockholders in each year, elect a Chairman
and other members of the Committee. The directors elected as members of the
Executive Committee shall serve as such for one year and until their respective
successors, willing to serve, shall have been elected. The Executive Committee
shall, when the board is not in session, have and may exercise all of the
authority of the board of directors in the management of the corporation;
provided, however, that the Executive Committee shall not have the authority of
the board of directors in reference to (1) amending the articles of
incorporation, (2) adopting a plan of merger or adopting a plan of
consolidation with another corporation or corporations, (3) recommending to the
stockholders the sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the property and assets of the corporation, (4)
recommending to the stockholders a voluntary dissolution of the corporation or
a revocation thereof, (5) amending, altering or repealing the by-laws of the
corporation, (6) electing or removing officers of the corporation or members of
the Executive Committee, (7) fixing the compensation of any member of the
Executive Committee, (8) declaring dividends, (9) authorizing the issuance of
stock, or (10) amending, altering or repealing any resolution of the board of
directors which by its terms provides that it shall not be amended, altered or
repealed by the Executive Committee; provided further, that in the event of the
death, disability or refusal to act of the chief executive officer or the
Chairman, the Executive Committee shall appoint a chief executive officer or a
Chairman who shall serve until the next meeting of the board of directors.
Vacancies in the regular membership of the Executive Committee shall be filled
by the board of directors.
Section 15. The board of directors shall have the authority to fix the
compensation of directors.
ARTICLE IV
Notices
Section 1. Notices to stockholders shall be in writing and delivered
personally or mailed to the stockholders at their addresses appearing on the
books of the corporation. Notice by mail shall be deemed to be given at the
time when the same shall be mailed.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.
ARTICLE V
Officers
Section 1. The officers of the corporation shall be chosen by the board of
directors and shall be a chief executive officer, a president, a vice
president, a secretary and a treasurer. The board of directors may also choose
additional vice presidents, executive vice presidents, senior vice presidents,
assistant secretaries and assistant treasurers. Two or more offices may be
held by the same person.
5
<PAGE> 6
Section 2. The board of directors at its first meeting after each annual
meeting of stockholders shall choose a chief executive officer, a president and
one or more vice presidents, a secretary and a treasurer, none of whom need be
a member of the Board.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Except as otherwise provided in Section 14
of Article III, any vacancy occurring in any office of the corporation shall be
filled by the board of directors.
Section 5. The chief executive officer of the corporation shall have,
under the direction of the board of directors, general charge of the affairs of
the corporation. He shall see that all orders and resolutions of the board of
directors are carried into effect. He may execute all contracts and agreements
authorized by the board of directors and shall vote all shares of stock in
other corporations standing in the name of the corporation. He may sign bonds,
mortgages, certificates for shares of stock and all other contracts and
documents whether or not under the seal of the corporation except in cases
where the signing and execution thereof shall be expressly delegated by law, by
the board of directors, or by these by-laws, to some other officer or agent of
the corporation. He shall from time to time report to the board of directors
all matters within his knowledge which the interest of the corporation may
require be brought to its notice. He shall have the general powers of
supervision and shall be the final arbiter in all differences between all
officers of the corporation and his decision as to any matter affecting the
corporation shall be final and binding as between officers of the corporation
subject only to the board of directors.
Section 6. The president shall have the direction and active management of
the business of the corporation under the general supervision of the chief
executive officer. He shall have concurrent power with the chief executive
officer to execute all contracts and agreements authorized by the board of
directors and shall have concurrent power with the chief executive officer to
vote all shares of stock in other corporations standing in the name of the
corporation. He may sign bonds, mortgages, certificates for shares of stock
and all other contracts and documents whether or not under the seal of the
corporation except in cases where the signing and execution thereof shall be
expressly delegated by law, by the board of directors, or by these by-laws, to
some other officer or agent of the corporation.
Section 7. The executive vice presidents, senior vice presidents and vice
presidents shall perform such duties and have such powers as may be prescribed
by the board of directors.
Section 8. The secretary shall keep the minutes of all meetings of the
board of directors, the minutes of all meetings of the stockholders, the
minutes of all meetings of the committees, which from time to time may be
appointed under authority of these by-laws, in books provided by the
corporation for such purpose. He shall attend to the giving and serving of all
notices of the corporation whereby meetings of the board of directors,
stockholders and committees are assembled. He shall prepare all lists of
stockholders and their addresses required to be prepared by the provisions of
any present or future statute of the State of Delaware. He may sign, with the
chief executive officer or the president or a vice president, in the name of
the corporation, when authorized by the board of directors so to do, all
contracts or other instruments requiring the seal of the corporation and may
affix the seal thereto. He
6
<PAGE> 7
shall have concurrent power, acting alone or jointly, with the chief
executive officer, or the president to vote all shares of stock in other
corporations the majority of the voting stock of which is owned by the
corporation. He shall have charge of such books and such papers as the board
of directors may direct. He shall, in general, perform all of the duties which
are incident to the office of secretary of a corporation, subject at all times,
to the direction and control of the board of directors.
Section 9. The treasurer shall have custody of all funds and securities of
the corporation. When necessary or proper he shall endorse for collection
checks, drafts and other instruments for the payment of money and shall deposit
them to the credit of the corporation in an authorized bank or depository.
Whenever required by the board of directors, he shall render an account of his
transactions. He shall perform all acts incident to the position of
treasurer, subject to the control of the board of directors. He shall have
such powers and perform such duties as may be assigned to him by the board of
directors. He shall submit such reports and records to the board of directors
as may be requested by them.
ARTICLE VI
Certificates of Stock
Section 1. The shares of the corporation shall be represented by
certificates signed by the chief executive officer or the Chairman or the
president or a vice president and by the treasurer or an assistant treasurer or
the secretary or an assistant secretary and may be sealed with the seal, or a
facsimile of the seal of the corporation. In case the seal of the corporation
is changed after the certificate is sealed with the seal or a facsimile of the
seal of the corporation, but before it is issued, the certificate may be issued
by the corporation with the same effect as if the seal had not been changed.
Any or all signatures on the certificate may be a facsimile. In case any
officer of the corporation, transfer agent or registrar, or any officer or
employee of the transfer agent or registrar who has signed or whose facsimile
signature has been placed upon such certificate ceases to be an officer of the
corporation, transfer agent or registrar before such certificate is issued, the
certificate may be issued by the corporation with the same effect as if the
officer of the corporation, transfer agent or registrar had not ceased to be
such at the date of its issue.
Section 2. The board of directors may by resolution adopt such procedures
as it deems appropriate for the issuance of certificates to replace
certificates which have been lost, stolen or destroyed.
Section 3. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 4. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the
7
<PAGE> 8
meeting: provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
ARTICLE VII
General Provisions
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. The board of directors may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve.
Section 3. The chief executive officer shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition
of the corporation.
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
Section 5. The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
Section 6. The corporate seal shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE VIII
Indemnification
Section 1. The Corporation shall indemnify any director, officer or
employee who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding in accordance with, and to the fullest extent
authorized by, the General Corporation Law of the State of Delaware as it may
be in effect from time to time.
Section 2. The indemnification provided by this article shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to
8
<PAGE> 9
be a director, officer or employee and shall inure to the benefit of
the heirs, executors and administrators of such a person.
Section 3. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not he would be entitled to indemnify against such liability under
the provisions of this article.
ARTICLE IX
Amendments
Section 1. These by-laws may be altered or repealed at any regular meeting
of the stockholders or of the board of directors or at any special meeting of
the stockholders or of the board of directors if notice of such alteration or
repeal be contained in the notice of such special meeting.
9
<PAGE> 1
Exhibit 4c
SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT
This Second Amendment and Waiver to Credit Agreement (this "Amendment")
effective as of the 31st day of December, 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
by that certain First Amendment to Credit Agreement dated as of October 29,
1997,(as further 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; and
WHEREAS, pursuant to Sections 7.8,7.9 and 7.13 of the Credit Agreement,
the Borrower is required to meet certain financial tests as of the fiscal
quarter ending December 31, 1997, and the Borrower has informed the Agent, the
Issuing Bank and the Lenders that it will fail to satisfy the requirements of
Sections 7.8, 7.9 and 7.13 for such fiscal quarter ending December 31, 1997(the
"December Covenant Defaults"); and
WHEREAS, the Borrower has requested that the Agent, the Issuing Bank, and
the Lenders waive the December Covenant Defaults;
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 deleting the definitions of "Additional Unsecured Debt",
"Availability" and "Interest Rate Margin" set forth therein in their
<PAGE> 2
entirety and substituting the following, respectively, in their place:
"'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 March 31, 1998, 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 Borrowing Base minus (b) the Aggregate Revolving Credit
Obligations.
'Interest Rate Margin' shall mean, (i) with respect to Base
Rate Advances, two percent (2.00%), and (ii) with respect to
Eurodollar Advances, three and one-quarter percent (3.25%)."
2. Amendment to Section 8.1. Section 8.1 of the Credit Agreement,
Events of Default, is hereby amended
by deleting paragraph (s) thereof in
its entirety and replacing such
paragraph (s) with the following:
"(s) (i) The Borrower shall not have the ability to borrow
Additional Unsecured Debt in an aggregate principal amount of at
least $160,000,000 by March 31, 1998, 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;"
3 Waiver. The Agent, the Issuing Bank and the Lenders hereby waive
the December Covenant Defaults and their rights and remedies which may arise
solely as a result of the December Covenant Defaults; provided, however, that
such waiver shall not waive any other requirement of the Loan Documents or
hinder, restrict or otherwise modify the rights and remedies of the Agent, the
Issuing Bank and the
2
<PAGE> 3
Lenders following the occurrence of any other Default or Event of Default under
the Credit Agreement.
4 No Other Amendment or Waiver. Except for the amendments and waiver
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.
5 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; and
(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, (y) to the extent
specifically relating to the Agreement Date, or (z) that the incurrence
of the Additional Unsecured Debt by the Borrower constitutes a default by
the Borrower under the Series 2001 Debentures.
3
<PAGE> 4
6 Loan Document. This Amendment shall be deemed to be a Loan Document
for all purposes.
7 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.
8 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.
9 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.
10 Definitions. All capitalized terms not otherwise defined herein shall
have the meanings set forth in the Credit Agreement.
11 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 accordance with their Commitment
Ratios) in the amount of one-eighth of one percent (0.125%) of the Commitments,
(ii) a counterpart hereof duly executed by the Borrower and the Majority
Lenders, and (iii) such other documents executed by the Borrower as the Agent
may reasonably require.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE> 5
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:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
AGENT: CITICORP NORTH AMERICA, INC.
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
ISSUING BANK: CITIBANK, N.A.
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
LENDERS: CITICORP USA, INC.
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
CONGRESS FINANCIAL CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
<PAGE> 6
BANK BOSTON, N.A., F/K/A THE FIRST
NATIONAL BANK OF BOSTON
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
HELLER FINANCIAL, INC.
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
THE BANK OF NEW YORK COMMERCIAL
CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
SANWA BUSINESS CREDIT CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
---------------------------------------
Name:
----------------------------------
Its:
----------------------------------
<PAGE> 1
EXHIBIT 10(j)
ZENITH SALARIED RETIREMENT SAVINGS PLAN
(As Amended and Restated Effective as of July 1, 1997)
<PAGE> 2
ZENITH SALARIED RETIREMENT SAVINGS PLAN
(As Amended and Restated Effective as of July 1, 1997)
<TABLE>
<CAPTION>
Table of Contents
PAGE
<S> <C>
ARTICLE 1 1
Introduction 1
Purpose of the Plan, Effective Date. 1
Plan Administrator, Plan Year 1
The Trust 1
The Employers 2
Preservation of Benefits Under Predecessor Plans 2
Supplements 3
Benefits For Participants Who Terminated Employment
Prior to July 1, 1997 3
ARTICLE 2 3
Plan Participation 3
Eligibility 3
Leave of Absence 4
Reemployment Within One Year 5
Transferred Employees 5
Hours of Service 6
Military Service 7
ARTICLE 3 8
Participant Contributions 8
Participant Pre-Tax Savings Contributions 8
Participant After-Tax Contributions 9
Form of Participant Contributions 9
Variation, Discontinuance and Resumption of Contributions 10
Compensation 10
Rollover Contributions 11
Transferred Benefits 12
Restricted Participation with Respect to Rollover Contributions
and Transferred Benefits 12
ARTICLE 4 13
Employers' Contributions 13
Employers' Contributions 13
Payment of Employers' Contributions; Company Stock 14
Verification of Employers' Contributions 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 5 15
Plan Accounting and Investment Funds 15
Participant Account Balances 15
Accounting Dates 16
Date of Crediting Contributions 16
Investment of Account Balances 17
Investment Funds 17
Investment Elections 18
Manner of Making Investment Elections 18
Investment Risks 19
Plan Expenses 19
Adjustment of Participants' Accounts 19
Statement of Accounts 19
Voting Shares of Company Stock 20
Tender Offers 20
ARTICLE 6 22
Distribution of Account Balances 22
Vesting 22
Forfeitures 23
Methods of Benefit Payment 24
Time and Benefit of Payment 25
Designated Beneficiaries 26
Payment to Substitute Beneficiaries 27
Payment With Respect to Incapacitated Participants or
Beneficiaries 27
Final Court Orders 28
Direct Rollover Option 28
ARTICLE 7 29
Withdrawals and Loans During Employment 29
Withdrawal of Employee After-Tax Contributions and Rollover
Accounts 29
Under Age 59-1/2 Hardship Withdrawals 29
Age 59-1/2 Withdrawals 31
Loans to Participants 31
No Representation Regarding Tax Effect of Withdrawals or Loans 34
ARTICLE 8 34
Limitations 34
Contribution Limitations 34
Participant Covered by Defined Contribution Plan 35
Participant Covered by Defined Contribution Plan and Defined
Benefit Plan 37
Distribution of Excess Deferrals 38
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Highly Compensated Employee 39
Limitations on Elective Contributions 39
Limitation on Employee and Matching Contributions 43
Multiple Use Limitation 47
ARTICLE 9 48
Reemployment 48
Rehired Employee or Participant 48
Reinstatement of Forfeitures 49
ARTICLE 10 50
Plan Administrator 50
Plan Administrator's Duties 50
Action by Plan Administrator 51
Information Required for Plan Administration 52
Decision of Plan Administrator Final 52
Review of Benefit Determinations 53
Uniform Rules 53
Plan Administrator's Expenses 53
Interested Plan Administrator 53
Resignation or Removal of Plan Administrative Committee Members 53
Indemnification 54
ARTICLE 11 55
Relating to the Employers 55
Action by Employers 55
Additional Employers 55
Restrictions on Reversions 55
ARTICLE 12 56
Amendment, Termination or Plan Merger 56
Amendment 56
Termination 56
Plan Merger 57
Continuation by a Successor or Purchaser 57
Notice to Participants of Amendments, Terminations or
Plan Mergers 58
Vesting and Distribution on Termination 58
Administrative Amendments 58
ARTICLE 13 59
General Provisions 59
Examination of Plan Documents 59
Notices 59
Nonalienation of Plan Benefits 59
No Employment Guarantee 59
Participant Litigation 60
Successors 61
Adequacy of Evidence 61
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
Gender and Number 61
Waiver of Notice 61
Applicable Law 61
Severability 61
Fiduciary Responsibilities 61
ARTICLE 14 62
Top-Heavy Plan Rules 62
Key Employees 62
Top-Heavy Plan 63
Aggregation Groups 64
Minimum Contributions and Benefits 64
Special Top-Heavy Plan Vesting Schedule 65
</TABLE>
<PAGE> 6
ZENITH SALARIED RETIREMENT SAVINGS PLAN
(As Amended and Restated Effective as of July 1, 1997)
ARTICLE 1
Introduction
1.1 Purpose of the Plan, Effective Date. The Zenith Salaried Retirement
Savings Plan (As Amended and Restated Effective as of July 1, 1997)(the "Plan")
constitutes an amendment, restatement and continuation of the prior plan, as
amended and restated through December 19, 1994. The Plan is maintained by
Zenith Electronics Corporation (the "Company") for the benefit of eligible
employees of the Company and eligible employees of any subsidiary or affiliated
company which adopts the Plan with the consent of the Company to enable such
employees to accumulate funds and thereby assist such employees in providing
for their future security. The effective date of the Plan is July 1, 1997 (the
"effective date"). The Plan is intended to comply with the requirements of
Section 404(c) of the Employee Retirement Income Security Act of 1974, as
amended, ("ERISA") and Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code").
1.2 Plan Administrator, Plan Year. The Plan is administered by the Named
Fiduciary Committee (as described in Article 10 below) to carry out the
administration of the Plan (the "Plan Administrator"). The Plan is administered
on the basis of a plan year which begins each year on January 1 and ends on the
next following December 31 (the "plan year").
1.3 The Trust. The assets of the Plan are held and invested by one or
more trustees (the "Trustee") which is acting and appointed for such purposes
in accordance with one or more trust agreements (the "Trust") which implement
and form a part of the Plan. Reference to the trust fund shall include all
assets held by the Trustee or any invest-
<PAGE> 7
ment managers and insurance institutions in accordance with the Trust and this
Plan.
1.4 The Employers. With the consent of the Company, the Plan may be
adopted in accordance with the provisions of section 11.2 by any subsidiary or
affiliated company of the Company for the benefit of its eligible employees.
For this purpose, a "subsidiary" means any corporation more than 80 percent of
the voting stock of which is directly or indirectly owned by the Company and an
"affiliated company means any corporation which directly or indirectly owns 80
percent or more of the voting stock of the Company and any corporation (other
than the Company and its subsidiaries) 80 percent or more of the voting stock
of which is directly or indirectly owned by any corporation which directly or
indirectly owns 80 percent or more of the voting stock of the Company. The
Company and its subsidiaries or affiliates that adopt the Plan are referred to
herein collectively as the "Employers" and individually as an "Employer". The
term "Zenith Companies" includes the Employers and all subsidiaries and
affiliated companies that have not adopted the Plan (and each such corporation
is sometimes referred to herein individually as a "Zenith Company"). Any
company which is not an Employer under the Plan and which does not qualify as a
subsidiary or related company, but is a member of a controlled group of
companies (within the meaning of Sections 414(b), (c) or (m) of the Code),
which contains an Employer under the Plan for purposes of the Plan, will be
considered as a subsidiary or affiliated company that has not adopted the Plan.
1.5 Preservation of Benefits Under Predecessor Plans. Any other savings
or retirement plan maintained by an Employer may be continued in effect by its
merger into this Plan with the consent of the Company. If appropriate, special
provisions relating to employees covered under any such plan when it is merged
into this Plan may be set forth in a supplement or certification of eligibility
which, by
<PAGE> 8
amendment, will be attached to and form a part of this Plan. Any such plan
which is merged into this Plan may be referred to below as a "predecessor
plan." As to employees who participate in the Plan on the effective date of
any merger of a predecessor plan into the Plan, it is intended that the
benefits they earned under the predecessor plan up to the effective date of its
merger into this Plan shall be preserved unless limited by Article 8. If the
Plan Administrator determines that any such benefits have not been provided for
under the terms and provisions of the Plan as in effect on and after the
effective date of such merger of a predecessor plan into the Plan, the Plan
Administrator shall direct the payment of such benefits under the Plan to the
participant or other person entitled to them.
1.6 Supplements. From time to time supplements may by amendment be
attached to and form a part of the Plan and shall be given the same effect that
such provision would have if it was incorporated within the basic text of the
Plan. Such supplements may modify or supplement the provisions of the Plan as
they apply to particular groups of employees or groups of participants, shall
specify the persons affected by such supplements and shall supersede the other
provisions of the Plan to the extent necessary to eliminate inconsistencies
between the Plan provisions and the provisions of such supplements.
1.7 Benefits For Participants Who Terminated Employment Prior to July 1,
1997. To the extent permitted by law, the benefits provided hereunder with
respect to any participant who retired or whose employment terminated prior to
July 1, 1997, will, except as otherwise specifically provided herein, be
governed in all respects by the terms of the plan document as in effect on the
date of the participant's retirement or other termination of employment.
<PAGE> 9
ARTICLE 2
Plan Participation
2.1 Eligibility. Each employee of an Employer who was a participant in
the prior plan immediately prior to the effective date, shall continue to
participate in the Plan on and after the effective date in accordance with the
terms of the Plan until such employee's participation ceases in accordance with
the Plan. Each employee of an Employer who was a participant in a plan when
such plan was merged into this Plan, shall continue as a participant in the
Plan on the effective date of such merger and in accordance with the terms of
the Plan.
Each other employee of an Employer who is a "covered employee" (as defined
below) will become a participant in the Plan on the first day which the
employee completes an "hour of service" (as defined below) with a Zenith
Company. A "covered employee" shall mean any employee of an Employer who is
paid by such Employer on a salaried basis (as determined by the payroll records
of the Employer) but excluding employees whose terms and conditions of
employment are covered by a collective bargaining agreement between the
Employer and a representative of the employee's if retirement benefits were the
subject of good faith bargaining. An employee of an Employer engaged in
business outside of the United States will be considered a "covered employee"
under the Plan, provided such employee is not covered by a fund or plan of
deferred compensation provided by another person with respect to compensation
paid to such person by the Employer.
2.2 Leave of Absence. A "leave of absence" as used in the Plan means:
(a) A leave of absence required by law or granted by a Zenith Company
on account of service in military or governmental branches described in
any applicable statute granting reemployment rights to employees who enter
such branches, or
<PAGE> 10
any other military or governmental branch designated by a Zenith Company,
provided the employee returns to employment with a Zenith Company;
(b) A leave of absence for any period the employee is absent from work
by reason of the employee's pregnancy, the birth of the child of the
employee, the placement of a child with the employee in connection with
the adoption of the child by the employee or the caring for the child for
a period beginning immediately after such birth or placement; and
(c) Any other absence from active employment with a Zenith Company
that is approved by such Zenith Company and not treated by it as a
termination of employment.
Leaves of absence granted by a Zenith Company will be governed by rules
uniformly applied to all employees of that Zenith Company similarly situated.
2.3 Reemployment Within One Year. If an employee terminates employment
with the Zenith Companies and is later rehired by the Zenith Companies within
one year of his termination of employment (or earlier absence from service for
reasons other than a termination) he shall not be considered to have incurred
such prior termination of employment. Solely for purposes of determining
whether an employee has incurred a break-in-service for purposes of sections
6.2 and 9.1, the severance from service date of an employee who is on a
maternity or paternity leave of absence (as described in section 2.2(b)) shall
be the earlier of the date his employment terminates on account of resignation,
retirement, discharge on the second anniversary of the first day of his
absence.
2.4 Transferred Employees. An employee of an Employer who was not but
who becomes a "covered employee" shall be credited with all of his years of
service with a Zenith Company for purposes of the Plan. In addition, any
"covered employee" who no longer is a "covered employee" or who otherwise
becomes an inactive participant in the Plan
<PAGE> 11
shall no longer be eligible to make employee contributions to the Plan or have
Employer contributions made to the Plan on his behalf, but his accounts under
the Plan shall continue to be held, adjusted and invested subject to the terms
of the Plan.
2.5 Hours of Service. An "hour of service" as used in the Plan means:
(a) Each hour for which an employee is directly or indirectly
compensated or entitled to be compensated for his performance of duties
for a Zenith Company as an employee (with each overtime hour being taken
into account as if it were a normal work hour);
(b) Each hour for which an employee is directly or indirectly
compensated or entitled to be compensated by a Zenith Company with respect
to a period of time during which no duties are performed (irrespective of
whether the employment relationship has terminated) due to vacation,
holiday, illness, incapacitation (including disability), layoff, military
duty or leave of absence (as defined in section 2.2); provided that not
more than 501 hours of service shall be credited to an employee on account
of any single continuous period during which he performs no duties and an
employee shall not be credited with hours of service under this subsection
for any period during which he performs no duties (i) if such employee's
compensation for such period is in the form of payments made or due under
a plan maintained solely for the purpose of complying with applicable
workers' compensation, unemployment compensation or state disability
insurance laws, (ii) if such employee's compensation for such period
constitutes reimbursement for medical or medically related expenses
incurred by the employee, or (iii) if such employee's compensation for
such period is paid to the employee while on maternity or paternity leave
of absence (as described in section 2.2(b) above), provided credit for
such period is granted in accordance with subsection (c) below; and
(c) Each other hour required by federal law to be counted as an "hour
of service," including
<PAGE> 12
(i) each such hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by a Zenith Company, and (ii) each
such hour for which an employee is on maternity or paternity leave of
absence, but only for purposes of preventing the employee from incurring a
one-year break-in-service; provided that not more than 501 hours of
service shall be credited for payments of back pay, to the extent that
such back pay is awarded for a period of time during which the employee
did not or would not have performed duties as an employee, and not more
than 501 hours of service shall be credited by reason of a maternity or
paternity leave of absence.
Compensated hours described in subsection (b) above shall be determined by
multiplying the number of scheduled work days during the applicable period for
which the employee is compensated by the number of hours in the average
scheduled work day (based on the scheduled work week for his job classification
then in effect, provided, that in the case of an employee without a regular
work schedule, such hours shall be computed on the basis of an forty-five hour
work week). Hours described in subsection (c) above for employees on maternity
or paternity leave of absence shall be determined in the same manner as
compensated hours. In determining hours of service, hours shall be credited
for the period in which such duties were performed (regardless of when payment
is due) or for which such compensation was paid and for this purpose the rules
for crediting hours of service set forth in Section 2530.200b-2 of the
Department of Labor regulations are hereby incorporated by reference; provided
that hours of service credited under subsection (c) above for a maternity or
paternity leave of absence shall be credited to the year in which such
maternity or paternity leave begins if such hours are required to prevent a
break in service from occurring in such year, or if not so required in that
year, such hours shall be credited in the immediately following year. In
construing the foregoing provisions of this section, ambiguities shall be
resolved in
<PAGE> 13
favor of crediting employees with hours of service. Hours required to be
credited for more than one reason under this section which pertains to the same
period of time shall be credited only once.
2.6 Military Service. Notwithstanding any provision of the Plan to the
contrary, benefits and service credits with respect to "qualified military
service" will be provided in accordance with Section 414(u) of the Code.
ARTICLE 3
Participant Contributions
3.1 Participant Pre-Tax Savings Contributions. Subject to the conditions
and limitations of this Article 3 and Article 8, for each plan year each
participant may elect to reduce his compensation from his Employer by an amount
equal to at least one percent but not in excess of fifteen percent (in whole
multiples of one percent) of his compensation for each payroll check, and his
Employer shall, in accordance with subsection 4.1(c), contribute the amount of
such reduction to the Plan on his behalf as an "employee pre-tax savings
contribution." The maximum combined pre-tax and after-tax (as described in
section 3.2 below) contributions made by any participant for any plan year
cannot exceed 19 percent of the participant's compensation. Notwithstanding
any provision contained herein to the contrary, a participant's employee
pre-tax savings contribution in any calendar year to this Plan and to any other
plan maintained by a Zenith Company in which such participant participates may
not exceed $9,500 for 1997 (or such other maximum amount as may be permitted
from time to time by the Secretary of the Treasury or the Secretary's delegate
or by law). The employee pre-tax savings contributions made on behalf of a
participant and the earnings thereon shall be fully vested and nonforfeitable
at all
<PAGE> 14
times. Each participant shall elect his rate of employee pre-tax savings
contributions pursuant to procedures established by the Plan Administrator.
Completion of such election shall evidence the participant's authorization to
reduce his compensation and his agreement (until subsequently modified by such
participant as permitted by section 3.4 or until he shall cease to be an active
participant) to have employee pre-tax savings contributions made on his behalf
at his chosen rate. Any changes in a participant's compensation will result in
an automatic adjustment in the amount (but not the percentage) of his
compensation on a pre-tax basis which is contributed to the Plan.
3.2 Participant After-Tax Contributions. Subject to the conditions and
limitations of this Article 3 and Article 8, for each plan year each
participant may elect to contribute an amount equal to at least one percent but
not in excess of ten percent (in whole multiples of one percent) of his
compensation, and his Employer shall, in accordance with subsection 4.1(c),
contribute such amount to the Plan on his behalf as an "employee after-tax
contribution." The employee after-tax contributions made on behalf of a
participant and the earnings thereon shall be fully vested and nonforfeitable
at all times. Each participant shall elect his rate of employee after-tax
contributions in accordance with rules established by the Plan Administrator.
Completion of the appropriate election shall evidence the participant's
authorization to contribute a percentage of his compensation to the Plan and
his agreement (until subsequently modified by such participant as permitted by
section 3.4 or until he shall cease to be an active participant) to have
employee after-tax contributions made on his behalf at his chosen rate. Any
changes in a participant's compensation will result in an automatic adjustment
in the amount (but not the percentage) of his
<PAGE> 15
compensation on an after-tax basis which is contributed to the Plan.
3.3 Form of Participant Contributions. All participant contributions
shall be made by payroll deduction or by any other method approved by the Plan
Administrator. The Plan Administrator may adopt appropriate regulations,
procedures or forms pertaining to participant contributions. Participant
contributions shall be paid to the Trust at such times as may be necessary or
appropriate for the proper administration of the Plan and in accordance with
applicable law, but no later than the fifteenth business day of the month
following the month in which such amount would otherwise have been payable to
the participant in cash.
3.4 Variation, Discontinuance and Resumption of Contributions. A
participant may elect to reduce, increase or discontinue entirely his rate of
contributions that are made by payroll deduction, and may elect to resume
making contributions, in the manner established by the Plan Administrator. Any
elections made in accordance with this section shall be made in a manner
prescribed by the Plan Administrator for such purposes.
3.5 Compensation. Subject to the exclusions set forth below, a
participant's "compensation" means such participant's total, regular cash
remuneration for services rendered to the Employers as a covered employee,
including salary, wages, vacation pay, payments in lieu of wages for periods
during which a participant is absent from work on account of sickness or
personal injury, overtime, bonuses, commissions and incentive compensation,
but, excluding:
(a) Any noncash compensation including any amounts contributed by the
Employers for the participant's benefit to this Plan or any other profit
sharing, pension, stock bonus or other retirement or benefit plan
maintained by the Employers; provided that any employee after-tax amounts
contributed on behalf of an employee under this Plan or any amounts under
a salary reduction
<PAGE> 16
arrangement under Sections 125 or 401(k) of the Code shall be included
in compensation;
(b) Any reimbursements for medical, dental or travel expenses,
relocation allowances, auto allowances, expatriate allowances, club
allowances, educational assistance allowances, non-cash awards, advance
draws, other foreign service premiums or other special allowances;
(c) Any income realized for income tax purposes as a result of (i)
group life insurance, (ii) the grant or exercise of an option or options
to acquire Company stock, the receipt of a cash appreciation payment in
lieu of the exercise of such an option or options, the disposition of
shares acquired by the exercise of such option, or (iii) the transfer of
restricted shares of Company stock or restricted property of an Employer,
or the removal of any such restrictions;
(d) Any severance paid as a result of the participant's termination
of employment;
(e) Any compensation paid or payable to the participant, or to any
governmental body or agency on account of the participant, under the terms
of any state or federal law requiring the payment of such compensation
because of the participant's voluntary or involuntary termination of
employment with any Zenith Company; and
(f) Effective January 1, 1997, any compensation paid or payable to
the participant which is in excess of $160,000 (or such other amount as
may be determined from time to time by the Secretary of Treasury or his
delegate or by law and for prior years the maximum amount as then in
effect under Section 401(a)(17) of the Code (or its predecessor section)).
Unless otherwise provided, for purposes of the limitations set forth in Article
8, a participant's compensation shall mean the remuneration (both cash and
non-cash) for which the Employer is required to report to the participant for
the plan year, plus amounts contributed pursuant to a salary reduction
agreement under Sections 125 or 401(k) of the Code.
<PAGE> 17
3.6 Rollover Contributions. The Plan Administrator may in its discretion
permit any employee of an Employer to (i) have any portion of an eligible
rollover distribution (as defined in section 6.9) paid directly to the Plan
from an eligible retirement plan (as defined in section 6.9) or (ii) make a
qualifying rollover contribution to the Plan. A "qualifying rollover
contribution" means the contribution to the Plan by an employee of:
(a) A portion or all of a qualifying total distribution (as defined
in Section 402(a)(5)(E)(i) or as referred to in Section 403(a)(4) of the
Code); provided that the portion, if any, of a qualifying total
distribution consisting of nondeductible employee contributions may not be
contributed to the Plan; or
(b) A rollover contribution (as defined in Section 408(d)(3) of the
Code).
A qualifying rollover contribution to be made by an employee must be made
to the Trust, in care of the Plan Administrator, by not later than the sixtieth
day following the day upon which the employee received the qualifying total
distribution or rollover contribution with respect to which the qualifying
rollover contribution is to be made. The Plan Administrator shall refuse to
permit the contribution to the Plan of property other than money (and shall
require instead that the property be sold and the proceeds contributed). A
participant's direct or qualifying rollover contribution shall be credited to
the participant's rollover account (as defined in section 5.1(e)) as of the
accounting date coincident with or next following the date the contribution is
made. Subject to the provisions of Article 6, a participant's rollover account
shall be distributed to the participant (or his beneficiary in the event of his
death) at the time and in the manner directed by the participant.
<PAGE> 18
3.7 Transferred Benefits. If an employee of an Employer had previously
participated in any other qualified pension, profit sharing, stock bonus or
other retirement or employee benefit plan and such other plan permits the
transfer to this Plan of the vested portion of such employee's benefits under
such other plan, and if so directed by the Plan Administrator in its
discretion, the Trustee shall accept a transfer of cash to this Plan equal to
the vested benefits of such employee under such other plan which are being
transferred to this Plan. The participant's transferred benefits shall be
credited to his rollover account (or any other applicable account as designated
by the Plan Administrator) as of the accounting date coincident with or next
following the date the transfer is made.
3.8 Restricted Participation with Respect to Rollover Contributions and
Transferred Benefits. For purposes of the Plan, a participant with respect to
whom a direct or qualifying rollover contribution or a transfer of benefits is
made in accordance with section 3.6, 3.7 or 6.9, respectively, shall not be
eligible to make employee contributions or have matching Employer contributions
made on his behalf before becoming a participant for all purposes of the Plan
in accordance with section 2.1.
ARTICLE 4
Employers' Contributions
4.1 Employers' Contributions. Effective as of July 1, 1997, subject to
the conditions and limitations of this Article 4 and Article 8, for each plan
year each Employer will make a contribution under the Plan for each participant
employed by it during that plan year in an amount equal to the sum of the
following:
(a) Employer Matching Contributions. For each plan year, each
Employer shall make a
<PAGE> 19
matching contribution of 50 percent with respect to the first 6% of a
participant's employee pre-tax savings contributions; provided, however,
that such matching contribution for the short plan year beginning July 1,
1997 and ending December 31, 1997, shall be with respect to employee
pre-tax savings contributions made during such short plan year). Solely
with respect to such short plan year, any participant who is prevented
from making any additional employee pre-tax savings contributions because
of the $9,500 limitation, shall, nonetheless, be entitled to receive the
full employer matching contribution for such short plan year. The
Employer's matching contribution shall be made at such time as is deemed
necessary or appropriate for the proper administration of the Plan, but in
no event later than the date for filing the Employer's federal income tax
return for the year for which the contribution is made.
(b) Employer Retirement Contribution. In addition, each plan year,
each Employer shall contribute three percent of participant compensation;
provided, however, that such Employer contribution for the short plan year
beginning July 1, 1997 and ending December 31, 1997, shall be made only
with respect to a participant's compensation for such short plan year. At
the discretion of the Company, the Employers may elect to contribute an
additional amount to the Plan as a retirement contribution. Such
contributions shall be allocated among participants who are employed by an
Employer on the last day of the plan year or who terminated employment
before the end of the plan year because of retirement at or after
attaining age 55, disability or death. Such Employer contributions shall
be allocated to such participant's account pro rata based on compensation.
The Employer contributions shall be made at such time as is deemed
necessary for the proper administration of the Plan, but in no event later
than the date for filing the Employer's federal income tax return for the
year for which the contribution is made.
(c) Employee Contributions. For each plan year, each Employer will
contribute to the Plan 100 percent of the contributions (as defined in
sections 3.1 and 3.2), if any, elected by the participant for that plan
year.
<PAGE> 20
4.2 Payment of Employers' Contributions; Company Stock. Each Employer's
contribution under the Plan for any plan year shall be paid to the Trust
implementing the Plan without interest. Such contributions may be made in cash
or Company stock, as determined by the Company in its sole discretion. The
Company may, at its discretion, issue shares of Company stock from authorized
but unissued shares of Company stock or issue Treasury shares of Company stock
for purposes of making such contribution. If Company stock is contributed, its
value shall be determined by averaging the closing price of the Company stock
on the New York Stock Exchange for the 20 consecutive trading days immediately
preceding the date selected by the Board of Directors of the Company for such
valuation, provided that the Company stock is in fact traded for at least ten
of such days on such Exchange. If the Company stock is not traded for at least
ten days on such Exchange, the value of the Company stock shall be determined
in good faith by the Company, based on all relevant factors as of the date of
the contribution, including an appraisal independently arrived at by a person
who customarily makes such appraisals and who is independent of the Zenith
Companies.
4.3 Verification of Employers' Contributions. The certificate of an
independent accountant selected by the Company as to the correctness of any
amounts or calculations relating to the Employers' contributions under the Plan
for any plan year shall be conclusive on all persons.
ARTICLE 5
Plan Accounting and Investment Funds
5.1 Participant Account Balances. The Plan Administrator will establish
and maintain the following separate accounts with respect to plan participants:
(a) Employee Pre-Tax Savings Contributions Account. An "employee
pre-tax
<PAGE> 21
savings contributions account" shall be maintained on behalf of each
participant which will represent the pre-tax savings contributions made on
the participant's behalf to the Plan and the earnings, losses, expenses,
appreciation and depreciation attributable thereto. Prior to the effective
date, this account was referred to as the "ESP II Savings Account."
(b) Employee After-Tax Contributions Account. An "employee after-tax
contributions account" shall be maintained on behalf of each participant
which will represent the after-tax contributions made on the participant's
behalf to the Plan and the earnings, losses, expenses, appreciation and
depreciation attributable thereto. Prior to the effective date, this
account was referred to as the "ESP I Savings Account."
(c) Employer Matching Contributions Account. An "employer matching
contributions account" shall be maintained on behalf of each participant
which will represent the matching contributions made on his behalf to the
Plan and the earnings, losses, expenses, appreciation and depreciation
attributable thereto.
(d) Employer Retirement Contributions Account. An "employer
retirement contributions account" will be maintained on behalf of each
participant which will represent the Employer retirement contributions
made on his behalf to the Plan and the earnings, losses, expenses,
appreciation and depreciation attributable thereto. Prior to the effective
date this account was referred to as the Regular Retirement Account and
the Regular Optional Account.
(e) Prior Plan Vested Optional Account. A "prior plan vested optional
account" shall be maintained on behalf of each participant int he prior
plan which shall represent the fully vested amounts in the Vested Optional
Account (as defined in the prior plan) and the earnings, losses, expenses,
appreciation and depreciation attributable thereto on and after the
effective date.
<PAGE> 22
(f) Rollover Account. A "rollover account" shall be maintained on
behalf of each participant which shall represent the participant's
rollover contributions and transferred benefits to the Plan made in
accordance with section 3.6, 3.7 or 6.9 of the Plan and the earnings,
losses, expenses, appreciation and depreciation attributable thereto.
The Plan Administrator may maintain such other accounts in the name of
participants as it considers desirable. The maintenance of separate account
balances shall not require physical segregation of Plan assets with respect to
each account balance. The accounts maintained hereunder represent the
participants' interests in the Plan and Trust and are intended as bookkeeping
account records to assist the Plan Administrator and the Trustee in the
administration of the Plan. Any reference to a participant's "accounts" or
"account balances" shall refer to all of the accounts maintained in the
participant's name under the Plan.
5.2 Accounting Dates. Effective as of January 1, 1996, an "accounting
date" is each day of the plan year that the New York Stock Exchange is open.
5.3 Date of Crediting Contributions. Employer contributions arising from
a participant's election to make contributions shall, in accordance with
administrative procedures established by the Plan Administrator, be credited to
such participant's employee pre-tax savings or after-tax contributions account.
Employer matching contributions shall be credited to a participant's employer
matching contributions account as of the last day of the plan year or as
otherwise may be determined by the Plan Administrator for the proper
administration of the Plan. Employer retirement contributions shall be
credited to a participant's employer retirement contributions accounts as of
the last day of the plan year to which they relate and in
<PAGE> 23
accordance with procedures established by the Plan Administrator.
5.4 Investment of Account Balances. The Trustee, the investment manager
and any insurance institution responsible for investment of Trust assets shall
be permitted to commingle the assets of the Trust for purposes of investment
with the assets of other plans or trusts which are intended to qualify for a
federal tax exemption under Sections 401(a) and 501(a) of the Code. Any
documents which are required to be incorporated in the Plan and the Trust to
permit such commingled investments are hereby so incorporated. Except to the
extent required by section 5.5, segregated investment of Plan and Trust assets
shall not be required with respect to any one or more Plan participants. Each
account invested in a particular investment fund shall represent an undivided
interest in such investment fund which corresponds to the balance of such
account.
5.5 Investment Funds. From time to time the Plan Administrator or its
delegate may cause the Trustee or an investment manager to establish one or
more investment funds for the investment and reinvestment of Plan assets. The
continued availability of any investment fund is necessarily conditioned upon
the terms and conditions of investment management agreements and other
investment arrangements. While the Plan Administrator or its delegate may
arrange with the Trustee and investment managers for the establishment of
investment funds, the continued availability of these funds cannot be assured,
nor is it possible to assure that the arrangements or the investment funds
managed by a particular investment manager or by the Trustee will continue to
be available on the same or similar terms. The Plan Administrator or its
delegate may direct the establishment of additional investment funds or may
terminate any investment fund as it deems appropriate and in the best interest
of Plan participants. Participants will be informed of the investment funds to
be provided under the
<PAGE> 24
Trust and any changes in such investment funds. Except as provided in this
section and sections 5.6 and 5.7, participants' accounts shall be invested in
any one or more investment funds as described above.
5.6 Investment Elections. Each participant may elect, in accordance with
uniform rules established by the Plan Administrator and in addition to the
Company stock fund, to have his account balances (after all adjustments as of
that date have been made) invested in accordance with his election entirely in
one of the investment funds or partially in several of the investment funds.
Similarly, each participant may elect, in accordance with uniform rules
established by the Plan Administrator, to have future contributions made on his
behalf invested in accordance with his election entirely in one of the
investment funds or partially in several of the investment funds. All
investment elections and all transfers to or from an investment fund shall be
made in whole percentages.
5.7 Manner of Making Investment Elections. All investment elections shall
be communicated through voice response or in such other manner as may be
prescribed by the Plan Administrator. The instructions shall be authorized by
the participant making the election and shall be communicated to the Plan
Administrator or its agent. All investment elections shall continue in force
until changed or revoked by the participant. Investment elections shall be
made, changed or revoked at such times as may be permitted by the Plan
Administrator and shall be implemented as soon as practicable. Effective as of
July 1, 1997, if a participant fails to file or make a timely election with
respect to the investment of all or part of the portion of his account that is
subject to his investment directions (determined in accordance with section
5.6), the portion over which the participant has not directed the investment
shall be invested in the stable value fund or such other similar investment
fund.
<PAGE> 25
5.8 Investment Risks. Completion of any investment election by a
participant shall constitute an agreement by such participant to assume
responsibility for the risk of investment of his account in accordance with
such investment election, it being expressly understood that all of the
investment funds involve some measure of investment risk including the risk of
diminution or loss of the principal amount of any investment. All fiduciary
responsibility with respect to the allocation of his accounts between the
various funds shall be considered to be delegated to the participant who
directs the investment of his contributions and accounts.
5.9 Plan Expenses. All costs and expenses incurred in connection with the
general administration of the Plan and Trust shall, to the extent not paid by
the Employers, be allocated among the investment funds in the proportion in
which the amount invested in each such fund bears to the amount invested in all
funds as of the accounting date preceding the day of allocation, provided that
all costs and expenses directly identifiable to one fund shall be allocated to
that fund. Notwithstanding the above, the Plan Administrator retains the right
to charge some or all of the Plan charges to participant accounts.
5.10 Adjustment of Participants' Accounts. As of each accounting date the
account balances of Plan participants shall be adjusted to reflect payments and
withdrawals of benefits, adjustments in the values of the trust fund and of the
investment funds, if any, and Employers' and participants' contributions.
5.11 Statement of Accounts. As soon as practicable after the last day of
each plan year, and at such other times as the Plan Administrator considers
desirable, each participant will be furnished with a statement reflecting the
condition of his accounts as of that date. No participant, except a member of
the
<PAGE> 26
Committee, shall have the right to inspect the records reflecting the accounts
of any other participant.
5.12 Voting Shares of Company Stock. Each participant shall be entitled to
give voting instructions to the Trustee with respect to the number of whole and
fractional shares of Company stock which bears the same ratio to the total
number of shares of Company stock held in the Zenith Stock Fund as the dollar
amount in such participant's accounts in the Zenith Stock Fund bears to the
total dollar value of the Zenith Stock Fund as the most recent accounting date
for which an valuation has been established prior to the shareholders record
date for such vote, and the Trustee shall vote the shares in accordance with
such instructions. Such instructions shall be maintained by the Trustee as
confidential and shall not be disclosed to any person, including the Company.
Written notice of any meeting of shareholders of the Company, a request for
voting instructions, and directions for returning such instructions to the
Trustee shall be given by the Company, at such time and in such manner as the
Company shall determine, to each participant entitled to give instructions or
voting shares of stock at such meeting, except that the Trustee shall give such
notice, request, and directions upon request of the Company or if required by
law in order to maintain the confidentiality of participants' voting
instructions. All shares of Company Stock with respect to which voting
instructions are not received shall, to the extent permitted by law, be voted
by the Trustee in the same proportions as shares for which instructions are
received.
5.13 Tender Offers.
(a) Rights of Participants. In the event a tender offer is made
generally to the shareholders of the Company to transfer all or a portion
of their shares of Company stock in return for valuable consideration,
including but not limited to offers regulated by section 14(d) of the
<PAGE> 27
Securities Exchange Act of 1934, as amended, the Trustee shall respond to
such offer in accordance with instructions to the Trustee obtained from
the participant in respect of such number of whole and, to the extent
practicable, fractional shares of Company stock held in the Zenith Stock
Fund which bears the same ratio to the total number of shares of Company
stock so held in the Zenith Stock Fund as the dollar amount in such
participant's accounts in the Zenith Stock Fund bears to the total dollar
value of the Zenith Stock Fund as of the most recent accounting date for
which a valuation has been established. Each participant shall be
entitled to give instructions to the Trustee with respect to tendering or
declining to tender or withdrawal from tender he can give; provided,
however, that the Trustee may establish reasonable rules restricting the
rights of participants to change instructions. Such instructions shall be
maintained by the Trustee as confidential and shall not be discussed with
any person, including the Company. The Trustee shall respond to any such
tender offer in respect to shares of stock for which no instructions are
received in the same proportions as shares for which instructions are
received.
(b) Duties of the Company. Within a reasonable time after the
commencement of a tender offer, the Company shall provide to each
participant:
(i) the offer to purchase as distributed by the offerer to the
shareholders of the Company;
(ii) a statement of the number of full and fractional shares
of Company stock calculated as allocable to his accounts in the
Zenith Stock Fund in accordance with the first sentence of this
section 5.13; and
(iii) directions as to the means by which a participant can
give instructions to the Trustee with respect to the tender offer;
except that the Trustee shall provide such documents, statement, and
directions upon request of the Company or if required by law in
<PAGE> 28
order to maintain the confidentiality of participants' instructions.
(c) Investment of Tender Offer Proceeds. If the Trustee shall receive
proceeds from the tender of shares represented by all or a portion of the
interest in the Zenith Stock Fund allocated to a participant's account,
such proceeds shall be invested in accordance with the participant's
current investment election.
ARTICLE 6
Distribution of Account Balances
6.1 Vesting. Upon a participant's termination of employment because of
death, because of retirement (as defined below), or because of disability (as
defined below), the participant shall have a 100 percent vested and
nonforfeitable interest in the balance in all of his accounts. Upon a
participant's termination of employment for any other reason, the participant
will have a 100 percent vested and nonforfeitable interest in the balance of
his employee pre-tax savings contributions account, employee after-tax
contributions account, prior plan vested optional account, and rollover account
and shall be vested in the balance of his employer matching contributions
account and employer retirement contributions account in accordance with the
following schedule:
<TABLE>
<CAPTION>
Years of Service Vested Percentage
---------------- -----------------
<S> <C>
Less than 2 0%
2 years but less than 3 25%
3 years but less than 4 50%
4 years but less than 5 75%
5 years or more 100%
</TABLE>
The vested balances in all of the participant's accounts shall be distributed
to or on behalf of the participant
<PAGE> 29
(after all adjustments required under the Plan as of that date have been made
but subject to any further adjustments required under the Plan prior to
distribution of accounts, along with any contributions made previously by or on
behalf of such participant but not credited to his accounts), or in the event
of death to his beneficiary, in accordance with section 6.3. For purposes of
above, an employee will be credited with "years of service" equal to his period
of employment (determined in completed full years and days in excess of
completed full years) by the Zenith Companies commencing with his employment
commencement date and ending with his severance from service date. An
employee's "employment commencement date" shall be the date the employee first
performs an hour of service (as defined in section 2.5) for a Zenith Company
and his "severance from service date" shall be the earlier of the date his
employment with all of the Zenith Companies terminates on account of
resignation, retirement, discharge or death or the first anniversary of the
first day of a period during which the employee is absent from service with the
Zenith Companies (with or without pay) for any reason other than resignation,
retirement, discharge, death or leave of absence on account of military service
(as described in section 2.2(a)) provided the employee returns to service
within the period provided by applicable law. "Retirement" means a
participant's voluntary termination of employment at or after attaining age 55
years or after completing at least 20 years of service with the Zenith
Companies. "Disability" means total and permanent incapacity of a participant
to perform his employment duties (as determined by the Plan Administrator).
6.2 Forfeitures. The extent to which a participant's employer matching
contributions and retirement contributions accounts are not fully vested shall
be a "forfeiture". Except as provided below, a forfeiture shall be treated the
same as other participant accounts (subject
<PAGE> 30
to adjustment above) until the earlier of (i) the accounting date on which the
participant with respect to whom the forfeiture arose incurs a "one-year break
in service" (as defined below) or (ii) the accounting date as of which the
participant receives a total distribution of his accounts, and then shall be
applied to reduce his Employer's contributions to the Plan in the then current
plan year. If the participant with respect to whom a forfeiture arose is
reemployed by an Employer before he incurs five consecutive one year breaks in
service, the forfeiture (as it may have been adjusted in accordance with the
Plan) shall be reinstated. Forfeitures shall be applied to reduce the
employers' contributions for the plan year coincident with or next following
the date it arose, provided that such forfeiture is reinstated if such
participant is reemployed by an Employer before he incurs five consecutive one
year breaks in service. A "one-year break in service" shall occur on the last
day of a 12-month period commencing on a participant's severance from service
date and ending on the day prior to his reemployment with a Zenith Company. A
"five-year break in service" means a period of five consecutive one-year breaks
in service. Notwithstanding the above, any forfeitures which, as of the
effective date, remain unallocated even though paragraph (i) above has been
satisfied shall be allocated to participant accounts in accordance with the
terms of the prior plan.
6.3 Methods of Benefit Payment. A participant's vested account balances
which are distributable under section 6.1, shall be distributed to or for the
benefit of the participant following his termination of employment by payment
in a lump sum. In lieu of a lump sum, as an optional form of distribution, a
participant can elect (in the manner provided by the Plan Administrator) to
have his vested benefits paid in one of the following optional forms of
distribution:
<PAGE> 31
(a) Life Annuity. The life annuity form of payment consists of an
annuity payable for the life of the participant which is the amount of
benefit which can be purchased with 100 percent of the participant's
vested account balances. A participant who elects the life annuity form
of payment and who is married at the time of his annuity commencement date
must get his spouse's consent in writing (in accordance with procedures
established by the Plan Administrator) to waive the joint and survivor
form of annuity. Such election to waive must describe the effect of such
election and the rights of the spouse to revoke such waiver.
(b) Installments. The installment form of payment shall consist of a
series of annual payments over a period of time not less than two years
nor more than ten years.
(c) Joint and Survivor Annuity. The joint and survivor annuity shall
consist of payment in the form of an immediate annuity payable for the
life of the participant with a survivor annuity payable for the life of
the participant's designated beneficiary and which is the amount of
benefit which could be purchased with 100 percent of the participant's
vested account balances. If the participant's spouse is not the
designated beneficiary, the joint and survivor annuity must be designed to
assure that at least 50 percent of the present value of the amount
available for distribution is paid within the life expectancy of the
participant.
6.4 Time and Benefit of Payment. Unless the participant elects to defer
payment, payment of a participant's benefits will be made within a reasonable
period of time after a participant's termination of employment, but not later
than 60 days after the end of the plan year in which occurs the later of the
participant's employment termination date or his attainment of age 65 years;
provided that payment of each participant's account balances must commence no
later than the April 1 of the calendar year following the calendar year in
which he
<PAGE> 32
attains age 70 1/2 years. In addition, notwithstanding anything in this
Article 6 to the contrary, (i) if at any time, a participant's account balances
exceed or exceeded $3,500, no amount shall be distributable to the participant
prior to the date he attains age 65 years without his consent, and (ii) if a
participant's vested account balances do not exceed, and have never exceeded,
$3,500, the participant's account balances shall be automatically distributed
to the participant (or his beneficiary) in a single payment. If distribution
of a participant's accounts has not commenced prior to such participant's
death, then the participant's accounts shall be distributed within five years
of the date of death unless the participant's designated beneficiary is his
surviving spouse in which event distribution of the participant's accounts to
such surviving spouse need not begin until the date the participant would have
attained age 70 1/2 years. If the surviving spouse dies before distributions
to such spouse begin, distribution of the participant's vested accounts
pursuant to section 6.3 shall be made as if the surviving spouse were the
employee.
6.5 Designated Beneficiaries. A participant may from time to time
designate a beneficiary or beneficiaries to whom the participant's benefits
will be distributed in the event of the participant's death prior to complete
payment of his benefits under the Plan. A participant may designate contingent
or successive beneficiaries and may name individuals, legal persons or
entities, trusts, estates, trustees or other legal representatives as
beneficiaries. A beneficiary designation properly completed and filed will
cancel all such designations filed earlier. Notwithstanding the foregoing or
any beneficiary designation filed by a participant, if a participant is married
at the date of his death, the participant's surviving spouse will be his
designated beneficiary for all purposes of the Plan unless the surviving spouse
consents in writing to the
<PAGE> 33
participant's designation of another beneficiary. A beneficiary properly
designated can elect another form of payment than had been previously elected
by the participant. Beneficiary designations must be completed and filed with
the Plan Administrator during the participant's lifetime, however, his
surviving spouse may consent to a designation after his death. The consent of
a surviving spouse to the participant's designation of another beneficiary must
be in writing, must acknowledge the effect of such designation, and must be
witnessed by a Plan representative or a notary public.
6.6 Payment to Substitute Beneficiaries. If benefits remain to be paid
with respect to a Plan participant at a time when the Plan Administrator is
unable to locate the participant, or his beneficiary or beneficiaries
designated in accordance with section 6.5, or following the death of the
participant and such beneficiaries, and if the participant failed to designate
one or more other beneficiaries in the manner described in section 6.5, then
the Plan Administrator shall cause the benefits for such participant to be
distributed or paid to the person or persons who can be located and agree to
accept such amounts within the applicable priority classification set forth
below. Participants and designated beneficiaries are required to maintain a
current post office address on file with the Plan Administrator by notifying
the Plan Administrator of such address in care of the Employer. A substitute
beneficiary will not be determined under this section with respect to a missing
participant or missing designated beneficiary unless the participant or
designated beneficiaries, as the case may be, have failed to claim the
participant's account balances or notify the Plan Administrator of their
whereabouts within three years after the Plan Administrator notifies such
participant or beneficiaries at their last post office addresses filed with the
Plan Administrator. Such notice shall describe the
<PAGE> 34
amounts to which the participant or the beneficiaries are entitled and shall
describe the substitution procedures of this section. In disposing of a
participant's benefits in accordance with this section, after three plan years
following a participant's termination of employment and after unsuccessful
attempts have been made by the Plan Administrator to locate the participant,
the benefits of the participant or of any beneficiary will be disposed of in
any manner permitted by law which the Plan Administrator considers to be fair
and equitable.
6.7 Payment With Respect to Incapacitated Participants or Beneficiaries.
If any person entitled to benefits under the Plan is under a legal disability
or in the Plan Administrator's opinion is incapacitated in any way so as to be
unable to manage his financial affairs, the Plan Administrator may direct the
payment of such benefits to such person's legal representative or to a relative
or friend of such person for such person's benefit, or the Plan Administrator
may direct the application of such benefits to the benefit of such person.
Payments made in accordance with this section shall discharge all liabilities
for such payments under the Plan.
6.8 Final Court Orders. Notwithstanding the other provisions of this
Article 6, if the Trustee is required by a final court order to distribute the
benefits of a participant other than in the manner required under the Plan,
then the Trustee shall cause the participant's benefits to be distributed in a
manner consistent with such final court order. The Trustee shall not be
required to comply with the requirements of a final court order in an action in
which the Trustee, the Plan Administrator, the Plan or the Trust was not a
party, except to the extent such order is a qualified domestic relations order
(as defined in Section 414(p) of the Code).
<PAGE> 35
6.9 Direct Rollover Option. Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a distributee's election under this
section 6.9, a distributee may elect, at the time and in the manner prescribed
by the Plan Administrator, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by the
distributee in a direct rollover.
(a) As used in this section 6.9, an "eligible rollover distribution"
means any distribution of all or any portion of the vested balance to the
credit of the distributee, except that an eligible rollover distribution
does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified period of ten
years or more; any distribution to the extent such distribution is
required under Section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to
Company stock).
(b) As used in this section 6.9, an "eligible retirement plan" means
an individual retirement account described in Section 408(a) of the Code,
an individual retirement annuity described in Section 408(b) of the Code
or a qualified trust described in Section 401(a) of the Code, that accepts
the distributee's eligible rollover distribution. However, in the case of
an eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual
retirement annuity.
(c) As used in this section 6.9, a "distributee" includes an employee
or former employee. In addition, the employee's or former employee's
surviving spouse and the employee's or former employee's spouse or former
spouse who is the alternate payee under a qualified domestic relations
order, as defined in Section 414(p) of
<PAGE> 36
the Code, are distributions with regard to the interest of the spouse
or former spouse.
(d) As used in this section 6.9, a "direct rollover" is a payment by
the Plan to the eligible retirement plan specified by the distributee.
ARTICLE 7
Withdrawals and Loans During Employment
7.1 Withdrawal of Employee After-Tax Contributions and Rollover Accounts.
A participant may request at any time, but not more frequently than twice in
any plan year, a withdrawal of his employee after-tax contributions and
rollover accounts, including any earnings thereon, in accordance with rules
established by the Plan Administrator. All withdrawals shall be in cash.
7.2 Under Age 59-1/2 Hardship Withdrawals. A participant who is
experiencing a financial hardship may request a withdrawal of all or a portion
of his employee pre-tax savings and vested employer matching and retirement
contributions accounts by filing a written request with the Plan Administrator
in accordance with such rules and procedures established by the Plan
Administrator. The Plan Administrator will have discretion to grant or deny
any such requests for hardship withdrawals, subject to the following:
(a) Each request for financial hardship must describe the hardship for
which the withdrawal is requested and provide appropriate documentation.
If the participant is married, each request for a financial hardship
withdrawal must include the consent of the participant's spouse.
(b) No amounts attributable to earnings on an employee pre-tax savings
contributions account after December 31, 1988, can be withdrawn.
(c) A withdrawal shall be considered on account of financial hardship
if it is necessary in light of the participant's immediate and heavy
financial need as described in (A) below and it is
<PAGE> 37
necessary to satisfy such financial need, as described in (B) below.
(i) A withdrawal will be on account of immediate and heavy
financial need only if it is on account of (I) medical expenses
described in Section 213(d) of the Code incurred by the participant
or the participant's spouse or dependents; (II) purchase (excluding
mortgage payments) of a principal residence for the participant;
(III) payment of tuition and related educational fees for the next
twelve months of post-secondary education for the participant or the
participant's spouse, children or dependents; (IV) the need to
prevent the eviction of the participant from the participant's
principal residence or the foreclosure on the mortgage of the
participant's principal residence; or (V) such other purpose deemed
by the Commissioner of the Internal Revenue Service to constitute
immediate and heavy financial need.
(ii) A withdrawal will be necessary to satisfy the financial
need described in (A) above only if (I) the withdrawal does not
exceed the amount necessary to meet such financial needs (including
amounts necessary to pay any federal, state or local income taxes or
penalties reasonably anticipated to result from the withdrawal); and
(II) the participant has obtained all distributions, other than
hardship withdrawals, under all plans maintained by the Zenith
Companies, unless it is determined by the Plan Administrator that
this requirement as it relates to participant loans should be waived
because it is highly likely that there would be a default on such
loan.
(d) Notwithstanding the provisions of section 3.1, the aggregate
participant pre-tax savings contributions to the Plan and to any other
<PAGE> 38
plan maintained by the Zenith Companies for the calendar year immediately
following the calendar year in which the participant receives the hardship
withdrawal shall not exceed the excess of (A) the maximum amount specified
in section 3.1 for such year over (B) the amount of such participant's
pre-tax savings contributions to this Plan and to any other plan
maintained by the Zenith Companies in the calendar year in which the
participant receives the hardship withdrawal.
7.3 Age 59-1/2 Withdrawals. A participant who has attained age 59-1/2
may request at any time, but not more frequently than four times in any plan
year, a withdrawal of part or all of the balance by his accounts under the
Plan.
7.4 Loans to Participants. The Plan Administrator may direct that a loan
be made to a participant, other than a former employee, subject to the
following:
(a) Each request for a loan under this section must be made in
accordance with the rules and procedures adopted from time to time by the
Plan Administrator.
(b) Each loan must be evidenced by a note on a form furnished by the
Plan Administrator or its designee and must be secured by a pledge of up
to 50 percent of the participant's vested account balances as of the
accounting date immediately preceding the date as of which the loan is
made.
<PAGE> 39
(c) The principal amount of each loan, when added to any other
outstanding loan balances of a participant under the Plan and all other
plans of the Zenith Companies, may not exceed the lesser of $50,000
(reduced by the highest outstanding balance of loans from the Plan during
the one-year period ending on the day before the date the new loan is
made) or the lesser of $10,000 (assuming the participant's vested account
balances equal or exceed $10,000 as of such date) or 50 percent of the
participant's vested account balances as of the accounting date
immediately preceding the date as of which the loan is made. The minimum
amount of any loan is $1,000.
(d) Each loan will be for a term not exceeding five years; provided
that the term of a loan may be for a term not exceeding 15 years where the
loan is used to acquire any dwelling unit which within a reasonable time
is to be used as a principal residence of the participant. A participant
shall be permitted no more than two loans outstanding at any one time.
(e) Each loan will bear interest at a reasonable rate (commensurate
with the prevailing rate charged by persons in the business of making
loans under similar circumstances) established by the Plan Administrator
at the beginning of each calendar quarter in a uniform and
nondiscriminatory manner (but not less than five percent nor greater than
the maximum rate permitted by law), and must be amortized in level
payments, made through regular payroll deductions (or by any other method
permitted by the Plan Administrator), made not less frequently than
quarterly, over the life of the loan.
(f) Each note evidencing a loan to a participant shall be held on the
participant's behalf and shall be considered an investment of such
participant's accounts. Accordingly, principal and interest payments on
the note shall be credited to such accounts on the participant's behalf
and reinvested in the investment funds under the Plan in accordance with a
participant's then effective investment election.
(g) The amount of each loan shall be withdrawn from a participant's
accounts in the
<PAGE> 40
following order (and returned upon repayment in reverse order): employer
matching contributions account, employer retirement contributions account,
employee pre-tax savings contribution account and rollover account.
(h) Upon default, the Plan may foreclose on the loan at the earliest
opportunity permitted by law and the loan will be treated as a taxable
distribution at such time. During the period, if any, between the date of
the event constituting default and the date of foreclosure, interest on
the loan will continue to accrue and shall be charged to the participant's
account. The distribution of a participant's canceled note to him (or to
his beneficiary in the event of his death) shall be considered as a
payment for purposes of the Plan. The following events will constitute
default on a loan:
(i) the failure to make an installment payment on the payday
on which it becomes due or the expiration of a grace period in the
loan note;
(ii) any other person (other than the Trustee) acquires an
interest in the participant's account except as otherwise required by
law;
(iii) the participant dies or becomes legally incompetent;
(iv) bankruptcy or insolvency proceedings are instituted by or
against the participant; or
(v) the participant's employment with the Zenith Companies is
terminated for any reason, including retirement, disability,
resignation or discharge.
In the event of (iii), (iv) or (v) above, there shall be no default
if, within the grace period (as defined in the loan documents) following
the occurrence of (iii), (iv) or (v), the participant (or his estate or
legal representative, as the case may be) pays the remaining balance of
the loan together with accrued interest thereon. Notwithstanding
<PAGE> 41
anything in this section 7.4 to the contrary, in the event of (v) above
there shall be no default if the participant continues to be a party in
interest (as defined in Section 3(14) of ERISA) following his termination
of employment.
(i) The Plan Administrator may establish such other rules and
regulations (which shall be uniformly applicable to all participants
similarly situated) as it may deem necessary regarding the granting of
loans, including loan fees (which may be charged directly to the
participant or to the participant's account).
7.5 No Representation Regarding Tax Effect of Withdrawals or Loans.
Neither an Employer, the Plan Administrator, the Trustee, nor any other person
shall be construed as representing the tax effects of any withdrawals or loans
in accordance with this Article 7. It shall be the responsibility of
participants requesting withdrawals or loans to consider the tax effects of
such withdrawals or loans requested by such participant. All loans and
withdrawals shall be deducted, pro-rata, from each investment fund in which the
participant is invested in at the time the loan or withdrawal is made except
for those investment funds which are reduced to zero as the result of such loan
or withdrawal.
ARTICLE 8
Limitations
8.1 Contribution Limitations. Section 415 of the Code imposes certain
limitations on the amount of contributions that may be allocated to a
participant under a defined contribution plan (as defined in Section 414(i) of
the Code) maintained by his employer. If a participant in a defined
contribution plan maintained by his employer also is a participant in a defined
benefit plan (as defined in Section 414(j) of the Code) maintained by such
employer, Section 415 of the Code imposes certain combined limitations
<PAGE> 42
as to the aggregate amount of contributions and benefits that may be provided
for the participant under both types of plans. This Plan is a defined
contribution plan and, therefore, each participant in the Plan shall be subject
to the maximum contribution and benefit limitations set forth in section 8.2 or
section 8.3, if applicable, irrespective of any other provisions of the Plan.
For purposes of Section 415 of the Code and this Article 8, the "limitation
year" with respect to this Plan is the plan year, and a participant's "total
compensation" means, with respect to any plan year, the total compensation paid
to the participant during that year for services rendered to the Zenith
Companies as an employee that is subject to withholding for federal income tax
purposes (before taking into account any withholding exemptions), but excluding
any noncash compensation and any compensation deferred beyond the participant's
termination of employment. In applying the limitations set forth in sections
8.2 and 8.3, reference to the Plan shall mean the Plan and all other defined
contribution plans (whether or not terminated) maintained by the Zenith
Companies and reference to a defined benefit plan maintained by the Zenith
Companies shall mean that plan and all other defined benefit plans (whether or
not terminated) maintained by the Zenith Companies.
8.2 Participant Covered by Defined Contribution Plan. If a participant
in the Plan is not covered by a defined benefit plan maintained by the Zenith
Companies, the annual addition (as defined below) which is allocated to his
accounts under this Plan and under any related defined contribution plans
maintained by the Zenith Companies shall not exceed the lesser of $30,000 (or,
if greater, one-fourth of the defined benefit dollar limitation set forth in
Section 415(b)(1) of the Code, as adjusted pursuant to Section 415(d) thereof
for such year) (the "defined
<PAGE> 43
contribution dollar limitation") or 25 percent of the participant's total
compensation for such limitation year. In applying the preceding limitation,
the annual addition to a participant's accounts under any such related defined
contribution plan will be limited before the annual addition to his account
under this Plan is limited. Any excess contributions resulting from the
allocation of forfeitures, a reasonable error in estimating a participant's
annual earnings or such other limited facts and circumstances as the
Commissioner of the Internal Revenue Service may prescribe and not allocable to
a participant's accounts under the Plan by reason of the limitations on
additions under Section 415 of the Code shall be disposed of as follows:
(a) Any employee after-tax contributions or 401(k) savings
contributions (including earnings thereon) to the extent they would reduce
the excess amount shall be returned to the participant;
(b) If after the application of subsection (a) above an excess amount
still exists, and if the participant is covered by the Plan at the end of
the limitation year, the excess amount shall be used to reduce Employer
contributions for such participant in the next limitation year, and each
succeeding year if necessary; and
(c) If after the application of subsection (a) above an excess amount
still exists and the participant is not covered by the Plan at the end of
the limitation year, the excess amount shall be held unallocated in a
suspense account and the suspense account shall be applied to reduce
future Employer contributions for all remaining participants in the next
limitation year, and each succeeding limitation year if necessary.
A participant's "annual addition" for any plan year means the sum for that year
of the following:
(i) Employer Contributions. Employer contributions (including
401(k)
<PAGE> 44
savings reduction contributions) credited to the participant's
accounts under this Plan and under any related defined contribution
plans;
(ii) Forfeitures. Forfeitures credited to the participant's
accounts under this Plan or under any related defined contribution
plans;
(iii) Participant After-Tax Contributions. The amount of the
participant's after-tax contributions to this Plan or any related
defined contribution or defined benefit plan (determined without
regard to rollover contributions, if any); and
(iv) Certain Medical Expenses for Key Employees. The amounts
attributable to medical benefits allocated to an account of a key
employee, as described in Section 419A(d) of the Code.
8.3 Participant Covered by Defined Contribution Plan and Defined Benefit
Plan. If a participant in the Plan also is a participant in a defined benefit
plan maintained by the Zenith Companies, the contributions made on behalf of
the participant and the benefits payable to the participant shall be determined
in a manner consistent with Section 415 of the Code, as follows:
(a) Defined Contribution Fraction. A fraction shall be determined,
the numerator of which shall be the participant's annual additions under
all related defined contribution plans for each limitation year
(determined in accordance with the plan provisions as in effect for such
year), and the denominator of which shall be the aggregate of the "defined
contribution limitation amounts" in effect for each year of the
participant's employment by the Zenith Companies. The "defined
contribution limitation amount" for any limitation year shall be the
lesser of (i) 1.25 multiplied by the dollar limitation in effect under
Section 415(c)(1)(A) of the Code for such year, provided that in any year
in which the Plan would be a top-heavy plan if 90 percent were substituted
for 60 percent in section 15.2, 1.0 shall be substituted for 1.25, or (ii)
1.4 multiplied by 25 percent of the participant's total compensation for
such year. The "defined contribution limitation amount", for any year
shall be the lesser of (i) 1.25 multiplied by the dollar limitation in
effect under Section 415(c)(l)(A) of the Internal Revenue Code for such
year, provided that in any year in which the Plan
<PAGE> 45
would be a top-heavy plan if 90 percent were substituted for 60 percent
in section 15.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied
by 25 percent of the participant's total compensation for such year. The
numerator of this fraction shall be adjusted in accordance with applicable
regulations to preserve the participant's benefits accrued as of the close
of the last limitation year beginning before December 31, 1986.
(b) Defined Benefit Fraction. A fraction shall also be determined,
the numerator of which shall be the benefits accrued or payable to or for
such participant under the related defined benefit plans as of the end of
the limitation year, and the denominator of which shall be the "defined
benefit limitation amount" in effect for that year. The "defined benefit
limitation amount" for any limitation year shall be the lesser of (i) 1.25
multiplied by the dollar limitation in effect under Section 415(b)(1)(A)
of the Code for such year, provided that in any year in which the Plan
would be a top-heavy plan if 90 percent were substituted for 60 percent in
section 15.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied by
100 percent of the participant's average annual total compensation for the
three consecutive plan years during which the participant actively
participated in such a plan and in which the participant's aggregate total
compensation was the greatest; provided that such amount shall be
appropriately adjusted if necessary as provided in Section 415(b) of the
Code.
(c) Combined Limitation. The contributions under this Plan and under
any related defined contribution plans and the benefits under all related
defined benefit plans will be adjusted to the extent necessary (by first
adjusting the
<PAGE> 46
benefits and contributions under such other plans) so that the sum of
the fractions determined with respect to any participant in accordance
with subsections (a) and (b) above will not exceed 1.0 (or such other
applicable maximum amount permitted by law).
8.4 Distribution of Excess Deferrals. If, not later than the March 1
next following the end of a calendar year, a participant notifies the Plan
Administrator that the participant has made 401(k) savings contributions to
this Plan and one or more other plans (whether maintained by an Zenith Company
or an unrelated company) in excess of $9,500 for 1997 (or such other maximum
amount for other plan years as may be permitted by law for such calendar year)
during such calendar year, and further notifies the Plan Administrator of the
amount of such excess allocated to this Plan, such excess amount shall be paid
to such participant (along with any income or loss allocable thereto as
determined pursuant to the method set forth in section 8.6(d)) as soon as
practicable following such notification, but in any event by the April 15
following the calendar year with respect to which such excess deferrals were
made. A participant is deemed to notify the Plan Administrator of such excess
that arises by taking into account only those 401(k) savings contributions made
to this Plan and any other plans of the Zenith Companies.
8.5 Highly Compensated Employee. The term highly compensated employee
includes highly compensated active employees and highly compensated former
employees. A highly compensated active employee includes any employee who
performs services for the Zenith Companies during the determination year and
who, (i) received compensation from the Zenith Companies in excess of $80,000
for the preceding year or (ii) was a 5 percent owner at any time during the
current year or the preceding year. A highly compensated former employee
includes any employee who was a highly
<PAGE> 47
compensated employee when he separated from service or who was a highly
compensated employee at any time after attaining age 55. The determination of
who is a highly compensated employee, including the determinations of the
number and identity of employees in the top-paid group and the compensation
that is considered, will be made in accordance with Section 414(q) of the Code
and the regulations thereunder, and the Plan Administrator shall be abe to make
and/or revoke any determinations in the future if laws or regulations permit.
8.6 Limitations on Elective Contributions. Participant 401(k) savings
contributions shall be subject to the following nondiscrimination standards and
shall be adjusted, as provided below, to the extent necessary to comply with
the limitations set forth in Section 401(k) of the Code and the regulations
thereunder. For purposes of this section, the term "pre-tax contribution"
shall mean any Employer contribution made to the Plan that (i) is subject to a
cash or deferred arrangement (as defined in Section 1.401(k)-1(a)(3) of the
Treasury regulations) and (ii) is immediately nonforfeitable. The Employer
shall maintain records demonstrating compliance with this section.
(a) Actual Deferral Percentage Limitation. In any plan year, the
actual deferral percentage for the group of participants who are highly
compensated employees may not exceed the greater of the following:
(i) the actual deferral percentage of the group of
participants who are not highly compensated employees (the
"non-highly compensated group") multiplied by 1.25, or
(ii) the lesser of the actual deferral percentage for the
non-highly compensated group multiplied by two or the actual deferral
percentage of the
<PAGE> 48
non-highly compensated group plus two percentage points.
(b) Actual Deferral Percentage. The actual deferral percentage for a
specified group of participants for any plan year shall be the average of
the ratios (computed, to the nearest one-hundredth of one percent,
separately for each participant in such group) of the pre-tax
contributions, and amounts treated as pre-tax contributions (including
excess pre-tax contributions of highly compensated employees), for such
participant for such year to the participant's compensation (as defined at
Section 414(s) of the Code, as modified by Section 414(s)(2) thereof)
taken into account for such plan year during which the participant was an
eligible employee. For purposes of this section the following additional
rules shall apply:
(i) A 401(k) savings contribution shall be taken into account
only if it relates to compensation that either (A) would have been
received by the participant in the plan year but for the deferral
election or (B) is attributable to services performed by the
participant in the plan year and would have been received by the
participant within 2 1/2 months after the close of the plan year but
for the deferral election. A pre-tax contribution that does not meet
the foregoing requirements will not be tested under Section 401(k) of
the Code but must separately satisfy Section 401(a)(4) of the Code
for the plan year of allocation as if it was the only non-pre-tax
Employer contribution for the year.
<PAGE> 49
(ii) In the event this Plan satisfies the requirement of
Sections 401(k), 401(a)(4) or 410(b) of the Code only if aggregated
with one or more other plans, or if one or more other plans satisfies
the requirements of such Sections of the Code only if aggregated with
this Plan, then this section shall be applied by determining the
actual deferral percentage of employees as if all such plans were a
single plan. In accordance with applicable Treasury regulations,
plans of the Employers may be aggregated in order to satisfy Section
401(k) of the Code but only if such plans as aggregated satisfy the
requirement of Section 410(b) of the Code and provided that each plan
has the same plan year.
(iii) Except as provided in applicable Treasury regulations,
the actual deferral percentage of a highly compensated employee will
be determined by treating all cash or deferred arrangements of the
Employer (or an entity that is required to be aggregated with the
Employer under Sections 414(b), (c), (m) or (o) of the Code) under
which the highly compensated employee is eligible as a single
arrangement. If the cash or deferral arrangements have different
plan years, all such arrangements ending with or within the same
calendar year will be treated as a single arrangement.
Notwithstanding the foregoing, certain plans shall be treated as
separate if mandatorily disaggregated under applicable Treasury
regulations issued pursuant to Section 401(k) of the Code.
(iv) At the discretion of the Plan Administrator, and in
accordance with applicable Treasury regulations, any Employer
contributions or matching contributions credited on a participant's
behalf in the plan year which meet the withdrawal restrictions and
vesting requirements of Sections
<PAGE> 50
401(k)(2)(B) and (C) of the Code ("qualified nonelective
contributions" and "qualified matching contributions," respectively)
may be added to the participant's 401(k) savings contributions in
computing the participant's actual deferral percentage; provided,
that the Employer contributions and matching contributions made to
the Plan for such year satisfy the requirements of Section 401(a)(4)
of the Code with and without the inclusion of the qualified
nonelective contributions and qualified matching contributions used
to satisfy this section. Qualified nonelective contributions and
qualified matching contributions which are used to satisfy this
section cannot be taken into account to satisfy the requirement of
section 8.7.
(v) Elective contributions treated as matching contributions
under section 8.7 shall not be included in the determination of a
participant's actual deferral percentage.
(c) Excess Contributions. If in any plan year the actual deferral
percentage for the highly compensated group does not satisfy one of the
tests in subsection (a) above, the Plan Administrator shall reduce the
401(k) savings contributions of some or all of the participants in the
highly compensated group until one of the tests is satisfied. Such
reduction shall be made by reducing the excess contributions for the
highly compensated employee with the highest dollar amount of excess
contributions to the lesser of (i) the extent required to enable the Plan
to satisfy the actual deferral percentage test or (ii) the extent required
to cause the dollar amount of such highly compensated employee's excess
contributions equal the dollar amount of the excess contributions for the
highly compensated employee with the next highest dollar amount of excess
contributions. This procedure shall be repeated until the Plan satisfies
the actual deferral percentage test set forth herein. The portion of any
participant's elective
<PAGE> 51
contribution which is reduced pursuant to this procedure shall be referred
to as the "excess contributions."
(d) Distribution of Excess Contributions. If in any plan year the
elective contributions of one or more of the participants who are highly
compensated employees must be reduced in accordance with subsection (c)
above, the Plan Administrator shall distribute the amount of the excess
contributions, plus the income (or minus the loss) allocable thereto, as
soon as practicable following the determination of such excess but in any
event by the last day of the plan year following the end of the plan year
in which the excess contributions were made. Under Section 4979 of the
Code a ten percent tax is imposed on the Employer for any such excess
contributions which are distributed more than 2 1/2 months after the last
day of the plan year in which the excess contributions were made. A
distribution of the excess contributions may be made without regard to any
notice or consent otherwise required under the Plan. The income or loss
allocable to such excess contributions shall be determined by multiplying
the income or loss allocable to the pre-tax contributions (and, if
applicable, amounts treated as pre-tax contributions for purposes of the
participant's deferral percentage) for the plan year by a fraction. The
numerator of the fraction is the excess contributions for the plan year.
The denominator is equal to (i) the total account balance of the
participant attributable to pre-tax contributions (and amounts treated as
such for purposes of the actual deferral percentage) as of the beginning
of the plan year, plus (ii) the participant's pre-tax contributions (and
amounts treated as such for purposes of the actual deferral percentage)
for the plan year. The amount of excess contributions distributed under
this subsection for a plan year shall be reduced by any excess deferrals
previously distributed for the employee's taxable year ending with or
within the plan year. Excess contributions shall be treated as annual
additions for purposes of Section 415 of the Code.
<PAGE> 52
8.7 Limitation on Employee and Matching Contributions. Employee and
matching contributions shall be subject to the following nondiscrimination
standards and such amounts shall be adjusted, as provided below, to the extent
necessary to comply with the limitations set forth in Section 401(m) of the
Code and the regulations thereunder. The term "employee contributions" shall
include any voluntary after-tax contribution to the Plan that is allocated to a
separate account to which earnings and losses are allocated. The term
"matching contributions" means any Employer contribution made to the Plan on
account of an employee contribution. The Employers shall maintain records
demonstrating compliance with this section.
(a) Contribution Percentage Limitations. In any plan year, the
contribution percentage for the group of participants who are highly
compensated employees may not exceed the greater of the following:
(i) the actual contribution percentage of the group of
participants who are not highly compensated employees (the
"non-highly compensated group") multiplied by 1.25, or
(ii) the lesser of the contribution percentage for the
non-highly compensated group multiplied by two or the contribution
percentage of the non-highly compensated group plus two percentage
points.
(b) Contribution Percentage. The contribution percentage of a
specified group of participants shall be the average of the contribution
percentages (computed separately, to the nearest one-hundredth of one
percent) for each participant in the group. The contribution percentage
for each participant shall equal the sum of the employee and matching
contributions allocated to the participant's account for the plan year and
the qualified non-elective contributions treated as matching contributions
for the plan year, divided by the participants'
<PAGE> 53
compensation (as defined in Section 414(s) of the Code, as modified by
Section 414(s)(2) thereof) taken into account for such plan year during
which the participant was an eligible employee. For purposes of this
section, the following additional rules shall apply:
(i) A matching contribution will be taken into account for
purposes of this section for a given plan year only if (A) it is made
on account of the participant's employee contributions for that plan
year, (B) it is allocated to the participant's account during that
plan year and (C) it is paid to the Trust by the end of the twelfth
month following the close of that plan year. A matching contribution
that does not meet the foregoing requirements will not be tested
under Section 401(m) of the Code but must separately satisfy Section
401(a)(4) of the Code for the plan year of allocation as if it were
the only Employer allocation for that plan year. An employee
contribution will be taken into account for purposes of this section
only if such contribution is paid to the Trust during the plan year
or paid to an agent of the Plan and transmitted to the Trust within a
reasonable period after the end of the plan year.
(ii) As provided in applicable Treasury regulations, for
purposes of determining the contribution percentage of the family
group (as defined in section 8.5), the family group shall be treated
as one highly compensated employee and the contribution percentage
for the family group shall be determined by combining the
compensation, employee contributions and matching contributions (and
amounts treated as matching contributions) of all eligible family
members.
(iii) In the event this Plan satisfies the requirement of
Sections 401(m), 401(a)(4) or 410(b) of the Code
<PAGE> 54
only if aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such Sections of the Code
only if aggregated with this Plan, then this section shall be applied
by determining the contribution percentage of employees as if all
such plans were a single plan. In accordance with applicable
Treasury regulations, plans of the Employers may be aggregated in
order to satisfy Section 401(m) of the Code but only if such plans as
aggregated satisfy the requirement of Section 410(b) of the Code and
provided that each plan has the same plan year.
(iv) Except as provided in applicable Treasury regulations,
the contribution percentage of a highly compensated employee who is
eligible to participate in more than one plan of the Employer in
which employee or matching contributions are made will be determined
by treating all the plans of the Employer (or an entity that is
required to be aggregated with the Employer under Sections 414(b),
(c), (m) or (o) of the Code) in which the highly compensated employee
is eligible as a single plan. If the highly compensated employee
participates in two or more plans that have different plan years, all
such plans ending with or within the same calendar year will be
treated as a single plan. Notwithstanding the foregoing, certain
plans shall be treated as separate if mandatorily disaggregated under
applicable Treasury regulations issued pursuant to Section 401(m) of
the Code.
(v) At the discretion of the Plan Administrator, and in
accordance with applicable Treasury regulations, any qualified
nonelective contributions (as defined in Section
1.401(k)-1(g)(13)(ii)) of the Treasury regulations made for such plan
year may be taken into account in computing the
<PAGE> 55
participant's contribution percentage; provided, that the qualified
nonelective contributions satisfy the requirements of Section
401(a)(4) of the Code both with and without inclusion of such
contributions used to satisfy the requirements of this section.
(c) Excess Aggregate Contributions. If in any plan year the
contribution percentage for the highly compensated group does not satisfy
one of the tests in subsection (a) above, the Plan Administrator shall
reduce the employee contributions and matching contributions of some or
all of the participants in the highly compensated group until one of the
tests is satisfied. Such reductions shall be made in accordance with
Section 1.401(m)-1(e)(2) of the Treasury regulations by reducing the
contribution percentage for the highly compensated employee with the
highest percentage to the extent required to enable this Plan to satisfy
the contribution percentage test or cause such highly compensated
employees' contribution percentage to equal the percentage for the highly
compensated employee with the next highest contribution percentage. This
procedure shall be repeated until the Plan satisfies the contribution
percentage test set forth herein. The amounts so reduced shall be
referred to as the "excess aggregate contributions". (If there are
employee and matching contributions, the employee contributions shall be
reduced first to the level of such contributions which are matched. If
the test is not satisfied by reducing the employee contributions, then the
matching contributions and any unreduced employee contributions shall be
reduced in tandem.) The determination of excess aggregate contributions
will be made after first determining the excess deferral amount and the
excess contribution amount. Excess aggregate contributions shall be
allocated among the family group (as defined in section 8.4) members in
proportion to the employee and matching contributions of each family
member that is combined in determining the contribution percentage.
(d) Distribution of Excess Aggregate Contributions. Except as
provided below, if in
<PAGE> 56
any plan year the employee or matching contributions of one or more of
the participants in the highly compensated group must be reduced in
accordance with subsection (c) above, the Plan Administrator shall
distribute the amount of the excess aggregate contributions, plus the
income (or minus the loss) allocable thereto, as soon as practicable
following the determination of such excess but in any event by the last
day of the plan year following the end of the plan year for which such
contributions were made. Under Section 4979 of the Code a ten percent tax
is imposed on the Employer for any such excess aggregate contribution
which are distributed after more than 2 1/2 months after the last day of
the plan year for which such contributions were made. A distribution of
the excess aggregate contribution may be made without regard to any notice
or consent otherwise required by the Plan. Excess aggregate
contributions, including forfeited matching contributions, are treated as
Employer contributions for purposes of Sections 404 and 415 of the Code.
The income or loss allocable to such excess aggregate contributions shall
be determined by multiplying the income or loss allocable to the
participant's employee and matching contributions (and amounts, if any,
treated as such for purposes of the contribution percentage, but excluding
such matching contributions used in the actual deferral percentage test
for the plan year) by a fraction. The numerator of the fraction is the
excess aggregate contributions for the plan year. The denominator is
equal to (i) the total account balance of the participant attributed to
employee and matching contributions as of the beginning of the plan year,
plus (ii) the employee and matching contributions (and amounts, if any,
treated as such for purposes of the contribution percentage, but excluding
such matching contributions used in the actual deferral percentage test
for the plan year).
8.8 Multiple Use Limitation. Notwithstanding the limitations required by
sections 8.6 and 8.7, a participant's pre-tax contributions, employee
contributions and matching contributions may be limited under this section in
order to prevent "multiple use" under Sections 401(k) and 401(m) of the Code,
as set forth below. The multiple use
<PAGE> 57
limitation shall apply if the sum of the actual deferral percentage and
contribution percentage for the group of highly compensated employees
(determined after any corrections required under section 8.6 or 8.7) exceeds
the "aggregate limit". The aggregate limit shall be the greater of (a) and (b)
below:
(a) the sum of (A) 1.25 times the greater of the actual deferral
percentage or the contribution percentage for non-highly compensated
employees and (B) two percentage points plus the lesser of the actual
deferral percentage or the contribution percentage for non-highly
compensated employees (which amount shall not exceed twice the lesser of
such percentages),
(b) the sum of (A) 1.25 times the lesser of the actual deferral
percentage or the contribution percentage for non-highly compensated
employees and (B) two percentage points plus the greater of the actual
deferral percentage or the contribution percentage for non-highly
compensated employees (which amount shall not exceed twice the greater of
such percentages).
The application of the multiple use limitation shall be made in accordance
with Section 1.401(m)-2 of the Treasury regulations. If the multiple use
limitation applies, then the actual deferral percentage or contribution
percentage of the highly compensated employees shall be reduced (in the manner
described in sections 8.6 or 8.7) until such limit shall be satisfied.
Alternatively, the Employer may satisfy the multiple use limitation by making
qualified nonelective contributions to plan participants in accordance with
applicable Treasury regulations.
ARTICLE 9
Reemployment
9.1 Rehired Employee or Participant. If an employee or a participant who
has no vested benefit under the Plan terminates his employment and is
subsequently
<PAGE> 58
reemployed by a Zenith Company, his years of service accrued prior to his
termination of employment shall not be reinstated for purposes of section 6.1
if the number of consecutive one year breaks in service (as defined in section
6.2) within such period exceeds five consecutive one year breaks in service.
In all other cases, an employee's or participant's prior years of service shall
be reinstated as of the date he is reemployed by a Zenith Company. In no event
shall years of service occurring after a participant incurs five consecutive
one year breaks in service be used to determine the vested and nonforfeitable
interest of a participant in his employer matching or [profit-sharing]
contributions accounts as of his prior termination of employment which as
become a forfeiture. A rehired employee shall become a participant and a
rehired participant shall again become a participant as of the date he meets or
again meets the requirements of section 2.1.
9.2 Reinstatement of Forfeitures. If a participant whose employment had
terminated because of resignation or dismissal is reemployed by a Zenith
Company prior to having incurred five consecutive one year breaks in service
(as defined in section 6.2), any forfeiture which resulted from his prior
resignation or dismissal shall again be credited to his employer matching and
retirement contributions accounts as of the accounting date coincident with or
next following his date of rehire. If such participant subsequently terminates
employment because of resignation or dismissal and the participant is not
entitled to the full balance in such employer contributions accounts, the
amount distributed under section 6.1 from such accounts will be determined in
accordance with the following:
(a) First, the amount of the distribution received by the participant
from each of his employer matching and retirement contributions accounts
because of his prior resignation or dismissal shall be added to the
balance in each of his employer matching and retirement contributions
<PAGE> 59
accounts as of the accounting date coincident with or next preceding his
subsequent employment termination date.
(b) Next, the amount determined under subsection (a) above shall be
multiplied by the vesting percentage applicable at his subsequent
employment termination date under section 6.1.
(c) Finally, the amount determined under subsection (b) above shall be
reduced by the amount of the distribution received by the participant from
such employer contributions accounts because of his prior resignation or
dismissal.
The remaining portion of the participant's employer contribution account will
be treated as a forfeiture and will be subject to the provisions of section
6.2.
ARTICLE 10
Plan Administrator
10.1 Plan Administrator's Duties. As provided in section 1.2, the Named
Fiduciary Committee is responsible for the administration of the Plan. Except
as otherwise specifically provided and in addition to the powers, rights and
duties specifically given to the Plan Administrator elsewhere in the Plan, the
Plan Administrator shall have the following powers, rights and duties:
(a) To have full and complete discretion to construe and interpret
the Plan, to decide all questions of Plan eligibility, to determine the
amount, manner and time of payment of any benefits under the Plan, and to
remedy ambiguities, inconsistencies or omissions.
(b) To adopt such rules of procedure as may be necessary for the
efficient administration of the Plan and as are consistent with its terms
and such rules.
<PAGE> 60
(c) To appoint or remove the Trustee and any investment managers and
to add or discontinue any investment funds.
(d) To make determinations as to the right of any person to a
benefit, to afford any person dissatisfied with such determination the
right to a hearing thereon, and to direct payments or distributions from
the Trust in accordance with the provisions of the Plan.
(e) To furnish the Employers with such information as may be
required by them for tax or other purposes in connection with the Plan.
(f) To enroll participants in the Plan, to distribute and receive
administration forms, and to comply with all applicable governmental
reporting and disclosure requirements.
(g) To employ agents, attorneys, accountants, actuaries or other
persons (who also may be employed by the Employers, the Trustee, or any
investment manager or managers) and to allocate or delegate to them such
powers, rights and duties as the Plan Administrator considers necessary or
advisable to properly carry out the administration of the Plan, provided
that any such allocation or delegation and the acceptance thereof must be
in writing.
(h) To report to such person or persons as the Company designates as
to the administration of the Plan, any significant problems which have
developed in connection with the administration of the Plan and any
recommendations which the Plan Administrator may have as to the amendment
of the Plan or the modification of Plan administration.
The Plan Administrator shall have no power to add to, subtract from or modify
any of the terms of the Plan, nor to change or add to any benefits provided by
the Plan, nor to waive or fail to apply any requirements of eligibility for
benefits under the Plan except as expressly provided by appropriate delegation
of any such powers by the Company.
10.2 Action by Plan Administrator. During a period in which two or more
Committee members are acting,
<PAGE> 61
any action by the Plan Administrator will be subject to the following
provisions:
(a) The Committee may act by meeting (including a meeting from
different locations by telephone conference) or by document signed without
meeting, and documents may be signed through the use of a single document
or concurrent documents.
(b) A Committee member by writing may delegate part or all of his
rights, powers, duties and discretion to any other committee member, with
such other Committee member's consent.
(c) The Committee shall act by a majority decision, which action
shall be as effective as if such action had been taken by all members of
the Committee; provided that by majority action one or more Committee
members or other persons may be authorized to act with respect to
particular matters on behalf of all Committee members.
(d) If there is an equal division among the Committee members with
respect to any question, a disinterested party may be selected by a
majority vote to decide the matter. Any decision by such disinterested
party will be binding.
(e) The certificate of the secretary of the Committee or the majority
of the Committee members that the Committee has taken or authorized any
action shall be conclusive in favor or any person relying on such
certificate.
(f) Except as required by law, no member of the Committee shall be
liable or responsible for an act or omission of other Committee members
in which the former has not concurred.
10.3 Information Required for Plan Administration. The Employers shall
furnish the Plan Administrator with such data and information as the Plan
Administrator considers necessary or desirable to perform its duties with
respect to Plan administration. The records of an Employer as to an employee's
or participant's period or periods of employment, termination of employment and
the
<PAGE> 62
reason therefor, leaves of absence, reemployment, and compensation will be
conclusive on all persons unless determined to the Plan Administrator's
satisfaction to be incorrect. Participants and other persons entitled to
benefits under the Plan also shall furnish the Plan Administrator with such
evidence, data or information as the Plan Administrator considers necessary or
desirable for the Plan Administrator to perform his duties with respect to Plan
administration.
10.4 Decision of Plan Administrator Final. Subject to applicable law and
the provision of section 10.5, any interpretation of the provisions of the Plan
and any decision on any matter within the discretion of the Plan Administrator
made by the Plan Administrator in good faith shall be binding on all persons.
A misstatement or other mistake of fact shall be corrected when it becomes
known, and the Plan Administrator shall make such adjustment on account thereof
as the Plan Administrator considers equitable and practicable.
10.5 Review of Benefit Determinations. If a claim for benefits made by a
participant or his beneficiary is denied, the Plan Administrator shall, within
90 days (or 180 days if special circumstances require an extension of time)
after the claim is made, furnish the person making the claim with a written
notice specifying the reasons for the denial. Such notice shall also refer to
the pertinent Plan provisions on which the denial is based, describe any
additional material or information necessary for properly completing the claim
and explain why such material or information is necessary, and explain the
Plan's claim review procedures. If requested in writing, the Plan
Administrator shall afford each claimant whose claim has been denied a full and
fair review of the Plan Administrator's decision and, within 60 days (120 days
if special circumstances require additional time) of the request for
reconsideration of the denied claim, the Plan
<PAGE> 63
Administrator shall notify the claimant in writing of the Plan Administrator's
final decision.
10.6 Uniform Rules. The Plan Administrator shall perform its duties with
respect to Plan administration on a reasonable and nondiscriminatory basis and
shall apply uniform rules to all participants similarly situated.
10.7 Plan Administrator's Expenses. All costs, charges and expenses
reasonably incurred by the Plan Administrator or other expenses of the Plan or
the Trust will be paid by the Employers or by the Trust in such portions as the
Company shall direct; provided no compensation will be paid to a committee
member as such.
10.8 Interested Plan Administrator. If a member of the Named Fiduciary
Committee is also a participant in the Plan, he may not decide or determine any
matter or question concerning his benefits unless such decision or
determination could be made by him under the Plan if he were not a Committee
member.
10.9 Resignation or Removal of Plan Administrative Committee Members. A
member of the Committee may be removed by the Company at any time. A member of
the Committee may resign at any time by giving ten days' prior written notice
to the Committee and the other members of the Committee. The Company may fill
any vacancy in the membership of the Committee; provided, however, that if a
vacancy reduces the membership of the committee to less than three, such
vacancy shall be filled as soon as practicable. The Company shall give prompt
written notice thereof to the other members of the Committee. Until any such
vacancy is filled, the remaining members may exercise all of the powers, rights
and duties conferred on the Plan Administrator.
10.10 Indemnification. To the extent permitted by law, no person
(including a Trustee, any present or former Named Fiduciary Committee member,
and any present or former director, officer or employee of any Employer) shall
<PAGE> 64
be personally liable for any act done or omitted to be done in good faith in
the administration of the Plan or the investment of the Trust fund. To the
extent permitted by law, each present or former director, officer or employee
of any Employer to whom the Named Fiduciary Committee or an Employer has
delegated any portion of its responsibilities under the Plan and each present
or former Named Fiduciary Committee member shall be indemnified and saved
harmless by the Employers (to the extent not indemnified or saved harmless
under any liability insurance or other indemnification arrangement with respect
to the Plan) from and against any and all claims of liability to which they are
subjected by reason of any act done or omitted to be done in good faith in
connection with the administration of the Plan or the investment of the Trust
fund, including all expenses reasonably incurred in their defense if the
Employers fail to provide such defense.
ARTICLE 11
Relating to the Employers
11.1 Action by Employers. Any action required or permitted of an
Employer under the Plan shall be by resolution of its Board of Directors or by
a duly authorized committee of its Board of Directors, or by a person or
persons authorized by resolution of its Board of Directors or such committee.
11.2 Additional Employers. With the consent of the Company, any
subsidiary or other related company that is not an Employer may adopt the Plan
and become an Employer thereunder by filing with the Plan Administrator a
certified copy of a resolution of the Board of Directors of the subsidiary or
other related company providing for its adoption of the Plan and a certified
copy of a resolution of the directors of the Company consenting to such
adoption.
<PAGE> 65
11.3 Restrictions on Reversions. The Employers shall have no right, title
or interest in the assets of the Plan, nor will any part of the assets of the
Plan at any time revert or be repaid to an Employer, directly or indirectly,
except as follows:
(a) If the Internal Revenue Service initially determines that the
Plan, as applied to any Employer, does not meet the requirements of a
"qualified plan" under Section 401(a) of the Code, the assets of the Plan
attributable to contributions made by that Employer under the Plan shall
be returned to that Employer within one year of the date of denial of
qualification of the plan as applied to that Employer.
(b) If a contribution or a portion of a contribution is made by an
Employer as a result of a mistake of fact, such contribution or portion of
a contribution shall not be considered to have been contributed under the
Plan by that Employer and, after having been reduced by any losses of the
Trust fund allocable thereto, shall be returned to that Employer within
one year of the date the amount is contributed under the Plan.
(c) Each contribution made by an Employer is conditioned upon the
continued qualification of the Plan and the deductibility of such
contribution as an expense for federal income tax purposes and, therefore,
to the extent that a contribution is made by an Employer under the Plan
for a period for which the Plan is not a qualified plan or the deduction
for a contribution made by the Employer is disallowed, then such
contribution or portion of a contribution, after having been reduced by
any losses of the Trust fund allocable thereto, shall be returned to that
Employer within one year of the date of determination of the nonqualified
status of the Plan or the date of disallowance of the deduction.
ARTICLE 12
Amendment, Termination or Plan Merger
<PAGE> 66
12.1 Amendment. While the Company expects and intends to continue the
Plan, the Company must necessarily reserve and hereby does reserve the right,
subject to section 11.3, to amend the Plan from time to time, except as
follows:
(a) The duties and liabilities of the Named Fiduciary Committee
cannot be changed substantially without its consent; and
(b) No amendment shall reduce the value of a participant's benefits
to less than the amount he would be entitled to receive if he had resigned
from the employ of all of the Zenith Companies on the day of the
amendment.
12.2 Termination. The Plan will terminate as to all Employers on any
date specified by the Company if advance written notice of the termination is
given to the Plan Administrator and any other Employers. The Plan will
terminate as to an individual Employer on the first to occur of the following:
(a) The date it is terminated by that Employer, if ten days' advance
written notice of the termination is given to the Company and the Plan
Administrator.
(b) The date that Employer is judicially declared bankrupt or
insolvent.
(c) The dissolution, merger, consolidation or reorganization of that
Employer, or the sale by that Employer of all or substantially all of its
assets, except that:
(i) In any such event arrangements may be made with the
consent of the Company whereby the Plan will be continued by any
successor to that Employer or any purchaser of all or substantially
all of its assets without a termination thereof, in which case the
successor or purchaser will be substituted for that Employer under
the Plan; and
<PAGE> 67
(ii) If any Employer is merged, dissolved or in any way
reorganized into, or consolidated with, any other Employer, the Plan
as applied to the former Employer will automatically continue in
effect without a termination thereof.
Notwithstanding the foregoing, if any of the events described above should
occur but some or all of the participants employed by an Employer are
transferred to employment with one or more of the other Employers coincident
with or immediately after the occurrence of such event, the Plan as applied to
those participants will automatically continue in effect without a termination
thereof.
12.3 Plan Merger. In no event shall there be any merger or consolidation
of the Plan with, or transfer of assets or liabilities to, any other plan
unless each participant in the Plan would (if the Plan then terminated) receive
a benefit immediately after the merger, consolidation or transfer which is
equal to or greater than the benefit the participant would have been entitled
to receive immediately before the merger, consolidation or transfer (if the
Plan had then terminated).
12.4 Continuation by a Successor or Purchaser. Notwithstanding section
12.2, the Plan and the Trust shall not terminate in the event of dissolution,
merger, consolidation or reorganization of an Employer or sale by an Employer
of its entire assets or substantially all of its assets if arrangements are
made in writing between the Employer and any successor to the Employer or
purchaser of all or substantially all of its assets whereby such successor or
purchaser will continue the Plan and the Trust. If such arrangements are made,
then such successor or purchaser shall be substituted for the Employer under
the Plan and the Trust.
<PAGE> 68
12.5 Notice to Participants of Amendments, Terminations or Plan Mergers.
Participants affected thereby shall be notified by the Company within a
reasonable time following any amendment, termination, plan merger, or
consolidation.
12.6 Vesting and Distribution on Termination. The date of any
termination or partial termination as respects all Employers (and, at the
discretion of the Company, on a termination or partial termination of the Plan
as respects any Employer that does not result in the termination or partial
termination of the Plan as respects all Employers), will be an "interim
accounting date", and the benefits of each participant affected by such
termination or partial termination will be fully vested and will be payable to
such participant in a lump sum as soon as practicable unless other arrangements
are previously made pursuant to the provisions of Article 6.
12.7 Administrative Amendments. Subject to foregoing provisions of this
Article, the Board of Directors of the Company hereby delegates to the Plan
Administrator the right to make administrative amendments to this Plan and the
trust agreement. An amendment will be considered an administrative amendment
properly within the delegated authority of the Plan Administrator only if such
amendment does not significantly change the amount or level of Employer funding
under this Plan or any other provision specifically governed by action of the
Board in accordance with the provisions of this Plan or the trust agreement.
Any amendment adopted by the Plan Administrator pursuant to the delegated
authority shall be reported to the Board within a reasonable period following
its adoption, but in no event later than 2-1/2 months after the close of the
plan year in which it becomes effective. Any such amendment shall become
effective as of the date specified by the Plan Administrator.
<PAGE> 69
ARTICLE 13
General Provisions
13.1 Examination of Plan Documents. Copies of the Plan and any
amendments thereto will be on file at the principal office of the Company where
they may be examined by any participant or any other person entitled to
benefits under the Plan.
13.2 Notices. A notice mailed to a participant or beneficiary at his
last address filed with the Plan Administrator in care of the Company will be
binding on the participant or beneficiary for all purposes of the Plan. Any
notice or document relating to the Plan required to be given to or filed with
the Plan Administrator or any Employer shall be considered as given or filed if
delivered or mailed by registered or certified mail, postage prepaid, to the
Plan Administrator, in care of the Company, at 1000 Milwaukee Avenue, Glenview,
Illinois 60025.
13.3 Nonalienation of Plan Benefits. The rights or interests of any
participant or any participant's beneficiaries to any benefits or future
payments hereunder shall not be subject to attachment or garnishment or other
legal process by any creditor of any such participant or beneficiary, nor shall
any such participant or beneficiary have any right to alienate, anticipate,
commute, pledge, encumber or assign any of the benefits or rights which he may
expect to receive, contingently or otherwise under this Plan except as may be
required by the tax withholding provisions of the Code or of a state's income
tax act or pursuant to a qualified domestic relations order, as defined in
Section 414(p) of the Code.
13.4 No Employment Guarantee. None of the establishment of the Plan,
modification thereof, the creation of any fund or account, or the payment of
any benefits shall be construed as giving to any participant or
<PAGE> 70
other person any legal or equitable right against the Employers, the Plan
Administrator or Trustee, except as herein provided. Under no circumstances
shall the terms of employment of any participant be modified or in any way
affected hereby. The maintenance of this Plan shall not constitute a contract
of employment, and participation in the Plan will not give any participant a
right to be retained in the employ of the Employers. None of the Employers,
the Plan Administrator or the Trustee in any way guarantees any assets of the
Plan from loss or depreciation or any payment to any person. The liability of
the Plan Administrator or any Employer as to any payment or distribution of
benefits under the Plan is limited to the available assets of the Trust fund.
13.5 Participant Litigation. In any action or proceeding regarding the
Plan assets or any property constituting a portion or all thereof or regarding
the administration of the Plan, employees or former employees of the Employers
or their beneficiaries or any other persons having or claiming to have an
interest in this Plan shall not be necessary parties and shall not be entitled
to any notice or process. Any final judgment which is not appealed or
appealable and may be entered in any such action or proceeding shall be binding
and conclusive on the parties hereto and all persons having or claiming to have
any interest in this plan. To the extent permitted by law, if a legal action
is begun against the Employers, the Plan Administrator or the Trustee by or on
behalf of any person, and such action results adversely to such person, or if a
legal action arises because of conflicting claims to a participant's or other
person's benefits, the costs to the Employers, the Plan Administrator or the
Trustee of defending the action will be charged to the sums, if any, which were
involved in the action or were payable to the participant or other person
concerned. To the extent permitted by applicable law, acceptance of
participation in
<PAGE> 71
this Plan shall constitute a release of the Employers, the Plan Administrator
and the Trustee and their agents from any and all liability and obligation not
involving willful misconduct or gross neglect.
13.6 Successors. The Plan and the Trust will be binding on all persons
entitled to benefits hereunder and their respective heirs and legal
representatives, and on the Plan Administrator and the Trustee and their
successors.
13.7 Adequacy of Evidence. Evidence which is required of anyone under
the Plan shall be executed or presented by the proper individuals or parties
and may be in the form of certificates, affidavits, documents or other
information which the Plan Administrator, the Trustee, the Employers or other
persons acting on such evidence considers pertinent and reliable.
13.8 Gender and Number. Words denoting the masculine gender shall
include the feminine and neuter genders and the singular shall include the
plural and the plural shall include the singular wherever required by the
context.
13.9 Waiver of Notice. Any notice required under the plan may be waived
by the person entitled to notice.
13.10 Applicable Law. The Plan and the Trust shall be construed in
accordance with the provisions of ERISA and other applicable federal laws. To
the extent not inconsistent with such laws, this Plan shall be construed in
accordance with the laws of the state of Illinois.
13.11 Severability. If any provision of the Plan shall be held illegal
or invalid for any reason, such illegal or invalid provision shall not affect
the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if such illegal or invalid provisions had never been contained in
the Plan.
13.12 Fiduciary Responsibilities. It is specifically intended that all
provisions of the Plan shall be applied so that all fiduciaries with respect to
the Plan
<PAGE> 72
shall be required to meet the prudence and other requirements and
responsibilities of applicable law to the extent such requirements of
responsibilities apply to them. No provisions of the Plan are intended to
relieve a fiduciary from any responsibility, obligation, duty or liability
imposed by applicable law. In general, a fiduciary shall discharge his duties
with respect to the Plan solely in the interests of participants and other
persons entitled to benefits under the Plan and with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent man acting
in a like capacity and familiar with such matters would use in the conduct of
an enterprise of like character and with like aims.
ARTICLE 14
Top-Heavy Plan Rules
14.1 Key Employees. An employee or former employee shall be a "key
employee" for any plan year if during such plan year or during any of the four
preceding plan years the employee is:
(a) An officer of an Employer having an annual compensation greater
than 50 percent of the amount in effect under Section 415(b)(1)(A) of the
Code for any such plan year;
(b) One of the ten employees of an Employer having annual
compensation from an Employer of more than the limitation in effect under
Section 415(c)(1)(A) of the Code and owning (or considered as owning
within the meaning of Section 318 of the Code) both more than 1/2 percent
interest and the largest interests in the Employer;
(c) Any person who owns (or is considered as owning within the
meaning of Section 318 of the Code) more than five percent of the
outstanding stock of the Employer or stock possessing more than five
percent of the total combined voting power of all the Employer's stock; or
(d) Any person having annual compensation in excess of $150,000 who
owns (or is considered as owning within the meaning of Section 318 of the
Code) more than one percent of the outstanding stock of the Employer or
stock possessing more than one percent of the total combined voting power
of all the Employer's stock.
<PAGE> 73
For purposes of subsection (a) above, if the number of officers exceeds 50,
only the 50 officers with the highest compensation shall be considered key
employees and if the number of officers is less than 50, the number of officers
considered key employees shall not exceed the greater of three such officers or
ten percent of all employees. For purposes of subsections (c) and (d) above,
Section 318(a)(2)(C) of the Code shall be applied by substituting "five
percent" for the reference to "50 percent" therein and the rules of Section
414(b), (c) and (m) of the Code shall not apply for determining ownership in
the Employer. For purposes of this Article, the term "Employer" includes all
corporations which are members of a controlled group of corporations which
includes the Company under Section 414(b) of the Code, all trades or businesses
(whether or not incorporated) which are under common control with the Company
under Section 414(c) of the Code and any service or other organization which is
a member of an affiliated service group with the Company under Section 414(m)
of the Code. The beneficiary of a key employee shall be considered a key
employee.
14.2 Top-Heavy Plan. The Plan will be considered a "top-heavy plan" for
any plan year if, as of the last day of the preceding plan year (the last day
of the initial plan year, in the case of that year) (the "determination date"),
the sum of (i) the aggregate of the accounts of all key employees under the
Plan and all other defined contribution plans in an aggregation group of plans
(as described in section 14.3 below), and (ii) the present value of the
aggregate cumulative accrued benefits for key employees under all defined
benefit plans in an aggregation group of plans, exceeds 60 percent of such sum
determined for all participants under all such plans, excluding participants
who are former key employees. For purposes of making the determination
described above, accounts in a defined
<PAGE> 74
contribution plan and benefits under a defined benefit plan shall be valued as
of the accounting date coincident with the determination date. There shall be
included in the determination of a participant's accounts and accrued benefit
under such plans any amounts distributed to such participant during the
preceding five-year period. Notwithstanding the foregoing, if any individual
has not performed services for the Zenith Companies at any time during the
five-year period ending on the determination date, any account of such
individual (and the accrued benefit for such individual) shall not be included
for purposes of this section. Furthermore, a rollover contribution initiated by
a participant and made to any plan in an aggregation group of plans shall not
be taken into account for purposes of determining whether the plan is a
top-heavy plan.
14.3 Aggregation Groups. All employer plans in a required aggregation
group of plans shall be considered to be top-heavy plans if either the required
or permissive aggregation group of plans is determined to be top-heavy under
section 15.2 above. If the required or permissive aggregation group of plans
is not a top-heavy group, no employer plans in the group shall be considered to
be top-heavy plans. A "required aggregation group of plans" shall include each
employer plan (whether or not terminated) in which a key employee participates
and any other employer plan which enables any plan in which a key employee
participates to meet the coverage and nondiscrimination requirements of
Sections 401(a)(4) or 410 of the Code. A "permissive aggregation group of
plans" shall include all plans in the required aggregation group plus any other
employer plans which satisfy the requirements of Sections 401(a)(4) and 410 of
the Code when considered together with the required aggregation group of plans.
14.4 Minimum Contributions and Benefits. Notwithstanding the provisions
of section 4.1, for each plan year for which the Plan is considered a top-heavy
plan, the amount contributed by an Employer in accordance with section 4.1(b)
for each participant (whether active or inactive) shall not be less
<PAGE> 75
than the lesser of (i) three percent of the participant's total compensation
for that year, or (ii) the highest percentage of earnings (disregarding
earnings in excess of $160,000 or such other maximum amount as was in effect
prior to the effective date or as may be permitted from time to time by the
Secretary of the Treasury or the Secretary's delegate or by law) contributed by
such Employer for such plan year on behalf of a key employee; provided,
however, that in the case of an employee covered under this Plan and a defined
benefit plan maintained by the Employer, for each plan year for which this Plan
and such defined benefit plans are considered top-heavy plans, if such employee
receives the top-heavy minimum contribution specified in such defined benefit
plan, such employee need not receive the minimum contribution specified in this
section. For purposes of satisfying the minimum top-heavy contribution
requirement under this section, neither elective contributions nor Employer
matching contributions shall be taken into account.
14.5 Special Top-Heavy Plan Vesting Schedule. Notwithstanding the
provisions of section 6.1, a participant who is employed by an Employer when
the Plan is considered a "top-heavy plan" shall be eligible to receive the
portion of his employer matching and discretionary contributions account
balances equal to the vested percentage determined in accordance with the
following schedule based on the participant's years of service:
<TABLE>
<CAPTION>
If the Participant's His Vested and
Number of Years of Nonforfeitable
Service Equals: Interest Shall Be:
--------------- ------------------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 100%
</TABLE>
If the Plan becomes a top-heavy Plan and subsequently ceases to be a top-heavy
Plan, a Participant with less than three years of service on the date the Plan
ceases to be a top-heavy Plan shall retain his vested interest as determined
above as of such date.
<PAGE> 1
EXHIBIT 10m
ZENITH ELECTRONICS CORPORATION
EMPLOYEE STOCK OPTION AGREEMENT
Zenith Electronics Corporation, a Delaware corporation (the "Company"),
hereby grants to <<FName>> <<LName>> (the "Optionee") as of <<Date>>,
<<Year>>(the "Option Date"), pursuant to the provisions of the Zenith
Electronics Corporation Long-Term Equity Compensation Plan (the "Plan"), a
non-qualified option to purchase from the Company (the "Option")
<<StockOptions_>> shares of its Common Stock, $1.00 par value ("Stock"), at the
price of $<<Price>> per share upon and subject to the terms and conditions set
forth below. References to employment by the Company shall also mean employment
by a subsidiary of the Company. Capitalized terms not defined herein shall have
the meanings specified in the Plan.
1. Option Subject to Acceptance of Agreement. The Option shall be null and
void unless the Optionee shall accept this Agreement by executing it in the
space provided below and returning such original execution copy to the Company.
2. Time and Manner of Exercise of Option.
2.1. Maximum Term of Option. In no event may the Option be exercised, in
whole or in part, after <<Date>>, 2007 (the "Expiration Date"). 2007
2.2. Exercise of Option. (a) Except as otherwise provided by Section 3.5
hereof, the Option shall become exercisable (i) on <<Date>>, 1998 with respect
to one-third of the number of shares of Stock subject to the Option on the
Option Date, (ii) on <<Date>>, 1999 with respect to an additional one-third of
the number of shares of Stock subject to the Option on the Option Date and
(iii) on <<Date>>, 2000 with respect to the remaining one-third of the shares
of Stock subject to the Option on the Option Date.
(b) If the Optionee's employment with the Company terminates by reason of
Disability or Retirement, as such terms are hereinafter defined, or by reason
of death, the Option shall be exercisable only to the extent it is exercisable
on the effective date of the Optionee's termination of employment and may
thereafter be exercised by the Optionee or the Optionee's Legal Representative
or Permitted Transferees until and including the earlier to occur of (i) the
date which is two years after the effective date of the Optionee's termination
of employment and (ii) the Expiration Date. For purposes of this Agreement,
Disability shall mean a determination by a physician designated by the Company
that the Optionee is permanently and totally disabled, and Retirement shall
mean the Optionee's voluntary termination of employment on or after attaining
age 55 or completing at least 20 years of employment with the Company.
(c) If the Optionee's employment with the Company terminates for any
reason other than Disability, Retirement or death, the Option shall be
exercisable only to the extent it is exercisable on the effective date of the
Optionee's termination of employment and may thereafter be exercised by the
Optionee or the Optionee's Legal
-1-
<PAGE> 2
Representative or Permitted Transferees until and including the earlier to
occur of (i) the date which is three months after the effective date of the
Optionee's termination of employment and (ii) the Expiration Date; provided
that if the Optionee's employment is terminated for Serious Misconduct, as
hereinafter defined, the Option shall terminate automatically at the effective
time of the Optionee's termination of employment. For purposes of this
Agreement, "Serious Misconduct" means a material breach by the Optionee of his
or her duties and responsibilities to the Company, other than as a result of
incapacity due to physical or mental illness, which is demonstrably willful and
deliberate, which is committed in bad faith or without a reasonable belief that
the breach is in the Company's best interests and which is not remedied within
a reasonable period of time after receipt of written notice of breach; or a
commission by the Optionee of a felony involving moral turpitude.
(d) If the Optionee dies during the period set forth in Section 2.2(b)
following termination of employment by reason of Disability or Retirement, the
Option shall be exercisable only to the extent it is exercisable on the date of
death and may thereafter be exercised by the Optionee's Legal Representative or
Permitted Transferees until and including the later to occur of (i) the date
which is one year after the date of death and (ii) two years after the
effective date of the Optionee's termination of employment, but in no event
later than the Expiration Date.
(e) If the Optionee dies during the period set forth in Section 2.2(c)
following termination of employment for any reason other than Disability or
Retirement, the Option shall be exercisable only to the extent it is
exercisable on the date of death and may thereafter be exercised by the
Optionee's Legal Representative or Permitted Transferees until and including
the earlier to occur of (i) the date which is two years after the date of death
and (ii) the Expiration Date.
(f) Notwithstanding the exercise periods set forth above in this Section
2.2, in the event the Company is involved in a business combination which is
intended to be treated as a pooling of interests for financial accounting
purposes (a "Pooling Transaction") in connection with which the Optionee
receives a substitute option to purchase securities of any entity, including an
entity directly or indirectly acquiring the Company:
(i) if the acquisition of the substitute option by the Optionee may be
treated as a purchase for purposes of Section 16(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and the Optionee's employment with the Company
is terminated for any reason described in Section 2.2(c) other than Serious
Misconduct during the nine-month period beginning three months prior to the
consummation of such business combination, then the Option (or option in
substitution thereof) shall be exercisable to the extent set forth above in
this Agreement until and including the later to occur of (i) the date set forth
pursuant to Section 2.2(c) and (ii) the date which is seven months after the
consummation of such business combination, but in no case later than the
Expiration Date; or
-2-
<PAGE> 3
(ii) if the Optionee is restricted from disposing of a security (or
security underlying a security) issued in connection with the Pooling
Transaction and the purpose of such restriction is to ensure that the Pooling
Transaction is accounted for as a pooling of interests (the "Pooling
Restriction") and the Optionee's employment with the Company is terminated for
any reason described in Section 2.2(c) other than Serious Misconduct during the
nine-month period beginning three months prior to the consummation of such
business combination, then the Option (or option in substitution thereof shall
be exercisable to the extent set forth above in this Agreement until and
including the later to occur of (i) the date set forth pursuant to Section
2.2(c) and (ii) the date which is one month after the date of expiration of the
Pooling Restriction, but in no case later than the Expiration Date.
2.3. Method of Exercise. Subject to the limitations set forth in this
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Treasurer of the Company specifying the number of whole shares of
Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (i) in
cash, (ii) by delivery of previously owned whole shares of Stock (which the
Optionee has held for at least six months prior to the delivery of such shares
or which the Optionee purchased on the open market and in each case for which
the Optionee has good title, free and clear of all liens and encumbrances)
having a Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable pursuant to the Option by reason of such
exercise, (iii) in cash by a broker-dealer acceptable to the Company to whom
the Optionee has submitted an irrevocable notice of exercise or (iv) a
combination of (i) and (ii), and (2) by executing such documents as the Company
may reasonably request. The Committee shall have sole discretion to disapprove
of an election pursuant to any of clauses (ii)-(iv) and in the case of an
Optionee who is subject to Section 16 of the Exchange Act, the Company may
require that the method of making such payment be in compliance with Section 16
and the rules and regulations thereunder. Any fraction of a share of Stock
which would be required to pay such purchase price shall be disregarded and the
remaining amount due shall be paid in cash by the Optionee. No certificate
representing a share of Stock shall be delivered until the full purchase price
therefor has been paid.
2.4. Cancellation of Agreement. In the event that rights to purchase all
or a portion of the shares of Stock subject to the Option expire or are
exercised, cancelled or forfeited, the Optionee shall, upon the Company's
request, promptly return this Agreement to the Company for full or partial
cancellation, as the case may be. Such cancellation shall be effective
regardless of whether the Optionee returns this Agreement. If the Optionee
continues to have rights to purchase shares of Stock hereunder, the Company
shall, within 10 days of the Optionee's delivery of this Agreement to the
Company, either (i) mark this Agreement to indicate the extent to which the
Option has expired or been exercised, cancelled or forfeited or (ii) issue to
the Optionee a substitute option agreement applicable to such rights, which
agreement shall otherwise be substantially similar to this Agreement in form
and substance.
3. Additional Terms and Conditions of Option.
-3-
<PAGE> 4
3.1. Nontransferability of Option. The Option may not be transferred by
the Optionee other than (i) by will or the laws of descent and distribution or
(ii) as otherwise permitted under Rule 16b-3 under the Exchange Act. Except to
the extent permitted by the foregoing sentence, during the Optionee's lifetime
the Option is exercisable only by the Optionee or the Optionee's Legal
Representative. Except to the extent permitted by the foregoing, the Option may
not be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the
Option, the Option and all rights hereunder shall immediately become null and
void.
3.2. Investment Representation. The Optionee hereby represents and
covenants that (a) any share of Stock purchased upon exercise of the Option
will be purchased for investment and not with a view to the distribution
thereof within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), unless such purchase has been registered under the
Securities Act and any applicable state securities laws; (b) any subsequent
sale of any such shares shall be made either pursuant to an effective
registration statement under the Securities Act and any applicable state
securities laws, or pursuant to an exemption from registration under the
Securities Act and such state securities laws; and (c) if requested by the
Company, the Optionee shall submit a written statement, in form satisfactory to
the Company, to the effect that such representation (x) is true and correct as
of the date of purchase of any shares hereunder or (y) is true and correct as
of the date of any sale of any such shares, as applicable. As a further
condition precedent to any exercise of the Option, the Optionee shall comply
with all regulations and requirements of any regulatory authority having
control of or supervision over the issuance or delivery of the shares and, in
connection therewith, shall execute any documents which the Board or the
Committee shall in its sole discretion deem necessary or advisable.
3.3. Withholding Taxes. (a) As a condition precedent to the delivery of
Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount as the Company may be required, under all applicable federal,
state, local or other laws or regulations, to withhold and pay over as income
or other withholding taxes (the "Required Tax Payments") with respect to such
exercise of the Option. If the Optionee shall fail to advance the Required Tax
Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (i) a cash payment to the
Company, (ii) delivery to the Company of previously owned whole shares of Stock
(which the Optionee has held for at least six months prior to the delivery of
such shares or which the Optionee purchased on the open market and in each case
for which the Optionee has good title, free and clear of all liens and
encumbrances) having a Fair
-4-
<PAGE> 5
Market Value, determined as of the date the obligation to withhold or pay taxes
first arises in connection with the Option (the "Tax Date"), equal to the
Required Tax Payments, (iii) authorizing the Company to withhold whole shares
of Stock which would otherwise be delivered upon exercise of the Option having
an aggregate Fair Market Value determined as of the Tax Date equal to the
Required Tax Payments, (iv) a cash payment by a broker-dealer acceptable to the
Company to whom the Optionee has submitted an irrevocable notice of exercise or
(v) any combination of (i), (ii) and (iii); provided, however, that the
Committee shall have sole discretion to disapprove of an election pursuant to
any of clauses (ii)-(v) and that in the case of an Optionee who is subject to
Section 16 of the Exchange Act, the Company may require that the method of
satisfying any such obligation be in compliance with Section 16 and the rules
and regulations thereunder. Shares of Stock to be delivered may not have a Fair
Market Value in excess of the minimum amount of the Required Tax Payments. Any
fraction of a share of Stock which would be required to satisfy any such
obligation shall be disregarded and the remaining amount due shall be paid in
cash by the Optionee. No certificate representing a share of Stock shall be
delivered until the Required Tax Payments have been satisfied in full.
3.4. Adjustment. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee
without an increase in the aggregate purchase price. If any adjustment would
result in a fractional security being subject to the Option, the Company shall
pay the Optionee, in connection with the first exercise of the Option occurring
after such adjustment, an amount in cash determined by multiplying (i) the
fraction of such security (rounded to the nearest hundredth) by (ii) the
excess, if any, of (A) the Fair Market Value on the exercise date over (B) the
exercise price of the Option. The decision of the Committee regarding any such
adjustment shall be final, binding and conclusive.
3.5. Change in Control. (a) Notwithstanding any provision in this
Agreement to the contrary, in the event of a Change in Control, the Option
shall immediately become exercisable in full.
(b) "Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act, of beneficial ownership within the meaning of Rule 1 3d-3
promulgated under the Exchange Act, of 25% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"), provided such
ownership interest is greater than the interest then owned by LG Electronics,
Inc. ("LGE"); excluding, however, the following: (A) any acquisition
-5-
<PAGE> 6
directly from the Company (excluding any acquisition resulting from the
exercise of an exercise, conversion or exchange privilege unless the security
being so exercised, converted or exchanged was acquired directly from the
Company), (B) any acquisition by the Company or LGE, (C) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (3) of this Section 3.5(b); provided further, that for
purposes of clause (B), if any Person (other than the Company, LGE or any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company) shall become the beneficial owner
of 25% or more of the Outstanding Company Common Stock or 25% or more of the
Outstanding Company Voting Securities by reason of an acquisition by the
Company (and which ownership interest is greater than the interest then owned
by LGE), and such Person shall, after such acquisition by the Company, become
the beneficial owner of any additional shares of the Outstanding Company Common
Stock or any additional Outstanding Company Voting Securities and such
beneficial ownership is publicly announced, such additional beneficial
ownership shall constitute a Change in Control:
(2) individuals who, as of May 21, 1996, constitute the Board of Directors
(the "Incumbent Board") cease for any reason to constitute at least a majority
of such Board; provided that any individual who becomes a director of the
Company subsequent to May 21, 1996 whose election, or nomination for election
by the Company's stockholders, was approved by the vote of at least a majority
of the directors then comprising the Incumbent Board shall be deemed a member
of the Incumbent Board; and provided further, that any individual who was
initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any Person
other than the Board shall not be deemed a member of the Incumbent Board;
(3) approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or substantially
all of the assets of the Company (a "Corporate Transaction"); excluding,
however, a Corporate Transaction pursuant to which (i) all or substantially all
of the individuals or entities who are the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such Corporate Transaction will beneficially
own, directly or indirectly, more than 60% of, respectively, the outstanding
shares of common stock, and the combined voting power of the outstanding
securities of such corporation entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or indirectly) in substantially the same proportions
relative to each other as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (other than: the
Company or LGE; any employee benefit plan
-6-
<PAGE> 7
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; the corporation resulting from such Corporate
Transaction; and any Person which beneficially owned, immediately prior to such
Corporate Transaction, directly or indirectly, 25% or more of the Outstanding
Company Common Stock or the Outstanding Company Voting Securities, as the case
may be) will beneficially own, directly or indirectly, 25% or more of,
respectively, the outstanding shares of common stock of the corporation
resulting from such Corporate Transaction or the combined voting power of the
outstanding securities of such corporation entitled to vote generally in the
election of directors and (iii) individuals who were members of the Incumbent
Board will constitute at least a majority of the members of the board of
directors of the corporation resulting from such Corporate Transaction; or
(4) approval by the stockholders of the Company of a plan of complete
liquidation or dissolution of the Company.
3.6. Compliance with Applicable Law. The Option is subject to the
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the
purchase or delivery of shares hereunder, the Option may not be exercised, in
whole or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company agrees to use reasonable efforts to
effect or obtain any such listing, registration, qualification, consent or
approval.
3.7. Delivery of Certificates. Upon the exercise of the Option, in whole
or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.
3.8. Option Confers No Rights as Stockholder. The Optionee shall not be
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon the exercise of the
Option, in whole or in part, and the Optionee becomes a stockholder of record
with respect to such delivered shares; and the Optionee shall not be considered
a stockholder of the Company with respect to any such shares not so purchased
and delivered.
3.9. Option Confers No Rights to Continued Employment. In no event shall
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by the Company or any
subsidiary or affiliate of the Company.
3. 10. Decisions of Board or Committee. The Board of Directors or the
Committee shall have the right to resolve all questions which may arise in
connection with the option or its exercise. Any interpretation, determination
or other action made
-7-
<PAGE> 8
or taken by the Board of Directors or the Committee regarding the Plan or this
Agreement shall be final, binding and conclusive.
3.11. Company to Reserve Shares. The Company shall at all times prior to
the expiration or termination of the Option reserve and keep available, either
in its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.
3.12. Agreement Subject to the Plan. This Agreement is subject to the
provisions of the Plan and shall be interpreted in accordance therewith. The
Optionee hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
4.1. Designation as Nonqualified Stock Option. The Option is hereby
designated as not constituting an "incentive stock option" within meaning of
section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); this
Agreement shall be interpreted and treated consistently with such designation.
4.2. Meaning of Certain Terms. (a) As used herein, employment by the
Company shall include employment by a corporation which is a "subsidiary
corporation" of the Company, as such term is defined in section 424 of the
Code. References in this Agreement to sections of the Code shall be deemed to
refer to any successor section of the Code or any successor internal revenue
law.
(b) As used herein, the term "Legal Representative" shall include an
executor, administrator, legal representative, guardian or similar person and
the term "Permitted Transferees" shall include any transferees pursuant to a
transfer permitted under Section 3.2 of the Plan and Section 3.1 hereof.
(c) As used herein, the term "Fair Market Value" shall mean the closing
transaction price of a share of Common Stock as reported in The Wall Street
Journal as New York Stock Exchange Composite Transactions for the date as of
which such value is being determined or, if there shall be no reported
transaction on such date, on the next preceding date for which a transaction
was reported; provided that if Fair Market Value for any date cannot be
determined as above provided, Fair Market Value shall be determined by the
Committee by whatever means or method as the Committee, in the good faith
exercise of its discretion, shall at such time deem appropriate.
4.3. Successors. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement or the Plan.
4.4. Notices. All notices, requests or other communications provided for
in this Agreement shall be made, if to the Company, to Zenith Electronics
Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025-2493, Attention:
Treasurer, and if to
-8-
<PAGE> 9
the Optionee, to the Optionee's last known address set forth in the records of
the Company, or such other address as shall be provided to the Company in
writing by the Optionee. All notices, requests or other communications provided
for in this Agreement shall be made in writing either (a) by personal delivery
to the party entitled thereto, (b) by facsimile with confirmation of receipt,
(c) by mailing in the United States mails to the last known address of the
party entitled thereto or (d) by express courier service. The notice, request
or other communication shall be deemed to be received upon personal delivery,
upon confirmation of receipt of facsimile transmission or upon receipt by the
party entitled thereto if by United States mail or express courier service;
provided, however, that if a notice, request or other communication sent to the
Company is not received during regular business hours, it shall be deemed to be
received on the next succeeding business day of the Company.
4.5. Governing Law. This Agreement, the Option and all determinations made
and actions taken pursuant hereto and thereto, to the extent not governed by
the laws of the United States, shall be governed by the laws of the State of
Illinois and construed in accordance therewith without giving effect to
principles of conflicts of laws.
4.6. Counterparts. This Agreement may be executed in two counterparts each
of which shall be deemed an original and both of which together shall
constitute one and the same instrument.
ZENITH ELECTRONICS CORPORATION
By:_________________________
Name: Dennis Winkleman
Title: VP Human Resources
Accepted this ____ of
__________________, 1997
______________________________
Optionee
-9-
<PAGE> 1
EXHIBIT 10(S)
December 29, 1997
Board of Directors
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview Illinois 60025
Re: Agreement for Financial Consulting Services
Gentlemen:
This letter outlines the understanding between Jay Alix & Associates, a
Michigan corporation ("JA&A") and Zenith Electronics Corporation (the
"Company") of the objective, tasks, work product and fees for the engagement of
JA&A to provide financial consulting services to the Company.
- --------------------------------------------------------------------------------
OBJECTIVE
- --------------------------------------------------------------------------------
- - Assist the Company in maximizing its value to its stakeholders and in
developing a viable, long-term business strategy.
- --------------------------------------------------------------------------------
TASKS
- --------------------------------------------------------------------------------
- - Bob Dangremond is appointed Acting Chief Financial Officer of the
Company. He will report to the Company's Chief Executive Officer.
- - In his role of Acting CFO, and with assistance from JA&A, Mr. Dangremond
shall provide support and input to other consultants and staff retained by
the Company, and shall:
- Assist in helping the Company to realize increased liquidity with
financial benefits from such areas as:
- Sale of nonessential assets,
- Reduction in working capital committed to the business
- Discontinuing lines of business that are
identified to be exited, and
- Operating improvements to the Company's
various businesses.
<PAGE> 2
Board of Directors
December 29, 1997
Page 2
- Assist in improving the quality and relevance of information that
is reported about the Company both internally and externally.
- Assist in providing financial input to the Company's business plan.
- Assist in managing the Company's cash and in maintaining the
Company's cash forecasting and control system.
- Assist in providing liaison with the Company's lenders until such
time as a permanent CFO is hired and assumes that responsibility.
- Assist in contingency planning for a possible Chapter 11 bankruptcy
filing in the event such a filing becomes strategically necessary or
desirable.
- - Assist in such other matters as may be mutually agreed upon.
- --------------------------------------------------------------------------------
WORK PRODUCT
- --------------------------------------------------------------------------------
Our work product will be in the form of:
- - Information to be discussed with you and others, as you may direct.
- - Written reports and analysis worksheets to support our suggestions as we
deem necessary or as you may request.
- --------------------------------------------------------------------------------
STAFFING
- --------------------------------------------------------------------------------
Bob Dangremond will be the principal responsible for the overall engagement.
He will be assisted by Al Koch, managing principal, who will be available to
both Mr. Dangremond and the Company to assure that JA&A has the appropriate
resources for this engagement. Mr. Dangremond will also be assisted by a staff
of consultants at various levels, all of whom have a wide range of skills and
abilities related to this type of assignment. In addition, we have
relationships with and periodically retain independent contractors with
specialized skills and abilities to assist us, and we agree that we will obtain
the prior approval of the Company for any such engagement. The size and
<PAGE> 3
Board of Directors
December 29, 1997
Page 3
composition of the JA&A staffing, and other consultants retained at the
suggestion of JA&A, shall be discussed with and subject to the prior approval
of the Company. It is understood that time is of the essence. Mr. Dangremond
shall provide the Company with his written proposal as to staffing assignments
and responsibilities for JA&A professionals on or prior to January 9, 1998.
JA&A and the Company agree that the initial engagement of Mr. Dangremond and at
least one other professional shall begin on December 29, 1997. Mr. Dangremond
shall be available to the Company and shall have the Company's matters as his
primary responsibility from that date. Prior to January 9, 1998, Mr.
Dangremond shall be expected to be available in the Company's offices not less
than four days per week. By not later than January 9, 1998, Mr. Dangremond
shall be available on a full-time basis at the Company's offices or on the
Company's behalf, except for such dates and times as shall be communicated to
the Company by December 31, 1997. The Company and JA&A understand and agree
that Mr. Dangremond may have some responsibilities relating to the winding down
of prior assignments; however, those responsibilities shall not interfere with
the general responsibilities of Mr. Dangremond as Acting Chief Financial
Officer, including functions critical to that assignment such as attending
Board of Directors meetings and Audit Committee meetings.
Following a review of Mr. Dangremond's plan, the Company and JA&A shall
mutually agree on a further course of action and the terms of an extended
agreement.
- -------------------------------------------------------------------------------
TIMING, FEES AND EXPENSES
- -------------------------------------------------------------------------------
We will commence this engagement immediately upon receipt of a signed
engagement letter.
HOURLY FEES -
This engagement will be staffed with professionals at various levels as the
tasks require. For purposes of bi-weekly billings, our fees will be based on
the hours charged at our hourly rates which are:
<PAGE> 4
Board of Directors
December 29, 1997
Page 4
Principals $430 - 495
Senior Associates $300 - 375
Associates $225 - 285
Accountants and Consultants $180 - 220
EXPENSES -
In addition to the fees set forth above, the Company shall pay directly or
reimburse JA&A upon receipt of periodic billings, for all reasonable
out-of-pocket expenses incurred in connection with this assignment such as
travel, lodging, postage, telephone and facsimile charges. JA&A shall use its
best efforts to obtain prior written approval of the Company for expenses
anticipated to exceed $30,000 for any month; however, the Company understands
that circumstances may not always permit this.
RETAINER -
The Company shall be billed for fees and expenses specific to the first two
weeks of the engagement. After January 9, 1998, the Company and JA&A shall
mutually agree on the amount of any retainer required for future work under
this agreement. We will submit bi-weekly invoices for services rendered and
expenses incurred as described above, and we will offset such invoices against
the retainer. Payment will be due upon receipt of the invoices to replenish
the retainer to the agreed upon amount. Any unearned portion of the retainer
will be returned to you at the termination of the engagement.
CONTINGENT SUCCESS FEE -
A contingent success fee will be considered based upon JA&A's demonstrated
contribution to value creation during the course of our engagement. This does
not represent a binding commitment but rather only is a commitment to, in good
faith, consider such a fee based upon our demonstrated contribution.
Additionally, if the Company is persuaded of the merits of having JA&A
facilitate a Turnaround Team process, it is agreed that an appropriate
amendment to this agreement will be negotiated whereby JA&A will receive a
<PAGE> 5
Board of Directors
December 29, 1997
Page 5
contingent bonus based upon demonstrated financial benefits attained. However,
whether to conduct such a team-based process, the objectives of such a process
and appropriate contingent compensation for that effort are matters that will
be subject to the Company's approval and this letter does not commit the
Company or its new CEO to undertake such a team-based process.
- -------------------------------------------------------------------------------
RELATIONSHIP OF THE PARTIES
- -------------------------------------------------------------------------------
The parties intend that an independent contractor relationship will be created
by this agreement. JA&A is not to be considered an employee or agent of the
Company and the employees of JA&A are not entitled to any of the benefits that
the Company provides for the Company's employees.
The Company and JA&A each agree not to solicit or recruit any employees or
agents of the other for a period of two years subsequent to the completion
and/or termination of this agreement.
<PAGE> 6
Board of Directors
December 29, 1997
Page 6
- -------------------------------------------------------------------------------
CONFIDENTIALITY
- -------------------------------------------------------------------------------
JA&A agrees to keep confidential all information obtained from the Company.
JA&A agrees that neither it nor its directors, officers, principals, employees,
agents or attorneys will disclose to any other person or entity, or use for any
purpose other than specified herein, any information pertaining to the Company
or any affiliate thereof which is either non-public, confidential or
proprietary in nature ("Information") which it obtains or is given access to
during the performance of the services provided hereunder. JA&A may make
reasonable disclosures of Information to third parties in connection with their
performance of their obligations and assignments hereunder and JA&A agrees that
it shall obtain a confidentiality agreement from unrelated third parties (which
shall not include the Company's vendors, customers or lenders) prior to the
disclosure of such Information. In addition, JA&A may disclose its involvement
with the Company, provided that JA&A shall not publicly announce its retention
by the Company unless the Company has previously made such public disclosure.
Information includes data, plans, reports, schedules, drawings, accounts,
records, calculations, specifications, flow sheets, computer programs, source
or object codes, results, models, or any work product relating to the business
of the Company, its subsidiaries, distributors, affiliates, vendors, customers,
employees, contractors and consultants.
The Company acknowledges that all advice (written or oral) given by JA&A to the
Company in connection with JA&A's engagement is intended solely for the benefit
and use of the Company (limited to its Board of Directors and its management)
in considering the transactions to which it relates. The Company agrees that
no such advice shall be used for any other purpose or reproduced, disseminated,
quoted or referred to at any time in any manner or for any purpose other than
accomplishing the tasks and programs referred to herein or in discussions with
the Company's lenders or debt holders, without JA&A's prior approval (which
shall not be unreasonably withheld) except as required by law. This agreement
will survive the termination of the engagement.
<PAGE> 7
Board of Directors
December 29, 1997
Page 7
- -------------------------------------------------------------------------------
FRAMEWORK OF THE ENGAGEMENT
- -------------------------------------------------------------------------------
The Company acknowledges that it is hiring JA&A purely to assist and advise the
Company in business planning and restructuring. JA&A's engagement shall not
constitute an audit, review or compilation, or any other type of financial
statement reporting engagement that is subject to the rules of the AICPA or
other such state and national professional bodies.
We acknowledge that JA&A and Mr. Dangremond are being retained to provide
services and perform functions normally performed by the chief financial
officer of companies in similar circumstances. Such responsibilities include,
but are not limited to, cash management, oversight of the preparation and audit
of required financial reports, management of the financial staff within the
Company and interface with the Company's lenders and creditors. We understand
that the Company has retained other consultants to handle investment banking
functions and that Mr. Dangremond and JA&A professionals shall serve in support
capacities to those consultants.
- -------------------------------------------------------------------------------
INDEMNIFICATION
- -------------------------------------------------------------------------------
In engagements of this nature, it is our practice to receive indemnification.
Accordingly, in consideration of our agreement to act on your behalf in
connection with this engagement, you agree to indemnify, hold harmless, and
defend us (including our principals, employees and agents) from and against all
claims, liabilities, losses, damages and reasonable expenses as they are
incurred, including reasonable legal fees and disbursements of counsel, and the
costs of our professional time (our professional time will be reimbursed at our
rates in effect when such future time is required), relating to or arising out
of the engagement, including any legal proceeding in which we may be required
or agree to participate but in which we are not a party. We, our principals,
employees and agents may, but are not required to, engage a single firm of
separate counsel of our choice in connection with any of the matters to which
this indemnification agreement relates. This indemnification agreement does
not apply to actions taken or omitted to be taken by us in bad faith.
<PAGE> 8
Board of Directors
December 29, 1997
Page 8
- -------------------------------------------------------------------------------
INDEMNIFICATION OF OFFICERS
- -------------------------------------------------------------------------------
In addition to the foregoing indemnification, Bob Dangremond, along with other
JA&A personnel who serve as acting officers of the Company, shall be
individually indemnified in a manner comparable to that provided under the
Company's directors' and officers' liability insurance as is applicable to
officers of the Company.
- -------------------------------------------------------------------------------
TERMINATION AND SURVIVAL
- -------------------------------------------------------------------------------
The agreement may be terminated at any time by written notice by one party to
the other; provided, however, that notwithstanding such termination JA&A will
be entitled to any fees and expenses due under the provisions of the agreement.
Such payment obligation shall inure to the benefit of any successor or
assignee of JA&A.
The obligations of the parties under the Indemnification, Indemnification of
Officers and Confidentiality sections of this agreement shall survive the
termination of the agreement as well as the other sections of this agreement
which expressly provide that they shall survive termination of this agreement.
- -------------------------------------------------------------------------------
GOVERNING LAW
- -------------------------------------------------------------------------------
This letter agreement is governed by and construed in accordance with the laws
of the State of Michigan with respect to contracts made and to be performed
entirely therein and without regard to choice of law or principles thereof.
- -------------------------------------------------------------------------------
CONFLICTS
- -------------------------------------------------------------------------------
We know of no fact or situation which would represent a conflict of interest
for us with regard to the Company.
<PAGE> 9
Board of Directors
December 29, 1997
Page 9
- -------------------------------------------------------------------------------
SEVERABILITY
- -------------------------------------------------------------------------------
If any portion of the letter agreement shall be determined to be invalid or
unenforceable, we each agree that the remainder shall be valid and enforceable
to the maximum extent possible.
- -------------------------------------------------------------------------------
ENTIRE AGREEMENT
- -------------------------------------------------------------------------------
All of the above contains the entire understanding of the parties relating to
the services to be rendered by JA&A and may not be amended or modified in any
respect except in writing signed by the parties. JA&A will not be responsible
for performing any services not specifically described in this letter or in a
subsequent writing signed by the parties.
- -------------------------------------------------------------------------------
NOTICES
- -------------------------------------------------------------------------------
All notices required or permitted to be delivered under this letter agreement
shall be sent, if to us, to the address set forth at the head of this letter,
to the attention of Mr. Melvin R. Christiansen, and if to you, to the address
for you set forth above, to the attention of your General Counsel, or to such
other name or address as may be given in writing to the other party. All
notices under the agreement shall be sufficient if delivered by facsimile or
overnight mail. Any notice shall be deemed to be given only upon actual
receipt.
If the Company becomes involved in any proceeding under the Bankruptcy Code, it
agrees to petition the Court to affirm this agreement as part of its first day
motions.
If these terms meet with your approval, please sign and return the enclosed
copy of this proposal.
We look forward to working with you.
Sincerely yours,
JAY ALIX & ASSOCIATES
Robert N. Dangremond
Principal
<PAGE> 10
Board of Directors
December 29, 1997
Page 10
Acknowledged and Agreed to:
ZENITH ELECTRONICS CORPORATION
By:
-----------------------------------
Its:
-----------------------------------
Dated:
-----------------------------------
<PAGE> 1
EXHIBIT 10u
LETTER AMENDMENT
Dated as of October 15, 1997
To Bankers Trust Company, as Trustee
pursuant to the Pooling and Servicing
Agreement referred to below
Ladies and Gentlemen:
We refer to (i) the Pooling and Servicing Agreement dated as of March 31,
1997 (as amended, supplemented or otherwise modified through the date hereof,
the "Pooling and Servicing Agreement"; capitalized terms not otherwise defined
in this Letter Amendment are used herein as defined in the Pooling and
Servicing Agreement and the other Transaction Documents referred to therein)
among the Transferor, the Servicer and you, (ii) the Receivables Purchase
Agreement, dated as of March 31, 1997, among Zenith Electronics Corporation, as
seller, and Zenith Finance Corporation, as purchaser, (iii) the Receivables
Purchase Agreement, dated as of March 31, 1997, among Zenith Microcircuits
Corporation, as seller, and Zenith Finance Corporation, as purchaser, (each
such Receivables Purchase Agreement, as amended, supplemented or otherwise
modified, being a "Receivables Purchase Agreement") and (iv) the other
Transaction Documents.
It is hereby agreed by you and us as follows:
Section 4.03(a) of each Receivables Purchase Agreement is, effective as of
the date of this Letter Amendment, hereby amended by deleting therein the
phrase "or any other property or asset of the Seller" and substituting therefor
the following phrase "or any proceeds thereof".
This Letter Amendment shall become effective as of the date first above
written when, and only when the Program Agent shall have received a counterpart
hereof executed by you, the undersigned, a Majority in Interest of the Series
1997-1 Holders and a Majority of Series 1997-1 Certificate Interests or, as to
any of the Series 1997-1 Holders and any of the Holders of Series 1997-1
Certificate Interests, advice satisfactory to the Program Agent that such
Series 1997-1 Holder or Holder of Series 1997-1 Certificate Interests has
executed this Letter Amendment, together with a- counterpart of the Consent
attached hereto executed by the Parent. This Letter Amendment is subject to
the provisions of Section 7.06 of each Receivables Purchase Agreement and
Section 5.04 of the Series 1997-1 Certificate Purchase Agreement.
On and after the effectiveness of this Letter Amendment, each reference in
each Receivables Purchase Agreement to "this Agreement", "hereunder", 'hereof"
or words of like import referring to each such Receivables Purchase Agreement,
respectively, and each reference in each of the other Transaction Documents to
"the Receivables Purchase Agreement", "thereunder", "thereof" or words of like
import referring to either Receivables Purchase Agreement, shall mean and be a
reference to either such Receivables Purchase Agreement, respectively, as
amended by this Letter Amendment.
The Transaction Documents, except to the extent specifically provided
above, are and shall continue to be in full force and effect and are hereby in
all respects ratified and confirmed. The execution, delivery and effectiveness
of this Letter Amendment shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of any Beneficiary, including
the Program
1
<PAGE> 2
Agent, under any of the Transaction Documents, nor constitute a waiver of any
provision of any of the Transaction Documents.
If you agree to the terms and provisions hereof, please evidence such
agreement by executing a counterpart hereof. Please return (i) at least one
counterpart of this Letter Amendment by fax to Liam Toohey at Shearman &
Sterling, fax no. (212) 8487179 and (ii) at least three original counterparts
of this Letter Amendment to Liam Toohey at Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022.
By their execution of this Letter Amendment, the Majority in Interest of
the Series 1997-1 Holders hereby instructs and directs the Trustee to execute
and deliver this Letter Amendment.
This Letter Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed 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 a signature page to this Letter Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Letter
Amendment.
This Letter Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York.
Very truly yours,
ZENITH FINANCE CORPORATION,
as Purchaser
By:
Name:
Title:
ZENITH ELECTRONICS CORPORATION,
as Seller and Originator
By:
Name:
Title:
ZENITH MICROCIRCUITS CORPORATION,
as Seller and Originator
By:
Name:
Title:
2
<PAGE> 3
Acknowledged and agreed as of
the date first above written:
BANKERS TRUST COMPANY,
not in its individual capacity, but solely
as Trustee
By:
Name:
Title:
CORPORATE RECEIVABLES CORPORATION,
as Purchaser
By: CITICORP NORTH AMERICA, INC.,
as Attorney-in-Fact
By:
Name:
Title:
CITIBANK, N.A.
as Liquidity Provider
By:
Name:
Title:
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, New York Branch,
as Liquidity Provider
By:
Name:
Title:
By:
Name:
Title.
3
<PAGE> 4
THE BANK OF NEW YORK COMMERCIAL
CORPORATION, as Liquidity Provider
By:
Name:
Title:
RAIFFEISEN ZENTRALBANK OSTERREICH
AKTIENGESELLSCHAFT, as Liquidity Provider
By:
Name:
Title:
INDUSTRIAL BANK OF JAPAN, LIMITED,
CHICAGO BRANCH, as Liquidity Provider
By:
Name:
Title:
BANK OF IRELAND, as Liquidity
Provider
By:
Name:
Title:
4
<PAGE> 5
CONSENT
Dated as of October 15, 1997
The undersigned, LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea, party to the Parent Undertaking Agreement dated
March 31, 1997 (as amended, supplemented or otherwise modified through the date
hereof, the "Parent Undertaking Agreement') in favor of Bankers Trust Company,
as trustee on behalf of the Investor Certificateholders parties to the
Transaction Documents referred to in the foregoing Letter Amendment, hereby
consents to such Letter Amendment and hereby confirms and agrees that
notwithstanding the effectiveness of such Letter Amendment, the Parent
Undertaking Agreement is, and shall continue to be, in full force and effect
and is hereby ratified and confirmed in all respects.
LG ELECTRONICS INC.
By
Name:
Title:
5
<PAGE> 1
EXHIBIT 10ad
PETER S. WILLMOTT
PRESIDENT & CEO
(847) 391-7383
FAX: (847) 391-7598
April 7, 1997
Mr. Richard F. Vitkus
Senior Vice President and General Counsel
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025
Dear Rich:
As you know, Zenith Electronics Corporation ("Zenith" or the "Company") is in
the process of implementing a turnaround program to bring the Company to a
level of profitability acceptable to the Board of Directors and the
shareholders. As a valued executive, your continued employment with and
commitment to the Company at this time is very important. In recognition of
your efforts in implementing the turnaround at Zenith, I have been authorized
by the Company's Board of Directors to offer you an opportunity to share in the
success of that effort by participating in a one time special bonus, the
Performance Optimization Plan ("POP"), the terms of which are described below.
The POP is in addition to and not in lieu of your current compensation and
benefits, including all benefits provided under your employment agreement dated
January 1, 1997.
The POP
If (a) Zenith's aggregate pre-tax earnings during the years 1997, 1998 and 1999
equals or exceeds an amount equal to break-even ( e.g., zero earnings), taking
into account the gross pre-tax cost to the Company of making the payments to
the executives selected for the POP program ("Formula Earnings") and, (b) you
are actually employed by Zenith on December 31, 1999, then on or before January
10, 2000 (or as soon thereafter as practicable, but in no event later than
March 31, 2000), you will receive a cash payment (less withholding) in an
amount equal to three times your base pay and target bonus as in effect on
December 31, 1999. If such cash payment is not made by February 15, 2000, then
it shall begin to accrue interest from that date until paid, at an annual rate
of the then Prime Rate as published by The Wall Street Journal. The definition
of Formula Earnings is subject to adjustment by the Zenith Board of Directors
to reflect extraordinary events and other circumstances having a material
impact on earnings.
So that it is clear, as an example: assuming the cost to the Company of making
the POP payment to all eligible participating executives is $10,000,000.00,
then Zenith's aggregate pre-tax earnings for the years 1997, 1998 and 1999,
after taking into account such $10,000,000.00, must equal or exceed zero
earnings in order for any payment to be made. It is immaterial, for purposes
of the POP, what Zenith's earnings or losses are for a particular year as long
as the aggregate of the earnings and losses for the three years equals or
exceeds the Formula Earnings. If the aggregate earnings for these years fall
below zero, no payment will be made and the POP will terminate. Likewise, the
payment will not increase if the earnings are above the Formula Earnings.
<PAGE> 2
Richard F. Vitkus
April 7, 1997
Page 2
Effect on Company Benefit Plans
No amounts payable pursuant to the POP shall constitute wages or compensation
for purposes of determining the amount of any benefits you are entitled to
receive at any time from any employee benefit plan, program or employment
practice maintained or contributed by Zenith.
Choice of Law
The POP and this letter agreement shaft be governed by the laws of the State of
Illinois.
Invalidity of Provision
If any provision of the POP or this letter agreement is declared invalid,
illegal or unenforceable by any court of competent jurisdiction, all of the
remaining provisions of the POP and this letter agreement shall continue in
full force and effect.
Successor
The POP and this letter agreement shall be binding on any successor, whether by
the merger or otherwise, to Zenith.
Amendment
No modification or amendment hereof shall be valid or binding on either party
unless made in writing and signed by both parties or by their duly authorized
officers or representatives.
Please review this letter agreement carefully before signing. If you are in
agreement with the above provisions, please signify your acceptance by signing
and dating both copies of this letter agreement in the space provided below and
return one copy to me.
Very truly yours,
By
Peter S. Willmott
AGREED TO AND ACCEPTED:
By
Richard F. Vitkus
Dated
<PAGE> 1
EXHIBIT 21
ZENITH ELECTRONICS CORPORATION SUBSIDIARIES
Cableproductos de Chihuahua, S.A. de C.V. Mexico
Electro Partes de Matamoros, S.A. de C.V. Mexico
Productos Magneticos de Chihuahua, S.A. de C.V. Mexico
Partes de Television de Reynosa, S.A. de C.V. Mexico
Radio Componentes de Mexico, S.A. de C.V. Mexico
Telson, S.A. de C.V. Mexico
Zenco de Chihuahua, S.A. de C.V. Mexico
Interocean Advertising Corporation of Illinois Illinois
Zenith Distributing Corporation of Illinois Illinois
Zenith Electronics Corporation of Arizona Arizona
Zenith Electronics Corporation of Pennsylvania Pennsylvania
Zenith Electronics Corporation of Texas Texas
Zenith Electronics (Europe) Limited England
Zenith Electronics (Ireland) Limited Ireland
Zenith/Inteq, Inc. Delaware
Zenith Radio Canada Ltd./Zenith Radio Canada Ltee Canada
Zenith Taiwan Corporation Taiwan
Zenith Video Tech Corporation Delaware
Zenith Video Tech Corporation-Florida Delaware
Zenith Finance Corporation Delaware
NOTE:
All subsidiaries are wholly-owned by Zenith Electronics Corporation
except for Radio Componentes de Mexico, S.A. de C.V., which is a
wholly-owned subsidiary of Cableproductos de Chihuahua S.A. de C.V.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated March 27, 1998, included in this Form 10-K for the year ended
December 31, 1997, into (i) the Company's previously filed Registration
Statements on Form S-8, File Nos. 33-15643, 33-11295 and 333-19587 (ii) the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-56889).
/s/ Arthur Andersen LLP
- -------------------------
Arthur Andersen LLP
Chicago, Illinois
March 27, 1998
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