-----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, GET6K2YeNhYp+L0S19L2dvzkbGxcYKU9UKcGxCVvMtZ+oyZqWnebkPfgY5KXnZAZ x1t6rCZNlqGZuyc7A3txYg== 0000950137-98-001392.txt : 19980401 0000950137-98-001392.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950137-98-001392 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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 SEC ACT: SEC FILE NUMBER: 001-04115 FILM NUMBER: 98584103 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 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-4115 ZENITH ELECTRONICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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 18, 1998, WAS $220,564,685. AS OF MARCH 18, 1998, THERE WERE 67,525,447 SHARES OF COMMON STOCK, PAR VALUE $1 PER SHARE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED APRIL 1998 ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. ================================================================================ 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 incurred losses in all but one of the years since 1985. These results reflected the cumulative effect of frequent and significant color TV price reductions during the 1980s and 1990s, and also reflected earlier recessionary conditions in the United States. In addition, the company has invested significant amounts in engineering and research in recent years, which amounts have been expensed as incurred. The company has been developing a broad operational and financial restructuring plan. See the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. In November 1995, a change in control of the company occurred, in which LG Electronics Inc. and LG Semicon Company, Ltd., corporations organized under the laws of the Republic of Korea ("LGE"), purchased shares of the company pursuant to a combined tender offer and purchase of newly issued shares of common stock from the company. As of December 31, 1997, LGE owned 36,569,000 shares of common stock of the company, which represents 55 percent of the outstanding common stock. Raw Materials Many materials, such as copper, plastic, steel, wood, glass, aluminum and zinc, are essential to the business. Adequate sources of supply exist for these materials. Patents The company holds many patents and is licensed under a number of patents which are of importance to its business. The company has patents and patent applications for numerous high definition television and digital TV ("DTV") related inventions. To the extent these inventions are incorporated into the DTV standard adopted by the Federal Communications Commission, the company expects to receive royalties from these patents. In addition, royalties have been and may be received from these patents for non-DTV applications as well. Major manufacturers of TV sets and VCRs agreed during 1992 to take licenses under some of the company's U.S. tuning system patents. Based on 1997 U.S. industry unit sales levels and technology, more than $25 million in annual royalty income is expected through the life of these patents, the last of which expire in 2003. While in the aggregate its patents and licenses are valuable, the business of the company is not materially dependent on them. Seasonal Variations in Business Sales of the company's consumer electronics products are generally at a higher level during the second half of the year. Sales of consumer electronics products typically increase in the fall, as the summer vacation season ends and people spend more time indoors with the new fall programming on TV and during the Christmas holiday season. During each of the last three years, approximately 55 percent of the company's net sales were recorded in the second half of the year and approximately 30 percent of the company's net sales were recorded in the fourth quarter of the year. 2 3 Major Customers Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6 million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1 million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million (11 percent) in 1996. No other customer accounted for 10 percent or more of net sales. Competitive Conditions Competitive factors in North America include price, performance, quality, brand strength and reputation, variety of products and features offered, marketing and sales capabilities, manufacturing costs, and service and support. The company believes it competes well with respect to each of these factors. The company's major product areas, including the color TV market, are highly competitive. The company's major competitors are significantly larger, 100 percent foreign-owned companies, generally with greater worldwide TV volume and overall resources. In efforts to increase market share or achieve higher production volumes, the company's major competitors have aggressively lowered their selling prices in the past several years. Research and Development During 1997 expenditures for company-sponsored research and engineering relating to new products and services and to improvements of existing products and services were $42.9 million. Research and engineering expenditures were $46.7 million in 1996 and $43.5 million in 1995. Environmental Matters Compliance with federal, state and local environmental protection provisions is not expected to have a material effect on capital expenditures, earnings or the competitive position of the company. Further information regarding environmental compliance is set forth under Item 3 of this report. Number of Employees At December 31, 1997, the company employed approximately 11,400 people, of whom approximately 7,800 are hourly workers covered by collective bargaining agreements. At December 31, 1996, the company employed approximately 15,900 people, of whom approximately 11,300 were hourly workers covered by collective bargaining agreements. At December 31, 1997, approximately 3,600 of the company's employees are located in the Chicago, Illinois, area, of whom approximately 2,400 are represented by unions. Approximately 7,500 of the company's employees are located in Mexico, of whom approximately 5,400 are represented by unions. Mexican labor contracts expire every two years and wages are renegotiated annually or more frequently under rapid devaluation or high inflation periods. The company pays competitive salaries, wages and benefits and believes that it has good relations with its employees. Financial Information about Foreign and Domestic Operations and Export Sales Information regarding foreign operations is included in Note Nine to the company's Consolidated Financial Statements. Export sales are less than 10% of consolidated net sales. The company's product lines are dependent on the continuing operations of the company's manufacturing and assembly facilities located in Mexico. 3 4 ITEM 2. PROPERTIES The company utilizes a total of approximately 5.2 million square feet for manufacturing, warehousing, engineering and research, administration and distribution, as described below.
SQUARE FEET LOCATION NATURE OF OPERATION (IN MILLIONS) -------- ------------------- ------------- DOMESTIC: Chicago, Illinois.................... Five locations -- production of color picture 1.9 (including suburban locations) tubes, parts and service; engineering and research, marketing and administration activities; and assembly of electronic components (.4 million square feet is leased by the company) Fort Worth, El Paso, McAllen,........ Nine locations -- warehouses/offices (.8 million .9 Brownsville and Dallas, Texas; square feet is leased by the company) Douglas, Arizona; Huntsville, Alabama; Ontario and San Jose, California FOREIGN: Mexico............................... Four locations (twelve manufacturing and warehouse 2.4 buildings) -- production of plastic and wooden cabinets for color television, sub-assembly production of television chassis, tuners and other components and final assembly of color television and Network Systems products Taiwan............................... One location -- purchasing office -- --- Total 5.2 ===
The company's facilities are suitable and adequate to meet current and anticipated requirements. Mortgages exist on domestic real property as collateral for certain of the company's financing agreements. See the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. ITEM 3. LEGAL PROCEEDINGS The company is involved in various legal actions, environmental matters, and other proceedings relating to a wide range of matters that are incidental to the conduct of its business. The company believes, after reviewing such matters with the company's counsel, that any liability which may ultimately be incurred with respect to these matters is not expected to have a material effect on either the company's consolidated financial position or results of operations. Litigation In May 1997, the company's directors and LGE were named as defendants and the company was named as a nominal defendant in a stockholder derivative suit entitled Fisher v. Zenith Electronics Corporation. The suit alleges breach of fiduciary duties by the directors resulting from the issuance of stock options to LGE to purchase company stock for its support of certain of the company's financing transactions. The suit seeks to void the stock option grants and to recover unspecified damages and attorneys' fees from the directors and LGE. A second derivative suit entitled Lazar v. Zenith Electronics Corporation was also filed in May 1997 alleging identical claims of breach of fiduciary duties by the company's directors and requesting the identical relief as sought in the Fisher case. Both cases were filed in the Court of Chancery, New Castle County, Delaware. Both cases are currently inactive. Lawsuits against major computer and peripheral equipment manufacturers are pending in the U.S. District Court, Eastern District of New York, the U.S. District Court of New Jersey and the New York State 4 5 courts, as well as other federal courts. These lawsuits seek several billion dollars in damages from various defendants for repetitive stress injuries claimed to have been caused by the use of word processor equipment. The company had been named as a defendant in twenty-seven of these cases which relate to keyboards allegedly manufactured or designed by the company for its former subsidiary, Zenith Data Systems Corporation, which the company sold in 1989. Of the twenty-seven cases originally filed, only four remain pending against the company. The company believes it has meritorious defenses to these cases. All the other cases have been dismissed without payment of any damages by the company. In 1994, the company notified its 15 independent distributors of its intent to change to direct-to-retail distribution on a nationwide basis during 1995. A suit arising in connection with this change in distribution was filed in April 1995 by an independent distributor. The lawsuit sought approximately $13 million in damages under the Wisconsin Fair Dealership Law. In January 1996 the court denied the company's motion for summary judgment and granted the plaintiff's motion for summary judgment, finding the company liable. A jury trial on damages was held in May 1996, and the jury awarded the plaintiff $2.37 million. The company has appealed the judgment, contesting both the summary judgment finding of liability and the damages awarded and is awaiting the appellate court's decision. Environmental Litigation The company was sued in 1995 as one of several defendants who, the plaintiffs allege, disposed of waste and, as such, may have contributed to the contamination of an aquifer in Hidalgo County, Texas. The matter, entitled Linn-Faysville Aquifer Preservations Association, et al. V. Republic Waste Industries, Inc., seeks unspecified damages and injunctive relief. The company is currently in settlement negotiations. The company has been named as one of several dozen defendants in a tort suit filed on behalf of several hundred plaintiffs. The suit alleges exposure to various chemicals linked to a former television manufacturing plant in Texas. The case entitled Aaron v. Akzo et al., No. D-0157586, 136(th) Judicial District Court, Jefferson City, Texas, was filed on November 30, 1997. Environmental The company and/or one of its subsidiaries are currently named as Potentially Responsible Parties ("PRP"s) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), as a generator of allegedly hazardous waste disposed of at seven contaminated sites in the United States. These are: the Rocky Flats Industrial Park Superfund Site in Jefferson County, Colorado, the Liquid Dynamics Superfund Site in Chicago, Illinois, the Midwest Solvent Recovery Superfund Sites in Gary, Indiana, the Galaxy/Spectron, Inc. Superfund Site in Elkton, Maryland, the Master Metals Superfund Site in Cleveland, Ohio, the North Penn Area 7 Superfund Site in Lansdale, Pennsylvania and the Boarhead Farms Superfund Site in Bridgeton Township, Pennsylvania. Based on information available to the company at this time, the company believes its share of liability at each of these Sites (other than North Penn & Boarhead) will not be material. At the North Penn and Boarhead sites, no cost estimates are available nor has liability been imposed. In addition to these 7 sites, the company is awaiting the finalization of a Consent Decree that it will enter into with the United States of America regarding the Moyer Landfill matter in Collegeville, Pennsylvania. Under the Consent Decree, the company will resolve its alleged liability for hazardous wastes disposed of at Moyer Landfill for $300,000. Events in 1997 include the following: In a letter dated August 13, 1997, the United States Environmental Protection Agency ("US EPA") gave notice to the Zenco de Chihuahua and, subsequently, Zenith Electronics Corporation of Texas, wholly-owned subsidiaries of the company (the "company") of their alleged liability as PRPs at the Rocky Flats Industrial Park Superfund Site under CERCLA. The US EPA issued an order to perform a "Non-Time Critical Removal" and established the framework for an investigation. The total cost to perform the investigation is currently estimated not to exceed $850,000 of which the company paid $42,500 in 1997 and is obligated to pay an additional $42,500 in 1998. In the event the investigation costs exceed $850,000, the 5 6 company may be required to contribute an additional sum equal to 10% of the such excess costs. No allocation has been established for future response costs. In addition, the liability for US EPA past costs and any remedial work that may be required has not been determined. On September 17, 1997 the US EPA served the company with a General Notice of Potential Liability pursuant to Section 107(a) of CERCLA with regard to the Liquid Dynamics, Inc., Superfund Site in Chicago, Illinois. The US EPA advised PRPs that it would perform a preliminary investigation. No costs have been incurred to date. US EPA advised the PRPs that it believes the entire Liquid Dynamics portion of the investigation will not exceed $200,000. Future US EPA response costs incurred performing the investigation and the cost of any remedial work have not yet been determined but will be allocated among the members of the PRP group. However, based on information currently available, the company believes it will be allocated a significant share of the cost of investigation and future response costs, if any. The Master Metals, Inc. Superfund site (the "Site") is located in Cleveland, Ohio. The company received notice from US EPA in 1996 that it was identified as a PRP under CERCLA and would be held responsible for a portion of the clean up costs associated with the Site. A PRP group was formed to conduct Phase I remedial activities which the company joined and contributed $24,936 out of the total amount of $1,700,000 assessed to finance the estimated cost of conducting the Phase I remedial activities. This was an interim allocation based on the estimated cost of conducting the Phase I remedial activities. At this early stage, the estimated cost of Phase II remedial activities is not expected to exceed a total amount of $500,000 which will be allocated among the PRP group in accordance with the previously established allocation. 6 7 EXECUTIVE OFFICERS OF THE REGISTRANT
NAME OFFICE HELD AGE ---- ----------- --- Michael Ahn.................... Former acting President of Consumer Electronics Division 49 from November 1997 to February 1998. Senior Vice President of Operations from July 1996 to October 1997. President OEM Sales Division from 1991 to 1995, LG Electronics U.S.A., Inc. Ramesh G. Amin................. Former President, Consumer Electronics Division, from 54 December 1996 to October 1997. Previously Senior Vice President, Display Products Group at Sony for seven years. Roger A. Cregg................. Former Executive Vice President, Chief Financial Officer, 41 from May 1996 to December 1997. Chief Financial Officer at Sweetheart Cup Company from 1990 to 1996. Robert N. Dangremond........... Acting Chief Financial Officer since December 1997. 55 Principal with Jay Alix & Associates, a consulting and accounting firm specializing in corporate restructurings and turnaround activities, since August 1989. Previously, beginning in August 1995, Mr. Dangremond has held the position of interim Chief Executive Officer and President of Forstmann & Company, Inc. and was Chairman of the Board, President and Chief Executive Officer of AM International, Inc. from February 1993 to September 1994. Jeffrey P. Gannon.............. President and Chief Executive Officer, since January 1998. 47 Previously held a variety of senior positions at General Electric during a 24-year career, including Corporate Vice President, International Business Development from October 1997 to January 1998 and President & Chief Executive Officer of General Electric Lighting's Asia Pacific Operations from 1994 to 1997. John M. Renfro................. Senior Vice President, Human Resources, since March 1998. 38 Previously, Vice President Human Resources and Administration, Ameritech Corporation, Small Business Service from 1996 to 1998. Vice President, Human Resources, Asia-Pacific, Latin America and Africa, Dun and Bradstreet Corporation, 1993 to 1996. Richard F. Vitkus.............. Senior Vice President, General Counsel since 1994. Secretary 58 since 1995. Previously Senior Vice President, General Counsel, and Director of Corporate Development at Vanstar Corporation (formerly ComputerLand Corporation) from 1991 to 1994. Peter S. Willmott.............. Former President and Chief Executive Officer from November 60 1996 to January 1998. Chairman, MacFrugal's Bargains Close-outs Inc., from 1990 to 1997; Chairman and Chief Executive Officer, Willmott Services, Inc., from 1989 to 1997. Dennis R. Winkleman............ Former Vice President, Human Resources, from March 1996 to 47 October 1997. Director, Human Resources, Case Corporation from 1990 to 1996. Nam K. Woo..................... Former Executive Vice President and acted as Chief Operating 48 Officer from October 1997 to January 1998. Senior Managing Director LG Electronics, Inc. since 1997. President of North American Operations and LG Electronics U.S.A., Inc. 1994 to 1997.
7 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The New York Stock Exchange is the principal United States market in which the company's common stock is traded. The number of stockholders of record was 11,488 as of March 18, 1998. No dividends were paid to stockholders during the two years ended December 31, 1997. The high and low price range for the company's common stock by quarter for the past two years is included in the Unaudited Quarterly Financial Information. ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Results of operations: Net sales........................... $1,173.1 $1,287.9 $1,273.9 $1,469.0 $1,228.2 Pre-tax income (loss)............... (300.2) (177.8) (98.5) (14.8) (93.2) Net income (loss)................... (299.4) (178.0) (90.8) (14.5) (93.2) Financial position: Total assets........................ $ 527.7 $ 765.3 $ 700.7 $ 662.4 $ 568.5 Long-term debt...................... 132.8 152.7 168.8 182.0 170.0 Stockholders' equity (deficit)...... (85.3) 162.0 317.5 237.1 161.5 Per share of common stock: Net income (loss)................... $ (4.49) $ (2.73) $ (1.85) $ (.35) $ (2.89) Book value (deficit)................ (1.27) 2.44 5.00 5.19 4.50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The statements of consolidated operations summarize operating results for the last three years. This section of Management's Discussion and Analysis highlights the main factors affecting the changes in operating results during the three-year period. REVENUES. Sales in 1997 were $1,173 million down nine percent from 1996 sales of $1,288 million. Sales in 1996 increased one percent as compared to 1995 sales of $1,274 million. The company's core business -- the development, manufacture and distribution of a broad range of products for the delivery of video entertainment -- is composed of two major product areas, Consumer Electronics (which includes color picture tube operations) and Network Systems. In Consumer Electronics, the color TV market remains extremely competitive. Price competition continued during 1997 and 1996 forcing the company to reduce color TV prices in each year to maintain sales volumes and market share. This price competition may continue to adversely affect the company's performance. Consumer Electronics sales decreased seven percent in 1997 from 1996 primarily due to soft demand for direct-view color TV sets (particularly during the traditionally strong fourth quarter) and lower VCR sales. In addition, sales continued to be negatively impacted as the company suffered delays in production of new high-margin Consumer Electronics products. Because of picture tube availability problems, the company's domestic direct-view color television unit sales declined compared with 1996, but the company gained market share in key large-screen categories. The industry color TV unit sales to dealers (including projection television) decreased by four percent in 1997 to 24.5 million units (following a decrease of three percent to 8 9 25.5 million units in 1996 and a decrease of four percent to 26.2 million units in 1995). The Zenith brand remains one of the top three U.S. color TV brands. Sales in 1997 were negatively impacted as a result of a dispute the company had with a Brazilian customer. The company shipped dramatically less to this customer during 1997, and as a result the company's international sales have been lower than expected. Consumer Electronics sales increased three percent in 1996 from 1995, driven largely by higher VCR sales. The company's domestic direct-view color television unit sales in 1996 were flat compared with 1995, while industry color TV unit sales to dealers declined. As a result, the company's market share increased slightly during 1996. The industry color TV unit sales to dealers (including projection televisions) decreased by three percent to 25.5 million units in 1996 (following a decrease of four percent to 26.2 million units in 1995 and an increase of ten percent to 27.4 million units in 1994). Sales in 1996 were negatively impacted as the company suffered delays in production of new high-margin Consumer Electronics products. In Network Systems, which includes the design and manufacture of digital and analog set-top boxes, along with data modems sold primarily to cable television operators, 1997 sales were down significantly compared with 1996 due to slowing industry-wide demand for analog set-top boxes as cable operators prepare to launch digital networks. Industry and the company's shipments of cable modems, while still relatively small, rose during 1997. During 1996, the company signed a multi-year agreement with the Americast programming venture to provide digital set-top boxes to a consortium of telecommunications companies. Initial shipments under this contract began in 1997. Network Systems 1996 sales were down significantly compared with 1995 for the reasons discussed above. COSTS AND EXPENSES. In light of the company's net losses, the competitive environment and inflationary cost pressures, the company has undertaken major cost reduction programs in each of the last three years. These programs included cost control and profit improvement initiatives; design, manufacturing, logistics and distribution improvements; and business consolidations. The company continues to seek ongoing additional cost reduction opportunities. The 1997 results included large losses in color picture tube operations along with significant charges related to inventory valuation (approximately $44 million) and bad debts (approximately $25 million) which are significantly higher that last year. The large losses in the company's color picture tube plant resulted from high operating costs and performance difficulties associated with new product start-up and new automated production processes. These product and process problems created a large amount of rework inventory that necessitated significant charges for excess and obsolete inventory. These items combined to negatively impact the company's gross margin. The charges for bad debts affected selling, general and administrative expenses and are discussed below. The 1996 results also included significant charges. The majority of these charges related to selling, general and administrative expenses, but a significant amount of the charges were included in costs of products sold and negatively impacted the company's gross margin. The charges included in costs of products sold were primarily associated with inventories (particularly write-offs of excess and obsolete inventory), and also included charges for hourly employees severance. Selling, general and administrative expenses were $178 million in 1997, $168 million in 1996 and $129 million in 1995. These expenses as a percent of revenues were 15 percent in 1997, 13 percent in 1996 and 10 percent in 1995. The increase in 1997, as compared to 1996, was primarily the result of a $21 million bad debt charge related to a dispute the company had with a Brazilian customer. See Note Four to the company's Consolidated Financial Statements for further information. The increase in 1996, as compared to 1995, was the result of the unusual charges which included severance charges for salaried employees (including executive severance), consulting fees and provisions for bad debts. Amounts that the company spends each year on engineering and research relating to new products and services and to improvements of existing products and services are expensed as incurred. These amounts were 9 10 $43 million in 1997, $47 million in 1996 and $44 million in 1995. These expenses as a percentage of revenues were approximately 4 percent in each year during the three years ended December 31, 1997. OTHER OPERATING EXPENSE (INCOME). Other Operating Expense (Income) contains royalty income received from manufacturers of TV sets and VCRs who have taken licenses under some of the company's U.S. tuning system patents. Royalty income from tuning system patents was $26 million in 1997, $27 million in 1996 and $26 million in 1995. Also included in Other operating expense (income) are foreign exchange gains and losses. These amounts have traditionally not been material. In 1997, Other Operating Expense (Income) was significantly impacted as the company recorded $64 million in charges for asset impairments. As required by Statement of Financial Accounting Standards (FAS) No. 121, long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. During the fourth quarter of 1997, an impairment was recognized for the Consumer Electronics business since the future undiscounted cash flows of assets were estimated to be insufficient to recover their related carrying values. As such, the company recognized an expense of $54 million and established a valuation reserve for the write-down of the excess carrying value over fair market value. The fair market value used in determining the impairment loss was based upon management and third party valuations. Also in accordance with FAS 121, certain long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. During the third quarter of 1997, the company recorded a charge of $10 million related to the impairment of certain long-lived assets to be disposed of. The charge relates primarily to (i) assets that will be sold or scrapped as a result of the company's decision to phase out of its printed circuit board operation (ii) assets that will be sold or scrapped as a result of the company's decision not to develop the proposed large-screen picture tube plant in Woodridge, Illinois and (iii) a building in Canada that was sold in December 1997. The impairment charges discussed above are based upon management's best estimates of the recoverability of long-lived assets and the fair value of the related assets. It is reasonably possible that the company's estimates of the recoverability of long-lived assets and the fair value will change. See the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. RESTRUCTURING AND OTHER CHARGES. There were no Restructuring and Other Charges during 1997, however, if the company executes its business plan for 1998, significant restructuring charges are expected to be incurred during 1998. See the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. During the fourth quarter of 1996, the company recorded $9 million of restructuring charges. The restructuring was composed of $5 million of charges related to severance costs associated with employment reductions (mostly in the company's U.S. salaried workforce) and $4 million of charges associated with the shutdown of the company's wholly-owned Canadian distributor. Substantially all of the provisions are related to cash expenditures that were made during 1997. During 1995, the company recorded $22 million of restructuring and other charges. The main component of this was a second-quarter charge of $18 million primarily to restructure its core Consumer Electronics and Network Systems business. The charge was mainly comprised of provisions made in anticipation of cash expenditures that were paid in the second half of 1995 or in the first half of 1996. The major elements of the restructuring related to severance expenses ($10 million) associated with employment reductions (mostly in the company's U.S. salaried workforce) and costs associated with realigned distribution activities ($3 million) as the company changed to direct-to-retail distribution on a nationwide basis. The remaining charges related to other non-recurring items, including certain environmental, legal and other regulatory matters, and trade receivable write-offs (primarily for accounts in Mexico as a result of the peso devaluation). The remainder of the 1995 charges related to fourth-quarter charges totaling $4 million that were incurred as a consequence of the LGE purchase of common stock. 10 11 INTEREST EXPENSE. Interest expense was $26 million in 1997, $15 million in 1996 and $20 million in 1995. The increased amounts in 1997 and 1995, when compared to 1996, resulted from higher funding requirements for company operations. To assist in funding these requirements, the company entered into various financing transactions. INCOME TAXES. Due to the company's continuing losses, provisions made for income taxes during the last three years have not been material. In 1995, the company recorded an income tax credit of $8 million (including interest) that related to a tax refund due the company as a result of certain foreign tax credit issues in audits of prior years. NET INCOME. As a result of the factors described above, net losses were $299 million in 1997, $178 million in 1996 and $91 million in 1995. Corresponding per share losses were $4.49 in 1997, $2.73 in 1996 and $1.85 in 1995. In recent years, the company has announced product initiatives based on its digital set-top box and cable modem technologies. The company has not yet recognized any significant revenues from these product initiatives. Whether the company will achieve significant revenues or profits from these product initiatives in the near term or ever will depend largely on market acceptance of the products and the existence of competitive products. The company expects from time to time in the future to announce other product initiatives. The ultimate contribution of any such initiatives to the financial performance of the company will similarly depend on such factors. Cash Flows The statements of consolidated cash flows reflect the changes in cash for the last three years by classifying transactions into three major categories; Operating, Investing and Financing activities. OPERATING ACTIVITIES. A principal use of the company's liquidity is the cash used by operating activities which consists of the company's net loss as adjusted for non-cash operating items and the changes in current assets and liabilities such as receivables, inventories and payables. In 1997, $25 million of cash was used by operating activities principally to fund $193 million of net losses from operations as adjusted for depreciation, charges for asset impairments and losses on asset sales. The change in current accounts provided $149 million of cash and was principally composed of a $187 million decrease in receivables and a $90 million decrease in inventories, offset by a $111 million increase in transferor certificates. The decrease in receivables and the increase in transferor certificates were mainly due to the receivable securitization agreement with Citicorp being put in place during 1997 which accounts for transactions under this agreement as the sale of receivables. The net effect of the decrease in receivables and the increase in transferor certificates was a decrease of $76 million which was primarily related to the lower sales levels, particularly in the fourth quarter of 1997, the $21 million bad debt charge related to a dispute the company had with a Brazilian customer, and the sale of receivable to outside investors under the receivable securitization agreement. The decrease in inventories was related to reduced amounts of purchases in anticipation of the lower fourth quarter sales. In addition, the company reduced cash used by operating activities by issuing common stock to the retirement savings plans to fulfill the 1996 obligation to salaried employees. This issuance increased stockholders' equity by $5 million. In 1996, $24 million of cash was used by operating activities principally to fund $143 million of net losses from operations as adjusted for depreciation. The change in current accounts provided $116 million of cash and was principally composed of a $180 million increase in accounts payable and accrued expenses offset by a $53 million increase in inventories and a $8 million increase in receivables. The increase in accounts payable and accrued expenses was mainly due to increased amounts of accounts payable, composed of (i) contracts with LGE which permit the company to elect interest-bearing extended-payment terms ($107 million at December 31, 1996, and $9 million at December 31, 1995) and (ii) all other accounts payable ($110 million at December 31, 1996 and $63 million at December 31, 1995). The increase in the LGE extended payables is due to a lengthening of the terms, while the increase in the other accounts payable is due mainly to the increased levels of inventory. In addition, the company reduced cash used by operating activities by issuing 11 12 common stock to the profit-sharing retirement plans to fulfill the 1995 obligation to salaried employees and some hourly employees. This issuance increased stockholders' equity by $5 million. In 1995, $33 million of cash was used by operating activities principally to fund $57 million of net losses from operations as adjusted for depreciation and a loss on asset sales. The change in current accounts provided $20 million of cash and was principally composed of a $51 million decrease in inventories offset by a $38 million decrease in accounts payable and accrued expenses. The decreases in inventories and accounts payable were due in part to lower levels of color TV production caused by lower sales levels. Inventories also were reduced as a result of process improvements implemented during 1995. INVESTING ACTIVITIES. The principal recurring investing activity is the addition of property, plant and equipment. These expenditures are primarily for equipment and tooling related to product improvements, more efficient production methods and replacement for normal wear. Beginning in 1997, another major investing activity became the distribution of investor certificates that were generated under the receivable securitization with Citicorp. In 1997, investing activities provided $21 million of cash, which consisted of $188 million of proceeds from asset sales offset by capital additions of $83 million and the distribution of $84 million of investor certificates. The proceeds from asset sales were primarily composed of $95 million of cash received from the sale of receivables (sold via the receivable securitization with Citicorp) and $87 million of cash received in connection with a sale-leaseback transaction whereby the company sold and leased back new and existing manufacturing equipment in its Melrose Park, Illinois, picture tube plant and in its Reynosa and Juarez, Mexico, facilities. Capital additions in 1997 included expenditures related to projects primarily in the color picture tube area, which include new automated production processes and the addition of new production lines for computer display tubes. In 1996, investing activities used $125 million of cash, which consisted of capital additions of $129 million offset by $4 million of proceeds from asset sales. The level of capital additions in 1996 was significantly higher other years primarily to support the expansion and modernization of the company's Melrose Park, Illinois, picture tube plant, and its Chihuahua, Mexico, plant for digital set-top boxes. In 1995, investing activities used $49 million of cash, which consisted of capital additions of $52 million offset by $3 million of proceeds from asset sales. Capital additions in 1995 included a new production line for projection TV picture tubes in the company's Juarez, Mexico, plant and new industrial robotics to perform labor-intensive production processes in the Melrose Park, Illinois, picture tube plant. The company is planning a significant reduction in capital investment projects during 1998. FINANCING ACTIVITIES. In 1997, financing activities provided $4 million of cash, which included $45 million provided as a result of borrowings under the company's new term loan, $25 million of increased borrowings under the company's short-term debt agreements and $1 million provided from sales of the company's common stock to employees of the company via the exercise of previously issued stock options. This was offset by $31 million of cash used to pay off the old term loan, $24 million of cash used to redeem the 8.5 percent Senior Subordinated Convertible Debentures due November 2000, $7 million of cash used to pay maturities of the new term loan and $6 million of cash used to pay maturities of the 6 1/4 percent Convertible Subordinated Debentures due 2011. In 1996, financing activities provided $55 million of cash, which included $47 million provided as a result of borrowings under the company's credit agreement and $15 million provided from sales of the company's common stock to employees of the company via the exercise of previously issued stock options. This was offset by $7 million of cash used to pay maturities of the Term Loan. The 1995 increase in cash provided was due to the company selling $171 million of common stock to investors, principally the sale at $10 per share of 16.5 million shares to LGE in November. In addition, the company sold 1.3 million shares to investors under a shelf registration statement. Cash also was provided during 1995 as the company entered into a Term Loan Agreement for $40 million. Cash was used during 1995 as the company repurchased $43 million principal amount of its 8.5% Convertible Senior Subordinated 12 13 Debentures due 2000 and 2001, at par plus accrued interest. This repurchase resulted from the exercise by certain holders of the debentures of the right to require repurchase of all or a portion of the debentures following a change of control of the company, which occurred upon the purchase of a controlling interest in the company by LGE. Financial Condition As of December 31, 1997, the company had $364 million of interest-bearing obligations which consisted of: (i) $144 million of extended-term payables with LGE, (ii) $109 million of 6 1/4 percent Convertible Subordinated Debentures due 2011 (the current portion of which is $6 million), (iii) $72 million currently payable under various unsecured and uncommitted credit facilities, (iv) a $38 million Term Loan with Citicorp (the current portion of which is $9 million), (v) $1 million aggregate principal amount of 8.5 percent Senior Subordinated Convertible Debentures due 2001 which are classified as current as they were redeemed subsequent to December 31, 1997. In April 1997, the company obtained several financing commitments. One of the commitments is a three year $110 million credit facility composed of a $45 million term loan and a $65 million revolving credit line. This facility replaces the company's previous credit agreement and term loan. The term loan requires scheduled quarterly principal payments of $2 million with a balloon payment of $20 million at maturity in the year 2000. Under the revolving credit line, the maximum commitment of funds available for borrowing is limited by a defined borrowing base formula related to eligible inventory. The facility is secured by the company's inventory, domestic fixed assets, stock of the company's subsidiaries and tuner patent royalties, along with the related patents, licenses and other general intangibles. Interest on borrowings is based on market rates. The facility contains certain covenants that must be met in order to remain in compliance with the facility, including financial covenants that must be maintained as of the end of each fiscal quarter. During 1997, the company amended its credit facility to relax certain financial covenants. As amended, the financial covenants include a minimum EBITDA amount, a current ratio test, a funded debt/total capitalization ratio test, a tuning patent royalties test and an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in December 1997 and March 1998, only the tuning patent royalties test and the LGE payable test were in effect as of December 31, 1997 and March 31, 1998, and the company was in compliance with both of these covenants. A second commitment is a three year trade receivables securitization which is provided through a Citicorp commercial paper conduit. The availability of funds under this receivable securitization is subject to receivables eligibility based on such items as agings, concentrations, dilution and loss history, subject to a maximum amount that was $165 million as of December 31, 1997, but can be increased to $200 million, assuming additional bank commitments. LGE provides support for this facility through a performance undertaking and a letter of credit. This trade receivable securitization was accounted for as a sale of receivables. Also, in April 1997, the company entered into an $87 million sale-leaseback transaction whereby the company sold and leased back new and existing manufacturing equipment in its Melrose Park, Illinois, picture tube plant and in its Reynosa and Juarez, Mexico, facilities. The term of the lease is 12 1/2 years and annual payments under the lease will average approximately $10 million. The company's payment obligations, along with certain other items under the lease agreement are fully guaranteed by LGE. The lease of the manufacturing equipment was accounted for as an operating lease. Upon the closing of the new financing agreements described above, the company received $142 million of which $77 million was used to pay off outstanding balances under the credit agreement and term loan agreement with General Electric Capital Corporation. The remainder of the funds was used to pay certain vendors, to pay fees related to the new financing agreements and for general corporate purposes. 13 14 Additionally in April 1997 the company and LGE entered into an arrangement whereby certain of the company's accounts payables arising in the ordinary course of business with LGE will be extended for certain periods of time with interest being charged on the amounts extended at negotiated rates. In return for LGE providing support for the securitizations and the sale-leaseback transaction and the extended-term payables arrangement, the company has granted options to LGE to purchase approximately 3.9 million common shares of the company at an exercise price of $0.01 per share, exercisable over time. The accounting for these stock options is based upon their fair value with that fair value being amortized straight-line over the term of the associated commitments. In August 1997 the company received $30 million from LGE representing payments in advance for 1997 sales from the company to LGE. The amount was recorded as a liability and as sales were made to LGE, the liability balance was reduced. As of December 31, 1997, $1 million of the liability to LGE remained and is included in accrued expenses. Between November 1997 and February 1998 the company entered into a series of new financing transactions designed to enhance the company's liquidity and financial flexibility. The company obtained a total of $110 million in unsecured and uncommitted credit facilities through four lines of credit with Bank of America ($30 million), First Chicago NBD ($30 million), Societe Generale ($20 million) and Credit Agricole ($30 million). The credit lines are guaranteed by LGE for which LGE will receive a fee in an amount up to 2 percent of the face amount of the loan, in the form of cash or the company's equity and subject to the approval of the Finance Committee of the company's Board of Directors and in the case of equity, the approval of the company's shareholders. The company granted liens in favor of LGE on the capital stock of the company's domestic subsidiaries and on the company's intellectual property (other than tuning patents, tuning patent royalties and related license agreements) to secure the guaranties of LGE for borrowings under these credit lines. As a result of this financing, the company redeemed, in December 1997, its 8.5 percent Senior Subordinated Convertible Debentures due November 2000. There was $24 million principal amount of such debentures outstanding and the redemption price of such debentures was 104 percent of such principal amount plus accrued interest through the redemption date. The company also called for redemption, in January, 1998 its 8.5 percent Senior Subordinated Convertible Debentures due January 2001. There was $1 million principal amount of such debentures outstanding. In March 1998, the company entered into a secured credit facility with LGE which provides for borrowings of up to $45 million. The term of the facility is one year from the date of the first borrowing, subject to LGE's right to demand repayment at anytime after June 30, 1998. Repayment is due in full at the end of the term. The facility is secured by liens on certain of the company's assets and is subject to certain terms and conditions. Outlook Since joining the company in January 1998, the new Chief Executive Officer, along with the rest of the company's management team has been developing a broad operational and financial restructuring plan. A broad outline of that plan has been presented to the company's Board of Directors in March 1998. The plan, which is designed to leverage the company's brand, distribution and technology strengths, includes reducing costs, outsourcing of certain components and products, disposition of certain assets and capitalizing on the company's patented digital television technologies. Restructuring costs must be incurred to implement the plan. Despite its negative cash flow, the company has been able to secure financing to support its operations to date, based on credit support from LGE. Between November 1997 and February 1998, the company (with the guarantee of LGE) entered into a series of new lending agreements with commercial lenders for unsecured lines of credit totaling more than $100 million, all of which has been drawn as of March 31, 1998. Going forward, significant amounts of additional cash will be needed to pay the restructuring costs to implement the proposed business plan and to fund losses until the company has returned to profitability. Based on management's proposed plan, the company estimates that at least $225 million would be required to fund 14 15 the company's restructuring costs and operations through the end of 1998 and that additional amounts could be required thereafter. While there is no assurance that funding will be available to execute the plan, the company is continuing to seek financing to support its turnaround efforts and is exploring a number of alternatives in this regard. LGE has agreed to provide up to $45 million in additional funding for one year from the date of the first borrowing, subject to LGE's right to demand repayment at anytime after June 30, 1998, and is secured by certain assets of the company. The company believes that this additional short-term financing, along with its current credit facilities, will be sufficient to support the company's liquidity requirements through June 30, 1998, depending on operating results and the level of continued trade support. In addition, the company is engaged in ongoing discussions with LGE concerning the company's business plan, and LGE is considering whether to provide additional long-term financial support. However, LGE has no obligation to do so. Any such support by LGE would be subject to a number of conditions, including the operating results of the company, third-party consents, Republic of Korea regulatory approvals and other conditions. No decision has been made at this time by LGE or the company regarding additional financial support, and there can be no assurance that any additional financial support will be forthcoming from LGE. In the absence of long-term financial support from LGE, there can be no assurance that additional financing can be obtained from conventional sources. Management is exploring alternatives that include seeking strategic investors, lenders and/or technology partners, selling substantial company assets or pursuing other transactions that could result in diluting LGE to a less than majority position. There can be no assurance that management's efforts in this regard will be successful. To implement the proposed business plan and to fund associated restructuring costs and operating losses, the company will be required to restructure certain of its outstanding debt and other financing arrangements (See Notes Six, Fourteen, Fifteen and Sixteen to the company's Consolidated Financial Statements for a description of certain debt and financing arrangements.) A number of alternatives, including out-of-court and in-court financial restructurings, are being considered. Management believes that, under any restructuring scenario, the company's common stock would likely be subject to massive dilution as a result of the conversion of debt to equity or otherwise. There can be no assurances as to what value, if any, would be ascribed to the common stock in a restructuring. In addition, the company's subordinated debentures could suffer substantial impairment in a restructuring. Due to a number of uncertainties, many of which are outside the control of the company, there can be no assurance that the company will be able to consummate any operational or financial restructuring. The company's independent public accountants have included a "going concern" emphasis paragraph in their audit report accompanying the 1997 financial statements. The paragraph states that the company's recurring losses and negative working capital raise substantial doubt about the company's ability to continue as a going concern and cautions that the financial statements do not include adjustments that might result from the outcome of this uncertainty. Existing credit facilities are not expected to be sufficient to cover liquidity requirements after June 30, 1998, and the company is currently facing the prospect of not having adequate funds to operate its business. There can be no assurance that additional credit facilities can be arranged or that any long-term restructuring alternative can be successfully initiated or implemented by June 30, 1998, in which case the company may be compelled to pursue a bankruptcy filing in the absence of a proposed or pre-approved financial restructuring. The company will be required to obtain waivers under its financing arrangements for periods subsequent to June 30, 1998 and the lenders thereunder are under no obligation to provide such waivers. Management believes that, despite the financial hurdles and funding uncertainties going forward, it has under development a business plan that, if successfully funded and executed as part of a financial restructuring, can significantly improve operating results. The support of the company's vendors, customers, lenders, stockholders and employees will continue to be key to the company's future success. 15 16 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain Statements in this Annual Report on Form 10-K, such as statements regarding the company's strategies, plans, objectives and expectations are forward-looking statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results of the company or of its efforts to execute a business and financial restructuring to be materially different from any future results expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both in the United States and other countries in which the company sells its products and from which the company obtains supplies; the effect of competition in the markets served by the company; required approvals of the Republic of Korea for additional financing, if any, that LGE may desire to extend to the company; the availability and terms of financing from LGE or other financing sources to fund the company's operating losses, restructuring charges and the other costs and expenses of its new business plan; the willingness of existing creditors to continue to forbear from enforcing available rights and remedies and to grant additional waivers of potential defaults and to agree to the terms of any proposed financial restructuring. Given these uncertainties, stockholders and debtholders are cautioned not to place undue reliance on any forward-looking statement contained herein. The company disclaims any obligation to update such factors or forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements contained herein or to reflect future events or developments. Readiness for the Year 2000 The company is currently evaluating its computer-based systems, facilities and products to determine whether they are "Year 2000 Ready." The company is employing a combination of internal resources and outside consultants to coordinate and implement it's Year 2000 Readiness initiatives. The company has established a company-wide Year 2000 Task Force, led by the company's technology group, with representation from its major business segments, to evaluate and address Year 2000 issues. The Year 2000 Task Force's responsibilities include, without limitation, (i) conducting an evaluation of the company's computer-based systems, facilities and products (and those of the dealers, vendors and other third-parties with which the company does business) to determine their Year 2000 Readiness, (ii) coordinating the replacement and/or upgrade of non-compliant systems as necessary, (iii) promoting the company-wide awareness of Year 2000 issues through education and training, and (iv) developing, and overseeing the implementation of all of the company's other Year 2000 Readiness initiatives. While the company is working to achieve Year 2000 Readiness, it makes no assurance that it will successfully achieve all of its goals. In 1997, the company spent approximately $2 million on software and hardware upgrades and replacements in connection with its Year 2000 transition and has budgeted an additional $2 million for 1998. Most of the costs incurred in addressing Year 2000 issues are expected to be expensed as incurred, in compliance with generally accepted accounting principles. The company continues to evaluate the estimated costs associated with its Year 2000 Readiness efforts. While the Year 2000 transition efforts will involve additional costs, at this time, the company has not yet determined the full cost of the necessary modifications necessary to address all Year 2000 issues. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial information required by Item 8 is contained in Item 14 of Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors is incorporated herein by reference from the sections entitled "Election of Directors" and "Board and Committee Meetings and Directors' Compensation" from the company's definitive Proxy Statement, copies of which will be electronically transmitted to the Commission via EDGAR. See also the list of the company's executive officers and related information under "Executive Officers of the Registrant" at the end of Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the sections entitled "Board and Committee Meetings and Directors' Compensation", "Summary Compensation Table", "Employment Agreements", "Option/SAR Grants in 1997" and "Aggregated Option/SAR Exercises in 1997 and year-end Option/SAR Values" from the company's definitive Proxy Statement, copies of which will be electronically transmitted to the Commission via EDGAR. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the sections entitled "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" from the company's definitive Proxy Statement, copies of which will be electronically transmitted to the Commission via EDGAR. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the sections entitled "Nominees for Election as Directors" and "Related Party Transactions" from the company's definitive Proxy Statement, copies of which will be electronically transmitted to the Commission via EDGAR. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following Consolidated Financial Statements of Zenith Electronics Corporation, the Report of Independent Public Accountants, and the Unaudited Quarterly Financial Data are included in this report: Statements of Consolidated Operations and Retained Earnings -- Years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets -- December 31, 1997 and 1996 Statements of Consolidated Cash Flows -- Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants Unaudited Quarterly Financial Information (a) 2. The following consolidated financial statement schedule for Zenith Electronics Corporation is included in this report: Schedule II -- Valuation and Qualifying Accounts The Report of Independent Public Accountants on Financial Statement Schedule is included in this report. 17 18 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 (4a) Credit Agreement dated as of March 31, 1997, among Zenith Electronics Corporation, Citibank N.A., Citicorp North America, Inc. and the other lenders named (incorporated by reference to Exhibit 4f to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (4b) First Amendment, effective as of October 29, 1997, to Credit Agreement dated as of March 31, 1997, among Zenith Electronics Corporation, Citibank N.A., Citicorp North America, Inc. and the other lenders named therein (incorporated by reference to Exhibit 4 to the company's Quarterly Report on Form 10-Q or the quarter ended September 27, 1997) (4c) Second Amendment, effective as of December 31, 1997, to Credit Agreement dated as of March 31, 1997, among Zenith Electronics Corporation, Citibank N.A., Citicorp North America, Inc. and the other lenders named therein (4d) Indenture dated as of April 1, 1986 between Zenith Electronics Corporation and The First National Bank of Boston as Trustee with respect to the 6 1/4% Convertible Subordinated Debentures due 2011 (incorporated by reference to Exhibit 1 of the company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1991) *(10a) 1987 Zenith Stock Incentive Plan (as amended) (incorporated by reference to Exhibit A of the company's definitive Proxy Statement dated March 13, 1992) *(10b) Form of Indemnification Agreement with Officers and Directors (incorporated by reference to Exhibit 8 of the company's Report on Form 10-K for the year ended December 31, 1989) *(10c) Form of Directors 1989 Stock Units Compensation Agreement with T. Kimball Brooker (1,000 units) (incorporated by reference to Exhibit 9 of the company's Report on Form 10-K for the year ended December 31, 1989) *(10d) Form of Directors 1990 Stock Units Compensation Agreement with T. Kimball Brooker, Andrew McNally IV and Peter S. Willmott (1000 units each) (incorporated by reference to Exhibit 6 of the company's Report on Form 10-K for the year ended December 31, 1990) *(10e) Form of Directors 1991 Stock Units Compensation Agreement with T. Kimball Brooker, Andrew McNally IV and Peter S. Willmott (1,000 units each) (incorporated by reference to Exhibit 10d of the company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1991) *(10f) Form of Amendment, dated as of July 24, 1991, to Directors Stock Units Compensation Agreements for 1990 and 1991 (incorporated by reference to Exhibit 10e of the company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1991) *(10g) Directors Retirement Plan and form of Agreement (incorporated by reference to Exhibit 10 of the company's Report on Form 10-K for the year ended December 31, 1989) *(10h) Form of Amendment, dated as of July 24, 1991, to Directors Retirement Plan and form of Agreement (incorporated by reference to Exhibit 10f of the company's Quarterly Report on Form 10-Q for the quarter ended June 29, 1991)
18 19 *(10i) Supplemental Executive Retirement Income Plan effective as of January 1, 1994 (incorporated by reference to Exhibit 10ab to the company's Annual Report on Form 10-K for the year ended December 31, 1994) *(10j) Restated and Amended Zenith Salaried Retirement Savings Plan *(10k) Long-Term Equity Compensation Plan (incorporated by reference on Form S-8 filed June 6, 1997) *(10l) Form of Employee Stock Option Agreement (incorporated by reference to Exhibit 10e of the company's Quarterly Report on Form 10-Q for the quarter ended April 1, 1995) *(10m) Form of Employee Stock Option Agreement, Long-Term Equity Compensation Plan (10n) Stock Purchase Agreement dated July 17, 1995, between Zenith Electronics Corporation and LG Electronics, Inc. (incorporated by reference to Exhibit 2 of the company's Report on Form 8-K dated July 17, 1995) *(10o) Employment Agreement, dated January 1, 1997, between Roger A. Cregg and Zenith Electronics Corporation (incorporated by reference to Exhibit 10p to the company's Annual Report on Form 10-K for the year ended December 31, 1996) *(10p) Employment Agreement, dated January 1, 1997, between Richard F. Vitkus and Zenith Electronics Corporation (incorporated by reference to Exhibit 10q to the company's Annual Report on Form 10-K for the year ended December 31, 1996) *(10q) Employment Agreement, dated January 1, 1997, between Peter S. Willmott and Zenith Electronics Corporation (incorporated by reference to Exhibit 10r to the company's Annual Report on Form 10-K for the year ended December 31, 1996) *(10r) Employment Agreement, dated January 1, 1997, between Dennis R. Winkleman and Zenith Electronics Corporation (incorporated by reference to Exhibit 10s to the company's Annual Report on Form 10-K for the year ended December 31, 1996) (10s) Agreement between Jay Alix & Associates and Zenith Electronics Corporation, as amended (10t) Receivables Purchase Agreement dated as of March 31, 1997, among Zenith Electronics Corporation and Zenith Finance Corporation (incorporated by reference to Exhibit 10a to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10u) Letter amendment, dated October 15, 1997, to Receivables Purchase Agreement dated as of March 31, 1997, among Zenith Electronics Corporation and Zenith Finance Corporation and to Zenith Trade Receivable Master Trust Pooling and Servicing Agreement dated as of March 31, 1997, among Zenith Finance Corporation, Zenith Electronics Corporation and Bankers Trust Company (10v) Receivables Purchase Agreement dated as of March 31, 1997, among Zenith Microcircuits Corporation and Zenith Finance Corporation (incorporated by reference to Exhibit 10b to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10w) Zenith Trade Receivable Master Trust Pooling and Servicing Agreement dated as of March 31, 1997, among Zenith Finance Corporation, Zenith Electronics Corporation and Bankers Trust Company (incorporated by reference to Exhibit 10c to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10x) Lease Agreement dated as of March 26, 1997, by and among Fleet National Bank and Zenith Electronics Corporation (incorporated by reference to Exhibit 10d to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10y) Lease Agreement dated as of March 26, 1997, by and among Fleet National Bank and Zenith Electronics Corporation of Texas (incorporated by reference to Exhibit 10e to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997)
19 20 (10z) Participation Agreement dated as of March 26, 1997, by and among Zenith Electronics Corporation, General Foods Credit Corporation, Fleet National Bank and other lenders named, and First Security Bank, National Association (incorporated by reference to Exhibit 10f to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10aa) Participation Agreement dated as of March 26, 1997, by and among Zenith Electronics Corporation of Texas, General Foods Credit Corporation, Fleet National Bank and other lenders named, and First Security Bank, National Association (incorporated by reference to Exhibit 10g to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10ab) Financial Support Agreement as of March 31, 1997, between LG Electronics Inc. and Zenith Electronics Corporation (incorporated by reference to Exhibit 10h to the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997) (10ac) Subordination Agreement, dated as of November 3, 1997, among Zenith Electronics Corporation, Citicorp North America, Inc. and LG Electronics Inc., (incorporated by reference to Exhibit 10 to the company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997) *(10ad) Performance Optimization Plan Agreement, dated April 7, 1997, between Richard F. Vitkus and Zenith Electronics Corporation (18) Letter re change in accounting principle (incorporated by reference to Exhibit 18 to the company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997) (21) Subsidiaries of the company (23) Consent of Independent Public Accountants (27) Financial Data Schedule for the Year ended December 31, 1997
- ------------------------- * Represents a management contract, compensation plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. (c) and (d) Exhibits and Financial Statement Schedules Certain exhibits and financial statement schedules required by this portion of Item 14 are filed as a separate section of this report. 20 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZENITH ELECTRONICS CORPORATION (Registrant) By: /s/ JEFFREY P. GANNON ------------------------------------ Jeffrey P. Gannon President and Chief Executive Officer Date: March 31, 1998 ----------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ T. KIMBALL BROOKER Director March 31, 1998 - ------------------------------------------------ T. Kimball Brooker /s/ KI-SONG CHO Director March 31, 1998 - ------------------------------------------------ Ki-song Cho /s/ EUGENE B. CONNOLLY Director March 31, 1998 - ------------------------------------------------ Eugene B. Connolly /s/ ROBERT A. HELMAN Director March 31, 1998 - ------------------------------------------------ Robert A. Helman /s/ CHA HONG (JOHN) KOO Director March 31, 1998 - ------------------------------------------------ Cha Hong (John) Koo /s/ SEUNG PYEONG KOO Director March 31, 1998 - ------------------------------------------------ Seung Pyeong Koo /s/ HUN JO LEE Director March 31, 1998 - ------------------------------------------------ Hun Jo Lee /s/ ANDREW MCNALLY IV Director March 31, 1998 - ------------------------------------------------ Andrew McNally IV /s/ YONG NAM Director March 31, 1998 - ------------------------------------------------ Yong Nam /s/ PETER S. WILLMOTT Director March 31, 1998 - ------------------------------------------------ Peter S. Willmott /s/ NAM WOO Director March 31, 1998 - ------------------------------------------------ Nam Woo /s/ ROBERT N. DANGREMOND Acting Chief Financial Officer March 31, 1998 - ------------------------------------------------ (Principal Financial Officer) Robert N. Dangremond /s/ LAWRENCE D. PANOZZO Director of Corporate Accounting March 31, 1998 - ------------------------------------------------ and Planning Lawrence D. Panozzo (Principal Accounting Officer)
21 22 INDEX TO FINANCIAL STATEMENTS AND EXHIBITS Consolidated Financial Statements Notes to Consolidated Financial Statements Report of Independent Public Accountants Unaudited Quarterly Financial Data Report of Independent Public Accountants on Financial Statement Schedule Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts Exhibits: (3c) By-Laws of the company, as amended (4c) Second Amendment, effective as of December 31, 1997, to Credit Agreement dated as of March 31, 1997, among Zenith Electronics Corporation, Citibank N.A., Citicorp North America, Inc. and the other lenders named therein (10j) Restated and Amended Zenith Salaried Retirement Savings Plan (10m) Form of Employee Stock Option Agreement, Long-Term Equity Compensation Plan (10s) Agreement between Jay Alix & Associates and Zenith Electronics Corporation, as amended (10u) Letter amendment, dated October 15, 1997, to Receivables Purchase Agreement dated as of March 31, 1997, among Zenith Electronics Corporation and Zenith Finance Corporation and to Zenith Trade Receivable Master Trust Pooling and Servicing Agreement dated as of March 31, 1997, among Zenith Finance Corporation, Zenith Electronics Corporation and Bankers Trust Company (10ad) Performance Optimization Plan Agreement, dated April 7, 1997, with Richard F. Vitkus (21) Subsidiaries of the company (23) Consent of Independent Public Accountants (27) Financial Data Schedule for the Year ended December 31, 1997
22 23 CONSOLIDATED FINANCIAL STATEMENTS ZENITH ELECTRONICS CORPORATION STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)
YEAR ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues Net sales................................................. $1,173.1 $1,287.9 $1,273.9 -------- -------- -------- Costs, Expenses and Other Cost of products sold..................................... 1,180.5 1,257.0 1,188.8 Selling, general and administrative (Note Four)........... 178.3 167.8 128.8 Engineering and research.................................. 42.9 46.7 43.5 Other operating expense (income), net (Notes One, Three and Ten)............................. 42.4 (26.3) (30.1) Restructuring and other charges (Note Seven).............. -- 9.3 21.6 -------- -------- -------- Income Operating income (loss)................................... (271.0) (166.6) (78.7) Gain (loss) on asset sales, net........................... (4.6) 0.3 (1.7) Interest expense.......................................... (25.5) (15.1) (19.9) Interest income........................................... 0.9 3.6 1.8 -------- -------- -------- Income (loss) before income taxes......................... (300.2) (177.8) (98.5) Income taxes (credit) (Note Eight)........................ (0.8) 0.2 (7.7) -------- -------- -------- Net income (loss)...................................... $ (299.4) $ (178.0) $ (90.8) ======== ======== ======== Per Share Income (loss) per common share (Note Eighteen)............ $ (4.49) $ (2.73) $ (1.85) ======== ======== ======== Retained Earnings (Deficit) Balance at beginning of year.............................. $ (362.3) $ (184.3) $ (93.5) Net income (loss)......................................... (299.4) (178.0) (90.8) -------- -------- -------- Retained earnings (deficit) at end of year............. $ (661.7) $ (362.3) $ (184.3) ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 23 24 ZENITH ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 -------------------- 1997 1996 ---- ---- (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current Assets Cash (Note One)........................................... $ -- $ -- Receivables, net of allowance for doubtful accounts of $-- and $6.2............................................... 21.7 208.3 Inventories (Note Eleven)................................. 165.5 255.7 Transferor Certificates (Note Twelve)..................... 99.7 -- Other..................................................... 26.3 11.1 ------- ------- Total current assets................................... 313.2 475.1 Noncurrent Assets Property, plant and equipment, net (Note Thirteen)........ 171.1 278.3 Other (Note Six).......................................... 43.4 11.9 ------- ------- Total assets...................................... $ 527.7 $ 765.3 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term debt (Note Fifteen)............................ $ 72.0 $ 47.0 Current portion of long-term debt (Note Sixteen).......... 15.3 17.8 Accounts payable.......................................... 91.3 109.6 Accounts payable to related party (Note Six).............. 145.9 124.5 Compensation and retirement benefits (Note Nineteen)...... 41.2 43.2 Product warranties........................................ 18.3 32.1 Co-op advertising and merchandising programs.............. 30.6 20.5 Income taxes payable...................................... 0.7 1.3 Other accrued expenses.................................... 51.6 54.6 ------- ------- Total current liabilities.............................. 466.9 450.6 Noncurrent Liabilities Long-term liabilities (Note Six).......................... 17.0 -- Long-term debt (Note Sixteen)............................. 132.8 152.7 Stockholders' Equity Preferred stock, $1 par value; 8,000,000 shares authorized; none outstanding........................... -- -- Common stock, $1 par value; 150,000,000 shares authorized; 67,130,628 and 66,564,119 shares issued................ 67.1 66.6 Additional paid-in capital................................ 507.3 459.4 Retained earnings (deficit)............................... (661.7) (362.3) Cost of 105,181 common shares in treasury................. (1.7) (1.7) ------- ------- Total stockholders' equity (Note Seventeen)............ (89.0) 162.0 ------- ------- Total liabilities and stockholders' equity........ $ 527.7 $ 765.3 ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 24 25 ZENITH ELECTRONICS CORPORATION STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH YEAR ENDED DECEMBER 31 ----------------------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Cash Flows from Operating Activities Net income (loss)......................................... $(299.4) $(178.0) $(90.8) Adjustments to reconcile net income (loss) to net cash used by operations: Depreciation......................................... 38.0 35.0 32.1 Charge for asset impairment.......................... 63.7 -- -- Employee retirement plan contribution in stock....... 4.9 5.3 -- (Gain) loss on asset sales, net...................... 4.6 (.3) 1.7 Charge for donated services.......................... 2.2 -- -- Other................................................ .5 1.6 .5 Changes in assets and liabilities: Current accounts................................... 149.4 116.4 19.9 Other assets....................................... 3.6 (3.9) 3.4 Other liabilities.................................. 7.6 -- -- ------- ------- ------ Net cash used by operating activities..................... (24.9) (23.9) (33.2) ------- ------- ------ Cash Flows from Investing Activities Capital additions......................................... (82.5) (129.0) (51.9) Proceeds from asset sales................................. 187.7 4.3 2.9 Distribution of Investor Certificates..................... (84.0) -- -- ------- ------- ------ Net cash provided (used) by investing activities.......... 21.2 (124.7) (49.0) ------- ------- ------ Cash Flows from Financing Activities Short-term borrowings, net................................ 25.0 47.0 -- Proceeds from issuance of long-term debt.................. 45.0 -- 40.0 Proceeds from issuance of common stock, net............... 1.1 15.7 170.7 Principal payments on long-term debt...................... (67.4) (7.3) (44.2) ------- ------- ------ Net cash provided by financing activities................. 3.7 55.4 166.5 ------- ------- ------ Cash Increase (decrease) in cash............................... -- (93.2) 84.3 Cash at beginning of year................................. -- 93.2 8.9 ------- ------- ------ Cash at end of year....................................... $ -- $ -- $ 93.2 ======= ======= ====== Changes in Current Assets and Liabilities Increase (decrease) in cash attributable to changes in: Receivables, net..................................... 186.6 $ (7.5) $ 10.2 Transferor Certificates.............................. (110.7) -- -- Income taxes, net.................................... (0.6) .1 (6.0) Inventories.......................................... 90.2 (53.1) 51.4 Other assets......................................... (9.7) (3.3) 2.2 Accounts payable and accrued expenses................ (6.4) 180.2 (37.9) ------- ------- ------ Net change in current accounts..................... $ 149.4 $ 116.4 $ 19.9 ======= ======= ====== Supplemental Disclosure Supplemental disclosure of cash flow information -- Cash paid (refunded) during the period for: Interest................................................ $ 24.8 $ 14.1 $ 20.6 Income taxes............................................ (9.3) .9 (.1) Non-cash activity: Asset and additional paid-in capital recorded related to guarantee fee......................................... $ 39.7 $ -- $ -- Liability recorded related to deferred gain on sale leaseback............................................. 10.2 -- --
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 25 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE -- SIGNIFICANT ACCOUNTING POLICIES: Principles of consolidation: The consolidated financial statements include the accounts of Zenith Electronics Corporation and all domestic and foreign subsidiaries (the company). All significant intercompany balances and transactions have been eliminated. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Statements of consolidated cash flows: The company considers time deposits, certificates of deposit and all highly liquid investments purchased with an original maturity of three months or less to be cash. Inventories: Inventories are stated at the lower of cost or market. Costs are determined for all inventories using the first-in, first-out (FIFO) method. Properties and depreciation: Property, plant and equipment is stated at cost. Additions of machinery and equipment with lives of eight years or more are depreciated by the straight-line method over their useful lives, which range between 8 to 12 years. Accelerated methods are used for depreciation of all other machinery and equipment items, including high technology equipment that may be subject to rapid economic obsolescence. Useful lives for these items range from 4 to 5 years. Additions of buildings are depreciated by the straight-line method over their useful lives, which range from 10 to 33 years. Property held for disposal is reported at the lower of carrying amount or fair value, less cost to sell, and is included in Other noncurrent assets. This property includes certain facilities and land no longer used in the company's operations. Rental expenses under operating leases were $20.7 million, $12.8 million, and $15.3 million in 1997, 1996 and 1995, respectively. The 1997 increase in rental expense was due to the sale-leaseback transaction that was entered into in April 1997. See Note Fourteen for additional information on the sale-leaseback transaction. The company capitalizes interest on major capital projects. The company capitalized $4.1 million and $2.3 million of interest in 1997 and 1996, respectively. The amount was not material in 1995. Engineering, research, product warranty and other costs: Engineering and research costs are expensed as incurred. Estimated costs for product warranties are provided at the time of sale based on experience factors. The costs of co-op advertising and merchandising programs are also provided at the time of sale. Foreign currency: The company uses the U.S. dollar as the functional currency for all foreign subsidiaries. Foreign exchange gains and losses are included in Other operating expense (income) and were not material in 1997, 1996 and 1995. Stock options: During 1996, the company adopted Statement of Financial Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation". The accounting standard requires the company to value all stock-based compensation based on the estimated fair value at the grant date and spread the deemed cost over the vesting period. The standard permits a choice of whether to charge operations or disclose the calculated cost, as pro forma information. The company has chosen to disclose the calculated cost, as pro forma information (see Note Seventeen). Impairment of Long-lived Assets: The company periodically assesses whether events or circumstances have occurred that may indicate the carrying value of its long-lived assets may not be recoverable. When such events or circumstances indicate the carrying value of an asset may be impaired, the company uses an estimate of the future undiscounted cash flows to be derived from the remaining useful life of the asset to assess whether or not the asset is recoverable. If the future undiscounted cash flows to be derived over the life of the asset do not exceed the asset's net book value, the company recognizes an impairment loss for the amount by 26 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which the net book value of the asset exceeds its estimated fair market value. See Note Three for additional information. NOTE TWO -- FINANCIAL RESULTS AND LIQUIDITY: The company has incurred net losses of $299.4 million, $178.0 million, and $90.8 million in 1997, 1996 and 1995, respectively. For many years the company's major competitors, many with greater resources, have aggressively lowered their selling prices in an attempt to increase market share. Although the company has benefited from cost reduction programs, these lower color television prices together with inflationary cost increases have more than offset such cost reduction benefits. Since joining the company in January 1998, the new Chief Executive Officer, along with the rest of the company's management team has been developing a broad operational and financial restructuring plan. A broad outline of that plan has been presented to the company's Board of Directors in March 1998. The plan, which is designed to leverage the company's brand, distribution and technology strengths, includes reducing costs, outsourcing of certain components and products, disposition of certain assets and capitalizing on the company's patented digital television technologies. Restructuring costs must be incurred to implement the plan. Despite its negative cash flow, the company has been able to secure financing to support its operations to date, based on credit support from LGE. Between November 1997 and February 1998, the company (with the guarantee of LGE) entered into a series of new lending agreements with commercial lenders for unsecured lines of credit totaling more than $100 million, all of which has been drawn as of March 31, 1998. Going forward, significant amounts of additional cash will be needed to pay the restructuring costs to implement the proposed business plan and to fund losses until the company has returned to profitability. Based on management's proposed plan, the company estimates that at least $225 million would be required to fund the company's restructuring costs and operations through the end of 1998 and that additional amounts could be required thereafter. While there is no assurance that funding will be available to execute the plan, the company is continuing to seek financing to support its turnaround efforts and is exploring a number of alternatives in this regard. LGE has agreed to provide up to $45 million in additional funding for one year from the date of the first borrowing, subject to LGE's right to demand repayment at anytime after June 30, 1998, and is secured by certain assets of the company. The company believes that this additional short-term financing, along with its current credit facilities, will be sufficient to support the company's liquidity requirements through June 30, 1998, depending on operating results and the level of continued trade support. In addition, the company is engaged in ongoing discussions with LGE concerning the company's business plan, and LGE is considering whether to provide additional long-term financial support. However, LGE has no obligation to do so. Any such support by LGE would be subject to a number of conditions, including the operating results of the company, third-party consents, Republic of Korea regulatory approvals and other conditions. No decision has been made at this time by LGE or the company regarding additional financial support, and there can be no assurance that any additional financial support will be forthcoming from LGE. In the absence of long-term financial support from LGE, there can be no assurance that additional financing can be obtained from conventional sources. Management is exploring alternatives that include seeking strategic investors, lenders and/or technology partners, selling substantial company assets or pursuing other transactions that could result in diluting LGE to a less than majority position. There can be no assurance that management's efforts in this regard will be successful. To implement the proposed business plan and to fund associated restructuring costs and operating losses, the company will be required to restructure certain of its outstanding debt and other financing arrangements (See Notes Six, Fourteen, Fifteen and Sixteen for a description of certain debt and financing arrangements.) A number of alternatives, including out-of-court and in-court financial restructurings, are being considered. 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management believes that, under any restructuring scenario, the company's common stock would likely be subject to massive dilution as a result of the conversion of debt to equity or otherwise. There can be no assurances as to what value, if any, would be ascribed to the common stock in a restructuring. In addition, the company's subordinated debentures could suffer substantial impairment in a restructuring. Due to a number of uncertainties, many of which are outside the control of the company, there can be no assurance that the company will be able to consummate any operational or financial restructuring. The company's independent public accountants have included a "going concern" emphasis paragraph in their audit report accompanying the 1997 financial statements. The paragraph states that the company's recurring losses and negative working capital raise substantial doubt about the company's ability to continue as a going concern and cautions that the financial statements do not include adjustments that might result from the outcome of this uncertainty. Existing credit facilities are not expected to be sufficient to cover liquidity requirements after June 30, 1998, and the company is currently facing the prospect of not having adequate funds to operate its business. There can be no assurance that additional credit facilities can be arranged or that any long-term restructuring alternative can be successfully initiated or implemented by June 30, 1998, in which case the company may be compelled to pursue a bankruptcy filing in the absence of a proposed or pre-approved financial restructuring. The company will be required to obtain waivers under its financing arrangements for periods subsequent to June 30, 1998 and the lenders thereunder are under no obligation to provide such waivers. Management believes that, despite the financial hurdles and funding uncertainties going forward, it has under development a business plan that, if successfully funded and executed as part of a financial restructuring, can significantly improve operating results. The support of the company's vendors, customers, lenders, stockholders and employees will continue to be key to the company's future success. NOTE THREE -- IMPAIRMENT OF LONG-LIVED ASSETS: During the fourth quarter of 1997, an impairment was recognized for the Consumer Electronics business since the future undiscounted cash flows of assets were estimated to be insufficient to recover their related carrying values. As such, the company recognized an expense of $53.7 million and established a valuation reserve for the write-down of the excess carrying value over fair market value. The fair market value used in determining the impairment loss was based upon management and third party valuations, including estimates of potential environmental liabilities. This FAS 121 charge is included in Other operating expense (income). During the third quarter of 1997, the company recorded a charge of $10.0 million related to the impairment of certain long-lived assets to be disposed of. The charge relates primarily to (i) assets that will be sold or scrapped as a result of the company's decision to phase out of its printed circuit board operation (ii) assets that will be sold or scrapped as a result of the company's decision not to develop the proposed large-screen picture tube plant in Woodridge, Illinois and (iii) a building in Canada that was sold in December 1997. The amount of the charge is included in Other operating expense (income). The impairment charges discussed above are based upon management's best estimates of the recoverability of long-lived assets and the fair value of the related assets. It is reasonably possible that the company's estimates of the recoverability of long-lived assets and the fair value will change. See Note Two for additional information. NOTE FOUR -- CHARGE FOR BAD DEBTS: In November 1995 the company entered into a contract with a customer in Brazil to purchase TVs and TV kits and to assemble and distribute Zenith brand TVs in that country. In early 1997, this customer discontinued timely payments of its obligations, and sought to renegotiate both the timing and the amount of the obligations to the company. While the company and this customer continued to negotiate in an attempt to reach a business solution, litigation was commenced by both parties in Brazil. The company had also initiated 28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) litigation against this customer in the United States. In late 1997, this matter was settled. The agreement provides that the company will make certain parts and components available to this customer, and will receive an $11.0 million settlement payable in installments over eleven months. As a result of the above problems, the company recorded a $21.3 million bad debt charge during 1997 related to this customer, which reflects the company's estimated loss as of December 31, 1997. The bad debt charge affected the transferor certificate valuation allowance. NOTE FIVE -- ACCOUNTING CHANGES: During 1997 the company changed its accounting policy for most tooling expenditures. The old policy was to charge most tooling expenditures to expense in the period acquired. The new policy is to defer the tooling charges incurred subsequent to March 29, 1997, over a 20-month period in order to more appropriately match the costs with their period of benefit. The accounting policy for picture tube tooling remains the same, which is to amortize that tooling over a four-year period. This change was accounted for as a change in accounting estimate effected by a change in accounting principle and will be accounted for on a prospective basis. The change decreased tooling expense by $8.9 million, and decreased the loss per share by $.13 in 1997. Effective January 1, 1996, the company changed its inventory costing method for its picture tube inventories from LIFO to FIFO. There has been a strategic marketing shift in the company toward selling more larger-screen television sets and less smaller-screen sets. The picture tubes for the smaller-screen television sets are manufactured by the company and have been costed using LIFO. It is expected that the LIFO picture tube inventory pool will decrease and this decrease would create a LIFO liquidation resulting in a poor matching of current costs with current revenues. As a result, the company believes that the FIFO method is preferable as it will provide a more appropriate and consistent matching of costs against revenues. This change in accounting had no material impact on quarterly results and as a result, quarterly information is not restated. The effect of this change in accounting principle was to reduce the net loss reported for 1996 by $2.7 million, or $.04 per share, The change has been applied to prior years by retroactively restating the financial statements. The effect of this change for 1995 was to reduce the net loss reported by $1.6 million, or $.03 per share. NOTE SIX -- RELATED PARTY: In November 1995, a change in control of the company occurred, in which LGE purchased shares of the company pursuant to a combined tender offer and purchase of newly issued shares of common stock from the company. As of December 31, 1997, LGE owned 36,569,000 shares of common stock of the company which represents 55 percent of the outstanding common stock. Because LGE owns a majority of the issued and outstanding common stock, it effectively controls the outcome of any matter requiring action by a majority of the company's stockholders, including the election of a majority of the company's directors and any future change in control of the company. LGE is a leading international brand-name manufacturer of five main groups of products: televisions; audio and video equipment; home appliances; computers and office automation equipment; and other products, including video displays, telecommunication products and components, and magnetic media. The following represent the most significant transactions between the company and LGE during 1997 and 1996. Product purchases: In the ordinary course of business, the company purchases VCRs, TV-VCR combinations and components from LGE and its affiliates. The company purchased $93.3 million and $128.8 million of these items in 1997 and 1996, respectively. Sales of products purchased from LGE and its affiliates contributed $112.3 million and $141.4 million to sales in 1997 and 1996, respectively, and $19.0 million and $12.6 million to gross margin in 1997 and 1996, respectively. Equipment purchases: The company purchased approximately $40 million of production machinery and equipment from LGE during 1997 and 1996. The machinery and equipment related primarily to new production lines in the company's picture tube plant for the manufacture of computer display tubes. 29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Product and other sales: The company sells TVs, picture tubes, yokes and other manufactured subassemblies to LGE and its affiliates at prices that equate to amounts charged by the company to its major customers. Sales in 1997 and 1996 by the company to LGE and its affiliates were $55.1 million and $29.4 million, respectively. In December 1996, the company closed its wholly-owned Canadian distributor and sold the remaining inventory to LGE at book value. The company entered into a Distributor Agreement with an LGE subsidiary whereby LGE will be the Canadian distributor for the company. During 1997, the company entered into a similar agreement with an LGE subsidiary in Mexico to sell the company's product in Mexico. Technical agreements: The company and LGE are currently operating under several technology agreements and licenses, including: LGE engineering support for HDTV development and related technical and intellectual property; technology and patent licenses to LGE to develop flat tension mask products; and agreements granting LGE the right to use the company's patents on TV tuners. LGE's payment in 1997 and 1996 to the company under these agreements and licenses was $.6 million and $1.0 million, respectively. Service Assistance: In 1997, employees of LGE provided certain services to the company for which LGE was not compensated. These donated services were valued at $2.2 million and the accounting treatment was to recognize the value of these expenses in the company's income statement and in additional paid-in capital. In 1996, employees of LGE provided certain services to the company for which LGE was not compensated. The value of these services was not material in 1996. In 1997, employees of LGE provided certain services to the company that were covered under service agreements. The company's payments and payable to LGE for such services totaled $4.8 million. Other Items: In March 1998, the company entered into a secured credit facility with LGE which provides for borrowings of up to $45 million. The term of the facility is one year from the date of the first borrowing, subject to LGE's right to demand repayment at anytime after June 30, 1998. Repayment is due in full at the end of the term. The facility is secured by liens on certain of the company's assets and is subject to certain terms and conditions. In September 1997, the company and LGE entered into an High Definition TV Receiver Project Agreement. As called for in the agreement, the company received $4.5 million from LGE toward funding for the project. In return, LGE will receive a percentage of applicable royalties the company anticipates receiving until such time as LGE has received $4.5 million. The $4.5 million is included in Long-term liabilities. In August 1997, the company received $30.0 million from LGE representing payments in advance for 1997 sales from the company to LGE. The amount was recorded as a liability and as sales were made to LGE, the liability balance was reduced. As of December 31, 1997, $.6 million of the liability to LGE remained and is included in Other accrued expenses. In April 1997, the company and LGE entered into an arrangement whereby the company's accounts payables arising in the ordinary course of business to LGE would be extended for certain periods of time. Prior to April 1997, the company's accounts payables arising in the ordinary course of business to LGE were extended for certain periods of time, but no formal arrangement was in place. The amount of extended payables was $144.3 million and $106.8 million as of December 31, 1997 and 1996, respectively. The company is charged interest on the extended period at negotiated rates. In return for LGE providing support for certain financing activities of the company entered into in April 1997, the company granted options to LGE to purchase approximately 3.9 million common shares of the company at an exercise price of $0.01 per share, exercisable over time. The accounting for these stock options was based upon their fair value with that fair value being amortized straight-line over the term of the associated commitments. The related deferred financing charge, net of amortization, is recorded as follows: $30.1 million in Noncurrent other assets and $5.1 million in Current other assets. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1997 and 1996, accounts payable included $145.9 million and $124.5 million, respectively, to LGE and its affiliates. The amount of receivables from LGE and its affiliates was not material as of December 31, 1997 and 1996. The company currently leases space from an LGE subsidiary in (i) Huntsville, Alabama, for its Parts & Service group, (ii) Ontario, California, for a warehouse and (iii) San Jose, California, for its Network Systems group. NOTE SEVEN -- RESTRUCTURING AND OTHER CHARGES: During the fourth quarter of 1996, the company recorded $9.3 million of restructuring charges. The restructuring was composed of $5.2 million of charges related to severance costs associated with employment reductions (mostly in the company's U.S. salaried workforce) and $4.1 million of charges associated with the shutdown of the company's wholly-owned Canadian distributor. Substantially all of the provisions were related to cash expenditures made during 1997. During the fourth quarter of 1995, the company recorded charges totaling $3.6 million that were incurred as a consequence of the LGE purchase of common stock as described in Note Six. During the second quarter of 1995, the company recorded a charge of $18.0 million primarily to restructure its core Consumer Electronics and Network Systems business. The major elements of the restructuring related to severance expenses associated with employment reductions, primarily in the company's U.S. salaried workforce and costs associated with realigned distribution activities as the company changed to direct-to-retail distribution on a nationwide basis. The remaining charges related to other non-recurring items, including certain environmental, legal and other regulatory matters, along with trade receivable write-offs (primarily for accounts in Mexico as a result of the December 1994 peso devaluation). NOTE EIGHT -- INCOME TAXES: The components of income taxes (credit) were:
YEAR ENDED DECEMBER 31 ------------------------- 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Currently payable (refundable): Federal................................................ $ .1 $-- $(7.8) State.................................................. (.9) .2 .1 ---- --- ----- Total income taxes (credit)............................ $(.8) $.2 $(7.7) ==== === =====
The $7.7 million income tax credit in 1995 included a $7.5 million tax refund (including interest) due the company as a result of certain foreign tax credit issues in audits of prior years. The company received this tax refund during 1997. The statutory federal income tax rate and the effective tax rate are compared below:
YEAR ENDED DECEMBER 31 ----------------------- 1997 1996 1995 ---- ---- ---- Statutory federal income tax rate..................... (35.0)% (35.0)% (35.0)% State income taxes, net............................... -- -- .1 Foreign tax effects................................... 2.2 1.0 1.5 Tax benefits not recognized subject to future realization......................................... 32.8 34.0 33.5 Net operating loss carryback/refund................... -- -- (8.4) ----- ----- ----- Effective tax rate.................................... (--)% (--)% (8.3)% ===== ===== =====
31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred tax assets (liabilities) are comprised of the following:
YEAR ENDED DECEMBER 31 ------------------ 1997 1996 ---- ---- (IN MILLIONS) Loss carryforwards......................................... $ 353.5 $ 228.2 Inventory valuation........................................ 22.6 23.8 Transferor certificate valuation reserve................... 14.6 -- PP&E valuation reserve..................................... 22.9 -- Product warranty........................................... 9.4 11.5 Co-op advertising.......................................... 3.7 6.3 Merchandising.............................................. 2.6 3.8 Other...................................................... 35.6 38.0 ------- ------- Deferred tax assets................................... 464.9 311.6 ------- ------- Depreciation............................................... 3.4 (6.6) Other...................................................... (1.3) 5.5 ------- ------- Deferred tax liabilities.............................. 2.1 (1.1) ------- ------- Valuation allowance........................................ (467.0) (310.5) ------- ------- Net deferred tax assets............................... $ -- $ -- ======= =======
The valuation allowance was established since the realization of these assets cannot be reasonably assured, given the company's recurring losses. As of December 31, 1997, the company had $835.6 million of total net operating loss carryforwards (NOLs) available for federal income tax purposes (which expire from 2004 through 2011) and unused tax credits of $3.9 million (which expire from 2000 through 2002). The stock purchase by LGE described in Note Six created an "ownership change" of the company for federal income tax purposes, with the effect that the company's annual usage of its NOLs will be limited to approximately $27 million, which represents the product of (i) a tax-exempt rate of return announced monthly by the Internal Revenue Service (5.75 percent for ownership changes occurring in the month of November 1995) and (ii) the value of the company immediately before the ownership change, as determined under applicable tax regulations. This limitation applies to approximately $481 million of the company's available NOL carryovers, which represents the losses generated prior to the "ownership change". The company's remaining loss carryovers are not subject to this limitation. In addition, this limitation, appropriately modified, will also apply to the company's utilization of most of its tax credit carryovers. The effect of this annual limit will depend upon the generation of sufficient taxable income in the future and certain other factors. NOTE NINE -- GEOGRAPHIC SEGMENT DATA: The company's operations involve a dominant industry segment -- the design, development, manufacture and distribution of video products, including color TV sets, VCRs and other consumer electronics products, color picture tubes, cable TV products and parts and accessories for these products. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial information, summarized by geographic area, is as follows:
YEAR ENDED DECEMBER 31 ------------------------------------ 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Net sales: Domestic companies........................... $1,144.9 $1,221.4 $1,212.7 Foreign companies............................ 28.2 66.5 61.2 -------- -------- -------- Total net sales.............................. $1,173.1 $1,287.9 $1,273.9 ======== ======== ======== Income (loss) before income taxes: Domestic companies........................... $ (195.3) $ (171.5) $ (94.5) Foreign companies............................ (4.9) (6.3) (4.0) -------- -------- -------- Total income (loss) before income taxes...... $ (300.2) $ (177.8) $ (98.5) ======== ======== ======== Identifiable assets: Domestic companies........................... $ 405.1 $ 615.5 $ 548.5 Foreign companies............................ 122.6 149.8 152.2 -------- -------- -------- Total identifiable assets.................... $ 527.7 $ 765.3 $ 700.7 ======== ======== ========
Foreign operations consist of manufacturing and sales subsidiaries in Mexico, a distribution subsidiary in Canada (which was closed in December 1996) and a purchasing office in Taiwan. Sales to affiliates are principally accounted for at amounts based on local costs of production plus a reasonable return. Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6 million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1 million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million (11 percent) in 1996. No other customer accounted for 10 percent or more of net sales. NOTE TEN -- OTHER OPERATING EXPENSE (INCOME): Major manufacturers of TVs and VCRs agreed during 1992 to take licenses under some of the company's U.S. tuning system patents (the licenses expire in 2003). Royalty income related to the tuning system patents was $26.0 million, $26.6 million, and $25.9 million in 1997, 1996 and 1995, respectively, and is included in Other operating expense (income). See Note Three for further discussion on Other operating expense (income). NOTE ELEVEN -- INVENTORIES: Inventories consisted of the following:
DECEMBER 31 --------------------- 1997 1996 ---- ---- (IN MILLIONS) Raw materials and work-in-process......................... $ 96.9 $152.1 Finished goods............................................ 68.6 103.6 ------ ------ Total inventories......................................... $165.5 $255.7 ====== ======
NOTE TWELVE -- TRANSFEROR CERTIFICATES: The Financial Accounting Standards Board issued FAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in 1996. The accounting standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement was adopted by the company during the second quarter of 1997 in connection with the three-year 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) trade receivables securitization that was entered into in April 1997. Pursuant to the new statement, the trade receivable securitization was accounted for as a sale of receivables. Transferor certificates represent the company's retained interest in the pool of saleable receivables that have been sold by the company to a special-purpose trust, but can not or have not yet been sold to outside investors in the commercial paper market via a multi-seller conduit pursuant to the trade receivables securitization agreement. Outside investors hold investor certificates which evidence their ownership of a portion of the assets contained in the special multi-purpose trust. Transferor certificates are valued at historical cost not to exceed their net realizable value. This cost approximates the value of the previous carrying amount (prior to transfer), allocated between the assets sold and the retained interest, based on their relative fair values at the date of the transfer, as required by FAS 125. NOTE THIRTEEN -- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consisted of the following:
DECEMBER 31 ------------------ 1997 1996 ---- ---- (IN MILLIONS) Land....................................................... $ 2.7 $ 9.9 Buildings.................................................. 147.9 135.5 Machinery and equipment.................................... 640.9 696.6 ------- ------- 791.5 842.0 Less accumulated depreciation.............................. (562.0) (563.7) Less valuation reserve..................................... (58.4) -- ------- ------- Total property, plant and equipment, net................... $ 171.1 $ 278.3 ======= =======
At December 31, 1997, the company reclassed $8.7 million of property pending disposal out of Property, Plant and Equipment into Other Noncurrent Assets. Included in this amount is $6.0 million of land, which is the primary reason for the 1997 decrease in land, when compared to 1996. NOTE FOURTEEN -- SALE LEASEBACK TRANSACTION: In April 1997 the company entered into an $87 million sale-leaseback transaction whereby the company sold and leased back new and existing manufacturing equipment in its Melrose Park, Ill., plant and in its Reynosa and Juarez, Mexico, facilities. The result of the sale was a $10.2 million gain for the company, which was deferred and is being amortized over the 12 1/2 year lease term The related lease is being accounted for as an operating lease. The rental expense under this lease in 1997 was $8.1 million. The minimum lease payments required by the lease over the next five years are as follows (in million): Year ending December 31: 1998................................................. $ 12.3 1999................................................. 10.6 2000................................................. 9.6 2001................................................. 9.7 2002................................................. 9.7 Thereafter........................................... 78.6 ------ Total minimum lease payments......................... $130.5 ======
34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The company's payment obligations, along with certain other items under the lease agreement are fully guaranteed by LGE (see discussion in Note Six). The sale-leaseback agreement contains financial penalties which would be triggered if the company was to terminate the lease early. NOTE FIFTEEN -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS: In April 1997, the company obtained a $65 million revolving credit line with Citicorp. This facility replaces the company's previous credit agreement with General Electric Capital Corporation. Under the revolving credit line, the maximum commitment of funds available for borrowing is limited by a defined borrowing base formula related to eligible inventory. The facility is secured by the company's inventory, domestic fixed assets, stock of the company's subsidiaries and tuner patent royalties, along with the related patents, licenses and other general intangibles. Interest on borrowings is based on market rates. The credit line contains certain covenants that must be met in order to remain in compliance with the facility, including financial covenants that must be maintained as of the end of each fiscal quarter. During 1997, the company amended the credit facility to relax certain financial covenants. As amended, the financial covenants include a minimum EBITDA amount, a current ratio test, a funded debt / total capitalization ratio test, a tuning patent royalties test and an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in December 1997 and March 1998, only the tuning patent royalties test and the LGE payable test were in effect as of December 31, 1997 and March 31, 1998, and the company was in compliance with both of these covenants. In addition, there are restrictions regarding investments, acquisitions, guaranties, transactions with affiliates, sales of assets, mergers and additional borrowings, along with limitations on liens. The credit agreement prohibits dividend payments on the company's common stock, restricts dividend payments on any of its preferred. Between November 1997 and February 1998 the company entered into a series of new financing transactions designed to enhance the company's liquidity and financial flexibility. The company obtained a total of $110 million in unsecured and uncommitted credit facilities through four lines of credit with Bank of America ($30 million), the First Chicago NBD ($30 million), Societe Generale ($20 million) and Credit Agricole ($30 million). As of December 31, 1997, a total of $72.0 million was outstanding under these credit lines. The credit lines are guaranteed by LGE for which LGE will receive a fee in an amount up to 2 percent of the face amount of the loan, in the form of cash or the company's equity and subject to the approval of the Finance Committee of the company's Board of Directors and in the case of equity, the approval of the company's shareholders. The company granted liens in favor of LGE on the capital stock of the company's domestic subsidiaries and on the company's intellectual property (other than tuning patents, tuning patent royalties and related license agreements) to secure the guaranties of LGE for borrowings under these credit lines. In March 1998, the company entered into a secured credit facility with LGE which provides for borrowings of up to $45 million. See Note Six for further discussion. Borrowings and interest rates on short-term debt were:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Maximum month-end borrowings........................... $72.0 $72.6 $69.5 Average daily borrowings............................... 26.4 18.3 37.2 Weighted average interest rate......................... 9.1% 8.8% 10.5%
35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE SIXTEEN -- LONG-TERM DEBT: The components of long-term debt were:
DECEMBER 31 --------------- 1997 1996 ---- ---- (IN MILLIONS) 6 1/4 percent convertible subordinated debentures due 2011...................................................... $109.3 $115.0 8.5 percent senior subordinated convertible debentures due 2000...................................................... -- 23.8 8.5 percent senior subordinated convertible debentures due 2001...................................................... .5 .5 Term Loan................................................... 38.3 31.5 ------ ------ 148.1 170.5 Less current portion........................................ 15.3 17.8 ------ ------ Total long-term debt................................... $132.8 $152.7 ====== ======
The 6 1/4 percent convertible subordinated debentures are unsecured general obligations, subordinate in right of payment to certain other debt obligations, and are convertible into common stock at $31.25 per share. Terms of the debenture agreement include annual sinking-fund payments of $5.8 million beginning in April 1997 and provisions which could result in the acceleration of their payment in the event the company is in default on provisions of other debt agreements. The debentures are redeemable at the option of the company, in whole or in part, at specified redemption prices at par or above. In December 1997 the company redeemed the 8.5 percent Senior Subordinated Convertible Debentures due November 2000. There was $23.8 million principal amount of such debentures outstanding and the redemption price of such debentures was 104 percent of such principal amount plus accrued interest through the redemption date. The loss on extinguishment of this debt was not material. The 8.5 percent debentures due 2001 are unsecured general obligations, subordinate in right of payment to certain other debt obligations, and are convertible into shares of common stock at an initial conversion price of $10.00 per share. Subsequent to December 31, 1997, the company redeemed the 8.5 percent Senior Subordinated Convertible Debentures due January 2001. There was $.5 million principal amount of such debentures outstanding and the redemption price of such debentures was 104 percent of such principal amount plus accrued interest through the redemption date. The loss on extinguishment of this debt was not material. In April 1997 the company entered into a $45 million term loan with Citicorp. This facility replaces the company's previous credit term loan with General Electric Capital Corporation. The term loan requires scheduled quarterly principal payments of $2.3 million with a balloon payment of $20.3 million at maturity. The facility is secured by the company's inventory, domestic fixed assets, stock of the company's subsidiaries and tuner patent royalties, along with the related patents, licenses and other general intangibles. Interest on borrowings is based on market rates. The term loan contains certain covenants that must be met in order to remain in compliance with the facility, including financial covenants that must be maintained as of the end of each fiscal quarter. During 1997, the company amended the credit facility to relax certain financial covenants. As amended, the financial covenants include a minimum EBITDA amount, a current ratio test, a funded debt/total capitalization ratio test, a tuning patent royalties test and an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in December 1997 and March 1998, only the tuning patent royalties test and the LGE payable test were in effect as of December 31, 1997 and March 31, 1998, and the company was in compliance with both of these covenants. The long-term portion of the term loan has been classified in the accompanying balance sheet based on the company's intention to seek additional waivers or amendments for any future noncompliance prior to the expiration of the March 1998 waiver in June 1998 that extent to a period subsequent to January 1, 1999. There are no assurances that such waivers or amendments will be granted. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition, the term loan contains restrictions regarding investments, acquisitions, guaranties, transactions with affiliates, sales of assets, mergers and additional borrowings, along with limitations on liens. The term loan prohibits dividend payments on the company's common stock and restricts dividend payments on any of its preferred stock. The fair value of long-term debt is $90.8 million as of December 31, 1997, as compared to the carrying amount of $132.8 million. The fair value of the 6 1/4 percent convertible subordinated debentures is based on the quoted market price from the New York Stock Exchange. The fair value of the 8.5 percent convertible senior subordinated debentures is based on the quoted price obtained from third party financial institutions. The fair value of the term loan approximates the carrying value as interest on the loan is based on market rates. As of December 31, 1997, the company's credit agreement and term loan would not allow the company to extinguish the long-term debt through purchase and thereby realize the gain. NOTE SEVENTEEN -- STOCKHOLDERS' EQUITY: Changes in stockholders' equity accounts are shown below:
ADDITIONAL COMMON PAID-IN TREASURY STOCK CAPITAL SHARES ------ ---------- -------- (IN MILLIONS) Balance, December 31, 1994.................... $45.7 $285.4 $ (.5) Sales of common stock....................... 17.8 152.6 -- Stock issued for stock options.............. -- .3 -- Other....................................... -- 1.7 (1.2) ----- ------ ----- Balance, December 31, 1995.................... 63.5 440.0 (1.7) Stock issued for benefit plans................ .8 4.5 -- Stock issued for stock options................ 1.9 13.9 -- Other....................................... .4 1.0 -- ----- ------ ----- Balance, December 31, 1996.................... 66.6 459.4 (1.7) Stock issued for benefit plans................ .5 4.4 -- Stock issued for stock options................ .1 1.0 -- Paid in capital -- LGE guarantee.............. -- 39.7 -- Paid in capital -- LGE services............... -- 2.2 -- Other......................................... (.1) .6 -- ----- ------ ----- Balance, December 31, 1997.................... $67.1 $507.3 $(1.7) ===== ====== =====
During 1997, the company entered into certain transactions with LGE that effected paid in capital. These transaction dealt with the granting of stock options and donated services. See Note Six for further discussion on these items. During 1996, the company sold 1.9 million shares of authorized but unissued common stock to employees of the company via the exercise of previously issued stock options. During 1995, the company sold 16.5 million shares of authorized but unissued common stock to LGE for a price of $10 per share (see Note Six for further discussion). Also during 1995 the company sold 1.3 million shares of authorized but unissued shares of common stock to investors under registration statements that had been filed with the Securities and Exchange Commission. The company has authorized 8 million shares of preferred stock of which none are issued or outstanding as of December 31, 1997. The Board of Directors of the company is authorized to issue the preferred stock from time to time in one or more series and to determine all relevant terms of each such series, including but not limited to the following (i) whether and upon what terms, the shares of such series would be redeemable; (ii) whether a sinking fund would be provided for the redemption of the shares of such series and, if so, the 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) terms thereof; and (iii) the preference, if any, to which shares of such series would be entitled in the event of voluntary or involuntary liquidation of the company. NOTE EIGHTEEN -- STOCK OPTIONS AND AWARDS: Stock Options: The 1987 Stock Incentive Plan, which expired in April 1997, and the Long Term Equity Compensation Plan, approved by the company's shareholders in May 1997, authorize the granting of incentive and non-qualified stock options and restricted stock awards to key management personnel. The purchase price of shares under option is the market price of the shares on the date of grant. Options expire 10 years from the date granted. The company accounts for employee stock options under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined based on the fair value of options at their grant dates consistent with the method of FAS 123, the company's net income (loss) and earnings (loss) per share would have been increased to the following pro forma amounts:
1997 1996 1995 ---- ---- ---- (IN MILLIONS) Net income (loss): As reported.................................. $(299.4) $(178.0) $(90.8) Pro forma.................................... (301.1) (179.1) (92.5) Earnings (loss) per share: As reported.................................. $ (4.49) $ (2.73) $(1.85) Pro forma.................................... (4.52) (2.75) (1.88)
Because the FAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost may not be representative of the pro forma cost to be expected in future years. A summary of the status of the company's outstanding stock options at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented in the table and narrative below:
NON-EMPLOYEES EMPLOYEES ------------------ ------------------------------------------------------------ 1997 1997 1996 1995 ------------------ ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE (000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE ------- -------- ------- -------- ------- -------- ------- -------- Options outstanding at January 1............................ -- $ -- 968 $ 9.92 2,588 $ 8.25 2,027 $8.66 Options granted................ 3,965 0.01 952 11.10 456 12.54 738 7.16 Options exercised.............. -- -- (154) 7.80 (1,889) 8.33 (38) 7.69 Options canceled............... -- -- (260) 11.20 (187) 9.30 (139) 8.66 ----- ----- ----- ------ ------ ------ ----- ----- Options outstanding at December 31........................... 3,965 $0.01 1,506 $10.66 968 $ 9.91 2,588 $8.25 ===== ===== ===== ====== ====== ====== ===== ===== Options exercisable at December 31........................... 793 $0.01 486 $ 9.05 427 $ 8.27 2,081 $8.34 Shares available for grant at December 31.................. N/A 1,340 1,329 1,269
The non-employee stock options were granted to LGE during 1997. See Note Six for further discussion. Of the employee options outstanding at December 31, 1997, 516,300 had exercise prices between $6.25 and $10.69, with a weighted average exercise price of $8.30 and a weighted average remaining contractual life of 6.52 years. The remaining 989,500 had exercise prices between $11.00 and $14.75, with a weighted average exercise price of $11.90 and a weighted average remaining contractual life of 9.05 years. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model, using the following assumptions; weighted average risk-free interest rates of 5.76 percent, 6.25 percent and 6.83 percent for grants in 1997,1996, and 1995, respectively; zero expected dividend yields, and expected volatility of 43.69 percent for 1997 and 62.35 percent for years 1996 and 1995. A 3.5 year estimated life was used for all employee grants. The weighted average fair value of employee options granted during 1997, 1996 and 1995 was $11.16, $13.93 and $7.16, respectively. Restricted stock awards: The company had 234,500 and 270,090 restricted stock awards issued and outstanding as of December 31, 1997 and 1996, respectively. The market value of the restricted shares is deferred in the additional paid-in capital account and is generally amortized over the years the restrictions lapse. The 1996 increase in restricted stock was caused by issuances to new members of the company's management. Total compensation expense in 1997 and 1996, related to these awards, was not material. NOTE NINETEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS: Virtually all employees in the United States are eligible to participate in noncontributory defined contribution retirement plans after completing one full year of service. The plans provide for an annual minimum contribution of between 3 and 6 percent of employees' eligible compensation, based partially on employees' contribution to the plans. Contributions above the minimum could be required based upon profits in excess of a specified return on net worth. Retirement plan expenses were $7.8 million, $8.6 million, $8.8 million and in 1997, 1996 and 1995, respectively. The company's 1997 contribution to the retirement plans will be made during 1998. The company's 1996 and 1995 contributions to the retirement plans were partially funded through the issuance of approximately 466,535 and 782,000 shares, respectively, of the company's common stock. Employees in Mexico are covered by government-mandated plans, the costs of which are accrued by the company. Benefits payable to employees when they leave the company other than by reason of retirement did not have a material effect on the financial statements of the company. NOTE TWENTY -- EARNINGS PER SHARE: In accordance with FAS 128, "Earnings Per Share", the company computed earnings per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share, assuming conversion of the 6 1/4 percent convertible subordinated debentures, the 8.5 percent Senior Subordinated Convertible Debentures due 2001 and outstanding stock options are not presented because the effect of the assumed conversion is antidilutive.
FOR THE YEAR ENDED ---------------------------------- 1997 1996 1995 ---- ---- ---- Net Income (Loss).............................. $(299.4) $(178.0) $(90.8) Weighted average common shares outstanding..... 66.6 65.2 49.2 Earnings per share............................. $ (4.49) $ (2.73) $(1.85)
NOTE TWENTY ONE -- CONTINGENCIES: The company is involved in various legal actions, environmental matters, patent claims, and other proceedings relating to a wide range of matters that are incidental to the conduct of its business. In addition, the company remains liable for certain retained obligations of a discontinued business, principally income and other taxes prior to the closing of the sale. Furthermore, the company has been named as a defendant in certain cases which relate to keyboards allegedly manufactured or designed by the company for the discontinued business. 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1994, the company notified its 15 independent distributors of its intent to change to direct-to-retail distribution on a nationwide basis during 1995. A suit arising in connection with this change in distribution was filed in April 1995 by an independent distributor. The lawsuit sought approximately $13 million in damages under the Wisconsin Fair Dealership Law. In January 1996 the court denied the company's motion for summary judgment and granted the plaintiff's motion for summary judgment, finding the company liable. A jury trial on damages was held in May 1996, and the jury awarded the plaintiff $2.37 million. The company has appealed the judgment, contesting both the summary judgment finding of liability and the damages awarded and is awaiting the appellate court's decision. The company believes that, after reviewing such matters with the company's counsel, any liability that may ultimately be incurred with respect to these matters is not expected to have a material effect on either the company's consolidated financial position or results of operations. 40 41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Zenith Electronics Corporation: We have audited the accompanying consolidated balance sheets of Zenith Electronics Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related statements of consolidated operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zenith Electronics Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note Two to the financial statements, the Company has suffered recurring losses from operations and has negative working capital that raises substantial doubt about the ability to continue as a going concern. Management's plans in regards to these matters are also described in Note Two. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As explained in Note Five to the financial statements, the Company changed its methods of accounting for tooling costs in 1997, and picture tube inventories in 1996. /s/ ARTHUR ANDERSEN LLP - --------------------------------------------- Arthur Andersen LLP Chicago, Illinois March 27, 1998 41 42 UNAUDITED QUARTERLY FINANCIAL INFORMATION
1997 QUARTERS ENDED 1996 QUARTERS ENDED ---------------------------------------------- ---------------------------------------------- DEC. 31,(1) SEPT. 27, JUNE 28, MARCH 29, DEC. 31,(2) SEPT. 28, JUNE 29, MARCH 30, ----------- --------- -------- --------- ----------- --------- -------- --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net sales....................... $ 347.7 $304.5 $261.8 $259.1 $427.6 $340.8 $282.1 $237.4 Gross margin.................... (32.0) (3.8) 15.8 12.6 (10.0) 20.4 12.4 8.1 Net income (loss)............... (155.7) (69.2) (49.3) (25.2) (69.3) (40.2) (33.2) (35.3) Per share of common stock: Net income (loss)............. $ (2.32) $(1.04) $ (.74) $ (.38) $(1.05) $ (.61) $ (.51) $ (.56) New York Stock Exchange market price per share: High.......................... 10 1/4 12 15/16 13 1/8 12 1/2 16 5/8 17 1/2 25 3/4 7 1/2 Low........................... 5 1/8 9 3/4 9 5/8 9 10 1/4 8 1/8 6 1/8 5 7/8 End of quarter................ 5 7/16 9 13/16 11 15/16 10 1/8 10 7/8 15 5/8 12 1/8 6 5/8
- ------------------------- (1) Includes $53.7 million of charges for asset impairment. (2) Includes $9.3 million of Restructuring and other charges. 42 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Stockholders of Zenith Electronics Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Zenith Electronics Corporation included in this Form 10-K, and have issued our report thereon dated March 27, 1998. Our report on the basic consolidated financial statements includes an explanatory paragraph with respect to the Company's ability to continue as a going-concern as discussed in Note Two to the financial statements. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule listed in Item 14 (a) 2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP - --------------------------------------------- Arthur Andersen LLP Chicago, Illinois March 27, 1998 43 44 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, 1997......... $ 6.2 $ -- $ -- $6.2(1) $ -- ====== ====== ==== ==== ====== Year Ended December 31, 1996......... $ 3.6 $ 5.2 $ -- $2.6(2) $ 6.2 ====== ====== ==== ==== ====== Year Ended December 31, 1995......... $ 3.1 $ .8 $ -- $ .3(2) $ 3.6 ====== ====== ==== ==== ====== Valuation allowance for deferred tax assets: Year Ended December 31, 1997......... $310.5 $156.5 $ -- $ -- $467.0 ====== ====== ==== ==== ====== Year Ended December 31, 1996......... $188.3 $122.2 $ -- $ -- $310.5 ====== ====== ==== ==== ====== Year Ended December 31, 1995......... $183.9 $ 4.4 $ -- $ -- $188.3 ====== ====== ==== ==== ======
- ------------------------- (1) Amount sold under accounts receivable securitization agreement. (2) Uncollectable accounts written off, net of recoveries. 44 EX-3.(C) 2 AMENDED & RESTATED BY-LAWS 1 EXHIBIT 3(C) AMENDED AND RESTATED BY-LAWS OF ZENITH ELECTRONICS CORPORATION EFFECTIVE AS OF APRIL 23, 1997 ARTICLE I Offices Section 1. The registered office in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Stockholders Section 1. All meetings of the stockholders for the election of directors shall be held at such place, either within or without the State of Delaware, as may be fixed from time to time by the board of directors. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof Section 2. An annual meeting of stockholders shall be held for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. The date of the annual meeting shall be determined by the board of directors. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote thereat not less than twenty nor more than sixty days before the date of the meeting. At an annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the board of directors or (b) by any stockholder of the corporation who complies with the notice procedures set forth in this Section 3. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. Except as otherwise provided in Regulation 14A under the Securities Exchange Act of 1934, as amended, to be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty days nor more than ninety days prior to the meeting; provided, however, that in the event that less than seventy-five days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting 1 2 (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the number of shares of common stock of the corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in these by-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 3. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 3, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city, town or village where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and subject to the inspection of any stockholder who may be present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the Chairman or president and shall be called by the secretary at the direction of a majority of the board of directors or at the request in writing of stockholders owning at least a majority of the entire capital stock of the corporation issued and outstanding and entitled to vote. Section 6. Written notice of a special meeting of stockholders, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat, not less than ten nor more than sixty days before the date fixed for the meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2 3 Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation and subject to statutory provisions relating to the fixing of record dates, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Any action required to be taken at a meeting of the stockholders, or any other action which may be taken at a meeting of the stockholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by stockholders having not less than the minimum number of votes that would be necessary to authorize or to take such action at a meeting at which all shares entitled to vote thereon were present and voted. ARTICLE III Directors Section 1. The board of directors shall consist of the number of directors as determined from time to time by resolution of the board. The directors shall be elected at the annual meeting of the stockholders as provided in Section 2 of Article II, except as provided in Section 2 of this Article III, and each director elected shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be residents of the state of Delaware or stockholders of this corporation. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office until their successors are duly elected and shall qualify, unless sooner displaced. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. Section 4. The board of directors at its first meeting after each annual meeting of stockholders shall choose a Chairman from among the directors. The Chairman shall act as Chairman of all meetings of stockholders and of the board of directors. The Chairman shall from time to time report to the board of directors all matters within his knowledge which the interest of the corporation may require be brought to its notice. If the Chairman of the Board is not elected, or if elected, is not present, the President or, in the absence of the President, a Vice Chairman (who is also a member of the board and, if more than one, in the order designated by the board of directors or, in the absence of such designation, in the order of their election), if any, or if no such Vice Chairman is present, a director chosen by a majority of the directors present, shall act as chairman at meetings of stockholders and of the board of directors. 3 4 Section 5. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 6. The first meeting of each newly elected board of directors shall be held immediately following and at the place of the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such other time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 7. Regular meetings of the board of directors shall be held at such time and at such place as shall from time to time be determined by resolution of the board. Written notice of each regular meeting of directors stating the place, date and time, shall be given to each director at least five (5) days before such meeting. Section 8. Special meetings of the board and meetings of any committee of the board may be called by the Chairman on one day notice to each director or committee member, either by telephone, mail, facsimile or telegram; special meetings of the board of directors shall be called by the Chairman or secretary in like manner and on like notice on the written request of two directors. Section 9. At all meetings of the board a majority shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 10. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing, or writings are filed with the minutes of proceedings of the board or committee. Section 11. Members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 12. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation, which, to the extent provided in the resolution and to the extent permitted by Delaware Law, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. 4 5 Section 13. Each committee shall report to the board of directors on the actions taken at its meetings, but need not keep regular minutes thereof unless required to do so by the board of directors. Section 14. There shall be an Executive Committee of the board of directors of the corporation. The board of directors shall, at its first meeting after the annual meeting of stockholders in each year, elect a Chairman and other members of the Committee. The directors elected as members of the Executive Committee shall serve as such for one year and until their respective successors, willing to serve, shall have been elected. The Executive Committee shall, when the board is not in session, have and may exercise all of the authority of the board of directors in the management of the corporation; provided, however, that the Executive Committee shall not have the authority of the board of directors in reference to (1) amending the articles of incorporation, (2) adopting a plan of merger or adopting a plan of consolidation with another corporation or corporations, (3) recommending to the stockholders the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the property and assets of the corporation, (4) recommending to the stockholders a voluntary dissolution of the corporation or a revocation thereof, (5) amending, altering or repealing the by-laws of the corporation, (6) electing or removing officers of the corporation or members of the Executive Committee, (7) fixing the compensation of any member of the Executive Committee, (8) declaring dividends, (9) authorizing the issuance of stock, or (10) amending, altering or repealing any resolution of the board of directors which by its terms provides that it shall not be amended, altered or repealed by the Executive Committee; provided further, that in the event of the death, disability or refusal to act of the chief executive officer or the Chairman, the Executive Committee shall appoint a chief executive officer or a Chairman who shall serve until the next meeting of the board of directors. Vacancies in the regular membership of the Executive Committee shall be filled by the board of directors. Section 15. The board of directors shall have the authority to fix the compensation of directors. ARTICLE IV Notices Section 1. Notices to stockholders shall be in writing and delivered personally or mailed to the stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V Officers Section 1. The officers of the corporation shall be chosen by the board of directors and shall be a chief executive officer, a president, a vice president, a secretary and a treasurer. The board of directors may also choose additional vice presidents, executive vice presidents, senior vice presidents, assistant secretaries and assistant treasurers. Two or more offices may be held by the same person. 5 6 Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a chief executive officer, a president and one or more vice presidents, a secretary and a treasurer, none of whom need be a member of the Board. Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Except as otherwise provided in Section 14 of Article III, any vacancy occurring in any office of the corporation shall be filled by the board of directors. Section 5. The chief executive officer of the corporation shall have, under the direction of the board of directors, general charge of the affairs of the corporation. He shall see that all orders and resolutions of the board of directors are carried into effect. He may execute all contracts and agreements authorized by the board of directors and shall vote all shares of stock in other corporations standing in the name of the corporation. He may sign bonds, mortgages, certificates for shares of stock and all other contracts and documents whether or not under the seal of the corporation except in cases where the signing and execution thereof shall be expressly delegated by law, by the board of directors, or by these by-laws, to some other officer or agent of the corporation. He shall from time to time report to the board of directors all matters within his knowledge which the interest of the corporation may require be brought to its notice. He shall have the general powers of supervision and shall be the final arbiter in all differences between all officers of the corporation and his decision as to any matter affecting the corporation shall be final and binding as between officers of the corporation subject only to the board of directors. Section 6. The president shall have the direction and active management of the business of the corporation under the general supervision of the chief executive officer. He shall have concurrent power with the chief executive officer to execute all contracts and agreements authorized by the board of directors and shall have concurrent power with the chief executive officer to vote all shares of stock in other corporations standing in the name of the corporation. He may sign bonds, mortgages, certificates for shares of stock and all other contracts and documents whether or not under the seal of the corporation except in cases where the signing and execution thereof shall be expressly delegated by law, by the board of directors, or by these by-laws, to some other officer or agent of the corporation. Section 7. The executive vice presidents, senior vice presidents and vice presidents shall perform such duties and have such powers as may be prescribed by the board of directors. Section 8. The secretary shall keep the minutes of all meetings of the board of directors, the minutes of all meetings of the stockholders, the minutes of all meetings of the committees, which from time to time may be appointed under authority of these by-laws, in books provided by the corporation for such purpose. He shall attend to the giving and serving of all notices of the corporation whereby meetings of the board of directors, stockholders and committees are assembled. He shall prepare all lists of stockholders and their addresses required to be prepared by the provisions of any present or future statute of the State of Delaware. He may sign, with the chief executive officer or the president or a vice president, in the name of the corporation, when authorized by the board of directors so to do, all contracts or other instruments requiring the seal of the corporation and may affix the seal thereto. He 6 7 shall have concurrent power, acting alone or jointly, with the chief executive officer, or the president to vote all shares of stock in other corporations the majority of the voting stock of which is owned by the corporation. He shall have charge of such books and such papers as the board of directors may direct. He shall, in general, perform all of the duties which are incident to the office of secretary of a corporation, subject at all times, to the direction and control of the board of directors. Section 9. The treasurer shall have custody of all funds and securities of the corporation. When necessary or proper he shall endorse for collection checks, drafts and other instruments for the payment of money and shall deposit them to the credit of the corporation in an authorized bank or depository. Whenever required by the board of directors, he shall render an account of his transactions. He shall perform all acts incident to the position of treasurer, subject to the control of the board of directors. He shall have such powers and perform such duties as may be assigned to him by the board of directors. He shall submit such reports and records to the board of directors as may be requested by them. ARTICLE VI Certificates of Stock Section 1. The shares of the corporation shall be represented by certificates signed by the chief executive officer or the Chairman or the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary and may be sealed with the seal, or a facsimile of the seal of the corporation. In case the seal of the corporation is changed after the certificate is sealed with the seal or a facsimile of the seal of the corporation, but before it is issued, the certificate may be issued by the corporation with the same effect as if the seal had not been changed. Any or all signatures on the certificate may be a facsimile. In case any officer of the corporation, transfer agent or registrar, or any officer or employee of the transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer of the corporation, transfer agent or registrar before such certificate is issued, the certificate may be issued by the corporation with the same effect as if the officer of the corporation, transfer agent or registrar had not ceased to be such at the date of its issue. Section 2. The board of directors may by resolution adopt such procedures as it deems appropriate for the issuance of certificates to replace certificates which have been lost, stolen or destroyed. Section 3. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the 7 8 meeting: provided, however, that the board of directors may fix a new record date for the adjourned meeting. ARTICLE VII General Provisions Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. The board of directors may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Section 3. The chief executive officer shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. Section 4. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. Section 5. The fiscal year of the corporation shall be fixed by resolution of the board of directors. Section 6. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII Indemnification Section 1. The Corporation shall indemnify any director, officer or employee who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding in accordance with, and to the fullest extent authorized by, the General Corporation Law of the State of Delaware as it may be in effect from time to time. Section 2. The indemnification provided by this article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to 8 9 be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 3. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not he would be entitled to indemnify against such liability under the provisions of this article. ARTICLE IX Amendments Section 1. These by-laws may be altered or repealed at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration or repeal be contained in the notice of such special meeting. 9 EX-4.(C) 3 SECOND AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 4c SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT This Second Amendment and Waiver to Credit Agreement (this "Amendment") effective as of the 31st day of December, 1997, among ZENITH ELECTRONICS CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages hereof as Lenders (the "Lenders"), CITIBANK, N.A., as issuing bank (the "Issuing Bank") and CITICORP NORTH AMERICA, INC., as agent (the "Agent"), W I T N E S S E T H: WHEREAS, the Borrower, the Lenders, the Issuing Bank and the Agent are parties to that certain Credit Agreement dated as of March 31, 1997, as amended by that certain First Amendment to Credit Agreement dated as of October 29, 1997,(as further amended, restated supplemented or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, the Borrower has requested that certain terms of the Credit Agreement be amended, and the Agent, the Issuing Bank and the Lenders have agreed to the requested amendments on the terms and conditions set forth herein; and WHEREAS, pursuant to Sections 7.8,7.9 and 7.13 of the Credit Agreement, the Borrower is required to meet certain financial tests as of the fiscal quarter ending December 31, 1997, and the Borrower has informed the Agent, the Issuing Bank and the Lenders that it will fail to satisfy the requirements of Sections 7.8, 7.9 and 7.13 for such fiscal quarter ending December 31, 1997(the "December Covenant Defaults"); and WHEREAS, the Borrower has requested that the Agent, the Issuing Bank, and the Lenders waive the December Covenant Defaults; NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration paid by each party to the other, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1 Amendment to Article 1. Article 1 of the Credit Agreement, Definitions, is hereby amended by deleting the definitions of "Additional Unsecured Debt", "Availability" and "Interest Rate Margin" set forth therein in their 2 entirety and substituting the following, respectively, in their place: "'Additional Unsecured Debt' shall mean the unsecured Funded Debt consisting of revolving credit lines made available to be borrowed by the Borrower after the Agreement Date but commencing prior to March 31, 1998, which are provided to the Borrower by one or more lenders, in an aggregate principal amount not exceeding $160 million, and on terms and conditions substantially similar to those set forth on Schedule A attached hereto, and evidenced by documentation in form and substance, acceptable to the Agent. 'Availability' shall mean at any time of determination, (a) the Borrowing Base minus (b) the Aggregate Revolving Credit Obligations. 'Interest Rate Margin' shall mean, (i) with respect to Base Rate Advances, two percent (2.00%), and (ii) with respect to Eurodollar Advances, three and one-quarter percent (3.25%)." 2. Amendment to Section 8.1. Section 8.1 of the Credit Agreement, Events of Default, is hereby amended by deleting paragraph (s) thereof in its entirety and replacing such paragraph (s) with the following: "(s) (i) The Borrower shall not have the ability to borrow Additional Unsecured Debt in an aggregate principal amount of at least $160,000,000 by March 31, 1998, or (ii) the Borrower shall not have used a portion of the proceeds of the Additional Unsecured Debt(x) to redeem and satisfy in full the Series 2000 Debentures by December 31, 1997; and (y) to redeem or repurchase and satisfy in full the Series 2001 Debentures by January 31, 1998;" 3 Waiver. The Agent, the Issuing Bank and the Lenders hereby waive the December Covenant Defaults and their rights and remedies which may arise solely as a result of the December Covenant Defaults; provided, however, that such waiver shall not waive any other requirement of the Loan Documents or hinder, restrict or otherwise modify the rights and remedies of the Agent, the Issuing Bank and the 2 3 Lenders following the occurrence of any other Default or Event of Default under the Credit Agreement. 4 No Other Amendment or Waiver. Except for the amendments and waiver expressly set forth above, the text of the Credit Agreement and all other Loan Documents shall remain unchanged and in full force and effect. The Borrower acknowledges and expressly agrees that the Lenders reserve the right to, and do in fact, require strict compliance with all terms and provisions of the Credit Agreement and the other Loan Documents. 5 Representations and Warranties. The Borrower hereby represents and warrants in favor of the Agent, the Issuing Bank, and each Lender, as follows: (a) the Borrower has the corporate power and authority (i) to enter into this Amendment, and (ii) to do all acts and things as are required or contemplated hereunder to be done, observed and performed by it; (b) this Amendment has been duly authorized, validly executed and delivered by one or more authorized signatories of the Borrower, and constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms; (c) the execution and delivery of this Amendment and performance by the Borrower under the Credit Agreement, as amended hereby, do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Borrower which has not already been obtained, nor contravene or conflict with the charter documents of the Borrower, or the provisions of any statute, judgment, order, indenture, instrument, agreement or undertaking, to which the Borrower is a party or by which any of its properties are or may become bound; and (d) as of the date hereof, and after giving effect to this Amendment (i) no Default or Event of Default exists under the Credit Agreement or is caused by this Amendment, and (ii) each representation and warranty set forth in Article 4 of the Credit Agreement is true and correct, except (x) to the extent previously fulfilled in accordance with the terms of the Credit Agreement, as amended hereby, (y) to the extent specifically relating to the Agreement Date, or (z) that the incurrence of the Additional Unsecured Debt by the Borrower constitutes a default by the Borrower under the Series 2001 Debentures. 3 4 6 Loan Document. This Amendment shall be deemed to be a Loan Document for all purposes. 7 Expenses. The Borrower agrees to pay all reasonable expenses of the Agent incurred in connection with this Amendment, including, without limitation, all fees and expenses of counsel to the Agent. 8 Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 9 Governing Law. This Amendment shall be deemed to be made pursuant to the laws of the State of New York with respect to agreements made and to be performed wholly in the State of New York, and shall be construed, interpreted, performed and enforced in accordance therewith. 10 Definitions. All capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement. 11 Effectiveness. This Amendment shall be effective as of the date first set forth above upon the Agent's receipt of (i) an amendment fee (for the account of the Lenders on a pro rata basis in accordance with their Commitment Ratios) in the amount of one-eighth of one percent (0.125%) of the Commitments, (ii) a counterpart hereof duly executed by the Borrower and the Majority Lenders, and (iii) such other documents executed by the Borrower as the Agent may reasonably require. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 4 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment or caused it to be executed by their duly authorized officers, effective as of the day and year first written above. BORROWER: ZENITH ELECTRONICS CORPORATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- AGENT: CITICORP NORTH AMERICA, INC. By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- ISSUING BANK: CITIBANK, N.A. By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- LENDERS: CITICORP USA, INC. By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- CONGRESS FINANCIAL CORPORATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- 6 BANK BOSTON, N.A., F/K/A THE FIRST NATIONAL BANK OF BOSTON By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- HELLER FINANCIAL, INC. By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- THE BANK OF NEW YORK COMMERCIAL CORPORATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- SANWA BUSINESS CREDIT CORPORATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- TRANSAMERICA BUSINESS CREDIT CORPORATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- WELLS FARGO BANK, NATIONAL ASSOCIATION By: --------------------------------------- Name: ---------------------------------- Its: ---------------------------------- EX-10.(J) 4 RESTATED & AMENDED RETIREMENT PLAN 1 EXHIBIT 10(j) ZENITH SALARIED RETIREMENT SAVINGS PLAN (As Amended and Restated Effective as of July 1, 1997) 2 ZENITH SALARIED RETIREMENT SAVINGS PLAN (As Amended and Restated Effective as of July 1, 1997)
Table of Contents PAGE ARTICLE 1 1 Introduction 1 Purpose of the Plan, Effective Date. 1 Plan Administrator, Plan Year 1 The Trust 1 The Employers 2 Preservation of Benefits Under Predecessor Plans 2 Supplements 3 Benefits For Participants Who Terminated Employment Prior to July 1, 1997 3 ARTICLE 2 3 Plan Participation 3 Eligibility 3 Leave of Absence 4 Reemployment Within One Year 5 Transferred Employees 5 Hours of Service 6 Military Service 7 ARTICLE 3 8 Participant Contributions 8 Participant Pre-Tax Savings Contributions 8 Participant After-Tax Contributions 9 Form of Participant Contributions 9 Variation, Discontinuance and Resumption of Contributions 10 Compensation 10 Rollover Contributions 11 Transferred Benefits 12 Restricted Participation with Respect to Rollover Contributions and Transferred Benefits 12 ARTICLE 4 13 Employers' Contributions 13 Employers' Contributions 13 Payment of Employers' Contributions; Company Stock 14 Verification of Employers' Contributions 14
3 ARTICLE 5 15 Plan Accounting and Investment Funds 15 Participant Account Balances 15 Accounting Dates 16 Date of Crediting Contributions 16 Investment of Account Balances 17 Investment Funds 17 Investment Elections 18 Manner of Making Investment Elections 18 Investment Risks 19 Plan Expenses 19 Adjustment of Participants' Accounts 19 Statement of Accounts 19 Voting Shares of Company Stock 20 Tender Offers 20 ARTICLE 6 22 Distribution of Account Balances 22 Vesting 22 Forfeitures 23 Methods of Benefit Payment 24 Time and Benefit of Payment 25 Designated Beneficiaries 26 Payment to Substitute Beneficiaries 27 Payment With Respect to Incapacitated Participants or Beneficiaries 27 Final Court Orders 28 Direct Rollover Option 28 ARTICLE 7 29 Withdrawals and Loans During Employment 29 Withdrawal of Employee After-Tax Contributions and Rollover Accounts 29 Under Age 59-1/2 Hardship Withdrawals 29 Age 59-1/2 Withdrawals 31 Loans to Participants 31 No Representation Regarding Tax Effect of Withdrawals or Loans 34 ARTICLE 8 34 Limitations 34 Contribution Limitations 34 Participant Covered by Defined Contribution Plan 35 Participant Covered by Defined Contribution Plan and Defined Benefit Plan 37 Distribution of Excess Deferrals 38
4 Highly Compensated Employee 39 Limitations on Elective Contributions 39 Limitation on Employee and Matching Contributions 43 Multiple Use Limitation 47 ARTICLE 9 48 Reemployment 48 Rehired Employee or Participant 48 Reinstatement of Forfeitures 49 ARTICLE 10 50 Plan Administrator 50 Plan Administrator's Duties 50 Action by Plan Administrator 51 Information Required for Plan Administration 52 Decision of Plan Administrator Final 52 Review of Benefit Determinations 53 Uniform Rules 53 Plan Administrator's Expenses 53 Interested Plan Administrator 53 Resignation or Removal of Plan Administrative Committee Members 53 Indemnification 54 ARTICLE 11 55 Relating to the Employers 55 Action by Employers 55 Additional Employers 55 Restrictions on Reversions 55 ARTICLE 12 56 Amendment, Termination or Plan Merger 56 Amendment 56 Termination 56 Plan Merger 57 Continuation by a Successor or Purchaser 57 Notice to Participants of Amendments, Terminations or Plan Mergers 58 Vesting and Distribution on Termination 58 Administrative Amendments 58 ARTICLE 13 59 General Provisions 59 Examination of Plan Documents 59 Notices 59 Nonalienation of Plan Benefits 59 No Employment Guarantee 59 Participant Litigation 60 Successors 61 Adequacy of Evidence 61
5 Gender and Number 61 Waiver of Notice 61 Applicable Law 61 Severability 61 Fiduciary Responsibilities 61 ARTICLE 14 62 Top-Heavy Plan Rules 62 Key Employees 62 Top-Heavy Plan 63 Aggregation Groups 64 Minimum Contributions and Benefits 64 Special Top-Heavy Plan Vesting Schedule 65
6 ZENITH SALARIED RETIREMENT SAVINGS PLAN (As Amended and Restated Effective as of July 1, 1997) ARTICLE 1 Introduction 1.1 Purpose of the Plan, Effective Date. The Zenith Salaried Retirement Savings Plan (As Amended and Restated Effective as of July 1, 1997)(the "Plan") constitutes an amendment, restatement and continuation of the prior plan, as amended and restated through December 19, 1994. The Plan is maintained by Zenith Electronics Corporation (the "Company") for the benefit of eligible employees of the Company and eligible employees of any subsidiary or affiliated company which adopts the Plan with the consent of the Company to enable such employees to accumulate funds and thereby assist such employees in providing for their future security. The effective date of the Plan is July 1, 1997 (the "effective date"). The Plan is intended to comply with the requirements of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). 1.2 Plan Administrator, Plan Year. The Plan is administered by the Named Fiduciary Committee (as described in Article 10 below) to carry out the administration of the Plan (the "Plan Administrator"). The Plan is administered on the basis of a plan year which begins each year on January 1 and ends on the next following December 31 (the "plan year"). 1.3 The Trust. The assets of the Plan are held and invested by one or more trustees (the "Trustee") which is acting and appointed for such purposes in accordance with one or more trust agreements (the "Trust") which implement and form a part of the Plan. Reference to the trust fund shall include all assets held by the Trustee or any invest- 7 ment managers and insurance institutions in accordance with the Trust and this Plan. 1.4 The Employers. With the consent of the Company, the Plan may be adopted in accordance with the provisions of section 11.2 by any subsidiary or affiliated company of the Company for the benefit of its eligible employees. For this purpose, a "subsidiary" means any corporation more than 80 percent of the voting stock of which is directly or indirectly owned by the Company and an "affiliated company means any corporation which directly or indirectly owns 80 percent or more of the voting stock of the Company and any corporation (other than the Company and its subsidiaries) 80 percent or more of the voting stock of which is directly or indirectly owned by any corporation which directly or indirectly owns 80 percent or more of the voting stock of the Company. The Company and its subsidiaries or affiliates that adopt the Plan are referred to herein collectively as the "Employers" and individually as an "Employer". The term "Zenith Companies" includes the Employers and all subsidiaries and affiliated companies that have not adopted the Plan (and each such corporation is sometimes referred to herein individually as a "Zenith Company"). Any company which is not an Employer under the Plan and which does not qualify as a subsidiary or related company, but is a member of a controlled group of companies (within the meaning of Sections 414(b), (c) or (m) of the Code), which contains an Employer under the Plan for purposes of the Plan, will be considered as a subsidiary or affiliated company that has not adopted the Plan. 1.5 Preservation of Benefits Under Predecessor Plans. Any other savings or retirement plan maintained by an Employer may be continued in effect by its merger into this Plan with the consent of the Company. If appropriate, special provisions relating to employees covered under any such plan when it is merged into this Plan may be set forth in a supplement or certification of eligibility which, by 8 amendment, will be attached to and form a part of this Plan. Any such plan which is merged into this Plan may be referred to below as a "predecessor plan." As to employees who participate in the Plan on the effective date of any merger of a predecessor plan into the Plan, it is intended that the benefits they earned under the predecessor plan up to the effective date of its merger into this Plan shall be preserved unless limited by Article 8. If the Plan Administrator determines that any such benefits have not been provided for under the terms and provisions of the Plan as in effect on and after the effective date of such merger of a predecessor plan into the Plan, the Plan Administrator shall direct the payment of such benefits under the Plan to the participant or other person entitled to them. 1.6 Supplements. From time to time supplements may by amendment be attached to and form a part of the Plan and shall be given the same effect that such provision would have if it was incorporated within the basic text of the Plan. Such supplements may modify or supplement the provisions of the Plan as they apply to particular groups of employees or groups of participants, shall specify the persons affected by such supplements and shall supersede the other provisions of the Plan to the extent necessary to eliminate inconsistencies between the Plan provisions and the provisions of such supplements. 1.7 Benefits For Participants Who Terminated Employment Prior to July 1, 1997. To the extent permitted by law, the benefits provided hereunder with respect to any participant who retired or whose employment terminated prior to July 1, 1997, will, except as otherwise specifically provided herein, be governed in all respects by the terms of the plan document as in effect on the date of the participant's retirement or other termination of employment. 9 ARTICLE 2 Plan Participation 2.1 Eligibility. Each employee of an Employer who was a participant in the prior plan immediately prior to the effective date, shall continue to participate in the Plan on and after the effective date in accordance with the terms of the Plan until such employee's participation ceases in accordance with the Plan. Each employee of an Employer who was a participant in a plan when such plan was merged into this Plan, shall continue as a participant in the Plan on the effective date of such merger and in accordance with the terms of the Plan. Each other employee of an Employer who is a "covered employee" (as defined below) will become a participant in the Plan on the first day which the employee completes an "hour of service" (as defined below) with a Zenith Company. A "covered employee" shall mean any employee of an Employer who is paid by such Employer on a salaried basis (as determined by the payroll records of the Employer) but excluding employees whose terms and conditions of employment are covered by a collective bargaining agreement between the Employer and a representative of the employee's if retirement benefits were the subject of good faith bargaining. An employee of an Employer engaged in business outside of the United States will be considered a "covered employee" under the Plan, provided such employee is not covered by a fund or plan of deferred compensation provided by another person with respect to compensation paid to such person by the Employer. 2.2 Leave of Absence. A "leave of absence" as used in the Plan means: (a) A leave of absence required by law or granted by a Zenith Company on account of service in military or governmental branches described in any applicable statute granting reemployment rights to employees who enter such branches, or 10 any other military or governmental branch designated by a Zenith Company, provided the employee returns to employment with a Zenith Company; (b) A leave of absence for any period the employee is absent from work by reason of the employee's pregnancy, the birth of the child of the employee, the placement of a child with the employee in connection with the adoption of the child by the employee or the caring for the child for a period beginning immediately after such birth or placement; and (c) Any other absence from active employment with a Zenith Company that is approved by such Zenith Company and not treated by it as a termination of employment. Leaves of absence granted by a Zenith Company will be governed by rules uniformly applied to all employees of that Zenith Company similarly situated. 2.3 Reemployment Within One Year. If an employee terminates employment with the Zenith Companies and is later rehired by the Zenith Companies within one year of his termination of employment (or earlier absence from service for reasons other than a termination) he shall not be considered to have incurred such prior termination of employment. Solely for purposes of determining whether an employee has incurred a break-in-service for purposes of sections 6.2 and 9.1, the severance from service date of an employee who is on a maternity or paternity leave of absence (as described in section 2.2(b)) shall be the earlier of the date his employment terminates on account of resignation, retirement, discharge on the second anniversary of the first day of his absence. 2.4 Transferred Employees. An employee of an Employer who was not but who becomes a "covered employee" shall be credited with all of his years of service with a Zenith Company for purposes of the Plan. In addition, any "covered employee" who no longer is a "covered employee" or who otherwise becomes an inactive participant in the Plan 11 shall no longer be eligible to make employee contributions to the Plan or have Employer contributions made to the Plan on his behalf, but his accounts under the Plan shall continue to be held, adjusted and invested subject to the terms of the Plan. 2.5 Hours of Service. An "hour of service" as used in the Plan means: (a) Each hour for which an employee is directly or indirectly compensated or entitled to be compensated for his performance of duties for a Zenith Company as an employee (with each overtime hour being taken into account as if it were a normal work hour); (b) Each hour for which an employee is directly or indirectly compensated or entitled to be compensated by a Zenith Company with respect to a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacitation (including disability), layoff, military duty or leave of absence (as defined in section 2.2); provided that not more than 501 hours of service shall be credited to an employee on account of any single continuous period during which he performs no duties and an employee shall not be credited with hours of service under this subsection for any period during which he performs no duties (i) if such employee's compensation for such period is in the form of payments made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation or state disability insurance laws, (ii) if such employee's compensation for such period constitutes reimbursement for medical or medically related expenses incurred by the employee, or (iii) if such employee's compensation for such period is paid to the employee while on maternity or paternity leave of absence (as described in section 2.2(b) above), provided credit for such period is granted in accordance with subsection (c) below; and (c) Each other hour required by federal law to be counted as an "hour of service," including 12 (i) each such hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Zenith Company, and (ii) each such hour for which an employee is on maternity or paternity leave of absence, but only for purposes of preventing the employee from incurring a one-year break-in-service; provided that not more than 501 hours of service shall be credited for payments of back pay, to the extent that such back pay is awarded for a period of time during which the employee did not or would not have performed duties as an employee, and not more than 501 hours of service shall be credited by reason of a maternity or paternity leave of absence. Compensated hours described in subsection (b) above shall be determined by multiplying the number of scheduled work days during the applicable period for which the employee is compensated by the number of hours in the average scheduled work day (based on the scheduled work week for his job classification then in effect, provided, that in the case of an employee without a regular work schedule, such hours shall be computed on the basis of an forty-five hour work week). Hours described in subsection (c) above for employees on maternity or paternity leave of absence shall be determined in the same manner as compensated hours. In determining hours of service, hours shall be credited for the period in which such duties were performed (regardless of when payment is due) or for which such compensation was paid and for this purpose the rules for crediting hours of service set forth in Section 2530.200b-2 of the Department of Labor regulations are hereby incorporated by reference; provided that hours of service credited under subsection (c) above for a maternity or paternity leave of absence shall be credited to the year in which such maternity or paternity leave begins if such hours are required to prevent a break in service from occurring in such year, or if not so required in that year, such hours shall be credited in the immediately following year. In construing the foregoing provisions of this section, ambiguities shall be resolved in 13 favor of crediting employees with hours of service. Hours required to be credited for more than one reason under this section which pertains to the same period of time shall be credited only once. 2.6 Military Service. Notwithstanding any provision of the Plan to the contrary, benefits and service credits with respect to "qualified military service" will be provided in accordance with Section 414(u) of the Code. ARTICLE 3 Participant Contributions 3.1 Participant Pre-Tax Savings Contributions. Subject to the conditions and limitations of this Article 3 and Article 8, for each plan year each participant may elect to reduce his compensation from his Employer by an amount equal to at least one percent but not in excess of fifteen percent (in whole multiples of one percent) of his compensation for each payroll check, and his Employer shall, in accordance with subsection 4.1(c), contribute the amount of such reduction to the Plan on his behalf as an "employee pre-tax savings contribution." The maximum combined pre-tax and after-tax (as described in section 3.2 below) contributions made by any participant for any plan year cannot exceed 19 percent of the participant's compensation. Notwithstanding any provision contained herein to the contrary, a participant's employee pre-tax savings contribution in any calendar year to this Plan and to any other plan maintained by a Zenith Company in which such participant participates may not exceed $9,500 for 1997 (or such other maximum amount as may be permitted from time to time by the Secretary of the Treasury or the Secretary's delegate or by law). The employee pre-tax savings contributions made on behalf of a participant and the earnings thereon shall be fully vested and nonforfeitable at all 14 times. Each participant shall elect his rate of employee pre-tax savings contributions pursuant to procedures established by the Plan Administrator. Completion of such election shall evidence the participant's authorization to reduce his compensation and his agreement (until subsequently modified by such participant as permitted by section 3.4 or until he shall cease to be an active participant) to have employee pre-tax savings contributions made on his behalf at his chosen rate. Any changes in a participant's compensation will result in an automatic adjustment in the amount (but not the percentage) of his compensation on a pre-tax basis which is contributed to the Plan. 3.2 Participant After-Tax Contributions. Subject to the conditions and limitations of this Article 3 and Article 8, for each plan year each participant may elect to contribute an amount equal to at least one percent but not in excess of ten percent (in whole multiples of one percent) of his compensation, and his Employer shall, in accordance with subsection 4.1(c), contribute such amount to the Plan on his behalf as an "employee after-tax contribution." The employee after-tax contributions made on behalf of a participant and the earnings thereon shall be fully vested and nonforfeitable at all times. Each participant shall elect his rate of employee after-tax contributions in accordance with rules established by the Plan Administrator. Completion of the appropriate election shall evidence the participant's authorization to contribute a percentage of his compensation to the Plan and his agreement (until subsequently modified by such participant as permitted by section 3.4 or until he shall cease to be an active participant) to have employee after-tax contributions made on his behalf at his chosen rate. Any changes in a participant's compensation will result in an automatic adjustment in the amount (but not the percentage) of his 15 compensation on an after-tax basis which is contributed to the Plan. 3.3 Form of Participant Contributions. All participant contributions shall be made by payroll deduction or by any other method approved by the Plan Administrator. The Plan Administrator may adopt appropriate regulations, procedures or forms pertaining to participant contributions. Participant contributions shall be paid to the Trust at such times as may be necessary or appropriate for the proper administration of the Plan and in accordance with applicable law, but no later than the fifteenth business day of the month following the month in which such amount would otherwise have been payable to the participant in cash. 3.4 Variation, Discontinuance and Resumption of Contributions. A participant may elect to reduce, increase or discontinue entirely his rate of contributions that are made by payroll deduction, and may elect to resume making contributions, in the manner established by the Plan Administrator. Any elections made in accordance with this section shall be made in a manner prescribed by the Plan Administrator for such purposes. 3.5 Compensation. Subject to the exclusions set forth below, a participant's "compensation" means such participant's total, regular cash remuneration for services rendered to the Employers as a covered employee, including salary, wages, vacation pay, payments in lieu of wages for periods during which a participant is absent from work on account of sickness or personal injury, overtime, bonuses, commissions and incentive compensation, but, excluding: (a) Any noncash compensation including any amounts contributed by the Employers for the participant's benefit to this Plan or any other profit sharing, pension, stock bonus or other retirement or benefit plan maintained by the Employers; provided that any employee after-tax amounts contributed on behalf of an employee under this Plan or any amounts under a salary reduction 16 arrangement under Sections 125 or 401(k) of the Code shall be included in compensation; (b) Any reimbursements for medical, dental or travel expenses, relocation allowances, auto allowances, expatriate allowances, club allowances, educational assistance allowances, non-cash awards, advance draws, other foreign service premiums or other special allowances; (c) Any income realized for income tax purposes as a result of (i) group life insurance, (ii) the grant or exercise of an option or options to acquire Company stock, the receipt of a cash appreciation payment in lieu of the exercise of such an option or options, the disposition of shares acquired by the exercise of such option, or (iii) the transfer of restricted shares of Company stock or restricted property of an Employer, or the removal of any such restrictions; (d) Any severance paid as a result of the participant's termination of employment; (e) Any compensation paid or payable to the participant, or to any governmental body or agency on account of the participant, under the terms of any state or federal law requiring the payment of such compensation because of the participant's voluntary or involuntary termination of employment with any Zenith Company; and (f) Effective January 1, 1997, any compensation paid or payable to the participant which is in excess of $160,000 (or such other amount as may be determined from time to time by the Secretary of Treasury or his delegate or by law and for prior years the maximum amount as then in effect under Section 401(a)(17) of the Code (or its predecessor section)). Unless otherwise provided, for purposes of the limitations set forth in Article 8, a participant's compensation shall mean the remuneration (both cash and non-cash) for which the Employer is required to report to the participant for the plan year, plus amounts contributed pursuant to a salary reduction agreement under Sections 125 or 401(k) of the Code. 17 3.6 Rollover Contributions. The Plan Administrator may in its discretion permit any employee of an Employer to (i) have any portion of an eligible rollover distribution (as defined in section 6.9) paid directly to the Plan from an eligible retirement plan (as defined in section 6.9) or (ii) make a qualifying rollover contribution to the Plan. A "qualifying rollover contribution" means the contribution to the Plan by an employee of: (a) A portion or all of a qualifying total distribution (as defined in Section 402(a)(5)(E)(i) or as referred to in Section 403(a)(4) of the Code); provided that the portion, if any, of a qualifying total distribution consisting of nondeductible employee contributions may not be contributed to the Plan; or (b) A rollover contribution (as defined in Section 408(d)(3) of the Code). A qualifying rollover contribution to be made by an employee must be made to the Trust, in care of the Plan Administrator, by not later than the sixtieth day following the day upon which the employee received the qualifying total distribution or rollover contribution with respect to which the qualifying rollover contribution is to be made. The Plan Administrator shall refuse to permit the contribution to the Plan of property other than money (and shall require instead that the property be sold and the proceeds contributed). A participant's direct or qualifying rollover contribution shall be credited to the participant's rollover account (as defined in section 5.1(e)) as of the accounting date coincident with or next following the date the contribution is made. Subject to the provisions of Article 6, a participant's rollover account shall be distributed to the participant (or his beneficiary in the event of his death) at the time and in the manner directed by the participant. 18 3.7 Transferred Benefits. If an employee of an Employer had previously participated in any other qualified pension, profit sharing, stock bonus or other retirement or employee benefit plan and such other plan permits the transfer to this Plan of the vested portion of such employee's benefits under such other plan, and if so directed by the Plan Administrator in its discretion, the Trustee shall accept a transfer of cash to this Plan equal to the vested benefits of such employee under such other plan which are being transferred to this Plan. The participant's transferred benefits shall be credited to his rollover account (or any other applicable account as designated by the Plan Administrator) as of the accounting date coincident with or next following the date the transfer is made. 3.8 Restricted Participation with Respect to Rollover Contributions and Transferred Benefits. For purposes of the Plan, a participant with respect to whom a direct or qualifying rollover contribution or a transfer of benefits is made in accordance with section 3.6, 3.7 or 6.9, respectively, shall not be eligible to make employee contributions or have matching Employer contributions made on his behalf before becoming a participant for all purposes of the Plan in accordance with section 2.1. ARTICLE 4 Employers' Contributions 4.1 Employers' Contributions. Effective as of July 1, 1997, subject to the conditions and limitations of this Article 4 and Article 8, for each plan year each Employer will make a contribution under the Plan for each participant employed by it during that plan year in an amount equal to the sum of the following: (a) Employer Matching Contributions. For each plan year, each Employer shall make a 19 matching contribution of 50 percent with respect to the first 6% of a participant's employee pre-tax savings contributions; provided, however, that such matching contribution for the short plan year beginning July 1, 1997 and ending December 31, 1997, shall be with respect to employee pre-tax savings contributions made during such short plan year). Solely with respect to such short plan year, any participant who is prevented from making any additional employee pre-tax savings contributions because of the $9,500 limitation, shall, nonetheless, be entitled to receive the full employer matching contribution for such short plan year. The Employer's matching contribution shall be made at such time as is deemed necessary or appropriate for the proper administration of the Plan, but in no event later than the date for filing the Employer's federal income tax return for the year for which the contribution is made. (b) Employer Retirement Contribution. In addition, each plan year, each Employer shall contribute three percent of participant compensation; provided, however, that such Employer contribution for the short plan year beginning July 1, 1997 and ending December 31, 1997, shall be made only with respect to a participant's compensation for such short plan year. At the discretion of the Company, the Employers may elect to contribute an additional amount to the Plan as a retirement contribution. Such contributions shall be allocated among participants who are employed by an Employer on the last day of the plan year or who terminated employment before the end of the plan year because of retirement at or after attaining age 55, disability or death. Such Employer contributions shall be allocated to such participant's account pro rata based on compensation. The Employer contributions shall be made at such time as is deemed necessary for the proper administration of the Plan, but in no event later than the date for filing the Employer's federal income tax return for the year for which the contribution is made. (c) Employee Contributions. For each plan year, each Employer will contribute to the Plan 100 percent of the contributions (as defined in sections 3.1 and 3.2), if any, elected by the participant for that plan year. 20 4.2 Payment of Employers' Contributions; Company Stock. Each Employer's contribution under the Plan for any plan year shall be paid to the Trust implementing the Plan without interest. Such contributions may be made in cash or Company stock, as determined by the Company in its sole discretion. The Company may, at its discretion, issue shares of Company stock from authorized but unissued shares of Company stock or issue Treasury shares of Company stock for purposes of making such contribution. If Company stock is contributed, its value shall be determined by averaging the closing price of the Company stock on the New York Stock Exchange for the 20 consecutive trading days immediately preceding the date selected by the Board of Directors of the Company for such valuation, provided that the Company stock is in fact traded for at least ten of such days on such Exchange. If the Company stock is not traded for at least ten days on such Exchange, the value of the Company stock shall be determined in good faith by the Company, based on all relevant factors as of the date of the contribution, including an appraisal independently arrived at by a person who customarily makes such appraisals and who is independent of the Zenith Companies. 4.3 Verification of Employers' Contributions. The certificate of an independent accountant selected by the Company as to the correctness of any amounts or calculations relating to the Employers' contributions under the Plan for any plan year shall be conclusive on all persons. ARTICLE 5 Plan Accounting and Investment Funds 5.1 Participant Account Balances. The Plan Administrator will establish and maintain the following separate accounts with respect to plan participants: (a) Employee Pre-Tax Savings Contributions Account. An "employee pre-tax 21 savings contributions account" shall be maintained on behalf of each participant which will represent the pre-tax savings contributions made on the participant's behalf to the Plan and the earnings, losses, expenses, appreciation and depreciation attributable thereto. Prior to the effective date, this account was referred to as the "ESP II Savings Account." (b) Employee After-Tax Contributions Account. An "employee after-tax contributions account" shall be maintained on behalf of each participant which will represent the after-tax contributions made on the participant's behalf to the Plan and the earnings, losses, expenses, appreciation and depreciation attributable thereto. Prior to the effective date, this account was referred to as the "ESP I Savings Account." (c) Employer Matching Contributions Account. An "employer matching contributions account" shall be maintained on behalf of each participant which will represent the matching contributions made on his behalf to the Plan and the earnings, losses, expenses, appreciation and depreciation attributable thereto. (d) Employer Retirement Contributions Account. An "employer retirement contributions account" will be maintained on behalf of each participant which will represent the Employer retirement contributions made on his behalf to the Plan and the earnings, losses, expenses, appreciation and depreciation attributable thereto. Prior to the effective date this account was referred to as the Regular Retirement Account and the Regular Optional Account. (e) Prior Plan Vested Optional Account. A "prior plan vested optional account" shall be maintained on behalf of each participant int he prior plan which shall represent the fully vested amounts in the Vested Optional Account (as defined in the prior plan) and the earnings, losses, expenses, appreciation and depreciation attributable thereto on and after the effective date. 22 (f) Rollover Account. A "rollover account" shall be maintained on behalf of each participant which shall represent the participant's rollover contributions and transferred benefits to the Plan made in accordance with section 3.6, 3.7 or 6.9 of the Plan and the earnings, losses, expenses, appreciation and depreciation attributable thereto. The Plan Administrator may maintain such other accounts in the name of participants as it considers desirable. The maintenance of separate account balances shall not require physical segregation of Plan assets with respect to each account balance. The accounts maintained hereunder represent the participants' interests in the Plan and Trust and are intended as bookkeeping account records to assist the Plan Administrator and the Trustee in the administration of the Plan. Any reference to a participant's "accounts" or "account balances" shall refer to all of the accounts maintained in the participant's name under the Plan. 5.2 Accounting Dates. Effective as of January 1, 1996, an "accounting date" is each day of the plan year that the New York Stock Exchange is open. 5.3 Date of Crediting Contributions. Employer contributions arising from a participant's election to make contributions shall, in accordance with administrative procedures established by the Plan Administrator, be credited to such participant's employee pre-tax savings or after-tax contributions account. Employer matching contributions shall be credited to a participant's employer matching contributions account as of the last day of the plan year or as otherwise may be determined by the Plan Administrator for the proper administration of the Plan. Employer retirement contributions shall be credited to a participant's employer retirement contributions accounts as of the last day of the plan year to which they relate and in 23 accordance with procedures established by the Plan Administrator. 5.4 Investment of Account Balances. The Trustee, the investment manager and any insurance institution responsible for investment of Trust assets shall be permitted to commingle the assets of the Trust for purposes of investment with the assets of other plans or trusts which are intended to qualify for a federal tax exemption under Sections 401(a) and 501(a) of the Code. Any documents which are required to be incorporated in the Plan and the Trust to permit such commingled investments are hereby so incorporated. Except to the extent required by section 5.5, segregated investment of Plan and Trust assets shall not be required with respect to any one or more Plan participants. Each account invested in a particular investment fund shall represent an undivided interest in such investment fund which corresponds to the balance of such account. 5.5 Investment Funds. From time to time the Plan Administrator or its delegate may cause the Trustee or an investment manager to establish one or more investment funds for the investment and reinvestment of Plan assets. The continued availability of any investment fund is necessarily conditioned upon the terms and conditions of investment management agreements and other investment arrangements. While the Plan Administrator or its delegate may arrange with the Trustee and investment managers for the establishment of investment funds, the continued availability of these funds cannot be assured, nor is it possible to assure that the arrangements or the investment funds managed by a particular investment manager or by the Trustee will continue to be available on the same or similar terms. The Plan Administrator or its delegate may direct the establishment of additional investment funds or may terminate any investment fund as it deems appropriate and in the best interest of Plan participants. Participants will be informed of the investment funds to be provided under the 24 Trust and any changes in such investment funds. Except as provided in this section and sections 5.6 and 5.7, participants' accounts shall be invested in any one or more investment funds as described above. 5.6 Investment Elections. Each participant may elect, in accordance with uniform rules established by the Plan Administrator and in addition to the Company stock fund, to have his account balances (after all adjustments as of that date have been made) invested in accordance with his election entirely in one of the investment funds or partially in several of the investment funds. Similarly, each participant may elect, in accordance with uniform rules established by the Plan Administrator, to have future contributions made on his behalf invested in accordance with his election entirely in one of the investment funds or partially in several of the investment funds. All investment elections and all transfers to or from an investment fund shall be made in whole percentages. 5.7 Manner of Making Investment Elections. All investment elections shall be communicated through voice response or in such other manner as may be prescribed by the Plan Administrator. The instructions shall be authorized by the participant making the election and shall be communicated to the Plan Administrator or its agent. All investment elections shall continue in force until changed or revoked by the participant. Investment elections shall be made, changed or revoked at such times as may be permitted by the Plan Administrator and shall be implemented as soon as practicable. Effective as of July 1, 1997, if a participant fails to file or make a timely election with respect to the investment of all or part of the portion of his account that is subject to his investment directions (determined in accordance with section 5.6), the portion over which the participant has not directed the investment shall be invested in the stable value fund or such other similar investment fund. 25 5.8 Investment Risks. Completion of any investment election by a participant shall constitute an agreement by such participant to assume responsibility for the risk of investment of his account in accordance with such investment election, it being expressly understood that all of the investment funds involve some measure of investment risk including the risk of diminution or loss of the principal amount of any investment. All fiduciary responsibility with respect to the allocation of his accounts between the various funds shall be considered to be delegated to the participant who directs the investment of his contributions and accounts. 5.9 Plan Expenses. All costs and expenses incurred in connection with the general administration of the Plan and Trust shall, to the extent not paid by the Employers, be allocated among the investment funds in the proportion in which the amount invested in each such fund bears to the amount invested in all funds as of the accounting date preceding the day of allocation, provided that all costs and expenses directly identifiable to one fund shall be allocated to that fund. Notwithstanding the above, the Plan Administrator retains the right to charge some or all of the Plan charges to participant accounts. 5.10 Adjustment of Participants' Accounts. As of each accounting date the account balances of Plan participants shall be adjusted to reflect payments and withdrawals of benefits, adjustments in the values of the trust fund and of the investment funds, if any, and Employers' and participants' contributions. 5.11 Statement of Accounts. As soon as practicable after the last day of each plan year, and at such other times as the Plan Administrator considers desirable, each participant will be furnished with a statement reflecting the condition of his accounts as of that date. No participant, except a member of the 26 Committee, shall have the right to inspect the records reflecting the accounts of any other participant. 5.12 Voting Shares of Company Stock. Each participant shall be entitled to give voting instructions to the Trustee with respect to the number of whole and fractional shares of Company stock which bears the same ratio to the total number of shares of Company stock held in the Zenith Stock Fund as the dollar amount in such participant's accounts in the Zenith Stock Fund bears to the total dollar value of the Zenith Stock Fund as the most recent accounting date for which an valuation has been established prior to the shareholders record date for such vote, and the Trustee shall vote the shares in accordance with such instructions. Such instructions shall be maintained by the Trustee as confidential and shall not be disclosed to any person, including the Company. Written notice of any meeting of shareholders of the Company, a request for voting instructions, and directions for returning such instructions to the Trustee shall be given by the Company, at such time and in such manner as the Company shall determine, to each participant entitled to give instructions or voting shares of stock at such meeting, except that the Trustee shall give such notice, request, and directions upon request of the Company or if required by law in order to maintain the confidentiality of participants' voting instructions. All shares of Company Stock with respect to which voting instructions are not received shall, to the extent permitted by law, be voted by the Trustee in the same proportions as shares for which instructions are received. 5.13 Tender Offers. (a) Rights of Participants. In the event a tender offer is made generally to the shareholders of the Company to transfer all or a portion of their shares of Company stock in return for valuable consideration, including but not limited to offers regulated by section 14(d) of the 27 Securities Exchange Act of 1934, as amended, the Trustee shall respond to such offer in accordance with instructions to the Trustee obtained from the participant in respect of such number of whole and, to the extent practicable, fractional shares of Company stock held in the Zenith Stock Fund which bears the same ratio to the total number of shares of Company stock so held in the Zenith Stock Fund as the dollar amount in such participant's accounts in the Zenith Stock Fund bears to the total dollar value of the Zenith Stock Fund as of the most recent accounting date for which a valuation has been established. Each participant shall be entitled to give instructions to the Trustee with respect to tendering or declining to tender or withdrawal from tender he can give; provided, however, that the Trustee may establish reasonable rules restricting the rights of participants to change instructions. Such instructions shall be maintained by the Trustee as confidential and shall not be discussed with any person, including the Company. The Trustee shall respond to any such tender offer in respect to shares of stock for which no instructions are received in the same proportions as shares for which instructions are received. (b) Duties of the Company. Within a reasonable time after the commencement of a tender offer, the Company shall provide to each participant: (i) the offer to purchase as distributed by the offerer to the shareholders of the Company; (ii) a statement of the number of full and fractional shares of Company stock calculated as allocable to his accounts in the Zenith Stock Fund in accordance with the first sentence of this section 5.13; and (iii) directions as to the means by which a participant can give instructions to the Trustee with respect to the tender offer; except that the Trustee shall provide such documents, statement, and directions upon request of the Company or if required by law in 28 order to maintain the confidentiality of participants' instructions. (c) Investment of Tender Offer Proceeds. If the Trustee shall receive proceeds from the tender of shares represented by all or a portion of the interest in the Zenith Stock Fund allocated to a participant's account, such proceeds shall be invested in accordance with the participant's current investment election. ARTICLE 6 Distribution of Account Balances 6.1 Vesting. Upon a participant's termination of employment because of death, because of retirement (as defined below), or because of disability (as defined below), the participant shall have a 100 percent vested and nonforfeitable interest in the balance in all of his accounts. Upon a participant's termination of employment for any other reason, the participant will have a 100 percent vested and nonforfeitable interest in the balance of his employee pre-tax savings contributions account, employee after-tax contributions account, prior plan vested optional account, and rollover account and shall be vested in the balance of his employer matching contributions account and employer retirement contributions account in accordance with the following schedule:
Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 years but less than 3 25% 3 years but less than 4 50% 4 years but less than 5 75% 5 years or more 100%
The vested balances in all of the participant's accounts shall be distributed to or on behalf of the participant 29 (after all adjustments required under the Plan as of that date have been made but subject to any further adjustments required under the Plan prior to distribution of accounts, along with any contributions made previously by or on behalf of such participant but not credited to his accounts), or in the event of death to his beneficiary, in accordance with section 6.3. For purposes of above, an employee will be credited with "years of service" equal to his period of employment (determined in completed full years and days in excess of completed full years) by the Zenith Companies commencing with his employment commencement date and ending with his severance from service date. An employee's "employment commencement date" shall be the date the employee first performs an hour of service (as defined in section 2.5) for a Zenith Company and his "severance from service date" shall be the earlier of the date his employment with all of the Zenith Companies terminates on account of resignation, retirement, discharge or death or the first anniversary of the first day of a period during which the employee is absent from service with the Zenith Companies (with or without pay) for any reason other than resignation, retirement, discharge, death or leave of absence on account of military service (as described in section 2.2(a)) provided the employee returns to service within the period provided by applicable law. "Retirement" means a participant's voluntary termination of employment at or after attaining age 55 years or after completing at least 20 years of service with the Zenith Companies. "Disability" means total and permanent incapacity of a participant to perform his employment duties (as determined by the Plan Administrator). 6.2 Forfeitures. The extent to which a participant's employer matching contributions and retirement contributions accounts are not fully vested shall be a "forfeiture". Except as provided below, a forfeiture shall be treated the same as other participant accounts (subject 30 to adjustment above) until the earlier of (i) the accounting date on which the participant with respect to whom the forfeiture arose incurs a "one-year break in service" (as defined below) or (ii) the accounting date as of which the participant receives a total distribution of his accounts, and then shall be applied to reduce his Employer's contributions to the Plan in the then current plan year. If the participant with respect to whom a forfeiture arose is reemployed by an Employer before he incurs five consecutive one year breaks in service, the forfeiture (as it may have been adjusted in accordance with the Plan) shall be reinstated. Forfeitures shall be applied to reduce the employers' contributions for the plan year coincident with or next following the date it arose, provided that such forfeiture is reinstated if such participant is reemployed by an Employer before he incurs five consecutive one year breaks in service. A "one-year break in service" shall occur on the last day of a 12-month period commencing on a participant's severance from service date and ending on the day prior to his reemployment with a Zenith Company. A "five-year break in service" means a period of five consecutive one-year breaks in service. Notwithstanding the above, any forfeitures which, as of the effective date, remain unallocated even though paragraph (i) above has been satisfied shall be allocated to participant accounts in accordance with the terms of the prior plan. 6.3 Methods of Benefit Payment. A participant's vested account balances which are distributable under section 6.1, shall be distributed to or for the benefit of the participant following his termination of employment by payment in a lump sum. In lieu of a lump sum, as an optional form of distribution, a participant can elect (in the manner provided by the Plan Administrator) to have his vested benefits paid in one of the following optional forms of distribution: 31 (a) Life Annuity. The life annuity form of payment consists of an annuity payable for the life of the participant which is the amount of benefit which can be purchased with 100 percent of the participant's vested account balances. A participant who elects the life annuity form of payment and who is married at the time of his annuity commencement date must get his spouse's consent in writing (in accordance with procedures established by the Plan Administrator) to waive the joint and survivor form of annuity. Such election to waive must describe the effect of such election and the rights of the spouse to revoke such waiver. (b) Installments. The installment form of payment shall consist of a series of annual payments over a period of time not less than two years nor more than ten years. (c) Joint and Survivor Annuity. The joint and survivor annuity shall consist of payment in the form of an immediate annuity payable for the life of the participant with a survivor annuity payable for the life of the participant's designated beneficiary and which is the amount of benefit which could be purchased with 100 percent of the participant's vested account balances. If the participant's spouse is not the designated beneficiary, the joint and survivor annuity must be designed to assure that at least 50 percent of the present value of the amount available for distribution is paid within the life expectancy of the participant. 6.4 Time and Benefit of Payment. Unless the participant elects to defer payment, payment of a participant's benefits will be made within a reasonable period of time after a participant's termination of employment, but not later than 60 days after the end of the plan year in which occurs the later of the participant's employment termination date or his attainment of age 65 years; provided that payment of each participant's account balances must commence no later than the April 1 of the calendar year following the calendar year in which he 32 attains age 70 1/2 years. In addition, notwithstanding anything in this Article 6 to the contrary, (i) if at any time, a participant's account balances exceed or exceeded $3,500, no amount shall be distributable to the participant prior to the date he attains age 65 years without his consent, and (ii) if a participant's vested account balances do not exceed, and have never exceeded, $3,500, the participant's account balances shall be automatically distributed to the participant (or his beneficiary) in a single payment. If distribution of a participant's accounts has not commenced prior to such participant's death, then the participant's accounts shall be distributed within five years of the date of death unless the participant's designated beneficiary is his surviving spouse in which event distribution of the participant's accounts to such surviving spouse need not begin until the date the participant would have attained age 70 1/2 years. If the surviving spouse dies before distributions to such spouse begin, distribution of the participant's vested accounts pursuant to section 6.3 shall be made as if the surviving spouse were the employee. 6.5 Designated Beneficiaries. A participant may from time to time designate a beneficiary or beneficiaries to whom the participant's benefits will be distributed in the event of the participant's death prior to complete payment of his benefits under the Plan. A participant may designate contingent or successive beneficiaries and may name individuals, legal persons or entities, trusts, estates, trustees or other legal representatives as beneficiaries. A beneficiary designation properly completed and filed will cancel all such designations filed earlier. Notwithstanding the foregoing or any beneficiary designation filed by a participant, if a participant is married at the date of his death, the participant's surviving spouse will be his designated beneficiary for all purposes of the Plan unless the surviving spouse consents in writing to the 33 participant's designation of another beneficiary. A beneficiary properly designated can elect another form of payment than had been previously elected by the participant. Beneficiary designations must be completed and filed with the Plan Administrator during the participant's lifetime, however, his surviving spouse may consent to a designation after his death. The consent of a surviving spouse to the participant's designation of another beneficiary must be in writing, must acknowledge the effect of such designation, and must be witnessed by a Plan representative or a notary public. 6.6 Payment to Substitute Beneficiaries. If benefits remain to be paid with respect to a Plan participant at a time when the Plan Administrator is unable to locate the participant, or his beneficiary or beneficiaries designated in accordance with section 6.5, or following the death of the participant and such beneficiaries, and if the participant failed to designate one or more other beneficiaries in the manner described in section 6.5, then the Plan Administrator shall cause the benefits for such participant to be distributed or paid to the person or persons who can be located and agree to accept such amounts within the applicable priority classification set forth below. Participants and designated beneficiaries are required to maintain a current post office address on file with the Plan Administrator by notifying the Plan Administrator of such address in care of the Employer. A substitute beneficiary will not be determined under this section with respect to a missing participant or missing designated beneficiary unless the participant or designated beneficiaries, as the case may be, have failed to claim the participant's account balances or notify the Plan Administrator of their whereabouts within three years after the Plan Administrator notifies such participant or beneficiaries at their last post office addresses filed with the Plan Administrator. Such notice shall describe the 34 amounts to which the participant or the beneficiaries are entitled and shall describe the substitution procedures of this section. In disposing of a participant's benefits in accordance with this section, after three plan years following a participant's termination of employment and after unsuccessful attempts have been made by the Plan Administrator to locate the participant, the benefits of the participant or of any beneficiary will be disposed of in any manner permitted by law which the Plan Administrator considers to be fair and equitable. 6.7 Payment With Respect to Incapacitated Participants or Beneficiaries. If any person entitled to benefits under the Plan is under a legal disability or in the Plan Administrator's opinion is incapacitated in any way so as to be unable to manage his financial affairs, the Plan Administrator may direct the payment of such benefits to such person's legal representative or to a relative or friend of such person for such person's benefit, or the Plan Administrator may direct the application of such benefits to the benefit of such person. Payments made in accordance with this section shall discharge all liabilities for such payments under the Plan. 6.8 Final Court Orders. Notwithstanding the other provisions of this Article 6, if the Trustee is required by a final court order to distribute the benefits of a participant other than in the manner required under the Plan, then the Trustee shall cause the participant's benefits to be distributed in a manner consistent with such final court order. The Trustee shall not be required to comply with the requirements of a final court order in an action in which the Trustee, the Plan Administrator, the Plan or the Trust was not a party, except to the extent such order is a qualified domestic relations order (as defined in Section 414(p) of the Code). 35 6.9 Direct Rollover Option. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this section 6.9, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (a) As used in this section 6.9, an "eligible rollover distribution" means any distribution of all or any portion of the vested balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Company stock). (b) As used in this section 6.9, an "eligible retirement plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) As used in this section 6.9, a "distributee" includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of 36 the Code, are distributions with regard to the interest of the spouse or former spouse. (d) As used in this section 6.9, a "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. ARTICLE 7 Withdrawals and Loans During Employment 7.1 Withdrawal of Employee After-Tax Contributions and Rollover Accounts. A participant may request at any time, but not more frequently than twice in any plan year, a withdrawal of his employee after-tax contributions and rollover accounts, including any earnings thereon, in accordance with rules established by the Plan Administrator. All withdrawals shall be in cash. 7.2 Under Age 59-1/2 Hardship Withdrawals. A participant who is experiencing a financial hardship may request a withdrawal of all or a portion of his employee pre-tax savings and vested employer matching and retirement contributions accounts by filing a written request with the Plan Administrator in accordance with such rules and procedures established by the Plan Administrator. The Plan Administrator will have discretion to grant or deny any such requests for hardship withdrawals, subject to the following: (a) Each request for financial hardship must describe the hardship for which the withdrawal is requested and provide appropriate documentation. If the participant is married, each request for a financial hardship withdrawal must include the consent of the participant's spouse. (b) No amounts attributable to earnings on an employee pre-tax savings contributions account after December 31, 1988, can be withdrawn. (c) A withdrawal shall be considered on account of financial hardship if it is necessary in light of the participant's immediate and heavy financial need as described in (A) below and it is 37 necessary to satisfy such financial need, as described in (B) below. (i) A withdrawal will be on account of immediate and heavy financial need only if it is on account of (I) medical expenses described in Section 213(d) of the Code incurred by the participant or the participant's spouse or dependents; (II) purchase (excluding mortgage payments) of a principal residence for the participant; (III) payment of tuition and related educational fees for the next twelve months of post-secondary education for the participant or the participant's spouse, children or dependents; (IV) the need to prevent the eviction of the participant from the participant's principal residence or the foreclosure on the mortgage of the participant's principal residence; or (V) such other purpose deemed by the Commissioner of the Internal Revenue Service to constitute immediate and heavy financial need. (ii) A withdrawal will be necessary to satisfy the financial need described in (A) above only if (I) the withdrawal does not exceed the amount necessary to meet such financial needs (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the withdrawal); and (II) the participant has obtained all distributions, other than hardship withdrawals, under all plans maintained by the Zenith Companies, unless it is determined by the Plan Administrator that this requirement as it relates to participant loans should be waived because it is highly likely that there would be a default on such loan. (d) Notwithstanding the provisions of section 3.1, the aggregate participant pre-tax savings contributions to the Plan and to any other 38 plan maintained by the Zenith Companies for the calendar year immediately following the calendar year in which the participant receives the hardship withdrawal shall not exceed the excess of (A) the maximum amount specified in section 3.1 for such year over (B) the amount of such participant's pre-tax savings contributions to this Plan and to any other plan maintained by the Zenith Companies in the calendar year in which the participant receives the hardship withdrawal. 7.3 Age 59-1/2 Withdrawals. A participant who has attained age 59-1/2 may request at any time, but not more frequently than four times in any plan year, a withdrawal of part or all of the balance by his accounts under the Plan. 7.4 Loans to Participants. The Plan Administrator may direct that a loan be made to a participant, other than a former employee, subject to the following: (a) Each request for a loan under this section must be made in accordance with the rules and procedures adopted from time to time by the Plan Administrator. (b) Each loan must be evidenced by a note on a form furnished by the Plan Administrator or its designee and must be secured by a pledge of up to 50 percent of the participant's vested account balances as of the accounting date immediately preceding the date as of which the loan is made. 39 (c) The principal amount of each loan, when added to any other outstanding loan balances of a participant under the Plan and all other plans of the Zenith Companies, may not exceed the lesser of $50,000 (reduced by the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date the new loan is made) or the lesser of $10,000 (assuming the participant's vested account balances equal or exceed $10,000 as of such date) or 50 percent of the participant's vested account balances as of the accounting date immediately preceding the date as of which the loan is made. The minimum amount of any loan is $1,000. (d) Each loan will be for a term not exceeding five years; provided that the term of a loan may be for a term not exceeding 15 years where the loan is used to acquire any dwelling unit which within a reasonable time is to be used as a principal residence of the participant. A participant shall be permitted no more than two loans outstanding at any one time. (e) Each loan will bear interest at a reasonable rate (commensurate with the prevailing rate charged by persons in the business of making loans under similar circumstances) established by the Plan Administrator at the beginning of each calendar quarter in a uniform and nondiscriminatory manner (but not less than five percent nor greater than the maximum rate permitted by law), and must be amortized in level payments, made through regular payroll deductions (or by any other method permitted by the Plan Administrator), made not less frequently than quarterly, over the life of the loan. (f) Each note evidencing a loan to a participant shall be held on the participant's behalf and shall be considered an investment of such participant's accounts. Accordingly, principal and interest payments on the note shall be credited to such accounts on the participant's behalf and reinvested in the investment funds under the Plan in accordance with a participant's then effective investment election. (g) The amount of each loan shall be withdrawn from a participant's accounts in the 40 following order (and returned upon repayment in reverse order): employer matching contributions account, employer retirement contributions account, employee pre-tax savings contribution account and rollover account. (h) Upon default, the Plan may foreclose on the loan at the earliest opportunity permitted by law and the loan will be treated as a taxable distribution at such time. During the period, if any, between the date of the event constituting default and the date of foreclosure, interest on the loan will continue to accrue and shall be charged to the participant's account. The distribution of a participant's canceled note to him (or to his beneficiary in the event of his death) shall be considered as a payment for purposes of the Plan. The following events will constitute default on a loan: (i) the failure to make an installment payment on the payday on which it becomes due or the expiration of a grace period in the loan note; (ii) any other person (other than the Trustee) acquires an interest in the participant's account except as otherwise required by law; (iii) the participant dies or becomes legally incompetent; (iv) bankruptcy or insolvency proceedings are instituted by or against the participant; or (v) the participant's employment with the Zenith Companies is terminated for any reason, including retirement, disability, resignation or discharge. In the event of (iii), (iv) or (v) above, there shall be no default if, within the grace period (as defined in the loan documents) following the occurrence of (iii), (iv) or (v), the participant (or his estate or legal representative, as the case may be) pays the remaining balance of the loan together with accrued interest thereon. Notwithstanding 41 anything in this section 7.4 to the contrary, in the event of (v) above there shall be no default if the participant continues to be a party in interest (as defined in Section 3(14) of ERISA) following his termination of employment. (i) The Plan Administrator may establish such other rules and regulations (which shall be uniformly applicable to all participants similarly situated) as it may deem necessary regarding the granting of loans, including loan fees (which may be charged directly to the participant or to the participant's account). 7.5 No Representation Regarding Tax Effect of Withdrawals or Loans. Neither an Employer, the Plan Administrator, the Trustee, nor any other person shall be construed as representing the tax effects of any withdrawals or loans in accordance with this Article 7. It shall be the responsibility of participants requesting withdrawals or loans to consider the tax effects of such withdrawals or loans requested by such participant. All loans and withdrawals shall be deducted, pro-rata, from each investment fund in which the participant is invested in at the time the loan or withdrawal is made except for those investment funds which are reduced to zero as the result of such loan or withdrawal. ARTICLE 8 Limitations 8.1 Contribution Limitations. Section 415 of the Code imposes certain limitations on the amount of contributions that may be allocated to a participant under a defined contribution plan (as defined in Section 414(i) of the Code) maintained by his employer. If a participant in a defined contribution plan maintained by his employer also is a participant in a defined benefit plan (as defined in Section 414(j) of the Code) maintained by such employer, Section 415 of the Code imposes certain combined limitations 42 as to the aggregate amount of contributions and benefits that may be provided for the participant under both types of plans. This Plan is a defined contribution plan and, therefore, each participant in the Plan shall be subject to the maximum contribution and benefit limitations set forth in section 8.2 or section 8.3, if applicable, irrespective of any other provisions of the Plan. For purposes of Section 415 of the Code and this Article 8, the "limitation year" with respect to this Plan is the plan year, and a participant's "total compensation" means, with respect to any plan year, the total compensation paid to the participant during that year for services rendered to the Zenith Companies as an employee that is subject to withholding for federal income tax purposes (before taking into account any withholding exemptions), but excluding any noncash compensation and any compensation deferred beyond the participant's termination of employment. In applying the limitations set forth in sections 8.2 and 8.3, reference to the Plan shall mean the Plan and all other defined contribution plans (whether or not terminated) maintained by the Zenith Companies and reference to a defined benefit plan maintained by the Zenith Companies shall mean that plan and all other defined benefit plans (whether or not terminated) maintained by the Zenith Companies. 8.2 Participant Covered by Defined Contribution Plan. If a participant in the Plan is not covered by a defined benefit plan maintained by the Zenith Companies, the annual addition (as defined below) which is allocated to his accounts under this Plan and under any related defined contribution plans maintained by the Zenith Companies shall not exceed the lesser of $30,000 (or, if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code, as adjusted pursuant to Section 415(d) thereof for such year) (the "defined 43 contribution dollar limitation") or 25 percent of the participant's total compensation for such limitation year. In applying the preceding limitation, the annual addition to a participant's accounts under any such related defined contribution plan will be limited before the annual addition to his account under this Plan is limited. Any excess contributions resulting from the allocation of forfeitures, a reasonable error in estimating a participant's annual earnings or such other limited facts and circumstances as the Commissioner of the Internal Revenue Service may prescribe and not allocable to a participant's accounts under the Plan by reason of the limitations on additions under Section 415 of the Code shall be disposed of as follows: (a) Any employee after-tax contributions or 401(k) savings contributions (including earnings thereon) to the extent they would reduce the excess amount shall be returned to the participant; (b) If after the application of subsection (a) above an excess amount still exists, and if the participant is covered by the Plan at the end of the limitation year, the excess amount shall be used to reduce Employer contributions for such participant in the next limitation year, and each succeeding year if necessary; and (c) If after the application of subsection (a) above an excess amount still exists and the participant is not covered by the Plan at the end of the limitation year, the excess amount shall be held unallocated in a suspense account and the suspense account shall be applied to reduce future Employer contributions for all remaining participants in the next limitation year, and each succeeding limitation year if necessary. A participant's "annual addition" for any plan year means the sum for that year of the following: (i) Employer Contributions. Employer contributions (including 401(k) 44 savings reduction contributions) credited to the participant's accounts under this Plan and under any related defined contribution plans; (ii) Forfeitures. Forfeitures credited to the participant's accounts under this Plan or under any related defined contribution plans; (iii) Participant After-Tax Contributions. The amount of the participant's after-tax contributions to this Plan or any related defined contribution or defined benefit plan (determined without regard to rollover contributions, if any); and (iv) Certain Medical Expenses for Key Employees. The amounts attributable to medical benefits allocated to an account of a key employee, as described in Section 419A(d) of the Code. 8.3 Participant Covered by Defined Contribution Plan and Defined Benefit Plan. If a participant in the Plan also is a participant in a defined benefit plan maintained by the Zenith Companies, the contributions made on behalf of the participant and the benefits payable to the participant shall be determined in a manner consistent with Section 415 of the Code, as follows: (a) Defined Contribution Fraction. A fraction shall be determined, the numerator of which shall be the participant's annual additions under all related defined contribution plans for each limitation year (determined in accordance with the plan provisions as in effect for such year), and the denominator of which shall be the aggregate of the "defined contribution limitation amounts" in effect for each year of the participant's employment by the Zenith Companies. The "defined contribution limitation amount" for any limitation year shall be the lesser of (i) 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such year, provided that in any year in which the Plan would be a top-heavy plan if 90 percent were substituted for 60 percent in section 15.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied by 25 percent of the participant's total compensation for such year. The "defined contribution limitation amount", for any year shall be the lesser of (i) 1.25 multiplied by the dollar limitation in effect under Section 415(c)(l)(A) of the Internal Revenue Code for such year, provided that in any year in which the Plan 45 would be a top-heavy plan if 90 percent were substituted for 60 percent in section 15.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied by 25 percent of the participant's total compensation for such year. The numerator of this fraction shall be adjusted in accordance with applicable regulations to preserve the participant's benefits accrued as of the close of the last limitation year beginning before December 31, 1986. (b) Defined Benefit Fraction. A fraction shall also be determined, the numerator of which shall be the benefits accrued or payable to or for such participant under the related defined benefit plans as of the end of the limitation year, and the denominator of which shall be the "defined benefit limitation amount" in effect for that year. The "defined benefit limitation amount" for any limitation year shall be the lesser of (i) 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such year, provided that in any year in which the Plan would be a top-heavy plan if 90 percent were substituted for 60 percent in section 15.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied by 100 percent of the participant's average annual total compensation for the three consecutive plan years during which the participant actively participated in such a plan and in which the participant's aggregate total compensation was the greatest; provided that such amount shall be appropriately adjusted if necessary as provided in Section 415(b) of the Code. (c) Combined Limitation. The contributions under this Plan and under any related defined contribution plans and the benefits under all related defined benefit plans will be adjusted to the extent necessary (by first adjusting the 46 benefits and contributions under such other plans) so that the sum of the fractions determined with respect to any participant in accordance with subsections (a) and (b) above will not exceed 1.0 (or such other applicable maximum amount permitted by law). 8.4 Distribution of Excess Deferrals. If, not later than the March 1 next following the end of a calendar year, a participant notifies the Plan Administrator that the participant has made 401(k) savings contributions to this Plan and one or more other plans (whether maintained by an Zenith Company or an unrelated company) in excess of $9,500 for 1997 (or such other maximum amount for other plan years as may be permitted by law for such calendar year) during such calendar year, and further notifies the Plan Administrator of the amount of such excess allocated to this Plan, such excess amount shall be paid to such participant (along with any income or loss allocable thereto as determined pursuant to the method set forth in section 8.6(d)) as soon as practicable following such notification, but in any event by the April 15 following the calendar year with respect to which such excess deferrals were made. A participant is deemed to notify the Plan Administrator of such excess that arises by taking into account only those 401(k) savings contributions made to this Plan and any other plans of the Zenith Companies. 8.5 Highly Compensated Employee. The term highly compensated employee includes highly compensated active employees and highly compensated former employees. A highly compensated active employee includes any employee who performs services for the Zenith Companies during the determination year and who, (i) received compensation from the Zenith Companies in excess of $80,000 for the preceding year or (ii) was a 5 percent owner at any time during the current year or the preceding year. A highly compensated former employee includes any employee who was a highly 47 compensated employee when he separated from service or who was a highly compensated employee at any time after attaining age 55. The determination of who is a highly compensated employee, including the determinations of the number and identity of employees in the top-paid group and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder, and the Plan Administrator shall be abe to make and/or revoke any determinations in the future if laws or regulations permit. 8.6 Limitations on Elective Contributions. Participant 401(k) savings contributions shall be subject to the following nondiscrimination standards and shall be adjusted, as provided below, to the extent necessary to comply with the limitations set forth in Section 401(k) of the Code and the regulations thereunder. For purposes of this section, the term "pre-tax contribution" shall mean any Employer contribution made to the Plan that (i) is subject to a cash or deferred arrangement (as defined in Section 1.401(k)-1(a)(3) of the Treasury regulations) and (ii) is immediately nonforfeitable. The Employer shall maintain records demonstrating compliance with this section. (a) Actual Deferral Percentage Limitation. In any plan year, the actual deferral percentage for the group of participants who are highly compensated employees may not exceed the greater of the following: (i) the actual deferral percentage of the group of participants who are not highly compensated employees (the "non-highly compensated group") multiplied by 1.25, or (ii) the lesser of the actual deferral percentage for the non-highly compensated group multiplied by two or the actual deferral percentage of the 48 non-highly compensated group plus two percentage points. (b) Actual Deferral Percentage. The actual deferral percentage for a specified group of participants for any plan year shall be the average of the ratios (computed, to the nearest one-hundredth of one percent, separately for each participant in such group) of the pre-tax contributions, and amounts treated as pre-tax contributions (including excess pre-tax contributions of highly compensated employees), for such participant for such year to the participant's compensation (as defined at Section 414(s) of the Code, as modified by Section 414(s)(2) thereof) taken into account for such plan year during which the participant was an eligible employee. For purposes of this section the following additional rules shall apply: (i) A 401(k) savings contribution shall be taken into account only if it relates to compensation that either (A) would have been received by the participant in the plan year but for the deferral election or (B) is attributable to services performed by the participant in the plan year and would have been received by the participant within 2 1/2 months after the close of the plan year but for the deferral election. A pre-tax contribution that does not meet the foregoing requirements will not be tested under Section 401(k) of the Code but must separately satisfy Section 401(a)(4) of the Code for the plan year of allocation as if it was the only non-pre-tax Employer contribution for the year. 49 (ii) In the event this Plan satisfies the requirement of Sections 401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfies the requirements of such Sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the actual deferral percentage of employees as if all such plans were a single plan. In accordance with applicable Treasury regulations, plans of the Employers may be aggregated in order to satisfy Section 401(k) of the Code but only if such plans as aggregated satisfy the requirement of Section 410(b) of the Code and provided that each plan has the same plan year. (iii) Except as provided in applicable Treasury regulations, the actual deferral percentage of a highly compensated employee will be determined by treating all cash or deferred arrangements of the Employer (or an entity that is required to be aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code) under which the highly compensated employee is eligible as a single arrangement. If the cash or deferral arrangements have different plan years, all such arrangements ending with or within the same calendar year will be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under applicable Treasury regulations issued pursuant to Section 401(k) of the Code. (iv) At the discretion of the Plan Administrator, and in accordance with applicable Treasury regulations, any Employer contributions or matching contributions credited on a participant's behalf in the plan year which meet the withdrawal restrictions and vesting requirements of Sections 50 401(k)(2)(B) and (C) of the Code ("qualified nonelective contributions" and "qualified matching contributions," respectively) may be added to the participant's 401(k) savings contributions in computing the participant's actual deferral percentage; provided, that the Employer contributions and matching contributions made to the Plan for such year satisfy the requirements of Section 401(a)(4) of the Code with and without the inclusion of the qualified nonelective contributions and qualified matching contributions used to satisfy this section. Qualified nonelective contributions and qualified matching contributions which are used to satisfy this section cannot be taken into account to satisfy the requirement of section 8.7. (v) Elective contributions treated as matching contributions under section 8.7 shall not be included in the determination of a participant's actual deferral percentage. (c) Excess Contributions. If in any plan year the actual deferral percentage for the highly compensated group does not satisfy one of the tests in subsection (a) above, the Plan Administrator shall reduce the 401(k) savings contributions of some or all of the participants in the highly compensated group until one of the tests is satisfied. Such reduction shall be made by reducing the excess contributions for the highly compensated employee with the highest dollar amount of excess contributions to the lesser of (i) the extent required to enable the Plan to satisfy the actual deferral percentage test or (ii) the extent required to cause the dollar amount of such highly compensated employee's excess contributions equal the dollar amount of the excess contributions for the highly compensated employee with the next highest dollar amount of excess contributions. This procedure shall be repeated until the Plan satisfies the actual deferral percentage test set forth herein. The portion of any participant's elective 51 contribution which is reduced pursuant to this procedure shall be referred to as the "excess contributions." (d) Distribution of Excess Contributions. If in any plan year the elective contributions of one or more of the participants who are highly compensated employees must be reduced in accordance with subsection (c) above, the Plan Administrator shall distribute the amount of the excess contributions, plus the income (or minus the loss) allocable thereto, as soon as practicable following the determination of such excess but in any event by the last day of the plan year following the end of the plan year in which the excess contributions were made. Under Section 4979 of the Code a ten percent tax is imposed on the Employer for any such excess contributions which are distributed more than 2 1/2 months after the last day of the plan year in which the excess contributions were made. A distribution of the excess contributions may be made without regard to any notice or consent otherwise required under the Plan. The income or loss allocable to such excess contributions shall be determined by multiplying the income or loss allocable to the pre-tax contributions (and, if applicable, amounts treated as pre-tax contributions for purposes of the participant's deferral percentage) for the plan year by a fraction. The numerator of the fraction is the excess contributions for the plan year. The denominator is equal to (i) the total account balance of the participant attributable to pre-tax contributions (and amounts treated as such for purposes of the actual deferral percentage) as of the beginning of the plan year, plus (ii) the participant's pre-tax contributions (and amounts treated as such for purposes of the actual deferral percentage) for the plan year. The amount of excess contributions distributed under this subsection for a plan year shall be reduced by any excess deferrals previously distributed for the employee's taxable year ending with or within the plan year. Excess contributions shall be treated as annual additions for purposes of Section 415 of the Code. 52 8.7 Limitation on Employee and Matching Contributions. Employee and matching contributions shall be subject to the following nondiscrimination standards and such amounts shall be adjusted, as provided below, to the extent necessary to comply with the limitations set forth in Section 401(m) of the Code and the regulations thereunder. The term "employee contributions" shall include any voluntary after-tax contribution to the Plan that is allocated to a separate account to which earnings and losses are allocated. The term "matching contributions" means any Employer contribution made to the Plan on account of an employee contribution. The Employers shall maintain records demonstrating compliance with this section. (a) Contribution Percentage Limitations. In any plan year, the contribution percentage for the group of participants who are highly compensated employees may not exceed the greater of the following: (i) the actual contribution percentage of the group of participants who are not highly compensated employees (the "non-highly compensated group") multiplied by 1.25, or (ii) the lesser of the contribution percentage for the non-highly compensated group multiplied by two or the contribution percentage of the non-highly compensated group plus two percentage points. (b) Contribution Percentage. The contribution percentage of a specified group of participants shall be the average of the contribution percentages (computed separately, to the nearest one-hundredth of one percent) for each participant in the group. The contribution percentage for each participant shall equal the sum of the employee and matching contributions allocated to the participant's account for the plan year and the qualified non-elective contributions treated as matching contributions for the plan year, divided by the participants' 53 compensation (as defined in Section 414(s) of the Code, as modified by Section 414(s)(2) thereof) taken into account for such plan year during which the participant was an eligible employee. For purposes of this section, the following additional rules shall apply: (i) A matching contribution will be taken into account for purposes of this section for a given plan year only if (A) it is made on account of the participant's employee contributions for that plan year, (B) it is allocated to the participant's account during that plan year and (C) it is paid to the Trust by the end of the twelfth month following the close of that plan year. A matching contribution that does not meet the foregoing requirements will not be tested under Section 401(m) of the Code but must separately satisfy Section 401(a)(4) of the Code for the plan year of allocation as if it were the only Employer allocation for that plan year. An employee contribution will be taken into account for purposes of this section only if such contribution is paid to the Trust during the plan year or paid to an agent of the Plan and transmitted to the Trust within a reasonable period after the end of the plan year. (ii) As provided in applicable Treasury regulations, for purposes of determining the contribution percentage of the family group (as defined in section 8.5), the family group shall be treated as one highly compensated employee and the contribution percentage for the family group shall be determined by combining the compensation, employee contributions and matching contributions (and amounts treated as matching contributions) of all eligible family members. (iii) In the event this Plan satisfies the requirement of Sections 401(m), 401(a)(4) or 410(b) of the Code 54 only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the contribution percentage of employees as if all such plans were a single plan. In accordance with applicable Treasury regulations, plans of the Employers may be aggregated in order to satisfy Section 401(m) of the Code but only if such plans as aggregated satisfy the requirement of Section 410(b) of the Code and provided that each plan has the same plan year. (iv) Except as provided in applicable Treasury regulations, the contribution percentage of a highly compensated employee who is eligible to participate in more than one plan of the Employer in which employee or matching contributions are made will be determined by treating all the plans of the Employer (or an entity that is required to be aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code) in which the highly compensated employee is eligible as a single plan. If the highly compensated employee participates in two or more plans that have different plan years, all such plans ending with or within the same calendar year will be treated as a single plan. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under applicable Treasury regulations issued pursuant to Section 401(m) of the Code. (v) At the discretion of the Plan Administrator, and in accordance with applicable Treasury regulations, any qualified nonelective contributions (as defined in Section 1.401(k)-1(g)(13)(ii)) of the Treasury regulations made for such plan year may be taken into account in computing the 55 participant's contribution percentage; provided, that the qualified nonelective contributions satisfy the requirements of Section 401(a)(4) of the Code both with and without inclusion of such contributions used to satisfy the requirements of this section. (c) Excess Aggregate Contributions. If in any plan year the contribution percentage for the highly compensated group does not satisfy one of the tests in subsection (a) above, the Plan Administrator shall reduce the employee contributions and matching contributions of some or all of the participants in the highly compensated group until one of the tests is satisfied. Such reductions shall be made in accordance with Section 1.401(m)-1(e)(2) of the Treasury regulations by reducing the contribution percentage for the highly compensated employee with the highest percentage to the extent required to enable this Plan to satisfy the contribution percentage test or cause such highly compensated employees' contribution percentage to equal the percentage for the highly compensated employee with the next highest contribution percentage. This procedure shall be repeated until the Plan satisfies the contribution percentage test set forth herein. The amounts so reduced shall be referred to as the "excess aggregate contributions". (If there are employee and matching contributions, the employee contributions shall be reduced first to the level of such contributions which are matched. If the test is not satisfied by reducing the employee contributions, then the matching contributions and any unreduced employee contributions shall be reduced in tandem.) The determination of excess aggregate contributions will be made after first determining the excess deferral amount and the excess contribution amount. Excess aggregate contributions shall be allocated among the family group (as defined in section 8.4) members in proportion to the employee and matching contributions of each family member that is combined in determining the contribution percentage. (d) Distribution of Excess Aggregate Contributions. Except as provided below, if in 56 any plan year the employee or matching contributions of one or more of the participants in the highly compensated group must be reduced in accordance with subsection (c) above, the Plan Administrator shall distribute the amount of the excess aggregate contributions, plus the income (or minus the loss) allocable thereto, as soon as practicable following the determination of such excess but in any event by the last day of the plan year following the end of the plan year for which such contributions were made. Under Section 4979 of the Code a ten percent tax is imposed on the Employer for any such excess aggregate contribution which are distributed after more than 2 1/2 months after the last day of the plan year for which such contributions were made. A distribution of the excess aggregate contribution may be made without regard to any notice or consent otherwise required by the Plan. Excess aggregate contributions, including forfeited matching contributions, are treated as Employer contributions for purposes of Sections 404 and 415 of the Code. The income or loss allocable to such excess aggregate contributions shall be determined by multiplying the income or loss allocable to the participant's employee and matching contributions (and amounts, if any, treated as such for purposes of the contribution percentage, but excluding such matching contributions used in the actual deferral percentage test for the plan year) by a fraction. The numerator of the fraction is the excess aggregate contributions for the plan year. The denominator is equal to (i) the total account balance of the participant attributed to employee and matching contributions as of the beginning of the plan year, plus (ii) the employee and matching contributions (and amounts, if any, treated as such for purposes of the contribution percentage, but excluding such matching contributions used in the actual deferral percentage test for the plan year). 8.8 Multiple Use Limitation. Notwithstanding the limitations required by sections 8.6 and 8.7, a participant's pre-tax contributions, employee contributions and matching contributions may be limited under this section in order to prevent "multiple use" under Sections 401(k) and 401(m) of the Code, as set forth below. The multiple use 57 limitation shall apply if the sum of the actual deferral percentage and contribution percentage for the group of highly compensated employees (determined after any corrections required under section 8.6 or 8.7) exceeds the "aggregate limit". The aggregate limit shall be the greater of (a) and (b) below: (a) the sum of (A) 1.25 times the greater of the actual deferral percentage or the contribution percentage for non-highly compensated employees and (B) two percentage points plus the lesser of the actual deferral percentage or the contribution percentage for non-highly compensated employees (which amount shall not exceed twice the lesser of such percentages), (b) the sum of (A) 1.25 times the lesser of the actual deferral percentage or the contribution percentage for non-highly compensated employees and (B) two percentage points plus the greater of the actual deferral percentage or the contribution percentage for non-highly compensated employees (which amount shall not exceed twice the greater of such percentages). The application of the multiple use limitation shall be made in accordance with Section 1.401(m)-2 of the Treasury regulations. If the multiple use limitation applies, then the actual deferral percentage or contribution percentage of the highly compensated employees shall be reduced (in the manner described in sections 8.6 or 8.7) until such limit shall be satisfied. Alternatively, the Employer may satisfy the multiple use limitation by making qualified nonelective contributions to plan participants in accordance with applicable Treasury regulations. ARTICLE 9 Reemployment 9.1 Rehired Employee or Participant. If an employee or a participant who has no vested benefit under the Plan terminates his employment and is subsequently 58 reemployed by a Zenith Company, his years of service accrued prior to his termination of employment shall not be reinstated for purposes of section 6.1 if the number of consecutive one year breaks in service (as defined in section 6.2) within such period exceeds five consecutive one year breaks in service. In all other cases, an employee's or participant's prior years of service shall be reinstated as of the date he is reemployed by a Zenith Company. In no event shall years of service occurring after a participant incurs five consecutive one year breaks in service be used to determine the vested and nonforfeitable interest of a participant in his employer matching or [profit-sharing] contributions accounts as of his prior termination of employment which as become a forfeiture. A rehired employee shall become a participant and a rehired participant shall again become a participant as of the date he meets or again meets the requirements of section 2.1. 9.2 Reinstatement of Forfeitures. If a participant whose employment had terminated because of resignation or dismissal is reemployed by a Zenith Company prior to having incurred five consecutive one year breaks in service (as defined in section 6.2), any forfeiture which resulted from his prior resignation or dismissal shall again be credited to his employer matching and retirement contributions accounts as of the accounting date coincident with or next following his date of rehire. If such participant subsequently terminates employment because of resignation or dismissal and the participant is not entitled to the full balance in such employer contributions accounts, the amount distributed under section 6.1 from such accounts will be determined in accordance with the following: (a) First, the amount of the distribution received by the participant from each of his employer matching and retirement contributions accounts because of his prior resignation or dismissal shall be added to the balance in each of his employer matching and retirement contributions 59 accounts as of the accounting date coincident with or next preceding his subsequent employment termination date. (b) Next, the amount determined under subsection (a) above shall be multiplied by the vesting percentage applicable at his subsequent employment termination date under section 6.1. (c) Finally, the amount determined under subsection (b) above shall be reduced by the amount of the distribution received by the participant from such employer contributions accounts because of his prior resignation or dismissal. The remaining portion of the participant's employer contribution account will be treated as a forfeiture and will be subject to the provisions of section 6.2. ARTICLE 10 Plan Administrator 10.1 Plan Administrator's Duties. As provided in section 1.2, the Named Fiduciary Committee is responsible for the administration of the Plan. Except as otherwise specifically provided and in addition to the powers, rights and duties specifically given to the Plan Administrator elsewhere in the Plan, the Plan Administrator shall have the following powers, rights and duties: (a) To have full and complete discretion to construe and interpret the Plan, to decide all questions of Plan eligibility, to determine the amount, manner and time of payment of any benefits under the Plan, and to remedy ambiguities, inconsistencies or omissions. (b) To adopt such rules of procedure as may be necessary for the efficient administration of the Plan and as are consistent with its terms and such rules. 60 (c) To appoint or remove the Trustee and any investment managers and to add or discontinue any investment funds. (d) To make determinations as to the right of any person to a benefit, to afford any person dissatisfied with such determination the right to a hearing thereon, and to direct payments or distributions from the Trust in accordance with the provisions of the Plan. (e) To furnish the Employers with such information as may be required by them for tax or other purposes in connection with the Plan. (f) To enroll participants in the Plan, to distribute and receive administration forms, and to comply with all applicable governmental reporting and disclosure requirements. (g) To employ agents, attorneys, accountants, actuaries or other persons (who also may be employed by the Employers, the Trustee, or any investment manager or managers) and to allocate or delegate to them such powers, rights and duties as the Plan Administrator considers necessary or advisable to properly carry out the administration of the Plan, provided that any such allocation or delegation and the acceptance thereof must be in writing. (h) To report to such person or persons as the Company designates as to the administration of the Plan, any significant problems which have developed in connection with the administration of the Plan and any recommendations which the Plan Administrator may have as to the amendment of the Plan or the modification of Plan administration. The Plan Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirements of eligibility for benefits under the Plan except as expressly provided by appropriate delegation of any such powers by the Company. 10.2 Action by Plan Administrator. During a period in which two or more Committee members are acting, 61 any action by the Plan Administrator will be subject to the following provisions: (a) The Committee may act by meeting (including a meeting from different locations by telephone conference) or by document signed without meeting, and documents may be signed through the use of a single document or concurrent documents. (b) A Committee member by writing may delegate part or all of his rights, powers, duties and discretion to any other committee member, with such other Committee member's consent. (c) The Committee shall act by a majority decision, which action shall be as effective as if such action had been taken by all members of the Committee; provided that by majority action one or more Committee members or other persons may be authorized to act with respect to particular matters on behalf of all Committee members. (d) If there is an equal division among the Committee members with respect to any question, a disinterested party may be selected by a majority vote to decide the matter. Any decision by such disinterested party will be binding. (e) The certificate of the secretary of the Committee or the majority of the Committee members that the Committee has taken or authorized any action shall be conclusive in favor or any person relying on such certificate. (f) Except as required by law, no member of the Committee shall be liable or responsible for an act or omission of other Committee members in which the former has not concurred. 10.3 Information Required for Plan Administration. The Employers shall furnish the Plan Administrator with such data and information as the Plan Administrator considers necessary or desirable to perform its duties with respect to Plan administration. The records of an Employer as to an employee's or participant's period or periods of employment, termination of employment and the 62 reason therefor, leaves of absence, reemployment, and compensation will be conclusive on all persons unless determined to the Plan Administrator's satisfaction to be incorrect. Participants and other persons entitled to benefits under the Plan also shall furnish the Plan Administrator with such evidence, data or information as the Plan Administrator considers necessary or desirable for the Plan Administrator to perform his duties with respect to Plan administration. 10.4 Decision of Plan Administrator Final. Subject to applicable law and the provision of section 10.5, any interpretation of the provisions of the Plan and any decision on any matter within the discretion of the Plan Administrator made by the Plan Administrator in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known, and the Plan Administrator shall make such adjustment on account thereof as the Plan Administrator considers equitable and practicable. 10.5 Review of Benefit Determinations. If a claim for benefits made by a participant or his beneficiary is denied, the Plan Administrator shall, within 90 days (or 180 days if special circumstances require an extension of time) after the claim is made, furnish the person making the claim with a written notice specifying the reasons for the denial. Such notice shall also refer to the pertinent Plan provisions on which the denial is based, describe any additional material or information necessary for properly completing the claim and explain why such material or information is necessary, and explain the Plan's claim review procedures. If requested in writing, the Plan Administrator shall afford each claimant whose claim has been denied a full and fair review of the Plan Administrator's decision and, within 60 days (120 days if special circumstances require additional time) of the request for reconsideration of the denied claim, the Plan 63 Administrator shall notify the claimant in writing of the Plan Administrator's final decision. 10.6 Uniform Rules. The Plan Administrator shall perform its duties with respect to Plan administration on a reasonable and nondiscriminatory basis and shall apply uniform rules to all participants similarly situated. 10.7 Plan Administrator's Expenses. All costs, charges and expenses reasonably incurred by the Plan Administrator or other expenses of the Plan or the Trust will be paid by the Employers or by the Trust in such portions as the Company shall direct; provided no compensation will be paid to a committee member as such. 10.8 Interested Plan Administrator. If a member of the Named Fiduciary Committee is also a participant in the Plan, he may not decide or determine any matter or question concerning his benefits unless such decision or determination could be made by him under the Plan if he were not a Committee member. 10.9 Resignation or Removal of Plan Administrative Committee Members. A member of the Committee may be removed by the Company at any time. A member of the Committee may resign at any time by giving ten days' prior written notice to the Committee and the other members of the Committee. The Company may fill any vacancy in the membership of the Committee; provided, however, that if a vacancy reduces the membership of the committee to less than three, such vacancy shall be filled as soon as practicable. The Company shall give prompt written notice thereof to the other members of the Committee. Until any such vacancy is filled, the remaining members may exercise all of the powers, rights and duties conferred on the Plan Administrator. 10.10 Indemnification. To the extent permitted by law, no person (including a Trustee, any present or former Named Fiduciary Committee member, and any present or former director, officer or employee of any Employer) shall 64 be personally liable for any act done or omitted to be done in good faith in the administration of the Plan or the investment of the Trust fund. To the extent permitted by law, each present or former director, officer or employee of any Employer to whom the Named Fiduciary Committee or an Employer has delegated any portion of its responsibilities under the Plan and each present or former Named Fiduciary Committee member shall be indemnified and saved harmless by the Employers (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with respect to the Plan) from and against any and all claims of liability to which they are subjected by reason of any act done or omitted to be done in good faith in connection with the administration of the Plan or the investment of the Trust fund, including all expenses reasonably incurred in their defense if the Employers fail to provide such defense. ARTICLE 11 Relating to the Employers 11.1 Action by Employers. Any action required or permitted of an Employer under the Plan shall be by resolution of its Board of Directors or by a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. 11.2 Additional Employers. With the consent of the Company, any subsidiary or other related company that is not an Employer may adopt the Plan and become an Employer thereunder by filing with the Plan Administrator a certified copy of a resolution of the Board of Directors of the subsidiary or other related company providing for its adoption of the Plan and a certified copy of a resolution of the directors of the Company consenting to such adoption. 65 11.3 Restrictions on Reversions. The Employers shall have no right, title or interest in the assets of the Plan, nor will any part of the assets of the Plan at any time revert or be repaid to an Employer, directly or indirectly, except as follows: (a) If the Internal Revenue Service initially determines that the Plan, as applied to any Employer, does not meet the requirements of a "qualified plan" under Section 401(a) of the Code, the assets of the Plan attributable to contributions made by that Employer under the Plan shall be returned to that Employer within one year of the date of denial of qualification of the plan as applied to that Employer. (b) If a contribution or a portion of a contribution is made by an Employer as a result of a mistake of fact, such contribution or portion of a contribution shall not be considered to have been contributed under the Plan by that Employer and, after having been reduced by any losses of the Trust fund allocable thereto, shall be returned to that Employer within one year of the date the amount is contributed under the Plan. (c) Each contribution made by an Employer is conditioned upon the continued qualification of the Plan and the deductibility of such contribution as an expense for federal income tax purposes and, therefore, to the extent that a contribution is made by an Employer under the Plan for a period for which the Plan is not a qualified plan or the deduction for a contribution made by the Employer is disallowed, then such contribution or portion of a contribution, after having been reduced by any losses of the Trust fund allocable thereto, shall be returned to that Employer within one year of the date of determination of the nonqualified status of the Plan or the date of disallowance of the deduction. ARTICLE 12 Amendment, Termination or Plan Merger 66 12.1 Amendment. While the Company expects and intends to continue the Plan, the Company must necessarily reserve and hereby does reserve the right, subject to section 11.3, to amend the Plan from time to time, except as follows: (a) The duties and liabilities of the Named Fiduciary Committee cannot be changed substantially without its consent; and (b) No amendment shall reduce the value of a participant's benefits to less than the amount he would be entitled to receive if he had resigned from the employ of all of the Zenith Companies on the day of the amendment. 12.2 Termination. The Plan will terminate as to all Employers on any date specified by the Company if advance written notice of the termination is given to the Plan Administrator and any other Employers. The Plan will terminate as to an individual Employer on the first to occur of the following: (a) The date it is terminated by that Employer, if ten days' advance written notice of the termination is given to the Company and the Plan Administrator. (b) The date that Employer is judicially declared bankrupt or insolvent. (c) The dissolution, merger, consolidation or reorganization of that Employer, or the sale by that Employer of all or substantially all of its assets, except that: (i) In any such event arrangements may be made with the consent of the Company whereby the Plan will be continued by any successor to that Employer or any purchaser of all or substantially all of its assets without a termination thereof, in which case the successor or purchaser will be substituted for that Employer under the Plan; and 67 (ii) If any Employer is merged, dissolved or in any way reorganized into, or consolidated with, any other Employer, the Plan as applied to the former Employer will automatically continue in effect without a termination thereof. Notwithstanding the foregoing, if any of the events described above should occur but some or all of the participants employed by an Employer are transferred to employment with one or more of the other Employers coincident with or immediately after the occurrence of such event, the Plan as applied to those participants will automatically continue in effect without a termination thereof. 12.3 Plan Merger. In no event shall there be any merger or consolidation of the Plan with, or transfer of assets or liabilities to, any other plan unless each participant in the Plan would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit the participant would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). 12.4 Continuation by a Successor or Purchaser. Notwithstanding section 12.2, the Plan and the Trust shall not terminate in the event of dissolution, merger, consolidation or reorganization of an Employer or sale by an Employer of its entire assets or substantially all of its assets if arrangements are made in writing between the Employer and any successor to the Employer or purchaser of all or substantially all of its assets whereby such successor or purchaser will continue the Plan and the Trust. If such arrangements are made, then such successor or purchaser shall be substituted for the Employer under the Plan and the Trust. 68 12.5 Notice to Participants of Amendments, Terminations or Plan Mergers. Participants affected thereby shall be notified by the Company within a reasonable time following any amendment, termination, plan merger, or consolidation. 12.6 Vesting and Distribution on Termination. The date of any termination or partial termination as respects all Employers (and, at the discretion of the Company, on a termination or partial termination of the Plan as respects any Employer that does not result in the termination or partial termination of the Plan as respects all Employers), will be an "interim accounting date", and the benefits of each participant affected by such termination or partial termination will be fully vested and will be payable to such participant in a lump sum as soon as practicable unless other arrangements are previously made pursuant to the provisions of Article 6. 12.7 Administrative Amendments. Subject to foregoing provisions of this Article, the Board of Directors of the Company hereby delegates to the Plan Administrator the right to make administrative amendments to this Plan and the trust agreement. An amendment will be considered an administrative amendment properly within the delegated authority of the Plan Administrator only if such amendment does not significantly change the amount or level of Employer funding under this Plan or any other provision specifically governed by action of the Board in accordance with the provisions of this Plan or the trust agreement. Any amendment adopted by the Plan Administrator pursuant to the delegated authority shall be reported to the Board within a reasonable period following its adoption, but in no event later than 2-1/2 months after the close of the plan year in which it becomes effective. Any such amendment shall become effective as of the date specified by the Plan Administrator. 69 ARTICLE 13 General Provisions 13.1 Examination of Plan Documents. Copies of the Plan and any amendments thereto will be on file at the principal office of the Company where they may be examined by any participant or any other person entitled to benefits under the Plan. 13.2 Notices. A notice mailed to a participant or beneficiary at his last address filed with the Plan Administrator in care of the Company will be binding on the participant or beneficiary for all purposes of the Plan. Any notice or document relating to the Plan required to be given to or filed with the Plan Administrator or any Employer shall be considered as given or filed if delivered or mailed by registered or certified mail, postage prepaid, to the Plan Administrator, in care of the Company, at 1000 Milwaukee Avenue, Glenview, Illinois 60025. 13.3 Nonalienation of Plan Benefits. The rights or interests of any participant or any participant's beneficiaries to any benefits or future payments hereunder shall not be subject to attachment or garnishment or other legal process by any creditor of any such participant or beneficiary, nor shall any such participant or beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or rights which he may expect to receive, contingently or otherwise under this Plan except as may be required by the tax withholding provisions of the Code or of a state's income tax act or pursuant to a qualified domestic relations order, as defined in Section 414(p) of the Code. 13.4 No Employment Guarantee. None of the establishment of the Plan, modification thereof, the creation of any fund or account, or the payment of any benefits shall be construed as giving to any participant or 70 other person any legal or equitable right against the Employers, the Plan Administrator or Trustee, except as herein provided. Under no circumstances shall the terms of employment of any participant be modified or in any way affected hereby. The maintenance of this Plan shall not constitute a contract of employment, and participation in the Plan will not give any participant a right to be retained in the employ of the Employers. None of the Employers, the Plan Administrator or the Trustee in any way guarantees any assets of the Plan from loss or depreciation or any payment to any person. The liability of the Plan Administrator or any Employer as to any payment or distribution of benefits under the Plan is limited to the available assets of the Trust fund. 13.5 Participant Litigation. In any action or proceeding regarding the Plan assets or any property constituting a portion or all thereof or regarding the administration of the Plan, employees or former employees of the Employers or their beneficiaries or any other persons having or claiming to have an interest in this Plan shall not be necessary parties and shall not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding shall be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this plan. To the extent permitted by law, if a legal action is begun against the Employers, the Plan Administrator or the Trustee by or on behalf of any person, and such action results adversely to such person, or if a legal action arises because of conflicting claims to a participant's or other person's benefits, the costs to the Employers, the Plan Administrator or the Trustee of defending the action will be charged to the sums, if any, which were involved in the action or were payable to the participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in 71 this Plan shall constitute a release of the Employers, the Plan Administrator and the Trustee and their agents from any and all liability and obligation not involving willful misconduct or gross neglect. 13.6 Successors. The Plan and the Trust will be binding on all persons entitled to benefits hereunder and their respective heirs and legal representatives, and on the Plan Administrator and the Trustee and their successors. 13.7 Adequacy of Evidence. Evidence which is required of anyone under the Plan shall be executed or presented by the proper individuals or parties and may be in the form of certificates, affidavits, documents or other information which the Plan Administrator, the Trustee, the Employers or other persons acting on such evidence considers pertinent and reliable. 13.8 Gender and Number. Words denoting the masculine gender shall include the feminine and neuter genders and the singular shall include the plural and the plural shall include the singular wherever required by the context. 13.9 Waiver of Notice. Any notice required under the plan may be waived by the person entitled to notice. 13.10 Applicable Law. The Plan and the Trust shall be construed in accordance with the provisions of ERISA and other applicable federal laws. To the extent not inconsistent with such laws, this Plan shall be construed in accordance with the laws of the state of Illinois. 13.11 Severability. If any provision of the Plan shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal or invalid provisions had never been contained in the Plan. 13.12 Fiduciary Responsibilities. It is specifically intended that all provisions of the Plan shall be applied so that all fiduciaries with respect to the Plan 72 shall be required to meet the prudence and other requirements and responsibilities of applicable law to the extent such requirements of responsibilities apply to them. No provisions of the Plan are intended to relieve a fiduciary from any responsibility, obligation, duty or liability imposed by applicable law. In general, a fiduciary shall discharge his duties with respect to the Plan solely in the interests of participants and other persons entitled to benefits under the Plan and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. ARTICLE 14 Top-Heavy Plan Rules 14.1 Key Employees. An employee or former employee shall be a "key employee" for any plan year if during such plan year or during any of the four preceding plan years the employee is: (a) An officer of an Employer having an annual compensation greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code for any such plan year; (b) One of the ten employees of an Employer having annual compensation from an Employer of more than the limitation in effect under Section 415(c)(1)(A) of the Code and owning (or considered as owning within the meaning of Section 318 of the Code) both more than 1/2 percent interest and the largest interests in the Employer; (c) Any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all the Employer's stock; or (d) Any person having annual compensation in excess of $150,000 who owns (or is considered as owning within the meaning of Section 318 of the Code) more than one percent of the outstanding stock of the Employer or stock possessing more than one percent of the total combined voting power of all the Employer's stock. 73 For purposes of subsection (a) above, if the number of officers exceeds 50, only the 50 officers with the highest compensation shall be considered key employees and if the number of officers is less than 50, the number of officers considered key employees shall not exceed the greater of three such officers or ten percent of all employees. For purposes of subsections (c) and (d) above, Section 318(a)(2)(C) of the Code shall be applied by substituting "five percent" for the reference to "50 percent" therein and the rules of Section 414(b), (c) and (m) of the Code shall not apply for determining ownership in the Employer. For purposes of this Article, the term "Employer" includes all corporations which are members of a controlled group of corporations which includes the Company under Section 414(b) of the Code, all trades or businesses (whether or not incorporated) which are under common control with the Company under Section 414(c) of the Code and any service or other organization which is a member of an affiliated service group with the Company under Section 414(m) of the Code. The beneficiary of a key employee shall be considered a key employee. 14.2 Top-Heavy Plan. The Plan will be considered a "top-heavy plan" for any plan year if, as of the last day of the preceding plan year (the last day of the initial plan year, in the case of that year) (the "determination date"), the sum of (i) the aggregate of the accounts of all key employees under the Plan and all other defined contribution plans in an aggregation group of plans (as described in section 14.3 below), and (ii) the present value of the aggregate cumulative accrued benefits for key employees under all defined benefit plans in an aggregation group of plans, exceeds 60 percent of such sum determined for all participants under all such plans, excluding participants who are former key employees. For purposes of making the determination described above, accounts in a defined 74 contribution plan and benefits under a defined benefit plan shall be valued as of the accounting date coincident with the determination date. There shall be included in the determination of a participant's accounts and accrued benefit under such plans any amounts distributed to such participant during the preceding five-year period. Notwithstanding the foregoing, if any individual has not performed services for the Zenith Companies at any time during the five-year period ending on the determination date, any account of such individual (and the accrued benefit for such individual) shall not be included for purposes of this section. Furthermore, a rollover contribution initiated by a participant and made to any plan in an aggregation group of plans shall not be taken into account for purposes of determining whether the plan is a top-heavy plan. 14.3 Aggregation Groups. All employer plans in a required aggregation group of plans shall be considered to be top-heavy plans if either the required or permissive aggregation group of plans is determined to be top-heavy under section 15.2 above. If the required or permissive aggregation group of plans is not a top-heavy group, no employer plans in the group shall be considered to be top-heavy plans. A "required aggregation group of plans" shall include each employer plan (whether or not terminated) in which a key employee participates and any other employer plan which enables any plan in which a key employee participates to meet the coverage and nondiscrimination requirements of Sections 401(a)(4) or 410 of the Code. A "permissive aggregation group of plans" shall include all plans in the required aggregation group plus any other employer plans which satisfy the requirements of Sections 401(a)(4) and 410 of the Code when considered together with the required aggregation group of plans. 14.4 Minimum Contributions and Benefits. Notwithstanding the provisions of section 4.1, for each plan year for which the Plan is considered a top-heavy plan, the amount contributed by an Employer in accordance with section 4.1(b) for each participant (whether active or inactive) shall not be less 75 than the lesser of (i) three percent of the participant's total compensation for that year, or (ii) the highest percentage of earnings (disregarding earnings in excess of $160,000 or such other maximum amount as was in effect prior to the effective date or as may be permitted from time to time by the Secretary of the Treasury or the Secretary's delegate or by law) contributed by such Employer for such plan year on behalf of a key employee; provided, however, that in the case of an employee covered under this Plan and a defined benefit plan maintained by the Employer, for each plan year for which this Plan and such defined benefit plans are considered top-heavy plans, if such employee receives the top-heavy minimum contribution specified in such defined benefit plan, such employee need not receive the minimum contribution specified in this section. For purposes of satisfying the minimum top-heavy contribution requirement under this section, neither elective contributions nor Employer matching contributions shall be taken into account. 14.5 Special Top-Heavy Plan Vesting Schedule. Notwithstanding the provisions of section 6.1, a participant who is employed by an Employer when the Plan is considered a "top-heavy plan" shall be eligible to receive the portion of his employer matching and discretionary contributions account balances equal to the vested percentage determined in accordance with the following schedule based on the participant's years of service:
If the Participant's His Vested and Number of Years of Nonforfeitable Service Equals: Interest Shall Be: --------------- ------------------ Less than 2 0% 2 but less than 3 20% 3 but less than 4 100%
If the Plan becomes a top-heavy Plan and subsequently ceases to be a top-heavy Plan, a Participant with less than three years of service on the date the Plan ceases to be a top-heavy Plan shall retain his vested interest as determined above as of such date. EX-10.(M) 5 EX-10(M) 1 EXHIBIT 10m ZENITH ELECTRONICS CORPORATION EMPLOYEE STOCK OPTION AGREEMENT Zenith Electronics Corporation, a Delaware corporation (the "Company"), hereby grants to <> <> (the "Optionee") as of <>, <>(the "Option Date"), pursuant to the provisions of the Zenith Electronics Corporation Long-Term Equity Compensation Plan (the "Plan"), a non-qualified option to purchase from the Company (the "Option") <> shares of its Common Stock, $1.00 par value ("Stock"), at the price of $<> per share upon and subject to the terms and conditions set forth below. References to employment by the Company shall also mean employment by a subsidiary of the Company. Capitalized terms not defined herein shall have the meanings specified in the Plan. 1. Option Subject to Acceptance of Agreement. The Option shall be null and void unless the Optionee shall accept this Agreement by executing it in the space provided below and returning such original execution copy to the Company. 2. Time and Manner of Exercise of Option. 2.1. Maximum Term of Option. In no event may the Option be exercised, in whole or in part, after <>, 2007 (the "Expiration Date"). 2007 2.2. Exercise of Option. (a) Except as otherwise provided by Section 3.5 hereof, the Option shall become exercisable (i) on <>, 1998 with respect to one-third of the number of shares of Stock subject to the Option on the Option Date, (ii) on <>, 1999 with respect to an additional one-third of the number of shares of Stock subject to the Option on the Option Date and (iii) on <>, 2000 with respect to the remaining one-third of the shares of Stock subject to the Option on the Option Date. (b) If the Optionee's employment with the Company terminates by reason of Disability or Retirement, as such terms are hereinafter defined, or by reason of death, the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee's termination of employment and may thereafter be exercised by the Optionee or the Optionee's Legal Representative or Permitted Transferees until and including the earlier to occur of (i) the date which is two years after the effective date of the Optionee's termination of employment and (ii) the Expiration Date. For purposes of this Agreement, Disability shall mean a determination by a physician designated by the Company that the Optionee is permanently and totally disabled, and Retirement shall mean the Optionee's voluntary termination of employment on or after attaining age 55 or completing at least 20 years of employment with the Company. (c) If the Optionee's employment with the Company terminates for any reason other than Disability, Retirement or death, the Option shall be exercisable only to the extent it is exercisable on the effective date of the Optionee's termination of employment and may thereafter be exercised by the Optionee or the Optionee's Legal -1- 2 Representative or Permitted Transferees until and including the earlier to occur of (i) the date which is three months after the effective date of the Optionee's termination of employment and (ii) the Expiration Date; provided that if the Optionee's employment is terminated for Serious Misconduct, as hereinafter defined, the Option shall terminate automatically at the effective time of the Optionee's termination of employment. For purposes of this Agreement, "Serious Misconduct" means a material breach by the Optionee of his or her duties and responsibilities to the Company, other than as a result of incapacity due to physical or mental illness, which is demonstrably willful and deliberate, which is committed in bad faith or without a reasonable belief that the breach is in the Company's best interests and which is not remedied within a reasonable period of time after receipt of written notice of breach; or a commission by the Optionee of a felony involving moral turpitude. (d) If the Optionee dies during the period set forth in Section 2.2(b) following termination of employment by reason of Disability or Retirement, the Option shall be exercisable only to the extent it is exercisable on the date of death and may thereafter be exercised by the Optionee's Legal Representative or Permitted Transferees until and including the later to occur of (i) the date which is one year after the date of death and (ii) two years after the effective date of the Optionee's termination of employment, but in no event later than the Expiration Date. (e) If the Optionee dies during the period set forth in Section 2.2(c) following termination of employment for any reason other than Disability or Retirement, the Option shall be exercisable only to the extent it is exercisable on the date of death and may thereafter be exercised by the Optionee's Legal Representative or Permitted Transferees until and including the earlier to occur of (i) the date which is two years after the date of death and (ii) the Expiration Date. (f) Notwithstanding the exercise periods set forth above in this Section 2.2, in the event the Company is involved in a business combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") in connection with which the Optionee receives a substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Company: (i) if the acquisition of the substitute option by the Optionee may be treated as a purchase for purposes of Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and the Optionee's employment with the Company is terminated for any reason described in Section 2.2(c) other than Serious Misconduct during the nine-month period beginning three months prior to the consummation of such business combination, then the Option (or option in substitution thereof) shall be exercisable to the extent set forth above in this Agreement until and including the later to occur of (i) the date set forth pursuant to Section 2.2(c) and (ii) the date which is seven months after the consummation of such business combination, but in no case later than the Expiration Date; or -2- 3 (ii) if the Optionee is restricted from disposing of a security (or security underlying a security) issued in connection with the Pooling Transaction and the purpose of such restriction is to ensure that the Pooling Transaction is accounted for as a pooling of interests (the "Pooling Restriction") and the Optionee's employment with the Company is terminated for any reason described in Section 2.2(c) other than Serious Misconduct during the nine-month period beginning three months prior to the consummation of such business combination, then the Option (or option in substitution thereof shall be exercisable to the extent set forth above in this Agreement until and including the later to occur of (i) the date set forth pursuant to Section 2.2(c) and (ii) the date which is one month after the date of expiration of the Pooling Restriction, but in no case later than the Expiration Date. 2.3. Method of Exercise. Subject to the limitations set forth in this Agreement, the Option may be exercised by the Optionee (1) by giving written notice to the Treasurer of the Company specifying the number of whole shares of Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and in each case for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable pursuant to the Option by reason of such exercise, (iii) in cash by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise or (iv) a combination of (i) and (ii), and (2) by executing such documents as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (ii)-(iv) and in the case of an Optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the full purchase price therefor has been paid. 2.4. Cancellation of Agreement. In the event that rights to purchase all or a portion of the shares of Stock subject to the Option expire or are exercised, cancelled or forfeited, the Optionee shall, upon the Company's request, promptly return this Agreement to the Company for full or partial cancellation, as the case may be. Such cancellation shall be effective regardless of whether the Optionee returns this Agreement. If the Optionee continues to have rights to purchase shares of Stock hereunder, the Company shall, within 10 days of the Optionee's delivery of this Agreement to the Company, either (i) mark this Agreement to indicate the extent to which the Option has expired or been exercised, cancelled or forfeited or (ii) issue to the Optionee a substitute option agreement applicable to such rights, which agreement shall otherwise be substantially similar to this Agreement in form and substance. 3. Additional Terms and Conditions of Option. -3- 4 3.1. Nontransferability of Option. The Option may not be transferred by the Optionee other than (i) by will or the laws of descent and distribution or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act. Except to the extent permitted by the foregoing sentence, during the Optionee's lifetime the Option is exercisable only by the Optionee or the Optionee's Legal Representative. Except to the extent permitted by the foregoing, the Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option, the Option and all rights hereunder shall immediately become null and void. 3.2. Investment Representation. The Optionee hereby represents and covenants that (a) any share of Stock purchased upon exercise of the Option will be purchased for investment and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), unless such purchase has been registered under the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such shares shall be made either pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to an exemption from registration under the Securities Act and such state securities laws; and (c) if requested by the Company, the Optionee shall submit a written statement, in form satisfactory to the Company, to the effect that such representation (x) is true and correct as of the date of purchase of any shares hereunder or (y) is true and correct as of the date of any sale of any such shares, as applicable. As a further condition precedent to any exercise of the Option, the Optionee shall comply with all regulations and requirements of any regulatory authority having control of or supervision over the issuance or delivery of the shares and, in connection therewith, shall execute any documents which the Board or the Committee shall in its sole discretion deem necessary or advisable. 3.3. Withholding Taxes. (a) As a condition precedent to the delivery of Stock upon exercise of the Option, the Optionee shall, upon request by the Company, pay to the Company in addition to the purchase price of the shares, such amount as the Company may be required, under all applicable federal, state, local or other laws or regulations, to withhold and pay over as income or other withholding taxes (the "Required Tax Payments") with respect to such exercise of the Option. If the Optionee shall fail to advance the Required Tax Payments after request by the Company, the Company may, in its discretion, deduct any Required Tax Payments from any amount then or thereafter payable by the Company to the Optionee. (b) The Optionee may elect to satisfy his or her obligation to advance the Required Tax Payments by any of the following means: (i) a cash payment to the Company, (ii) delivery to the Company of previously owned whole shares of Stock (which the Optionee has held for at least six months prior to the delivery of such shares or which the Optionee purchased on the open market and in each case for which the Optionee has good title, free and clear of all liens and encumbrances) having a Fair -4- 5 Market Value, determined as of the date the obligation to withhold or pay taxes first arises in connection with the Option (the "Tax Date"), equal to the Required Tax Payments, (iii) authorizing the Company to withhold whole shares of Stock which would otherwise be delivered upon exercise of the Option having an aggregate Fair Market Value determined as of the Tax Date equal to the Required Tax Payments, (iv) a cash payment by a broker-dealer acceptable to the Company to whom the Optionee has submitted an irrevocable notice of exercise or (v) any combination of (i), (ii) and (iii); provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (ii)-(v) and that in the case of an Optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying any such obligation be in compliance with Section 16 and the rules and regulations thereunder. Shares of Stock to be delivered may not have a Fair Market Value in excess of the minimum amount of the Required Tax Payments. Any fraction of a share of Stock which would be required to satisfy any such obligation shall be disregarded and the remaining amount due shall be paid in cash by the Optionee. No certificate representing a share of Stock shall be delivered until the Required Tax Payments have been satisfied in full. 3.4. Adjustment. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Stock other than a regular cash dividend, the number and class of securities subject to the Option and the purchase price per security shall be appropriately adjusted by the Committee without an increase in the aggregate purchase price. If any adjustment would result in a fractional security being subject to the Option, the Company shall pay the Optionee, in connection with the first exercise of the Option occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over (B) the exercise price of the Option. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. 3.5. Change in Control. (a) Notwithstanding any provision in this Agreement to the contrary, in the event of a Change in Control, the Option shall immediately become exercisable in full. (b) "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 1 3d-3 promulgated under the Exchange Act, of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"), provided such ownership interest is greater than the interest then owned by LG Electronics, Inc. ("LGE"); excluding, however, the following: (A) any acquisition -5- 6 directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company), (B) any acquisition by the Company or LGE, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 3.5(b); provided further, that for purposes of clause (B), if any Person (other than the Company, LGE or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 25% or more of the Outstanding Company Common Stock or 25% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company (and which ownership interest is greater than the interest then owned by LGE), and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Company Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control: (2) individuals who, as of May 21, 1996, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to May 21, 1996 whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall not be deemed a member of the Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction pursuant to which (i) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than: the Company or LGE; any employee benefit plan -6- 7 (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; the corporation resulting from such Corporate Transaction; and any Person which beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) will beneficially own, directly or indirectly, 25% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (4) approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company. 3.6. Compliance with Applicable Law. The Option is subject to the condition that if the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the purchase or delivery of shares hereunder, the Option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company agrees to use reasonable efforts to effect or obtain any such listing, registration, qualification, consent or approval. 3.7. Delivery of Certificates. Upon the exercise of the Option, in whole or in part, the Company shall deliver or cause to be delivered one or more certificates representing the number of shares purchased against full payment therefor. The Company shall pay all original issue or transfer taxes and all fees and expenses incident to such delivery, except as otherwise provided in Section 3.3. 3.8. Option Confers No Rights as Stockholder. The Optionee shall not be entitled to any privileges of ownership with respect to shares of Stock subject to the Option unless and until purchased and delivered upon the exercise of the Option, in whole or in part, and the Optionee becomes a stockholder of record with respect to such delivered shares; and the Optionee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and delivered. 3.9. Option Confers No Rights to Continued Employment. In no event shall the granting of the Option or its acceptance by the Optionee give or be deemed to give the Optionee any right to continued employment by the Company or any subsidiary or affiliate of the Company. 3. 10. Decisions of Board or Committee. The Board of Directors or the Committee shall have the right to resolve all questions which may arise in connection with the option or its exercise. Any interpretation, determination or other action made -7- 8 or taken by the Board of Directors or the Committee regarding the Plan or this Agreement shall be final, binding and conclusive. 3.11. Company to Reserve Shares. The Company shall at all times prior to the expiration or termination of the Option reserve and keep available, either in its treasury or out of its authorized but unissued shares of Stock, the full number of shares subject to the Option from time to time. 3.12. Agreement Subject to the Plan. This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Optionee hereby acknowledges receipt of a copy of the Plan. 4. Miscellaneous Provisions. 4.1. Designation as Nonqualified Stock Option. The Option is hereby designated as not constituting an "incentive stock option" within meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); this Agreement shall be interpreted and treated consistently with such designation. 4.2. Meaning of Certain Terms. (a) As used herein, employment by the Company shall include employment by a corporation which is a "subsidiary corporation" of the Company, as such term is defined in section 424 of the Code. References in this Agreement to sections of the Code shall be deemed to refer to any successor section of the Code or any successor internal revenue law. (b) As used herein, the term "Legal Representative" shall include an executor, administrator, legal representative, guardian or similar person and the term "Permitted Transferees" shall include any transferees pursuant to a transfer permitted under Section 3.2 of the Plan and Section 3.1 hereof. (c) As used herein, the term "Fair Market Value" shall mean the closing transaction price of a share of Common Stock as reported in The Wall Street Journal as New York Stock Exchange Composite Transactions for the date as of which such value is being determined or, if there shall be no reported transaction on such date, on the next preceding date for which a transaction was reported; provided that if Fair Market Value for any date cannot be determined as above provided, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. 4.3. Successors. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company and any person or persons who shall, upon the death of the Optionee, acquire any rights hereunder in accordance with this Agreement or the Plan. 4.4. Notices. All notices, requests or other communications provided for in this Agreement shall be made, if to the Company, to Zenith Electronics Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025-2493, Attention: Treasurer, and if to -8- 9 the Optionee, to the Optionee's last known address set forth in the records of the Company, or such other address as shall be provided to the Company in writing by the Optionee. All notices, requests or other communications provided for in this Agreement shall be made in writing either (a) by personal delivery to the party entitled thereto, (b) by facsimile with confirmation of receipt, (c) by mailing in the United States mails to the last known address of the party entitled thereto or (d) by express courier service. The notice, request or other communication shall be deemed to be received upon personal delivery, upon confirmation of receipt of facsimile transmission or upon receipt by the party entitled thereto if by United States mail or express courier service; provided, however, that if a notice, request or other communication sent to the Company is not received during regular business hours, it shall be deemed to be received on the next succeeding business day of the Company. 4.5. Governing Law. This Agreement, the Option and all determinations made and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the United States, shall be governed by the laws of the State of Illinois and construed in accordance therewith without giving effect to principles of conflicts of laws. 4.6. Counterparts. This Agreement may be executed in two counterparts each of which shall be deemed an original and both of which together shall constitute one and the same instrument. ZENITH ELECTRONICS CORPORATION By:_________________________ Name: Dennis Winkleman Title: VP Human Resources Accepted this ____ of __________________, 1997 ______________________________ Optionee -9- EX-10.(S) 6 AGREEMENT BETWEEN JAY ALIX & ZENITH 1 EXHIBIT 10(S) December 29, 1997 Board of Directors Zenith Electronics Corporation 1000 Milwaukee Avenue Glenview Illinois 60025 Re: Agreement for Financial Consulting Services Gentlemen: This letter outlines the understanding between Jay Alix & Associates, a Michigan corporation ("JA&A") and Zenith Electronics Corporation (the "Company") of the objective, tasks, work product and fees for the engagement of JA&A to provide financial consulting services to the Company. - -------------------------------------------------------------------------------- OBJECTIVE - -------------------------------------------------------------------------------- - - Assist the Company in maximizing its value to its stakeholders and in developing a viable, long-term business strategy. - -------------------------------------------------------------------------------- TASKS - -------------------------------------------------------------------------------- - - Bob Dangremond is appointed Acting Chief Financial Officer of the Company. He will report to the Company's Chief Executive Officer. - - In his role of Acting CFO, and with assistance from JA&A, Mr. Dangremond shall provide support and input to other consultants and staff retained by the Company, and shall: - Assist in helping the Company to realize increased liquidity with financial benefits from such areas as: - Sale of nonessential assets, - Reduction in working capital committed to the business - Discontinuing lines of business that are identified to be exited, and - Operating improvements to the Company's various businesses. 2 Board of Directors December 29, 1997 Page 2 - Assist in improving the quality and relevance of information that is reported about the Company both internally and externally. - Assist in providing financial input to the Company's business plan. - Assist in managing the Company's cash and in maintaining the Company's cash forecasting and control system. - Assist in providing liaison with the Company's lenders until such time as a permanent CFO is hired and assumes that responsibility. - Assist in contingency planning for a possible Chapter 11 bankruptcy filing in the event such a filing becomes strategically necessary or desirable. - - Assist in such other matters as may be mutually agreed upon. - -------------------------------------------------------------------------------- WORK PRODUCT - -------------------------------------------------------------------------------- Our work product will be in the form of: - - Information to be discussed with you and others, as you may direct. - - Written reports and analysis worksheets to support our suggestions as we deem necessary or as you may request. - -------------------------------------------------------------------------------- STAFFING - -------------------------------------------------------------------------------- Bob Dangremond will be the principal responsible for the overall engagement. He will be assisted by Al Koch, managing principal, who will be available to both Mr. Dangremond and the Company to assure that JA&A has the appropriate resources for this engagement. Mr. Dangremond will also be assisted by a staff of consultants at various levels, all of whom have a wide range of skills and abilities related to this type of assignment. In addition, we have relationships with and periodically retain independent contractors with specialized skills and abilities to assist us, and we agree that we will obtain the prior approval of the Company for any such engagement. The size and 3 Board of Directors December 29, 1997 Page 3 composition of the JA&A staffing, and other consultants retained at the suggestion of JA&A, shall be discussed with and subject to the prior approval of the Company. It is understood that time is of the essence. Mr. Dangremond shall provide the Company with his written proposal as to staffing assignments and responsibilities for JA&A professionals on or prior to January 9, 1998. JA&A and the Company agree that the initial engagement of Mr. Dangremond and at least one other professional shall begin on December 29, 1997. Mr. Dangremond shall be available to the Company and shall have the Company's matters as his primary responsibility from that date. Prior to January 9, 1998, Mr. Dangremond shall be expected to be available in the Company's offices not less than four days per week. By not later than January 9, 1998, Mr. Dangremond shall be available on a full-time basis at the Company's offices or on the Company's behalf, except for such dates and times as shall be communicated to the Company by December 31, 1997. The Company and JA&A understand and agree that Mr. Dangremond may have some responsibilities relating to the winding down of prior assignments; however, those responsibilities shall not interfere with the general responsibilities of Mr. Dangremond as Acting Chief Financial Officer, including functions critical to that assignment such as attending Board of Directors meetings and Audit Committee meetings. Following a review of Mr. Dangremond's plan, the Company and JA&A shall mutually agree on a further course of action and the terms of an extended agreement. - ------------------------------------------------------------------------------- TIMING, FEES AND EXPENSES - ------------------------------------------------------------------------------- We will commence this engagement immediately upon receipt of a signed engagement letter. HOURLY FEES - This engagement will be staffed with professionals at various levels as the tasks require. For purposes of bi-weekly billings, our fees will be based on the hours charged at our hourly rates which are: 4 Board of Directors December 29, 1997 Page 4 Principals $430 - 495 Senior Associates $300 - 375 Associates $225 - 285 Accountants and Consultants $180 - 220 EXPENSES - In addition to the fees set forth above, the Company shall pay directly or reimburse JA&A upon receipt of periodic billings, for all reasonable out-of-pocket expenses incurred in connection with this assignment such as travel, lodging, postage, telephone and facsimile charges. JA&A shall use its best efforts to obtain prior written approval of the Company for expenses anticipated to exceed $30,000 for any month; however, the Company understands that circumstances may not always permit this. RETAINER - The Company shall be billed for fees and expenses specific to the first two weeks of the engagement. After January 9, 1998, the Company and JA&A shall mutually agree on the amount of any retainer required for future work under this agreement. We will submit bi-weekly invoices for services rendered and expenses incurred as described above, and we will offset such invoices against the retainer. Payment will be due upon receipt of the invoices to replenish the retainer to the agreed upon amount. Any unearned portion of the retainer will be returned to you at the termination of the engagement. CONTINGENT SUCCESS FEE - A contingent success fee will be considered based upon JA&A's demonstrated contribution to value creation during the course of our engagement. This does not represent a binding commitment but rather only is a commitment to, in good faith, consider such a fee based upon our demonstrated contribution. Additionally, if the Company is persuaded of the merits of having JA&A facilitate a Turnaround Team process, it is agreed that an appropriate amendment to this agreement will be negotiated whereby JA&A will receive a 5 Board of Directors December 29, 1997 Page 5 contingent bonus based upon demonstrated financial benefits attained. However, whether to conduct such a team-based process, the objectives of such a process and appropriate contingent compensation for that effort are matters that will be subject to the Company's approval and this letter does not commit the Company or its new CEO to undertake such a team-based process. - ------------------------------------------------------------------------------- RELATIONSHIP OF THE PARTIES - ------------------------------------------------------------------------------- The parties intend that an independent contractor relationship will be created by this agreement. JA&A is not to be considered an employee or agent of the Company and the employees of JA&A are not entitled to any of the benefits that the Company provides for the Company's employees. The Company and JA&A each agree not to solicit or recruit any employees or agents of the other for a period of two years subsequent to the completion and/or termination of this agreement. 6 Board of Directors December 29, 1997 Page 6 - ------------------------------------------------------------------------------- CONFIDENTIALITY - ------------------------------------------------------------------------------- JA&A agrees to keep confidential all information obtained from the Company. JA&A agrees that neither it nor its directors, officers, principals, employees, agents or attorneys will disclose to any other person or entity, or use for any purpose other than specified herein, any information pertaining to the Company or any affiliate thereof which is either non-public, confidential or proprietary in nature ("Information") which it obtains or is given access to during the performance of the services provided hereunder. JA&A may make reasonable disclosures of Information to third parties in connection with their performance of their obligations and assignments hereunder and JA&A agrees that it shall obtain a confidentiality agreement from unrelated third parties (which shall not include the Company's vendors, customers or lenders) prior to the disclosure of such Information. In addition, JA&A may disclose its involvement with the Company, provided that JA&A shall not publicly announce its retention by the Company unless the Company has previously made such public disclosure. Information includes data, plans, reports, schedules, drawings, accounts, records, calculations, specifications, flow sheets, computer programs, source or object codes, results, models, or any work product relating to the business of the Company, its subsidiaries, distributors, affiliates, vendors, customers, employees, contractors and consultants. The Company acknowledges that all advice (written or oral) given by JA&A to the Company in connection with JA&A's engagement is intended solely for the benefit and use of the Company (limited to its Board of Directors and its management) in considering the transactions to which it relates. The Company agrees that no such advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time in any manner or for any purpose other than accomplishing the tasks and programs referred to herein or in discussions with the Company's lenders or debt holders, without JA&A's prior approval (which shall not be unreasonably withheld) except as required by law. This agreement will survive the termination of the engagement. 7 Board of Directors December 29, 1997 Page 7 - ------------------------------------------------------------------------------- FRAMEWORK OF THE ENGAGEMENT - ------------------------------------------------------------------------------- The Company acknowledges that it is hiring JA&A purely to assist and advise the Company in business planning and restructuring. JA&A's engagement shall not constitute an audit, review or compilation, or any other type of financial statement reporting engagement that is subject to the rules of the AICPA or other such state and national professional bodies. We acknowledge that JA&A and Mr. Dangremond are being retained to provide services and perform functions normally performed by the chief financial officer of companies in similar circumstances. Such responsibilities include, but are not limited to, cash management, oversight of the preparation and audit of required financial reports, management of the financial staff within the Company and interface with the Company's lenders and creditors. We understand that the Company has retained other consultants to handle investment banking functions and that Mr. Dangremond and JA&A professionals shall serve in support capacities to those consultants. - ------------------------------------------------------------------------------- INDEMNIFICATION - ------------------------------------------------------------------------------- In engagements of this nature, it is our practice to receive indemnification. Accordingly, in consideration of our agreement to act on your behalf in connection with this engagement, you agree to indemnify, hold harmless, and defend us (including our principals, employees and agents) from and against all claims, liabilities, losses, damages and reasonable expenses as they are incurred, including reasonable legal fees and disbursements of counsel, and the costs of our professional time (our professional time will be reimbursed at our rates in effect when such future time is required), relating to or arising out of the engagement, including any legal proceeding in which we may be required or agree to participate but in which we are not a party. We, our principals, employees and agents may, but are not required to, engage a single firm of separate counsel of our choice in connection with any of the matters to which this indemnification agreement relates. This indemnification agreement does not apply to actions taken or omitted to be taken by us in bad faith. 8 Board of Directors December 29, 1997 Page 8 - ------------------------------------------------------------------------------- INDEMNIFICATION OF OFFICERS - ------------------------------------------------------------------------------- In addition to the foregoing indemnification, Bob Dangremond, along with other JA&A personnel who serve as acting officers of the Company, shall be individually indemnified in a manner comparable to that provided under the Company's directors' and officers' liability insurance as is applicable to officers of the Company. - ------------------------------------------------------------------------------- TERMINATION AND SURVIVAL - ------------------------------------------------------------------------------- The agreement may be terminated at any time by written notice by one party to the other; provided, however, that notwithstanding such termination JA&A will be entitled to any fees and expenses due under the provisions of the agreement. Such payment obligation shall inure to the benefit of any successor or assignee of JA&A. The obligations of the parties under the Indemnification, Indemnification of Officers and Confidentiality sections of this agreement shall survive the termination of the agreement as well as the other sections of this agreement which expressly provide that they shall survive termination of this agreement. - ------------------------------------------------------------------------------- GOVERNING LAW - ------------------------------------------------------------------------------- This letter agreement is governed by and construed in accordance with the laws of the State of Michigan with respect to contracts made and to be performed entirely therein and without regard to choice of law or principles thereof. - ------------------------------------------------------------------------------- CONFLICTS - ------------------------------------------------------------------------------- We know of no fact or situation which would represent a conflict of interest for us with regard to the Company. 9 Board of Directors December 29, 1997 Page 9 - ------------------------------------------------------------------------------- SEVERABILITY - ------------------------------------------------------------------------------- If any portion of the letter agreement shall be determined to be invalid or unenforceable, we each agree that the remainder shall be valid and enforceable to the maximum extent possible. - ------------------------------------------------------------------------------- ENTIRE AGREEMENT - ------------------------------------------------------------------------------- All of the above contains the entire understanding of the parties relating to the services to be rendered by JA&A and may not be amended or modified in any respect except in writing signed by the parties. JA&A will not be responsible for performing any services not specifically described in this letter or in a subsequent writing signed by the parties. - ------------------------------------------------------------------------------- NOTICES - ------------------------------------------------------------------------------- All notices required or permitted to be delivered under this letter agreement shall be sent, if to us, to the address set forth at the head of this letter, to the attention of Mr. Melvin R. Christiansen, and if to you, to the address for you set forth above, to the attention of your General Counsel, or to such other name or address as may be given in writing to the other party. All notices under the agreement shall be sufficient if delivered by facsimile or overnight mail. Any notice shall be deemed to be given only upon actual receipt. If the Company becomes involved in any proceeding under the Bankruptcy Code, it agrees to petition the Court to affirm this agreement as part of its first day motions. If these terms meet with your approval, please sign and return the enclosed copy of this proposal. We look forward to working with you. Sincerely yours, JAY ALIX & ASSOCIATES Robert N. Dangremond Principal 10 Board of Directors December 29, 1997 Page 10 Acknowledged and Agreed to: ZENITH ELECTRONICS CORPORATION By: ----------------------------------- Its: ----------------------------------- Dated: ----------------------------------- EX-10.(U) 7 1ST AMENDMENT TO RECEIVABLES 1 EXHIBIT 10u LETTER AMENDMENT Dated as of October 15, 1997 To Bankers Trust Company, as Trustee pursuant to the Pooling and Servicing Agreement referred to below Ladies and Gentlemen: We refer to (i) the Pooling and Servicing Agreement dated as of March 31, 1997 (as amended, supplemented or otherwise modified through the date hereof, the "Pooling and Servicing Agreement"; capitalized terms not otherwise defined in this Letter Amendment are used herein as defined in the Pooling and Servicing Agreement and the other Transaction Documents referred to therein) among the Transferor, the Servicer and you, (ii) the Receivables Purchase Agreement, dated as of March 31, 1997, among Zenith Electronics Corporation, as seller, and Zenith Finance Corporation, as purchaser, (iii) the Receivables Purchase Agreement, dated as of March 31, 1997, among Zenith Microcircuits Corporation, as seller, and Zenith Finance Corporation, as purchaser, (each such Receivables Purchase Agreement, as amended, supplemented or otherwise modified, being a "Receivables Purchase Agreement") and (iv) the other Transaction Documents. It is hereby agreed by you and us as follows: Section 4.03(a) of each Receivables Purchase Agreement is, effective as of the date of this Letter Amendment, hereby amended by deleting therein the phrase "or any other property or asset of the Seller" and substituting therefor the following phrase "or any proceeds thereof". This Letter Amendment shall become effective as of the date first above written when, and only when the Program Agent shall have received a counterpart hereof executed by you, the undersigned, a Majority in Interest of the Series 1997-1 Holders and a Majority of Series 1997-1 Certificate Interests or, as to any of the Series 1997-1 Holders and any of the Holders of Series 1997-1 Certificate Interests, advice satisfactory to the Program Agent that such Series 1997-1 Holder or Holder of Series 1997-1 Certificate Interests has executed this Letter Amendment, together with a- counterpart of the Consent attached hereto executed by the Parent. This Letter Amendment is subject to the provisions of Section 7.06 of each Receivables Purchase Agreement and Section 5.04 of the Series 1997-1 Certificate Purchase Agreement. On and after the effectiveness of this Letter Amendment, each reference in each Receivables Purchase Agreement to "this Agreement", "hereunder", 'hereof" or words of like import referring to each such Receivables Purchase Agreement, respectively, and each reference in each of the other Transaction Documents to "the Receivables Purchase Agreement", "thereunder", "thereof" or words of like import referring to either Receivables Purchase Agreement, shall mean and be a reference to either such Receivables Purchase Agreement, respectively, as amended by this Letter Amendment. The Transaction Documents, except to the extent specifically provided above, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. The execution, delivery and effectiveness of this Letter Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Beneficiary, including the Program 1 2 Agent, under any of the Transaction Documents, nor constitute a waiver of any provision of any of the Transaction Documents. If you agree to the terms and provisions hereof, please evidence such agreement by executing a counterpart hereof. Please return (i) at least one counterpart of this Letter Amendment by fax to Liam Toohey at Shearman & Sterling, fax no. (212) 8487179 and (ii) at least three original counterparts of this Letter Amendment to Liam Toohey at Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. By their execution of this Letter Amendment, the Majority in Interest of the Series 1997-1 Holders hereby instructs and directs the Trustee to execute and deliver this Letter Amendment. This Letter Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Letter Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Letter Amendment. This Letter Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, ZENITH FINANCE CORPORATION, as Purchaser By: Name: Title: ZENITH ELECTRONICS CORPORATION, as Seller and Originator By: Name: Title: ZENITH MICROCIRCUITS CORPORATION, as Seller and Originator By: Name: Title: 2 3 Acknowledged and agreed as of the date first above written: BANKERS TRUST COMPANY, not in its individual capacity, but solely as Trustee By: Name: Title: CORPORATE RECEIVABLES CORPORATION, as Purchaser By: CITICORP NORTH AMERICA, INC., as Attorney-in-Fact By: Name: Title: CITIBANK, N.A. as Liquidity Provider By: Name: Title: WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch, as Liquidity Provider By: Name: Title: By: Name: Title. 3 4 THE BANK OF NEW YORK COMMERCIAL CORPORATION, as Liquidity Provider By: Name: Title: RAIFFEISEN ZENTRALBANK OSTERREICH AKTIENGESELLSCHAFT, as Liquidity Provider By: Name: Title: INDUSTRIAL BANK OF JAPAN, LIMITED, CHICAGO BRANCH, as Liquidity Provider By: Name: Title: BANK OF IRELAND, as Liquidity Provider By: Name: Title: 4 5 CONSENT Dated as of October 15, 1997 The undersigned, LG Electronics Inc., a corporation organized under the laws of the Republic of Korea, party to the Parent Undertaking Agreement dated March 31, 1997 (as amended, supplemented or otherwise modified through the date hereof, the "Parent Undertaking Agreement') in favor of Bankers Trust Company, as trustee on behalf of the Investor Certificateholders parties to the Transaction Documents referred to in the foregoing Letter Amendment, hereby consents to such Letter Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Letter Amendment, the Parent Undertaking Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects. LG ELECTRONICS INC. By Name: Title: 5 EX-10.(AD) 8 FORM OF PERFORMANCE OPTIMIZATION 1 EXHIBIT 10ad PETER S. WILLMOTT PRESIDENT & CEO (847) 391-7383 FAX: (847) 391-7598 April 7, 1997 Mr. Richard F. Vitkus Senior Vice President and General Counsel Zenith Electronics Corporation 1000 Milwaukee Avenue Glenview, IL 60025 Dear Rich: As you know, Zenith Electronics Corporation ("Zenith" or the "Company") is in the process of implementing a turnaround program to bring the Company to a level of profitability acceptable to the Board of Directors and the shareholders. As a valued executive, your continued employment with and commitment to the Company at this time is very important. In recognition of your efforts in implementing the turnaround at Zenith, I have been authorized by the Company's Board of Directors to offer you an opportunity to share in the success of that effort by participating in a one time special bonus, the Performance Optimization Plan ("POP"), the terms of which are described below. The POP is in addition to and not in lieu of your current compensation and benefits, including all benefits provided under your employment agreement dated January 1, 1997. The POP If (a) Zenith's aggregate pre-tax earnings during the years 1997, 1998 and 1999 equals or exceeds an amount equal to break-even ( e.g., zero earnings), taking into account the gross pre-tax cost to the Company of making the payments to the executives selected for the POP program ("Formula Earnings") and, (b) you are actually employed by Zenith on December 31, 1999, then on or before January 10, 2000 (or as soon thereafter as practicable, but in no event later than March 31, 2000), you will receive a cash payment (less withholding) in an amount equal to three times your base pay and target bonus as in effect on December 31, 1999. If such cash payment is not made by February 15, 2000, then it shall begin to accrue interest from that date until paid, at an annual rate of the then Prime Rate as published by The Wall Street Journal. The definition of Formula Earnings is subject to adjustment by the Zenith Board of Directors to reflect extraordinary events and other circumstances having a material impact on earnings. So that it is clear, as an example: assuming the cost to the Company of making the POP payment to all eligible participating executives is $10,000,000.00, then Zenith's aggregate pre-tax earnings for the years 1997, 1998 and 1999, after taking into account such $10,000,000.00, must equal or exceed zero earnings in order for any payment to be made. It is immaterial, for purposes of the POP, what Zenith's earnings or losses are for a particular year as long as the aggregate of the earnings and losses for the three years equals or exceeds the Formula Earnings. If the aggregate earnings for these years fall below zero, no payment will be made and the POP will terminate. Likewise, the payment will not increase if the earnings are above the Formula Earnings. 2 Richard F. Vitkus April 7, 1997 Page 2 Effect on Company Benefit Plans No amounts payable pursuant to the POP shall constitute wages or compensation for purposes of determining the amount of any benefits you are entitled to receive at any time from any employee benefit plan, program or employment practice maintained or contributed by Zenith. Choice of Law The POP and this letter agreement shaft be governed by the laws of the State of Illinois. Invalidity of Provision If any provision of the POP or this letter agreement is declared invalid, illegal or unenforceable by any court of competent jurisdiction, all of the remaining provisions of the POP and this letter agreement shall continue in full force and effect. Successor The POP and this letter agreement shall be binding on any successor, whether by the merger or otherwise, to Zenith. Amendment No modification or amendment hereof shall be valid or binding on either party unless made in writing and signed by both parties or by their duly authorized officers or representatives. Please review this letter agreement carefully before signing. If you are in agreement with the above provisions, please signify your acceptance by signing and dating both copies of this letter agreement in the space provided below and return one copy to me. Very truly yours, By Peter S. Willmott AGREED TO AND ACCEPTED: By Richard F. Vitkus Dated EX-21 9 ZENITH ELECTRONICS CORP. SUBSIDIARIES 1 EXHIBIT 21 ZENITH ELECTRONICS CORPORATION SUBSIDIARIES Cableproductos de Chihuahua, S.A. de C.V. Mexico Electro Partes de Matamoros, S.A. de C.V. Mexico Productos Magneticos de Chihuahua, S.A. de C.V. Mexico Partes de Television de Reynosa, S.A. de C.V. Mexico Radio Componentes de Mexico, S.A. de C.V. Mexico Telson, S.A. de C.V. Mexico Zenco de Chihuahua, S.A. de C.V. Mexico Interocean Advertising Corporation of Illinois Illinois Zenith Distributing Corporation of Illinois Illinois Zenith Electronics Corporation of Arizona Arizona Zenith Electronics Corporation of Pennsylvania Pennsylvania Zenith Electronics Corporation of Texas Texas Zenith Electronics (Europe) Limited England Zenith Electronics (Ireland) Limited Ireland Zenith/Inteq, Inc. Delaware Zenith Radio Canada Ltd./Zenith Radio Canada Ltee Canada Zenith Taiwan Corporation Taiwan Zenith Video Tech Corporation Delaware Zenith Video Tech Corporation-Florida Delaware Zenith Finance Corporation Delaware NOTE: All subsidiaries are wholly-owned by Zenith Electronics Corporation except for Radio Componentes de Mexico, S.A. de C.V., which is a wholly-owned subsidiary of Cableproductos de Chihuahua S.A. de C.V. EX-23 10 CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated March 27, 1998, included in this Form 10-K for the year ended December 31, 1997, into (i) the Company's previously filed Registration Statements on Form S-8, File Nos. 33-15643, 33-11295 and 333-19587 (ii) the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-56889). /s/ Arthur Andersen LLP - ------------------------- Arthur Andersen LLP Chicago, Illinois March 27, 1998 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 0 0 22 0 166 313 792 562 528 467 0 0 0 67 (156) 528 1,173 1,173 1,181 1,181 221 0 26 (300) (1) (299) 0 0 0 (299) (4.49) (4.49)
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