UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to____________
Commission File Number: 1-4115
ZENITH ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1996520
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 Milwaukee Avenue, Glenview, Illinois 60025
(Address of principal executive offices) (Zip Code)
(847) 391-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of July 31, 1998, there were 67,525,447 shares of Common Stock, par
value $1 per share, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
In Millions, Except Per Share Amounts
Three Months Ended Six Months Ended
---------------------- ----------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 224.0 $ 261.8 $ 444.7 $ 520.9
---------- ---------- ---------- ----------
Costs, expenses and other:
Cost of products sold 204.8 246.0 418.3 492.5
Selling, general and
administrative 31.2 50.0 61.9 78.1
Engineering and research 11.4 10.0 22.2 20.8
Other operating expense
(income), net (Note 4) (7.9) (3.1) (15.1) (10.2)
Restructuring and other
charges (Note 3) 4.8 - 7.4 -
---------- ---------- ---------- ----------
Operating income (loss) (20.3) (41.1) (50.0) (60.3)
Gain (loss) on asset sales, net 0.3 (0.9) 0.1 (0.9)
Interest expense (11.3) (7.6) (19.5) (13.9)
Interest income 0.3 0.3 0.6 0.6
---------- ---------- ---------- ----------
Income (loss) before income taxes (31.0) (49.3) (68.8) (74.5)
Income taxes (credit) - - - -
---------- ---------- ---------- ----------
Net Income (loss) $ (31.0) $ (49.3) $ (68.8) $ (74.5)
========== ========== ========== ==========
Net income (loss) per share of
common stock (Note 5) $ (0.46) $ (0.74) $ (1.02) $ (1.12)
========== ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
In Millions
June 27, December 31, June 28,
1998 1997 1997
-------- ------------ --------
ASSETS
- ------
Current assets:
Cash $ 16.3 $ - $ -
Receivables, net of allowance for
doubtful accounts of $2.1, $--
and $--, respectively (Note 7) 15.0 21.7 27.0
Inventories (Note 8) 128.6 165.5 254.0
Transferor certificates 82.6 99.7 90.7
Other 26.8 26.3 27.7
-------- ------------ --------
Total current assets 269.3 313.2 399.4
Property, plant and equipment, net 158.6 171.1 240.9
Other 41.2 43.4 45.2
-------- ------------ --------
Total assets $ 469.1 $ 527.7 $ 685.5
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt (Note 9) $ 132.0 $ 72.0 $ 23.9
Current portion of long-term
debt (Note 9) 41.8 15.3 14.7
Accounts payable 63.6 91.3 101.5
Accounts payable to related
party (Note 10) 136.3 145.9 112.1
Income taxes payable 0.6 0.7 0.9
Accrued expenses 135.6 141.7 131.3
-------- ------------ --------
Total current liabilities 509.9 466.9 384.4
Long-term liabilities 19.2 17.0 9.2
Long-term debt (Note 9) 97.8 132.8 163.8
Stockholders' equity:
Preferred stock - - -
Common stock 67.6 67.1 66.6
Additional paid-in capital 506.8 507.3 500.0
Retained earnings (deficit) (730.5) (661.7) (436.8)
Treasury stock (1.7) (1.7) (1.7)
-------- ------------ --------
Total stockholders' equity (157.8) (89.0) 128.1
-------- ------------ --------
Total liabilities and
stockholders' equity $ 469.1 $ 527.7 $ 685.5
======== ============ ========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
In Millions
Increase (Decrease) in Cash
Six Months Ended
---------------------------
June 27, June 28,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (68.8) $ (74.5)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Depreciation 16.8 16.6
Other 0.4 0.1
Gain on asset sales, net (0.1) -
Changes in assets and liabilities:
Current accounts (13.1) (14.6)
Other assets 2.2 0.9
Other liabilities 2.2 -
----------- -----------
Net cash used by operating activities (60.4) (71.5)
----------- -----------
Cash flows from investing activities:
Capital additions (4.8) (55.6)
Proceeds from asset sales 30.0 141.6
----------- -----------
Net cash provided by investing activities 25.2 86.0
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net 60.0 (23.1)
Proceeds from issuance of long-term debt - 45.0
Proceeds from issuance of common stock, net - 0.6
Principal payments on long-term debt (8.5) (37.0)
----------- -----------
Net cash provided (used) by financing activities 51.5 (14.5)
----------- -----------
Increase (decrease) in cash 16.3 -
Cash at beginning of period - -
----------- -----------
Cash at end of period $ 16.3 $ -
=========== ===========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net $ 6.7 $ 181.3
Transferor certificates (12.9) (145.7)
Income taxes, net (0.1) (0.4)
Inventories 36.9 1.7
Other assets (0.5) (11.1)
Accounts payable and accrued expenses (43.2) (40.4)
----------- -----------
Net change in current accounts $ (13.1) $ (14.6)
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 20.2 $ 13.8
Income taxes (0.1) 0.5
Non-cash activity:
Asset and additional paid-in capital recorded
related to guarantee fee $ - $ 39.7
Liability recorded related to deferred gain on
sale leaseback - 10.2
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
Zenith Electronics Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note One - Basis of presentation
The accompanying unaudited condensed consolidated financial
statements ("financial statements") have been prepared in accordance with
generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. The accuracy of
the amounts in the financial statements is in some respects dependent upon
facts that will exist, and procedures that will be performed by the
company, later in the year. In the opinion of management, all adjustments
necessary for a fair presentation of the financial statements have been
included and are of a normal, recurring nature. For further information,
refer to the consolidated financial statements and notes thereto included in
the company's Form 10-K for the year ended December 31, 1997.
Note Two - Subsequent events
On August 10, 1998, the company filed a Registration Statement
on Form S-4 which contains information relating to the implementation of
the company's proposed financial and operational restructuring plans
along with information regarding a pre-packaged plan of reorganization.
The Registration Statement discusses potential 1998 restructuring and
reorganization charges that are projected to be approximately $242
million for the full year. The $242 million of potential restructuring and
reorganization charges are composed of (i) non-cash asset impairments
($70 million), (ii) the non-cash loss on termination of a lease ($69 million)
as discussed below, (iii) severance and costs for staff reductions ($47
million), (iv) plant closure and business exit costs ($18 million), (v)
professional fees ($17 million) (vi) non-cash inventory writedowns ($9
million) and (vii) other costs associated with the restructuring effort. The
1998 restructuring and reorganization charges are offset by a potential
extraordinary gain on debt retirement of approximately $64 million.
Subsequent to June 27, 1998, the company's existing Citicorp
credit facility (initially composed of a $45.0 million amortizing term loan
and a $65.0 million revolving credit line) was amended and restated. The
amended Citibank credit facility provides for up to $125 million of
revolving loans, subject to borrowing base restrictions. The revolving
loans must be repaid on or before the earlier of the company's court filing
for a pre-packaged plan of reorganization or December 31, 1998. In
addition, the company is required to make repayments: (i) to the extent of
the excess of borrowings over the borrowing base and (ii) with the
proceeds of most sales of capital stock or assets. The obligations of
the company under the amended Citibank credit facility are secured
by certain of the company's assets. The amended Citibank credit
facility requires the company, among other things, to meet certain
financial tests regarding the amount of tuner patent royalties
and the average outstanding payable to LG Electronics Inc. ("LGE") for
products purchased in the ordinary course of business. The facility also
contains covenants which, among other things, restrict the ability of the
company and its subsidiaries to incur indebtedness, issue guarantees,
incur liens, declare dividends or pay management or consulting fees to
affiliates, make loans and investments, engage in transactions with
affiliates, liquidate, sell assets or engage in mergers. Interest on
borrowings is based on market rates.
Subsequent to June 27, 1998, the company's trade receivables
securitization (which was provided through a Citicorp commercial paper
conduit) was terminated. As a result, the company's third quarter
financial statements will reflect the following: (i) receivables will no
longer be sold and transferor certificates (which represented the
company's retained interest in the pool of receivables that were sold) will
not exist, and (ii) a non-cash charge of approximately $4 million will be
made to write-off deferred charges (bank, attorney and guarantee fees)
related to the receivable securitization.
In April 1997, the company entered into a sale-leaseback
transaction whereby the company sold and leased back manufacturing
equipment in its Melrose Park, Illinois, plant and in its Reynosa and
Juarez, Mexico, facilities. The company's payment obligations, along
with certain other items under the lease agreement were fully guaranteed
by LGE. In July 1998 LGE made payment under the guarantees of the
lease in the amount of $90.1 million as a result of a negotiated settlement
with the lessor. As a result, the company's third quarter financial
statements will reflect a $90.1 million current liability to LGE,
a $21.3 million current asset entitled "Other Receivable", and
a loss on termination of the lease of approximately $68.8 million,
which represents the difference between the LGE payment and the estimated
fair value of the "Other Receivable" asset. In addition, the financial
statements will reflect a non-cash charge of approximately $28 million
to write-off deferred charges (bank, attorney and guarantee fees) related
to the lease, offset by a non-cash gain of approximately $8 million which
represents the accelerated amortization of the deferred gain on the lease.
As of June 27, 1998, the company had a total of $110.0 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30.0 million), First Chicago NBD ($30.0 million), Societe
Generale ($20.0 million) and Credit Agricole ($30.0 million). These credit
lines are guaranteed by LGE. In July 1998 LGE made payments under
demands against guarantees of $50.0 million of the facilities and the
company is obligated to LGE for these payments plus interest.
On August 7, 1998, the company entered into a restructuring agreement with
LGE which sets forth the terms and conditions pursuant to which LGE has
agreed to assist the company with its proposed financial and operational
restructuring plans. See exhibit 10 under "Item 6. Exhibits and Reports
on Form 8-K".
Note Three - Restructuring charges
During 1998, the company has recorded a restructuring charge
related to costs associated with the proposed financial and operational
restructuring plans, and a pre-packaged plan of reorganization. The
major elements of the charge relate to costs associated with work
performed by outside consulting and law firms to support the development
of the operational and financial restructuring plans, and the pre-packaged
plan of reorganization. The restructuring charge was $4.8 million and
$7.4 million for the three and six months ended June 27, 1998,
respectively. The first-quarter 1998 results contained $2.6 million of
these charges which were then reported as Selling, General and
Administrative.
Note Four - Other operating expense (income)
Royalty income accrued in relation to tuning system patents was
$6.4 million and $12.7 million for the three and six months ended June 27,
1998, respectively, and $4.5 million and $11.2 million for the three and
six months ended June 28, 1997, respectively. These amounts are
included in other operating expense (income).
Note Five - Earnings per share
In accordance with Statement of Financial Accounting Standards
No. 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 period. Diluted earnings (loss) per
share, assuming conversion of the 6-1/4 percent convertible subordinated
debentures and outstanding stock options are not presented because the
effect of the assumed conversion is antidilutive. The weighted average
number of shares was 67.5 million and 67.3 million for the three and six
months ended June 27, 1998, respectively, and 66.4 million and 66.5
million for the three and six months ended June 28, 1997, respectively.
Note Six - Change in accounting estimate
During the second quarter of 1997, the company changed its
accounting policy for most tooling expenditures. The old policy was to
charge most tooling expenditures to expense in the period acquired. The
new policy is to defer the tooling charges incurred subsequent to March
29, 1997, over a 20-month period in order to more appropriately match
the costs with their period of benefit. The accounting policy for picture
tube tooling remains the same, which is to amortize that tooling over a
four year period.
This change was accounted for as a change in accounting estimate
effected by a change in accounting principle and as such was accounted
for on a prospective basis. The change decreased tooling costs by $5.4
million and increased net income per share by 8 cents during the second-
quarter of 1997.
Note Seven - Receivables
During the second quarter of 1998 the company recorded a $2.1
million bad debt reserve related to certain sundry receivables that are not
sold by the company via its trade receivable securitization. The bad debt
charge was recorded in selling, general and administrative expenses.
Note Eight - Inventories
Inventories consisted of the following (in millions):
June 27, December 31, June 28,
1998 1997 1997
---------- ------------- ----------
Raw materials and work-in-process $ 81.7 $ 96.9 $ 164.7
Finished goods 46.9 68.6 89.3
---------- ------------- ----------
Total inventories $128.6 $165.5 $ 254.0
========== ============= ==========
Note Nine - Short-term debt and credit arrangements; Long-term debt
As discussed in "Note Two - Subsequent events" the company's existing
Citicorp credit facility (initially composed of a $45 million amortizing
term loan and a $65 million revolving credit line) was amended and
restated subsequent to June 27, 1998. As of June 27, 1998, the company
had $36 million outstanding under the term loan, and no amounts
outstanding under the revolving credit line. The entire $36 million balance
of the term loan has been classified as a current liability as of June 27,
1998, due to the fact that it was subsequently replaced with the amended
and restated agreement which is short term in nature.
Between November 1997 and February 1998 the company
entered into a series of 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). As of June 27, 1998, a total of $102 million was
outstanding under these credit lines. As discussed in "Note Two -
Subsequent events" , subsequent to June 27, 1998, LGE made payments
under demands against guarantees on $50 million of the facilities and the
company is obligated to LGE for these payments plus interest.
In March 1998, the company entered into a secured credit facility
with LGE which provides for borrowings of up to $45 million. As of June
27, 1998, $30 million was outstanding under the facility. See Note Ten
for further discussion.
In January 1998 the company redeemed its 8.5 percent Senior
Subordinated Convertible Debentures due January 2001. There was $0.5
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.
Note Ten- Related party
In November 1995, a change in control of the company occurred, in which
LGE and a affiliate 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 June 27, 1998, LGE beneficially owned 36,569,000 shares of
common stock of the company which represents 54.2 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 the three
and six months ended June 27, 1998 and June 28, 1997.
Product purchases: In the ordinary course of business, the
company purchases VCRs, TV-VCR combinations and components from
LGE and its affiliates. The company purchased $15.2 million and $23.0
million of these items during the three and six months ended June 27,
1998, and $15.6 million and $26.7 million during the three and six months
ended June 28, 1997, respectively. Sales of products purchased from
LGE and its affiliates contributed $15.2 million and $35.3 million to sales
during the three and six months ended June 27, 1998, respectively, and
$18.5 million and $43.8 million to sales during the three and six months
ended and June 28, 1997, respectively.
Product and other sales: The company sells TVs, picture tubes,
yokes and other manufactured subassemblies to LGE and its affiliates.
Sales by the company to LGE and its affiliates were $15.0 million and
$26.0 million during the three and six months ended June 27, 1998,
respectively, and $6.9 million and $13.4 million during the three and six
months ended June 28, 1997, respectively.
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. As of June 27, 1998, $30 million
was outstanding under the facility. This facility was amended subsequent
to June 27, 1998, to extend the demand date from June 30, 1998, to
December 31, 1998.
Accounts payable included $136.3 million and $112.1 million to
LGE and its affiliates as of June 27, 1998 and June 28, 1997,
respectively. 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 $134.4 million and $105.5 million as of June 27, 1998 and
June 28, 1997, respectively. The company is charged interest on the
extended period at negotiated rates. The amount of receivables from LGE
and its affiliates was not material as of June 27, 1998 and June 28, 1997.
See "Note Two - Subsequent events" for a discussion of certain
events that occurred subsequent to June 27, 1998, and involved LGE.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The company reported a second-quarter 1998 net loss of $31.0
million, or 46 cents per share, compared with a net loss of $49.3 million,
or 74 cents per share, in the second quarter of 1997. Total second-quarter
sales were $224.0 million in 1998 compared with $261.8 million in 1997.
Consumer electronics sales declined in the 1998 quarter compared with
the same period last year, driven largely by planned sales reductions in
lower-margin color TV products.
Sales of Network Systems products increased significantly in the second
quarter of 1998 compared with a year ago due to shipments of digital set-top
boxes, which more than offset lower analog set-top box sales.
Selling, general and administrative expenses were $31.2 million in
the second quarter of 1998, compared with $50.0 million in the previous
year. During the second quarter of 1998 the company recorded a $2.1
million bad debt charge related to certain sundry receivables that are not
sold by the company via its trade receivable securitization. The bad debt
charge was recorded in selling, general and administrative expenses.
Selling, general and administrative expenses in the second quarter of 1997
include a $15.0 million bad debt charge related to a bad debt for a
South American customer's receivable.
Results for the second quarter of 1998 include $6.4 million of
accrued royalty revenues from tuner patent licenses. These revenues
were $4.5 million in the second quarter of 1997.
During the second quarter of 1998, the company recorded a $4.8
million restructuring charge related to costs associated with the proposed
financial and operational restructuring. The major elements of the charge
relate to costs related to work performed by outside consulting and law
firms to support the development of the company's operational and
financial restructuring plan.
Interest expense was $11.3 million in the second quarter of 1998,
compared with $7.6 million in the previous year. The change resulted
from higher funding requirements for company operations.
For the first six months of 1998 the company reported a net loss
of $68.8 million, or $1.02 per share, compared with a net loss of $74.5
million, or $1.12 per share for the first six months of 1997. First-half
sales were $444.7 million in 1998 compared with $520.9 million in 1997.
On August 10, 1998, the company filed a Registration Statement
on Form S-4 which contains information relating to the implementation of
the company's proposed financial and operational restructuring plans
along with information regarding a pre-packaged plan of reorganization.
The Registration Statement discusses potential 1998 restructuring and
reorganization charges that are projected to be approximately $242
million for the full year. The $242 million of potential restructuring and
reorganization charges are composed of (i) non-cash asset impairments
($70 million), (ii) the non-cash loss on termination of a lease
($69 million), (iii) severance and costs for staff reductions ($47
million), (iv) plant closure and business exit costs ($18 million), (v)
professional fees ($17 million) (vi) non-cash inventory writedowns ($9
million) and (vii) other costs associated with the restructuring effort. The
1998 restructuring and reorganization charges are offset by a potential
extraordinary gain on debt retirement of approximately $64 million.
Liquidity and Capital Resources
During the six months ended June 27, 1998, $60.4 million of cash
was used by operating activities principally to fund $52.1 million of net
losses from operations, as adjusted for depreciation and a gain on asset
sales. In addition, $13.1 million of cash was used to fund the change in
current accounts, which was principally composed of a $43.2 million
decrease in accounts payable and accrued expenses offset by a $36.9
million decrease in inventories.
During the six months ended June 27, 1998, $25.2 million of cash
was provided by investing activities. This was composed of $30.0 million
of cash received from the sale of receivables under the three-year trade
receivables securitization, offset by $4.8 million of cash used for capital
additions. The capital additions during the first six months of 1998 were
significantly lower than the $55.6 million spent during the same period in
1997. The 1997 capital additions were the result of spending related to
projects primarily in the color picture tube area, which included new
automated production processes and the addition of new production lines
for computer display tubes. The company is planning a significant
reduction in capital investment projects for the full year 1998.
During the six months ended June 27, 1998, $51.5 million of cash
was provided by financing activities. This was composed of $30.0 million
of borrowings under one of the company's new short-term unsecured
credit agreements and $30.0 million of borrowings under the secured
credit facility with LGE, offset by cash used to pay the current portion
($5.8 million) of the company's 6-1/4 percent convertible subordinated
debentures due 2011, cash used to pay maturities of the term loan ($2.2
million) and cash used to redeem the company's 8.5 percent Senior
Subordinated Convertible Debentures due January 2001 ($0.5 million).
As of June 27, 1998, the company had $405.9 million of interest-
bearing obligations which consisted of: (i) $134.4 million of extended-
term payables with LGE, (ii) $103.5 million of 6-1/4 percent convertible
subordinated debentures due 2011 (the current portion of which is $5.8
million), (iii) $102.0 million currently payable under various unsecured
and uncommitted credit facilities, (iv) a $36.0 million term loan with
Citicorp (the entire balance of the term loan is classified as current due to
the fact that it was subsequently replaced with the amended and restated
agreement which is short term in nature) and (v) $30.0 million outstanding
under a secured credit facility with LGE.
Between November 1997 and February 1998, the company obtained a
total of $110.0 million in unsecured and uncommitted credit facilities
through lines of credit with Bank of America ($30.0 million), First
Chicago NBD ($30.0 million), Societe Generale ($20.0 million) and Credit
Agricole ($30.0 million). The credit lines are guaranteed by LGE for
which LGE is entitled to receive a fee in an amount up to 2 percent of the
face amount of the loan. The company granted liens in favor of LGE on the
capital stock of the company's domestic subsidiaries, on the company's
intellectual property (other than tuning patents, tuning patent royalties and
related license agreements) and certain other company assets to secure the
guaranties of LGE for borrowings under these credit lines. In July 1998
LGE made payments under demands against guarantees on $50.0 million
of the facilities and the company is obligated to LGE for these payments
plus interest.
In April 1997, the company entered into a sale-leaseback
transaction whereby the company sold and leased back manufacturing
equipment in its Melrose Park, Illinois, plant and in its Reynosa and
Juarez, Mexico, facilities. The company's payment obligations, along
with certain other items under the lease agreement were fully guaranteed
by LGE. In July 1998 LGE made payment under the guarantees of the
lease in the amount of $90.1 million as a result of a demand made under
the guarantees by the lessor.
Subsequent to June 27, 1998, the company's existing Citicorp credit
facility (initially composed of a $45.0 amortizing million term loan and a
$65.0 million revolving credit line) was amended and restated. The
amended Citibank credit facility provides for up to $125.0 million of
revolving loans, subject to borrowing base restrictions. The revolving
loans must be repaid on or before the earlier of the company's court filing
for a pre-packaged plan of reorganization or December 31, 1998. (See
"Note Two - Subsequent events" for additional discussion of the amended
credit facility.) The company is in discussions with lenders regarding
debtor-in-possession financing to cover the period during the court
proceeding related to the pre-packaged plan of reorganization and a new
credit facility to cover the period following consummation of the
prepackaged plan. In addition, pursuant to a restructuring agreement
between the company and LGE, LGE has agreed to provide additional
credit support. LGE's obligation to provide such financing is subject to
the conditions set forth in a restructuring agreement (see exhibit 10
under "Item 6. Exhibits and Reports on Form 8-K").
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. This facility was amended subsequent to June 27, 1998, to
extend the demand date from June 30, 1998, to December 31, 1998.
Following the filing of the 1997 10-K, the New York Stock
Exchange ("NYSE") contacted the company regarding the continuing
listing status of its common stock. On May 21, 1998, the company
announced the terms of the financial restructuring, and on May 22, 1998,
the NYSE suspended trading of the common stock. The common stock
has traded in the over-the-counter market since that time.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q, such
as those 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; and 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 or referred to 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 or referred to 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 its 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 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 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, there can be no assurance that it will
successfully achieve all of its goals. At this time, the company does not
believe that its Year 2000 related issues will have a material adverse
effect on the company's business. As a result, no contingency plan has
been deemed to be necessary.
Prior to 1998, the company spent in the aggregate approximately
$1.8 million on software and hardware upgrades and replacements and
approximately $200,000 in other costs (i.e., labor, consulting fees and
other expenses) in connection with Year 2000 Readiness. The company
has budgeted a total of $2 million for 1998 (approximately $400,000 for
software and hardware upgrades and approximately $1.6 million for other
costs) and $2.1 million for 1999 (approximately $1 million for software
and hardware upgrades and approximately $1.1 million for other
expenses) with respect to Year 2000 readiness. Most of the costs incurred
by the company in addressing Year 2000 Readiness 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, a licensee of the company's tuner patents filed suit
against the company seeking a declaratory judgment that the company's
tuner patents were invalid and unenforceable, and that the plaintiff's use
of certain technologies in its current products did not infringe on the
company's tuner patents. The complaint seeks the return of previously
paid royalties. The plaintiff is also seeking a preliminary injunction
precluding the company from terminating its licensing agreement and
allowing the plaintiff to pay future royalties into an escrow. The court
has denied the plaintiff's request for a temporary restraining order
against the company.
In July 1998, the company's directors, its President and Chief
Executive Officer and LG Electronics U.S.A., a subsidiary of LG
Electronics Inc., ("LGE") were named as defendants in a class action
entitled Vengrove v. Jeffrey Gannon, et al, in the Superior Court of New
Jersey, Law Division, Bergen County. The suit alleges breach of
fiduciary duties by the individual defendants in pursuing a pre-packaged
plan of reorganization to permit LGE to gain control of the company by
canceling the company's common stock thereby freezing out the minority
shareholders. The suit seeks to enjoin cancellation of the common stock,
the termination of the pre-packaged bankruptcy process as well as other
unspecified damages.
Item 2. Changes in Securities
(b) The company's credit facility prohibits dividend payments on the
company's common stock and preferred stock, if issued, and prohibits
the redemption or repurchase of capital stock.
Item 5. Other Information
On August 10, 1998 the company filed a Form S-4 Registration
Statement with the Securities and Exchange Commission which contains
the disclosure statement and proxy statement-prospectus for the
solicitation of votes for the prepackaged plan of reorganization that the
company previously announced.
Item 6. Exhibits and Reports on Form 8-K
(4) Amended and Restated credit Agreement dated as of June 29,
1998, among Zenith Electronics Corporation, Citibank N.A., Citicorp
North America, Inc. and the other lenders named therein (incorporated by
reference to Exhibit (4a) to the company's Form S-4 Registration
Statement as filed with the Securities and Exchange Commission on
August 10, 1998)
(10) Restructuring Agreement, dated August 7, 1998, between Zenith
Electronics Corporation and LG Electronics, Inc. (incorporated by
reference to Exhibit (10ah) to the company's Form S-4 Registration
Statement as filed with the Securities and Exchange Commission on
August 10, 1998)
(27) Financial Data Schedule for the six months ended June 27, 1998
(b) Reports on Form 8-K:
A report on Form 8-K dated May 22, 1998, was filed by the
company stating under Item 5 that on May 21, 1998, the company
announced that its Board of Directors has unanimously approved in
principle a financial restructuring to be implemented through a
prepackaged plan of reorganization.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZENITH ELECTRONICS CORPORATION
(Registrant)
Date: August 11, 1998
By: /s/ Edward J. McNulty
-----------------------
Edward J. McNulty
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Lawrence D. Panozzo
------------------------
Lawrence D. Panozzo
Director of Corporate Accounting and Planning
(Principal Accounting Officer)
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