UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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 October 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 Nine Months Ended
---------------------- ----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 230.4 $ 304.5 $ 675.1 $ 825.4
---------- ---------- ---------- ----------
Costs, expenses and other:
Cost of products sold 203.3 308.3 621.6 800.8
Selling, general and
administrative 31.5 44.6 93.4 122.7
Engineering and research 9.8 10.6 32.0 31.4
Other operating expense
(income), net (Note 4) (9.2) 5.2 (24.3) (5.0)
Restructuring charges (Note 3) 100.4 - 107.8 -
---------- ---------- ---------- ----------
Operating income (loss) (105.4) (64.2) (155.4) (124.5)
Gain (loss) on asset sales, net - 1.1 0.1 0.2
Interest expense (4.1) (3.5) (12.2) (11.8)
Interest expense - related party (9.6) (3.6) (21.0) (9.2)
Interest income 0.1 - 0.7 0.6
---------- ---------- ---------- ----------
Income (loss) before income taxes (119.0) (70.2) (187.8) (144.7)
Income taxes (credit) - (1.0) - (1.0)
---------- ---------- ---------- ----------
Net income (loss) $ (119.0) $ (69.2) $ (187.8) $ (143.7)
========== ========== ========== ==========
Net income (loss) per share of
common stock (Note 5) $ (1.76) $ (1.04) $ (2.78) $ (2.16)
========== ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
In Millions
Sept. 26, December 31, Sept. 27,
1998 1997 1997
-------- ------------ --------
ASSETS
- ------
Current assets:
Cash $ - $ - $ -
Receivables, net of allowance for
doubtful accounts of $36.3, $--
and $--, respectively (Note 6) 143.4 21.7 17.1
Inventories (Note 7) 164.8 165.5 275.4
Transferor certificates - 99.7 102.4
Other 14.5 26.3 29.0
-------- ------------ --------
Total current assets 322.7 313.2 423.9
Property, plant and equipment, net 155.1 171.1 243.5
Receivable from related party (Note 8) 21.3 - -
Other 5.3 43.4 39.9
-------- ------------ --------
Total assets $ 504.4 $ 527.7 $ 707.3
======== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt (Note 8) $ 107.8 $ 72.0 $ 25.0
Short-term debt with related
party (Note 8) 192.1 - -
Current portion of long-term
debt (Note 8) 5.8 15.3 14.7
Accounts payable 87.8 92.9 119.1
Accounts payable with related
party (Note 9) 134.9 144.3 140.2
Income taxes payable 0.6 0.7 0.8
Accrued expenses 143.4 141.7 172.3
-------- ------------ --------
Total current liabilities 672.4 466.9 472.1
Long-term liabilities - 8.8 9.0
Long-term liabilities with related party 11.0 8.2 -
Long-term debt (Note 8) 97.8 132.8 161.6
Stockholders' equity:
Preferred stock - - -
Common stock 67.6 67.1 67.1
Additional paid-in capital 506.8 507.3 505.2
Retained earnings (deficit) (849.5) (661.7) (506.0)
Treasury stock (1.7) (1.7) (1.7)
-------- ------------ --------
Total stockholders' equity (276.8) (89.0) 64.6
-------- ------------ --------
Total liabilities and
stockholders' equity $ 504.4 $ 527.7 $ 707.3
======== ============ ========
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ZENITH ELECTRONICS CORPORATION
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
In Millions
Increase (Decrease) in Cash
Nine Months Ended
---------------------------
Sept. 26, Sept. 27,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income (loss) $(187.8) $(143.7)
Adjustments to reconcile net income (loss) to
net cash used by operations:
Depreciation 24.4 26.4
Employee retirement plan contribution made
in stock - 4.9
Other (1.8) (0.2)
Gain on asset sales, net (0.1) (0.2)
Non-cash restructuring charges 95.4 -
Changes in assets and liabilities:
Current accounts (18.3) 37.5
Other assets 3.0 1.4
Other liabilities 3.1 -
----------- -----------
Net cash used by operating activities (82.1) (73.9)
----------- -----------
Cash flows from investing activities:
Capital additions (6.4) (68.0)
Proceeds from asset sales 36.2 161.8
Distribution of investor certificates (41.0) (5.0)
----------- -----------
Net cash provided (used) by investing activities (11.2) 88.8
----------- -----------
Cash flows from financing activities:
Short-term borrowings, net 137.8 (22.0)
Proceeds from issuance of long-term debt - 45.0
Proceeds from issuance of common stock, net - 1.3
Principal payments on long-term debt (44.5) (39.2)
----------- -----------
Net cash provided (used) by financing activities 93.3 (14.9)
----------- -----------
Increase (decrease) in cash - -
Cash at beginning of period - -
----------- -----------
Cash at end of period $ - $ -
=========== ===========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net $(121.7) $ 191.2
Transferor certificates 110.7 (167.4)
Income taxes, net (0.1) (0.5)
Inventories 0.7 (19.7)
Other assets 6.8 (12.4)
Accounts payable and accrued expenses (14.7) 46.3
----------- -----------
Net change in current accounts $ (18.3) $ 37.5
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 28.4 $ 18.9
Income taxes (0.8) (8.1)
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
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
Subsequent to September 26, 1998, the company announced plans
to close its Melrose Park, Illinois, color picture tube plant in
December 1998. This decision is consistent with the company's
restructuring plan announced earlier this year, which disclosed plans to
sell or close the plant by the end of 1998 unless operations improved
considerably. Costs associated with the plant closure are included in the
potential 1998 restructuring and reorganization charges discussed in
"Note Three - Restructuring charges".
Subsequent to September 26, 1998, the company completed the
sale of its headquarters building in Glenview, Illinois. As a result of the
sale, the company's fourth-quarter financial statements will reflect a
significant gain on the sale of the building.
Note Three - Restructuring charges
During the first nine months of 1998, the company recorded
$107.8 million of restructuring charges. Of this total amount, $100.4
million was recorded during the third quarter of 1998 and related to (i) a
$68.8 million loss on the termination of the company's leveraged lease
(as discussed in "Note Eight - Short-term debt and credit arrangements;
Long-term debt") , (ii) $32.3 million of deferred charges (bank, attorney
and guarantee fees) that were written off (as discussed in "Note Six -
Receivables" and "Note Eight - Short-term debt and credit arrangements;
Long-term debt"), (iii) accelerated amortization of the remaining
deferred gain ($9.1 million) related to the 1997 sale of the assets into the
leveraged lease (as discussed in "Note Eight - Short-term debt and credit
arrangements; Long-term debt"), (iv) $7.0 million of professional fees
(associated with work performed by outside consultants to support the
development of the operational and financial restructuring plans and the
pre-packaged plan of reorganization) and financing charges (relative to
amending the Citicorp credit agreement), and (v) $1.4 million of other
charges, related primarily to the company's exiting of its analog set-top
box product line.
A summary of the restructuring charges for the first nine months
of 1998 is as follows:
Restructuring Restructuring
Charges at Asset Cash Reserve at
Inception Writeoff Payment 9/26/98
------------- --------- --------- ------------
Loss on termination of
leveraged lease $ 68.8 $ (68.8) $ - $ -
Deferred finance charges 32.3 (32.3) - -
Accelerated amortization of
deferred gain (9.1) 9.1 - -
Professional fees and
financing charges 11.6 (1.5) (9.5) 0.6
Severance costs 1.4 - (0.9) 0.5
Other 2.8 (1.9) (0.3) 0.6
------------- --------- --------- ------------
Total restructuring charges $107.8 $ (95.4) $ (10.7) $ 1.7
============= ========= ========= ============
On August 10, 1998, the company filed a Registration Statement
on Form S-4 which contains information relating to 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,
reorganization and special one-time charges that are projected to be
approximately $242 million for the full year. The $242 million of
potential restructuring, reorganization and special one-time charges are
composed of (i) non-cash asset impairments ($70 million), (ii) the non-
cash loss on termination of a lease ($69 million) which was recorded in
the third quarter and is shown above, (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 partially offset by a potential extraordinary gain on debt retirement
of approximately $64 million.
Note Four - Other operating expense (income)
Royalty income accrued in relation to tuning system patents was
$7.7 million and $20.4 million for the three and nine months ended
September 26, 1998, respectively, and $5.7 million and $16.9 million for
the three and nine months ended September 27, 1997, respectively.
These amounts are 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 related primarily to (i) assets that were sold
or scrapped as a result of the company's decision to phase out of its
printed circuit board operation, (ii) assets were 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).
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
for both the three and nine months ended September 26, 1998, and 66.6
million and 66.5 million for the three and nine months ended September
27, 1997, respectively.
Note Six - Receivables
During the third quarter of 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 reflect the following: (i) receivables
are no longer sold and transferor certificates (which represented the
company's retained interest in the pool of receivables that were sold) do
not exist, and (ii) a non-cash restructuring charge of $3.9 million was
made to write-off deferred charges (bank, attorney and guarantee fees)
related to the receivable securitization.
Note Seven - Inventories
Inventories consisted of the following (in millions):
Sept. 26, December 31, Sept. 27,
1998 1997 1997
---------- ------------ ----------
Raw materials and work-in-process $ 71.2 $ 96.9 $ 144.6
Finished goods 93.6 68.6 130.8
---------- ----------- ----------
Total inventories $ 164.8 $ 165.5 $ 275.4
========== =========== ==========
Note Eight - Short-term debt and credit arrangements; Long-term debt
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.
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). The credit lines are guaranteed by LG
Electronics Inc. ("LGE") for which LGE is entitled to receive a fee in an
amount up to 2 percent of the outstanding amount of the loans. As of
September 26, 1998, only the Credit Agricole loan remains outstanding,
in the amount of $30.0 million. During the second and third
quarter of 1998, LGE made payments under demands against
guarantees on $72.0 million of the facilities and the company is
obligated to LGE for these payments plus interest. The company's
obligations to LGE are secured by a second lien on certain assets of the
company.
In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45 million.
As of September 26, 1998, $30.0 million was outstanding under the
facility. See Note Nine for further discussion.
During the third quarter of 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 (a) the
company's court filing for a pre-packaged plan of reorganization or (b)
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 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.
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
leases in the amount of $90.1 million under a negotiated settlement with
the lessor. As a result, the company's third quarter financial statements
reflect a $90.1 million current liability to LGE (included in "Short-term
debt with related party" on the balance sheet), a $21.3 million Other
Receivable from LGE, and a loss on termination of the lease of $68.8
million. The receivable from LGE represents the fair value of the
manufacturing equipment receivable from LGE as a result of their
performance under the terms of the guarantee and negotiated settlement
with the lessor. In addition, the financial statements reflect a non-cash
restructuring charge of $28.3 million to write-off deferred charges
(bank, attorney and guarantee fees) related to the lease, offset by a non-
cash restructuring gain of $9.1 million which represents the accelerated
amortization of the deferred gain on the 1997 sale of the assets into the
lease.
Note Nine- Related party
In November 1995, a change in control of the company
occurred, in which LGE and an 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 September 26,
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.
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 participate in and assist the company with
its proposed financial and operational restructuring plans. The
agreement is listed as exhibit 10 under "Item 6. Exhibits and Reports on
Form 8-K".
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 nine months ended September 26, 1998 and September 27, 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 $11.6 million and
$34.7 million of these items during the three and nine months ended
September 26, 1998, and $38.1 million and $64.8 million during the
three and nine months ended September 27, 1997, respectively. Sales of
products purchased from LGE and its affiliates contributed $11.2 million
and $46.5 million to sales during the three and nine months ended
September 26, 1998, respectively, and $31.7 million and $75.5 million
to sales during the three and nine months ended September 27, 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 $8.2 million and
$30.7 million during the three and nine months ended September 26,
1998, respectively, and $18.6 million and $32.0 million during the three
and nine months ended September 27, 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
December 31, 1998 (as amended). Repayment is due in full at the end
of the term. The first such borrowing occurred in May 1998, and as of
September 26, 1998, $30.0 million was outstanding under the facility.
The facility is secured by a second lien on certain of the company's
assets, including its VSB technology and is subject to certain terms and
conditions.
Accounts payable included $134.9 million and $140.2 million to
LGE and its affiliates as of September 26, 1998 and September 27, 1997,
respectively. In April 1997, the company and LGE entered into an
arrangement whereby LGE provided a vendor credit line to the company
to finance the company's purchases of certain goods from LGE in the
ordinary course of business. 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 $134.0 million and
$133.5 million as of September 26, 1998 and September 27, 1997,
respectively. The company is charged interest on the extended period at
rates reflecting then - current market conditions in Korea.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The company's third-quarter net loss, excluding restructuring
and asset impairment charges, was $18.6 million in 1998 compared to
$59.2 million a year ago. Including a $100.4 million restructuring
charge, the company reported a third-quarter net loss of $119.0 million
or $1.76 per share. In the 1997 third quarter, including a $10 million
asset impairment charge, the company reported a net loss of $69.2
million or $1.04
The third-quarter 1998 restructuring charge related to (i) a $68.8
million loss on the termination of the company's leveraged lease, (ii)
$32.3 million of deferred charges (bank, attorney and guarantee fees)
that were written off, (iii) accelerated amortization of the remaining
deferred gain ($9.1 million) related to the 1997 sale of the assets into the
leveraged lease, (iv) $7.0 million of professional fees (associated with
work performed by outside consultants to support the development of
the operational and financial restructuring plans and the pre-packaged
plan of reorganization) and financing charges (relative to amending the
Citicorp credit agreement), and (v) $1.4 million of other charges, related
primarily to the company's exiting of its analog set-top box product line.
Total third-quarter sales were $230.4 million in 1998 compared
with $304.5 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 and a
change in distribution strategy whereby certain VCRs are sold directly
from the manufacturer (LGE) rather than through the company's direct
sales organization. The company receives a royalty for these sales.
Sales of Network Systems products increased significantly in the third
quarter of 1998 compared with a year ago due to shipments of digital
set-top boxes.
The company's 1998 third-quarter gross margin was $27.1
million compared to the prior year of $(3.8) million. This was primarily
the result of (i) significant 1997 third-quarter excess and obsolete
inventory charges, (ii) decreased 1998 third-quarter raw material costs,
(iii) lower depreciation expense in the 1998 third quarter (due to the
asset impairment charges the company recorded in December 1997) and
(iv) large 1997 third-quarter losses in color picture tube operations
which resulted from high operating costs and performance difficulties
associated with new product start-up and new automated production
processes.
Selling, general and administrative expenses were $31.5 million
in the third quarter of 1998, compared with $44.6 million in the previous
year. The decrease was primarily caused by (i) the 1997 third quarter
bad debt charge of $6.0 million related to a South American customer's
receivable, (ii) lower advertising costs in the 1998 third quarter
compared to the prior year and (iii) expense savings related to lower
sales.
Other operating expense (income) for the third quarter of 1998
includes $7.7 million of accrued royalty income from tuner patent
licenses. This income was $5.7 million in the third quarter of 1997.
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. The charge related primarily to (i) assets that were sold or
scrapped as a result of the company's decision to phase out of its printed
circuit board operation, (ii) assets were 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).
Interest expense was $13.7 million in the third quarter of 1998,
compared with $7.1 million in the previous year. The change resulted
from higher funding requirements (at generally higher interest rates) for
company operations and the company began accruing interest to LGE on
the $90.1 million the company owes LGE for LGE's guarantee of the
company's obligation under the sale-leaseback agreement.
For the first nine months of 1998 the company reported a net
loss of $187.8 million, or $2.78 per share, compared with a net loss of
$143.7 million, or $2.16 per share for the first nine months of 1997.
Nine-month sales were $675.1 million in 1998 compared with $825.4
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) which was recorded in the third quarter, (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 nine months ended September 26, 1998, $82.1
million of cash was used by operating activities principally to fund $67.0
million of net losses from operations, as adjusted for $94.8 million of
non-cash restructuring charges and $24.4 million of depreciation. In
addition, $17.7 million of cash was used to fund the change in current
accounts, which was principally composed of a $121.7 million increase
in receivables and a $14.1 million decrease in accounts payable and
accrued expenses, offset by a $110.7 million decrease in transferor
certificates and a $6.8 million decrease in other assets The increase in
receivables and the decrease in transferor certificates were mainly due to
the receivable securitization agreement being terminated during the third
quarter of 1998. As a result, receivables are no longer sold and
transferor certificates (which represented the company's retained interest
in the pool of receivables that were sold) do not exist.
During the nine months ended September 26, 1998, $11.2
million of cash was used by investing activities. This was composed of
$30.0 million of cash received from the sale of receivables under the
now terminated three-year trade receivables securitization and $6.2
million of cash received from the sale of certain property held for
disposal, offset by $6.4 million of cash used for capital additions and
$41.0 million used to pay off the investor certificates upon the
termination of the terminated three-year trade receivables securitization.
The capital additions during the first nine months of 1998 were
significantly lower than the $68.0 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.
During the nine months ended September 26, 1998, $93.3
million of cash was provided by financing activities. This was
composed of $77.8 million of borrowings under the amended Citibank
credit facility, $30.0 million of borrowings under the company's
remaining unsecured and uncommitted credit agreement, $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
off the old term loan ($38.2 million) and cash used to redeem the
company's 8.5 percent Senior Subordinated Convertible Debentures due
January 2001 ($0.5 million).
As of September 26, 1998, the company had $537.4 million of
interest-bearing obligations which consisted of: (i) $134.0 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) $30.0 million currently payable under the
remaining unsecured and uncommitted credit facilities, (iv) $77.8
million currently payable under a Credit Agreement with Citicorp, (v)
$30.0 million outstanding under a secured credit facility with LGE, (vi)
$90.1 million owed to LGE as a result of LGE's payment under the
guarantees of the leveraged leases and (vii) $72.0 million owed to LGE
as a result of LGE's payments under demands against guarantees on the
unsecured and uncommitted credit facilities.
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 outstanding amount of the loans. 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. As of September 26, 1998, only the
Credit Agricole loan remains outstanding, in the amount of $30.0 million.
During the second and third quarter of 1998, LGE made payments under
demands against guarantees on $72.0 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.
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 December
31, 1998 (as amended). Repayment is due in full at the end of the term.
The first such borrowing occurred in May 1998, and as of September 26,
1998, $30.0 million was outstanding under the facility. The facility is
secured by liens on certain of the company's assets and is subject to
certain terms and conditions.
During the third quarter of 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 (a) the
company's court filing for a pre-packaged plan of reorganization or (b)
December 31, 1998. (See "Note Eight - Short-term debt and credit
arrangements; Long-term debt" 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 and subject to certain conditions, 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 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.
Following the filing of the 1997 Form 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 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 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 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.
The company has completed its evaluation of its computer-
based systems, facilities and products to determine whether they are
"Year 2000 Ready." The company has identified certain information
and computer systems that are not Year 2000 Ready and is in the process
of purchasing software and hardware upgrades and replacements for
these systems. The company anticipates that each of these upgrades and
replacements will be implemented prior to the Year 2000. Additionally,
the company believes that its material non-information technology
systems will be Year 2000 Ready prior to the Year 2000. The company
believes that most of its currently manufactured products are Year 2000
Ready. The company has sent Year 2000 Readiness Questionnaires to
its existing key vendors and suppliers to assess the Year 2000 Readiness
of their systems and products. The responses to these Questionnaires
have indicated that the company's vendors or suppliers are addressing
their Year 2000 issues and expect to be Year 2000 Ready by the Year
2000. At this time, and based on the company's current implementation
plan, 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 at this time.
In connection with the company's proposed operational
restructuring, the company plans to discontinue substantially all of its
manufacturing operations and to outsource substantially all components
and products. The company believes its principal exposure to Year 2000
risks are related to the ability of its vendors to provide the company with
Year 2000 Ready components and products and to assure that such
vendors otherwise are Year 2000 Ready so that they are able to provide
the company with components and products in a timely manner. The
company has not yet concluded which vendors it will rely upon
following completion of the operational restructuring. The company is
aware, however, that Year 2000 issues may exist with respect to vendors
with which it has or will have a material relationship, and Year 2000
Readiness will be a material consideration in the company's selection of,
and contract negotiations with, such third-party vendors.
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. While
the Year 2000 transition efforts may involve costs in addition to those
currently budgeted or anticipated to be budgeted, at this time, the
company has not yet determined the full costs of the modifications that
may be necessary to address all Year 2000 issues.
While the company is working to achieve Year 2000 Readiness, there
can be no assurance that it will successfully achieve all of its goals.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
WVP Income III, LP has brought a legal action in the federal
court for the Northern District of California under RCRA, CERCLA and
several state causes of action, asserting that the company caused
contamination on property owned by the plaintiff in Menlo Park,
California. A wholly-owned subsidiary of the company, Zenith Radio
Research Corporation, purchased the Menlo Park facility newly
constructed in 1959. The subsidiary ceased operations at the facility in
1972 and the property was sold in 1974. Following the company's sale
of the property, the primary occupant was Raychem Corporation, from
approximately 1976 until 1993. Plaintiff's lawsuit has named the company
and Raychem as defendants. No work plan has yet been adopted and no
estimates on the cost to cleanup the property have yet been provided to
the company. The company has notified its insurance carriers of the
claim.
During the three months ended September 26, 1998, no other
reportable events or material developments occurred regarding the legal
proceedings of the company that would need to be reported.
Item 2. Changes in Securities
(b) 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 Registration Statement
on Form S-4 which contains information relating to the company's
proposed financial and operational restructuring plans along with
information regarding a pre-packaged plan of reorganization. The
Securities and Exchange Commission review and response processes to
make the filing of the Form S-4 Registration Statement effective are
underway.
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 nine months ended September
26, 1998
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ZENITH ELECTRONICS CORPORATION
(Registrant)
Date: November 3, 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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