-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LEb9pti5sHwC3qxwcNsX5Hn23R/vOjQpZpDOoIM9tQhX77+i0laqQOYrMzCk+nHr shmGbWjYrAFO6+Kg68vdeA== 0000950137-97-001533.txt : 19970417 0000950137-97-001533.hdr.sgml : 19970417 ACCESSION NUMBER: 0000950137-97-001533 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970416 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZENITH ELECTRONICS CORP CENTRAL INDEX KEY: 0000109265 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 361996520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-04115 FILM NUMBER: 97581659 BUSINESS ADDRESS: STREET 1: 1000 MILWAUKEE AVE CITY: GLENVIEW STATE: IL ZIP: 60025 BUSINESS PHONE: 7083917000 MAIL ADDRESS: STREET 1: 1000 MILWAUKEE AVENUE CITY: GLENVIEW STATE: IL ZIP: 60025 FORMER COMPANY: FORMER CONFORMED NAME: ZENITH RADIO CORP DATE OF NAME CHANGE: 19840508 10-K405/A 1 AMENDMENT NO. 1 TO FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 THE FOLLOWING ITEMS WERE THE SUBJECT OF A FORM 12B-25 AND ARE INCLUDED HEREIN: Financial information regarding foreign and domestic operations and export sales required under Item 1, information on quarterly stock prices required under Item 5, Items 6, 7, 8, 10, 11, 12, 13 and financial information, certain exhibits and other items required under Item 14. FORM 10-K/A - 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-4115 ZENITH ELECTRONICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 391-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- 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
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 26, 1997, WAS $321,205,625. AS OF MARCH 26, 1997, THERE WERE 66,448,593 SHARES OF COMMON STOCK, PAR VALUE $1 PER SHARE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED APRIL 22, 1997, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. ================================================================================ 2 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 sold or downsized its non-core business activities. The company sold its monochrome video monitor business in 1993 and its power supply business in 1994. Its activities in color video monitors sold to computer manufacturers ceased in 1995 and its activities in high-security electronic equipment have been discontinued. 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. 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, 1996, 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 TV ("HDTV") related inventions. To the extent these inventions are incorporated into the HDTV 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-HDTV applications as well. In addition, 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 1996 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 60 percent of the company's net 3 3 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. Major Customers Sales to a single customer, Circuit City Stores, Inc., amounted to $187.2 million (15 percent) in 1996, $172.1 million (14 percent) in 1995 and $180.8 million (12 percent) in 1994. Sales to a second customer, Sears, Roebuck and Company, accounted for $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'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 1996 expenditures for company-sponsored research and engineering relating to new products and services and to improvements of existing products and services were $46.7 million. Research and engineering expenditures were $43.5 million in 1995 and $45.4 million in 1994. 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 year-end 1996, the company employed approximately 15,900 people, of whom approximately 11,300 are hourly workers covered by collective bargaining agreements. Approximately 4,400 of the company's employees are located in the Chicago, Illinois, area, of whom approximately 2,800 are represented by unions. Approximately 11,200 of the company's employees are located in Mexico, of whom approximately 8,500 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 Eight -- Geographic Segment Data" which is contained in this report. 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. 4 4 ITEM 2. PROPERTIES The company utilizes a total of approximately 5.3 million square feet for manufacturing, warehousing, engineering and research, administration and distribution, as described below.
SQUARE FEET (IN LOCATION NATURE OF OPERATION MILLIONS) -------- ------------------- ----------- DOMESTIC: Chicago, Illinois (including......... Six locations -- production of color picture tubes, parts suburban locations) and service; engineering and research, marketing 2.2 and administration activities; and assembly of electronic components (.6 million square feet is leased by the company) Fort Worth, El Paso, McAllen,........ Six locations -- warehouses/offices (.6 million square Brownsville and Dallas, Texas; feet is leased by the company) .7 Douglas, Arizona FOREIGN: Mexico............................... Twelve manufacturing and warehouse locations -- 2.4 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 5.3 ===
The company's facilities are suitable and adequate to meet current and anticipated requirements. None of the real property owned by the company is mortgaged. 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 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. Litigation Numerous 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 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 has 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. Plaintiffs in the company's cases seek to recover $31 million actual and $321 million punitive damages from the company. The company believes it has meritorious defenses to the cases. Thirteen of the foregoing cases have been dismissed, most without prejudice or subject to the appeal of the 1996 Blanco v. AT&T ruling on the applicable statute of limitations in the New York Supreme Court Appellate Division. 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. In February 1995, one of the independent distributors filed suit challenging the company's right to discontinue the distributorship relationship and alleging that it had been 5 5 damaged by certain of the company's practices. The lawsuit sought injunctive relief, actual damages of $8 million and punitive damages of $20 million. In October 1995, summary judgment dismissing the case on all counts was entered. The plaintiff has appealed. Another suit arising in connection with this change in distribution was filed in April 1995 by another independent distributor. The lawsuit seeks 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 is 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 award. 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 sought and injunctive relief. The company has insufficient information at this time from which it can determine the extent of its liability, if any. The company is a defendant in a suit for contribution in the matter of S C Holdings, Inc. v. .A.A.A. Realty Co., et al (Civil Action No. 95-947 (GEB) which was filed in the U.S. District Court, District of New Jersey on November 30, 1995. This litigation concerns the Cinnaminson Groundwater Contamination Site (the "Site") in the Township of Cinnaminson, Burlington County, New Jersey. The Site is a former landfill. The company is one of 100 parties involved in this litigation; the company is an alleged generator of 40 drums of solvents that were disposed of at the Site. The company is currently in settlement negotiations and expects to resolve the matter for $140,000. Environmental The company has been identified by the U.S. EPA as an alleged de minimis generator of waste disposed at two sites, both of which are subject to U.S. EPA action under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. ("CERCLA") These are the Ramp Industries Superfund Site in Denver, Colorado and the Galaxy/Spectron, Inc. Superfund Site in Elkton, Maryland. The company has been identified as a potential responsible party ("PRP") at three other Superfund sites: the North Penn Area 7 Superfund Site in Lansdale, Pennsylvania, the Master Metals Superfund Site in Cleveland, Ohio and the Midwest Solvent Recovery Superfund Site in Gary, Indiana. Neither the extent of contamination nor the allocation of liability have been determined for the North Penn site and, therefore, the company is unable to estimate the extent of its liability, if any. On April 4, 1997, the company entered into an Administrative Order on Consent ("AOC"), along with other PRPs, pursuant to which the PRPs will undertake certain response activities at the Master Metals Superfund Site. The company expects to be allocated a charge of 3.5% of an estimated $1.6 million to implement the work outlined in the AOC. The extent of the company's liability for future work at the Master Metals site, if any, is unknown. The company expects to pay an additional $160,000 to cover costs incurred at the Midwest Solvent Recovery Site through the end of 1997, as the site cleanup is completed. In October 1989, the U.S. Department of Justice brought a civil action under CERCLA against certain owners, operators and generators, seeking reimbursement of response costs incurred by U.S. EPA in connection with the Moyer Landfill in Collegeville, Pennsylvania. One of the defendants sued Ford Electronics and Refrigeration Corporation ("FERCO") and others as third party defendants. FERCO in turn sued the company, as a subsequent owner of the Site, for contribution as a third party defendant for the company's alleged hazardous waste materials sent to the Moyer Landfill through FERCO as the company's transporter. The company has agreed to settle the FERCO claim for $300,000, the payment of which will occur upon the entry of a Consent Decree between the Department of Justice and FERCO, which is expected to be consummated in the near future. The Consent Decree takes into account the company-FERCO settlement. 6 6 EXECUTIVE OFFICERS OF THE REGISTRANT
NAME OFFICE HELD AGE ---- ----------- --- Roger A. Cregg................. Executive Vice President, Chief Financial Officer since May 41 1996. Chief Financial Officer at Sweetheart Cup Company from 1990 to 1996. Richard F. Vitkus.............. Senior Vice President, General Counsel since 1994. Secretary 57 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.............. President and Chief Executive Officer since November 1996. 59 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............ Vice President - Human Resources since March 1996. Director, 46 Human Resources, Case Corporation from 1990 to 1996.
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 12,026 as of March 26, 1997. No dividends were paid to stockholders during the two years ended December 31, 1996. 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 which is contained in this report. ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary of Selected Financial Data
1996 1995* 1994* 1993* 1992* ---- ----- ----- ----- ----- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Results of operations: Net sales.................................. $1,287.9 $1,273.9 $1,469.0 $1,228.2 $1,243.5 Pre-tax income (loss)...................... (177.8) (98.5) (14.8) (93.2) (123.8) Net income (loss).......................... (178.0) (90.8) (14.5) (93.2) (107.9) Financial position: Total assets............................... $ 765.3 $ 700.7 $ 662.4 $ 568.5 $ 583.9 Long-term debt............................. 152.7 168.8 182.0 170.0 149.5 Stockholders' equity....................... 162.0 317.5 237.1 161.5 215.4 Per share of common stock (primary and fully diluted): Net income (loss).......................... $ (2.73) $ (1.85) $ (.35) $ (2.89) $ (3.66) Book value................................. 2.44 5.00 5.19 4.50 7.12
- ------------------------- * Restated for a change in the method of accounting for certain inventories. The effect of the change was to decrease the 1996 net loss by $2.7 million, decrease the 1995 net loss by $1.6 million, increase the 1994 net loss by $.3 million, decrease the 1993 net loss by $3.8 million and increase the 1992 net loss by $2.0 million. See Note Three of Notes to Consolidated Financial Statements for additional information. 7 7 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 1996 were $1,288 million, up one percent from 1995 sales of $1,274 million. Sales in 1995 decreased 13 percent as compared to 1994 sales of $1,469 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 1996 and 1995 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 increased 3 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 television) decreased by 3 percent to 25.5 million units in 1996 (following a decrease of 4 percent to 26.2 million units in 1995 and an increase of 10 percent to 27.4 million units in 1994). The Zenith brand remains one of the top three U.S. color TV brands. Sales in 1996 were negatively impacted as the company suffered delays in production of new high-margin Consumer Electronics products. Consumer Electronics sales decreased 14 percent in 1995 from 1994 primarily due to lower selling prices, soft domestic demand for direct-view color TV sets, reduced VCR revenues (partially due to a change in distribution method) and significantly lower color TV unit sales in Mexico, due to the December 1994 devaluation of the Mexican peso. As a result of soft industry conditions during 1995, particularly during the traditionally strong fourth quarter, domestic industry color TV unit sales to dealers (including projection television) decreased by 4 percent to 26.2 million units (following increases of 10 percent to 27.4 million units in 1994 and 11 percent to 25.0 million units in 1993). The company's market share declined slightly during 1995 due to slow shipments early in the first quarter caused by start-up problems associated with a new finished-goods warehouse. In color picture tube operations, sales of picture tubes to other manufacturers decreased 37 percent in 1996 from 1995 and the number of units sold was down 48 percent. The 1996 decrease was a result of increased competition in the market place along with a shift in the mix of items sold. These sales had increased 33 percent in 1995 from 1994, and the number of units sold was up 29 percent. In Network Systems, which includes the design and manufacture of set-top boxes and data modems sold primarily to the cable TV industry, 1996 sales were down significantly compared with 1995 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 1996. During the third quarter of 1996, the company signed a multi-year agreement with the Americast programming venture to provide up to 3 million digital set-top boxes to a consortium of telecommunications companies. In 1995, Network Systems sales increased 12 percent from 1994, reflecting the strength of the industry and the popularity of the company's high-performance analog set-top units. Sales also were aided by a multi- million-dollar agreement with the Malaysian pay television operation Mega TV to provide as many as 200,000 wireless cable decoders. 8 8 Sales of non-core products, primarily power supplies and display monitors, decreased by 77 percent in 1995 from 1994, to less than 1 percent of total sales. These businesses were phased out or sold during 1994, although the company continued to manufacture power supplies for the purchaser of the magnetics business until April 1995. 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 1996 results include approximately $80 million of non-recurring charges, reflecting actions taken by the company to stabilize its cost structure and improve operating performance. 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. The Mexican peso devaluation, which began in December 1994, lowered peso-denominated costs -- including wages and salaries, utilities, supplies and materials in 1996 and 1995. These cost savings were offset by inflationary increases for purchased material and labor costs (Mexican labor contracts expire every two years and wages are renegotiated annually or more frequently under rapid devaluation or high inflation periods). Selling, general and administrative expenses were $168 million in 1996, $129 million in 1995 and $119 million in 1994. These expenses as a percent of revenues were 13 percent in 1996, 10 percent in 1995 and 8 percent in 1994. The increase in 1996, as compared to 1995, was the result of the unusual charges mentioned above. These items included severance charges for salaried employees (including executive severance), consulting fees and provisions for bad debts. The amount of these expenses in 1995, as compared to 1994, was relatively constant but the decline in sales caused the ratio to increase. 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 $47 million in 1996, $44 million in 1995 and $45 million in 1994. These expenses as a percentage of revenues were approximately 4 percent in each year during the three years ended December 31, 1996. OTHER OPERATING EXPENSE (INCOME). Other operating expense (income) is primarily composed of 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 $27 million in 1996, $26 million in 1995 and $28 million in 1994. Also included in Other operating expense (income) are foreign exchange gains and losses. These amounts have traditionally not been material, but in 1994 the company recorded $4 million of foreign exchange gain, mainly as a result of the Mexican peso devaluation. RESTRUCTURING AND OTHER CHARGES. 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 will be 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) 9 9 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. GAIN (LOSS) ON ASSET SALES. In 1996 and 1995, the gain (loss) on asset sales was not material. During 1994 the company realized a gain of $11 million on asset sales, including more than 3 million square feet of excess plant and office space, 98 acres of vacant land, and assets related to the magnetics business. INTEREST EXPENSE. Interest expense in 1996 was consistent with the 1994 amount, but was approximately $5 million less than the 1995 amount. The increased interest expense in 1995 resulted from higher funding requirements (at higher interest rates) for company operations. To assist in funding these requirements, the company entered into a $40 million Term Loan Agreement in May 1995. 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 $178 million in 1996, $91 million in 1995 $15 million in 1994. Corresponding per share losses were $2.73 in 1996, $1.85 in 1996 and $.35 in 1994. During 1996, the company announced a series of product initiatives based on its set-top box and cable modem technologies. The company has not yet recognized any revenues from these recently announced 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. In 1997, the company is focusing on higher-margin home theater TV systems, and expects to launch a multimillion-dollar national advertising campaign, the company's first in five years. In addition, the company is scheduled to begin initial shipments of new digital set-top boxes to telecommunications companies under the multi-year, $1 billion Americast contract signed in August 1996. 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 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 10 10 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. In 1994, $42 million of cash was used by operating activities primarily to fund a $52 million change in current accounts, offset by $3 million in net income from operations as adjusted for depreciation and gains on the sales of assets. The change in current accounts was composed primarily of a $46 million increase in receivables (due to higher sales) and a $43 million increase in inventories (due mainly to increased levels of color television production in support of higher sales), partially offset by a $40 million increase in accounts payable and accrued expenses. In addition, the company reduced cash used by operating activities by issuing common stock to the profit-sharing retirement plans to fulfill the 1994 obligation to salaried employees and some hourly employees. This issuance increased stockholders' equity by $6 million. 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. 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. 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. In 1994, investing activities used $31 million of cash, which consisted of capital additions of $59 million, offset by $28 million of proceeds from asset sales. The level of capital additions in 1996 was significantly higher than the additions in 1995 primarily to support the expansion and modernization of the company's Melrose Park, Ill., picture tube plant, and its Chihuahua, Mexico, plant for digital set-top boxes. The company expects these capital projects, scheduled for completion in the first half of 1997, to yield significant productivity improvements. The level of capital additions in 1995 was consistent with the additions in 1994. 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 plant. The company is planning significant capital investment projects during 1997, primarily in the color picture tube area, which include the expansion of production capacity for color TV picture tubes, new automated production processes and the completion of new production lines for computer display tubes. FINANCING ACTIVITIES. Financing activities provided cash of $55 million in 1996, $167 million in 1995 and $62 million in 1994. 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 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. 11 11 In 1994, financing activities provided $62 million of cash, which included $84 million provided from sales of the company's common stock and $12 million from the sale of 8.5% Senior Subordinated Convertible Debentures due 2001. This was offset by $35 million of cash used to redeem the company's outstanding 12 1/8% Notes due 1995 at a redemption price equal to par value (plus accrued interest). Financial Condition As of December 31, 1996, the company had $324 million of interest-bearing obligations which consisted of: (i) $115 million of 6 1/4 percent Convertible Subordinated Debentures due 2011 (the current portion of which is $6 million), (ii) $24 million aggregate principal amount of 8.5 percent Senior Subordinated Convertible Debentures due 2000 and 2001, (iii) a $31 million Term Loan with General Electric Capital Corporation ("GE") (the current portion of which is $12 million), (iv) $47 million currently payable under a Credit Agreement with GE, and (v) $107 million of extended-term payables with LGE. On April 2, 1997, the company obtained new financing commitments which significantly enhance the company's liquidity and are consistent with its strategy to improve its operating and financial performance. One of the commitments 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 with General Electric Capital Corporation. The term loan requires scheduled quarterly principal payments of $2 million with a balloon payment of $20 million at maturity. Under the revolving credit line, the maximum commitment of funds available for borrowing is limited by a defined borrowing base formula related to eligible inventory. The facility is secured by the company's inventory, trademarks and tuner patent royalties, along with the related patents and licenses. Interest on borrowings is based on market rates. The facility contains certain covenants that must be met in order to remain in compliance with the facility, including financial covenants that must be maintained as of the end of each fiscal quarter. 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 is currently $130 million, but can be increased to $200 million, assuming additional bank commentments. 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, on April 2, 1997, the company entered into an $87 million sale-leaseback transaction whereby the company sold and leased back new and existing manufacturing equipment in its Melrose Park, Ill., plant and in its Reynosa and Juarez, Mexico, facilities. The term of the lease is 12 1/2 years and annual payments under the lease will average approximately $10 million. The company's, payment obligations, along with certain other items under the lease agreement are fully guaranteed by LGE. The lease of the manufacturing equipment was accounted for as an operating lease. Additionally on April 2, 1997, the company and LGE entered into an arrangement whereby certain of the company's accounts payables arising in the ordinary course of business with LGE will be extended for certain periods of time with interest being charged on the amounts extended. In return for LGE providing support for the securitizations and the sale-leaseback transaction and the extended-term payables arrangement, the company will grant 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 will be based upon their fair value with that fair value being amortized straight-line over the term of the associated commitments. Upon the closing of the new financing agreements described above, the company received $142 million of cash 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. 12 12 As part of this refinancing, and to provide for contingencies, the company has agreed to raise an additional $33 million by the end of the third quarter of 1997 through additional sale-leaseback transactions. There can be no assurance that the company will be able to enter into such sale-leaseback transactions, or that the company will not experience liquidity problems in the future because of adverse market conditions or other unfavorable events. However, the company believes that its new financing commitments and the extended-term payables available from LGE, together with its fulfillment of the additional sale-leaseback obligations, will be adequate to meet its seasonal working capital, capital expenditure and other requirements during 1997. Recently Issued Accounting Standards The Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in 1996. The new accounting standard (which is effective beginning in 1997) provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement was adopted by the company during 1997 in connection with the new three year trade receivables securitization that was entered into on April 2, 1997. Pursuant to the new statement, the trade receivable securitization was accounted for as a sale of receivables. The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 96-1 "Environmental Remediation Liabilities" in 1996. The new SOP (which is effective beginning in 1997) provides a nonauthoritative discussion of major federal legislation dealing with environmental laws and authoritative guidance on specific accounting issues that are present in the recognition, measurement and disclosure of environmental remediation liabilities. The effects of adopting this SOP are to be considered a change in an estimate and recorded solely on a prospective basis. The company has not yet quantified the impact, if any, on the consolidated financial position or results of operations of the company as a result of the new SOP. 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. 13 13 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 1996", "Aggregated Option/SAR Exercises in 1996 and Year-End Option/SAR Values" and "Pension Plan" 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. 14 14 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, 1996, 1995 and 1994 Consolidated Balance Sheets -- December 31, 1996 and 1995 Statements of Consolidated Cash Flows -- Years ended December 31, 1996, 1995 and 1994 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: 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: (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 (incorporated by reference to Exhibit 3 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) (4a) 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) (4b) Debenture Purchase Agreement dated as of November 19, 1993 with the institutional investors named therein (incorporated by reference to Exhibit 4(a) of the company's Current Report on Form 8-K dated November 19, 1993) (4c) Amendment No. 1 dated November 24, 1993 to the Debenture Purchase Agreement dated as of November 19, 1993 with the institutional investor named therein (incorporated by reference to Exhibit 4(a) of the company's Current Report on Form 8-K dated November 24, 1993) (4d) Amendment No. 2 dated as of January 11, 1994 to the Debenture Purchase Agreement dated as of November 19, 1993 (incorporated by reference to Exhibit 4(c) of the company's Current Report on Form 8-K dated January 11, 1994)
15 15 (4e) Debenture Purchase Agreement dated as of January 11, 1994 with the institutional investor named therein (incorporated by reference to Exhibit 4(a) of the company's Current Report on Form 8-K dated January 11, 1994) *(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 Amended and Restated Employment Agreement with Gerald M. McCarthy and Albin F. Moschner (incorporated by reference to Exhibit 2 of the company's Report on Form 10-K for the year ended December 31, 1990) *(10c) 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) *(10d) Letter Agreement, dated October 21, 1991, with Albin F. Moschner (incorporated by reference to Exhibit 10u of the company's Report on Form 10-K for the year ended December 31, 1991) *(10e) 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) *(10f) Form of Directors 1989 Stock Units Compensation Agreement with T. Kimball Brooker (1000 units) (incorporated by reference to Exhibit 9 of the company's Report on Form 10-K for the year ended December 31, 1989) *(10g) 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) *(10h) 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) *(10i) 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) *(10j) 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) *(10k) 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) *(10l) 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) *(10m) Supplemental Salaried Profit Sharing Retirement Plan effective as of January 1, 1994 (incorporated by reference to Exhibit 10ac to the company's Annual Report on Form 10-K for the year ended December 31, 1994) (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) Resignation letter of Albin F. Moschner as president, chief executive officer and director of the company (incorporated by reference to Exhibit 10 of the company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996) *(10p) Employment Agreement, dated January 1, 1997, between Roger A. Cregg and Zenith Electronics Corporation *(10q) Employment Agreement, dated January 1, 1997, between Richard F. Vitkus and Zenith Electronics Corporation
16 16 *(10r) Employment Agreement, dated January 1, 1997, between Peter S. Willmott and Zenith Electronics Corporation *(10s) Employment Agreement, dated January 1, 1997, between Dennis R. Winkleman and Zenith Electronics Corporation (18) Letter re change in accounting principle (21) Subsidiaries of the company (23) Consent of Independent Public Accountants (27) Financial Data Schedule for the Year ended December 31, 1996
- ------------------------- * Represents a management contract, compensation plan or arrangement. (b) Reports on Form 8-K A report on Form 8-K dated December 18, 1996, was filed by the company stating under Item 5 that on December 18, 1996, the company announced that in a major restructuring designed to help accelerate the company's return to profitability and conserve cash, it is cutting its U.S. workforce by more than 25 percent. (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. 17 17 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/ PETER S. WILLMOTT ------------------------------------ Peter S. Willmott President and Chief Executive Officer Date: April 15, 1997 ----------------------------------- 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.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ T. KIMBALL BROOKER Director April 15, 1997 - ------------------------------------------------ T. Kimball Brooker /s/ KI-SONG CHO Director April 15, 1997 - ------------------------------------------------ Ki-song Cho /s/ EUGENE B. CONNOLLY Director April 15, 1997 - ------------------------------------------------ Eugene B. Connolly /s/ ROBERT A. HELMAN Director April 15, 1997 - ------------------------------------------------ Robert A. Helman /s/ CHA HONG (JOHN) KOO Director April 15, 1997 - ------------------------------------------------ Cha Hong (John) Koo /s/ HUN JO LEE Director April 15, 1997 - ------------------------------------------------ Hun Jo Lee /s/ ANDREW MCNALLY IV Director April 15, 1997 - ------------------------------------------------ Andrew McNally IV /s/ YONG NAM Director April 15, 1997 - ------------------------------------------------ Yong Nam /s/ PETER S. WILLMOTT Director April 15, 1997 - ------------------------------------------------ Peter S. Willmott /s/ ROGER A. CREGG Executive Vice President, and Chief April 15, 1997 - ------------------------------------------------ Financial Officer (Principal Roger A. Cregg Financial Officer)
18 18 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: (10p) Employment Agreement, dated January 1, 1997, between Roger A. Cregg and Zenith Electronics Corporation (10q) Employment Agreement, dated January 1, 1997, between Richard F. Vitkus and Zenith Electronics Corporation (10r) Employment Agreement, dated January 1, 1997, between Peter S. Willmott and Zenith Electronics Corporation (10s) Employment Agreement, dated January 1, 1997, between Dennis R. Winkleman and Zenith Electronics Corporation (18) Letter re change in accounting principle (21) Subsidiaries of the company (23) Consent of Independent Public Accountants (27) Financial Data Schedule for the Year ended December 31, 1996
19 19 CONSOLIDATED FINANCIAL STATEMENTS ZENITH ELECTRONICS CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31 --------------------------------------- 1996 1995* 1994* ---- ----- ----- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues Net sales................................................. $1,287.9 $1,273.9 $1,469.0 -------- -------- -------- Costs, Expenses and Other Cost of products sold..................................... 1,257.0 1,188.8 1,348.8 Selling, general and administrative....................... 167.8 128.8 118.8 Engineering and research.................................. 46.7 43.5 45.4 Other operating expense (income), net (Notes One and Nine).................................................. (26.3) (30.1) (33.6) Restructuring and other charges (Note Six)................ 9.3 21.6 -- -------- -------- -------- Income Operating income (loss)................................... (166.6) (78.7) (10.4) Gain (loss) on asset sales, net (Note Eleven)............. .3 (1.7) 11.0 Interest expense.......................................... (15.1) (19.9) (15.9) Interest income........................................... 3.6 1.8 .5 -------- -------- -------- Income (loss) before income taxes......................... (177.8) (98.5) (14.8) Income taxes (credit) (Note Seven)........................ .2 (7.7) (.3) -------- -------- -------- Net income (loss)......................................... $ (178.0) $ (90.8) $ (14.5) ======== ======== ======== Per Share Income (loss) per common share (Note One)................. $ (2.73) $ (1.85) $ (.35) ======== ======== ======== Retained Earnings Balance at beginning of year.............................. $ (184.3) $ (93.5) $ (79.0) Net income (loss)......................................... (178.0) (90.8) (14.5) -------- -------- -------- Retained earnings (deficit) at end of year................ $ (362.3) $ (184.3) $ (93.5) ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * Restated, see Note Three. 20 20 ZENITH ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------ 1996 1995* ---- ----- (IN MILLIONS) ASSETS Current Assets Cash (Note One)........................................... $ -- $ 93.2 Receivables, net of allowance for doubtful accounts of $6.2 and $3.6.......................................... 208.3 201.3 Inventories (Note Ten).................................... 255.7 202.6 Other..................................................... 11.1 7.8 ------- ------- Total current assets................................. 475.1 504.9 Noncurrent Assets Property, plant and equipment, net (Note Eleven).......... 278.3 184.7 Other (Note One).......................................... 11.9 11.1 ------- ------- Total assets......................................... $ 765.3 $ 700.7 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt (Note Twelve)............................. $ 47.0 $ -- Current portion of long-term debt (Note Thirteen)......... 17.8 9.0 Accounts payable.......................................... 109.6 62.9 Accounts payable to related party (Note Five)............. 124.5 8.9 Compensation and retirement benefits (Note Sixteen)....... 43.2 30.8 Product warranties........................................ 32.1 28.4 Co-op advertising and merchandising programs.............. 20.5 29.9 Income taxes payable...................................... 1.3 1.2 Other accrued expenses.................................... 54.6 43.3 ------- ------- Total current liabilities............................ 450.6 214.4 Noncurrent Liabilities Long-term debt (Note Thirteen)............................ 152.7 168.8 Stockholders' Equity Preferred stock, $1 par value; 8,000,000 shares authorized; none outstanding........................... -- -- Common stock, $1 par value; 150,000,000 shares authorized; 66,564,119 and 63,542,922 shares issued................ 66.6 63.5 Additional paid-in capital................................ 459.4 440.0 Retained earnings (deficit)............................... (362.3) (184.3) Cost of 105,181 common shares in treasury................. (1.7) (1.7) ------- ------- Total stockholders' equity (Note Fourteen)........... 162.0 317.5 ------- ------- Total liabilities and stockholders' equity........... $ 765.3 $ 700.7 ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * Restated, see Note Three. 21 21 ZENITH ELECTRONICS CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH YEAR ENDED DECEMBER 31 --------------------------- 1996 1995* 1994* ---- ----- ----- (IN MILLIONS) Cash Flows from Operating Activities Net income (loss)......................................... $(178.0) $(90.8) $(14.5) Adjustments to reconcile net income (loss) to net cash used by operations: Depreciation.............................................. 35.0 32.1 28.8 Employee retirement plan contribution in stock............ 5.3 -- 6.0 (Gain) loss on asset sales, net........................... (.3) 1.7 (11.0) Other..................................................... 1.6 .5 (.2) Changes in assets and liabilities: Current accounts.......................................... 116.4 19.9 (51.8) Other assets.............................................. (3.9) 3.4 .6 ------- ------ ------ Net cash used by operating activities....................... (23.9) (33.2) (42.1) ------- ------ ------ Cash Flows from Investing Activities Capital additions......................................... (129.0) (51.9) (58.9) Proceeds from asset sales................................. 4.3 2.9 27.5 ------- ------ ------ Net cash used by investing activities..................... (124.7) (49.0) (31.4) ------- ------ ------ Cash Flows from Financing Activities Short-term borrowings, net................................ 47.0 -- -- Proceeds from issuance of long-term debt.................. -- 40.0 12.0 Proceeds from issuance of common stock, net............... 15.7 170.7 84.1 Principal payments on long-term debt...................... (7.3) (44.2) (34.5) ------- ------ ------ Net cash provided by financing activities................. 55.4 166.5 61.6 ------- ------ ------ Cash Increase (decrease) in cash............................... (93.2) 84.3 (11.9) Cash at beginning of year................................. 93.2 8.9 20.8 ------- ------ ------ Cash at end of year....................................... $ -- $ 93.2 $ 8.9 ------- ------ ------ Changes in Current Assets and Liabilities Increase (decrease) in cash attributable to changes in: Receivables, net.......................................... $ (7.5) $ 10.2 $(45.5) Income taxes, net......................................... .1 (6.0) (.2) Inventories............................................... (53.1) 51.4 (42.4) Other assets.............................................. (3.3) 2.2 (3.8) Accounts payable and accrued expenses..................... 180.2 (37.9) 40.1 ------- ------ ------ Net change in current accounts....................... $ 116.4 $ 19.9 $(51.8) ======= ====== ====== Supplemental Disclosure Supplemental disclosure of cash flow information -- Cash paid (refunded) during the period for: Interest............................................... $ 14.1 $ 20.6 $ 17.6 Income taxes........................................... .9 (.1) (.1)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * Restated, see Note Three. 22 22 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 stated at the lower of cost or estimated net realizable value. As of December 31, 1995, $3.4 million of property held for disposal was included in Other noncurrent assets and included certain facilities and land no longer used in the company's operations. Most tooling expenditures are charged to expense in the year acquired, except for picture tube tooling, which is amortized over four years. Certain production fixtures are capitalized as machinery and equipment. Rental expenses under operating leases were $12.8 million, $15.3 million and $13.6 million in 1996, 1995 and 1994, respectively. These expenses will be significantly higher in future years due to the sale-leaseback transaction that was entered into subsequent to December 31, 1996. See Note Two for additional information on the sale-leaseback transaction. The company capitalizes interest on major capital projects. The company capitalized $2.3 million of interest in 1996. These amounts were not material in 1995 and 1994. 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 netted to a $3.6 million gain in 1994. These amounts were not material in 1996 and 1995. Earnings per share: Primary earnings per share are based upon the weighted average number of shares outstanding and common stock equivalents, if dilutive. Fully diluted earnings per share, assuming conversion of the 6 1/4 percent convertible subordinated debentures and the 8.5 percent convertible senior subordinated debentures, are not presented because the effect of the assumed conversion is antidilutive. The number of shares used in the computation were 65.2 million, 49.2 million and 42.0 million in 1996, 1995 and 1994, respectively. Stock options: During 1996, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". The new 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 23 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) disclose the calculated cost, as pro forma information. The company has chosen to disclose the calculated cost, as pro forma information (see Note Fifteen). 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 which the net book value of the asset exceeds its estimated fair market value. The company has not recognized any material impairment losses for the three years ended December 31, 1996. Management does not believe any material impairment of long-lived assets exists as of December 31, 1996. NOTE TWO -- SUBSEQUENT EVENT: On April 2, 1997, the company obtained new financing commitments which significantly enhance the company's liquidity and are consistent with its strategy to improve its operating and financial performance. One of the commitments 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 with General Electric Capital Corporation. The term loan requires scheduled quarterly principal payments of $2 million with a balloon payment of $20 million at maturity. Under the revolving credit line, the maximum commitment of funds available for borrowing is limited by a defined borrowing base formula related to eligible inventory. The facility is secured by the company's inventory, trademarks and tuner patent royalties, along with the related patents and licenses. Interest on borrowings is based on market rates. The facility contains certain covenants that must be met in order to remain in compliance with the facility, including financial covenants that must be maintained as of the end of each fiscal quarter. 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 is currently $130 million, but can be increased to $200 million, assuming additional bank committments. LGE provides support for this facility through a performance undertaking and a letter of credit. Also, on April 2, 1997, the company entered into an $87 million sale-leaseback transaction whereby the company sold and leased back new and existing manufacturing equipment in its Melrose Park, Ill., plant and in its Reynosa an Juarez, Mexico, facilities. The term of the lease is 12 1/2 years and annual payments under the lease will average approximately $10 million. The company's, payment obligations, along with certain other items under the lease agreement are fully guaranteed by LGE. Additionally on April 2, 1997, the company and LGE entered into an arrangement whereby certain of the company's accounts payables arising in the ordinary course of business with LGE will be extended for certain periods of time with interest being charged on the amounts extended. In return for LGE providing support for the securitizations and the sale-leaseback transaction and the extended-term payables arrangement, the company will grant options to LGE to purchase approximately 3.9 million common shares of the company at an exercise price of $0.01 per share, excercisable over time. The accounting for these stock options will be based upon their fair value with that fair value being amortized straight-line over the term of the associated commitments. Upon the closing of the new financing agreements described above, the company received $142 million of which $77 million was used to pay off outstanding balances under the credit agreement and term loan agreement with General Electric Capital Corporation. The remainder of the funds was used to pay certain vendors, to pay fees related to the new financing agreements and for general corporate purposes. 24 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE THREE -- ACCOUNTING CHANGE: 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 the 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 restatement was to increase retained earnings as of January 1, 1994 by $9.1 million. The restatement increased 1995 net income by $1.6 million, or $.03 per share, and decreased 1994 net income by $.3 million, or $.01 per share. NOTE FOUR -- FINANCIAL RESULTS AND LIQUIDITY: The company has incurred net losses of $178.0 million, $90.8 million and $14.5 million in 1996, 1995 and 1994, 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. As discussed in Note Two, the company has recently obtained new financing commitments that significantly enhance the company's liquidity and are consistent with its strategy to improve its operating and financial performance. As part of this refinancing, and to provide for contingencies, the company has agreed to raise an additional $33 million by the end of the third quarter of 1997 through additional sale-leaseback transaction. There can be no assurance that the company will be able to enter into such sale leaseback transactions, or that the company will not experience liquidity problems in the future because of adverse market conditions or other unfavorable events. However, the company believes that its new financing commitments and the extended-term payables available from LGE, together with its fulfillment of the additional sale-leaseback obligations, will be adequate to meet its seasonal working capital, capital expenditure and other requirements during 1997. NOTE FIVE -- RELATED PARTY: 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, 1996, LGE owned 36,569,000 shares of common stock of the company which represents 55 percent of the outstanding common stock. As described in Note Two, the company will grant options to LGE to purchase approximately 3.9 million common shares of the company at an exercise price of $0.01 per share, excercisable over time. 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. 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. 25 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represent the most significant transactions between the company and LGE during 1996 and 1995, all of which, in the opinion of management, were made at an arms-length basis: Product purchases: In the ordinary course of business, the company purchases VCRs, TV-VCR combinations and components from LGE and its affiliates. The company purchased $128.8 million and $87.2 million of these items in 1996 and 1995, respectively. Sales of products purchased from LGE and its affiliates contributed $141.4 million and $92.5 million to sales in 1996 and 1995, respectively, and $12.6 million and $5.3 million to gross margin in 1996 and 1995, respectively. Product and other sales: The company sells CRT tubes and 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 1996 and 1995 by the company to LGE and its affiliates were $29.4 million and $31.7 million, respectively, with a contribution of $(1.3) million and $2.8 million to gross margin, respectively. 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 net payment in 1996 and 1995 to the company under these agreements and licenses was $1.0 million and $1.1 million, respectively. Service Assistance: 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. As of December 31, 1996 and 1995, receivables included $2.4 million and $7.7 million, respectively, from LGE and its affiliates and accounts payable included $124.5 million and $8.9 million, respectively, to LGE and its affiliates. LGE has agreed to extended payment terms for certain of the accounts payable to them. The amount of extended payables was $106.8 million and $8.8 million as of December 31, 1996 and 1995, respectively. The company is charged interest on the extended period at negotiated rates. 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 LGE whereby LGE will be the Canadian distributor for the company. LGE is providing support for certain financing activities of the company that were entered into subsequent to December 31, 1996. See Note Two for further discussion. NOTE SIX -- 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 are related to cash expenditures that will be 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 Five. 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). 26 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE SEVEN -- INCOME TAXES: The components of income taxes (credit) were:
YEAR ENDED DECEMBER 31 -------------------------- 1996 1995 1994 ---- ---- ---- (IN MILLIONS) Currently payable (refundable): Federal............................................... $-- $(7.8) $ (.5) State................................................. .2 .1 .2 --- ----- ----- Total income taxes (credit)........................ $.2 $(7.7) $ (.3) === ===== =====
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 expects to receive this tax refund during 1997. The statutory federal income tax rate and the effective tax rate are compared below:
YEAR ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ---- ---- ---- Statutory federal income tax rate..................... (35.0)% (35.0)% (35.0)% State income taxes, net............................... -- .1 .7 Foreign tax effects................................... 1.0 1.5 21.9 Tax benefits not recognized subject to future realization......................................... 34.0 33.5 13.4 Net operating loss carryback/refund................... -- (8.4) (3.2) ----- ----- ----- Effective tax rate.................................... (--)% (8.3)% (2.2)% ===== ===== =====
Deferred tax assets (liabilities) are comprised of the following:
YEAR ENDED DECEMBER 31 ------------------ 1996 1995 ---- ---- (IN MILLIONS) Loss carryforwards......................................... $ 228.2 $ 163.8 Inventory valuation........................................ 23.8 23.8 Product warranty........................................... 11.5 11.1 Co-op advertising.......................................... 6.3 2.5 Merchandising.............................................. 3.8 5.4 Other...................................................... 38.0 14.6 ------- ------- Deferred tax assets................................... 311.6 221.2 ------- ------- Depreciation............................................... (6.6) (17.5) Employee benefits.......................................... -- (.7) Other...................................................... 5.5 (14.7) ------- ------- Deferred tax liabilities.............................. (1.1) (32.9) ------- ------- Valuation allowance........................................ (310.5) (188.3) ------- ------- Net deferred tax assets............................... $ -- $ -- ======= =======
The valuation allowance was established since the realization of these assets cannot be reasonably assured, given the company's recurring losses. 27 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1996, the company had $555.4 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 $3.6 million (which expire from 2000 through 2002). The stock purchase by LGE described in Note Five 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, 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 EIGHT -- 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. Financial information, summarized by geographic area, is as follows:
YEAR ENDED DECEMBER 31 ------------------------------------ 1996 1995 1994 ---- ---- ---- (IN MILLIONS) Net sales to unaffiliated customers: Domestic companies........................... $1,221.4 $1,212.7 $1,365.2 Foreign companies............................ 66.5 61.2 103.8 -------- -------- -------- Total net sales...................... $1,287.9 $1,273.9 $1,469.0 ======== ======== ======== Income (loss) before income taxes: Domestic companies........................... $ (171.5) $ (94.5) $ (8.7) Foreign companies............................ (6.3) (4.0) (6.1) -------- -------- -------- Total income (loss) before income taxes.............................. $ (177.8) $ (98.5) $ (14.8) ======== ======== ======== Identifiable assets: Domestic companies........................... $ 615.5 $ 548.5 $ 512.0 Foreign companies............................ 149.8 152.2 150.4 -------- -------- -------- Total identifiable assets............ $ 765.3 $ 700.7 $ 662.4 ======== ======== ========
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 $187.2 million (15 percent) in 1996, $172.1 million (14 percent) in 1995 and $180.8 million (12 percent) in 1994. Sales to a second customer, Sears, Roebuck and Company, accounted for $140.9 million (11 percent) in 1996. No other customer accounted for 10 percent or more of net sales. NOTE NINE -- 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 $26.6 million, $25.9 million and $27.9 million in 1996, 1995 and 1994, respectively, and is included in Other operating expense (income). 28 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE TEN -- INVENTORIES: Inventories consisted of the following:
DECEMBER 31 --------------------- 1996 1995 ---- ---- (IN MILLIONS) Raw materials and work-in-process......................... $152.1 $128.7 Finished goods............................................ 103.6 73.9 ------ ------ Total inventories......................................... $255.7 $202.6 ====== ======
NOTE ELEVEN -- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consisted of the following:
DECEMBER 31 ------------------ 1996 1995 ---- ---- (IN MILLIONS) Land....................................................... $ 9.9 $ 3.9 Buildings.................................................. 135.5 126.5 Machinery and equipment.................................... 696.6 591.0 ------- ------- 842.0 721.4 Less accumulated depreciation.............................. (563.7) (536.7) ------- ------- Total property, plant and equipment, net................... $ 278.3 $ 184.7 ======= =======
During 1994 the company recorded $11.0 million of net gain on asset sales. Included in this amount is a $5.4 million gain on the sale of a warehouse in Northlake, Illinois, and a $3.6 million gain on the sale of vacant land adjacent to its Glenview, Illinois, headquarters. The company also sold its power supply business and facilities in Chicago, Illinois, Springfield, Missouri and Lenexa, Kansas. NOTE TWELVE -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS: As described in Note Two, subsequent to December 31, 1996, the company entered into revolving credit agreement and paid off the balance outstanding under the credit agreement with General Electric Capital Corporation. In December 1996, the company entered into an amendment (the "Third Amendment") to its $110 million Second Amended and Restated Credit Agreement dated November 6, 1995 (the "Credit Agreement"), among the company, General Electric Capital Corporation, as agent for itself and the other lenders named therein. The Third Amendment (i) revised the minimum net worth levels, reducing the amounts from $211.0 million to $150.0 million as of December 31, 1996, and from $211.0 million to $100.0 million for every quarter thereafter and (ii) revised the liabilities to net worth ratio, increasing the amounts from 4.00 to 1.0 to 4.50 to 1.0 as of December 31, 1996, and from 4.00 to 1.0 to 6.00 to 1.0 for every quarter thereafter. In May 1996, the company entered into an amendment (the "First Amendment") to its Credit Agreement. The First Amendment (i) revised the maximum capital expenditure levels, increasing the amount for 1996 from $142.0 million to $180.0 million and (ii) revised the minimum net worth levels, reducing the amounts from $245.0 million to $215.0 million as of June 29, 1996, and from $245.0 million to $211.0 million for every quarter thereafter. Borrowings under the Credit Agreement, are secured by accounts receivable, inventory, general intangibles and trademarks of the company. The Credit Agreement is scheduled to expire on June 30, 1998. The maximum commitment of funds available for borrowing under the Credit Agreement is $110 million, but is limited by a defined borrowing base formula related to eligible receivables and eligible inventory. Net 29 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) proceeds arising from material asset transactions will result in a partial reduction in the maximum commitment of the lenders thereunder. Interest on borrowings is based on market rates with a commitment fee of 3/8 percent per annum payable monthly on the unused balance of the facility. As of December 31, 1996, $47.0 million of borrowings were outstanding under the Credit Agreement. No borrowings were outstanding under the Credit Agreement as of December 31, 1995. As discussed above, the Credit Agreement contains restrictive financial covenants that must be maintained as of the end of each fiscal quarter, including a liabilities to net worth ratio and a minimum net worth amount. As of December 31, 1996, the ratio of liabilities to net worth was required to be not greater than 4.50 to 1.0 and was actually 3.98 to 1.0, and net worth was required to be equal to or greater than $150.0 million and was actually $151.6 million (as defined in the Credit Agreement). The Credit Agreement restricts the amount of capital expenditures by the company in each fiscal year. For the fiscal years 1996, 1997 and each fiscal year thereafter the company is permitted to make capital expenditures (as defined in the Credit Agreement) of up to $180.0 million, $87.0 million and $60.0 million, respectively. 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 stock, if issued, and prohibits the redemption or repurchase of stock. Borrowings and interest rates on short-term debt were:
YEAR ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ---- ---- ---- (IN MILLIONS) Maximum month-end borrowings............................. $72.6 $69.5 $60.4 Average daily borrowings................................. 18.3 37.2 26.3 Weighted average interest rate........................... 8.8% 10.5% 9.1%
NOTE THIRTEEN -- LONG-TERM DEBT: The components of long-term debt were:
DECEMBER 31 ---------------- 1996 1995 ---- ---- (IN MILLIONS) 6 1/4 percent convertible subordinated debentures due 2011...................................................... $115.0 $115.0 8.5 percent senior subordinated convertible debentures due 2000...................................................... 23.8 23.8 8.5 percent senior subordinated convertible debentures due 2001...................................................... .5 .5 Term Loan................................................... 31.2 38.5 ------ ------ 170.5 177.8 Less current portion........................................ 17.8 9.0 ------ ------ Total long-term debt................................... $152.7 $168.8 ====== ======
As described in Note Two, subsequent to December 31, 1996, the company entered into a new term loan agreement and paid off the balance outstanding under the term loan with General Electric Capital Corporation. In December and May 1996, the company entered into amendments to its $40.0 million First Amended and Restated Term Loan Agreement dated November 6, 1995, among the company, General Electric Capital Corporation, as agent for itself and the other lenders named therein. These amendments revised the identical items that are described in the Third Amendment and the First Amendment to the Credit Agreement (see Note Twelve). 30 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Term Loan was in the initial principal amount of $40.0 million, and requires scheduled quarterly principal payments over the life of the loan with a balloon payment of $17.5 million due on the termination date of the loan, June 30, 1998, and additional mandatory prepayment in certain events. The borrowing under the Term Loan Agreement is secured by the tuning system patent license agreements of the company and a second security interest in the accounts receivable, inventory, general intangibles and trademarks of the company. The Term Loan Agreement contains the same financial covenants and other restrictions that are contained in the Credit Agreement (see Note Twelve). Interest on the borrowing is based on market rates. 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. The debentures are redeemable at the option of the company, in whole or in part, at specified redemption prices at par or above. The 8.5 percent debentures due 2000 and 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 $9.76 per share and $10.00 per share, respectively. The debentures due 2000 and 2001 are redeemable at the option of the company, in whole or in part, at any time on or after November 19, 1997 and January 18, 1998, respectively, at specified redemption prices at par or above. On December 21, 1995, the company repurchased $42.7 million principal amount of the 8.5 percent debentures, 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. The fair value of long-term debt is $130.4 million as of December 31, 1996, as compared to the carrying amount of $152.7 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, 1996, the company's Credit Agreement and Term Loan Agreement would not allow the company to extinguish the long-term debt through purchase and thereby realize the gain. 31 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE FOURTEEN -- STOCKHOLDERS' EQUITY: Changes in stockholders' equity accounts are shown below:
ADDITIONAL COMMON PAID-IN TREASURY STOCK CAPITAL SHARES ------ ---------- -------- (IN MILLIONS) Balance, December 31, 1993......................... $35.9 $205.1 $ (.5) Sales of common stock............................ 8.6 71.2 -- Stock issued for benefit plans................... .6 5.4 -- Stock issued for stock options................... .5 3.6 -- Other............................................ .1 .1 -- ----- ------ ----- 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) ===== ====== =====
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 Five for further discussion). Also during 1995 and 1994 the company sold 1.3 million and 8.6 million shares, respectively, 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, 1996. 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 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 FIFTEEN -- STOCK OPTIONS AND AWARDS: Stock Options: The 1987 Stock Incentive Plan authorizes the granting of incentive and non-qualified stock options, restricted stock awards and stock appreciation rights 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 32 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fair value of options at their grant dates consistent with the method of SFAS 123, the company's net income and earnings per share would have been reduced to the following pro forma amounts:
1996 1995 ---- ---- (IN MILLIONS) Net income: As reported............................................... $(178.0) $(90.8) Pro forma................................................. (179.1) (92.5) Earnings per share: As reported............................................... $ (2.73) $(1.85) Pro forma................................................. (2.75) (1.88)
Because the SFAS 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 stock option plans at December 31, 1996 and 1995 and changes during the years then ended is presented in the table and narrative below:
1996 1995 ------------------- ------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE (000'S) PRICE (000'S) PRICE ------- -------- ------- -------- Options outstanding at January 1.......................... 2,588 8.25 2,027 8.66 Options granted........................................... 456 12.54 738 7.16 Options exercised......................................... (1,889) 8.33 (38) 7.69 Options canceled or expired............................... (187) 9.30 (139) 8.66 ------ ----- ------ ---- Options outstanding at December 31........................ 968 9.91 2,588 8.25 ------ ----- ------ ---- Options exercisable at December 31........................ 427 8.27 2,081 8.34 Shares available for grant at December 31................. 1,329 1,269
Of the options outstanding at December 31, 1996, 589,000 had exercise prices between $6.25 and $9.63, with a weighted average exercise price of $7.80 and a weighted average remaining contractual life of 6.99 years. The remaining 380,000 had exercise prices between $9.75 and $14.75, with a weighted average exercise price of $13.25 and a weighted average remaining contractual life of 9.29 years. 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 for grants in 1996 and 1995, respectively; weighted average risk-free interest rates of 6.25 percent and 6.83 percent, zero expected dividend yields, and expected volatility of 62.35 percent for both years. A 3.5 year estimated life was used for all grants. Restricted stock awards: The company had 270,090 and 9,339 restricted stock awards issued and outstanding as of December 31, 1996 and 1995, 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 1996 and 1995, related to these awards, was not material. NOTE SIXTEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS: Virtually all employees in the United States and Canada are eligible to participate in noncontributory profit-sharing retirement plans after completing one full year of service. The plans provide for a minimum annual contribution of 6 percent of employees' eligible compensation. Contributions above the minimum could be required based upon profits in excess of a specified return on net worth. Profit-sharing expenses were 33 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $8.6 million, $8.8 million and $9.7 million in 1996, 1995 and 1994, respectively. The 1995 and 1994 contributions were partially funded through the issuance of approximately 782,000 and 547,000 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, nor are they expected to have a material effect on future results of operations. NOTE SEVENTEEN -- 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. 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. In February 1995, one of the independent distributors filed suit challenging the company's right to discontinue the distributorship relationship and alleging that it had been damaged by certain of the company's practices. The lawsuit sought injunctive relief, actual damages of $8 million and punitive damages of $20 million. In October 1995 summary judgment dismissing the case on all counts was entered. The plaintiff has appealed. Another suit arising in connection with this change in distribution was filed in April 1995 by another independent distributor. The lawsuit seeks approximately $13 million in damages under the Wisconsin Fair Dealership Law ("WFDL"). 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 is 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. 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. NOTE EIGHTEEN -- RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform with the presentation currently used. 34 34 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As explained in Note Three to the financial statements, the Company has given retroactive effect to the change in accounting for its picture tube inventories from the LIFO method to the FIFO method. /s/ Arthur Andersen LLP - -------------------------- Arthur Andersen LLP Chicago, Illinois February 26, 1997 (except with respect to the matter discussed in Note Two, as to which the date is April 2, 1997) 35 35 UNAUDITED QUARTERLY FINANCIAL INFORMATION
In millions, except per share amounts 1996 Quarters Ended 1995 Quarters Ended --------------------------------------------------------------------------------------------------- Dec.31(1), Sept. 28, June 29, March 30, Dec. 31,*(2) Sept. 30,(3) July 1(4), April 1 --------------------------------------------------------------------------------------------------- Net sales $427.6 $340.8 $282.1 $237.4 $394.7 $332.5 $284.6 $262.1 Gross margin (10.0) 20.4 12.4 8.1 26.4 32.8 10.0 15.9 Net income (loss) (69.3) (40.2) (33.2) (35.3) (23.0) 1.8 (45.3) (24.3) Per share of common stock (primary and fully diluted): Net income (loss) $ (1.05) $ (.61) $ (.51) $ (.56) $ (.42) $ .04 $ (.97) $ (.53) New York Stock Exchange market price per share: High 16 5/8 17 1/2 25 3/4 7 1/2 8 7/8 9 1/4 8 1/2 12 1/8 Low 10 1/4 8 1/8 6 1/8 5 7/8 6 5/8 7 1/4 6 7/8 7 1/2 End of quarter 10 7/8 15 5/8 12 1/8 6 5/8 6 7/8 8 5/8 7 3/8 7 3/4 (1) Includes $ 9.3 million of Restructuring and other charges. (2) Includes $ 3.6 million of Restructuring and other charges. (3) Includes $ 7.5 million of Income tax credits. (4) Includes $18.0 million of Restructuring and other charges. * Restated for a change in the method of accounting for certain inventories. See Note Three of Notes to Consolidated Financial Statements.
36 36 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 included in Zenith Electronics Corporation's annual report to stockholders included in this Form 10-K, and have issued our report thereon dated February 26, 1997 (except with respect to the matters discussed in Note Two, as to which the date is April 2, 1997). Our audits were made for the purpose of forming an opinion on those 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 February 26, 1997 37 37 FINANCIAL STATEMENT SCHEDULE SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
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) Allowance for doubtful accounts: Year Ended December 31, 1996......... $ 3.6 $ 5.2 $ -- $2.6(1) $ 6.2 ====== ======= ==== ==== ====== Year Ended December 31, 1995......... $ 3.1 $ .8 $ -- $ .3(1) $ 3.6 ====== ======= ==== ==== ====== Year Ended December 31, 1994......... $ 2.5 $ 1.4 $ -- $ .8(1) $ 3.1 ====== ======= ==== ==== ====== Valuation allowance for deferred tax assets: Year Ended December 31, 1996......... $188.3 $122.2 $ -- $ -- $310.5 ====== ======= ==== ==== ====== Year Ended December 31, 1995......... $183.9 $ 4.4 $ -- $ -- $188.3 ====== ======= ==== ==== ====== Year Ended December 31, 1994......... $179.2 $ 4.7 $ -- $ -- $183.9 ====== ======= ==== ==== ======
- ------------------------- (1) Uncollectible accounts written off, net of recoveries. 38 EX-10.(P) 2 EMPLOY. AGR. DATED 1/1/97 BETWEEN GREGG & ZENITH 1 EXHIBIT 10p EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of JANUARY 1, 1997, between ZENITH ELECTRONICS CORPORATION, a Delaware corporation (the "Company"), and ROGER A. CREGG (the "Executive"). WHEREAS, the Executive currently serves as EXECUTIVE VICE PRESIDENT of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to provide for the continued employment of the Executive by the Company upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by the Company upon the terms and subject to the conditions contained in this Agreement. The term of employment of the Executive by the Company pursuant to this Agreement (the "Employment Period") shall commence on the date hereof and shall end on December 31, 1999, unless earlier terminated pursuant to Section 4, provided that the Employment Period shall automatically be extended as of January 1, 2000, for one additional year and, if so extended, shall automatically be further extended as of each January 1 thereafter, for additional consecutive one-year periods, unless either the Company or the Executive elects not to extend the Agreement by written notice given to the other party at least 90 days prior to each such period. 2. POSITION AND DUTIES. The Company shall employ the Executive during the Employment Period as its EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. The Executive shall perform faithfully and loyally and to the best of his abilities the duties assigned to him hereunder, shall devote his full business time, attention and effort to the affairs of the Company and shall use his reasonable best efforts to promote the interests of the Company. The Executive shall report to such executive officer of the Company as shall be designated from time to time by the Chief Executive Officer of the Company (the "CEO") or the Board of Directors of the Company (the "Board"). Notwithstanding the foregoing, the Executive may engage in charitable, civic or community activities and, with the prior approval of the CEO or the Board, may serve as a director of any business corporation, provided that such activities or service does not interfere with his duties hereunder or violate the terms of any of the covenants contained in Section 10 or 11. 3. COMPENSATION. (a) Base Compensation. As compensation for the services to be provided by the Executive hereunder, the Company shall pay to the Executive during the Employment Period a minimum annual salary of THREE HUNDRED THOUSAND DOLLARS ($300,000.00) (the "Base Salary"), payable in installments in accordance with the Company's normal payment schedule for senior management of the Company. The Executive's salary may be increased or decreased from time to time, provided that the Executive's salary shall not be decreased below the Base Salary specified by this Section 3(a). The Executive's annual salary in effect from time to time under this Section 3(a) is hereinafter called his "Base Compensation." 41 2 (b) Incentive Compensation. In addition to his Base Compensation, the Executive shall be eligible to receive incentive compensation awards for services rendered during the Employment Period, determined in accordance with (i) the Company's annual bonus plan or any other short-term incentive plan adopted by the Company and (ii) the 1987 Zenith Stock Incentive Plan or any other long-term incentive plan adopted by the Company. (c) Supplemental Profit Sharing Benefits. During the Employment Period, the Executive shall be entitled to participate in the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan, as in effect on the date hereof, or in a comparable plan adopted by the Company. (d) Supplemental Long-Term Disability Benefits. During the Employment Period, the Executive shall be eligible for supplemental long-term disability benefits, the current terms of which are described on Schedule I attached hereto. (e) Supplemental Life Insurance Benefits. During the Employment Period, the Executive shall be eligible for supplemental life insurance benefits, the current terms of which are described on Schedule II attached hereto. (f) Other Benefits. In addition to the benefits described in subsections (c), (d) and (e) above, the Executive shall be entitled to participate in all employee benefit plans generally available to those executives who are parties to agreements with the Company which are comparable to this Agreement, including, as of the date of this Agreement, group medical and dental, health and accident, group life insurance, long-term disability, short-term disability, executive insurance, pension, profit sharing and 401(k) plans. The Executive shall be entitled to take time off for vacation or illness in accordance with the Company's policy for senior executives and to receive all other fringe benefits as are from time to time made generally available to senior executives of the Company. The Company may from time to time modify the benefits provided to the Executive, provided that all such modifications are made on the same basis for all executives in positions comparable to that of the Executive. (g) Expense Reimbursement. The Company shall reimburse the Executive for all proper expenses incurred by him in the performance of his duties hereunder in accordance with the Company's policies and procedures. 4. TERMINATION OF EMPLOYMENT PERIOD. The Employment Period shall be terminated upon the first to occur of (i) termination of the employment of the Executive by the Company at any time without Cause (as such term is defined in Section 8) upon written notice given to the Executive at least 30 days prior to such termination, (ii) the election by the Company pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iii) the election by the Executive pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iv) termination of the employment of the Executive by the Company at any time for Cause or Serious Misconduct upon written notice given to the Executive, (v) termination of the employment of the Executive by the Company on account of the Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than 180 consecutive days, (vi) termination of the employment of the Executive by reason of retirement, (vii) the Executive's death or (viii) termination of employment by the Executive at any time upon written notice given to the Company at least 90 days prior to such termination. The date on which the Employment Period terminates is hereinafter referred to as the "Termination Date." 5. CONSEQUENCES OF TERMINATION OUTSIDE OF A CHANGE IN CONTROL PERIOD. If a Termination Date occurs, other than within a Change in Control Period, as defined in Section 8, the Executive shall be entitled to receive the compensation and benefits specified by this Section 5 in lieu of any severance amounts which otherwise would be payable to the Executive. (a) Termination by Company Without Cause. If the Employment Period terminates for a reason set forth in clause (i) of Section 4: 42 3 (i) the Company shall pay to the Executive (A) all Base Compensation otherwise payable through the Termination Date, (B) vacation pay accrued through the Termination Date and (C) reimbursement of expenses incurred through the Termination Date, in each case to the extent not theretofore paid; (ii) the Company shall pay to the Executive the amount of the target bonus otherwise payable for the year in which the Termination Date occurs, prorated to the Termination Date; (iii) the Company shall pay to the Executive a lump sum cash amount equal to the greater of (A) the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs, multiplied by the number of whole and/or fractional years remaining under the term of the Employment Period (as in effect under Section 1 without regard to the early termination thereof under Section 4) and (B) one and one-half times the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs; (iv) the Company shall provide the Executive with continued coverage, or substantially equivalent coverage, during the period represented by the amount of the lump sum payment under clause (iii) (i.e., one and one-half years or the remaining term of the Employment Period, as the case may be) under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) unless the Executive becomes covered under similar plans or arrangements maintained by a subsequent employer; provided that if the Company is unable to provide such continued coverage or substantially similar coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such benefits; and (v) the Company shall provide to the Executive outplacement services appropriate for the Executive in accordance with industry standards (the cost of which shall not exceed 15% of the Executive's Base Compensation). (b) Failure of Company to Renew Agreement. If the Employment Period terminates for a reason set forth in clause (ii) of Section 4, in lieu of any severance amounts which otherwise would be payable to the Executive, the Company shall pay to the Executive the amounts or benefits set forth in Sections 5(a)(i), (ii) and (v), plus a lump sum cash amount equal to one and one-half times the sum of his Base Compensation and target bonus for the year in which the Termination Date occurs, and shall provide to the Executive the benefits described in Section 5(a)(iv) for the period of one and one-half years commencing on the Termination Date. (c) Termination for Cause. If the Employment Period terminates for a reason set forth in clause (iv) of Section 4, the Company shall pay to the Executive the amounts set forth in Section 5(a)(i) and the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. (d) Disability, Retirement or Death. If the Employment Period terminates for any reason set forth in clause (v), (vi) or (vii) of Section 4, the Company shall pay to the Executive or his executor, administrator or other legal representative, as the case may be, the amounts set forth in Section 5(a)(i) and the Executive (or his executor, administrator or other legal representative, as the case may be) shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. (e) Failure of Executive to Renew Agreement; Other Voluntary Termination by the Executive. If the Employment Period terminates for any reason set forth in clause (iii) or (viii) of Section 4, (A) the Company shall pay to the Executive the amounts set forth in Section 5(a)(i), (B) the Company may, in its sole discretion, but shall have no obligation to, pay to the Executive the amount of the target bonus for the year in which the 43 4 Termination Date occurs, prorated to the Termination Date, and (C) the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. 6. CONSEQUENCES OF TERMINATION WITHIN CHANGE IN CONTROL PERIOD. (a) Termination Payments and Benefits. If during a Change in Control Period, as defined in Section 8, the Employment Period of the Executive shall terminate other than by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay or provide to the Executive (or his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, as compensation for services rendered to the Company and in lieu of any severance amounts which otherwise would be payable to the Executive, the following amounts: (i) the Company shall pay to the Executive a lump sum cash amount equal to the sum of (A) the Executive's Base Compensation, accrued vacation pay and reimbursable expenses incurred through the Termination Date, in each case to the extent not theretofore paid, (B) the Executive's annual bonus in an amount equal to the annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company for less than 12 full months) bonus payable to the Executive by the Company for the fiscal year in which the Termination Date occurs (determined at the higher of the target or actual level of performance for such year), multiplied by a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs prior to the Termination Date and the denominator of which is 365 or 366, as applicable, (C) three times the Executive's highest annual rate of Base Compensation during the three full fiscal years prior to the Termination Date, (D) three times the greater of (I) the Executive's highest annual bonus payable during the three full fiscal years prior to the Termination Date and (II) the target bonus payable for the year in which the Termination Date occurs and (E) all accruals under the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan; (ii) for a period of three years commencing on the Termination Date, or until such earlier date on which the Executive becomes covered under similar plans maintained by a subsequent employer, the Company shall continue to provide the Executive and his dependents with coverage, or shall provide substantially equivalent coverage, under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance and executive insurance programs) with the same level of coverage, upon the same terms and otherwise to the same extent as such plans or arrangements shall have been in effect immediately prior to the Termination Date or, if more favorable to the Executive, as provided generally with respect to other peer executives of the Company. If the Company cannot provide such continued coverage or substantially equivalent coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such coverage; and (iii) the Company shall provide outplacement services appropriate for the Executive in accordance with industry standards (which shall not exceed 15% of the Executive's Base Compensation). (b) Nonqualifying Termination Within Change in Control Period. If during a Change in Control Period the Employment Period shall terminate by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay to the Executive (or to his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, a lump sum cash amount equal to the sum of the Executive's Base Compensation payable through the Termination Date, any vacation pay accrued prior to the Termination Date and any reimbursable expenses incurred prior to the Termination Date, in each case to the extent not theretofore paid. 7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under 44 5 this Section 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 7(c), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; 45 6 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 7(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8. DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Cause" means (i) embezzlement, misappropriation of corporate funds or any other act of dishonesty by the Executive, (ii) commission by the Executive of a felony involving moral turpitude, (iii) significant activities of the Executive harmful to the reputation of the Company, (iv) significant violation by the Executive of any statutory or common law duty of loyalty to the Company or (v) a material breach by the Executive of the Executive's duties and responsibilities to the Company, including the refusal to perform or the substantial disregard of such duties, other than as a result of incapacity due to physical or mental illness. (b) "Change in Control" means: (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 Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 25% or more of either (i) then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of 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 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), 46 7 (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 or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 8(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 the date hereof, constitute the Board (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 the date hereof 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 (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. (c) "Change in Control Period" means the period of time beginning on the date on which a Change in Control is consummated and ending on the earlier to occur of (i) 24 months following such Change in Control and (ii) the Executive's death. 47 8 (d) "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following events within a Change in Control Period: (1) any of (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position(s), duties, responsibilities or status with the Company immediately prior to the commencement of such Change in Control Period, (ii) a change in the Executive's reporting responsibilities, titles or offices with the Company as in effect immediately prior to the commencement of such Change in Control Period or (iii) any failure to re-elect the Executive to any position with the Company held by the Executive immediately prior to the commencement of such Change in Control Period; (2) a reduction by the Company in the Executive's rate of Base Compensation as in effect immediately prior to the commencement of such Change in Control Period or as the same may be increased from time to time thereafter or the failure by the Company to increase such rate of Base Compensation each year after the commencement of such Change in Control Period by an amount which at least equals, on a percentage basis, the mean average percentage increase, during the two full fiscal years of the Company immediately preceding the commencement of such Change in Control Period, in the rates of base salary for all officers of the Company elected by the Board; (3) the failure of the Company to pay the Executive a bonus at or greater than the target level in effect in the year in which the Change in Control Period commences, or to continue the Executive's participation in the 1987 Zenith Stock Incentive Plan or any comparable long-term incentive plan; (4) any requirement of the Company that the Executive (i) be based anywhere other than at the facility where the Executive is located immediately prior to the commencement of such Change in Control Period or (ii) travel on Company business to an extent substantially more burdensome than the travel obligations of the Executive immediately prior to the commencement of such Change in Control Period; (5) an election by the Company not to extend the Employment Period in accordance with Section 1; (6) the failure of the Company to (i) continue in effect any employee benefit plan or compensation plan in which the Executive is participating immediately prior to the commencement of such Change in Control Period, unless the Executive is permitted to participate in other plans providing the Executive with substantially comparable benefits, or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such plan, (ii) provide the Executive and the Executive's dependents welfare benefits (including, without limitation, group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iii) provide fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iv) provide the Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the 48 9 Company and its affiliated companies, or (v) reimburse the Executive promptly for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period, or if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; or (7) the failure of the Company to obtain the assumption agreement from any successor as contemplated in Section 18(b). For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive; provided, however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason. (e) "Nonqualifying Termination" means a termination of the Employment Period (i) by the Company for Serious Misconduct, (ii) by the Executive as a result of his election pursuant to Section 1 not to extend the Agreement in accordance with Section 1 or by the Executive at any other time for any reason, in either case other than for Good Reason, (iii) as a result of the Executive's death or (iv) by the Company due to the Executive's absence from his duties with the Company on a full-time basis for at least 180 consecutive days as a result of the Executive's incapacity due to physical or mental illness. A termination of the Employment Period for any reason not expressly set forth in the preceding sentence, including, without limitation, the election by the Company not to extend the Agreement pursuant to Section 1, shall not constitute a Nonqualifying Termination. (f) "Serious Misconduct" means (i) embezzlement or misappropriation of corporate funds by the Executive, (ii) commission by the Executive of a felony involving moral turpitude or (iii) a material breach by the Executive of the Executive's duties and responsibilities to the Company as in effect prior to the commencement of the Change in Control Period, including the refusal to perform or the substantial disregard of such duties, 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 such breach. 9. FEDERAL AND STATE WITHHOLDING. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 10. NONCOMPETITION; NONSOLICITATION. (a) The Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment with the Company or any of its subsidiaries prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of, and other confidential information concerning, the Company and its subsidiaries and that his services have been and will be of special, unique and extraordinary value to the Company. (b) The Executive agrees that during the Employment Period and, if the Employment Period terminates for a reason set forth in clause (i) or (ii) of Section 4, for a period of two years thereafter (the "Noncompetition Period"), he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business being conducted by the Company or any of its subsidiaries as of the termination of the Employment Period in any geographic area in which the Company is then conducting such business. 49 10 (c) The Executive further agrees that during the Noncompetition Period he shall not in any manner, directly or indirectly induce or attempt to induce any employee of the Company or any of its subsidiaries to terminate or abandon his or her employment for any purpose whatsoever. (d) Nothing in this Section 10 shall prohibit the Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than two percent of the outstanding stock of any class of a corporation any equity securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. (e) If, at any time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. CONFIDENTIALITY. The Executive shall not, at any time during the Employment Period or thereafter, make use of or disclose, directly or indirectly, any trade secret or other confidential or secret information of the Company or of its subsidiaries or other technical, business, proprietary or financial information of the Company or of its subsidiaries not available to the public generally or to the competitors of the Company or of its subsidiaries ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of the Executive, or (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency. Promptly following the termination of the Employment Period, the Executive shall surrender to the Company all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data relating to any Confidential Information or the business of the Company or of its subsidiaries which he may then possess or have under his control (together with all copies thereof); provided, however, that the Executive may retain copies of such documents as are necessary for the preparation of his federal or state income tax returns. 12. ENFORCEMENT. The parties hereto agree that the Company would be damaged irreparably in the event any provision of Sections 10 or 11 of this Agreement were not performed in accordance with their respective terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 13. SURVIVAL. Sections 10, 11 and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms hereof, notwithstanding any termination of the Employment Period. 14. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise under this Agreement involving termination of the Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse the Executive, on a current basis, for all legal fees and expenses, if any, incurred by the Executive in connection with such contest or dispute, together with interest in an amount equal to the prime rate from time to time in effect, as published in The Wall Street Journal under "Money Rates," but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives the Executive's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of any such contest or dispute includes a finding denying, in total, the Executive's claims in such contest or dispute, the Executive shall be required to reimburse the Company, over a period of 12 months from the date of such resolution, for all sums advanced to the Executive pursuant to this Section 14. 50 11 15. NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered, when delivered by courier or overnight express service or five days after having been sent by certified or registered mail, postage prepaid, addressed (a) if to the Executive, to the Executive's address set forth in the records of the Company or, if to the Company, to Richard F. Vitkus, Senior Vice President, Administration and General Counsel, Zenith Electronics Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025 or (b) to such other address as either party may have furnished to the other party in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 16. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes and preempts any prior understanding, agreements or representations by or between the parties, written or oral, which may have related in any manner to the subject matter hereof other than rights to indemnification, if any, for the benefit of the Executive. The foregoing notwithstanding, and in addition to the compensation and benefits provided by this Employment Agreement, the Executive will also be entitled to the Retention Bonus in accordance with its terms as set forth in the Letter Agreement dated May 7, 1996, a copy of which is attached hereto as Addendum A. 18. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section 18, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to the Executive (or his executor, administrator or other legal representative, as the case may be), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive's employment were terminated during a Change in Control Period other than by reason of a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the Termination Date. (c) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts would be payable to the Executive hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by the Executive to receive such amounts or, if no person is so appointed, to the Executive's estate. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to the principle of conflict of laws. 51 12 20. AMENDMENT AND WAIVER. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. ZENITH ELECTRONICS CORPORATION By: /s/ Peter S. Willmott ------------------------------------ Its: President and CEO ------------------------------------ EXECUTIVE /s/ Roger A. Cregg ------------------------------------ ROGER A. CREGG 52 13 SCHEDULE I SUPPLEMENTAL LONG-TERM DISABILITY BENEFITS (a) Purpose. The benefits provided by this Schedule shall be in addition to the benefits provided by the long term disability plan maintained by the Company for salaried employees as of the date hereof (the "LTD Plan"), provided, however, that no benefits shall be payable under this Schedule if the Executive does not elect to participate in the LTD Plan. (b) Definitions. As used in this Schedule, the following terms shall have the following respective meanings: (1) "Disability" means the inability of the Executive arising during his employment by the Company to perform the duties pertaining to the employment position held by the Executive with the Company at the inception of such disability, if such inability is due to sickness or injury. If such disability continues for a period of more than 180 days, it shall become a "total long term disability" effective upon the expiration of such 180 days. The terms "disability" and "total long term disability" exclude disability resulting from intentional self-inflicted injuries or sickness. (2) "Maximum monthly salary" of the Executive means the maximum amount of monthly salary specified in the LTD Plan on which the benefit payments under such plan will be calculated and based. (As of the date hereof, benefits under the LTD Plan are 66-2/3% of monthly salary. The maximum monthly salary thereunder is $6,000 and the maximum monthly benefit thereunder is $4,000.) (c) Benefits Payable. The amount of monthly benefits payable by the Company to the Executive during a total long term disability of the Executive shall be 66-2/3% of the amount, if any, by which the actual monthly salary he was receiving immediately prior to the commencement of his disability exceeds his maximum monthly salary as heretofore defined, provided, however, that if such actual monthly salary exceeds $12,500, then the amount of such benefits payable by the Company to the Executive shall be limited to 66-2/3% of the amount by which $12,500 exceeds his maximum monthly salary. (d) Exclusion. No benefits shall be payable under this Schedule if the LTD Plan has been terminated prior to the date of the commencement of the disability. (e) Period of Benefit Payment. Benefits shall be payable by the Company to the Executive upon the commencement of the total long term disability (180 days after inception of the disability) and thereafter as long as both of the following conditions continue to be satisfied: (i) The long term disability continues, and (ii) The Executive is under the care of a physician. Notwithstanding the foregoing, the benefits hereunder shall cease and terminate upon the first of the following to occur: (i) The cessation of the total long term disability. (ii) The death of the Executive. (iii) The failure of the Executive to comply with Subsection (i) of this Schedule. 53 14 (iv) The cessation of the payment of benefits to the Executive under the LTD Plan for any reason not specified above. (f) Reduction or Termination of Benefits. If during the period of total long term disability the Executive becomes employed by any employer (including the Company) in a position other than the employment position held by the Executive with the Company at the inception of such disability or if it is determined that the Executive is medically able to work in another such position, the Company shall then or at any time or times thereafter have the right to reduce the amount of benefits provided hereunder to any lesser amount specified by the Company or discontinue such benefits altogether. (g) Effect of Termination of Long Term Disability Plan. In the event the Executive elects not to participate or elects to terminate his participation in the LTD Plan, then this Schedule shall be of no further force and effect, and the Company shall have no obligation to provide the benefits described herein. In the event the Executive does participate in and does not terminate his participation in the LTD Plan, and the LTD Plan is terminated by the Company subsequent to the commencement of the disability, the Executive shall nevertheless continue to be entitled to the benefits provided hereunder and, in addition, the Company shall be obligated to provide, and the Executive shall be entitled to receive, long term disability benefits in the same amounts and under the same terms and conditions as if the LTD Plan remained in full force and effect. Nothing herein shall prohibit the Company from at any time, or from time to time, establishing a substitute plan or plans for the LTD Plan, in which event: (1) the Company shall be relieved of its obligation to continue payment of benefits under the terminated LTD Plan and shall be obligated to provide benefits under the substituted plan or plans; and (2) "maximum monthly salary" defined in Subsection (b)(2) above shall mean the maximum monthly salary specified in such substitute plan or plans. (h) Determinations. All determinations as to whether a disability or total long term disability exists at any time or has ceased to exist, all determinations as to date of commencement or cessation of such disability or total long term disability and all determinations as to whether the Executive is medically able to work in another position as provided in Subsection (f) shall be made by the Company's Corporate Medical Director (or if at any time no person holds such a position with the Company, then by any physician designated by the Company from time to time), which determination shall be final and binding on the parties hereto regardless of whether such determination is in accord with any medical or other decision made under the LTD Plan. (i) Medical Examinations and Data. The Company at its own expense shall have the right and opportunity to make a medical examination of the person of the Executive in the event of a sickness or injury of the Executive which constitutes or might constitute a disability or a total long term disability as herein defined and as often as the Company may require. Such examination shall be conducted by the Company's Corporate Medical Director or any physician designated by the Company from time to time. The Executive agrees to submit to all such examinations. In addition, the Company shall be entitled to examine and obtain copies of all medical records pertaining to such sickness or injury of any licensed physician, hospital, organization, institution or person and the Executive agrees to furnish the Company with written authorization to examine and obtain copies of such records as often as required by the Company. 54 15 SCHEDULE II SUPPLEMENTAL LIFE INSURANCE BENEFITS (a) Supplemental Life Insurance Benefit. The life insurance benefits provided in this Schedule shall be in addition to any group term life insurance program applying generally to salaried employees. In the event the Executive's employment with the Company is terminated for any reason, other than by death, prior to age fifty-five (55), no benefits shall be paid pursuant to this Schedule. (b) Benefit Amount - Preretirement. If the Executive shall die prior to retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary at the date of death. (c) Benefit Amount - Postretirement. The life insurance benefits provided under this Schedule shall continue for a period of ten (10) years from the date of the Executive's retirement. If the Executive shall die within one year after the date of retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary in effect on the date of the Executive's retirement. Thereafter, on each yearly anniversary after commencement of such ten (10) year period, the amount of such life insurance benefit shall be decreased by ten percent (10%) of the amount of such benefit in effect at the commencement of such ten (10) year period. If the Executive is alive on the tenth (10th) anniversary of the commencement of such ten (10) year period, the life insurance benefits provided under this Schedule shall cease and expire and be of no further force and effect and the Company shall have no further obligation hereunder. (d) Purchase of Life Insurance Policy. The Company may, but is not required to, purchase a life insurance policy to fund the life insurance benefits payable to the Executive hereunder. If such an insurance policy is purchased by the Company, such policy shall name the Company as owner and beneficiary and, when purchased, shall remain a general unsecured, unrestricted asset of the Company, and neither the Executive nor any beneficiary of the Executive shall have any rights with respect to, or claim against, such policy. Such policy, if and when purchased by the Company, shall not be deemed to be held under any trust for the benefit of the Executive or any beneficiary of the Executive, nor shall such policy be deemed to be held in trust as collateral security for fulfilling the obligations of the Company hereunder. The benefits provided to the Executive and any beneficiary of the Executive under this Schedule are based upon the general credit of the Company and are otherwise unsecured. In the event the Company shall purchase a life insurance policy as set forth in this Subsection (d), and if a medical examination or examinations of the Executive and/or the furnishing of a health statement signed by the Executive (which statement may include an authorization by the Executive to any licensed physician or any organization, institution, or person that has knowledge of the Executive or his dependents to give such information to the insurer), is requested by the insurer, then the Executive agrees to submit to such examination or examinations or to provide such health statement in whatever form required by the insurer. If the Executive refuses to submit to such examination or examinations or to provide such health statement, then neither the Executive nor any beneficiary of the Executive shall have any right to the life insurance benefits provided under this Schedule and the Company shall have no further obligation hereunder. 55 EX-10.(Q) 3 EMPLOY. AGR. DATED 1/1/97 BETWEEN VITKUS & ZENITH 1 EXHIBIT 10Q EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of JANUARY 1, 1997, between ZENITH ELECTRONICS CORPORATION, a Delaware corporation (the "Company"), and RICHARD F. VITKUS (the "Executive"). WHEREAS, the Executive currently serves as SENIOR VICE PRESIDENT of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to provide for the continued employment of the Executive by the Company upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by the Company upon the terms and subject to the conditions contained in this Agreement. The term of employment of the Executive by the Company pursuant to this Agreement (the "Employment Period") shall commence on the date hereof and shall end on December 31, 1999, unless earlier terminated pursuant to Section 4, provided that the Employment Period shall automatically be extended as of January 1, 2000 for one additional year and, if so extended, shall automatically be further extended as of each January 1 thereafter, for additional consecutive one-year periods, unless either the Company or the Executive elects not to extend the Agreement by written notice given to the other party at least 90 days prior to each such period. 2. POSITION AND DUTIES. The Company shall employ the Executive during the Employment Period as its SENIOR VICE PRESIDENT, ADMINISTRATION AND GENERAL COUNSEL. The Executive shall perform faithfully and loyally and to the best of his abilities the duties assigned to him hereunder, shall devote his full business time, attention and effort to the affairs of the Company and shall use his reasonable best efforts to promote the interests of the Company. The Executive shall report to such executive officer of the Company as shall be designated from time to time by the Chief Executive Officer of the Company (the "CEO") or the Board of Directors of the Company (the "Board"). Notwithstanding the foregoing, the Executive may engage in charitable, civic or community activities and, with the prior approval of the CEO or the Board, may serve as a director of any business corporation, provided that such activities or service does not interfere with his duties hereunder or violate the terms of any of the covenants contained in Section 10 or 11. 3. COMPENSATION. (a) Base Compensation. As compensation for the services to be provided by the Executive hereunder, the Company shall pay to the Executive during the Employment Period a minimum annual salary of TWO HUNDRED THIRTY THOUSAND DOLLARS ($230,000.00) (the "Base Salary"), payable in installments in accordance with the Company's normal payment schedule for senior management of the Company. The Executive's salary may be increased or decreased from time to time, provided that the Executive's salary shall not be decreased below the 56 2 Base Salary specified by this Section 3(a). The Executive's annual salary in effect from time to time under this Section 3(a) is hereinafter called his "Base Compensation." (b) Incentive Compensation. In addition to his Base Compensation, the Executive shall be eligible to receive incentive compensation awards for services rendered during the Employment Period, determined in accordance with (i) the Company's annual bonus plan or any other short-term incentive plan adopted by the Company and (ii) the 1987 Zenith Stock Incentive Plan or any other long-term incentive plan adopted by the Company. (c) Supplemental Profit Sharing Benefits. During the Employment Period, the Executive shall be entitled to participate in the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan, as in effect on the date hereof, or in a comparable plan adopted by the Company. (d) Supplemental Long-Term Disability Benefits. During the Employment Period, the Executive shall be eligible for supplemental long-term disability benefits, the current terms of which are described on Schedule I attached hereto. (e) Supplemental Life Insurance Benefits. During the Employment Period, the Executive shall be eligible for supplemental life insurance benefits, the current terms of which are described on Schedule II attached hereto. (f) Other Benefits. In addition to the benefits described in subsections (c), (d) and (e) above, the Executive shall be entitled to participate in all employee benefit plans generally available to executives who are parties to agreements with the Company which are comparable to this Agreement, including, as of the date of this Agreement, group medical and dental, health and accident, group life insurance, long-term disability, short-term disability, executive insurance, pension, profit sharing and 401(k) plans. The Executive shall be entitled to take time off for vacation or illness in accordance with the Company's policy for senior executives and to receive all other fringe benefits as are from time to time made generally available to senior executives of the Company. The Company may from time to time modify the benefits provided to the Executive, provided that all such modifications are made on the same basis for all executives in positions comparable to that of the Executive. (g) Expense Reimbursement. The Company shall reimburse the Executive for all proper expenses incurred by him in the performance of his duties hereunder in accordance with the Company's policies and procedures. 4. TERMINATION OF EMPLOYMENT PERIOD. The Employment Period shall be terminated upon the first to occur of (i) termination of the employment of the Executive by the Company at any time without Cause (as such term is defined in Section 8) upon written notice given to the Executive at least 30 days prior to such termination, (ii) the election by the Company pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iii) the election by the Executive pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iv) termination of the employment of the Executive by the Company at any time for Cause or Serious Misconduct upon written notice given to the Executive, (v) termination of the employment of the Executive by the Company on account of the Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than 180 consecutive days, (vi) termination of the employment of the Executive by reason of retirement, (vii) the Executive's death or (viii) termination of employment by the Executive at any time upon written notice given to the Company at least 90 days prior to such termination. The date on which the Employment Period terminates is hereinafter referred to as the "Termination Date." 5. CONSEQUENCES OF TERMINATION OUTSIDE OF A CHANGE IN CONTROL PERIOD. If a Termination Date occurs, other than within a Change in Control Period, as defined in Section 8, the Executive shall be entitled to receive the compensation and benefits specified by this Section 5 in lieu of any severance amounts which otherwise would be payable to the Executive. 57 3 (a) Termination by Company Without Cause. If the Employment Period terminates for a reason set forth in clause (i) of Section 4: (i) the Company shall pay to the Executive (A) all Base Compensation otherwise payable through the Termination Date, (B) vacation pay accrued through the Termination Date and (C) reimbursement of expenses incurred through the Termination Date, in each case to the extent not theretofore paid; (ii) the Company shall pay to the Executive the amount of the target bonus otherwise payable for the year in which the Termination Date occurs, prorated to the Termination Date; (iii) if the Termination Date occurs prior to November 8, 1997, the Company shall pay to the Executive a lump sum cash amount equal to three times the sum of the Executive's Base Compensation and target bonus for the year in which the Executive's Termination Date occurs or, if such Termination Date occurs on or after November 8, 1997, the Company shall pay to the Executive a lump sum cash amount equal to the greater of (A) the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs, multiplied by the number of whole and/or fractional years remaining under the term of the Employment Period (as in effect under Section 1 without regard to the early termination thereof under Section 4) and (B) one and one-half times the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs; (iv) the Company shall provide the Executive with continued coverage, or substantially equivalent coverage, during the period represented by the amount of the lump sum payment under clause (iii) (i.e., three years or one and one-half years, as the case may be) under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) unless the Executive becomes covered under similar plans or arrangements maintained by a subsequent employer; provided that if the Company is unable to provide such continued coverage or substantially similar coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such benefits; and (v) the Company shall provide to the Executive outplacement services appropriate for the Executive in accordance with industry standards (the cost of which shall not exceed 15% of the Executive's Base Compensation). (b) Failure of Company to Renew Agreement. If the Employment Period terminates for a reason set forth in clause (ii) of Section 4, in lieu of any severance amounts which otherwise would be payable to the Executive, the Company shall pay to the Executive the amounts or benefits set forth in Sections 5(a)(i), (ii) and (v), plus a lump sum cash amount equal to one and one-half times the sum of his Base Compensation and target bonus for the year in which the Termination Date occurs, and shall provide to the Executive the benefits described in Section 5(a)(iv) for the period of one and one-half years commencing on the Termination Date. (c) Termination for Cause. If the Employment Period terminates for a reason set forth in clause (iv) of Section 4, the Company shall pay to the Executive the amounts set forth in Section 5(a)(i) and the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. (d) Disability, Retirement or Death. If the Employment Period terminates for any reason set forth in clause (v), (vi) or (vii) of Section 4, the Company shall pay to the Executive or his executor, administrator or other legal representative, as the case may be, the amounts set forth in Section 5(a)(i) and the Executive (or his executor, administrator or other legal representative, as the case may be) shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. 58 4 (e) Failure of Executive to Renew Agreement; Other Voluntary Termination by the Executive. If the Employment Period terminates for any reason set forth in clause (iii) or (viii) of Section 4, (A) the Company shall pay to the Executive the amounts set forth in Section 5(a)(i), (B) the Company may, in its sole discretion, but shall have no obligation to, pay to the Executive the amount of the target bonus for the year in which the Termination Date occurs, prorated to the Termination Date, and (C) the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. 6. CONSEQUENCES OF TERMINATION WITHIN CHANGE IN CONTROL PERIOD. (a) Termination Payments and Benefits. If during a Change in Control Period, as defined in Section 8, the Employment Period of the Executive shall terminate other than by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay or provide to the Executive (or his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, as compensation for services rendered to the Company and in lieu of any severance amounts which otherwise would be payable to the Executive, the following amounts: (i) the Company shall pay to the Executive a lump sum cash amount equal to the sum of (A) the Executive's Base Compensation, accrued vacation pay and reimbursable expenses incurred through the Termination Date, in each case to the extent not theretofore paid, (B) the Executive's annual bonus in an amount equal to the annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company for less than 12 full months) bonus payable to the Executive by the Company for the fiscal year in which the Termination Date occurs (determined at the higher of the target or actual level of performance for such year), multiplied by a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs prior to the Termination Date and the denominator of which is 365 or 366, as applicable, (C) three times the Executive's highest annual rate of Base Compensation during the three full fiscal years prior to the Termination Date, (D) three times the greater of (I) the Executive's highest annual bonus payable during the three full fiscal years prior to the Termination Date and (II) the target bonus payable for the year in which the Termination Date occurs and (E) all accruals under the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan; (ii) for a period of three years commencing on the Termination Date, or until such earlier date on which the Executive becomes covered under similar plans maintained by a subsequent employer, the Company shall continue to provide the Executive and his dependents with coverage, or shall provide substantially equivalent coverage, under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance and executive insurance programs) with the same level of coverage, upon the same terms and otherwise to the same extent as such plans or arrangements shall have been in effect immediately prior to the Termination Date or, if more favorable to the Executive, as provided generally with respect to other peer executives of the Company. If the Company cannot provide such continued coverage or substantially equivalent coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such coverage; and (iii) the Company shall provide outplacement services appropriate for the Executive in accordance with industry standards (which shall not exceed 15% of the Executive's Base Compensation). (b) Nonqualifying Termination Within Change in Control Period. If during a Change in Control Period the Employment Period shall terminate by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay to the Executive (or to his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, a lump sum cash amount equal to the sum of the Executive's Base Compensation payable through the Termination Date, any vacation pay accrued prior to the Termination Date and any reimbursable expenses incurred prior to the Termination Date, in each case to the extent not theretofore paid. 59 5 7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 7(c), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, 60 6 (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) if, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 7(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8. DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Cause" means (i) embezzlement, misappropriation of corporate funds or any other act of dishonesty by the Executive, (ii) commission by the Executive of a felony involving moral turpitude, (iii) significant activities of the Executive harmful to the reputation of the Company, (iv) significant violation by the Executive of any statutory or common law duty of loyalty to the Company or (v) a material breach by the Executive of the Executive's duties and responsibilities to the Company, including the refusal to perform or the substantial disregard of such duties, other than as a result of incapacity due to physical or mental illness. (b) "Change in Control" means: (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 Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 25% or more of either (i) then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of then outstanding securities 61 7 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 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 or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 8(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 the date hereof, constitute the Board (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 the date hereof 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 (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 62 8 (4) approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company. (c) "Change in Control Period" means the period of time beginning on the date on which a Change in Control is consummated and ending on the earlier to occur of (i) 24 months following such Change in Control and (ii) the Executive's death. (d) "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following events within a Change in Control Period: (1) any of (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position(s), duties, responsibilities or status with the Company immediately prior to the commencement of such Change in Control Period, (ii) a change in the Executive's reporting responsibilities, titles or offices with the Company as in effect immediately prior to the commencement of such Change in Control Period or (iii) any failure to re-elect the Executive to any position with the Company held by the Executive immediately prior to the commencement of such Change in Control Period; (2) a reduction by the Company in the Executive's rate of Base Compensation as in effect immediately prior to the commencement of such Change in Control Period or as the same may be increased from time to time thereafter or the failure by the Company to increase such rate of Base Compensation each year after the commencement of such Change in Control Period by an amount which at least equals, on a percentage basis, the mean average percentage increase, during the two full fiscal years of the Company immediately preceding the commencement of such Change in Control Period, in the rates of base salary for all officers of the Company elected by the Board; (3) the failure of the Company to pay the Executive a bonus at or greater than the target level in effect in the year in which the Change in Control Period commences, or to continue the Executive's participation in the 1987 Zenith Stock Incentive Plan or any comparable long-term incentive plan; (4) any requirement of the Company that the Executive (i) be based anywhere other than at the facility where the Executive is located immediately prior to the commencement of such Change in Control Period or (ii) travel on Company business to an extent substantially more burdensome than the travel obligations of the Executive immediately prior to the commencement of such Change in Control Period; (5) an election by the Company not to extend the Employment Period in accordance with Section 1; (6) the failure of the Company to (i) continue in effect any employee benefit plan or compensation plan in which the Executive is participating immediately prior to the commencement of such Change in Control Period, unless the Executive is permitted to participate in other plans providing the Executive with substantially comparable benefits, or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such plan, (ii) provide the Executive and the Executive's dependents welfare benefits (including, without limitation, group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately 63 9 prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iii) provide fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iv) provide the Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, or (v) reimburse the Executive promptly for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period, or if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; or (7) the failure of the Company to obtain the assumption agreement from any successor as contemplated in Section 18(b). For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive; provided, however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason. (e) "Nonqualifying Termination" means a termination of the Employment Period (i) by the Company for Serious Misconduct, (ii) by the Executive as a result of his election pursuant to Section 1 not to extend the Agreement in accordance with Section 1 or by the Executive at any other time for any reason, in either case other than for Good Reason, (iii) as a result of the Executive's death or (iv) by the Company due to the Executive's absence from his duties with the Company on a full-time basis for at least 180 consecutive days as a result of the Executive's incapacity due to physical or mental illness. A termination of the Employment Period for any reason not expressly set forth in the preceding sentence, including, without limitation, the election by the Company not to extend the Agreement pursuant to Section 1, shall not constitute a Nonqualifying Termination. (f) "Serious Misconduct" means (i) embezzlement or misappropriation of corporate funds by the Executive, (ii) commission by the Executive of a felony involving moral turpitude or (iii) a material breach by the Executive of the Executive's duties and responsibilities to the Company as in effect prior to the commencement of the Change in Control Period, including the refusal to perform or the substantial disregard of such duties, 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 such breach. 9. FEDERAL AND STATE WITHHOLDING. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 10. NONCOMPETITION; NONSOLICITATION. (a) The Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment with the Company or any of its subsidiaries prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of, and other confidential information concerning, the Company and its subsidiaries and that his services have been and will be of special, unique and extraordinary value to the Company. (b) The Executive agrees that during the Employment Period and, if the Employment Period terminates for a reason set forth in clause (i) or (ii) of Section 4, for a period of two years thereafter (the "Noncompetition Period"), he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, 64 10 firm, corporation or enterprise in engaging or being engaged, in any business being conducted by the Company or any of its subsidiaries as of the termination of the Employment Period in any geographic area in which the Company is then conducting such business. (c) The Executive further agrees that during the Noncompetition Period he shall not in any manner, directly or indirectly induce or attempt to induce any employee of the Company or any of its subsidiaries to terminate or abandon his or her employment for any purpose whatsoever. (d) Nothing in this Section 10 shall prohibit the Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than two percent of the outstanding stock of any class of a corporation any equity securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. (e) If, at any time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. CONFIDENTIALITY. The Executive shall not, at any time during the Employment Period or thereafter, make use of or disclose, directly or indirectly, any trade secret or other confidential or secret information of the Company or of its subsidiaries or other technical, business, proprietary or financial information of the Company or of its subsidiaries not available to the public generally or to the competitors of the Company or of its subsidiaries ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of the Executive, or (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency. Promptly following the termination of the Employment Period, the Executive shall surrender to the Company all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data relating to any Confidential Information or the business of the Company or of its subsidiaries which he may then possess or have under his control (together with all copies thereof); provided, however, that the Executive may retain copies of such documents as are necessary for the preparation of his federal or state income tax returns. 12. ENFORCEMENt. The parties hereto agree that the Company would be damaged irreparably in the event any provision of Sections 10 or 11 of this Agreement were not performed in accordance with their respective terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 13. SURVIVAL. Sections 10, 11 and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms hereof, notwithstanding any termination of the Employment Period. 14. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise under this Agreement involving termination of the Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse the Executive, on a current basis, for all legal fees and expenses, if any, incurred by the Executive in connection with such contest or dispute, together with interest in an amount equal to the prime rate from time to time in effect, as published in The Wall Street Journal under "Money Rates," but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives the Executive's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of any such 65 11 contest or dispute includes a finding denying, in total, the Executive's claims in such contest or dispute, the Executive shall be required to reimburse the Company, over a period of 12 months from the date of such resolution, for all sums advanced to the Executive pursuant to this Section 14. 15. NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered, when delivered by courier or overnight express service or five days after having been sent by certified or registered mail, postage prepaid, addressed (a) if to the Executive, to the Executive's address set forth in the records of the Company or, if to the Company, to Dennis R. Winkleman, Vice President, Human Resources, Zenith Electronics Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025 or (b) to such other address as either party may have furnished to the other party in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 16. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes and preempts any prior understanding, agreements or representations by or between the parties, written or oral, which may have related in any manner to the subject matter hereof other than rights to indemnification, if any, for the benefit of the Executive. Pursuant to, but not in limitation of, the foregoing sentence, the following agreements between the Company and the Executive shall be terminated, effective as of the date hereof, and shall have no further force or effect: (i) the Agreement dated August 29, 1994, (ii) the Supplemental Letter Agreement, and an Addendum thereto, both dated August 29, 1994, and (iii) an Addendum Number Two to Supplemental Letter Agreement dated April 4, 1995. Such termination shall have no effect upon the vesting of options and restricted stock (if any) pursuant to such agreements, which options and restricted stock shall remain fully vested. 18. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section 18, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to the Executive (or his executor, administrator or other legal representative, as the case may be), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive's employment were terminated during a Change in Control Period other than by reason of a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the Termination Date. (c) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts would be payable to the Executive hereunder had the Executive continued to 66 12 live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by the Executive to receive such amounts or, if no person is so appointed, to the Executive's estate. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to the principle of conflict of laws. 20. AMENDMENT AND WAIVER. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. ZENITH ELECTRONICS CORPORATION By: /s/ Peter S. Willmott --------------------------------- Its: President and CEO --------------------------------- EXECUTIVE /s/ Richard F. Vitkus --------------------------------- RICHARD F. VITKUS 67 13 SCHEDULE I SUPPLEMENTAL LONG-TERM DISABILITY BENEFITS (a) Purpose. The benefits provided by this Schedule shall be in addition to the benefits provided by the long term disability plan maintained by the Company for salaried employees as of the date hereof (the "LTD Plan"), provided, however, that no benefits shall be payable under this Schedule if the Executive does not elect to participate in the LTD Plan. (b) Definitions. As used in this Schedule, the following terms shall have the following respective meanings: (1) "Disability" means the inability of the Executive arising during his employment by the Company to perform the duties pertaining to the employment position held by the Executive with the Company at the inception of such disability, if such inability is due to sickness or injury. If such disability continues for a period of more than 180 days, it shall become a "total long term disability" effective upon the expiration of such 180 days. The terms "disability" and "total long term disability" exclude disability resulting from intentional self-inflicted injuries or sickness. (2) "Maximum monthly salary" of the Executive means the maximum amount of monthly salary specified in the LTD Plan on which the benefit payments under such plan will be calculated and based. (As of the date hereof, benefits under the LTD Plan are 66-2/3% of monthly salary. The maximum monthly salary thereunder is $6,000 and the maximum monthly benefit thereunder is $4,000.) (c) Benefits Payable. The amount of monthly benefits payable by the Company to the Executive during a total long term disability of the Executive shall be 66-2/3% of the amount, if any, by which the actual monthly salary he was receiving immediately prior to the commencement of his disability exceeds his maximum monthly salary as heretofore defined, provided, however, that if such actual monthly salary exceeds $12,500, then the amount of such benefits payable by the Company to the Executive shall be limited to 66-2/3% of the amount by which $12,500 exceeds his maximum monthly salary. (d) Exclusion. No benefits shall be payable under this Schedule if the LTD Plan has been terminated prior to the date of the commencement of the disability. (e) Period of Benefit Payment. Benefits shall be payable by the Company to the Executive upon the commencement of the total long term disability (180 days after inception of the disability) and thereafter as long as both of the following conditions continue to be satisfied: (i) The long term disability continues, and (II) The Executive is under the care of a physician. Notwithstanding the foregoing, the benefits hereunder shall cease and terminate upon the first of the following to occur: (i) The cessation of the total long term disability. (ii) The death of the Executive. (iii) The failure of the Executive to comply with Subsection (i) of this Schedule. 68 14 (iv) The cessation of the payment of benefits to the Executive under the LTD Plan for any reason not specified above. (f) Reduction or Termination of Benefits. If during the period of total long term disability the Executive becomes employed by any employer (including the Company) in a position other than the employment position held by the Executive with the Company at the inception of such disability or if it is determined that the Executive is medically able to work in another such position, the Company shall then or at any time or times thereafter have the right to reduce the amount of benefits provided hereunder to any lesser amount specified by the Company or discontinue such benefits altogether. (g) Effect of Termination of Long Term Disability Plan. In the event the Executive elects not to participate or elects to terminate his participation in the LTD Plan, then this Schedule shall be of no further force and effect, and the Company shall have no obligation to provide the benefits described herein. In the event the Executive does participate in and does not terminate his participation in the LTD Plan, and the LTD Plan is terminated by the Company subsequent to the commencement of the disability, the Executive shall nevertheless continue to be entitled to the benefits provided hereunder and, in addition, the Company shall be obligated to provide, and the Executive shall be entitled to receive, long term disability benefits in the same amounts and under the same terms and conditions as if the LTD Plan remained in full force and effect. Nothing herein shall prohibit the Company from at any time, or from time to time, establishing a substitute plan or plans for the LTD Plan, in which event: (1) the Company shall be relieved of its obligation to continue payment of benefits under the terminated LTD Plan and shall be obligated to provide benefits under the substituted plan or plans; and (2) "maximum monthly salary" defined in Subsection (b)(2) above shall mean the maximum monthly salary specified in such substitute plan or plans. (h) Determinations. All determinations as to whether a disability or total long term disability exists at any time or has ceased to exist, all determinations as to date of commencement or cessation of such disability or total long term disability and all determinations as to whether the Executive is medically able to work in another position as provided in Subsection (f) shall be made by the Company's Corporate Medical Director (or if at any time no person holds such a position with the Company, then by any physician designated by the Company from time to time), which determination shall be final and binding on the parties hereto regardless of whether such determination is in accord with any medical or other decision made under the LTD Plan. (i) Medical Examinations and Data. The Company at its own expense shall have the right and opportunity to make a medical examination of the person of the Executive in the event of a sickness or injury of the Executive which constitutes or might constitute a disability or a total long term disability as herein defined and as often as the Company may require. Such examination shall be conducted by the Company's Corporate Medical Director or any physician designated by the Company from time to time. The Executive agrees to submit to all such examinations. In addition, the Company shall be entitled to examine and obtain copies of all medical records pertaining to such sickness or injury of any licensed physician, hospital, organization, institution or person and the Executive agrees to furnish the Company with written authorization to examine and obtain copies of such records as often as required by the Company. 69 15 SCHEDULE II SUPPLEMENTAL LIFE INSURANCE BENEFITS (a) Supplemental Life Insurance Benefit. The life insurance benefits provided in this Schedule shall be in addition to any group term life insurance program applying generally to salaried employees. In the event the Executive's employment with the Company is terminated for any reason, other than by death, prior to age fifty-five (55), no benefits shall be paid pursuant to this Schedule. (b) Benefit Amount - Preretirement. If the Executive shall die prior to retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary at the date of death. (c) Benefit Amount - Postretirement. The life insurance benefits provided under this Schedule shall continue for a period of ten (10) years from the date of the Executive's retirement. If the Executive shall die within one year after the date of retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary in effect on the date of the Executive's retirement. Thereafter, on each yearly anniversary after commencement of such ten (10) year period, the amount of such life insurance benefit shall be decreased by ten percent (10%) of the amount of such benefit in effect at the commencement of such ten (10) year period. If the Executive is alive on the tenth (10th) anniversary of the commencement of such ten (10) year period, the life insurance benefits provided under this Schedule shall cease and expire and be of no further force and effect and the Company shall have no further obligation hereunder. (d) Purchase of Life Insurance Policy. The Company may, but is not required to, purchase a life insurance policy to fund the life insurance benefits payable to the Executive hereunder. If such an insurance policy is purchased by the Company, such policy shall name the Company as owner and beneficiary and, when purchased, shall remain a general unsecured, unrestricted asset of the Company, and neither the Executive nor any beneficiary of the Executive shall have any rights with respect to, or claim against, such policy. Such policy, if and when purchased by the Company, shall not be deemed to be held under any trust for the benefit of the Executive or any beneficiary of the Executive, nor shall such policy be deemed to be held in trust as collateral security for fulfilling the obligations of the Company hereunder. The benefits provided to the Executive and any beneficiary of the Executive under this Schedule are based upon the general credit of the Company and are otherwise unsecured. In the event the Company shall purchase a life insurance policy as set forth in this Subsection (d), and if a medical examination or examinations of the Executive and/or the furnishing of a health statement signed by the Executive (which statement may include an authorization by the Executive to any licensed physician or any organization, institution, or person that has knowledge of the Executive or his dependents to give such information to the insurer), is requested by the insurer, then the Executive agrees to submit to such examination or examinations or to provide such health statement in whatever form required by the insurer. If the Executive refuses to submit to such examination or examinations or to provide such health statement, then neither the Executive nor any beneficiary of the Executive shall have any right to the life insurance benefits provided under this Schedule and the Company shall have no further obligation hereunder. 70 EX-10.(R) 4 EMPLOY. AGR. DATED 1/1/97 BETWEEN WILMOTT & ZENITH 1 EXHIBIT 10r EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of January 1, 1997 by and between PETER S. WILLMOTT (the "Executive") and Zenith Electronics Corporation (the "Company"); WITNESSETH THAT: WHEREAS, the parties desire to enter into this Agreement pertaining to the employment of the Executive by the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, it is hereby covenanted and agreed by the Executive and the Company as follows: 1. Performance of Services. The Executive's employment with the Company shall be subject to the following: (a) Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as its President and Chief Executive Officer during the Agreement Term (as defined below), and the Executive hereby agrees to remain in the employ of the Company during the Agreement Term. During the Agreement Term, while he is employed by the Company, the Executive shall be a member of the Board of Directors of the Company (the "Board"). (b) During the Agreement Term, while the Executive is employed by the Company, the Executive shall devote his full time, energies and talents to serving as its President and Chief Executive Officer. (c) The Executive agrees that he shall perform his duties faithfully and efficiently subject to the directions of the Board. The Executive's duties may include providing services for both the Company and the Subsidiaries (as defined below), as determined by the Board; provided, that the Executive shall not, without his consent, be assigned tasks that would be inconsistent with those of President and Chief Executive Officer. The Executive will have such authority, power, responsibilities and duties as are inherent to his positions and necessary to carry out his responsibilities and the duties required of him hereunder. (d) Notwithstanding the foregoing provisions of this paragraph 1, during the Agreement Term, the Executive may devote reasonable time to activities other than those required under this Agreement, including the supervision of his personal investments, and activities involving professional, charitable, educational, religious and similar types of organizations, speaking engagements, membership on the boards of directors of other organizations, and similar type activities, to the extent that such other activities do not, in the judgement of the Board, materially inhibit or prohibit the performance of the Executive's duties under this Agreement, or conflict in any material way with the business of the Company or any Subsidiary. (e) Subject to the provisions of this Agreement, the Executive shall not be required to perform services under this Agreement during any period that he is Disabled. The Executive shall be considered "Disabled" during any period in which he has a physical or mental disability which renders him incapable, after reasonable accommodation, of performing his duties under this Agreement. In the event of a dispute as to whether the 71 2 Executive is Disabled, the Company may refer the same to a mutually acceptable licensed practicing physician, and the Executive agrees to submit to such tests and examinations as such physician shall deem appropriate. (f) The "Agreement Term" shall be the period beginning on January 1, 1997 (the "Effective Date") and ending on December 29, 1998. (g) For purposes of this Agreement, the term "Subsidiary" shall mean any corporation, partnership, joint venture or other entity during any period in which at least a fifty percent interest in such entity is owned, directly or indirectly, by the Company (or a successor to the Company). 2. Compensation. Subject to the terms of this Agreement, during the Agreement Term, while the Executive is employed by the Company, the Company shall compensate him for his services as follows: (a) The Executive shall receive, in substantially equal monthly or more frequent installments, in accordance with the Company's regular payroll practices, an annual base salary of $750,000 (the "Salary"). (b) For Company performance based on the performance period beginning on the Effective Date and ending December 31, 1997 (the "1997 Performance Period") and for the performance period beginning on the January 1, 1998 and ending December 31, 1998 (the "1998 Performance Period"), the Executive shall participate in a bonus program. The bonus program shall provide, for each performance period, a maximum bonus amount of 120% of the Executive's annual Salary, and a minimum bonus amount for each performance period of not less than 60% of the Executive's annual Salary, with the minimum payable only if the target goals for the performance period are achieved. The performance goals for each performance period shall be established by the Organization and Compensation Committee of the Board after consultation with the Executive. The performance goals for the 1997 Performance Period shall be established not later than March 31, 1997. The value for each bonus award will be distributed in cash. For the 1997 Performance Period, the bonus shall be distributed not later than February 28, 1998, and for the 1998 Performance Period, the bonus shall be distributed not later than February 28, 1999. Notwithstanding the foregoing provisions of this paragraph (b), for the 1997 Performance Period, the Executive shall be entitled to a bonus of not less than $450,000. (c) As provided in Exhibit 1, which is attached to and forms a part of this Agreement, the Executive shall be entitled to receive a cash payment based on the value of 150,000 shares of common stock of the Company ("Company Stock"). (d) As provided in Exhibit 2, which is attached to and forms a part of this Agreement, the Executive shall be entitled to receive the award of options to purchase 150,000 shares of Company Stock. (e) The Executive shall be provided with the welfare benefits and other fringe benefits to the same extent and on the same terms as those benefits are provided by the Company from time to time to the Company's other senior management employees, except that the Salary, and the bonus, stock-based awards, and other incentive compensation benefits for the Executive shall be determined under the provisions of this agreement rather than the policies applicable to other employees. (f) If the Executive's Date of Termination is December 29, 1998, and he is precluded from receiving an allocation under the Zenith Salaried Profit Sharing Retirement Plan and/or the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan for the year ending December 31, 1998 by reason of his not being employed by the Company on that date, the Company shall make a cash payment to the Executive equal to the amount which would have been allocated to his accounts under those plans, based on his actual compensation from the Company for 1998, but determined as though he had been employed through December 31, 1998. Such payment shall be made not later than January 20, 1999. 72 3 (g) The Executive shall be provided, at the Company's expense, transportation between his home and the office, and the Executive is authorized to incur reasonable expenses for entertainment, traveling, meals, lodging and similar items in promoting the Company's business. The Company will reimburse the Executive for all reasonable expenses so incurred, and for reasonable legal fees incurred in connection with the negotiation of this Agreement. (h) The Executive shall be entitled to coverage under the indemnification agreement dated April 24, 1990 between the Executive and the Company (the "Indemnification Agreement"), and coverage under such agreement shall continue during the period in which the Executive is employed, and for five years after the Date of Termination, or such period longer than five years as is consistent with the Company policy applicable to other senior executives of the Company. 3. Termination. The Executive's employment with the Company during the Agreement Term may be terminated by the Company or the Executive without any breach of this Agreement only under the circumstances described in paragraphs 3(a) through 3(f): (a) Death. The Executive's employment hereunder will terminate upon his death. (b) Disability. The Company may terminate the Executive's employment during any period in which he is Permanently Disabled. The Executive shall be considered "Permanently Disabled" during any period in which (i) he has a physical or mental disability which renders him incapable, after reasonable accommodation, of performing his duties under this Agreement; and (ii) such disability is determined by the Board to be of a long-term nature. In the event of a dispute as to whether the Executive is Permanently Disabled, the Company may refer the same to a mutually acceptable licensed practicing physician, and the Executive agrees to submit to such tests and examination as such physician shall deem appropriate. (c) Cause. The Company may terminate the Executive's employment hereunder at any time for Cause. For purposes of this Agreement, the term "Cause" shall mean: (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's being Disabled) within a reasonable period of time after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties; (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (iii) the engaging by the Executive in egregious misconduct involving serious moral turpitude to the extent that, in the reasonable judgment of the Company's Board, the Executive's credibility and reputation no longer conform to the standard of the Company's executives. For purposes of this Agreement, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was not contrary to the best interest of the Company. (d) Constructive Discharge. If (i) the Company commits a material breach of the Agreement; (ii) the Executive provides written notice to the Company of the occurrence of such material breach, which specifically identifies the manner in which the Executive believes that the breach has occurred; (iii) the Company fails to correct such breach within a reasonable time (not to exceed 10 business days) after such notice is given; and (iv) the Executive resigns within the 60-calendar-day period following the Executive's discovery of such breach, then, for purposes of this paragraph 3(d), the Executive shall be considered to have been dismissed by the Company for reasons other than Cause. For purposes of this paragraph (d), a "material 73 4 breach" of the Agreement shall include (without limitation), in the absence of the Executive's express written consent, the occurrence of either of the following circumstances: (i) The assignment to the Executive of any duties materially inconsistent with the Executive's position as President and Chief Executive Officer, or the removal from the Executive of the authority for any material responsibilities normally attendant to the office of the President and Chief Executive Officer. (ii) The failure of the Executive to be elected as a member of the Board. (e) Termination by Executive. The Executive may terminate his employment hereunder at any time for any reason by giving the Company prior written Notice of Termination (as defined in paragraph 3(g)), which Notice of Termination shall be effective not less than 30 calendar days after it is given to the Company, provided that nothing in this Agreement shall require the Executive to specify a reason for any such termination. However, to the extent that the procedures specified in paragraph 3(d) are required, the procedures of this paragraph 3(e) may not be used in lieu of the procedures required under paragraph 3(d). (f) Termination by Company. The Company may terminate the Executive's employment hereunder at any time for any reason, by giving the Executive prior written Notice of Termination, which Notice of Termination shall be effective immediately, or such later time as is specified in such notice. The Company shall not be required to specify a reason for the termination under this paragraph 3(f), provided that termination of the Executive's employment by the Company shall be deemed to have occurred under this paragraph 3(f) only if it is not for reasons described in paragraph 3(b), 3(c), 3(d) or 3(e). (g) Notice of Termination. Any termination of the Executive's employment by the Company or the Executive (other than a termination pursuant to paragraph 3(a)) must be communicated by a written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a dated notice which indicates the specific termination provision in this Agreement relied on and which sets forth in reasonable detail the facts and circumstances, if any, claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (h) Date of Termination. "Date of Termination" means the last day the Executive is employed by the Company, provided that the Executive's employment is terminated in accordance with the foregoing provisions of this paragraph 3. 4. Rights Upon Termination. The Executive's right to payment and benefits under this Agreement for periods after his Date of Termination shall be determined in accordance with the following provisions of this paragraph 4: (a) General. If the Executive's Date of Termination occurs during the Agreement Term for any reason, the Company shall pay to the Executive: (i) The Executive's Salary for the period ending on the Date of Termination. (ii) Payment for unused vacation days, as determined in accordance with Company policy as in effect from time to time, which amounts shall be paid in accordance with the Company's regular payroll practices. (iii) Payment of any unpaid bonus amount for the 1997 Performance Period in accordance with actual performance for the period (subject to the minimum for the period set forth above), but only if the Date of Termination has occurred on or after December 31, 1997. Amounts paid under this paragraph (iii) shall be paid to the Executive at the time such bonus amounts would otherwise have been paid to the Executive if he had remained in the employ of the Company through the end of the Agreement Term. 74 5 (iv) Any other payments or benefits due to be provided to the Executive pursuant to any employee compensation or benefit plans or arrangements (as the terms of those compensation or benefit plans or arrangements may be modified by paragraph 2 of this Agreement), to the extent such payments and benefits are earned as of the Date of Termination. Except as may otherwise be expressly provided to the contrary in this Agreement, nothing in this Agreement shall be construed as requiring the Executive to be treated as employed by the Company for purposes of any employee benefit plan or arrangement following the date of the Executive's Date of Termination. (b) Resignation and Termination for Cause. If the Executive's Date of Termination occurs during the Agreement Term under circumstances described in paragraph 3(c) (relating to the Executive's termination for Cause) or paragraph 3(e) (relating to the Executive's resignation), then, in addition to the amounts payable in accordance with paragraph 4(a): (i) All unexercised stock options granted to the Executive prior to the Date of Termination and which are exercisable immediately prior to the Date of Termination shall continue to be exercisable by the Executive for a period of 90 days after the Date of Termination. (ii) The Executive shall receive a cash payment from the Company equal to the Fair Market Value of the vested Share Units credited to his Stock Account as of the Date of Termination. (c) Death. If the Executive's Date of Termination occurs during the Agreement Term because of the Executive's death, then, in addition to the amounts payable in accordance with paragraph 4(a): (i) The Executive's estate shall receive from the Company, for the period continuing through the end of the Agreement Term, the Salary amount described in paragraph 2(a), as in effect on his Date of Termination, in monthly or more frequent installments in accordance with the Company's regular payroll practices. (ii) The Executive's estate shall receive from the Company a payment (or payments) in lieu of bonus (or bonuses). If the Date of Termination occurs during the 1997 Performance Period, the Executive's estate shall be entitled to a payment based on actual performance for that performance period (provided that such amount shall be not less than $450,000), and the Executive's estate shall be entitled to a payment for the 1998 Performance Period in an amount determined by the Board, provided that such amount shall be not less than $450,000. If the Date of Termination occurs during the 1998 Performance Period, the Executive's estate shall be entitled to a payment based on actual performance for that performance period. Amounts payable under this paragraph (ii) shall be paid at the time such bonus amounts would otherwise have been paid to the Executive if he had remained in the employ of the Company through the end of the Agreement Term. (iii) All unexercised stock options granted to the Executive prior to the Executive's death (regardless of whether they are exercisable prior to the Date of Termination) shall be exercisable by the Executive's estate, heirs and assigns for a period expiring on the third anniversary of the Date of Termination. (iv) The Executive's estate shall receive a cash payment from the Company equal to the Fair Market Value of the Share Units credited to his Stock Account as of the Date of Termination (regardless of whether such Share Units are vested prior to the Date of Termination). By writing filed with the Company in accordance with the procedures established by it, the Executive may designate one or more beneficiaries to receive the benefits which would otherwise be provided to the Executive's estate under this paragraph (c). (d) Disability. If the Executive's Date of Termination occurs during the Agreement Term under circumstances described in paragraph 3(b) (relating to the Executive's being Disabled), then, in addition to the amounts payable in accordance with paragraph 4(a): 75 6 (i) The Executive shall receive from the Company for the period continuing through the end of the Agreement Term (regardless of whether the Executive continues to be Disabled through the end of the Agreement Term), the Salary amount described in paragraph 2(a), as in effect on his Date of Termination, in monthly or more frequent installments in accordance with the Company's regular payroll practices. (ii) The Executive shall receive from the Company a payment (or payments) in lieu of the bonus (or bonuses). If the Date of Termination occurs during the 1997 Performance Period, the Executive shall be entitled to a payment based on actual performance for that performance period (provided that such amount shall be not less than $450,000), and the Executive shall be entitled to a payment for the 1998 Performance Period in an amount determined by the Board, provided that such amount shall be not less than $450,000. If the Date of Termination occurs during the 1998 Performance Period, the Executive shall be entitled to a payment based on actual performance for that performance period. Amounts payable under this paragraph (ii) shall be paid at the time such bonus amounts would otherwise have been paid to the Executive if he had remained in the employ of the Company through the end of the Agreement Term. (iii) All unexercised stock options granted to the Executive prior to the Date of Termination (regardless of whether they are exercisable prior to the Date of Termination) shall be exercisable by the Executive for a period expiring on the third anniversary of the Date of Termination. (iv) The Executive shall receive a cash payment from the Company equal to the Fair Market Value of the Share Units credited to his Stock Account as of the Date of Termination (regardless of whether such Share Units are vested prior to the Date of Termination). (v) If the Executive continues to be Disabled through the end of the Agreement Term, then, for the period after the end of the Agreement Term, the Executive shall be entitled to receive disability income replacement coverage to the extent provided under the disability policy applicable to other senior management employees of the Company. During any period while the Executive is Disabled, and is otherwise entitled to receive Salary (or Salary replacement) payments under this Agreement, any Salary payments otherwise due to the Executive shall be reduced by the amount of any benefits paid for the same period of time under such disability income replacement coverage. (e) Discharge without Cause. If the Executive's Date of Termination occurs during the Agreement Term under circumstances described in paragraph 3(d) (relating to constructive discharge) or paragraph 3(f) (relating to termination by the Company without Cause), then, in addition to the amounts payable in accordance with paragraph 4(a): (i) The Executive shall receive from the Company, for the period continuing through the end of the Agreement Term, the Salary amount described in paragraph 2(a), as in effect on his Date of Termination, in monthly or more frequent installments in accordance with the Company's regular payroll practices. (ii) The Executive shall receive from the Company a payment (or payments) in lieu of the bonus (or bonuses), which payment shall be based on actual performance for the performance period (but shall not be less than the rate of $450,000 for each of the performance periods). However, if the Executive is entitled to payment for the 1997 Performance Period in accordance with paragraph 4(a)(iii) because the Date of Termination occurs on or after December 31, 1997, no payment shall be made for the 1997 Performance Period under this paragraph (ii). Amounts payable under this paragraph (ii) shall be paid at the time the bonus amounts would otherwise have been paid to the Executive if he had remained in the employ of the Company through the end of the Agreement Term. (iii) All unexercised stock options granted to the Executive prior to the Date of Termination (regardless of whether they are exercisable prior to the Date of Termination) shall be exercisable by the Executive for a period expiring on the third anniversary of the Date of Termination. 76 7 (iv) The Executive shall receive a cash payment from the Company equal to the Fair Market Value of the Share Units credited to his Stock Account as of the Date of Termination (regardless of whether such Share Units are vested prior to the Date of Termination). (f) Other Severance Benefits. Except as may be otherwise specifically provided by an amendment of this paragraph (f) adopted in accordance with paragraph 10, payments under this paragraph 4 shall be in lieu of any benefits that may be otherwise payable to or on behalf of the Executive pursuant to the terms of any severance pay arrangement of the Company or any Subsidiary or any other, similar arrangement of the Company or any Subsidiary providing benefits upon involuntary termination of employment. 5. Duties on Termination. Subject to the terms and conditions of this Agreement, during the period beginning on the date of delivery of a Notice of Termination, and ending on the Date of Termination, the Executive shall continue to perform his duties as set forth in this Agreement, and shall also perform such services for the Company as are necessary and appropriate for a smooth transition to the Executive's successor. Notwithstanding the foregoing provisions of this paragraph 5, the Company may suspend the Executive from performing his duties under this Agreement following the delivery of a Notice of Termination providing for the Executive's resignation, or delivery by the Company of a Notice of Termination providing for the Executive's termination of employment for any reason; provided, however, that during the period of suspension (which shall end on the Date of Termination), the Executive shall continue to be treated as employed by the Company for other purposes, and his rights to compensation or benefits shall not be reduced by reason of the suspension. 6. Mitigation and Set-Off. The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of his employment with the Company, or any amounts which might have been earned by the Executive in other employment had he sought such other employment. 7. Noncompetition and Confidentiality. Except as otherwise provided in this Agreement, the Executive shall be subject to such restrictions on competition, interference with the business of the Company and its Subsidiaries, and on the use, disclosure and retention of trade secrets and confidential information as are applicable to other senior management employees of the Company. 8. Assistance with Claims. The Executive agrees that, for the period beginning the Effective Date, and continuing for a reasonable period after the Executive's termination of employment with the Company, the Executive will assist the Company in defense of any claims that may be made against the Company, and will assist the Company in the prosecution of any claims that may be made by the Company, to the extent that such claims may relate to services performed by the Executive for the Company. The Executive agrees to promptly inform the Company if he becomes aware of any lawsuits involving such claims that may be filed against the Company. The Company agrees to reimburse the Executive for all of the Executive's reasonable out-of-pocket expenses associated with such assistance, including travel expenses. For periods after the Executive's employment with the Company terminates, the Company agrees to provide reasonable compensation to the Executive for such assistance. The Executive also agrees to promptly inform the Company if he is asked to assist in any investigation of the Company (or its actions) that may relate to services performed by the Executive for the Company, regardless of whether a lawsuit has then been filed against the Company with respect to such investigation. 9. Nonalienation. The interests of the Executive under this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Executive or the Executive's beneficiary. 77 8 10. Amendment. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 11. Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois, without regard to the conflict of law provisions of any state. All disputes shall be litigated in Chicago, Illinois. 12. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified). 13. Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party or any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues. 14. Successors. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business. 15. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice). Such notices, demands, claims and other communications shall be deemed given: (a) in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; (b) in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail; or (c) in the case of facsimile, the date upon which the transmitting party received confirmation of receipt by facsimile, telephone or otherwise; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received. Communications that are to be delivered by the U.S. mail or by overnight service are to be delivered to the addresses set forth below: to the Company: Zenith Electronics Corporation 1000 Milwaukee Avenue Glenview, IL 60025 or to the Executive: Peter S. Willmott Zenith Electronics Corporation 1000 Milwaukee Avenue 78 9 Glenview, IL 60025 All notices to the Company shall be directed to the attention of Chairman of the Board of Directors of the Company, with a copy to the General Counsel of the Company. Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. 16. Costs of Enforcement. The following provisions of this paragraph 16 shall apply if it becomes necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in connection with either enforcing any and all of his rights under this Agreement or defending against any allegations of breach of this Agreement by the Company: (a) The Executive shall be entitled to recover from the Company reasonable attorneys' fees, costs and expenses incurred by him in connection with such enforcement or defense. (b) Payments required under this paragraph 16 shall be made by the Company to the Executive (or directly to the Executive's attorney) at the time the attorneys' fees, costs, and expenses are incurred by the Executive. (c) The Executive shall be entitled to select his legal counsel; provided, however, that such right of selection shall not affect the requirement that any costs and expenses reimbursable under this paragraph 16 be reasonable. (d) The Executive's rights to payments under this paragraph 16 shall not be affected by the final outcome of any dispute with the Company; provided, however, that to the extent that the court shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust, the Executive shall not be entitled to such recovery; and to the extent that such amount have been recovered by the Executive previously, the Executive shall repay such amounts to the Company. 17. Survival of Agreement. Except as otherwise expressly provided in this Agreement, the rights and obligations of the parties to this Agreement shall survive the termination of the Executive's employment with the Company. 18. Entire Agreement. Except as otherwise provided herein, this Agreement (including the Exhibits attached hereto) constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof. IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Company has caused these presents to be executed in its name and on its behalf, and its corporate seal to be hereunto affixed, all as of the day and year first above written. /s/ Peter S. Willmott ------------------------------- PETER S. WILLMOTT Zenith Electronics Corporation By /s/ Richard F. Vitkus ------------------------------- Richard F. Vitkus Senior Vice President ATTEST: 79 10 /s/ Wayne M. Koprowski Wayne M. Koprowski Assistant Secretary (SEAL) 80 11 EXHIBIT 1 SHARE UNIT AWARDS Under paragraph 2(c) of the employment agreement (the "Agreement") between Zenith Electronics Corporation (the "Company") and Peter S. Willmott (the "Executive"), the Executive is entitled to receive a cash payment based on 150,000 shares of common stock of the Company ("Company Stock"). Except as otherwise expressly provided in the Agreement, this Exhibit 1 sets forth the terms and conditions of such award. (a) A "Stock Account" shall be established by the Company in the name of the Executive, which will reflect an unfunded obligation of the Company to pay cash to the Executive, as determined in accordance with this Exhibit 1. (b) As of the Effective Date, 150,000 Share Units shall be allocated to the Executive's Stock Account. (c) As of the record date for the payment of any dividend with respect to Company Stock which record date occurs on or after the Effective Date and on or before the Date of Termination, the Executive's Stock Account will be credited with additional Share Units equal to (i) the amount of the dividends or other distribution that would have been paid with respect to the number of shares of Company Stock equal to the number of Share Units credited to the Stock Account as of the dividend record date; divided by (ii) the Fair Market Value of a share of Company Stock on the day such dividend is payable. (d) Except as otherwise provided in the Agreement, the Executive's right to Share Units allocated to his Stock Account shall become vested in accordance with the following: (i) The Executive shall be vested in 25% of the Share Units as of December 31, 1997, if the Executive is then employed by the Company. (ii) The Executive shall be vested in 25% of the Share Units as of December 29, 1998, if the Executive is then employed by the Company. (iii) The Executive shall be vested in 25% of the Share Units in proportion to the achievement of performance goals for the 1997 Performance Period and 25% of the Share Units in proportion to the achievement of the performance goals for the 1998 Performance Period. (e) If the Executive remains in the employ of the Company through the end of the Agreement Term (i.e., through December 29, 1998), or is otherwise entitled to such cash payments under the Agreement, he shall receive a cash payment from the Company equal to the Fair Market Value of the vested Share Units credited to his Stock Account as of his Date of Termination. (f) The cash to be paid to the Executive with respect to Share Units credited to his Stock Account following his Date of Termination shall be distributed within 20 days after such Date of Termination, provided that no such payment shall be made prior to the Executive's Date of Termination. (g) In the event of recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or other change in the corporate structure or shares of the Company, the Share Units and the right to shares of Company Stock shall be adjusted to the same extent such adjustment would be made with respect to shares awarded under the 1987 Zenith Stock Incentive Plan (the "Stock Incentive Plan"). (h) The Company shall use a procedure to grant the Share Units under this Exhibit 1 so that, to the extent that the grant is a "purchase" for purposes of Section 16(b) of the Securities Exchange Act of 1934, the grant will be exempt from Section 16(b) by reason of SEC Rule 16b-3 (or other SEC rules). 81 12 (i) For purposes of this Agreement: (i) The "Fair Market Value" of a Share Unit as of any date shall be the Fair Market Value of a share of Company Stock on that date. (ii) The "Fair Market Value" of a share of Company Stock as of any date shall be determined on the same manner as is used to determine such fair market value in establishing the minimum option exercise price for a stock option under the Stock Incentive Plan. (iii) For purposes of determining the amount of cash to be distributed to the Executive with respect to Share Units credited to his Stock Account as of his Date of Termination, the "Fair Market Value" of a Share Unit shall be determined as of the Date of Termination. 82 13 EXHIBIT 2 STOCK OPTION AWARDS Under paragraph 2(d) of the employment agreement (the "Agreement") between Zenith Electronics Corporation (the "Company") and Peter S. Willmott (the "Executive"), the Executive is entitled to receive the award of options to purchase 150,000 shares of common stock of the Company ("Company Stock"). Except as otherwise expressly provided in the Agreement, this Exhibit 2 sets forth the terms and conditions of such options. (a) As of the Effective Date, the Executive shall be granted an option to purchase 100,000 shares of Company stock. As of January 1, 1998 if the Executive is then employed by the Company, the Executive shall be granted an option to purchase an additional 50,000 shares of Company stock. The option exercise price per share of Company Stock under each option shall equal the fair market value of a share of Company Stock on the date the option is granted. (b) The option granted as of the Effective Date shall first become exercisable with respect to 50% of the shares covered thereby as of January 1, 1998, if the Executive is then employed by the Company. The option granted as of the Effective Date shall first become exercisable with respect to the remaining 50% of the shares covered thereby as of December 29, 1998, if the Executive is then employed by the Company. The option granted as of January 1, 1998 shall first become exercisable with respect to 100% of the shares covered thereby as of December 29, 1998, if the Executive is then employed by the Company. (c) If the Executive continues to be employed by the Company through the last day of the Agreement Term, all unexercised stock options then held by the Executive shall be exercisable by the Executive (or his executor or assigns) through the third anniversary of the last day of the Agreement Term. (d) If the Executive dies after the Date of Termination, but before the expiration of the period during which options are exercisable by the Executive under the Agreement (including this Exhibit 2), such options shall continue to be exercisable until such expiration of the period by the Executive's estate (or his executor or assigns or, if applicable, the beneficiary designated by the Executive). (e) The options granted under this Exhibit 2 shall not be incentive stock options. (f) The options granted under this Exhibit 2 will provide that after the option has been granted, and prior to its exercise, the options may be transferred by the Executive, for no consideration, to or for the benefit of the Executive's Immediate Family (including, without limitation, to a trust for the benefit of the Executive's Immediate Family or to a partnership for members of a Executive's Immediate Family), subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to the options prior to such transfer. The Executive's "Immediate Family" shall mean the Executive's spouse, children, stepchildren, adoptive relationships, sisters, brothers and grandchildren (and, for this purpose, shall also include the Executive). (g) The Company shall use a procedure to grant the options under this Exhibit 2 so that, to the extent that the grant is a "purchase" for purposes of Section 16(b) of the Securities Exchange Act of 1934, the grant will be exempt from Section 16(b) by reason of SEC Rule 16b-3 (or other SEC rules). (h) The options awarded under this Exhibit 2 shall be granted under and subject to the terms and conditions of the 1987 Zenith Stock Incentive Plan. 83 14 ZENITH ELECTRONICS CORPORATION EMPLOYEE SHARE UNIT AGREEMENT THIS AGREEMENT, entered into as of January 1, 1997 (the "Agreement Date"), by and between PETER S. WILLMOTT (the "Executive"), and Zenith Electronics Corporation, a Delaware corporation (the "Company"); WITNESSETH THAT: WHEREAS, pursuant to the terms of Exhibit 1 of the employment agreement between the Executive and the Company dated January 1, 1997 (the "Employment Agreement"), the Company is to establish a stock account in the name of the Executive, which will reflect an unfunded obligation of the Company to pay cash to the Executive, based on the value of units representing shares of Company stock allocated to the Stock Account, and the rights provided by this Agreement are in settlement of that obligation; NOW, THEREFORE, IT IS AGREED, by and between the Company and the Executive, as follows: 1. Establishment of Stock Account. As of the Effective Date, the Company shall establish a Stock Account, which shall be used to record the number of Share Units allocated for the benefit of the Executive. 2. Adjustments to Stock Account. The Stock Account shall be adjusted in accordance with the following: (a) As of the Effective Date, 150,000 Share Units shall be allocated to the Stock Account for the benefit of the Executive, which 150,000 Share Units shall be the opening account balance of the Stock Account. (b) As of the record date for the payment of any dividend with respect to common stock of the Company ("Stock"), which record date occurs on or after the Effective Date, and on or before the Date of Termination, the Stock Account will be credited with additional Share Units equal to (i) the amount of the dividends or other distributions that would have been paid with respect to the number of shares of Stock equal to the number of Share Units credited to the Stock Account as of the dividend record date; divided by (ii) the Fair Market Value of a share of Stock on the day such dividend is payable. For purposes of this Agreement, the term "Date of Termination" shall be defined as set forth in the Employment Agreement. (c) Immediately after distribution of the Value of the vested portion of the Stock Account in accordance with paragraph 6, the number of Share Units allocated to the Stock Account shall be reduced to zero, and the Stock Account shall be cancelled. 3. Adjustment to Share Units. 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 with respect to Stock, or any distribution to holders of Stock which would not otherwise result in a corresponding adjustment to the number of Share Units allocated to the Stock Account in accordance with paragraph 2, the Share Units allocated to the Stock Account shall be adjusted by the committee (the "Committee") which administers the 1987 Zenith Stock Incentive Plan (the "Plan") to the same extent such adjustment would be made with respect to shares awarded under the Plan. 4. Statement of Stock Account. As soon as practicable after the end of calendar year 1997 and calendar year 1998, the Company shall provide the Executive with a statement of the transactions in his Stock Account during that year and the number of Share Units allocated to his Stock Account as of the end of the year. 5. Vesting. The Executive shall be vested in the Share Units allocated to the Stock Account as of his Date of Termination in accordance with the following: 84 15 (a) The Executive shall be vested 25% of the Share Units allocated to the Stock Account as of his Date of Termination, if the Executive's Date of Termination has not occurred before December 31, 1997. (b) The Executive shall be vested in an additional 25% of the Share Units allocated to the Stock Account as of his Date of Termination, if the Executive's Date of Termination has not occurred before December 29, 1998. (c) The Executive shall be vested in 25% of the Share Units allocated to the Stock Account as of his Date of Termination, in proportion to the achievement of performance goals for the 1997 Performance Period, and shall be vested in the remaining 25% of the Share Units allocated to the Stock Account as of his Date of Termination, in proportion to the achievement of the performance goals for the 1998 Performance Period, as those Performance Periods and performance goals are established in accordance with the Employment Agreement. (d) Notwithstanding the foregoing provisions of this paragraph 5, the Executive shall become vested in 100% of the Share Units allocated to his Stock Account as of his Date of Termination (which vesting shall be deemed to occur prior to the determination and distribution of the Value of his Stock Account in accordance with paragraph 6), if the Executive's Date of Termination occurs prior to December 29, 1998 under circumstances described in paragraph 3(b) of the Employment Agreement (relating to the Executive's being Disabled), under circumstances described in paragraph 3(d) of the Employment Agreement (relating to constructive discharge), or under circumstances described in paragraph 3(f) of the Employment Agreement (relating to termination by the Company without Cause), or the Date of Termination occurs prior to December 29, 1998 by reason of his death. 6. Distribution. On, or within 20 days after, the Executive's Date of Termination, but in no event prior to the Date of Termination, the Executive shall receive a cash payment from the Company equal to the Value of the vested portion of the Stock Account, determined as of the Date of Termination, and based on the vesting provisions set forth in paragraph 5. The "Value" of the Stock Account as of the Date of Termination shall equal the product of: (a) number of Share Units (including fractional Share Units) allocated to the Stock Account as of that date; multiplied by (b) the Fair Market Value of a share of Stock. The Value of the vested portion of the Stock Account shall be equal to the Value of the Stock Account, but proportionately reduced to reflect the portion of the Share Units allocated to the Stock Account that is not vested on the Date of Termination. As used in this Agreement, the "Fair Market Value" of a share of Stock shall mean the closing transaction price of a share of 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 the 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. 7. Withholding. All amounts payable under this Agreement shall be subject to withholding of all applicable taxes, and the Executive shall also be responsible for payment of any withholding taxes which become due with respect to such payment prior to the date such payment occurs. 8. Heirs. Any amounts payable to the Executive under this Agreement that are not paid at the time of the Executive's death shall be paid at the time and in the form determined in accordance with the provisions of this Agreement, to the beneficiary designated by the Executive in writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Executive fails to designate a beneficiary, or if the designated beneficiary of the deceased Executive dies before the Executive or before complete payment of the amounts distributable under this Agreement, the Committee shall direct that benefits to be paid under this Agreement be paid to the legal representative or representatives of the estate of the last to die of the Executive and his beneficiary. 85 16 9. Transferability. The interests of the Executive under this Agreement 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, other than by will or the laws of descent and distribution. 10. Limitation of Implied Rights. Neither the Executive nor any other person shall, by reason of the establishment of the Stock Account, or by reason of the allocation of Share Units to that account, acquire any right in or title to any assets, funds or property of the Company whatsoever prior to the date of distribution with respect to the Stock Account. The Executive shall have only a contractual right to the cash distributable under this Agreement, unsecured by any assets of the Company. Nothing contained in this Agreement shall constitute a guarantee by the Company that the assets of the Company shall be sufficient to provide any benefits specified under this Agreement. 11. Share Units Confer No Rights as Stockholder. The Executive shall not be considered a stockholder of the Company by reason of the allocation of Share Units to the Stock Account, and shall not be entitled to any privileges of Stock ownership with respect to Share Units. 12. 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. 13. 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 Executive, acquire any rights hereunder in accordance with this Agreement. 14. Governing Law. This Agreement and all determinations made and actions taken pursuant hereto, 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. 15. Amendment. This Agreement may be amended by written Agreement of the Executive and the Company, without the consent of any other person. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Agreement Date. ZENITH ELECTRONICS CORPORATION By /s/ Richard F. Vitkus -------------------------------- Richard F. Vitkus Senior Vice President /s/ Peter S. Willmott - ------------------------- PETER S. WILLMOTT Attest: /s/ Wayne M. Koprowski - ------------------------- Wayne M. Koprowski Assistant Secretary 86 17 ZENITH ELECTRONICS CORPORATION EMPLOYEE STOCK OPTION AGREEMENT THIS AGREEMENT, entered into as of January 1, 1997 (the "Agreement Date"), by and between PETER S. WILLMOTT (the "Executive"), and Zenith Electronics Corporation, a Delaware corporation (the "Company"); WITNESSETH THAT: WHEREAS, the Company maintains the 1987 Zenith Stock Incentive Plan (the "Plan"), which is incorporated into and forms a part of this Agreement; and WHEREAS, pursuant to the terms of paragraph (a) of Exhibit 2 of the employment agreement between the Executive and the Company dated January 1, 1997 (the "Employment Agreement"), the Executive is entitled to receive an option to purchase 100,000 shares of common stock of the Company, par value $1.00 ("Stock"), and the option award reflected by this Agreement, which is made under the Plan, is in settlement of that obligation (which award is in addition to the grant of an option to purchase 50,000 shares of Stock, to be made to the Executive as of January 1, 1998, subject to the terms of the Employment Agreement); NOW, THEREFORE, IT IS AGREED, by and between the Company and the Executive, as follows: 1. Award and Purchase Price. Subject to the terms of this Agreement and the Plan, the Executive is hereby granted an option to purchase a total of 100,000 shares of Stock (the "Option"). The price of each share of Stock subject to the Option shall be $10.875. The Option is not intended to constitute an "incentive stock option" as that term is used in Code section 422. 2. Exercise Date. The Option shall become exercisable with respect to 50,000 shares of Stock as of January 1, 1998, if the Executive's Date of Termination has not occurred before that date; and the Option shall become exercisable with respect to the remaining 50,000 shares of Stock as of December 29, 1998, if the Executive's Date of Termination has not occurred before that date. The Option shall become fully exercisable on the Executive's Date of Termination (regardless of the extent to which is was exercisable immediately prior to the Date of Termination), if the Executive's Date of Termination occurs prior to December 29, 1998 under circumstances described in paragraph 3(b) of the Employment Agreement (relating to the Executive's being Disabled), under circumstances described in paragraph 3(d) of the Employment Agreement (relating to constructive discharge), or under circumstances described in paragraph 3(f) of the Employment Agreement (relating to termination by the Company without Cause), or the Executive's Date of Termination occurs prior to December 29, 1998 by reason of his death. For purposes of this Agreement, the term "Date of Termination" shall be defined as set forth in the Employment Agreement. 3. Expiration Date. The Option shall expire on, and shall not be exercisable after, the "Expiration Date" determined in accordance with the following: (a) If the Executive's Date of Termination occurs on or after December 29, 1998, the Expiration Date shall be December 29, 2000. 87 18 (b) If the Executive's Date of Termination occurs prior to December 29, 1998 under circumstances described in paragraph 3(b) of the Employment Agreement (relating to the Executive's being Disabled), under circumstances described in paragraph 3(d) of the Employment Agreement (relating to constructive discharge), or under circumstances described in paragraph 3(f) of the Employment Agreement (relating to termination by the Company without Cause), or if the Executive's Date of Termination occurs prior to December 29, 1998 by reason of his death, the Expiration Date shall be the three-year anniversary of his Date of Termination. (c) If the Executive's Date of Termination occurs prior to December 29, 1998 under circumstances described in paragraph 3(c) of the Employment Agreement (relating to the Executive's termination for Cause) or paragraph 3(e) of the Employment Agreement (relating to the Executive's resignation), the Expiration Date shall be the 90-day anniversary of the Date of Termination. In no event, however, shall the Expiration Date be later than the ten-year anniversary of the Agreement Date. No portion of the Option shall be exercisable after the Executive's Date of Termination except to the extent that it is exercisable on the Executive's Date of Termination; provided, however, that, subject to the limitations in paragraphs (a), (b) and (c), next above, the Option shall remain exercisable after the Executive's Date of Termination to the extent that it becomes exercisable on the Executive's Date of Termination in accordance with the provisions of paragraph 2 of this Agreement. 4. Method of Exercise. Any portion of the Option that is exercisable may be exercised in whole or in part in accordance with the following: (a) The Option may be exercised by filing a written notice with the Treasurer of the Company, provided that the notice is filed on or before the date the Option expires. The exercise notice shall specify the number of whole shares of Stock to be purchased, and shall 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 Executive has held for at least six months prior to the delivery of such shares or which the Executive purchased on the open market, and in each case for which the Executive 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 Executive has submitted an irrevocable notice of exercise or (iv) a combination of (i) and (ii). The Executive shall execute such documents in connection with the Option exercise as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) and (iv) and, to the extent that the Executive 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 Executive. No certificate representing a share of Stock shall be delivered until the full purchase price therefor has been paid. (b) 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 paragraph 5. (c) As used in this Agreement, the "Fair Market Value" of a share of Stock shall mean the closing transaction price of a share of 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 the 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. 88 19 5. Withholding. (a) As a condition precedent to the delivery of Stock upon exercise of the Option, the Executive 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 Executive 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 Executive. (b) The Executive may elect to satisfy his obligation to advance the Required Tax Payments (which, for purposes of this paragraph (b), shall include such increased amount as the Company may be required to withhold by reason of an election by the Executive) 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 Executive has held for at least six months prior to the delivery of such shares or which the Executive purchased on the open market and in each case for which the Executive has good title, free and clear of all liens and encumbrances) having a Fair 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 Executive 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, to the extent that the Executive 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. 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 Executive. 6. Heirs. Subject to the terms of the Plan, any benefits to be provided to the Executive under this Agreement that have not been provided at the time of the Executive's death shall be provided at the time and in the form determined in accordance with the provisions of this Agreement, to the beneficiary designated by the Executive in writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Executive fails to designate a beneficiary, or if the designated beneficiary of the deceased Executive dies before the Executive or before complete provision of the benefits under this Agreement, the Committee shall direct that benefits to be provided under this Agreement be provided to the legal representative or representatives of the estate of the last to die of the Executive and his beneficiary. 7. 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 with respect to Stock, 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 Executive, 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. 8. Transferability. (a) Except to the extent otherwise provided in paragraph (b) next below, 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, other than by will or the 89 20 laws of descent and distribution. During the Executive's lifetime, the Option shall be exercisable only by the Executive. (b) Notwithstanding the foregoing provisions of this paragraph 8, the Option may be transferred by the Executive for no consideration to or for the benefit of the Executive's Immediate Family (including, without limitation, to a trust for the benefit of an Executive's Immediate Family or to a partnership for members of an Executive's Immediate Family), subject to such limits and exceptions as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to the Option prior to such transfer. The foregoing right to transfer the Option shall also apply to the right to consent to amendments to the Option agreement. The Executive's "Immediate Family" shall mean the Executive's spouse, children, stepchildren, adoptive relationships, sisters, brothers and grandchildren (and, for this purpose, shall also include the Executive). 9. Definitions. Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in this Agreement. 10. Notices. All notices, request 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 the Executive, to the Executive'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 Executive. 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 transaction 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. 11. Option Confers No Rights as Stockholder. The Executive 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 Executive becomes a stockholder of record with respect to such delivered shares; and the Executive shall not be considered a stockholder of the Company with respect to any such shares not so purchased and delivered. 12. Agreement Subject to the Plan. This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Executive hereby acknowledges receipt of a copy of the Plan. 13. 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. 14. 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 Executive, acquire any rights hereunder in accordance with this Agreement or the Plan. 15. 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. 16. Amendment. This Agreement may be amended by written Agreement of the Executive and the Company, without the consent of any other person. 90 21 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the Agreement Date. ZENITH ELECTRONICS CORPORATION By /s/ Richard F. Vitkus --------------------------------- Richard F. Vitkus /s/ Peter S. Willmott - -------------------------- PETER S. WILLMOTT Attest: /s/ Wayne M. Koprowski - -------------------------- Wayne M. Koprowski Assistant Secretary 91 EX-10.(S) 5 EMPLOY. AGR. DATED 1/1/97 BETW. WINKLEMAN & ZENITH 1 EXHIBIT 10s EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of JANUARY 1, 1997, between ZENITH ELECTRONICS CORPORATION, a Delaware corporation (the "Company"), and DENNIS R. WINKLEMAN (the "Executive"). WHEREAS, the Executive currently serves as VICE PRESIDENT of the Company; and WHEREAS, the Company and the Executive desire to enter into this Agreement to provide for the continued employment of the Executive by the Company upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by the Company upon the terms and subject to the conditions contained in this Agreement. The term of employment of the Executive by the Company pursuant to this Agreement (the "Employment Period") shall commence on the date hereof and shall end on December 31, 1999, unless earlier terminated pursuant to Section 4, provided that the Employment Period shall automatically be extended as of January 1, 2000, for one additional year and, if so extended, shall automatically be further extended as of each January 1 thereafter, for additional consecutive one-year periods, unless either the Company or the Executive elects not to extend the Agreement by written notice given to the other party at least 90 days prior to each such period. 2. POSITION AND DUTIES. The Company shall employ the Executive during the Employment Period as its VICE PRESIDENT, HUMAN RESOURCES. The Executive shall perform faithfully and loyally and to the best of his abilities the duties assigned to him hereunder, shall devote his full business time, attention and effort to the affairs of the Company and shall use his reasonable best efforts to promote the interests of the Company. The Executive shall report to such executive officer of the Company as shall be designated from time to time by the Chief Executive Officer of the Company (the "CEO") or the Board of Directors of the Company (the "Board"). Notwithstanding the foregoing, the Executive may engage in charitable, civic or community activities and, with the prior approval of the CEO or the Board, may serve as a director of any business corporation, provided that such activities or service does not interfere with his duties hereunder or violate the terms of any of the covenants contained in Section 10 or 11. 3. COMPENSATION. (a) Base Compensation. As compensation for the services to be provided by the Executive hereunder, the Company shall pay to the Executive during the Employment Period a minimum annual salary of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000.00) (the "Base Salary"), payable in installments in accordance with the Company's normal payment schedule for senior management of the Company. The Executive's salary may be increased or decreased from time to time, provided that the Executive's salary shall not be decreased below the Base Salary specified by this Section 3(a). The Executive's annual salary in effect from time to time under this Section 3(a) is hereinafter called his "Base Compensation." 92 2 (b) Incentive Compensation. In addition to his Base Compensation, the Executive shall be eligible to receive incentive compensation awards for services rendered during the Employment Period, determined in accordance with (i) the Company's annual bonus plan or any other short-term incentive plan adopted by the Company and (ii) the 1987 Zenith Stock Incentive Plan or any other long-term incentive plan adopted by the Company. (c) Supplemental Profit Sharing Benefits. During the Employment Period, the Executive shall be entitled to participate in the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan, as in effect on the date hereof, or in a comparable plan adopted by the Company. (d) Supplemental Long-Term Disability Benefits. During the Employment Period, the Executive shall be eligible for supplemental long-term disability benefits, the current terms of which are described on Schedule I attached hereto. (e) Supplemental Life Insurance Benefits. During the Employment Period, the Executive shall be eligible for supplemental life insurance benefits, the current terms of which are described on Schedule II attached hereto. (f) Other Benefits. In addition to the benefits described in subsections (c), (d) and (e) above, the Executive shall be entitled to participate in all employee benefit plans generally available to those executives who are parties to agreements with the Company which are comparable to this Agreement, including, as of the date of this Agreement, group medical and dental, health and accident, group life insurance, long-term disability, short-term disability, executive insurance, pension, profit sharing and 401(k) plans. The Executive shall be entitled to take time off for vacation or illness in accordance with the Company's policy for senior executives and to receive all other fringe benefits as are from time to time made generally available to senior executives of the Company. The Company may from time to time modify the benefits provided to the Executive, provided that all such modifications are made on the same basis for all executives in positions comparable to that of the Executive. (g) Expense Reimbursement. The Company shall reimburse the Executive for all proper expenses incurred by him in the performance of his duties hereunder in accordance with the Company's policies and procedures. 4. TERMINATION OF EMPLOYMENT PERIOD. The Employment Period shall be terminated upon the first to occur of (i) termination of the employment of the Executive by the Company at any time without Cause (as such term is defined in Section 8) upon written notice given to the Executive at least 30 days prior to such termination, (ii) the election by the Company pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iii) the election by the Executive pursuant to Section 1 not to extend this Agreement in accordance with Section 1, (iv) termination of the employment of the Executive by the Company at any time for Cause or Serious Misconduct upon written notice given to the Executive, (v) termination of the employment of the Executive by the Company on account of the Executive's having become unable (as determined by the Board in good faith) to regularly perform his duties hereunder by reason of illness or incapacity for a period of more than 180 consecutive days, (vi) termination of the employment of the Executive by reason of retirement, (vii) the Executive's death or (viii) termination of employment by the Executive at any time upon written notice given to the Company at least 90 days prior to such termination. The date on which the Employment Period terminates is hereinafter referred to as the "Termination Date." 5. CONSEQUENCES OF TERMINATION OUTSIDE OF A CHANGE IN CONTROL PERIOD. If a Termination Date occurs, other than within a Change in Control Period, as defined in Section 8, the Executive shall be entitled to receive the compensation and benefits specified by this Section 5 in lieu of any severance amounts which otherwise would be payable to the Executive. 93 3 (a) Termination by Company Without Cause. If the Employment Period terminates for a reason set forth in clause (i) of Section 4: (i) the Company shall pay to the Executive (A) all Base Compensation otherwise payable through the Termination Date, (B) vacation pay accrued through the Termination Date and (C) reimbursement of expenses incurred through the Termination Date, in each case to the extent not theretofore paid; (ii) the Company shall pay to the Executive the amount of the target bonus otherwise payable for the year in which the Termination Date occurs, prorated to the Termination Date; (iii) the Company shall pay to the Executive a lump sum cash amount equal to the greater of (A) the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs, multiplied by the number of whole and/or fractional years remaining under the term of the Employment Period (as in effect under Section 1 without regard to the early termination thereof under Section 4) and (B) one and one-half times the sum of the Executive's Base Compensation and target bonus for the year in which the Termination Date occurs; (iv) the Company shall provide the Executive with continued coverage, or substantially equivalent coverage, during the period represented by the amount of the lump sum payment under clause (iii) (i.e., one and one-half years or the remaining term of the Employment Period, as the case may be) under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) unless the Executive becomes covered under similar plans or arrangements maintained by a subsequent employer; provided that if the Company is unable to provide such continued coverage or substantially similar coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such benefits; and (v) the Company shall provide to the Executive outplacement services appropriate for the Executive in accordance with industry standards (the cost of which shall not exceed 15% of the Executive's Base Compensation). (b) Failure of Company to Renew Agreement. If the Employment Period terminates for a reason set forth in clause (ii) of Section 4, in lieu of any severance amounts which otherwise would be payable to the Executive, the Company shall pay to the Executive the amounts or benefits set forth in Sections 5(a)(i), (ii) and (v), plus a lump sum cash amount equal to one and one-half times the sum of his Base Compensation and target bonus for the year in which the Termination Date occurs, and shall provide to the Executive the benefits described in Section 5(a)(iv) for the period of one and one-half years commencing on the Termination Date. (c) Termination for Cause. If the Employment Period terminates for a reason set forth in clause (iv) of Section 4, the Company shall pay to the Executive the amounts set forth in Section 5(a)(i) and the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. (d) Disability, Retirement or Death. If the Employment Period terminates for any reason set forth in clause (v), (vi) or (vii) of Section 4, the Company shall pay to the Executive or his executor, administrator or other legal representative, as the case may be, the amounts set forth in Section 5(a)(i) and the Executive (or his executor, administrator or other legal representative, as the case may be) shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. (e) Failure of Executive to Renew Agreement; Other Voluntary Termination by the Executive. If the Employment Period terminates for any reason set forth in clause (iii) or (viii) of Section 4, (A) the Company shall pay to the Executive the amounts set forth in Section 5(a)(i), (B) the Company may, in its sole discretion, but 94 4 shall have no obligation to, pay to the Executive the amount of the target bonus for the year in which the Termination Date occurs, prorated to the Termination Date, and (C) the Executive shall not be entitled to any severance payments, but shall be entitled to any benefits payable under applicable plans. 6. CONSEQUENCES OF TERMINATION WITHIN CHANGE IN CONTROL PERIOD. (a) Termination Payments and Benefits. If during a Change in Control Period, as defined in Section 8, the Employment Period of the Executive shall terminate other than by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay or provide to the Executive (or his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, as compensation for services rendered to the Company and in lieu of any severance amounts which otherwise would be payable to the Executive, the following amounts: (i) the Company shall pay to the Executive a lump sum cash amount equal to the sum of (A) the Executive's Base Compensation, accrued vacation pay and reimbursable expenses incurred through the Termination Date, in each case to the extent not theretofore paid, (B) the Executive's annual bonus in an amount equal to the annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company for less than 12 full months) bonus payable to the Executive by the Company for the fiscal year in which the Termination Date occurs (determined at the higher of the target or actual level of performance for such year), multiplied by a fraction, the numerator of which is the number of days in the fiscal year in which the termination occurs prior to the Termination Date and the denominator of which is 365 or 366, as applicable, (C) three times the Executive's highest annual rate of Base Compensation during the three full fiscal years prior to the Termination Date, (D) three times the greater of (I) the Executive's highest annual bonus payable during the three full fiscal years prior to the Termination Date and (II) the target bonus payable for the year in which the Termination Date occurs and (E) all accruals under the Zenith Electronics Corporation Supplemental Salaried Profit Sharing Retirement Plan; (ii) for a period of three years commencing on the Termination Date, or until such earlier date on which the Executive becomes covered under similar plans maintained by a subsequent employer, the Company shall continue to provide the Executive and his dependents with coverage, or shall provide substantially equivalent coverage, under all welfare benefit plans or arrangements (including group medical and dental, health and accident, long-term disability, short-term disability, group life insurance and executive insurance programs) with the same level of coverage, upon the same terms and otherwise to the same extent as such plans or arrangements shall have been in effect immediately prior to the Termination Date or, if more favorable to the Executive, as provided generally with respect to other peer executives of the Company. If the Company cannot provide such continued coverage or substantially equivalent coverage, the Company shall pay the Executive a lump sum cash amount equal to the present value of such coverage; and (iii) the Company shall provide outplacement services appropriate for the Executive in accordance with industry standards (which shall not exceed 15% of the Executive's Base Compensation). (b) Nonqualifying Termination Within Change in Control Period. If during a Change in Control Period the Employment Period shall terminate by reason of a Nonqualifying Termination, as defined in Section 8, then the Company shall pay to the Executive (or to his executor, administrator or other legal representative, as the case may be) within 30 days following the Termination Date, a lump sum cash amount equal to the sum of the Executive's Base Compensation payable through the Termination Date, any vacation pay accrued prior to the Termination Date and any reimbursable expenses incurred prior to the Termination Date, in each case to the extent not theretofore paid. 7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to 95 5 the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 7(c), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; 96 6 provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 7(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8. DEFINITIONS. As used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "Cause" means (i) embezzlement, misappropriation of corporate funds or any other act of dishonesty by the Executive, (ii) commission by the Executive of a felony involving moral turpitude, (iii) significant activities of the Executive harmful to the reputation of the Company, (iv) significant violation by the Executive of any statutory or common law duty of loyalty to the Company or (v) a material breach by the Executive of the Executive's duties and responsibilities to the Company, including the refusal to perform or the substantial disregard of such duties, other than as a result of incapacity due to physical or mental illness. (b) "Change in Control" means: (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 Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 25% or more of either (i) then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of 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 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), 97 7 (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 or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 8(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 the date hereof, constitute the Board (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 the date hereof 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 (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. (c) "Change in Control Period" means the period of time beginning on the date on which a Change in Control is consummated and ending on the earlier to occur of (i) 24 months following such Change in Control and (ii) the Executive's death. 98 8 (d) "Good Reason" means, without the Executive's express written consent, the occurrence of any of the following events within a Change in Control Period: (1) any of (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position(s), duties, responsibilities or status with the Company immediately prior to the commencement of such Change in Control Period, (ii) a change in the Executive's reporting responsibilities, titles or offices with the Company as in effect immediately prior to the commencement of such Change in Control Period or (iii) any failure to re-elect the Executive to any position with the Company held by the Executive immediately prior to the commencement of such Change in Control Period; (2) a reduction by the Company in the Executive's rate of Base Compensation as in effect immediately prior to the commencement of such Change in Control Period or as the same may be increased from time to time thereafter or the failure by the Company to increase such rate of Base Compensation each year after the commencement of such Change in Control Period by an amount which at least equals, on a percentage basis, the mean average percentage increase, during the two full fiscal years of the Company immediately preceding the commencement of such Change in Control Period, in the rates of base salary for all officers of the Company elected by the Board; (3) the failure of the Company to pay the Executive a bonus at or greater than the target level in effect in the year in which the Change in Control Period commences, or to continue the Executive's participation in the 1987 Zenith Stock Incentive Plan or any comparable long-term incentive plan; (4) any requirement of the Company that the Executive (i) be based anywhere other than at the facility where the Executive is located immediately prior to the commencement of such Change in Control Period or (ii) travel on Company business to an extent substantially more burdensome than the travel obligations of the Executive immediately prior to the commencement of such Change in Control Period; (5) an election by the Company not to extend the Employment Period in accordance with Section 1; (6) the failure of the Company to (i) continue in effect any employee benefit plan or compensation plan in which the Executive is participating immediately prior to the commencement of such Change in Control Period, unless the Executive is permitted to participate in other plans providing the Executive with substantially comparable benefits, or the taking of any action by the Company which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such plan, (ii) provide the Executive and the Executive's dependents welfare benefits (including, without limitation, group medical and dental, health and accident, long-term disability, short-term disability, group life insurance, and executive insurance programs) in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iii) provide fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies, (iv) provide the Executive with paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive immediately prior to the commencement of such Change in Control Period or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the 99 9 Company and its affiliated companies, or (v) reimburse the Executive promptly for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive immediately prior to the commencement of such Change in Control Period, or if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; or (7) the failure of the Company to obtain the assumption agreement from any successor as contemplated in Section 18(b). For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive; provided, however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason. (e) "Nonqualifying Termination" means a termination of the Employment Period (i) by the Company for Serious Misconduct, (ii) by the Executive as a result of his election pursuant to Section 1 not to extend the Agreement in accordance with Section 1 or by the Executive at any other time for any reason, in either case other than for Good Reason, (iii) as a result of the Executive's death or (iv) by the Company due to the Executive's absence from his duties with the Company on a full-time basis for at least 180 consecutive days as a result of the Executive's incapacity due to physical or mental illness. A termination of the Employment Period for any reason not expressly set forth in the preceding sentence, including, without limitation, the election by the Company not to extend the Agreement pursuant to Section 1, shall not constitute a Nonqualifying Termination. (f) "Serious Misconduct" means (i) embezzlement or misappropriation of corporate funds by the Executive, (ii) commission by the Executive of a felony involving moral turpitude or (iii) a material breach by the Executive of the Executive's duties and responsibilities to the Company as in effect prior to the commencement of the Change in Control Period, including the refusal to perform or the substantial disregard of such duties, 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 such breach. 9. FEDERAL AND STATE WITHHOLDING. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 10. NONCOMPETITION; NONSOLICITATION. (a) The Executive acknowledges that in the course of his employment with the Company pursuant to this Agreement he will become familiar, and during the course of his employment with the Company or any of its subsidiaries prior to the date of this Agreement he has become familiar, with trade secrets and customer lists of, and other confidential information concerning, the Company and its subsidiaries and that his services have been and will be of special, unique and extraordinary value to the Company. (b) The Executive agrees that during the Employment Period and, if the Employment Period terminates for a reason set forth in clause (i) or (ii) of Section 4, for a period of two years thereafter (the "Noncompetition Period"), he shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business being conducted by the Company or any of its subsidiaries as of the termination of the Employment Period in any geographic area in which the Company is then conducting such business. 100 10 (c) The Executive further agrees that during the Noncompetition Period he shall not in any manner, directly or indirectly induce or attempt to induce any employee of the Company or any of its subsidiaries to terminate or abandon his or her employment for any purpose whatsoever. (d) Nothing in this Section 10 shall prohibit the Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than two percent of the outstanding stock of any class of a corporation any equity securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. (e) If, at any time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 11. CONFIDENTIALITY. The Executive shall not, at any time during the Employment Period or thereafter, make use of or disclose, directly or indirectly, any trade secret or other confidential or secret information of the Company or of its subsidiaries or other technical, business, proprietary or financial information of the Company or of its subsidiaries not available to the public generally or to the competitors of the Company or of its subsidiaries ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical available to the general public, other than as a result of any act or omission of the Executive, or (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency. Promptly following the termination of the Employment Period, the Executive shall surrender to the Company all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data relating to any Confidential Information or the business of the Company or of its subsidiaries which he may then possess or have under his control (together with all copies thereof); provided, however, that the Executive may retain copies of such documents as are necessary for the preparation of his federal or state income tax returns. 12. ENFORCEMENT. The parties hereto agree that the Company would be damaged irreparably in the event any provision of Sections 10 or 11 of this Agreement were not performed in accordance with their respective terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). 13. SURVIVAL. Sections 10, 11 and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms hereof, notwithstanding any termination of the Employment Period. 14. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise under this Agreement involving termination of the Executive's employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse the Executive, on a current basis, for all legal fees and expenses, if any, incurred by the Executive in connection with such contest or dispute, together with interest in an amount equal to the prime rate from time to time in effect, as published in The Wall Street Journal under "Money Rates," but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives the Executive's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of any such contest or dispute includes a finding denying, in total, the Executive's claims in such contest or dispute, the Executive shall be required to reimburse the Company, over a period of 12 months from the date of such resolution, for all sums advanced to the Executive pursuant to this Section 14. 101 11 15. NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered, when delivered by courier or overnight express service or five days after having been sent by certified or registered mail, postage prepaid, addressed (a) if to the Executive, to the Executive's address set forth in the records of the Company or, if to the Company, to Richard F. Vitkus, Senior Vice President, Administration and General Counsel, Zenith Electronics Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025 or (b) to such other address as either party may have furnished to the other party in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 16. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 17. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes and preempts any prior understanding, agreements or representations by or between the parties, written or oral, which may have related in any manner to the subject matter hereof other than rights to indemnification, if any, for the benefit of the Executive. 18. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred. (b) The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section 18, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to the Executive (or his executor, administrator or other legal representative, as the case may be), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive's employment were terminated during a Change in Control Period other than by reason of a Nonqualifying Termination. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the Termination Date. (c) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts would be payable to the Executive hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by the Executive to receive such amounts or, if no person is so appointed, to the Executive's estate. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to the principle of conflict of laws. 20. AMENDMENT AND WAIVER. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and the Executive, and no course of conduct or failure or delay in 102 12 enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 21. COUNTERPARTS. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. ZENITH ELECTRONICS CORPORATION By: Peter S. Willmott ---------------------------------- Its: President and CEO ---------------------------------- EXECUTIVE /s/ Dennis R. Winkleman ---------------------------------- DENNIS R. WINKLEMAN 103 13 SCHEDULE I SUPPLEMENTAL LONG-TERM DISABILITY BENEFITS (a) Purpose. The benefits provided by this Schedule shall be in addition to the benefits provided by the long term disability plan maintained by the Company for salaried employees as of the date hereof (the "LTD Plan"), provided, however, that no benefits shall be payable under this Schedule if the Executive does not elect to participate in the LTD Plan. (b) Definitions. As used in this Schedule, the following terms shall have the following respective meanings: (1) "Disability" means the inability of the Executive arising during his employment by the Company to perform the duties pertaining to the employment position held by the Executive with the Company at the inception of such disability, if such inability is due to sickness or injury. If such disability continues for a period of more than 180 days, it shall become a "total long term disability" effective upon the expiration of such 180 days. The terms "disability" and "total long term disability" exclude disability resulting from intentional self-inflicted injuries or sickness. (2) "Maximum monthly salary" of the Executive means the maximum amount of monthly salary specified in the LTD Plan on which the benefit payments under such plan will be calculated and based. (As of the date hereof, benefits under the LTD Plan are 66-2/3% of monthly salary. The maximum monthly salary thereunder is $6,000 and the maximum monthly benefit thereunder is $4,000.) (c) Benefits Payable. The amount of monthly benefits payable by the Company to the Executive during a total long term disability of the Executive shall be 66-2/3% of the amount, if any, by which the actual monthly salary he was receiving immediately prior to the commencement of his disability exceeds his maximum monthly salary as heretofore defined, provided, however, that if such actual monthly salary exceeds $12,500, then the amount of such benefits payable by the Company to the Executive shall be limited to 66-2/3% of the amount by which $12,500 exceeds his maximum monthly salary. (d) Exclusion. No benefits shall be payable under this Schedule if the LTD Plan has been terminated prior to the date of the commencement of the disability. (e) Period of Benefit Payment. Benefits shall be payable by the Company to the Executive upon the commencement of the total long term disability (180 days after inception of the disability) and thereafter as long as both of the following conditions continue to be satisfied: (i) The long term disability continues, and (ii) The Executive is under the care of a physician. Notwithstanding the foregoing, the benefits hereunder shall cease and terminate upon the first of the following to occur: (i) The cessation of the total long term disability. (ii) The death of the Executive. (iii) The failure of the Executive to comply with Subsection (i) of this Schedule. 104 14 (iv) The cessation of the payment of benefits to the Executive under the LTD Plan for any reason not specified above. (f) Reduction or Termination of Benefits. If during the period of total long term disability the Executive becomes employed by any employer (including the Company) in a position other than the employment position held by the Executive with the Company at the inception of such disability or if it is determined that the Executive is medically able to work in another such position, the Company shall then or at any time or times thereafter have the right to reduce the amount of benefits provided hereunder to any lesser amount specified by the Company or discontinue such benefits altogether. (g) Effect of Termination of Long Term Disability Plan. In the event the Executive elects not to participate or elects to terminate his participation in the LTD Plan, then this Schedule shall be of no further force and effect, and the Company shall have no obligation to provide the benefits described herein. In the event the Executive does participate in and does not terminate his participation in the LTD Plan, and the LTD Plan is terminated by the Company subsequent to the commencement of the disability, the Executive shall nevertheless continue to be entitled to the benefits provided hereunder and, in addition, the Company shall be obligated to provide, and the Executive shall be entitled to receive, long term disability benefits in the same amounts and under the same terms and conditions as if the LTD Plan remained in full force and effect. Nothing herein shall prohibit the Company from at any time, or from time to time, establishing a substitute plan or plans for the LTD Plan, in which event: (1) the Company shall be relieved of its obligation to continue payment of benefits under the terminated LTD Plan and shall be obligated to provide benefits under the substituted plan or plans; and (2) "maximum monthly salary" defined in Subsection (b)(2) above shall mean the maximum monthly salary specified in such substitute plan or plans. (h) Determinations. All determinations as to whether a disability or total long term disability exists at any time or has ceased to exist, all determinations as to date of commencement or cessation of such disability or total long term disability and all determinations as to whether the Executive is medically able to work in another position as provided in Subsection (f) shall be made by the Company's Corporate Medical Director (or if at any time no person holds such a position with the Company, then by any physician designated by the Company from time to time), which determination shall be final and binding on the parties hereto regardless of whether such determination is in accord with any medical or other decision made under the LTD Plan. (i) Medical Examinations and Data. The Company at its own expense shall have the right and opportunity to make a medical examination of the person of the Executive in the event of a sickness or injury of the Executive which constitutes or might constitute a disability or a total long term disability as herein defined and as often as the Company may require. Such examination shall be conducted by the Company's Corporate Medical Director or any physician designated by the Company from time to time. The Executive agrees to submit to all such examinations. In addition, the Company shall be entitled to examine and obtain copies of all medical records pertaining to such sickness or injury of any licensed physician, hospital, organization, institution or person and the Executive agrees to furnish the Company with written authorization to examine and obtain copies of such records as often as required by the Company. 105 15 SCHEDULE II SUPPLEMENTAL LIFE INSURANCE BENEFITS (a) Supplemental Life Insurance Benefit. The life insurance benefits provided in this Schedule shall be in addition to any group term life insurance program applying generally to salaried employees. In the event the Executive's employment with the Company is terminated for any reason, other than by death, prior to age fifty-five (55), no benefits shall be paid pursuant to this Schedule. (b) Benefit Amount - Preretirement. If the Executive shall die prior to retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary at the date of death. (c) Benefit Amount - Postretirement. The life insurance benefits provided under this Schedule shall continue for a period of ten (10) years from the date of the Executive's retirement. If the Executive shall die within one year after the date of retirement, the Company shall pay to the beneficiary designated by the Executive in writing (or, if the Executive fails to designate a beneficiary, to the Executive's estate) a lump sum equal to one and one-half (1-1/2) times the Executive's base salary in effect on the date of the Executive's retirement. Thereafter, on each yearly anniversary after commencement of such ten (10) year period, the amount of such life insurance benefit shall be decreased by ten percent (10%) of the amount of such benefit in effect at the commencement of such ten (10) year period. If the Executive is alive on the tenth (10th) anniversary of the commencement of such ten (10) year period, the life insurance benefits provided under this Schedule shall cease and expire and be of no further force and effect and the Company shall have no further obligation hereunder. (d) Purchase of Life Insurance Policy. The Company may, but is not required to, purchase a life insurance policy to fund the life insurance benefits payable to the Executive hereunder. If such an insurance policy is purchased by the Company, such policy shall name the Company as owner and beneficiary and, when purchased, shall remain a general unsecured, unrestricted asset of the Company, and neither the Executive nor any beneficiary of the Executive shall have any rights with respect to, or claim against, such policy. Such policy, if and when purchased by the Company, shall not be deemed to be held under any trust for the benefit of the Executive or any beneficiary of the Executive, nor shall such policy be deemed to be held in trust as collateral security for fulfilling the obligations of the Company hereunder. The benefits provided to the Executive and any beneficiary of the Executive under this Schedule are based upon the general credit of the Company and are otherwise unsecured. In the event the Company shall purchase a life insurance policy as set forth in this Subsection (d), and if a medical examination or examinations of the Executive and/or the furnishing of a health statement signed by the Executive (which statement may include an authorization by the Executive to any licensed physician or any organization, institution, or person that has knowledge of the Executive or his dependents to give such information to the insurer), is requested by the insurer, then the Executive agrees to submit to such examination or examinations or to provide such health statement in whatever form required by the insurer. If the Executive refuses to submit to such examination or examinations or to provide such health statement, then neither the Executive nor any beneficiary of the Executive shall have any right to the life insurance benefits provided under this Schedule and the Company shall have no further obligation hereunder. 106 EX-18 6 LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE 1 EXHIBIT 18 ARTHUR ANDERSON LLP To: Management of Zenith Electronics Corporation Re: Form 10-K Report for the year ended December 31, 1996. Gentlemen: This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent accountants whenever there has been a change in accounting principle or practice. As of January 1, 1996, the Zenith Electronics Corporation (the Company) changed from the LIFO method of accounting for its internally manufactured picture tube inventories to the FIFO method. According to the management of the Company, this change was made because the Company believes that the FIFO method will provide a more appropriate and consistent matching of costs against revenue due to LIFO liquidations which would be anticipated to occur were the Company to continue to account for the tube inventories on a LIFO basis. Management believes such liqudations would occur due to the Company's strategic shift toward selling large screen television sets which occurred in fiscal 1996. A complete coordinated set of financial and reporting standards for determining the preferability of accounting principals among acceptable alternative principles has not been established by the accounting profession. Thus, we cannot make an objective determination of whether the change in accounting described in the preceding paragraph is to a preferable method. However, we have reviewed the pertinent factors, including those related to financial reporting, in this particular case on a subjective basis, and out opinion stated below is based on our determination made in this manner. We are of the opinion that the Company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with you, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgment and business planning of your management. Very truly yours, /s/ Arthur Andersen LLP _________________________ Arthur Andersen LLP Chicago, Illinois February 26, 1997 107 EX-21 7 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 ZENITH ELECTRONICS CORPORATION SUBSIDIARIES State or Other Jurisdiction of Incorporation Cableproductos de Chihuahua, S.A. de C.V. Mexico Electro Partes de Matamoros, S.A. de C.V. Mexico Interocean Advertising Corporation New York Interocean Advertising Corporation of California California Interocean Advertising Corporation of Illinois Illinois 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 Zenith Distributing Corporation of Illinois Illinois Zenith Distributing Corporation of New York New York Zenith Distributing Corporation-West California Zenith Distributing 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 Microcircuits Corporation 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 Zentrans, Inc. Delaware Zenith Finance Corporation Delaware * 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. 108 EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 26, 1997 (except with respect to the matter discussed in Note Two, as to which the date is April 2, 1997), included in this Form 10-K for the year ended December 31, 1996, 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 April 14, 1997 109 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 0 0 214 6 256 475 842 564 765 451 0 0 0 67 95 765 1,288 1,288 1,257 1,257 215 0 15 (178) 0 (178) 0 0 0 (178) (2.73) (2.73)
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