<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 11)*
Zenith Electronics Corporation
(Name of Issuer)
Common Stock, par value $1.00 per share
(Including the Associated Rights)
(Title of Class of Securities)
989349 10 5
(CUSIP Number)
Chan-Ho Lee Copy to:
Managing Director Steven R. Gross, Esq.
LG Electronics Inc. Debevoise & Plimpton
LG Twin Towers 875 Third Avenue
20, Yoido-dong New York, NY 10022
Youngdungpo-gu (212) 909-6000
Seoul, Korea 150-721
011-82-2-3777-3049
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
August 7, 1998
- --------------------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Sections 240.13d-1(3), 240.13d-1(f) or 240.13d-1(g),
check the following box [ ].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Section 240.13d-7(b) for
other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purposes of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE> 2
SCHEDULE 13D
CUSIP No. 989349 10 5 Page 2 of 6 Pages
1 NAMES OF REPORTING PERSONS
LG Electronics Inc.
LG Semicon Co., Ltd.
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ]
(b) [ ]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS
N/A
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(d) OR 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Republic of Korea
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF LG Electronics Inc. -- 38,155,000*
SHARES --------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY N/A
EACH --------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON LG Electronics Inc. -- 12,059,800
WITH LG Semicon Co., Ltd. -- 26,095,200
--------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
N/A
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
LG Electronics Inc. -- 38,155,000*
LG Semicon Co., Ltd. -- 26,095,200
- --------
*. Includes the shares of Zenith Electronics Corporation's common
stock, par value $1.00 per share (the "Common Stock"), held by LG
Semicon Co., Ltd., a minority-owned subsidiary of LG Electronics
Inc. LG Semicon Co., Ltd. granted LG Electronics Inc. a voting
proxy with respect to the Common Stock held by LG Semicon Co., Ltd.
Also includes 793,000 shares held by LG Electronics Inc. obtainable
pursuant to stock options exercisable within sixty (60) days of the
date hereof.
<PAGE> 3
SCHEDULE 13D
CUSIP No. 989349 10 5 Page 3 of 6 Pages
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12 CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES
[ ]
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
LG Electronics Inc. -- 56.9%*
LG Semicon Co., Ltd. -- 38.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
CO
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<PAGE> 4
SCHEDULE 13D
CUSIP No. 989349 10 5 Page 4 of 6 Pages
AMENDMENT NO. 11 TO STATEMENT ON SCHEDULE 13D
This Amendment No. 11 amends and supplements the Tender Offer
Statement on Schedule 14D-1 and Schedule 13D dated July 21, 1995, as amended
(the "Schedule 13D") of LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea ("LGE"), and LG Semicon Co., Ltd, a corporation
organized under the laws of the Republic of Korea ("LG Semicon"), filed in
connection with shares of common stock, par value $1.00 per share (the "Common
Stock"), of Zenith Electronics Corporation, a Delaware corporation (the
"Company"), and the associated Common Stock purchase rights. This Amendment is
being filed on behalf of the reporting persons identified on the cover page of
this Amendment. This Amendment amends Items 4, 6 and 7 of the Schedule 13D.
ITEM 4. PURPOSE OF THE TRANSACTION.
LGE and the Company entered into a Restructuring Agreement, dated as
of August 7, 1998 (the "Restructuring Agreement"), regarding a proposed,
prepackaged plan of reorganization of the Company (the "Prepackaged Plan"), and
the Company has filed with the Securities and Exchange Commission (the "SEC") a
Disclosure Statement and Proxy Statement-Prospectus (the "Registration
Statement") for the solicitation of votes for the Prepackaged Plan. In addition,
the Company and LGE have filed with the SEC a Rule 13E-3 Transaction Statement
(the "Rule 13E-3 Transaction Statement") relating to certain of the transactions
contemplated by the Prepackaged Plan. (The Restructuring Agreement, the
Registration Statement and the Rule 13E-3 Transaction Statement are attached
hereto as Exhibits.)
The purpose of the Prepackaged Plan is to reduce the Company's debt
service obligations, facilitate future borrowing to fund liquidity needs and
permit the Company to implement a restructuring of its operations. The
Prepackaged Plan will reduce the Company's overall debt and other obligations by
approximately $300 million by exchanging (i) $200 million of debt and other
liabilities owed to LGE for all of the newly issued common stock, par value $.01
per share, of the reorganized Company (the "New Common Stock"), (ii) the 6 1/4%
Convertible Subordinated Debentures due 2011 (the "Old Subordinated Debentures")
in an aggregate principal amount of $103.5 million plus accrued interest thereon
for the 6 1/4% Senior Subordinated Debentures due 2010 (the "New Subordinated
Debentures") of the reorganized Company in an aggregate principal amount of $40
million and (iii) approximately $32.4 million of indebtedness to LGE for certain
property, plant and equipment owned by the Company's subsidiaries located in
Reynosa, Tamaulipas, Mexico, which have an appraised value equal to such amount.
In addition, as a consequence of the Prepackaged Plan, the Common Stock, par
value $1.00 per share, of the Company, together with all outstanding options,
warrants or rights to acquire shares of the Common Stock, will be canceled and
the holders of the Common Stock (including LGE and LG Semicon) will receive no
distributions and retain no property under the Prepackaged Plan in respect of
their holdings of the Common Stock.
<PAGE> 5
SCHEDULE 13D
CUSIP No. 989349 10 5 Page 5 of 6 Pages
The information set forth in Items 4, 5 and 7(a) of the Rule 13E-3
Transaction Statement is incorporated herein by reference.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO SECURITIES OF THE ISSUER.
The information set forth in Item 11 of the Rule 13E-3 Transaction
Statement is incorporated herein by reference.
ITEM 7. MATERIALS TO BE FILED AS EXHIBITS.
Exhibit A Registration Statement filed August 10, 1998
Exhibit B Rule 13E-3 Transaction Statement filed August
10, 1998
Exhibit C Restructuring Agreement, dated as of August 7,
1998, between Zenith Electronics Corporation
and LG Electronics Inc.
<PAGE> 6
SCHEDULE 13D
CUSIP No. 989349 10 5 Page 6 of 6 Pages
SIGNATURE.
After reasonable inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete and
correct.
Dated: August 31, 1998
LG ELECTRONICS INC.
By: /s/ Chan-Ho Lee
---------------------------
Name: Chan-Ho Lee
Title: Managing Director
LG SEMICON CO., LTD.
By: /s/ Kyoung-Ji Lee
----------------------------
Name: Kyoung-Ji Lee
Title: Managing Director
<PAGE> 7
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
Exhibit A Registration Statement filed August 10, 1998
Exhibit B Rule 13E-3 Transaction Statement filed August
10, 1998
Exhibit C Restructuring Agreement, dated as of August 7,
1998, between Zenith Electronics Corporation
and LG Electronics Inc.
<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ZENITH ELECTRONICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3651 36-1996520
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
1000 MILWAUKEE AVENUE
GLENVIEW, ILLINOIS 60025-2493
TELEPHONE: (847) 391-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
EDWARD J. MCNULTY
1000 MILWAUKEE AVENUE
GLENVIEW, ILLINOIS 60025-2493
TELEPHONE: (847) 391-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
RICHARD F. VITKUS JAMES H.M. SPRAYREGEN
ZENITH ELECTRONICS CORPORATION KIRKLAND & ELLIS
1000 MILWAUKEE AVENUE 200 EAST RANDOLPH DRIVE
GLENVIEW, ILLINOIS 60025-2493 CHICAGO, ILLINOIS 60601
(847) 391-7000 (312) 861-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction 6, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
6 1/4% Subordinated
Debentures due 2010....... $40,000,000 -- 34,500,000 $10,178
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(2) as one-third of the principal amount of Zenith Electronics
Corporation's 6 1/4% Convertible Subordinated Debentures due 2011 (the "Old
Subordinated Debentures") as of August 10, 1998. The Old Subordinated
Debentures will be exchanged for Zenith Electronics Corporation's 6 1/4%
Subordinated Debentures due 2010.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 10, 1998
DISCLOSURE STATEMENT AND
PROXY STATEMENT-PROSPECTUS FOR THE SOLICITATION
OF VOTES FOR THE PREPACKAGED PLAN OF REORGANIZATION OF
ZENITH ELECTRONICS CORPORATION
Zenith Electronics Corporation ("Zenith" or the "Company"), upon the terms
and subject to the conditions set forth in this Disclosure Statement and Proxy
Statement-Prospectus (the "Disclosure Statement") and the accompanying forms of
Ballot or Master Ballot (each as defined herein), hereby solicits from each
holder of Impaired Claims (as defined herein) as of the close of business on
, 1998 (the "Voting Record Date") acceptance of a prepackaged plan
of reorganization (the "Prepackaged Plan") under chapter 11 of Title 11 of the
United States Code, as amended (the "Bankruptcy Code").
The Prepackaged Plan provides, among other things, that as of the date the
Prepackaged Plan becomes effective (the "Effective Date"), holders of the
Company's 6 1/4% Convertible Subordinated Debentures due 2011 (the "Old
Subordinated Debentures") issued under the Indenture dated as of April 1, 1986
between the Company and State Street Bank & Trust Company, as trustee (the "Old
Subordinated Debenture Indenture"), shall receive a pro rata distribution of $40
million of new 6 1/4% Subordinated Debentures due 2010 (the "New Subordinated
Debentures"). IN THE EVENT THAT HOLDERS OF THE OLD SUBORDINATED DEBENTURES DO
NOT APPROVE THE PREPACKAGED PLAN, HOWEVER, THE PREPACKAGED PLAN PROVIDES FOR A
"CRAM DOWN" MECHANISM WITH RESPECT TO THE CLASS (AS DEFINED HEREIN) COMPOSED OF
THE HOLDERS OF THE OLD SUBORDINATED DEBENTURES. IF SUCH A "CRAM DOWN" IS
APPROVED BY THE BANKRUPTCY COURT, HOLDERS OF THE OLD SUBORDINATED DEBENTURE
CLAIMS WOULD RECEIVE NO DISTRIBUTION AND RETAIN NO PROPERTY. Confirmation of the
Prepackaged Plan pursuant to Section 1129 of the Bankruptcy Code
("Confirmation") is subject to judicial approval of this solicitation and the
terms of the Prepackaged Plan including, as necessary, under the "cram down"
provisions of the Bankruptcy Code.
In connection with the financial restructuring contemplated by the
Prepackaged Plan (the "Financial Restructuring"), the Company expects to
implement an operational restructuring plan (the "Operational Restructuring,"
and together with the Financial Restructuring, the "Restructuring") which is
designed to leverage the Company's brand, distribution and technology strengths,
and which includes reducing costs, outsourcing substantially all components and
products, selling certain assets and capitalizing on the Company's patented
digital television technologies, all as more fully described in this Disclosure
Statement.
The Company believes that confirmation of the Prepackaged Plan is necessary
for successful implementation of the Operational Restructuring. There can be no
assurance, however, that the Company will be able to consummate the Financial
Restructuring or the Operational Restructuring. If the Prepackaged Plan is not
confirmed, holders of claims (as defined in section 101(5) of the Bankruptcy
Code) ("Claims") against the Company would likely receive less than they would
receive pursuant to the Prepackaged Plan and in the case of the holders of the
Old Subordinated Debentures, would likely receive no distribution and retain no
property. The holders of Equity Interests (as defined herein) would receive no
distribution and retain no property under any circumstances. See "RISK FACTORS."
(continued on next page)
------------------------
THE VOTING DEADLINE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 5:00 PM.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
THE SOLICITATION AGENT IS:
------------------------
THE DATE OF THIS DISCLOSURE STATEMENT IS , 1998.
<PAGE> 3
(cover page continued)
DURING THE PENDENCY OF THE BANKRUPTCY CASE THAT WILL BE FILED IN CONNECTION
WITH THE RESTRUCTURING, THE COMPANY INTENDS TO OPERATE ITS BUSINESS IN THE
ORDINARY COURSE AND TO MAKE PAYMENT IN FULL ON A TIMELY BASIS TO ALL OF ITS
GENERAL UNSECURED CREDITORS, INCLUDING ALL TRADE CREDITORS, CUSTOMERS AND
EMPLOYEES FOR ALL AMOUNTS DUE PRIOR TO AND DURING THE BANKRUPTCY CASE.
Pursuant to the Prepackaged Plan and the Restructuring Agreement, dated as
of August 7, 1998 (the "Restructuring Agreement"), between the Company and LG
Electronics Inc., a corporation organized under the laws of the Republic of
Korea ("LGE"), LGE has agreed to restructure substantially all of its Claims
against and all of its Equity Interests in the Company. The following chart
summarizes the Claims projected to be held by LGE as of December 31, 1998.
<TABLE>
<CAPTION>
PROJECTED AS OF
TYPE OF SUPPORT DECEMBER 31, 1998
--------------- -----------------
<S> <C>
Direct secured loans to Zenith (the "LGE Demand Loan $ 45.0 million
Claims")
Guarantees of Zenith's obligations under unsecured demand $ 50.0 million
note financing transactions with Bank of America, First
National Bank of Chicago-NBD, Societe Generale, Seoul Branch
and Credit Agricole Indosuez, Seoul Branch (the "Unsecured
Bank Loans") (as of June 30, 1998, LGE had made payments
under demands against guarantees on $50 million of the
Unsecured Bank Loans and the Company is obligated to LGE for
these payments plus stated interest pursuant to the
Reimbursement Agreement (as defined herein) (the "LGE
Reimbursement Claims"))
Guarantees of Zenith's obligations under or related to $ 90.1 million
leveraged leases with respect to equipment at its Melrose
Park, Illinois plant (the "Leveraged Lease (Melrose Park)")
and at its Reynosa, Mexico and Juarez, Mexico facilities
(the "Leveraged Lease (Mexico)") and together with the
Leveraged Lease (Melrose Park), the "Leveraged Leases") (On
July 22, 1998, LGE made payment under the guarantees of the
Leveraged Leases in the amount of approximately $90.1
million as the result of a demand made under the guarantees
by the lessor. Under the Restructuring Agreement,
approximately $8.0 million of these Claims will be satisfied
by LGE retaining title to certain equipment (collectively,
the "LGE Leveraged Lease Claims"))
Vendor credit line for Zenith's purchase of products from $140.0 million
LGE (the "LGE Extended Payables Claims")
Fees owed for certain technical and other services (the "LGE $ 10.5 million
Technical Services Claims")
Fees for the guarantees of the Unsecured Bank Loans (the $ 1.6 million
"LGE Guarantee Fee Claims")
</TABLE>
Pursuant to the Restructuring Agreement, under the Prepackaged Plan, LGE
will receive a promissory note issued by the Company (the "LGE New Restructured
Senior Note"), the principal amount of which is projected to be approximately
$96.8 million assuming an Effective Date of December 31, 1998, and certain
property, plant and equipment owned by Zenith's subsidiaries located in Reynosa,
Tamaulipas, Mexico (the "Reynosa Assets") having an appraised value of
approximately $32.4 million in satisfaction of the following Claims against the
Company held by LGE: (i) the LGE Leveraged Lease Claims and (ii) that portion of
the LGE Reimbursement Claims and the LGE Demand Loan Claims not classified as
LGE Tranche B Claims (collectively, the "LGE Tranche A Claims").
In addition, pursuant to the Restructuring Agreement and under the
Prepackaged Plan, LGE will receive 1,000 shares of common stock, par value $0.01
per share (the "New Common Stock") of the reorganized corporation ("New
Zenith"), representing 100% of the New Common Stock outstanding following the
Effective Date, in satisfaction of $200 million of Claims held by LGE against
the Company. The Claims held by LGE that will be converted into 100% of the New
Common Stock are comprised of the following Claims, which will not exceed $200
million in the aggregate: (i) the LGE Extended Payables Claims, not to exceed
ii
<PAGE> 4
(cover page continued)
$140 million; (ii) the LGE Reimbursement Claims, not to exceed $50 million;
(iii) the LGE Technical Services Claims; (iv) the LGE Guarantee Fee Claims; and
(v) the LGE Demand Loan Claims in an amount (if any) sufficient when aggregated
with the amounts described in clauses (i) through (iv) to equal $200 million
(collectively, the "LGE Tranche B Claims"). To the extent the aggregate of the
Claims described in items (i) through (iv) of the preceding sentence exceeds
$200 million, a portion of the LGE Reimbursement Claims equal to such excess
shall constitute LGE Tranche A Claims. LGE Tranche A Claims and LGE Tranche B
Claims are collectively referred to herein as the "LGE Claims."
For a description of LGE's additional financial support and relationships
with the Company, see "SPECIAL FACTORS -- Events Leading to the Restructuring"
and "CERTAIN TRANSACTIONS."
Under the terms of the Prepackaged Plan, on the Effective Date, all of the
shares of common stock, par value $1.00 per share, of the Company (the "Old
Common Stock"), including the 38,155,000 million shares of Old Common Stock
(which represents approximately 56.5% of the Old Common Stock including vested
but unexercised options) held by LGE and LG Semicon Co., Ltd. ("LG Semicon"),
together with all outstanding options, warrants or rights to acquire shares of
common stock (together with the Old Common Stock, "Equity Interests") will be
cancelled and the holders thereof will receive no distribution and retain no
property on account of such Equity Interests upon the occurrence of the
Effective Date ("Consummation") of the Prepackaged Plan.
The Company will not hold a creditors' or shareholders' meeting to vote on
the Prepackaged Plan. Rather, the Company is soliciting acceptances of the
Prepackaged Plan by means of Ballots and Master Ballots (the "Solicitation").
Any entity that is the beneficial owner of a Claim and is entitled to vote with
respect to the Prepackaged Plan should complete, sign and return the applicable
Ballot or Master Ballot in accordance with the instructions set forth in this
Disclosure Statement. See "SOLICITATION; VOTING PROCEDURES."
Under the Prepackaged Plan, all Claims and Equity Interests have been
placed in various classes, based on the nature and priority of the Claim or
Equity Interest. Each Class (as defined herein) is either impaired or unimpaired
under the Prepackaged Plan. See "SUMMARY -- The Prepackaged Plan" and "THE
PREPACKAGED PLAN." Each Class of Unimpaired Claims is conclusively presumed to
have accepted the Prepackaged Plan under the Bankruptcy Code. Accordingly,
acceptances of the Prepackaged Plan are being solicited only from holders of
Impaired Claims. A Class of Impaired Claims will have accepted the Prepackaged
Plan if the Prepackaged Plan is accepted by creditors that hold at least
two-thirds in dollar amount and a majority in number of the Claims of holders in
that Class who cast Ballots or Master Ballots. Only those holders who vote to
accept or reject the Prepackaged Plan will be counted for purposes of
determining acceptance or rejection of the Prepackaged Plan. Therefore, the
Prepackaged Plan could be accepted by any Class of Impaired Claims with the
affirmative vote of significantly less than two-thirds in dollar amount and a
majority in number of Claims in a Class. The Prepackaged Plan also provides that
all of the Equity Interests of the Company, including the Old Common Stock
(including those held by LGE and LG Semicon) will be cancelled. The holders of
Equity Interests, including holders of Old Common Stock, will receive no
distributions and retain no property pursuant to the Prepackaged Plan, and are
therefore deemed to have rejected the Prepackaged Plan. The Bankruptcy Court may
nevertheless confirm the Prepackaged Plan at the Company's request if at least
one Class of Impaired Claims has accepted the Prepackaged Plan (with such
acceptance determined without including the acceptance of any "insider" in such
Class).
IN DECIDING WHETHER TO VOTE IN FAVOR OF THE PREPACKAGED PLAN, HOLDERS OF
CLAIMS SHOULD CAREFULLY CONSIDER THE TYPE, AMOUNT AND TERMS OF THE SECURITIES
AND OTHER TREATMENT BEING OFFERED, AS WELL AS CERTAIN RISK FACTORS. SEE "SPECIAL
FACTORS -- PURPOSES AND EFFECTS OF THE FINANCIAL RESTRUCTURING" AND "RISK
FACTORS."
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY (THE
"SPECIAL COMMITTEE"), WHICH IS COMPOSED OF INDEPENDENT DIRECTORS OF THE COMPANY,
HAS UNANIMOUSLY RECOMMENDED TO THE BOARD OF DIRECTORS OF THE
iii
<PAGE> 5
(cover page continued)
COMPANY (THE "BOARD"), AND THE BOARD HAS UNANIMOUSLY APPROVED, THE RESTRUCTURING
AGREEMENT AND THE PREPACKAGED PLAN. THE BOARD RECOMMENDS THAT ALL HOLDERS OF
IMPAIRED CLAIMS VOTE TO ACCEPT THE PREPACKAGED PLAN.
Pursuant to the Restructuring Agreement, LGE has agreed to vote for the
Prepackaged Plan. LGE's obligation to consummate the transactions contemplated
by the Restructuring Agreement is subject to numerous conditions. See "SPECIAL
FACTORS -- The Restructuring Agreement."
AT ALL TIMES, THE COMPANY RESERVES THE RIGHT IN ITS SOLE DISCRETION NOT TO
FILE THE PREPACKAGED PLAN, OR, IF IT FILES THE PREPACKAGED PLAN, TO WITHDRAW THE
PREPACKAGED PLAN AT ANY TIME PRIOR TO CONFIRMATION, IN WHICH CASE THE
PREPACKAGED PLAN WILL BE DEEMED TO BE NULL AND VOID.
THE NEW SUBORDINATED DEBENTURES WILL NOT BE LISTED ON ANY EXCHANGE. THERE
CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL DEVELOP. THERE CAN BE NO
ASSURANCE AS TO THE PRICE AT WHICH THE NEW SUBORDINATED DEBENTURES WILL TRADE.
------------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES NOR THE PREPACKAGED PLAN HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THESE
TRANSACTIONS OR THE ACCURACY OR ADEQUACY OF THIS DISCLOSURE STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
SINCE NO BANKRUPTCY CASE HAS BEEN FILED, THIS DISCLOSURE STATEMENT HAS NOT
BEEN APPROVED BY ANY BANKRUPTCY COURT. HOWEVER, IF THE PREPACKAGED CHAPTER 11
CASE IS COMMENCED, THE COMPANY INTENDS TO PROMPTLY SEEK AN ORDER FROM THE
BANKRUPTCY COURT THAT THE SOLICITATION OF VOTES FOR THE PREPACKAGED PLAN BY
MEANS OF THIS DISCLOSURE STATEMENT WAS IN COMPLIANCE WITH THE BANKRUPTCY CODE.
THIS DISCLOSURE STATEMENT IS FIRST BEING MAILED TO HOLDERS OF CLAIMS AND
EQUITY INTERESTS ON , 1998.
iv
<PAGE> 6
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Financial Restructuring. As permitted by the rules
and regulations of the Commission, this Disclosure Statement omits certain
information, exhibits and undertakings contained in the Registration Statement.
Such additional information, exhibits and undertakings can be inspected at and
obtained from the Commission in the manner set forth below. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, and the financial schedules and
exhibits filed as a part thereof and the exhibits thereto. Statements contained
in this Disclosure Statement as to the terms of any contract or other documents
are not necessarily complete, and, in each case, reference is made to the copy
of each such contract or other document that has been filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports and other information with the Commission.
Such reports and other information filed with the Commission, as well as the
Registration Statement, can be inspected and copied at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World
Trade Center, New York, New York 10048. Copies of such material can also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains an Internet web site at http://www.sec.gov that contains reports,
proxy statements and other information. Historically, the Old Common Stock was
listed on the New York, Chicago, Basel, Geneva and Zurich, Switzerland Stock
Exchanges and the Old Subordinated Debentures were listed on the New York Stock
Exchange. On May 22, 1998, the New York Stock Exchange suspended trading of both
the Old Common Stock and the Old Subordinated Debentures. The Company believes
that the Old Common Stock continues to be traded in the over-the-counter market.
Reports, proxy statements and other information with respect to the Company are
available for inspection at the offices of the New York Stock Exchange, Inc.
(the "NYSE"), 20 Broad Street, New York, New York 10005 and the Chicago Stock
Exchange, Inc., One Financial Place, 440 South LaSalle Street, Chicago, Illinois
60605.
No person has been authorized to give any information or make any
representation not contained in this Disclosure Statement and, if given or made,
such information or representation must not be relied upon. This Disclosure
Statement does not constitute an offer to sell or the solicitation of an offer
to buy any securities other than those to which it relates, or an offer to sell
or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this Disclosure Statement nor the
distribution of any securities hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the Company or in
the information contained herein since the date hereof.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Disclosure Statement incorporates by reference documents which are not
presented herein or delivered herewith. Documents relating to the Company,
excluding exhibits to such documents unless such exhibits are specifically
incorporated herein by reference, are available upon request to Zenith
Electronics Corporation, 1000 Milwaukee Avenue, Glenview, Illinois 60025-2493.
Telephone requests may be directed to Investor Relations at 847-391-7010.
Internet requests may be directed to [email protected].
The following documents filed with the Commission by the Company (File No.
1-4115) are incorporated herein by reference: (a) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, as amended; (b) the
Company's report on Form 10-Q for the quarterly period ended March 27, 1998; (c)
the Company's current report on Form 8-K filed May 22, 1998; (d) the Company's
Registration Statement on Form 8-A, dated September 22, 1980, together with
amendments thereto; and (e) the Company's Proxy Statement with respect to the
Special Meeting of Stockholders held on November 7, 1995.
v
<PAGE> 7
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Disclosure Statement are forward-looking
statements that involve known and unknown risks, uncertainties and other factors
which may cause the actual results of the Company to be materially different
from any future results expressed or implied by such forward-looking statements.
Forward-looking statements include, among others, statements regarding the
ability of the Company to successfully implement the Operational Restructuring
and achieve the Business Plan Projections (as defined herein) and the projected
or assumed future operations and financial results of the Company. Factors that
may cause actual results of the Company to differ from future results expressed
or implied by forward-looking statements 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; the risks described under the caption "RISK FACTORS"; the ability of
the Company to obtain confirmation of the Prepackaged Plan; and the ability of
the Company to successfully implement the Restructuring and achieve the Business
Plan Projections. Given these uncertainties, holders of Impaired Claims are
cautioned not to place undue reliance on any forward-looking statements in
determining whether to vote to accept or reject the Prepackaged Plan. The
Company claims the protection of the disclosure liability safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
vi
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION....................................... v
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ vi
INDEX OF CERTAIN DEFINED TERMS.............................. x
SUMMARY..................................................... 1
The Company............................................... 1
The Prepackaged Plan...................................... 1
Special Factors........................................... 6
Dissenters' Rights........................................ 8
The Prepackaged Proceeding and Classification of
Creditors.............................................. 8
Historical and Pro Forma Capitalization................... 10
Business Plan Projections................................. 11
Comparison of the Old Subordinated Debentures to the New
Subordinated Debentures................................ 15
Voting Procedures......................................... 16
U.S. Federal Income Tax Matters........................... 18
Risk Factors.............................................. 19
RISK FACTORS................................................ 20
Recent Operating Results, Independent Auditor's Report and
High Leverage.......................................... 20
Certain Risks Relating to the Business Plan Projections... 20
Risks Associated with Proposed Operational
Restructuring.......................................... 22
Legal Proceedings......................................... 28
Financing Agreement Restrictions.......................... 28
Possible Defaults; Risk of Acceleration................... 28
Control by LGE............................................ 29
Certain Bankruptcy Considerations......................... 29
Readiness for the Year 2000............................... 32
Dependence on Patents and Proprietary Technology.......... 33
SPECIAL FACTORS............................................. 34
Events Leading to the Restructuring....................... 34
Purposes and Effects of the Financial Restructuring....... 41
LGE Agreements Related to Common Stock.................... 41
Alternatives to Confirmation and Consummation of the
Prepackaged Plan....................................... 41
Going Private Transaction................................. 42
Recommendation of the Board............................... 43
LGE's Position Regarding the Financial Restructuring...... 45
Liquidation and Going Concern Analyses.................... 45
The Restructuring Agreement............................... 47
Amendments to Certificate of Incorporation and By-Laws.... 51
Interests of Certain Persons in the Financial
Restructuring; Conflicts of Interest................... 52
Liquidity Pending Consummation of the Restructuring....... 53
Dissenters' Rights........................................ 53
THE PREPACKAGED PLAN........................................ 54
General................................................... 54
Classification of Claims and Equity Interests under the
Prepackaged Plan....................................... 55
Summary of Treatment Under the Prepackaged Plan........... 56
Summary of Other Provisions of the Prepackaged Plan....... 60
Conditions to Confirmation/Consummation................... 66
</TABLE>
vii
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<TABLE>
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Effect of Consummation of the Prepackaged Plan............ 66
Modification of the Prepackaged Plan...................... 67
Intended Actions During the Prepackaged Chapter 11 Case... 67
Confirmation Standards.................................... 68
Confirmation of the Prepackaged Plan Without Acceptance by
All Classes of Impaired Claims......................... 69
Certain Consequences of Non-Acceptance of the Prepackaged
Plan................................................... 70
MARKET PRICES OF THE COMMON STOCK........................... 71
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES............ 72
HISTORICAL AND PRO FORMA CAPITALIZATION..................... 73
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 74
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................ 75
BUSINESS PLAN PROJECTIONS................................... 81
ACCOUNTING TREATMENT........................................ 92
LIQUIDATION ANALYSIS........................................ 92
DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS................. 97
Short-Term Debt........................................... 97
Long-Term Debt............................................ 98
DESCRIPTION OF NEW SUBORDINATED DEBENTURES.................. 100
SUMMARY OF LGE NEW RESTRUCTURED SENIOR NOTE................. 103
SUMMARY OF LGE NEW CREDIT FACILITY.......................... 104
SOLICITATION; VOTING PROCEDURES............................. 106
General................................................... 106
Voting Record Date........................................ 106
Expiration Date; Extensions; Amendments................... 106
Voting Procedures and Other Requirements.................. 107
Agreements Upon Furnishing Ballots........................ 110
Method of Delivery of Ballots............................. 110
Withdrawal of Ballots; Revocation......................... 110
Solicitation Agent........................................ 111
Waivers of Defects, Irregularities, Etc................... 111
MANAGEMENT.................................................. 112
Current Directors of the Company.......................... 112
Board and Committee Meetings and Directors'
Compensation........................................... 114
Current Executive Officers of the Company................. 115
SECURITY OWNERSHIP.......................................... 118
Security Ownership of Certain Beneficial Owners........... 118
DESCRIPTION OF CAPITAL STOCK................................ 119
Old Common Stock and Old Preferred Stock.................. 119
New Common Stock.......................................... 119
Delaware Anti-Takeover Law................................ 119
CERTAIN TRANSACTIONS........................................ 120
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO
RESALES OF NEW SECURITIES................................. 122
Issuance of New Subordinated Debentures Under the
Prepackaged Plan....................................... 122
Transfers of New Subordinated Debentures.................. 122
Certain Transactions by Stockbrokers...................... 123
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS.............. 124
Consequences to Holders of the Old Subordinated
Debentures............................................. 124
</TABLE>
viii
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Consequences to Holders of Other Claims................... 127
Consequences to Holders of Equity Interests in the
Company................................................ 128
Consequences to LGE....................................... 128
Consequences to the Company............................... 128
ESTIMATED FEES AND EXPENSES................................. 131
Advisors.................................................. 131
LEGAL MATTERS............................................... 131
EXPERTS..................................................... 131
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- THE PREPACKAGED PLAN............................. A-1
ANNEX B -- CERTAIN HISTORICAL INFORMATION REGARDING
ZENITH.................................................... B-1
Results of Operations: First Quarter of 1998 Compared to
First Quarter of 1997.................................. B-1
Liquidity and Capital Resources........................... B-1
Results of Operations for 1995-1997....................... B-2
Cash Flows................................................ B-5
Financial Condition....................................... B-7
Readiness for the Year 2000............................... B-9
BUSINESS.................................................... B-10
General................................................... B-10
Raw Materials............................................. B-10
Patents................................................... B-10
Seasonal Variations in Business........................... B-11
Major Customers........................................... B-11
Competitive Conditions.................................... B-11
Research and Development.................................. B-11
Environmental Matters..................................... B-11
Employees................................................. B-11
Financial Information about Foreign and Domestic
Operations and Export Sales............................ B-12
Properties of the Company................................. B-13
Subsidiaries.............................................. B-14
Legal Proceedings......................................... B-14
Executive Compensation and Other Information.............. B-17
Employment Agreements..................................... B-18
Aggregated Option/SAR Exercises in 1997 and Year-End
Option/SAR Values...................................... B-19
</TABLE>
ix
<PAGE> 11
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
1997 10-K............................. B-2
60-Day Period......................... 126
Administrative Claims................. 2
AFR................................... 127
AHYDOs................................ 130
Allowed............................... 56
Alternative Proposal.................. 48
Amended Certificate of
Incorporation....................... 51
Amended Citibank Credit Facility...... 3
ATSC.................................. 22
Audit Committee....................... 35
Ballots............................... 16
Bank Lender Claims.................... 3
Bankruptcy Code....................... i
Bankruptcy Court...................... 5
Bankruptcy Rules...................... 17
Board................................. iii
Business Plan Projections............. 11
CDT................................... 34
CERCLA................................ B-15
Certifications........................ 108
Change in Control Period.............. 117
Citibank.............................. 7
Citibank Credit Facility.............. 35
Citibank Receivables Facility......... 35
Citibank Secured Claims............... 3
Claims................................ i
Class................................. 5
COD................................... 128
Commission............................ v
Company............................... i
Company Peer Group.................... 45
Confirmation.......................... i
Confirmation Date..................... 54
Consumer Electronics.................. B-2
Consummation.......................... iii
Contingent Compensation Plan.......... 114
D&O Releasees......................... 5
Delaware anti-takeover law............ 119
DGCL.................................. 119
DIP................................... 28
Directors' Retirement Plan............ 115
Disclosure Statement.................. i
Disqualified OID...................... 130
Distribution Record Date.............. 64
Distributor Agreement................. 37
EBIT.................................. 47
Effective Date........................ i
Employment Agreements................. 116
Equity Interests...................... iii
ERISA................................. 97
Exchange Act.......................... v
Executive Committee................... 114
Executive Officers.................... B-17
Expiration Date....................... 17
Final Order........................... 9
Financial Restructuring............... i
GECC Credit Facility.................. 97
General Unsecured Claims.............. 3
Impaired Claims....................... 1
Implementation Program................ 48
Indenture Event of Default............ 101
Investor Releasees.................... 5
IRS................................... 124
Issue Price........................... 124
Jay Alix.............................. 37
Key Executives........................ 116
Lazard................................ 38
Leveraged Lease (Melrose Park)........ ii
Leveraged Lease (Mexico).............. ii
Leveraged Leases...................... ii
LG Semicon............................ iii
LGE................................... ii
LGE Claims............................ iii
LGE Demand Loan Claims................ ii
LGE Demand Loan Facility.............. 36
LGE Extended Payables Claims.......... ii
LGE Guarantee Fee Claims.............. ii
LGE Leveraged Lease Claims............ ii
LGE New Credit Facility............... 104
LGE New Credit Facility
Event of Default.................... 105
LGE New Credit Support................ 6
LGE New Restructured Senior Note...... ii
LGE Reimbursement Claims.............. ii
LGE Restructured Notes Default........ 103
LGE Stock Purchase Agreement.......... 34
LGE Technical Services Claims......... ii
LGE Tranche A Claims.................. ii
LGE Tranche B Claims.................. iii
Master Ballots........................ 16
Merrill Lynch......................... 34
</TABLE>
x
<PAGE> 12
<TABLE>
<S> <C>
NAFTA.......................................... 23
New Bank Lender Notes.......................... 3
New Common Stock............................... ii
New Indenture.................................. 100
New Investor................................... 50
New Subordinated Debentures.................... i
New Zenith..................................... ii
NOLs........................................... 6
Nominee........................................ 18
NWS............................................ 21
NYSE........................................... v
OID............................................ 125
Old Common Stock............................... iii
Old Preferred Stock............................ 119
Old Subordinated Debenture Claims.............. 4
Old Subordinated Debenture Indenture........... i
Old Subordinated Debentures.................... i
Operational Restructuring...................... i
Organization and Compensation Committee........ 114
Other Priority Claims.......................... 2
Other Receivable............................... 13
Other Secured Claims........................... 3
Petition Date.................................. 66
PIK............................................ 6
PJSC........................................... 7
Prepackaged Chapter 11 Case.................... 5
Prepackaged Plan............................... i
Priority Tax Claims............................ 2
Professionals.................................. 8
PRP............................................ B-15
Public shareholders............................ 129
Qualifying Debt................................ 129
Recognition Period............................. 129
Registration Statement......................... v
Reimbursement Agreement........................ 36
Reorganization Period.......................... 11
Restructuring.................................. i
Restructuring Agreement........................ ii
Reynosa Assets................................. ii
Sales Multiples Approach....................... 46
Section 382 Limitation......................... 18
Securities Act................................. v
Senior Indebtedness............................ 100
Solicitation................................... iv
Solicitation Agent............................. 18
Solicitation Materials......................... 17
Special Committee.............................. iii
Stock Compensation Committee................... 114
Subsidiaries................................... 1
Tax Code....................................... 18
TIN............................................ 127
Transaction Expenses........................... 51
Transaction Fee................................ 51
Treasury Regulations........................... 124
Trustee........................................ 102
Unimpaired Claims.............................. 63
Unsecured Bank Loans........................... ii
US EPA......................................... B-15
Voting Record Date............................. i
VSB............................................ 22
Zenith......................................... i
</TABLE>
xi
<PAGE> 13
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Disclosure
Statement. Unless the context otherwise requires, references in this Disclosure
Statement to "Subsidiaries" shall mean the Company's subsidiaries.
THE COMPANY
Zenith was founded in 1918. The Company's operations include the design,
development, manufacturing and marketing of video products (including color
television sets and other consumer products) along with parts and accessories
for such products. These products, along with purchased VCRs and accessories,
are sold principally to retail dealers in the United States and to retail
dealers and wholesale distributors in other 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 also produces video
products, such as color picture tubes, for other manufacturers, and network
systems products, such as digital and analog set-top boxes and cable modems,
interactive television and data communication products for cable television
operators, telecommunications companies and other commercial users of these
products in the United States and abroad.
The Company has incurred losses in all but one of the years since 1985, and
is currently experiencing severe financial difficulties. The Company projects
that fiscal 1998 cash flows will be insufficient to meet all of the Company's
working capital requirements, scheduled cash debt service obligations and
anticipated capital expenditures. As a result, during the first quarter of
fiscal 1998, management developed and began implementing the Operational
Restructuring to enhance the long-term viability of the Company by reducing
production costs and concentrating on areas in which the Company believes it can
operate profitably. Pursuant to the Operational Restructuring, the Company
intends to become a sales, distribution and technology company by discontinuing
substantially all of its manufacturing operations, outsourcing substantially all
components and products, selling certain assets and focusing on the development
of its technologies, patent rights, parts and service operations and accessory
business.
The Company has concluded that it cannot implement the Operational
Restructuring with its present capital structure. Therefore, during the first
quarter of fiscal 1998 the Company commenced efforts to restructure its debt and
equity capitalization in order to enable it to implement the Operational
Restructuring. The Prepackaged Plan and the Financial Restructuring contemplated
thereby are the products of these efforts.
The principal offices of the Company are located at 1000 Milwaukee Avenue,
Glenview, Illinois 60025-2495. The Company's telephone number is (847) 391-7000.
For additional information concerning the Company and its business,
financial position and operations, see "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA," "INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," "ANNEX
B -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "ANNEX B -- BUSINESS."
THE PREPACKAGED PLAN
Upon the terms and subject to the conditions set forth in this Disclosure
Statement and the accompanying forms of Ballot and Master Ballot, the Company
hereby solicits acceptances of the Prepackaged Plan under the Bankruptcy Code
from holders of the Old Subordinated Debentures, the LGE Claims and the
Unsecured Bank Loans (collectively, the "Impaired Claims") as of the close of
business on the Voting Record Date. The following table summarizes the
classification and treatment of the various Classes of Claims against, and
Equity Interests in, Zenith under the Prepackaged Plan. See "THE PREPACKAGED
PLAN." The following description is qualified in its entirety by reference to
the detailed provisions of the Prepackaged Plan set forth in Annex A to this
Disclosure Statement.
1
<PAGE> 14
CLASS/TYPE OF CLAIM DESCRIPTION AND TREATMENT OF CLAIMS
ADMINISTRATIVE CLAIMS These Claims consist of the Claims for costs
and expenses of administration under section
503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary
costs and expenses incurred after the Petition
Date (as defined herein) of preserving the
estate of the Company and operating the
business of the Company (such as wages,
salaries or commissions for services and
payments for goods and other services and
leased premises); (b) compensation for legal,
financial advisory, accounting and other
services and reimbursement of expenses awarded
or allowed under section 330(a) or 331 of the
Bankruptcy Code; and (c) all fees and charges
assessed against the estate under Chapter 123
of Title 28 United States Code, 28 U.S.C.
sec.sec. 1911-1930 ("Administrative Claims").
Subject to the provisions of sections 330(a)
and 331 of the Bankruptcy Code, each holder of
an Allowed Administrative Claim will be paid
the full unpaid amount of such Allowed
Administrative Claim in cash on the Effective
Date, or upon such other terms as may be agreed
upon by such holder and the Company or
otherwise upon order of the Bankruptcy Court;
provided, however, that Allowed Administrative
Claims representing obligations incurred in the
ordinary course of business by the Company
pursuant to the Prepackaged Plan will be paid
or performed by New Zenith when due in
accordance with the terms and conditions of the
particular agreements governing such
obligations.
PRIORITY TAX CLAIMS These Claims consist of all Claims of a
governmental unit of the kind specified in
section 507(a)(8) of the Bankruptcy Code
("Priority Tax Claims"). On the Effective Date,
each holder of a Priority Tax Claim due and
payable on or prior to the Effective Date shall
be paid cash in an amount equal to the amount
of such Allowed Claim, or shall be paid on
account of its Allowed Claim on such other
terms as have been or may be agreed upon by
such holder and the Company.
CLASS 1--OTHER PRIORITY CLAIMS
(Unimpaired, not entitled to
vote) This Class of Claims consists of all Claims
accorded priority in right of payment under
section 507(a) of the Bankruptcy Code, other
than Priority Tax Claims or Administrative
Claims ("Other Priority Claims"). Unless the
holder of such Claim and the Company agree to a
different treatment, each holder of an Allowed
Other Priority Claim shall receive one of the
following alternative treatments, at the
election of the Company: (a) to the extent then
due and owing on the Effective Date, such Claim
will be paid in full in cash by New Zenith; (b)
to the extent not due and owing on the
Effective Date, such Claim (A) will be paid in
full in cash by New Zenith, or (B) will be paid
in full in cash by New Zenith when and as such
Claim becomes due and owing in the ordinary
course of business; or (c) such Claim will be
otherwise treated in any other manner so that
such Claims shall otherwise be rendered
unimpaired pursuant to section 1124 of the
Bankruptcy Code.
2
<PAGE> 15
CLASS/TYPE OF CLAIM DESCRIPTION AND TREATMENT OF CLAIMS
CLASS 2--CITIBANK SECURED
CLAIMS (Unimpaired, not
entitled to vote) This Class of Claims (the "Citibank Secured
Claims") consists of all Claims arising from or
relating to the Company's $125 million senior
secured credit facility (the "Amended Citibank
Credit Facility"). On the Effective Date,
unless the holders of such Claims and the
Company agree to a different treatment, the
holders of such Claims (i) will be paid in full
in cash by New Zenith or (ii) will be otherwise
treated in any manner so that such Claims shall
otherwise be unimpaired pursuant to section
1124 of the Bankruptcy Code.
CLASS 3--OTHER SECURED CLAIMS
(Unimpaired, not entitled to
vote) This Class of Claims consists of all secured
Claims against the Company, other than secured
Claims classified in a different Class (the
"Other Secured Claims"). The legal, equitable
and contractual rights of the holders of Other
Secured Claims are unaltered by the Prepackaged
Plan. Unless the holder of such Claim and the
Company agree to a different treatment, each
holder of an allowed Other Secured Claim shall
receive one of the following alternative
treatments, at the election of the Company: (a)
the legal, equitable and contractual rights to
which such Claim entitled the holder thereof
shall be unaltered by the Prepackaged Plan; (b)
the Company shall surrender all collateral
securing such Claim to the holder thereof,
without representation or warranty by or
recourse against the Company or New Zenith; or
(c) such Claim will be otherwise treated in any
other manner so that such Claims shall
otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
CLASS 4--BANK LENDER CLAIMS
(Impaired, entitled to vote) This Class of Claims consists of all Claims
arising from or relating to the Unsecured Bank
Loans (the "Bank Lender Claims"). On the
Effective Date, each holder of a Bank Lender
Claim shall receive a new unsecured term note
that shall mature one year from the Effective
Date in full satisfaction of its Claims
(collectively, the "New Bank Lender Notes").
CLASS 5--GENERAL UNSECURED
CLAIMS (Unimpaired, not
entitled to vote) This Class of Claims consists of all unsecured
Claims against the Company that are not Bank
Lender Claims, Old Subordinated Debenture
Claims or LGE Tranche A Claims or LGE Tranche B
Claims (the "General Unsecured Claims"). Unless
the holder of such Claim and the Company agree
to a different treatment, each holder of an
Allowed General Unsecured Claim shall receive
one of the following alternative treatments, at
the election of the Company: (a) to the extent
then due and owing on the Effective Date, such
Claim will be paid in full in cash by New
Zenith; (b) to the extent not due and owing on
the Effective Date, such Claim (X) will be paid
in full in cash by New Zenith, or (Y) will be
paid in full in cash by New Zenith when and as
such Claim becomes due and owing in the
ordinary course of business; or (c) such Claim
will be otherwise treated in any other manner
so that such
3
<PAGE> 16
CLASS/TYPE OF CLAIM DESCRIPTION AND TREATMENT OF CLAIMS
Claims shall otherwise be rendered unimpaired
pursuant to section 1124 of the Bankruptcy
Code.
CLASS 6--OLD SUBORDINATED
DEBENTURE CLAIMS (Impaired,
entitled to vote) This Class of Claims consists of all Claims
arising from or relating to the Old
Subordinated Debentures (the "Old Subordinated
Debenture Claims"). If the holders of the Old
Subordinated Debenture Claims accept the
Prepackaged Plan, they will receive a pro rata
distribution of the New Subordinated
Debentures. IF THE HOLDERS OF THESE CLAIMS DO
NOT ACCEPT THE PREPACKAGED PLAN, THE COMPANY
INTENDS TO INITIATE A "CRAM DOWN" PROCEDURE
WITH RESPECT TO THE CLASS COMPOSED OF THE
HOLDERS OF THE OLD SUBORDINATED DEBENTURES. IF
SUCH A "CRAM DOWN" IS APPROVED BY THE
BANKRUPTCY COURT, HOLDERS OF THE OLD
SUBORDINATED DEBENTURE CLAIMS SHALL RECEIVE NO
DISTRIBUTION AND RETAIN NO PROPERTY UNDER THE
PREPACKAGED PLAN.
CLASS 7--LGE CLAIMS (Impaired,
entitled to vote)
LGE TRANCHE A CLAIMS: The LGE Tranche A Claims consist of the
following Claims held by LGE (i) the LGE
Leveraged Lease Claims and (ii) that portion of
the LGE Reimbursement Claims and the LGE Demand
Loan Claims not classified as LGE Tranche B
Claims. On the Effective Date, LGE will receive
the LGE New Restructured Senior Note and the
Reynosa Assets in full satisfaction of the LGE
Tranche A Claims.
LGE TRANCHE B CLAIMS: The LGE Tranche B Claims consist of $200
million of the following Claims held by LGE (i)
the LGE Extended Payables Claims, not to exceed
$140 million; (ii) the LGE Reimbursement
Claims, not to exceed $50 million; (iii) the
LGE Technical Services Claims; (iv) the LGE
Guarantee Fee Claims; and (v) the LGE Demand
Loan Claims in an amount (if any) sufficient
when aggregated with the amounts described in
clauses (i) through (iv) to equal $200 million.
To the extent the aggregate of the Claims
described in items (i) through (iv) of the
preceding sentence exceeds $200 million, a
portion of the LGE Reimbursement Claims equal
to such excess shall constitute LGE Tranche A
Claims. On the Effective Date, LGE will receive
the New Common Stock in full satisfaction of
the LGE Tranche B Claims.
CLASS 8--EQUITY INTERESTS
(Impaired, deemed to reject,
not entitled to vote) This Class consists of holders of Equity
Interests. Holders of Equity Interests in the
Company shall receive no distribution and
retain no property under the Prepackaged Plan.
All Old Common Stock will be cancelled.
For a complete description of each Class and the treatment of such Classes
under the Prepackaged Plan, see "THE PREPACKAGED PLAN -- Classification and
Treatment of Claims and Equity Interests under the Prepackaged Plan."
4
<PAGE> 17
Releases
In consideration of the contributions of certain parties to the chapter 11
case commenced by the Company ("Prepackaged Chapter 11 Case"), including, but
not limited to, (i) the commitment and obligation of LGE to provide the
financial support necessary for Consummation of the Prepackaged Plan, and (ii)
the service of certain designated individuals to facilitate the expeditious
reorganization of the Company and the implementation of the Restructuring, the
Prepackaged Plan provides for certain waivers, exculpation, releases and
injunctions. The Prepackaged Plan provides an injunction barring the
commencement or continuation of any Claims released pursuant to its terms.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, (i) all officers, directors,
employees, attorneys, financial advisors, agents and representatives of the
Company and its Subsidiaries who served in such capacity on or after January 1,
1998, in each case in their capacity as such (collectively, "D&O Releasees"),
and (ii) LGE, LG Semicon, and each of their current and former parents,
subsidiaries and affiliates and their respective officers, directors, employees,
attorneys, financial advisors, agents and representatives (collectively,
"Investor Releasees"), from any and all Claims and causes of action, whether
known or unknown, foreseen and unforeseen, existing or hereafter arising, that
the Company or its Subsidiaries would have been legally entitled to assert in
their own right or on behalf of the holder of any Claim or Equity Interest or
other person or entity against any of them relating to any event occurring on or
before the Effective Date of the Prepackaged Plan. The release of the D&O
Releasees by the Company and its Subsidiaries does not affect certain loans or
contracts such parties have entered into in the ordinary course of business.
In addition, the Prepackaged Plan provides that each holder of any Claim
that has accepted the Prepackaged Plan, whose Claim is part of a Class of Claims
as defined in the Prepackaged Plan (a "Class") that has accepted (or is deemed
to accept) the Prepackaged Plan, or that is entitled to receive a distribution
of property under the Prepackaged Plan, is deemed to release, upon the Effective
Date, any and all Claims and causes of action, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, that it would have been
legally entitled to assert against the D&O Releasees and the Investor Releasees
relating to the Company or its Subsidiaries, the Prepackaged Chapter 11 Case, or
the negotiation, formulation and preparation of the Prepackaged Plan and related
documents.
The Prepackaged Plan also provides that the Company, each of its
Subsidiaries, the D&O Releasees, and the Investor Releasees shall be exculpated
from any liability to any person or entity (as defined in the Bankruptcy Code)
for any act or omission in connection with or related to the negotiation,
formulation, preparation and Confirmation of the Prepackaged Plan, the
Consummation and administration of the Prepackaged Plan, the Prepackaged Chapter
11 Case, or the property distributed under the Prepackaged Plan, except by
virtue of any willful misconduct or gross negligence, as determined by a court
of competent jurisdiction.
It is a condition to LGE's obligations under the Restructuring Agreement
that the Investor Releasees receive the releases, waivers and injunctions as set
forth in the Prepackaged Plan. See "SPECIAL FACTORS -- Interests of Certain
Persons in the Financial Restructuring; Conflicts of Interest" and "-- The
Restructuring Agreement."
General Unsecured Creditors
During the pendency of the Prepackaged Chapter 11 Case, the Company intends
to operate its business in the ordinary course and to make payment in full on a
timely basis to all of its general unsecured creditors. The Company also will
seek approval of the United States Bankruptcy Court (the "Bankruptcy Court")
immediately upon the filing of the petition to pay in full in the ordinary
course of business the pre-petition claim of each holder of a General Unsecured
Claim. Management expects that the Company will have sufficient funds from
operations and a debtor in possession credit facility to continue to pay its
general unsecured creditors in the ordinary course of business through the
conclusion of the Prepackaged Chapter 11 Case, and to have sufficient liquidity
under its lending facilities and from operations to make such payments
thereafter. Under the Prepackaged Plan, holders of General Unsecured Claims will
not be required to file
5
<PAGE> 18
proofs of claim with the Bankruptcy Court, and it is not expected that they will
be required to take any other action to receive payment on their Claims.
The Subsidiaries of Zenith are not parties to the Prepackaged Plan and will
not file for chapter 11 bankruptcy protection as part of the Prepackaged Plan.
Accordingly, those Subsidiaries intend to continue to operate their businesses
in the ordinary course of business and pay their trade and other creditors in
full and on time.
SPECIAL FACTORS
Events Leading to the Restructuring
For a description of events leading to the Restructuring, see "SPECIAL
FACTORS -- Events Leading to the Restructuring."
Purposes and Effects of the Financial Restructuring
The purpose of the Financial Restructuring is to reduce the Company's debt
service obligations, to facilitate future borrowing to fund liquidity needs and
to permit it to implement the Operational Restructuring. The Prepackaged Plan
will reduce the Company's overall debt and other obligations by approximately
$300 million by exchanging (i) $200 million of debt and other liabilities owed
to LGE for the New Common Stock; (ii) the Old Subordinated Debentures in an
aggregate principal amount of $103.5 million plus accrued interest thereon for
New Subordinated Debentures in an aggregate principal amount of $40 million; and
(iii) approximately $32.4 million of indebtedness to LGE for the Reynosa Assets,
which have an appraised value equal to such amount. In addition, assuming
Consummation of the Prepackaged Plan, on a projected basis as of December 31,
1998, the Company's annual interest obligations are expected to be reduced by
approximately $25 million in 1999 (compared to interest charges in 1999 if the
Restructuring had not occurred).
As a result of the Financial Restructuring, the Company will also have
significantly more liquidity. For example, the Company's cash interest
obligations will be reduced because the LGE New Restructured Senior Note will
have a "payment in kind" ("PIK") interest feature. In addition, pursuant to the
Restructuring Agreement, LGE has agreed to provide additional credit support of
up to $60 million that, if needed by the Company, may take the form of direct
loans or credit support, such as a guarantee provided to a third-party lender,
in form and in an amount to be set on the Effective Date based on the financing
necessary to enable the Company to implement the Operational Restructuring (the
"LGE New Credit Support"). Finally, the Company is in discussions with potential
lenders regarding credit facilities following Consummation of the Prepackaged
Plan. The combination of the PIK feature of the LGE New Restructured Senior
Note, the LGE New Credit Support and the financing to be provided by a
third-party lender is expected to enhance the liquidity of the Company following
the Consummation of the Prepackaged Plan.
Finally, as a consequence of the Financial Restructuring, the Old Common
Stock will be cancelled and the holders of the Old Common Stock (including LGE
and LG Semicon) will receive no distributions and retain no property in respect
of their holdings of Old Common Stock under the Prepackaged Plan. See "SPECIAL
FACTORS -- Purposes and Effects of the Financial Restructuring."
Alternatives to Confirmation and Consummation of the Prepackaged Plan
If the Company commences the Prepackaged Chapter 11 Case and the
Prepackaged Plan is not subsequently confirmed by the Bankruptcy Court and
consummated, the alternatives include (i) liquidation of the Company under
chapter 7 or chapter 11 of the Bankruptcy Code and (ii) confirmation of an
alternative plan of reorganization under chapter 11 of the Bankruptcy Code. The
Company believes the Prepackaged Plan is significantly more attractive than
these alternatives because it could, among other things, maximize the value of
the Company's net operating loss tax attributes ("NOLs"), minimize disputes
during such proceeding concerning the reorganization of the Company,
significantly shorten the time required to accomplish the
6
<PAGE> 19
reorganization, reduce the expenses of a case under chapter 11 of the Bankruptcy
Code, minimize the disruption to the Company's business that would result from a
protracted and contested bankruptcy case and ultimately result in a larger
distribution to creditors than would other types of reorganizations under
chapter 11 of the Bankruptcy Code or a liquidation under chapter 7 of the
Bankruptcy Code. The Company's ability to implement the Operational
Restructuring is dependent upon the Confirmation and Consummation of the
Prepackaged Plan, among other things, because its ability to obtain contracts
for outsourcing of products would be substantially more difficult if the Company
were in a traditional chapter 11 bankruptcy proceeding. See "SPECIAL
FACTORS -- Alternatives to Confirmation and Consummation of the Prepackaged
Plan."
Recommendation of the Board
The Special Committee has unanimously recommended to the Board, and the
Board has unanimously approved, the Restructuring Agreement and the Prepackaged
Plan. The Board recommends that all holders of Impaired Claims vote to accept
the Prepackaged Plan. For a description of the material factors considered by
the Special Committee and the Board in reaching their respective conclusions,
see "SPECIAL FACTORS -- Recommendation of the Board."
Liquidation and Going Concern Analyses
The Board has reviewed and considered liquidation and going concern
analyses with respect to the Company, each developed by Peter J. Solomon Company
Limited ("PJSC"), the Company's investment banker and financial advisor, based
upon information supplied by management of the Company and the views of various
experts relating to certain aspects of the Company's VSB (as defined herein)
technologies. Based upon the enterprise value of the Company under the
liquidation and going concern analyses, and based upon the assumptions utilized
therein, these analyses concluded that there was no value available to holders
of Equity Interests, and demonstrated that under the Financial Restructuring,
the value to be received by holders of Impaired Claims was equal to or greater
than the amount that would be received by such holders in the hypothetical
absolute priority distribution of the Company's assets, under both the going
concern valuation and the liquidation valuation. These analyses also concluded
that under the treatment offered in the Prepackaged Plan, LGE would receive less
with respect to its unsecured Claims than holders of the Old Subordinated
Debentures (as a percentage of their respective Claims). See "SPECIAL FACTORS --
Recommendation of the Board," "-- Liquidation and Going Concern Analyses" and
"LIQUIDATION ANALYSIS."
Interests of Certain Persons in the Financial Restructuring; Conflicts of
Interest
In considering the recommendation of the Board with respect to the
Restructuring, the holders of Claims should be aware that the Board and members
of management have certain interests which give rise to actual and potential
conflicts of interest with respect to the Restructuring. See "SPECIAL
FACTORS -- Events Leading to the Restructuring" and "-- Interests of Certain
Persons in the Financial Restructuring; Conflicts of Interest."
Although the Board recognizes the existence of the conflicts of interest
described herein, the Board does not believe that such conflicts of interest had
the effect of causing the terms of the Financial Restructuring to be different
in any material respect than such terms would have been in the absence of such
conflicts of interests. Moreover, the Board established the Special Committee
specifically to address and mitigate against any potential conflicts of
interest. See "SPECIAL FACTORS -- Events Leading to the Restructuring."
Liquidity Pending Consummation of the Restructuring
Until the Prepackaged Plan is implemented on the Effective Date, the
Company will be required to rely on its cash resources to operate its business,
service certain of its debt and pay other costs. Currently, the Company has
access to funds under the Amended Citibank Credit Facility with Citibank, N.A.
("Citibank") and a consortium of other financial institutions and the LGE Demand
Loan Facility (as defined herein) to supplement cash flow from operations. As a
result, the Company believes that it will have sufficient cash
7
<PAGE> 20
resources to meet trade obligations, cover operating and restructuring expenses,
and fund certain contingencies and capital expenditures through Consummation of
the Prepackaged Plan. See "SPECIAL FACTORS -- Liquidity Pending Consummation of
Restructuring."
Dissenters' Rights
There are no dissenters' rights available under applicable law with respect
to the Restructuring. If the Prepackaged Plan is confirmed by the Bankruptcy
Court and the Restructuring is consummated in accordance therewith, holders of
the Old Subordinated Debentures that do not vote in favor of the Prepackaged
Plan will nevertheless be bound by all the terms and conditions thereof.
Executive Retention Programs
In connection with the Restructuring, the Company has developed a retention
program for 14 key executives and senior managers, has established short-term
and long-term incentive bonus programs for its Chief Executive Officer and key
personnel, and has established retention bonus and stay bonus programs covering
approximately 175 other key managers and employees. See "MANAGEMENT -- Current
Executive Officers of the Company."
THE PREPACKAGED PROCEEDING AND CLASSIFICATION OF CREDITORS
The Prepackaged Proceeding
The Prepackaged Plan provides specified treatment to the various Classes of
Claims against and Equity Interests in the Company. The Company believes the
Prepackaged Plan provides treatment for all Classes of Claims and Equity
Interests that reflects an appropriate resolution of the Claims and Equity
Interests taking into account the differing nature and priority (including
applicable contractual subordination) of such Claims and Equity Interests. The
Bankruptcy Court must find, however, that a number of statutory tests are met
before it may confirm the Prepackaged Plan. See "THE PREPACKAGED
PLAN -- Confirmation Standards."
The Company intends to seek relief from the Bankruptcy Court as to various
matters, including, for example, approvals to honor outstanding payroll checks,
to make scheduled payments under employment, consulting and retirement
agreements, to permit employees to utilize their accrued paid vacation time, to
continue paying medical benefits under health plans, to maintain their cash
management systems, to retain certain attorneys, financial advisors and other
professionals (the "Professionals") to represent or assist the Company in the
Prepackaged Chapter 11 Case, and to maintain and continue their insurance
programs, including workers' compensation, as such programs are presently
administered. There can be no assurance, however, that any such approvals will
be granted.
Classification of Creditors
Section 1122 of the Bankruptcy Code requires that the Prepackaged Plan
classify Claims against, and Equity Interests in, the Company. The Bankruptcy
Code also provides that, except for certain Claims classified for administrative
convenience, the Prepackaged Plan may place a Claim or Equity Interest in a
particular Class only if such Claim or Equity Interest is substantially similar
to the other Claims or Equity Interests of such Class. The Company believes that
all Claims and Equity Interests have been appropriately classified in the
Prepackaged Plan. The Company has elected to separately classify General
Unsecured Claims because this Class is comprised largely of trade creditors.
Many of these creditors are key suppliers of products and services used by the
Company. Accordingly, any impairment of these Claims could be detrimental to the
ability of the Company to obtain essential trade credit and could substantially
impair the ability of the Company to do business with trade creditors whose
goods and services are essential to the Company. Bank Lender Claims have been
separately classified because the Company believes that LGE's guaranty of these
Claims renders their legal and financial position substantially unlike other
unsecured Claims. LGE Claims have been separately classified because the holder
of these Claims has voluntarily agreed to convert a
8
<PAGE> 21
substantial portion of its Claims to equity and because LGE is an insider. LGE
has consented to the separate classification of its Claims as provided in the
Prepackaged Plan. Finally, because the Old Subordinated Debenture Indenture
contains subordination provisions, the Old Subordinated Debentures are not held
by insiders, and the Old Subordinated Debenture Claims are not guaranteed by
LGE, the Company contends that the Old Subordinated Debenture Claims are
significantly different from the other unsecured debt and therefore may be
classified separately. For a more detailed description of the classification and
treatment of Claims, see "THE PREPACKAGED PLAN -- Classification and Treatment
of Claims and Equity Interests under the Prepackaged Plan."
Conditions to Confirmation/Consummation
It is a condition to Confirmation of the Prepackaged Plan that all
provisions, terms and conditions of the Prepackaged Plan have been approved in
the Confirmation Order.
It is a condition to Consummation of the Prepackaged Plan that the
following conditions have been satisfied or waived pursuant to the Prepackaged
Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy
Court and duly entered on the docket for the Prepackaged Chapter 11 Case by
the Clerk of the Bankruptcy Court, in form and substance acceptable to the
Company;
2. the Confirmation Order shall be an order or judgment of the
Bankruptcy Court, or other court of competent jurisdiction with respect to
the subject matter, which has not been reversed, stayed, modified or
amended, and as to which the time to appeal or seek certiorari has expired
and no appeal or petition for certiorari has been timely taken, or as to
which any appeal that has been taken or any petition for certiorari that
has been or may be filed has been resolved by the highest court to which
the order or judgment was appealed or from which certiorari was sought
("Final Order");
3. a revolving credit facility and letter of credit subfacility shall
be available to the Company in the amounts and on such terms and conditions
as set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
Such conditions to Confirmation and Consummation may be waived as described
in the Prepackaged Plan. See "THE PREPACKAGED PLAN -- Conditions to
Confirmation/Consummation -- Waiver of Conditions."
9
<PAGE> 22
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) March 28, 1998 on an historical basis and
on a pro forma basis giving effect to the Financial Restructuring as if it had
occurred on March 28, 1998 and (ii) December 31, 1998 on a projected basis as if
the Financial Restructuring had not occurred and on a pro forma basis giving
effect to the Financial Restructuring as if it had occurred on December 31,
1998. The table should be read in conjunction with "ANNEX B -- MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Company's consolidated financial statements, including the notes thereto,
located elsewhere in this Disclosure Statement. See "SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA" and "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
PROJECTED
AS OF DECEMBER 31, 1998
AS OF MARCH 28, 1998 ------------------------------
-------------------- WITHOUT WITH
ACTUAL PRO FORMA RESTRUCTURING RESTRUCTURING
------- --------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash......................................... $ 23.2 $ 68.2 $ -- $ --
======= ======= ======= =======
LGE Extended Payables Claims................. $ 133.7 $ -- $ 140.0 $ --
======= ======= ======= =======
Debt:
Bank Lender Claims......................... $ 102.0(1) $ 52.0(2) $ 52.0(2) $ 52.0(2)
Citibank Credit Facility................... 38.3 38.3 -- --
Amended Citibank Credit Facility........... -- -- 56.7 56.7
LGE Leveraged Lease Claims................. -- -- 90.1 --
LGE Reimbursement Claims................... -- -- 50.0 --
LGE Direct Loan Claims..................... -- -- 45.0 --
Old Subordinated Debentures (at face
value).................................. 103.5 -- 103.5 --
New Subordinated Debentures (at face
value).................................. -- 40.0 -- 40.0
LGE New Restructured Senior Note........... -- 86.6 -- 96.8
------- ------- ------- -------
Total debt(3)...................... $ 243.8 $ 216.9 $ 397.3 $ 245.5
======= ======= ======= =======
Stockholders' equity:
Old Common Stock, $1.00 par value,
150,000,000 shares authorized,
67,525,447 shares issued and
outstanding(4).......................... $ 67.1 $ -- $ 67.1 $ --
New Common Stock, $0.01 par value, 1,000
shares authorized, 1,000 shares issued
and outstanding(5)...................... -- -- -- --
Additional paid-in capital, old............ 507.3 572.7 507.3 572.7
Additional paid-in capital, new............ -- 200.0 -- 200.0
Retained earnings (deficit)................ (699.5) (745.6) (886.1) (910.7)
Treasury stock............................. (1.7) -- (1.7) --
------- ------- ------- -------
Total stockholders' equity......... $(126.8) $ 27.1 $(313.4) $(138.0)
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes the Company's credit facilities with Bank of America ($22.0), First
National Bank of Chicago -- NBD ($30.0), Societe Generale ($20.0) and Credit
Agricole Indosuez ($30.0).
(2) Includes the Company's credit facilities with Bank of America ($22.0) and
Credit Agricole Indosuez ($30.0).
(3) As of March 28, 1998, the Company had two off balance sheet financing
vehicles: (i) the Citibank Receivables Facility, which was terminated and
replaced by the Amended Citibank Credit Facility; and (ii) the Leveraged
Leases, which have subsequently been terminated or restated to bring them
back on balance sheet. On March 28, 1998, the Citibank Receivables Facility
had $21 million of investors
10
<PAGE> 23
certificates outstanding which were funded via a commingled commercial paper
conduit managed by Citibank. On July 22, 1998, LGE made a negotiated
settlement payment of $90.1 million under the guarantees of the Leveraged
Leases. Zenith is obligated under documents related to the Leveraged Leases
for the repayment of this settlement amount.
(4) Excludes 5,721,401 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of June 30, 1998, of which 3,965,000 shares are
issuable to LGE and 1,756,401 shares are issuable to employees. There will
be no such options outstanding on a pro forma basis.
(5) New Common Stock does not show a value due to rounding in millions.
BUSINESS PLAN PROJECTIONS
In connection with the planning and development of the Prepackaged Plan,
certain financial projections were prepared by the Company to present the
anticipated impact of the Prepackaged Plan and the Operational Restructuring
(the "Business Plan Projections"). Such projections assume that the Prepackaged
Plan will be implemented in accordance with its terms. Since the projections are
based on forecasts of key economic variables, including without limitation
estimated domestic market television sales, the introduction of digital
television products, the Company's ability to exit manufacturing in an efficient
manner, and the availability of externally sourced product at acceptable prices,
the estimates and assumptions underlying the projections are inherently
uncertain, and are subject to significant business, economic and competitive
uncertainties. Accordingly, such projections, estimates and assumptions are not
necessarily indicative of current values or future performance of the Company,
which may be significantly less favorable or more favorable than as set forth.
Holders of Claims are cautioned not to place undue reliance on the following
projections. See "BUSINESS PLAN PROJECTIONS"; "RISK FACTORS -- Certain Risks
Relating to the Business Plan Projections" and "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS."
For presentation purposes, it is assumed that the Company files and emerges
from chapter 11 in the fourth quarter of 1998 (the "Reorganization Period") thus
completing the Financial Restructuring of the Company. All costs presented in
the Restructuring columns of the Business Plan Projections are assumed to take
place during the Reorganization Period. However not all costs presented in the
column relate directly to the Financial Restructuring, some costs relate to the
Operational Restructuring which coincides with the timing of the Financial
Restructuring.
11
<PAGE> 24
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
PROJECTED
ACTUAL PROJECTED PROJECTED RESTRUCTURING PROJECTED PROJECTED PROJECTED PROJECTED
Q1 Q2-Q4 UNADJUSTED ADJUSTMENTS ADJUSTED 1999 2000 2001
------ --------- ---------- ------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $220.7 $ 769.0 $ 989.7 $ -- $ 989.7 $916.0 $917.8 $961.9
Cost of goods sold...... 213.5 715.6 929.1 9.3(a) 938.4 858.8 840.2 869.6
Selling, general and
administrative........ 30.7 87.1 117.8 -- 117.8 100.3(h) 92.7 94.6
Engineering and
research.............. 10.8 27.6 38.4 -- 38.4 13.3 7.9 8.2
Restructuring expense... 2.6 94.1 96.7(b) -- 96.7 -- -- --
Other operating expense
(income), net (c)..... (5.8) (17.6) (23.4) -- (23.4) (24.7) (35.9) (53.6)
------ ------- ------- ------- ------- ------ ------ ------
Operating income
(loss)................ (31.1) (137.8) (168.9) (9.3) (178.2) (31.7) 12.9 43.1
Gain (loss) on asset
sales................. (0.2) 19.1 18.9 -- 18.9 35.8 -- --
Finance guarantee fee
charge (d)............ -- (32.0) (32.0) (2.0) (34.0) -- -- --
Interest expense, net... (6.5) (36.1) (42.6) -- (42.6) (23.5) (25.6) (25.1)
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) before
reorganization
items................. (37.8) (186.8) (224.6) (11.3) (235.9) (19.4) (12.7) 18.0
Reorganization items.... -- -- -- 134.3(e) 134.3 -- -- --
Taxes on income/
(income tax
benefit).............. -- -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------ ------ ------
Net income (loss) before
extraordinary items... (37.8) (186.8) (224.6) (145.6) (370.2) (19.4) (12.7) 18.0
Extraordinary gain on
debt retirement....... -- -- -- 63.6(f) 63.6 -- -- --
------ ------- ------- ------- ------- ------ ------ ------
Net income (loss)....... $(37.8) $(186.8) $(224.6) $ (82.0) $(306.6) $(19.4) $(12.7) $ 18.0
====== ======= ======= ======= ======= ====== ====== ======
Memo:
Operating income
(loss)................ $(31.1) $(137.8) $(168.9) $ (9.3) $(178.2) $(31.7) $ 12.9 $ 43.1
Restructuring expense... 2.6 94.1 96.7 -- 96.7 -- -- --
Depreciation and
amortization.......... 7.8 27.9 35.7 9.3 45.0 9.0 2.7 3.2
------ ------- ------- ------- ------- ------ ------ ------
EBITDA(g)............... $(20.7) $ (15.8) $ (36.5) $ -- $ (36.5) $(22.7) $ 15.6 $ 46.3
====== ======= ======= ======= ======= ====== ====== ======
<CAPTION>
PROJECTED PROJECTED
2002 2003
--------- ---------
<S> <C> <C>
Sales................... $1,013.9 $1,039.9
Cost of goods sold...... 912.3 931.5
Selling, general and
administrative........ 99.1 102.2
Engineering and
research.............. 8.4 8.7
Restructuring expense... -- --
Other operating expense
(income), net (c)..... (75.2) (78.8)
-------- --------
Operating income
(loss)................ 69.3 76.3
Gain (loss) on asset
sales................. -- --
Finance guarantee fee
charge (d)............ -- --
Interest expense, net... (23.7) (19.7)
-------- --------
Income (loss) before
reorganization
items................. 45.6 56.6
Reorganization items.... -- --
Taxes on income/
(income tax
benefit).............. -- --
-------- --------
Net income (loss) before
extraordinary items... 45.6 56.6
Extraordinary gain on
debt retirement....... -- --
-------- --------
Net income (loss)....... $ 45.6 $ 56.6
======== ========
Memo:
Operating income
(loss)................ $ 69.3 $ 76.3
Restructuring expense... -- --
Depreciation and
amortization.......... 3.6 3.9
-------- --------
EBITDA(g)............... $ 72.9 $ 80.2
======== ========
</TABLE>
- ---------------
(a) Cost of Sales increase represents the estimated provision required to
write-down inventories of raw materials and work-in-process to net
realizable value upon shutdown of the manufacturing facilities.
(b) Restructuring expenses are as follows:
<TABLE>
<S> <C>
Professional Fees(i)................................. $15.1
Melrose Park shift reduction(ii)..................... 1.5
Engineering staff reductions......................... 2.5
Relocation of Parts and Services business............ 1.3
Exit from Analog Set-Top Boxes....................... 6.3
Loss on Leveraged Lease termination.................. 70.0
-----
Total...................................... $96.7
=====
</TABLE>
(i) professional fees for advisors and consultants to assist in
formulating and implementing the Prepackage Plan; and
(ii) various costs incurred to implement the Operational Restructuring
including staff reductions, and facility and product line
eliminations.
These costs are classified as Restructuring expenses because they are not
incurred during the Reorganization Period as defined above. The loss on the
termination of the Leveraged Leases is measured as the
12
<PAGE> 25
difference between the liability to LGE, of $90.1 million, based upon its
payment in performance of its guarantee of the Leveraged Leases and a
receivable (the "Other Receivable") from LGE of $20.1 million, created at
the third quarter termination of the Leveraged Leases, which represents the
Company's rights under the Restructuring Agreement to the assets previously
covered by the Leveraged Leases. The Other Receivable is stated at the
appraised value of the assets to be received by the Company during the
Reorganization Period.
(c) Other operating expense (income) includes royalty income from VSB and tuner
patent/other sources in amounts per year as follows:
<TABLE>
<CAPTION>
TUNER PATENT/
VSB(1) VSB(2) OTHER
------ ------ -------------
<S> <C> <C> <C>
1998........................ $ -- $ -- $(28.6)
1999........................ (2.5) (1.2) (28.0)
2000........................ (8.2) (6.7) (28.0)
2001........................ (15.7) (16.9) (28.0)
2002........................ (27.3) (26.9) (28.0)
2003........................ (33.3) (37.4) (14.9)
</TABLE>
(1) Royalties from televisions, VCRs, DVDs, and converter boxes.
(2) Royalties from personal computers, satellite boxes, cable boxes and
add-in cards for personal computers.
Royalty amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustments for costs or reductions relating
to development, marketing, legal costs, and potential additional cross
licensing, which costs are included elsewhere in components of the
Statement of Operations.
(d) Finance guarantee fees represent the accelerated write-off of unamortized
deferred charges (bank, attorney, and LGE guarantee fees) associated with
financing agreements terminated in the third quarter of 1998 and during the
Reorganization Period. These are non-cash amortization expenses.
(e) Reorganization expenses of $134.3 are as follows:
<TABLE>
<S> <C>
Reorganization expenses(i):
Severance......................................... $ 44.7
Legal for plant closures.......................... 2.3
Outplacement...................................... 1.1
Retention plan.................................... 4.3
Plant closure/exit costs.......................... 9.2
Purchase contracts................................ 1.0
Professional fees................................. 2.0
------
Reorganization...................................... $ 64.6
Asset impairment (ii)............................... 69.7
------
Total............................................... $134.3
</TABLE>
(i) estimated Reorganization expenses related to executing the
Prepackaged Plan and Business Plan Projections. The timing and
amount of these charges could vary significantly from the estimates
presented depending on the actual implementation of the Business
Plan Projections and the timing of the bankruptcy proceedings.
(ii) the estimated impairment, of $69.7 million, on property, plant and
equipment that occurs at the confirmation of the Prepackaged Plan.
It is measured as the difference between the book value of assets
and the estimated (by appraisal) fair value in an orderly
liquidation, including estimated environmental obligations.
13
<PAGE> 26
(f) Extraordinary Gain represents the gain realized on the retirement of the Old
Subordinated Debentures at a discount from face value:
<TABLE>
<S> <C>
Old Subordinated Debentures before restructuring
(Current portion).................................. $ 5.8
Old Subordinated Debentures before restructuring
(Long Term portion)................................ 97.8
less: New Subordinated Debentures (at face value).... (40.0)
-----
Gain....................................... $63.6
</TABLE>
(g) EBITDA represents operating income (loss) including royalties before
interest expense, income taxes, depreciation and amortization, and
restructuring expenses. EBITDA is not intended to represent cash flow from
operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating cash
flow as an indication of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it a
useful tool for measuring the Company's ability to service its debt.
(h) Selling, general and administrative expenses, in 1999, include $1.8 million
in retention plan expenses.
14
<PAGE> 27
COMPARISON OF THE OLD SUBORDINATED DEBENTURES TO THE NEW SUBORDINATED DEBENTURES
The following is a brief comparison of certain provisions of the Old
Subordinated Debentures with the New Subordinated Debentures. For a more
detailed description of the provisions of the New Subordinated Debentures, see
"DESCRIPTION OF NEW SUBORDINATED DEBENTURES."
<TABLE>
<CAPTION>
OLD SUBORDINATED DEBENTURES NEW SUBORDINATED DEBENTURES
--------------------------- ---------------------------
<S> <C> <C>
Aggregate Principal Amount
Outstanding.................... $103.5 million $40 million
Maturity Date.................... April 1, 2011 April 1, 2010
Interest......................... 6 1/4% per annum, payable in cash 6 1/4% per annum, payable in cash
on April 1 and October 1 of each on April 1 and October 1 of each
year year
Redemption....................... The Old Subordinated Debentures The New Subordinated Debentures
may be redeemed at the option of may be redeemed at the option of
the Company, in whole or in part, the Company, in whole or in part,
at a premium which declined to at par.
par on April 1, 1996.
Conversion....................... The Old Subordinated Debentures The New Subordinated Debentures
are convertible into shares of are not convertible.
the Company's common stock at any
time prior to maturity at a
conversion price of $31.25 per
share (subject to adjustment).
Ranking; Security................ The Old Subordinated Debentures Same
are subordinated to the prior
payment when due of all Senior
Indebtedness (as defined in the
Old Subordinated Debenture
Indenture, including the Citibank
Secured Claims, the Other Secured
Claims, the Bank Lender Claims,
and certain LGE Claims) and are
not secured.
Sinking Fund..................... The Company is required to None
provide through the operation of
a sinking fund for the retirement
on April 1 in each of the years
1997 to and including 2010 of 5%
of the principal amount of the
Old Subordinated Debentures at
par. The Company may increase any
sinking fund payment to retire up
to an additional 5% of the
principal amount of the Old
Subordinated Debentures
originally issued at par.
Events of Default................ Events of Default with respect to Same
the Old Subordinated Debentures
include, among other things,
default in payment of principal
or premium, default for 30 days
in payment of interest, default
in the performance of other
covenants for 90 days after
notice, the acceleration of any
indebtedness for borrowed money
of the Company or any Subsidiary
aggregating at least $5 million
and not rescinded within 10 days
after written notice, and certain
events of bankruptcy, insolvency
or reorganization.
Remedies......................... If an Event of Default occurs, Same
the Trustee or the holders of at
least 25% in principal amount of
all Old Subordinated Debentures
then outstanding may declare the
principal of all the Old
Subordinated Debentures due and
payable.
</TABLE>
15
<PAGE> 28
VOTING PROCEDURES
The Bankruptcy Code provides that acceptances obtained prior to the filing
of a petition will be effective in a chapter 11 case if the pre-petition
solicitation of the acceptances complies with applicable non-bankruptcy law
governing the adequacy of disclosure or, if there is no such applicable
non-bankruptcy law, "adequate information" as defined under the Bankruptcy Code
is furnished in connection with the Solicitation. The Company intends to use the
ballots ("Ballots") and master ballots ("Master Ballots") received pursuant to
this Solicitation to confirm the Prepackaged Plan once it has filed its
Prepackaged Chapter 11 Case. The Company believes that this Solicitation
complies with such applicable non-bankruptcy law and otherwise contains
"adequate information" and will seek appropriate findings from the Bankruptcy
Court in this regard.
Acceptance of the Prepackaged Plan
The Company will not hold a creditors' or shareholders' meeting to vote on
the Prepackaged Plan. Rather, the Company is soliciting acceptances of the
Prepackaged Plan by means of Ballots and Master Ballots. Any holder of Impaired
Claims who wishes to vote with respect to the Prepackaged Plan should complete,
sign and return the applicable Ballot or Master Ballot in accordance with the
instructions set forth in this Disclosure Statement.
All holders of Unimpaired Claims (as defined herein) are conclusively
presumed under the Bankruptcy Code to have accepted the Prepackaged Plan.
Consequently, the Company is not soliciting acceptance of the Prepackaged Plan
from holders of Unimpaired Claims.
Any Class not receiving or retaining any consideration under the
Prepackaged Plan is deemed to have rejected the Prepackaged Plan. Consequently,
holders of Equity Interests are presumed under the Bankruptcy Code to have
rejected the Prepackaged Plan, and the Company is not soliciting acceptance of
the Prepackaged Plan from holders of Equity Interests.
The following Classes of Claims are impaired under the Prepackaged Plan,
and all holders of Claims in such Classes as of the Voting Record Date are
entitled to vote to accept or reject the Prepackaged Plan: (i) Class 4 -- Bank
Lender Claims; (ii) Class 6 -- Old Subordinated Debenture Claims; and (iii)
Class 7 -- LGE Claims. A Class of Claims will have accepted the Prepackaged Plan
if votes to accept are cast by the holders of at least two-thirds in amount and
more than one-half in number of Claims of such Class that vote on the
Prepackaged Plan. See "RISK FACTORS -- Certain Bankruptcy
Considerations -- Nonacceptance of the Prepackaged Plan -- Confirmation by Cram
Down." Any holder of Claims in more than one Class is required to vote
separately with respect to each Class in which such holder has Claims. Please
use a separate Ballot of the appropriate form to vote each such Class of Claims.
In the event any impaired Class of Claims does not accept the Prepackaged
Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan at the
Company's request pursuant to the "cram down" provisions of the Bankruptcy Code
if at least one impaired Class has accepted the Prepackaged Plan (with such
acceptance being determined without including the acceptance of any "insider" in
such Class) and, as to each impaired Class which has not accepted the
Prepackaged Plan, the Bankruptcy Court determines, among other things, that the
Prepackaged Plan "does not discriminate unfairly" and is "fair and equitable"
with respect to such Class of impaired Claims. See "THE PREPACKAGED
PLAN -- Confirmation of the Prepackaged Plan Without Acceptance by All Classes
of Impaired Claims." Because the holders of Equity Interests will receive no
distribution and retain no property under the Prepackaged Plan, that Class is
presumed to have rejected the Prepackaged Plan pursuant to section 1126(g) of
the Bankruptcy Code. Therefore, that Class will be subject to "cram down" as
part of the Confirmation of the Prepackaged Plan. IN ADDITION, IF THE HOLDERS OF
THE OLD SUBORDINATED DEBENTURE CLAIMS DO NOT ACCEPT THE PREPACKAGED PLAN, THE
COMPANY INTENDS TO INITIATE A "CRAM DOWN" PROCEDURE WITH RESPECT TO THE CLASS
COMPOSED OF THE HOLDERS OF THE OLD SUBORDINATED DEBENTURES. IF SUCH A "CRAM
DOWN" IS APPROVED BY THE BANKRUPTCY COURT, HOLDERS OF THE OLD SUBORDINATED
DEBENTURE CLAIMS WOULD RECEIVE NO DISTRIBUTION AND RETAIN NO PROPERTY. The
Company believes that the Prepackaged Plan meets the "cram down" requirements.
16
<PAGE> 29
This Disclosure Statement, together with the accompanying forms of Ballot
and Master Ballot, pre-addressed postage-paid envelope and other materials (the
"Solicitation Materials"), are being furnished to holders of the Old
Subordinated Debentures (i.e., holders whose respective names (or the names of
whose nominees) appear as of the Voting Record Date on the securityholder lists
maintained by State Street Bank & Trust Company, indenture trustee under the Old
Subordinated Debenture Indenture or, if applicable, who are listed as
participants in a clearing agency's security position listing). If such persons
or entities do not hold for their own account, they should provide copies of
this Disclosure Statement and the appropriate Solicitation Materials to the
beneficial owners of the Old Subordinated Debentures for whose account they
hold.
THE SOLICITATION PURSUANT TO THIS DISCLOSURE STATEMENT WILL EXPIRE ON
. TO BE COUNTED, BALLOTS AND, WHEN APPROPRIATE, MASTER BALLOTS,
MUST BE RECEIVED BY 5:00 PM., NEW YORK CITY TIME, ON (THE
"EXPIRATION DATE"), UNLESS THE COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR
WAIVES THE PERIOD DURING WHICH BALLOTS AND MASTER BALLOTS WILL BE ACCEPTED BY
THE COMPANY, IN WHICH CASE THE TERM "EXPIRATION DATE" FOR SUCH SOLICITATION
SHALL MEAN THE LAST TIME AND DATE TO WHICH SUCH SOLICITATION IS EXTENDED.
Except to the extent the Company so determines or as permitted by the
Bankruptcy Court, Ballots or Master Ballots received after the Expiration Date
will not be accepted or counted in connection with the request for Confirmation
of the Prepackaged Plan.
The Company expressly reserves the right, at any time or from time to time,
to extend the period during which the Solicitation is open. During any extension
of the Solicitation, all Ballots and Master Ballots previously given will remain
subject to all the terms and conditions of the Solicitation, including the
revocation rights specified herein. To extend the Expiration Date, the Company
will notify the Solicitation Agent of any extension by oral or written notice
and will make a public announcement thereof, each at any time prior to 10:00
a.m., New York City Time, on the next business day after the previously
scheduled Expiration Date. Without limiting the means by which the Company may
choose to make any public announcement, the Company will not have any
obligation, unless otherwise required by law, to publish, advertise or otherwise
communicate any such public announcement other than by issuing a news release
through the Dow Jones News Service. There can be no assurance that the Company
will exercise its right to extend the Solicitation.
Ballots or Master Ballots previously delivered may be withdrawn or revoked
at any time prior to the Expiration Date by the beneficial owner on the Voting
Record Date who completed the original Ballot or by the nominee who completed
the Master Ballot on such beneficial owner's behalf, as the case may be. The
Company does not intend to commence a case under chapter 11 of the Bankruptcy
Code prior to the Expiration Date, although it reserves the right to do so in
its sole discretion. After commencement of a case under the Bankruptcy Code,
withdrawal or revocation of any Ballot or Master Ballot may be effected only
with the approval of the Bankruptcy Court.
The Company expressly reserves the right to amend, at any time and from
time to time, the terms of the Solicitation and the Prepackaged Plan (subject to
compliance with the requirements of section 1127 of the Bankruptcy Code, the
Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules") and any applicable
non-bankruptcy laws and, pursuant to the Restructuring Agreement, the approval
of LGE).
Beneficial owners of Claims as of the Voting Record Date electing to vote
on the Prepackaged Plan should complete and sign the applicable Ballot and, when
applicable, Master Ballot, and check the box entitled "Accepts the Prepackaged
Plan" or "Rejects the Prepackaged Plan," as appropriate. Except as provided on
the applicable Ballot or Master Ballot, the applicable duly completed Ballot or
Master Ballot must be mailed or delivered to the Solicitation Agent at the
address listed on the back cover of this Disclosure Statement. It is incumbent
upon each holder of an Impaired Claim to select a delivery method for the
submission of its Ballot or Master Ballot that will ensure timely receipt
thereof in accordance with the instructions for voting set forth herein. Any
beneficial owner whose securities were registered or held of record in the name
of his broker, dealer, commercial bank, trust company, savings and loan or other
nominee
17
<PAGE> 30
("Nominee") who wishes to vote on the Prepackaged Plan, but who does not have a
Ballot, should contact such Nominee and request a Ballot from such Nominee and
return a completed Ballot to such Nominee.
Under the Bankruptcy Code, for purposes of determining whether the
requisite acceptances have been received by an impaired Class of Claims, only
beneficial owners who vote will be counted. Failure of a beneficial owner to
send to its Nominee or to the Solicitation Agent a properly executed Ballot or
Master Ballot will be deemed to constitute an abstention by such beneficial
owner with respect to a vote regarding the Prepackaged Plan. Abstentions, as a
result of not submitting a properly executed Ballot or Master Ballot, will not
be counted as votes for or against the Prepackaged Plan.
Solicitation Agent
will act as the solicitation and voting agent (the
"Solicitation Agent") in connection with the Solicitation. Its telephone number
is . All inquiries relating to the Solicitation, including any
inquiries concerning the voting, should be directed to the Solicitation Agent at
such telephone number. All deliveries to the Solicitation Agent relating to the
Solicitation should be directed to the address set forth on the back cover page
of this Disclosure Statement. Requests for information or additional copies of
this Disclosure Statement or Ballots should be directed to the Solicitation
Agent. See "SOLICITATION; VOTING PROCEDURES -- Withdrawal of Ballots;
Revocation."
U.S. FEDERAL INCOME TAX MATTERS
Upon consummation of the transactions contemplated by the Prepackaged Plan,
the Company anticipates realizing approximately $63.5 million of cancellation of
debt income attributable to the exchange of New Subordinated Debentures for the
Old Subordinated Debentures and possibly an additional amount of cancellation of
debt income attributable to the satisfaction of certain other Claims. The
Company had an estimated $835.6 million NOL carryover as of December 31, 1997,
which may be decreased by the amount of cancellation of debt income realized as
a result of the Restructuring.
In addition, the Company anticipates that it will undergo an "ownership
change" within the meaning of Section 382 of the Internal Revenue Code of 1986,
as amended ("Tax Code") as a result of the Restructuring. Generally, if a
corporation undergoes an ownership change, its annual use of its NOL carryover
to offset taxable income in taxable years after the ownership change will be
limited by Section 382 of the Tax Code (the "Section 382 Limitation"). The
Section 382 Limitation is generally equal to the product of the net equity value
of all of the corporation's stock immediately before the ownership change and
the long-term tax-exempt rate for the month in which the ownership change
occurs. (The long-term tax exempt rate for August 1998 is 5.15%).
Section 382(l)(5) provides an exception to the application of the Section
382 Limitation for ownership changes which occur as a result of a bankruptcy
reorganization. The Section 382(l)(5) exception will apply if the corporation's
pre-bankruptcy shareholders and holders of "qualifying debt" own at least 50% of
the corporation's stock after the reorganization. The Company believes that the
exchanges contemplated by the Prepackaged Plan will qualify for the Section
382(l)(5) exception so that the Company's use of its NOL carryover after
consummation of the Prepackaged Plan will generally continue unimpaired.
However, under Section 382(l)(5), such NOL carryover will not survive a
subsequent ownership change if such ownership change occurs during the 2-year
period immediately following Consummation of the Prepackaged Plan.
If the Company does not qualify for Section 382(l)(5) or elects not to
apply Section 382(l)(5), Section 382(l)(6) will apply, in which case the Section
382 Limitation will be calculated by reference to the net equity value of the
Company's stock immediately after the ownership change (as opposed to
immediately before the ownership change, as is the case for non-bankruptcy
ownership changes). In such case, since it is unclear what the net equity value
of the Company immediately after consummation of the Prepackaged Plan will be,
the Company's use of its NOL carryover may be substantially limited after the
ownership change.
The rules regarding ownership changes are very complicated, and although
the Company believes there will be an ownership change upon consummation of the
Prepackaged Plan, it is possible that such change will
18
<PAGE> 31
not constitute an ownership change. In such case, any change after the Effective
Date that affects the percentage stock ownership of a 5% shareholder may trigger
an ownership change upon such event. If the Company is not in bankruptcy at such
time, neither the Section 382(l)(5) nor Section 382(l)(6) exception will be
available, and the Company's use of its NOL carryover will be subject to the
general Section 382 Limitation as described above.
RISK FACTORS
Acceptance of the Prepackaged Plan and ownership of the Company's
securities involves a high degree of risk. Prior to deciding whether and how to
vote on the Prepackaged Plan, each holder of Impaired Claims should consider
carefully all of the information contained in this Disclosure Statement,
especially the factors described in "RISK FACTORS."
19
<PAGE> 32
RISK FACTORS
Holders of Impaired Claims should read and carefully consider the factors
set forth below, as well as the other information set forth or otherwise
referenced in this Disclosure Statement, prior to voting to accept or reject the
Prepackaged Plan. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS."
RECENT OPERATING RESULTS, INDEPENDENT AUDITOR'S REPORT AND HIGH LEVERAGE
The Company faces liquidity problems caused by its significant debt burden
and its historical net losses. The Company incurred net losses of $178.0 million
and $299.4 million for the years ended December 31, 1996 and 1997, respectively.
The Company had a net loss of $37.8 million for the three months ended March 28,
1998. The Company's cash flows in 1996 and 1997 were, and its projected cash
flows in the current and future years are projected to be, insufficient to meet
its operating expenses, including its current interest and principal repayment
obligations. The Company's independent public accountants included in their
report on the Company's consolidated financial statements for the fiscal year
ended December 31, 1997 an explanatory paragraph that describes the significant
uncertainty about the Company's ability to continue as a going concern due to
recurring losses and a negative working capital position, and that the Company's
financial statements do not reflect any adjustment that might result from the
outcome of this uncertainty. See "INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" and "ANNEX B -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
As of March 28, 1998, the Company had $482.7 million in total current
liabilities (including a $133.7 million vendor credit line payable to LGE and
$102.0 million in demand loans guaranteed by LGE) and a deficit in stockholders'
equity of $126.8 million. Although the Financial Restructuring will reduce the
Company's debt obligations by approximately $300 million upon the Confirmation
of the Prepackaged Plan, the Company projects it will still have $243.6 million
of indebtedness and will therefore remain highly leveraged after the Financial
Restructuring. The Company's high leverage poses substantial risks to holders of
the Company's debt and equity securities.
The Company is in discussions with potential lenders regarding financing
during the Prepackaged Chapter 11 Case and following Consummation of the
Prepackaged Plan. The Company believes that if it obtains satisfactory
financing, following Consummation of the Prepackaged Plan, the Company's cash
generated by operations and the estimated levels of liquidity available to the
Company will be sufficient to permit the Company to satisfy its debt service
requirements and other capital requirements. However, such belief is based on
various assumptions, including those regarding the terms of new financing and
those underlying the Business Plan Projections. Accordingly, there can be no
assurance that the Company's financial resources will be sufficient for the
Company to satisfy its debt service obligations and other capital requirements.
CERTAIN RISKS RELATING TO THE BUSINESS PLAN PROJECTIONS
The Company has developed its 1999 - 2003 business plan based on certain
assumptions concerning its business, its ability to implement the Operational
Restructuring, the general domestic market for consumer electronics products,
its ability to sell assets, and timelines relating to its restructuring
activities. See "BUSINESS PLAN PROJECTIONS." In the event that the actual
performance of the Company is below that projected, the domestic market or
demand for consumer electronics products is less than projected or the time
required to achieve certain milestones in the Operational Restructuring is
greater than expected, the Company may not be able to generate sufficient cash
flow to meet its debt service requirements or operating cash needs.
The Company prepared the Business Plan Projections in connection with the
planning and development of the Operational Restructuring and the Prepackaged
Plan. The Business Plan Projections assume that all aspects of the Prepackaged
Plan and the Operational Restructuring will be successfully implemented on the
terms outlined in this Disclosure Statement. Because such projections are based
on forecasts of key economic
20
<PAGE> 33
variables, the estimates and assumptions underlying the Business Plan
Projections are inherently uncertain and, though considered reasonable by the
Company, are subject to significant business, economic and competitive
uncertainties. There can be no assurance that the Business Plan Projections will
be realized, and actual results may vary materially and adversely from those
shown. The Business Plan Projections were developed in connection with the
development of the Prepackaged Plan and should not be relied on for any other
purpose. See "BUSINESS PLAN PROJECTIONS."
Operating Entities, Facilities and Business Assumptions
The Business Plan Projections include projected income, expenses and cash
requirements of the Company's consumer electronics core businesses for all
periods covered by the Business Plan Projections. The Business Plan Projections
do not include income, expenses or cash requirements of the Company's Network
Systems Division ("NWS") after 1998, as the Business Plan Projections assume
that all or a portion of those business lines will be sold during 1999. The
Business Plan Projections incorporate the proceeds of the sale of manufacturing
facilities and also include certain expenses associated with such sales,
including environmental clean-up costs, employee severance and relocation
expenses and brokerage fees associated with the sale of assets or operating
businesses. The Business Plan Projections contemplate that the Company will
outsource all or substantially all products and exit manufacturing by the end of
the first quarter of 1999, and that all manufacturing facilities will be
transferred or sold to third parties by the third quarter of 1999. Equipment
leases are expected to be terminated and certain charges associated with those
terminations will be made against the Company's capital structure.
The Business Plan Projections assume that products required for the
Company's offered lines in 1999 and later years will be available and obtainable
from third parties, including LGE, at the prices or margins set forth in the
Business Plan Projections. No allowances have been made or contingencies
budgeted for in the event there are shortages in raw materials, component parts
or finished product within the requirements of the Company's projected product
lines. No allowances have been made for increased costs or for extraordinary
costs associated with procuring or shipping necessary component parts or
finished product in the event of unforseen economic or political difficulties in
the locations from which the Company currently expects to obtain such goods. If
the Company is unable to obtain outsourced product on expected terms or due to
shortages or political or economic uncertainties or hostilities in any location
from which it currently expects to obtain products, the Company may not be able
to meet the timetable or budget for outsourced products.
The Business Plan Projections also include and assume certain costs and
expenses associated with the transformation from manufacturing to a sales,
distribution and technology strategy. Such costs and expenses include severance
and vacation relating to layoffs in the manufacturing segments of the Company's
business, legal costs for contract terminations, environmental charges
associated with the disposition of facilities, outplacement expenses for
personnel, retention program costs for key personnel and consultant fees for
professionals. The Company's estimates and assumptions with respect to all such
fees include estimates of the time required to complete project phases. If the
outsourcing initiatives take more time than assumed in the Business Plan
Projections, or if unexpected additional expenses are incurred, the Company may
not be able to achieve its timetable and budget for the outsourcing initiatives.
The Business Plan Projections also include certain assumptions concerning
accounts receivables and inventory turns, as well as for capital budget
requirements and depreciation expense. Those assumptions are based on current
performance and the expectation of improved performance during the Company's
restructuring and conversion to outsourcing. Such improvements in performance,
particularly with respect to inventory and accounts receivable turns, depend in
part on factors outside of the control of the Company, such as the market for
consumer electronics and the general economy. Lack of demand for consumer goods
and a general downturn in the economy would have a detrimental effect on the
Company's planned performance in these areas. The Company anticipates that
additional costs will be incurred, including increased interest and carrying
costs, if it is unable to achieve the performance levels and timing for
performance as contemplated in the Operational Restructuring. If the Company is
unable to meet improved performance goals, the Company may not be able to meet
the budget established under the Business Plan Projections.
21
<PAGE> 34
Assumptions Concerning Credit Facilities
The Company executed the Amended Citibank Credit Facility as of June 29,
1998. The Amended Citibank Credit Facility expires on the earlier of (i) a
bankruptcy filing by the Company or (ii) December 31, 1998. The Company is in
discussions with lenders regarding debtor-in-possession financing to cover the
period during the pendency of the bankruptcy proceeding and a new credit
facility to cover the period following Consummation of the Prepackaged Plan. In
addition, pursuant to the Restructuring Agreement, LGE has agreed to provide the
LGE New Credit Support. LGE's obligation to provide such financing is subject to
the conditions set forth in the Restructuring Agreement. The Business Plan
Projections include certain assumptions as to the amount, availability and term
of new working capital, fixed asset and revolving facilities, all of which are
based on uncommitted proposals received from credit providers in discussion with
the Company at this time. Failure of the Company to obtain credit facilities
meeting the availability levels included in the Business Plan Projections may
effect the Company's ability to implement the Operational Restructuring.
Assumptions Concerning VSB
The Company has developed the vestigial sideband ("VSB") digital
transmission system adopted by the Federal Communications Commission as part of
the Advanced Television Systems Committee ("ATSC") digital television broadcast
standard for terrestrial broadcasting. Any consumer product that receives an
ATSC digital television signal will require the use of the Company's technology.
However, the rate of absorption of the technology into the U.S. consumer
electronics industry cannot be determined with certainty at this time.
In the United States, the cable television industry, which provides
television transmissions to approximately 70% of U.S. households, has not
currently indicated that it will carry transmissions in VSB-compatible formats
and is not required under current regulations to carry VSB-compatible formats.
Digital broadcasts are scheduled to begin in the U.S. in selected markets in
November 1998, and the U.S. government has mandated that all terrestrial
broadcasts be digital by 2006.
The Business Plan Projections contemplate that VSB royalties, excluding
development costs, received by the Company in cash will total $3.7 million,
$14.9 million, $32.6 million, $54.2 million and $70.7 million for the years
1999 - 2003, respectively. For a detailed discussion of analyses, see "BUSINESS
PLAN PROJECTIONS." These royalties would be received from the integration of the
VSB technology into televisions, VCRs, DVDs, converter boxes, personal
computers, satellite boxes, cable boxes and add-in cards for personal computers.
The Business Plan Projections also include certain assumptions concerning
the royalty rates that the Company will be able to negotiate from other consumer
electronics companies and other potential users of VSB technology. There can be
no assurance that the Company will be able to obtain the royalty rates included
in its projections. Additionally, the Company's cash flow income from VSB
royalties may be adversely impacted by royalty free cross-licensing agreements
involving VSB which are required in order to give the Company access to
technologies which it believes are necessary for its own product lines.
The absorption rate of VSB technology into other non-television consumer
electronics, such as personal computers, is uncertain at this time. There can be
no assurance that VSB technologies will be incorporated into non-television
consumer electronics within the time periods and at the absorption rates
contemplated by the Business Plan Projections.
There can be no assurance that the ATSC digital television standard will be
adopted in other countries. Canada, Taiwan and the Republic of Korea have
adopted the ATSC digital television standard that would incorporate VSB
technologies but Western Europe and Australia have already adopted a non-VSB
digital broadcast standard and Japan appears likely to adopt a non-VSB standard.
The Business Plan Projections do not contain royalty assumptions for
non-domestic VSB.
RISKS ASSOCIATED WITH PROPOSED OPERATIONAL RESTRUCTURING
The Company has formulated the Operational Restructuring, which
contemplates that the Company will substantially restructure the way in which it
does business. The Company plans to transform its primary
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business operations from those of a vertically integrated television
manufacturer, with research and development design, manufacturing, marketing,
sales, distribution, parts and service functions, to a sales, distribution, and
technology company with all or substantially all product lines produced on an
outsourced basis. There are potential disadvantages, adverse consequences and
risks associated with the Operational Restructuring.
Exiting Manufacturing
Zenith currently operates six major manufacturing centers in the United
States and Mexico for the production and assembly of televisions and television
components and accessories, and for cable and satellite set-top boxes. The
Operational Restructuring includes initiatives to sell or close its Melrose
Park, Illinois operations by the end of the fourth quarter of 1998 unless the
profitability of these operations improves considerably. The Operational
Restructuring contemplates that the other manufacturing facilities will close by
the end of the first quarter of 1999 and be sold by the end of the third quarter
of 1999. Until a sale or closure of any facility has been finalized, the Company
would continue to bear some costs associated with basic maintenance relating to
plant and equipment. With respect to the closing or sale of the Company's
Mexican operations, under Mexican law, certain tax, administrative, severance
and other employee benefit claims enjoy priority treatment and will be paid
first from potential proceeds of the sale or transfer of such assets. The
Company currently estimates the aggregate of such payments to be approximately
$44.2 million. Additionally, the Company expects that it will incur additional
expenses related to expatriate U.S. workers assigned to Mexican facilities,
including relocation costs.
The Company may not be able to accomplish the sale of each of its
facilities within the time frame contemplated by the Operational Restructuring
or may be unable to obtain offers at the price levels contemplated in the
Business Plan Projections. Failure to finalize any sale within the schedule of
the Operational Restructuring will result in additional costs and expenses to
the Company. Failure to achieve the sale price contemplated by the Business Plan
Projections may result in a shortfall in cash required to accomplish the
Operational Restructuring. Such additional costs and expenses or cash shortfalls
could have a material adverse effect on the Company's business, financial
condition, results of operations, ability to implement the Restructuring and
ability to meet its financial obligations, including those under the New
Subordinated Debentures. Additionally, the disposition schedule contemplated by
the Operational Restructuring and the nature of the market for the facilities
may adversely affect the selling price for the facilities. The Company's plants
vary in layout, age, features and condition, and may not be suitable for
alternative uses.
The sale of the Mexican manufacturing facilities is dependent in part on
the condition of the real estate market in Mexico in general and in the
"maquiladora" designated regions in particular. International trade
considerations, including customs, duties, North American Free Trade Agreement
("NAFTA") requirements and the currency markets with respect to the Mexican Peso
and currencies of other competing off-shore manufacturing areas influence the
decision of other companies to select Mexico as a manufacturing location. There
are substantial risks associated with changes in international economies,
particularly those in Asia, that may influence the Company's ability to sell its
Mexican operations within the schedule and budget set forth in the Operational
Restructuring.
If the Company is unable to enter into significant outsourcing contracts by
January 1, 1999, as contemplated by the Operational Restructuring, the Company
may be unable to sell or close plants and equipment and/or reduce inventories as
contemplated by the Operational Restructuring. Failure to sell these assets as
contemplated by the Operational Restructuring would result in a shortfall in
cash required to implement the Operational Restructuring and could have a
material adverse effect on the Company's business, financial condition, results
of operations, ability to implement the Restructuring and ability to meet its
financial obligations, including those under the New Subordinated Debentures.
The Financial Restructuring currently anticipates that the Company will transfer
the Reynosa Assets to LGE in exchange for the forgiveness of debt owed by the
Company to LGE, and the Operational Restructuring currently provides that the
Company will outsource certain products from the LGE-owned Reynosa Assets after
the Restructuring. The Company and LGE have not yet entered into any agreement
or contract concerning the products to be outsourced from the Reynosa Assets
after the transfer to LGE, nor has pricing for those products been established.
The Company believes that it would be beneficial to its outsourcing efforts to
have the Reynosa
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Assets (while owned by LGE) provide certain products due to the general
unavailability of certain screen-sized televisions through other manufacturers.
Because no contract concerning outsourcing from the Reynosa Assets following the
transfer to LGE currently exists, there can be no assurance that the Company
will be able to procure products from this source at prices or in volumes
anticipated by the Operational Restructuring. If the Company is unable to reach
agreement with LGE concerning such outsourcing, the Company may not be able to
implement the Operational Restructuring. See "-- Outsourcing Initiatives."
Environmental issues associated with each property may also affect the
value from the sale of the manufacturing facilities realized by the Company. The
manufacture of televisions and television components involves the use of
hazardous chemicals and substances including metals, caustics, acids, volatile
and semivolatile organic chemicals, plastics and resins. Potential purchasers of
any one of the manufacturing facilities offered for sale by the Company may
require escrows, indemnities or other financial considerations from the Company.
See "RISK FACTORS -- Legal Proceedings."
Outsourcing Initiatives
The Operational Restructuring calls for the Company to outsource all or
substantially all of its product lines beginning in 1999. While the Company
currently outsources some small screen televisions, all of its VCRs, and many
television components and accessories, there are substantial risks associated
with the Company's plan to outsource all or substantially all of its product
lines within the time frame provided for in the Operational Restructuring,
including without limitation: (i) limited manufacturing capacity within the
television and consumer electronics industries, particularly in the case of
cathode ray tubes or picture tubes for 25 inch and 27 inch screen sizes; (ii)
many sources of manufacturing capacity for the Company's outsourcing
requirements are the Company's competitors within the United States domestic
television market and may be unwilling to supply products with features and at
prices assumed in the Business Plan Projections; (iii) trade restrictions and
customs duties related to products produced outside of the territories covered
by NAFTA may significantly affect the Company's ability to import goods or
components, particularly high end or high featured televisions, at competitive
prices; and (iv) long lead-times required for the design and sourcing of
televisions and consumer electronics (generally in the six- to twelve-month
range) may delay implementation of the Operational Restructuring.
If the Company has not located sources of significant levels of product for
its 1999 model year (which begins April 1, 1999) by the end of September 1998,
the ability of the Company to achieve the Operational Restructuring on schedule
is doubtful. Delays in implementation of the Operational Restructuring will
result in additional costs to the Company and could have a material adverse
effect on the Company's business, financial condition, results of operations,
ability to implement the Restructuring and ability to meet its financial
obligations, including those under the New Subordinated Debentures.
If the Company is unable to procure certain key products, including 25 inch
and 27 inch television sets and tubes from other sources, as contemplated by the
Operational Restructuring, it may be required to either continue operation of
its Melrose Park and Mexican facilities or sell those facilities to an outside
party under terms which include supply contracts relating to those products. The
Financial Restructuring provides that the Company will transfer to LGE the
Reynosa Assets in return for the forgiveness of debt. The Company currently
anticipates that it will procure certain products from Reynosa following that
transfer but no contract relating to that outsourcing relationship has been
completed at this time. Such contracts may be at prices or under terms less
favorable to the Company than those included in assumptions used in formulation
of the Operational Restructuring.
Due to the current industry under-capacity for high end, high feature
television sets, the Company may not be able to procure such products at
attractive prices or at all. These products typically have higher margins than
smaller screen products or products with fewer features. Additionally,
manufacturers with over-capacity in these product lines may be unwilling or
unable to manufacture sets to Company specifications or to unique Company
designs due to tooling requirements. Successful brand definition through unique
designs and features is critical to the ability of the Company's outsourcing
efforts. The Company believes it must be able to
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provide products which are easily differentiated from those of its competitors,
including competitors providing outsourced products to the Company, in order for
a marketing plan to be successful.
As of June 27, 1998, the Company had identified and was undertaking
negotiations with third parties which it believes have capacity and interest to
provide product for the Company's 1999 product year. The Company has executed a
number of letters of intent with respect to product line outsourcing, but does
not yet have any definitive contracts.
There can be no assurance that the Company will be successful in procuring
outsourced products at the prices and covering the product lines contemplated by
the Operational Restructuring. Failure of the Company to provide its planned
product line at the designated price points could adversely impact the ability
of the Company to place products in targeted retail outlets or maintain targeted
market share and could have a material adverse effect on the Company's business,
financial condition, results of operations, ability to implement the
Restructuring and ability to meet its financial obligations, including those
under the New Subordinated Debentures. Continued delays in the implementation of
the Operational Restructuring or in the confirmation of the Prepackaged Plan may
also adversely influence consumer attitudes toward the Company's products.
Assumptions Concerning Other Royalty Revenue
The majority of the Company's current royalty income relates to several
core patents used in tuner applications on consumer electronics. Those tuner
patents are scheduled to expire by 2003. The Business Plan Projections assume
that the royalty revenue from licenses associated with the tuner patents,
excluding development and management costs, will be $26 million for each of the
years 1998 - 2002 and $13 million in 2003. In June 1998, a licensee of the
Company's tuner patents filed suit against the Company seeking a declaratory
judgment that the Company's tuner patents were invalid and unenforceable, or
that the plaintiff's use of certain technologies in its current products did not
infringe on the Company's tuner patents. The complaint seeks the return of
previously paid royalties. The plaintiff is also seeking a preliminary
injunction precluding the Company from terminating its licensing agreement and
allowing it to pay future royalties into an escrow. See "RISK FACTORS -- Legal
Proceedings" and "BUSINESS -- Legal Proceedings." If a challenge to the tuner
patents were successful prior to 2003, or if an alternative technology was
developed which alleviated the requirement that televisions or VCRs include the
Company's patented processes, income received from such patents could be
significantly reduced during the term of the Operational Restructuring. The loss
of all or a substantial portion of such tuner patent royalties would have a
material adverse effect on the Company's business, financial condition, results
of operations, ability to implement the Operational Restructuring and ability to
meet its financial obligations, including those under the New Subordinated
Debentures.
Timing
The Business Plan Projections include a number of assumptions concerning
the time within which the Company will achieve certain milestones in its
conversion from a manufacturing to a sales, distribution and technology company.
The Company believes that it will be able to achieve the timetable established
in the Operational Restructuring. However, most, if not all, steps in the
Operational Restructuring require actions by parties or the occurrence of events
outside of the influence of the Company for completion. Any delay in achieving
any portion of the Operational Restructuring could result in additional costs or
expenses to the Company, for which the Company will incur additional cash needs.
Such additional cash needs may not be covered by or available under the capital
and funding structure available to the Company and upon which the Business Plan
Projections are based. For example, elements of the Operational Restructuring,
such as the sale or divestiture of certain assets, the ability to enter into
contracts for outsourced products at the prices and on the schedules included in
the Business Plan Projections, the ability of the Company to reduce its
inventories through sales or the ability of the Company to draw under certain
credit facilities, are all time sensitive within the Operational Restructuring
and are not yet certain. There can be no assurance that the Company will meet
the milestones required under the Operational Restructuring in accordance and
within the time frame assumed in the Business Plan Projections.
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Ability to Maximize Value for Network Systems Division
Pursuant to the Operational Restructuring, the Company intends to seek an
investor for, or sell all or a portion of, NWS during 1999. NWS has designed,
manufactured and distributed set top boxes for the cable and satellite
television industries for the past 15 years. The majority of NWS' current
business is derived from two strategic contractual relationships with Americast
and affiliates of News Corporation for the production of digital set top boxes.
Americast is a consortium of four Regional Bell Operating Companies which
compete with cable and satellite providers in the delivery of video
entertainment services to subscribers. Zenith sells digital satellite receivers
to News Corporation-affiliated satellite network providers. NWS' main domestic
competitors are General Instrument and Scientific-Atlanta, both of which have
substantially greater market share and have strong relationships with large,
traditional, domestic cable television service providers. The Company's current
financial situation has to some extent affected NWS' ability to attract
additional business. NWS' main contracts with Americast and affiliates of News
Corporation are not assignable without the consent of the contract parties.
Accordingly, the value of NWS will be adversely affected if such customers do
not consent to a proposed transaction. Both major NWS customers currently have
alternative sources for some or all set top box models they offer in their
businesses. NWS and its advisors have informed Americast, the consortium
members, and News Corporation of its intention to locate an investor for the
business and elicited their support. The value obtainable for NWS may also be
affected by contract renegotiations involving changes in prices or volumes.
There can be no assurance that the Company will be able to locate an investor in
or to sell NWS within the time period or for the price contemplated in the
Operational Restructuring or that Americast or News Corporation or their
successors will consent to any such transaction. Additionally, there can be no
assurance that the Company will continue as a major supplier to Americast or
News Corporation or their affiliates, or that the current contracts will remain
in force for the term of the Business Plan Projections. Failure to locate an
investor in or to sell NWS on the terms and timing contemplated by the Business
Plan Projections or to continue to be a major supplier to Americast or New
Corporation could result in increased costs, expenses and cash shortfalls, and
could have a material adverse effect on the Company's business, financial
condition, results of operations, ability to implement the Operational
Restructuring and ability to meet its financial obligations, including those
under the New Subordinated Debentures.
Sales, Distribution and Technology Company
The Company's Operational Restructuring contemplates that the Company will
exit manufacturing and will become a sales, distribution and technology company,
capable of designing and specifying features for its products on a year-by-year
basis and largely outsourcing the manufacture of those goods. The Operational
Restructuring assumes that the Company will be able to adopt a "best of the
breed" design philosophy, incorporating the newest and highest demand features
and capacities into its models each year, without regard to the restrictions of
manufacturing capabilities within any supplier's facilities. The Operational
Restructuring also contemplates that the Company will maintain or build its
current warranty, parts and service and accessory businesses. Failure to
implement such design philosophy (or to maintain or build warranty, accessory,
parts and service businesses, including increasing margins in some of those
areas) could have a material adverse effect on the Company's business, financial
condition, results of operations, ability to implement the Operational
Restructuring and ability to meet its financial obligations, including those
under the New Subordinated Debentures.
The Business Plan Projections also assume that the Company's market share
will remain consistent with the Company's historical market share, except that
the Operational Restructuring contemplates that the Company will focus its
efforts in larger screen sizes and in digital products. The Business Plan
Projections assume that the Company will be able to achieve at least a 4% to 7%
share of the digital product market in the later years of the Operational
Restructuring. There can be no assurance, however, that the Company will be able
to achieve such market share.
The television and consumer electronics industries have seen substantial
price erosion since the late 1980s. Since 1994, consumer prices have declined
from 2% to 6% per year, depending on screen size. While high end, large screen
sizes have historically exhibited price erosion at lesser rates or levels than
smaller screen sizes, the price erosion has accelerated in higher end products.
The Business Plan Projections forecast similar
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price erosion will occur in future years, with accelerated price erosion in
digital products as those products are more widely produced and available. The
Company cannot predict or control further price erosion. Most television and
consumer electronics companies are vertically integrated, allowing absorption of
price erosion across a broad band of related functions. The highest profit
margins within an integrated business generally are obtainable in the research
and development areas (royalty and licensing payments) and in the sale of after
market applications such as gaming software or accessories. The next highest
margins are generally available in the components and parts and service segments
of the industry. The lowest profit margins generally exist in the assembly and
sales segments of the industry. The Operational Restructuring contemplates that
the Company will retain one segment -- sales -- with traditionally the lowest
margins, one segment in the mid-range (parts and service), and limited functions
in one high range segment (research and development). Continued price erosion in
consumer electronics beyond that forecast by the Business Plan Projections would
severely impact the Company's ability to maintain profit margins contemplated in
the Operational Restructuring and would have a material adverse effect on the
Company's business, financial condition, results of operations, ability to
implement the Operational Restructuring and ability to meet its financial
obligations, including those under the New Subordinated Debentures. The Business
Plan Projections also assume that the Company will be able to reposition its
brand, which repositioning will allow the Company to increase its prices while
maintaining projected volume. There can be no assurance that the Company will be
able to reposition its brand while maintaining projected volumes with increased
prices.
Manufacturing Alliances to Leverage Technology Applications
The Company currently owns certain patent rights in VSB technology and
other technologies that may be employed in high definition television. While the
Company's VSB technology has been approved by the Federal Communications
Commission as part of the ATSC terrestrial broadcast standard in the U.S., the
Company lacks sufficient resources either to develop additional uses of the
technology or to extend the applications of the technology as the standard in
other markets internationally. The Company also holds numerous patents relating
to other consumer electronics products, some of which do not yet have current
applications or uses. Development and marketing of applications for these
technologies is expensive and time consuming. The Company does not currently
have, nor does the Operational Restructuring contemplate that it will have in
the near future, sufficient resources to undertake such development and
marketing efforts on its own. The Operational Restructuring requires that the
Company seek joint ventures or technical alliances with third parties in order
to exploit its technologies. Such joint ventures or alliances would likely be
with other companies currently in the consumer electronics industry that have
manufacturing or marketing synergies with the Company. The Operational
Restructuring contemplates that the Company will locate and enter into
agreements with partners for continued development of projection television,
high definition television and digital set top boxes.
There can be no assurance that the Company will be successful in locating
joint venture partners or technology alliance partners in order to achieve
market or financial returns on currently unused or underutilized technologies.
Many of the Company's competitors in the consumer electronics industry may have
similar technologies or strategies and the financial resources to proceed
without the requirement of a joint venture or technology alliance. If the
competitors are successful in advocating alternative strategies and technologies
that do not include the Company's patents, the Company will be unable to achieve
significant licensing income from its applications. Failure to locate joint
venture partners or technology alliance partners to achieve acceptable returns
on its technology would have a material adverse effect on the Company's
business, financial condition, results of operations, ability to implement the
Operational Restructuring and ability to meet its financial obligations,
including those under the New Subordinated Debentures.
Employee Retention
The Company's ability to consummate the Operational Restructuring is
dependent in part on its ability to retain and motivate its officers and key
employees. The Company's current financial difficulties have had a detrimental
effect on its ability to attract or retain key officers and employees. The
Company has experienced over the last two years, and continues to experience,
high turnover in the ranks of its executives, professionals,
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sales and marketing personnel and technical and engineering staff. In
particular, several key digital technology and software engineers have recently
left the Company. There can be no assurance that the Company will be able to
retain or employ technical and engineering personnel necessary to meet the
research and development goals of the Operational Restructuring. The Company is
implementing a retention program which includes base salary adjustments, short-
and long-term incentive bonuses and retention and stay bonuses for key personnel
and approximately 175 other key managers and employees. See
"MANAGEMENT -- Executive Officers of the Company." There can be no assurance,
however, that such programs will be successful, and the Company's inability to
retain key individuals could have a material adverse effect on the Company's
business, financial condition, results of operations, its ability to implement
the Operational Restructuring and ability to meet its financial obligations,
including those under the New Subordinated Debentures.
LEGAL PROCEEDINGS
In June 1998, a licensee of the Company's tuner patents filed suit against
the Company seeking a declaratory judgment that the Company's tuner patents were
invalid and unenforceable, or that the plaintiff's use of certain technologies
in its current products did not infringe on the Company's tuner patents. The
complaint seeks the return of previously paid royalties. The plaintiff is also
seeking a preliminary injunction precluding the Company from terminating its
licensing agreement and allowing it to pay future royalties into an escrow. The
court has denied the plaintiff's request for a temporary restraining order
against the Company. See "-- Risks Associated with Proposed Operational
Restructuring -- Assumptions Concerning Other Royalty Revenue."
In June 1998, the Company's president and chief executive officer, its
directors, and an affiliate of LGE were named as defendants in a suit filed by a
shareholder in a state court in New Jersey entitled Vengrove v. Gannon, et al.
The suit alleges breach of fiduciary duties by the directors, the officer and
the LGE affiliate arising out of the Company and the Board's actions related to
the Financial Restructuring and Prepackaged Plan. The plaintiff seeks to be
certified as a class representative and the suit designated as a class action.
The suit seeks to enjoin the defendants from proceeding with the cancellation of
the Old Common Stock held by minority shareholders or to provide compensation to
the minority holders for such cancellation.
The Company is also involved in various other legal actions, environmental
matters, and other proceedings relating to a wide range of matters that are
incidental to the conduct of its business. See "BUSINESS -- Legal Proceedings."
FINANCING AGREEMENT RESTRICTIONS
The Company is currently engaged in preliminary discussions of the terms of
both debtor-in-possession ("DIP") and post-restructuring facilities with
possible lenders. No binding commitment has been issued by any lender and no
facility has been entered into by the Company covering the DIP or
post-restructuring periods. The Business Plan Projections incorporates
assumptions about the terms, conditions and available borrowings under both the
DIP and post-restructuring financing arrangements. There can be no assurance
that the Company will obtain either DIP or post-restructuring financing, or that
the terms or conditions of or availability of borrowings under such facilities,
if obtained, will be consistent with the assumptions underlying the Business
Plan Projections. If the Company is unable to obtain financing in an amount and
under terms sufficient to meet the requirements of the Business Plan
Projections, the Company may be unable to complete its Operational
Restructuring. See "DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS -- Short-Term
Debt."
POSSIBLE DEFAULTS; RISK OF ACCELERATION
As described in this Disclosure Statement, the Company has entered into the
Amended Citibank Credit Facility and is a party to other financing arrangements.
Default by the Company of its obligations under any such arrangement could
result in the acceleration of the Company's obligations under such arrangements.
In the event such an acceleration were to occur, the full amount of principal
and interest due with respect to the accelerated debt would be immediately due
and payable. Substantially all of the Company's outstanding
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indebtedness contains cross-acceleration provisions which could allow the
requisite holder(s) of such indebtedness to accelerate all of its indebtedness
in the event of an acceleration of any portion. If a material amount of the
Company's indebtedness were to be accelerated (which could occur at any time and
whether or not there are delays in obtaining requisite acceptances of the
Prepackaged Plan and the filing of the Prepackaged Chapter 11 Case), the Company
likely would be unable to repay such indebtedness. Under such circumstances, the
Company might have no choice but to seek immediate relief under the Bankruptcy
Code. In the event the Company were required to commence a chapter 11 case
without a pre-approved plan of reorganization, the Company believes that there
is a risk that little, if any, value would be available for distribution to
unsecured creditors. Furthermore, there can be no assurance that the Company
would be able to emerge from such a proceeding under the Bankruptcy Code, in
which case the Company might be forced into a liquidation proceeding under
chapter 7 of the Bankruptcy Code. If the Company is sold, the Company believes
that the ability of holders of Claims to recover on their investments would be
impaired to an even greater degree.
CONTROL BY LGE
LGE and LG Semicon presently beneficially own 56.5% of the Old Common Stock
(including vested but unexercised options) and control a majority of the Board.
Following consummation of the Financial Restructuring, LGE will own 100% of the
New Common Stock. Accordingly, LGE will continue to have the ability to control
the management policy of the Company and all fundamental corporate actions,
including mergers, substantial acquisitions and divestitures and other
agreements and the election of the Board. See "SECURITY OWNERSHIP."
LGE may have an interest in pursuing acquisitions, divestitures, financings
or other transactions that, in their judgment, could enhance their investment in
the Company even though such transactions might involve increased risk to the
holders of the New Subordinated Debentures. In addition to their investment in
the Company, LGE is a global consumer electronics company and along with its
affiliates, has, and may develop, additional relationships with businesses that
are or may be competitive with the Company. The Company has engaged in, and
expects to continue to engage in, a number of other transactions with LGE. See
"SPECIAL FACTORS -- Events Leading to the Restructuring" and "CERTAIN
TRANSACTIONS."
CERTAIN BANKRUPTCY CONSIDERATIONS
Method of Solicitation
Section 1126(b) of the Bankruptcy Code provides that the holder of a Claim
against, or Equity Interest in, a debtor who accepts or rejects a plan of
reorganization before the commencement of a chapter 11 case is deemed to have
accepted or rejected such plan under the Bankruptcy Code so long as the
solicitation of such acceptance was made in accordance with applicable
non-bankruptcy law governing the adequacy of disclosure in connection with such
solicitations, or, if such laws do not exist, such acceptance was solicited
after disclosure of "adequate information," as defined under the Bankruptcy
Code. This Disclosure Statement is being presented to all holders of Impaired
Claims in order to satisfy the requirements of section 1126(b) of the Bankruptcy
Code.
The Company believes that the use of the Disclosure Statement and of
Ballots and Master Ballots for the purpose of obtaining acceptances of the
Prepackaged Plan and the Solicitation is in compliance with the Bankruptcy Code.
However, there can be no assurance that the Bankruptcy Court will decide that
the Solicitation meets the requirements of section 1126(b) of the Bankruptcy
Code. If the Bankruptcy Court determines that the Solicitation does not comply
with the requirements of section 1126(b) of the Bankruptcy Code, the Company may
seek to resolicit acceptances, and, in such event, Confirmation of the
Prepackaged Plan could be delayed and possibly jeopardized.
Classification and Treatment of Claims and Equity Interests
Section 1122 of the Bankruptcy Code requires that the Prepackaged Plan
classify Claims against, and Equity Interests in, the Company. The Bankruptcy
Code also provides that, except for certain Claims
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classified for administrative convenience, the Prepackaged Plan may place a
Claim or Equity Interest in a particular Class only if such Claim or Equity
Interest is substantially similar to the other Claims or Equity Interests of
such Class. The Company believes that all Claims and Equity Interests have been
appropriately classified in the Prepackaged Plan. The Company has elected to
separately classify General Unsecured Claims because this Class is comprised
largely of trade creditors. Many of these creditors are key suppliers of
products and services used by the Company. Accordingly, any impairment of these
Claims could be detrimental to the ability of the Company to obtain essential
trade credit and could substantially impair the ability of the Company to do
business with trade creditors whose goods and services are essential for the
Company. Bank Lender Claims have been separately classified because the Company
believes that LGE's guaranty of these Claims renders their legal and financial
position substantially unlike other unsecured Claims. LGE Claims have been
separately classified because the holder of these Claims has voluntarily agreed
to convert their debt to equity and because LGE is an insider. LGE has consented
to the separate classification of its Claims as provided in the Prepackaged
Plan. Finally, because the Old Subordinated Debenture Indenture contains
subordination provisions, the Old Subordinated Debentures are not held by
insiders, and the Old Subordinated Debenture Claims are not guaranteed by LGE,
the Company believes that the Old Subordinated Debenture Claims are
significantly different from the other unsecured debt and therefore must be
classified separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the Company
presently anticipates that it would seek (i) to modify the Prepackaged Plan to
provide for whatever reasonable classification might be required for
Confirmation and (ii) to use the acceptances received from any creditor pursuant
to this solicitation for the purpose of obtaining the approval of the Class or
Classes of which such creditor ultimately is deemed to be a member. Any such
reclassification of creditors, although subject to the notice and hearing
requirements of the Bankruptcy Code, could adversely affect the Class in which
such creditor was initially a member, or any other Class under the Prepackaged
Plan, by changing the composition of such Class and the vote required for
approval of the Prepackaged Plan. There can be no assurance that the Bankruptcy
Court, after finding that a classification was inappropriate and requiring a
reclassification, would approve the Prepackaged Plan based upon such
reclassification. Except to the extent that modification of classification in
the Prepackaged Plan requires resolicitation, the Company will, in accordance
with the Bankruptcy Code and the Bankruptcy Rules, seek a determination by the
Bankruptcy Court that acceptance of the Prepackaged Plan by any holder of Claims
pursuant to this solicitation will constitute a consent to the Prepackaged
Plan's treatment of such holder regardless of the Class as to which such holder
is ultimately deemed to be a member.
The Bankruptcy Code also requires that the Prepackaged Plan provide the
same treatment for each Claim or Equity Interest of a particular Class unless
the holder of a particular Claim or Equity Interest agrees to a less favorable
treatment of its Claim or Equity Interest. The Company believes it has complied
with the requirement of equal treatment. To the extent that the Bankruptcy Court
finds that the Prepackaged Plan does not satisfy such requirements, the
Bankruptcy Court could deny Confirmation of the Prepackaged Plan.
Issues or disputes relating to classification and/or treatment could result
in a delay in the Confirmation and Consummation of the Prepackaged Plan and
could increase the risk that the Prepackaged Plan will not be consummated.
Nonacceptance of the Prepackaged Plan -- Confirmation by "Cram Down"
In the event any impaired Class of Claims does not accept the Prepackaged
Plan, the Bankruptcy Court may nevertheless confirm the Prepackaged Plan at the
Company's request pursuant to the "cram down" provisions of the Bankruptcy Code
if at least one impaired Class has accepted the Prepackaged Plan (with such
acceptance being determined without including the acceptance of any "insider" in
such Class) and, as to each impaired Class which has not accepted the
Prepackaged Plan, the Bankruptcy Court determines that the Prepackaged Plan
"does not discriminate unfairly" and is "fair and equitable" with respect to
such Impaired Class. See "THE PREPACKAGED PLAN -- Confirmation of the
Prepackaged Plan Without Acceptance by All Classes of Impaired Claims." In the
event that the Class of holders of the Old Subordinated Debentures fails to
accept the Prepackaged Plan, the Company intends (and the Prepackaged Plan so
provides) to seek Confirmation of the Prepackaged Plan without the acceptance of
such Class and reserves the
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right to request Confirmation in the event that any other Class of Impaired
Claims fails to accept the Prepackaged Plan. IF THE HOLDERS OF THE OLD
SUBORDINATED DEBENTURE CLAIMS DO NOT ACCEPT THE PREPACKAGED PLAN, THE COMPANY
INTENDS TO INITIATE A "CRAM DOWN" PROCEDURE WITH RESPECT TO THE CLASS COMPOSED
OF THE HOLDERS OF THE OLD SUBORDINATED DEBENTURES. IF SUCH A "CRAM DOWN" IS
APPROVED BY THE BANKRUPTCY COURT, HOLDERS OF THE OLD SUBORDINATED DEBENTURE
CLAIMS WOULD RECEIVE NO DISTRIBUTION AND RETAIN NO PROPERTY. If the Prepackaged
Plan is not consummated, the Company may be required to sell its assets, and the
Company believes that in the event of a liquidation, holders of the Old
Subordinated Debentures would receive no distribution and retain no property.
Because the holders of Equity Interests receive no distribution and retain no
property under the Prepackaged Plan, that Class is presumed to have rejected the
Prepackaged Plan pursuant to section 1126(g) of the Bankruptcy Code. Therefore,
that Class will be subject to "cram down" as part of the Confirmation of the
Prepackaged Plan.
The Company also reserves the right to modify the terms of the Prepackaged
Plan as necessary for the Confirmation of the Prepackaged Plan without the
acceptance of other Classes of Impaired Claims. Such modification could result
in a less favorable treatment to any non-accepting Class or Classes, as well as
any Classes junior to such non-accepting Classes, than the treatment currently
provided in the Prepackaged Plan. Such less favorable treatment could include a
distribution to the affected Class of property of less value than that currently
provided in the Prepackaged Plan or, in certain cases, no distribution of
property under the Prepackaged Plan, as modified. Any such modification may
require resolicitation of one or more Classes of Impaired Claims and could
result in a delay in the Confirmation and Consummation of the Prepackaged Plan
and could increase the risk that the Prepackaged Plan will not be consummated.
See "THE PREPACKAGED PLAN -- Modification of the Prepackaged Plan." However,
except as described above, the Company may choose not to seek Confirmation of
the Prepackaged Plan in the event one or more Classes of Claims do not accept
the Prepackaged Plan, but may choose instead to pursue an alternative means to
restructure the Company.
Certain Risks of Non-Confirmation
Even if the requisite acceptances are received, there can be no assurance
that the Bankruptcy Court will confirm the Prepackaged Plan. A non-accepting
creditor of the Company might challenge the adequacy of the disclosure or the
solicitation procedures and results as not being in compliance with the
Bankruptcy Code. Even if the Bankruptcy Court were to determine that the
disclosure and the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm the Prepackaged Plan if it were
to find that any statutory conditions to confirmation had not been met. Section
1129 of the Bankruptcy Code sets forth the requirements for confirmation and
requires, among other things, a finding by the Bankruptcy Court that the
confirmation of the Prepackaged Plan is not likely to be followed by a
liquidation or a need for further financial reorganization and that the value of
distributions to non-accepting Classes of Impaired Claims and Equity Interests
will not be less than the value of distributions such Classes of Impaired Claims
and Equity Interests would receive if the Company were liquidated under chapter
7 of the Bankruptcy Code. See "THE PREPACKAGED PLAN -- Confirmation Standards."
While there can be no assurance that the Bankruptcy Court will conclude that
these requirements have been met, the Company believes that the Prepackaged Plan
will not be followed by a liquidation or the need for further financial
reorganization and that non-accepting holders of Impaired Claims and Equity
Interests will receive distributions at least as great as would be received
following a liquidation pursuant to chapter 7 of the Bankruptcy Code. The
Company believes that holders of Old Common Stock would receive no distribution
under either a liquidation pursuant to chapter 7 or a liquidation or
reorganization pursuant to chapter 11. See "THE PREPACKAGED PLAN -- Confirmation
Standards."
The Confirmation and Consummation of the Prepackaged Plan are also subject
to certain conditions. See "THE PREPACKAGED PLAN -- Summary of Other Provisions
of the Prepackaged Plan." No assurance can be given that these conditions will
be satisfied or if not satisfied that the Company would waive such conditions.
If the Prepackaged Plan, or a plan determined not to require resolicitation
of any Classes by the Bankruptcy Court, were not to be confirmed in a timely
manner, it is unclear whether the Restructuring could be implemented and what
holders of Claims and Equity Interests would ultimately receive with respect to
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their Claims and Equity Interests. If an alternative reorganization could not be
agreed to in a timely manner, it is possible that the Company would have to
liquidate its assets, in which case it is likely that holders of Claims and
Equity Interests would receive less than they would have received pursuant to
the Prepackaged Plan. See "SPECIAL FACTORS -- Alternatives to Confirmation and
Consummation of the Prepackaged Plan -- Liquidation Under Chapter 7."
Risk of Subsequent Insolvency Proceeding
There may be significant consequences to holders of the New Subordinated
Debenture in the event of a subsequent bankruptcy. A holder of New Subordinated
Debentures will have a smaller claim with respect to New Subordinated Debentures
in a subsequent bankruptcy than it currently has with respect to the Old
Subordinated Debentures and may therefore receive a smaller distribution in a
subsequent bankruptcy. Similarly, there may be significant consequences to LGE
in the event of a subsequent bankruptcy. LGE will have a smaller claim, and will
hold equity interests in the Company, in a subsequent bankruptcy (as opposed to
holding the LGE Claims), and may therefore receive a smaller distribution in a
subsequent bankruptcy.
READINESS FOR THE YEAR 2000
The Company currently is evaluating its computer-based systems, facilities
and products to determine whether they are "Year 2000 Ready." The Company is
employing a combination of internal resources and outside consultants to
coordinate and implement its Year 2000 Readiness initiatives. The Company has
established a Company-wide Year 2000 Task Force, led by the Company's technology
group, with representation from its major business segments, to evaluate and
address Year 2000 issues. The Year 2000 Task Force's responsibilities include,
without limitation, (i) conducting an evaluation of the Company's computer-based
systems, facilities and products (and those of dealers, vendors and other third
parties with which the Company does business) to determine their Year 2000
Readiness, (ii) coordinating the replacement and/or upgrade of non-compliant
systems, as necessary, (iii) promoting the Company-wide awareness of Year 2000
issues through education and training, and (iv) developing, and overseeing the
implementation of all of the Company's other Year 2000 Readiness initiatives.
The Company has identified certain information and computer systems that
are not Year 2000 Ready and is in the process of purchasing software and
hardware upgrades and replacements for these systems. The Company anticipates
that each of these upgrades and replacements will be effected prior to the Year
2000. Additionally, the Company believes that its material non-information
technology systems will be Year 2000 Ready prior to the Year 2000. The Company
has completed its Year 2000 Readiness assessment of its products and operating
systems and believes that most of its currently manufactured products are Year
2000 Ready. The Company has sent Year 2000 Readiness Questionnaires to its
existing key vendors and suppliers to assess the Year 2000 Readiness of their
systems and products. The responses to these Questionnaires have indicated that
the Company's vendors or suppliers are addressing their Year 2000 issues and
expect to be Year 2000 Ready by the Year 2000. While the Company is working to
achieve Year 2000 Readiness, there can be no assurance that it will successfully
achieve all of its goals. At this time, the Company does not believe that its
Year 2000 related issues will have a material adverse effect on the Company's
business. As a result, no contingency plan has been deemed to be necessary.
In connection with the Operational Restructuring, the Company plans to
discontinue substantially all of its manufacturing operations and to outsource
substantially all components and products. The Company believes its principal
exposure to Year 2000 risks are related to the ability of its vendors to provide
the Company with Year 2000 Ready components and products and to assure that they
otherwise are Year 2000 Ready so that they are able to provide the Company with
components and products in a timely manner. The Company has not yet determined
those vendors on which it will rely following completion of the Operational
Restructuring. The Company is aware, however, that Year 2000 issues may exist
with respect to vendors with which they have or will have a material
relationship, and Year 2000 Readiness will be a material consideration in the
Company's selection of, and contract negotiations with, such third-party
vendors.
Prior to 1998, the Company spent in the aggregate approximately $1.8
million on software and hardware upgrades and replacements and approximately
$200,000 in other costs (i.e., labor, consulting fees and other expenses) in
connection with Year 2000 Readiness. The Company has budgeted a total of $2
million for 1998
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(approximately $400,000 for software and hardware upgrades and approximately
$1.6 million for other costs) and $2.1 million for 1999 (approximately $1
million for software and hardware upgrades and approximately $1.1 million for
other expenses) with respect to Year 2000 Readiness. Most of the costs incurred
by the Company in addressing Year 2000 Readiness are expected to be expensed as
incurred, in compliance with generally accepted accounting principles. The
Company continues to evaluate the estimated costs associated with its Year 2000
Readiness efforts. While the Year 2000 transition efforts may involve costs in
addition to those currently budgeted or anticipated to be budgeted, at this
time, the Company has not yet determined the full costs of the modifications
that may be necessary to address all Year 2000 issues.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
In connection with the Operational Restructuring, the Company intends to
become a sales, distribution and technology development company. As a result,
the Company will continue to be dependent on its ability to protect and utilize
its proprietary technologies. The Company currently holds many patents relating
to VSB technologies, HDTV and digital television related inventions. The
Company's ability to commercialize many of the products it has under development
will depend, in part, on its ability, both in the United States and in other
countries, to obtain and maintain patents, enforce those patents, preserve trade
secrets, operate without infringing on the proprietary rights of third parties
and obtain licenses to use patents held by third parties when necessary.
There can be no assurance that the patents currently owned or licensed by
the Company, or any future patents owned or licensed by the Company, will
prevent other companies from developing similar or technologically equivalent
products, or that other companies will not be issued patents that may prevent
the sale of the Company's products or require licensing and the payment of
significant fees or royalties by the Company. There can be no assurance that
pending or future patent applications licensed to or owned by the Company will
result in issued patents, patent protection will be secured for any particular
technology, any patent rights that have been or may be issued to the Company or
its licensors will be valid or enforceable, any patent rights that have been or
may be issued to the Company or its licensors will not infringe upon the patents
of third parties or that the Company's patents will provide meaningful
protection to the Company. The Company may be unable to avoid infringement of
third-party patents and may have to obtain licenses, defend infringement actions
or challenge the validity of those patents in court. There can be no assurance
that a license will be available to the Company on terms and conditions
acceptable to the Company, if at all, or that the Company will prevail in any
patent dispute. Patent litigation is costly and time consuming, and there can be
no assurance the Company will have, or will devote, resources sufficient to
pursue such litigation. If the Company does not obtain a license under such
patents, is found liable for infringement, or is not able to have such patents
declared invalid, the Company may be liable for significant monetary damages,
may encounter significant delays in bringing products to market, or may be
precluded from participating in the manufacture, use or sale of products or
technologies protected by such patents.
The Company relies on trade secrets and other unpatented proprietary
information in connection with its product development activities. To the extent
that the Company relies on confidential information to maintain its competitive
position, there can be no assurance that other parties may not independently
develop the same or similar information. The Company seeks to protect trade
secrets and proprietary knowledge, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. These agreements
may not effectively prevent disclosure of the Company's confidential information
and may not provide the Company with an adequate remedy in the event of
unauthorized disclosure of such information. If the Company's employees,
scientific consultants or collaborators develop inventions or technologies
independently that may be applicable to the Company's products under
development, disputes may arise about ownership of proprietary rights to those
inventions and technologies. Such inventions and technologies will not
necessarily become the Company's property, but may remain the property of those
persons or their employers. Protracted and costly litigation could be necessary
to enforce and determine the scope of the Company's proprietary rights. There
can be no assurance that the Company will have, or will devote, sufficient
resources to pursue such litigation. The Company's failure to obtain or maintain
patent and trade secret protection, for any reason, could have a material
adverse effect on the Company's business, financial position and results of
operations.
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SPECIAL FACTORS
EVENTS LEADING TO THE RESTRUCTURING
The Company has for many years experienced and continues to experience,
severe financial difficulties, resulting in the immediate need to restructure
both its business operations and its capital structure. The Company has incurred
losses in all but one of the years since 1985. These results generally reflect,
among other things: significant and persistent declines in the Company's gross
margins, largely resulting from reductions in color television prices driven by
competitive factors, and high operating costs and performance difficulties
associated with product development programs and new automated production
processes.
In light of the Company's net losses, the competitive environment and
inflationary cost pressures over the past several years, and in an effort to
increase gross margins and lower costs, the Company has undertaken various cost
reduction programs, profit improvement initiatives, design, manufacturing,
logistics and distribution improvements and various business consolidations.
While the Company has been able to achieve some operating improvements through
these measures, it has been unable to generate sufficient revenues to support
its continued business operations in the absence of a significant operational
and financial restructuring.
LGE Acquisition of Controlling Interest
Beginning in 1994 and as part of its strategy to return to profitability,
the Company developed plans to expand and modernize its production facilities in
the United States and Mexico. Those plans, which in 1994 had projected costs of
$150 million, necessitated that the Company initiate discussions with possible
joint venture partners because the Company did not have sufficient financial
resources to undertake the planned projects without additional capital. In
January 1995, the Company retained Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") to assist in the exploration of possible
strategic alternatives, focusing on alternatives for raising equity and locating
potential investors or strategic partners. In early 1995, the Company had
discussions with potential investors, none of which resulted in a transaction.
At this time, the Company also approached and had numerous discussions with LGE,
with which the Company had a long-term supply relationship and which had already
purchased 4.97% of the Company's Old Common Stock in 1991 for $15 million,
concerning its willingness to make an investment in the Company to provide
capital necessary for the Company's expansion and modernization plans.
Discussions between the Company and LGE resulted in an agreement (the "LGE Stock
Purchase Agreement"), which was approved by the stockholders of the Company. In
November 1995, pursuant to the LGE Stock Purchase Agreement, LGE and LG Semicon
purchased 18,619,000 shares of Old Common Stock at $10.00 per share from the
Company's stockholders pursuant to a tender offer and 16,500,000 newly issued
shares of Old Common Stock at $10.00 per share from the Company. After giving
effect to such transactions, which resulted in a $186.2 million aggregate
payment to the stockholders of the Company and a $165 million capital
contribution to the Company, LGE and LG Semicon owned approximately 57.7% of the
Old Common Stock. Pursuant to the Prepackaged Plan, the $366.2 million equity
investment of LGE and LG Semicon will be cancelled.
Financing Transactions
In 1996 the Company continued to experience price competition in the color
television markets and delays in production of new high-margin products. The
Company's losses accelerated in 1996 and 1997 as it attempted to modernize and
automate its manufacturing facilities. The Company invested heavily in upgrading
portions of its color picture tube operations in Melrose Park and in setting up
a new automated manufacturing line for computer display terminals ("CDTs"). The
Company's CDT line was set up to produce low definition, small screen size
displays. By the time the CDT line was operational, the market for such displays
was limited, having been replaced in demand by higher definition, larger screen
sizes capable of handling the requirements of advanced gaming and software
developments. In order to make the CDT line economically feasible, the Company
would have to invest substantial additional funding. Such funding will not be
available under the Business Plan Projections. Additionally, reconfiguring the
production line would take substantial time and expense relating to the process
of bringing the production line up to capacity.
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After an initial investment of $9.8 million, the Company abandoned its
plans to build a fully automated plant in Woodridge, Illinois to provide larger
screen size picture tubes when the projected cost of the facility significantly
exceeded its budget and available funding.
Despite initiatives to reduce costs, including restructuring some of its
business lines and reducing its workforce, the Company experienced deteriorating
working capital levels. In response, LGE began to provide additional funding to
the Company through extended payment terms on interest bearing acceptances for
products, such as VCRs, manufactured by LGE for the Company. LGE also extended
payment terms to the Company on other payables owed by the Company to LGE.
In 1997, facing decreasing liquidity due to losses of $178 million in 1996
and expenditures in excess of $100 million on the revised expansion and
modernization plan for its Melrose Park facility, the Company sought to
refinance its existing credit facility. During March and April 1997, the Company
entered into financing arrangements with two consortia of financial institutions
led by Citibank. The Company obtained a three year $110 million secured credit
facility (the "Citibank Credit Facility") and a three year trade receivables
securitization facility (the "Citibank Receivables Facility"). In 1997, the
Company also consummated $87 million in sale-leaseback transactions in which the
Company sold and leased back new and existing manufacturing equipment in its
Melrose Park, Illinois plant and the Reynosa, Mexico and Juarez, Mexico
facilities pursuant to the Leveraged Leases.
LGE's credit support in respect of such new financings included a
performance undertaking and letter of credit in connection with the Citibank
Receivables Facility and guarantees in respect of the Leveraged Leases. In
addition, in April 1997, the Company and LGE entered into arrangements pursuant
to which LGE extended a vendor credit line to the Company for a period of up to
three years to finance the Company's purchase of product from LGE. Prior to
April 1997, the Company's accounts payable arising in the ordinary course of
business to LGE were extended for certain periods of time, but no formal
agreement existed. As of December 31, 1996 and 1997, $106.8 million and $144.3
million, respectively, of accounts payable were extended pursuant to these
arrangements. Such extended payables bear interest at market rates. Accounts
receivable from LGE and LG Semicon during such periods were not material at such
dates.
In consideration of such support, the Audit Committee of the Board (the
"Audit Committee"), which is comprised of independent directors of the Board,
approved a guarantee fee equal to 2% of the fair value of the amounts of such
LGE commitments, payable in stock options to purchase 3.9 million shares of Old
Common Stock at an exercise price of $0.01 per share. All such options will be
cancelled pursuant to the Prepackaged Plan.
In August 1997, due to losses of $74.5 million in the first two quarters,
the Company required an additional infusion of cash to meet operating expenses.
The Company received $30.0 million from an LGE subsidiary, representing payments
in advance for 1997 sales of products from the Company to several LGE
subsidiaries. As of March 28, 1998, this liability to LGE had been applied in
full by the Company against amounts owed to the Company by LGE's Canadian
affiliate.
In September 1997, the Company required financing to develop further its
HDTV receiver project, but such funding was not available under its existing
credit arrangements. As a result, LGE agreed to provide $4.5 million in funding
for the HDTV receiver project. LGE is to be repaid the $4.5 million advance,
without interest, from the royalties generated from future VSB licensing.
Due to losses of $143.7 million in the first three quarters of 1997, the
Company was forced to obtain waivers of certain provisions and to amend in
certain respects the Citibank Credit Facility on three separate occasions. The
Company was again compelled to obtain waivers from Citibank in March of 1998.
In October 1997, the Company realized that it would require additional
financing to meet its operating expenses. LGE agreed to provide credit support
for up to $160 million of third-party financing in consideration of a credit
support fee of approximately 2% of the facilities actually obtained by the
Company and guaranteed by LGE (to be paid in cash or equity). This credit
support fee was also approved by the Audit Committee, subject to receipt of an
independent opinion letter. This fee will be converted into New Common Stock
under the Prepackaged Plan. With the credit support of LGE, and following an
amendment to the Citibank Credit
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Agreement and a covenant thereunder requiring the Company to have availability
of $160 million from other lenders on an unsecured basis by December 31, 1997,
between November 1997 and February 1998, the Company entered into a series of
new unsecured financing transactions with each of Bank of America, First
National Bank of Chicago-NBD, Societe Generale, Seoul Branch and Credit Agricole
Indosuez, Seoul Branch, pursuant to which the Company borrowed $102 million. The
Company was unable to obtain additional facilities up to the $160 million level
required under the Citibank Credit Facility. When the Company was unable to
obtain the full $160 million in available unsecured lines, the Citibank Credit
Facility was amended twice to provide that the Company had until June 1998 to
obtain the additional financing. In connection with the Unsecured Bank Loans,
the Company and LGE entered into a reimbursement agreement (as amended, the
"Reimbursement Agreement") pursuant to which the Company agreed to reimburse LGE
for amounts paid pursuant to the guarantees and granted liens, junior to the
lien securing the Citibank Credit Facility, in favor of LGE on the capital stock
of the Company's domestic subsidiaries and the equipment, real property and
intellectual property of the Company and its Subsidiaries (other than tuner and
VSB patents, patent royalties and related license agreements) to secure these
reimbursement obligations. In December 1997 and January 1998, in connection with
and as a requirement to being able to obtain other unsecured financing,
including the Unsecured Bank Loans, the Company redeemed the remaining $25
million of aggregate principal amount under its 8.5% Senior Subordinated
Convertible Debentures due November 2000 and January 2001 at a redemption price
of 104% of such principal amount, plus accrued interest through the redemption
date. Without defeasing or calling such debentures, the Company would have been
unable to obtain the additional financing necessary for continuing working
capital and operating requirements of the Company.
In March 1998, the Company entered into that certain Demand Note dated
March 31, 1998 issued by the Company to LGE, which provides for borrowings of up
to $45 million (the "LGE Demand Loan Facility"). The term of the facility is one
year from the date of the first borrowing, subject to LGE's right to demand
repayment at any time after June 30, 1998. In June 1998, this facility was
amended to provide that, in the absence of an event of default, demand for
repayment may not occur prior to December 31, 1998. Repayment is due in full at
the end of the term. The facility is secured by a second lien on the assets that
secure the Company's obligations under the Reimbursement Agreement and a second
lien on the Company's VSB patents.
In June 1998, LGE paid $50 million of the Unsecured Bank Loans pursuant to
its guarantees of those obligations. Pursuant to the Reimbursement Agreement,
the Company is obligated to LGE for these payments plus interest.
On July 22, 1998, LGE made a negotiated settlement payment of $90.1 million
under the guarantees of the Leveraged Leases. The Company is obligated under
documents related to the Leveraged Leases for the repayment of this settlement
amount.
Other Transactions with LGE
In the ordinary course of its business, the Company purchases VCRs,
television-VCR combinations and various components from LGE and its affiliates
at prices comparable to amounts charged by LGE to other customers, but with
payment terms that are more favorable to the Company than are granted to other
third-party purchasers. The Company purchased $93.3 million and $128.8 million
of these items in 1997 and 1996, respectively. The Company also purchased
approximately $40 million of production machinery and equipment from LGE during
1996 and 1997, of which the majority related to the manufacture of computer
display tubes. LGE also acted as a purchasing agent on behalf of the Company for
certain production machinery and equipment. LGE received no compensation for
such services. The Company sells televisions, picture tubes, yokes and other
manufactured subassemblies to LGE and its subsidiaries at prices that are
comparable to amounts charged by the Company to its major customers. Sales in
1997 and 1996 by the Company to LGE and to subsidiaries of LGE were $55.1
million and $29.4 million, respectively.
In an effort to reduce costs and increase marketing efficiencies, in
December 1996, the Company closed its wholly-owned Canadian distributor and sold
the remaining inventory to LGE at book value. The Company
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entered into a distributor agreement with an LGE subsidiary whereby such
subsidiary became the Canadian distributor for the Company (the "Distributor
Agreement"). During 1997, the Company entered into a similar agreement for
similar reasons with an LGE subsidiary in Mexico to sell the Company's products
in Mexico.
The Company and LGE are currently operating under several technology
agreements and licenses related to 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 television tuners. LGE's payments to the Company
in 1997 and 1996 under these agreements and licenses were $0.6 million and $1.0
million, respectively.
In 1996 and 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 in 1997 and were not material in 1996. In addition, employees of LGE
provided certain services to the Company at cost in 1997 that were covered under
service agreements. The Company's obligations to LGE for such services totaled
$4.8 million. The Company currently leases space from LGE subsidiaries (i) in
Huntsville, Alabama, for its Parts & Service group, (ii) in Ontario, California,
for a warehouse and (iii) in San Jose, California, for NWS. In addition, a U.S.
affiliate of LGE has provided a guarantee of the Company's obligations under the
employment agreement and indemnity agreement with Jeffrey P. Gannon, the
Company's President and Chief Executive Officer.
For a description of other arrangements between the Company and LGE, see
"CERTAIN TRANSACTIONS."
The Development of the Restructuring
In August 1997, as a result of the Company's worsening operational
performance, the Company and LGE began evaluating the Company's business and
operations to identify possible means by which the Company's operations could be
improved. LGE also explored through the fall of 1997 the possibility of bringing
in a partner, but such a strategy appeared untenable due to the Company's
persistent losses and the absence of any concrete business plan or strategy to
return to profitability. LGE believed that the Company could not demonstrate to
a potential investor the means by which an investment in the Company would
generate an attractive return.
In October 1997, as the Company began to evaluate options for additional
financing or capital in light of its continuing cash requirements and continuing
losses from operations, LGE began to consider its future strategy with the
Company. Beginning in November 1997, LGE faced increasing financial pressures
due to the broad deterioration of the Korean economy and the effect of such
developments on LGE. The uncertain economic and political situation made it less
clear that LGE would be able or willing to continue to provide funding for the
Company's operating losses, which losses in 1997 totaled $299.4 million. In
November 1997, LGE engaged legal counsel to assist it in connection with a
possible financial restructuring of the Company. In addition, LGE introduced the
Company to PJSC, with which LGE had been in communication regarding PJSC's
possible engagement by LGE to assist LGE in connection with a possible
reorganization of the Company. Following such introduction, the Board retained
PJSC to act as the Company's investment banker and financial advisor in
evaluating the Company's strategic and financial alternatives.
The Company and the Board retained PJSC based on its experience in the
restructuring of other public companies in similar types of transactions. The
Company engaged PJSC pursuant to an engagement letter dated November 28, 1997,
as amended. See "Estimated Fees and Expenses -- Advisors."
In December 1997, LGE informed the Company that it was considering, in
general terms, possible courses of action, and determined to continue to provide
funding to the Company on a limited basis while a new business plan was being
developed. LGE also advised the Company, in response to a request for additional
funding, that the Company needed to develop a detailed business plan and
complete its search to engage a new chief executive officer.
On January 12, 1998, the Board elected Jeffrey P. Gannon as President and
Chief Executive Officer of the Company, and elected Robert N. Dangremond as
Acting Chief Financial Officer of the Company. The Company also engaged Jay Alix
& Associates ("Jay Alix") as restructuring advisors. Jay Alix was engaged by
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the Company based on its prior experience in the restructuring of other public
companies in similar types of transactions. Robert N. Dangremond, a principal
with Jay Alix, served as the Company's Acting Chief Financial Officer from
January 1998 to June 1998, and currently serves as the Company's Senior Vice
President, Restructuring. Mr. Dangremond has served as chief executive officer
and as a director of other companies which have undergone restructuring,
including companies which have sought protection under the Bankruptcy Code.
Other Jay Alix employees serve in financial positions at the Company. The
Company has engaged Jay Alix pursuant to an engagement letter dated as of
December 1997, as amended, under which Jay Alix agreed to assist the Company in
business planning, cash management and forecasting, financial reporting,
contingency and restructuring planning and such other matters as may be mutually
agreed upon. See "Estimated Fees and Expenses -- Advisors."
Also in January 1998, the Company's independent auditors communicated to
management of the Company and the Audit Committee that the Company's 1997
financial statements would likely contain an explanatory paragraph that
describes the significant uncertainty about the Company's ability to continue as
a going concern due to recurring losses and a negative working capital position,
and that the Company's financial statements do not reflect any adjustment that
might result from the outcome of this uncertainty.
During January and February 1998, Mr. Gannon and his management team began
developing a new business strategy, while at the same time implementing a number
of changes designed to reduce costs and improve revenues. In February 1998, the
Company's management presented a proposed strategy for the Company to the Board
and outlined its key elements, including cessation of substantially all
manufacturing operations, outsourcing of most product lines and focusing on
sales, distribution and technology. Such strategy addressed the need for
additional credit sources, the possibility of a strategic investment in the
Company, the sale of certain of the Company's assets or businesses, recruiting
and retention programs and work force restructuring, the search for partners to
aid in market development, steps in the transition from manufacturing to
outsourcing and the need to explore opportunities to improve the value of VSB
rights.
During January and February of 1998, LGE monitored the Company's
performance and evaluated the business plan being developed by new management of
the Company as it considered its strategy with the Company. LGE retained Lazard
Freres & Co. LLC ("Lazard") as of February 1, 1998 to act as its investment
banker to assist LGE's evaluation of restructuring alternatives.
During February and March 1998 and under the direction of Mr. Gannon,
members of management and PJSC began identifying potential investors, joint
venture partners and other sources of capital and investigating industry or
technological synergies that the Company might have with such parties. Beginning
in this period (and continuing through June), the Company and PJSC, at the
direction of the Company, contacted numerous parties concerning a transaction
and discussed the Operational Restructuring and the Company's strong brand and
distribution and technology capabilities. LGE supported management's effort to
attract a new investor or joint venture partner and provided introductions to
certain potential investors. While several parties indicated that they might
have some interest in providing the Company with outsourced product under the
Operational Restructuring, no party approached in this effort expressed an
interest in an investment or other transaction with the Company sufficient to
provide the funding to the Company to implement the Operational Restructuring.
At a meeting on March 11, 1998, LGE reported to the Board that it was
considering whether and on what terms it would be prepared to participate in a
long-term restructuring of the Company. In addition, LGE anticipated that
approval of several Korean government ministries would be required for any such
participation and expressed concern that the economic and political situation in
Korea at that time might adversely impact its participation in any such
long-term restructuring of the Company. On March 12, 1998, LGE's advisors
provided the Company with a timeline and conditions related to a possible
long-term restructuring in the event that LGE determined it would provide
financial support in connection with any such restructuring. The outline
contemplated, subject to LGE's willingness and ability to proceed, that the
restructuring would be accomplished pursuant to a prepackaged plan of
reorganization, but did not make any specific proposal with respect to the
treatment of any Class of Claims or Equity Interests, including the Claims and
Equity Interests of LGE. The conditions included: (i) the continued service of
Mr. Gannon as Chief Executive Officer of the Company;
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(ii) the formulation and implementation of detailed programs satisfactory to LGE
for the Company to outsource production, the sale of certain nonessential assets
and maximization of the value of VSB technology; (iii) the availability of at
least $150 million of financing from sources other than LGE; (iv) business
results consistent with the Company's business plan; (v) the absence of default
under any LGE short-term financing; (vi) LGE's satisfaction with the terms of
the restructuring, including the availability of releases in favor of LGE and
Zenith's officers and directors; (vii) Korean governmental approvals; and (viii)
various other customary conditions. Notwithstanding the possibility of LGE
support of a long-term restructuring, the Company continued to explore all
possible restructuring and financing alternatives, including investments in the
Company, the sale of all or certain of the Company's assets, possible
partnerships or alliances and additional financing sources as alternatives to an
LGE-sponsored restructuring.
On March 26, 1998, the Board established the Special Committee, comprised
of independent directors T. Kimball Brooker, Eugene B. Connolly, Andrew McNally
IV and Peter S. Willmott, and authorized the Special Committee to assess and
negotiate along with management any proposal made by LGE with respect to
providing long-term financial support necessary or appropriate to allow the
Company to pursue its proposed business plan. At its first meeting on March 29,
1998, the Special Committee retained Sidley & Austin as its special counsel.
Prior to this time, Sidley & Austin had regularly acted as one of the Company's
outside counsel.
At the end of March 1998, LGE made the $45 million LGE Demand Loan Facility
available to the Company, which was secured by a second lien on the assets
securing the Company's obligations under the Reimbursement Agreement and a
second lien on the Company's VSB patents. The loan was intended to provide
sufficient funds for operations of the Company through June 30, 1998 and to
provide additional time for the Company to refine its business plan and for LGE
to decide whether it would participate in a restructuring of the Company. The
Special Committee recommended the terms of the LGE Demand Loan Facility to the
Board which approved the LGE Demand Loan Facility.
During March and early April of 1998, the Company, LGE and their advisors
considered alternatives for the Company, including attracting a new investor for
the Company, a cash-out merger, a traditional chapter 11 reorganization, a
liquidation and a prepackaged plan of reorganization. LGE favored the
Prepackaged Plan, and rejected other alternatives, for the reasons stated in
"-- Alternatives to Confirmation and Consummation of the Prepackaged Plan" and
"-- LGE's Position Regarding the Financial Restructuring." Discussions among the
Company, the Special Committee and representatives of LGE concerning possible
restructuring alternatives continued throughout April and May of 1998. During
this time, advisors to LGE presented to management and the Special Committee for
discussion purposes possible terms and conditions for a financial restructuring
pursuant to a prepackaged plan of reorganization. Such terms included a pro rata
distribution to holders of the Old Subordinated Debentures of new 10% debentures
(with no convertibility feature) with an aggregate face value of $26 million to
mature in 2011, pursuant to an indenture with substantially the same terms as
the Old Subordinated Debenture Indenture, in exchange for their Old Subordinated
Debentures, and treatment of other Classes of Claims and Equity Interests on
terms substantially similar to those set forth in the Prepackaged Plan.
The Special Committee, in person or by conference telephone, met seven
times in April and May to consider various long-term financing alternatives for
the Company, including the financial restructuring outlined by LGE. The Special
Committee discussed and reviewed with PJSC and the Company certain preliminary
going concern and liquidation scenarios as well as certain related hypothetical
sensitivity analyses and discussed and reviewed with management and LGE the
Company's business plan at the time and the various alternatives for the Company
on a going-forward basis. In light of the expressed intention of LGE to include
releases in favor of itself in a possible restructuring, the Special Committee
discussed and reviewed with its special counsel the reasonableness and effects
of any such releases. Throughout this period, the Special Committee, the
Company's management and their advisors and representatives of LGE continued
their discussions and negotiations concerning the terms of a financial
restructuring. As a consequence of those negotiations, LGE eventually proposed,
as part of an overall restructuring to be consummated through a prepackaged plan
of reorganization, that holders of the Old Subordinated Debentures would receive
a pro rata
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distribution of the New Subordinated Debentures (i.e., $40 million of New
Subordinated Debentures) in exchange for their Old Subordinated Debentures.
At a Special Committee meeting on May 21, 1998, PJSC presented to the
Special Committee and to the Company's management and their advisors a report
summarizing the history of the negotiations and PJSC's preliminary analyses of
the terms of the proposed financial restructuring as negotiated with LGE. PJSC
advised the Special Committee that, based upon the going concern and liquidation
analyses and reasonable variations of the assumption contained therein, no value
existed for the holders of Old Common Stock. PJSC further advised the Special
Committee (and subsequently the Board) based upon the liquidation analysis, the
holders of unsecured Claims, including the holders of the Old Subordinated
Debentures, were likely to receive no distribution or a lower distribution than
if the Company were restructured as a going concern pursuant to the terms of the
proposed financial restructuring as negotiated with LGE. Mr. Gannon reported to
the Special Committee on the status of contacts with potential acquirors and
outside investors, concluding that no outside party contacted by PJSC or the
Company was presently willing to provide the financing or other investment
required to provide the funding to implement the Operational Restructuring.
Based on the factors described herein, the Special Committee unanimously
recommended to the Board that the Company accept in principle the terms of the
proposed financial restructuring as negotiated with LGE. See "-- Liquidation and
Going Concern Analyses."
At the May 21, 1998 Board meeting, convened subsequent to the Special
Committee meeting of the same date, the Board heard (i) a report from Mr. Gannon
regarding the status of contacts with potential acquirors and outside strategic
investors and (ii) a report from PJSC regarding (A) the status of its efforts in
connection with potential investment in or sale of NWS, (B) the status of
negotiations with prospective lenders and (C) its preliminary valuation analysis
of the Company, both as a going-concern and in a liquidation scenario. The Board
then received a detailed presentation of the terms of the proposed financial
restructuring as negotiated with LGE. The Special Committee reported to the
Board regarding the negotiation process, including the Special Committee's
considerations with respect to the proposed release in favor of LGE, and
concluded its report by recommending that the Board accept in principle the
terms of the proposed financial restructuring as negotiated with LGE. Management
of the Company also recommended that the Board accept such restructuring plan.
After further deliberation, the Board unanimously voted to accept in principle,
and subject to the negotiation and execution of definitive documentation and
final approval thereof, the terms of the proposed financial restructuring as
negotiated with LGE.
Subsequent to the May 21, 1998 Board meeting, management and the Company's
advisors began negotiating the Restructuring Agreement. On July 17, 1998, the
Special Committee met to review the then-current draft of the Restructuring
Agreement, to discuss the Restructuring with the Company's restructuring counsel
and to receive an updated financial analysis from PJSC. Based on such
information, the Special Committee confirmed its earlier decision to approve in
principle the terms of the proposed financial restructuring as negotiated with
LGE. The Special Committee also received an update from management and PJSC
about contacts with possible acquirors or alternative investors, none of which
had been successful.
On July 20, 1998, the Special Committee met by conference telephone to
receive a status report. It was advised that certain of the changes to the
Restructuring Agreement which had been requested by it had been agreed to by
LGE, including the elimination of a so-called "no shop" provision.
On July 22, 1998, the Special Committee, based upon discussions with the
Company's restructuring counsel and PJSC, the recommendation of management and
upon various other factors, including the absence of any viable alternatives,
unanimously determined to recommend the Restructuring Agreement to the Board for
its approval.
At a meeting of the Board on July 22, 1998, the Board received a further
report from Mr. Gannon and PJSC regarding the status of contacts with potential
acquirors and stating that no outside party contacted by PJSC or the Company
appeared willing to provide the financing or investment required to provide the
funding to implement the Operational Restructuring. PJSC presented to the Board
its report on a liquidation analysis and a going concern analysis with respect
to the Company, which were based upon information supplied by management of the
Company and the views of various experts relating to certain aspects of the
Company's
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VSB (as defined herein) technologies. PJSC also discussed with the Board the
terms of the Business Plan Projections and the terms of the Restructuring
Agreement. The Special Committee reported its recommendation to the Board that
the Restructuring Agreement be approved. Management of the Company also
recommended that the Board accept the Restructuring Agreement as negotiated. The
Board unanimously voted to approve the terms of the Restructuring Agreement,
subject only to management's completion of documentation.
PURPOSES AND EFFECTS OF THE FINANCIAL RESTRUCTURING
The purpose of the Financial Restructuring is to reduce the Company's debt
service obligations, to facilitate future borrowing to fund liquidity needs and
to permit it to implement the Operational Restructuring. The Prepackaged Plan
will reduce the Company's overall debt and other obligations by approximately
$300 million by exchanging (i) $200 million of debt and other liabilities owed
to LGE for the New Common Stock; (ii) the Old Subordinated Debentures in an
aggregate principal amount of $103.5 million plus accrued interest thereon for
New Subordinated Debentures in an aggregate principal amount of $40 million; and
(iii) approximately $32.4 million of indebtedness to LGE for the Reynosa Assets,
which have an appraised value equal to such amount. In addition, assuming
consummation of the Prepackaged Plan, on a projected basis as of December 31,
1998, the Company's annual interest obligations are expected to be reduced by
approximately $25 million in 1999 (compared to interest charges in 1999 if the
Restructuring had not occurred).
As a result of the Financial Restructuring, the Company will also have
significantly more liquidity. For example, the Company's cash interest
obligations will be reduced because the LGE New Restructured Senior Note will
have a PIK interest feature. In addition, pursuant to the Restructuring
Agreement, LGE has agreed to provide additional credit support of up to $60
million pursuant to the LGE New Credit Support. Finally, the Company is in
discussions with potential lenders regarding credit facilities following
Consummation of the Prepackaged Plan. The combination of the PIK feature of the
LGE New Restructured Senior Note, the LGE New Credit Support and the financing
to be provided by a third-party lender is expected to enhance the liquidity of
the Company following the Consummation of the Prepackaged Plan.
Finally, as a consequence of the Financial Restructuring, the Old Common
Stock will be cancelled and the holders of the Old Common Stock (including LGE
and LG Semicon) will receive no distributions and retain no property in respect
of their holdings of Old Common Stock under the Prepackaged Plan. See "SPECIAL
FACTORS -- Purposes and Effects of the Financial Restructuring."
LGE AGREEMENTS RELATED TO COMMON STOCK
On March 25, 1997, LG Semicon granted LGE an irrevocable proxy to vote all
shares of common stock owned by LG Semicon. By its terms, the proxy terminates
after thirteen years. On March 3, 1998, LGE purchased 2,000,000 shares of Old
Common Stock from LG Semicon.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PREPACKAGED PLAN
If the Company commences the Prepackaged Chapter 11 Case and the
Prepackaged Plan is not subsequently confirmed by the Bankruptcy Court and
consummated, the alternatives include (i) liquidation of the Company under
chapter 7 or chapter 11 of the Bankruptcy Code and (ii) confirmation of an
alternative plan of reorganization under chapter 11 of the Bankruptcy Code.
Liquidation Under Chapter 7 or Chapter 11
If no plan of reorganization is confirmed (and in certain other
circumstances), the Prepackaged Chapter 11 Case may be converted to a case under
chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be elected
or appointed to liquidate the assets of the Company for distribution to
creditors in accordance with the priorities established by the Bankruptcy Code.
A discussion of the potential effects that a chapter 7 liquidation would have on
the recovery of holders of Claims and Equity Interests is set forth under
"LIQUIDATION ANALYSIS." In a liquidation, the assets of the Company would be
sold in exchange for
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cash, securities or other property, which would then be distributed to
creditors. In contrast to the Prepackaged Plan (or an alternative reorganization
under chapter 11 of the Bankruptcy Code) in which creditors would receive debt
or equity securities of the Company and would be subject to the risks associated
with holding such securities, in a liquidation creditors might receive cash or
other assets which are not subject to those risks. See "RISK FACTORS." However,
the Company believes that liquidation under chapter 7 would result in smaller
distributions (and, as to certain Classes, no distributions) as compared to
those provided for in the Prepackaged Plan because of, among other things, (i)
failure to realize the greater going concern value of the Company's assets and
the erosion in value of assets in a chapter 7 case due to the expeditious
liquidation required and the "forced sale" atmosphere that would prevail, (ii)
additional administrative expenses involved in the appointment of a trustee and
professional advisors to such trustee and (iii) additional expenses and Claims,
some of which would be entitled to priority, which would be generated during the
liquidation and from the rejection of leases and other executory contracts in
connection with a cessation of the operations of the Company. In addition, a
chapter 7 liquidation is likely to result in substantial litigation and delays
in ultimate distributions to creditors. In the event of a chapter 7 liquidation,
the Company believes that there would not be sufficient assets to make any
distribution to any unsecured creditors.
In a liquidation under chapter 11, the Company's assets could be sold in an
orderly fashion over a more extended period of time than in a liquidation under
chapter 7, potentially resulting in somewhat greater (but indeterminate)
recoveries. Although preferable to a chapter 7 liquidation, the Company believes
that a liquidation under chapter 11 would still not realize the full going
concern value of the Company's assets or the value of the accumulated NOLs.
Consequently, the Company believes that a liquidation under chapter 11 is a less
attractive alternative to creditors than the Prepackaged Plan because of the
likelihood of a greater recovery provided for by the Prepackaged Plan. See "THE
PREPACKAGED PLAN" and "LIQUIDATION ANALYSIS."
Alternative Plans of Reorganization
If the Prepackaged Plan is not confirmed, the Company (or, if the exclusive
period in which to file a plan of reorganization has expired or is terminated by
the Bankruptcy Court, any other party in interest) could attempt to formulate a
different plan of reorganization. Such a plan might involve either a
reorganization and continuation of the Company's business or an orderly
liquidation of its assets.
The Company believes that the Prepackaged Plan is a significantly more
attractive alternative than these alternatives, because it could, among other
things, maximize the value of the Company's NOLs, minimize disputes during such
proceeding concerning the reorganization of the Company, significantly shorten
the time required to accomplish the reorganization, reduce the expenses of a
case under chapter 11 of the Bankruptcy Code, minimize the disruption of the
Company's business that would result from a protracted and contested bankruptcy
case and ultimately result in a larger distribution to creditors than would
other types of reorganizations under chapter 11 of the Bankruptcy Code or a
liquidation under chapter 7 or chapter 11 of the Bankruptcy Code. The Company's
ability to implement the Operational Restructuring is dependent upon the
confirmation and consummation of the Prepackaged Plan.
GOING PRIVATE TRANSACTION
As of June 30, 1998, there were issued and outstanding 67,525,447 shares of
Old Common Stock and approximately 11,481 holders of record of Old Common Stock.
As a consequence of the Financial Restructuring, the Old Common Stock will be
cancelled (including that of LGE and LG Semicon) and the holders of the Old
Common Stock (including LGE and LG Semicon) will receive no distributions and
retain no property in respect of their holdings of the Old Common Stock. The
Company believes that the Old Common Stock has no value, and after evaluating
various factors, the Board believes that the Financial Restructuring provides
the Company with best opportunity to enhance its long-term viability. See
"-- Recommendation of the Board."
In satisfaction of the LGE Tranche B Claims of $200 million, LGE will
receive all of the issued and outstanding New Common Stock of New Zenith. After
consummation of the Financial Restructuring, all of
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the outstanding New Common Stock of New Zenith will be held by LGE and thus,
with respect to such New Common Stock, New Zenith will no longer be subject to
the proxy rules under the Exchange Act.
The New Subordinated Debentures will not be convertible. However, the New
Subordinated Debentures will continue to be publicly held after the Financial
Restructuring and New Zenith will remain subject to the reporting requirements
under the Exchange Act.
RECOMMENDATION OF THE BOARD
The Special Committee of the Board has unanimously recommended to the
Board, and the Board has unanimously approved, the Restructuring Agreement and
the Prepackaged Plan. Since the holders of the Old Common Stock will receive no
distributions and retain no property under the Financial Restructuring, they are
deemed to reject the Prepackaged Plan and are not entitled to vote. See "THE
PREPACKAGED PLAN -- Confirmation Standards." Thus, the following discussion of
the Financial Restructuring as it affects the holders of Old Common Stock is for
disclosure purposes only.
The following is a summary of the material factors considered by the
Special Committee in reaching its recommendation to the Board.
(1) Going Concern Valuation and Liquidation Analyses. The Special
Committee considered analyses of the value of the Company's assets based
both on the continuation of the Company as a going concern and on the
liquidation of the Company's assets. These analyses were prepared by PJSC
based on information supplied by management, including the proposed
business plan as of April 16 and June 26, 1998. The analyses also took into
account the views of various experts on the value of the Company's VSB
technology. In the course of its discussions with representatives of LGE,
the Special Committee reviewed a number of possible alternatives and
scenarios for the analyses, including the risks associated therewith, and
believed that the assumptions underlying the going concern valuation and
the liquidation analysis were reasonable. The Special Committee believed
that the optimal outcome for the Company was a restructuring in which LGE
participates for a number of reasons, including the Company's ability to
realize greater value due to its ability to utilize the Company's NOLs.
The Special Committee noted that under both the going concern analysis
and the liquidation analysis there was no value available to holders of
Equity Interests, and that under the terms of the proposed financial
restructuring as negotiated with LGE, even considering the release
requested by LGE, the treatment offered to holders of Impaired Claims was
equal to or greater than the amount that would be received by such holders
in the hypothetical absolute priority distribution of the Company's assets,
under both the going concern valuation and the liquidation valuation.
The Special Committee also noted that under the terms of the proposed
financial restructuring as negotiated with LGE, the amount to be received
by LGE with respect to its unsecured Claims is reasonable in comparison to
the amount offered to holders of the Old Subordinated Debentures (as a
percentage of such Claims). The Special Committee concluded that the more
favorable treatment of other Classes of unsecured Claims was appropriate,
because (a) such treatment is essentially being funded at the expense of
LGE, and not the holders of the Old Subordinated Debentures, and (b) the
Company's ability to announce favorable treatment of trade creditors would
optimize value for the benefit of all Classes of Claims and the Company as
a whole.
Based on the foregoing, the Special Committee viewed the going concern
and liquidation analyses as strongly supporting its recommendation to the
Board that it approve the terms of the financial restructuring as
negotiated with LGE.
(2) Available Alternatives. In the course of its negotiations with
LGE, the Special Committee considered several alternatives to the terms of
the proposed financial restructuring as negotiated with LGE, including
continued interim financing by LGE, significant investment by a strategic
investor, a cash-out merger, an "exchange" or "rights" offering pursuant to
the 1933 Act and the sale of all or a portion the Company or all of its
assets.
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The Special Committee rejected each of these alternatives as
unworkable or inappropriate because the Company does not believe a
third-party interested in providing the required capital (such as strategic
investors or buyers for the Company as a whole) exists, and because such
alternatives did not resolve the Company's need to restructure its
obligations on a long-term basis in order to reduce debt service
obligations.
(3) Procedural Considerations. In evaluating the aggregate
consideration available for distribution under the terms of the proposed
financial restructuring as negotiated with LGE, the Special Committee
considered the fact that the terms of the proposed financial restructuring
as negotiated with LGE resulted from an arm's length negotiation process
which was designed to obtain the maximum amount of proceeds for the
Company. These negotiations were held between representatives of and
advisors to LGE, on the one hand, and the Special Committee, the Company
and their respective advisors, on the other hand. Such arm's length
negotiation process resulted in various changes and modifications to the
terms of the financial restructuring as initially proposed by LGE which
improved the status of certain Claims and resulted in an enhanced
distribution of proceeds. It was the belief of the Special Committee that
no further improvements in the terms of the proposed financial
restructuring as negotiated with LGE could be obtained by additional
negotiation with LGE.
With respect to the procedural fairness of a prepackaged bankruptcy
proceeding to the holders of the Old Subordinated Debentures, the Special
Committee noted that (i) confirmation of a prepackaged plan would require that
the Bankruptcy Court find that the prepackaged plan is in the "best interests"
of the holders of the Old Subordinated Debentures who do not vote to accept the
prepackaged plan; and (ii) any holder of the Old Subordinated Debentures that
objects to the confirmation of a prepackaged plan will be entitled, subject to
compliance with the procedural, standing and other requirements of the
Bankruptcy Code, to file an objection with the Bankruptcy Court and to have such
objection considered at the Confirmation Hearing. See "-- Events Leading to the
Restructuring" and "THE PREPACKAGED PLAN -- Confirmation Standards."
A finding by the Bankruptcy Court that a prepackaged plan is in the "best
interests" of the holders of the Old Subordinated Debentures who do not vote to
accept such prepackaged plan generally means that the court has determined that
they will receive property of a value that is not less than the value such
holders would receive if the debtor were liquidated under chapter 7 of the
Bankruptcy Code on the effective date of the prepackaged plan. Such a finding
does not necessarily imply that the prepackaged plan is fair to the holders of
Claims in all respects. However, it provides a significant procedural safeguard
to the holders of Claims in that it requires that the Bankruptcy Court determine
that the value of the consideration to be paid to the holders of such Claims in
the prepackaged plan exceeds the value of the distributions they would receive
in a hypothetical chapter 7 liquidation. See "-- Alternatives to Confirmation
and Consummation of the Prepackaged Plan" and "THE PREPACKAGED
PLAN -- Confirmation Standards."
The Board considered the following material factors, each of which, in the
view of the Board, supported its determination to approve and recommend the
terms of the proposed financial restructuring as negotiated with LGE to the
holders of the Old Subordinated Debentures: (1) the conclusions and
recommendations of the Special Committee; (2) the considerations referred to
above as having been taken into account by the Special Committee, including the
analyses of PJSC, and (3) the fact that the terms of the proposed financial
restructuring as negotiated with LGE were the result of arms-length negotiations
between the Special Committee, management and LGE and their respective advisors.
In evaluating the foregoing factors, the members of the Board, including
the members of the Special Committee, evaluated the terms of the proposed
financial restructuring as negotiated with LGE based upon their business
judgment and in light of their knowledge of and familiarity with, and
information provided by management with respect to, the Company's business,
prospects, financial condition, results of operations and current business
strategy, assets, liabilities and current industry, economic and market
conditions.
The foregoing discussion of the factors and information considered by the
Special Committee and the Board is not intended to be exhaustive, but includes
material factors considered by both the Special Committee and the Board. In view
of the circumstances and the wide variety of factors considered in connection
with its evaluation of the terms of the proposed financial restructuring as
negotiated with LGE, the
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Special Committee and Board did not find it practicable to assign relative
weights to the factors considered in reaching its determination to recommend the
terms of the proposed financial restructuring as negotiated with LGE to the
holders of the Old Subordinated Debentures.
The Company believes that the Prepackaged Plan complies with all applicable
requirements for confirmation under 11 U.S.C. sec. 1129, including that the
Prepackaged Plan is fair and equitable with respect to each Class of Claims and
Equity Interests.
LGE'S POSITION REGARDING THE FINANCIAL RESTRUCTURING
LGE has concluded, based on the liquidation and going concern analyses
presented to the Board by PJSC and the fact that the terms of the proposed
financial restructuring as negotiated with the Company were the result of
negotiations with the Company and its advisors, including PJSC and the Special
Committee, the expected cost of a prolonged liquidation or traditional
bankruptcy proceeding as compared to the cost of the Restructuring, and based
upon discussions with LGE advisors, that LGE is willing to proceed with the
Restructuring pursuant to the Restructuring Agreement. LGE did not find it
practicable to, and did not, quantify or otherwise attach relative weights to
such factors. LGE has made no recommendation in support of or in opposition to
the Prepackaged Plan but has agreed to vote its Claims in favor of the
Prepackaged Plan.
LGE engaged Lazard to act as its investment banker in connection with the
Restructuring. Lazard was retained based on its prior experience in
restructurings of other public companies in similar types of transactions.
Lazard has not provided investment banking services to LGE or its affiliates
(including the Company) in the last two years. LGE retained Lazard to assist it
in reviewing the analyses prepared by PJSC and to advise LGE with respect to,
and to assist in, the negotiation of a restructuring of the Company. The terms
of the proposed financial restructuring were the result of arms-length
negotiations among the Company, the Special Committee and their advisors, on the
one hand, and LGE and its advisors, on the other. Lazard was not engaged to and
did not render an opinion, valuation or appraisal, make any finding or make any
recommendation with respect to the terms of the proposed financial restructuring
as negotiated with the Company. With Lazard's advice, LGE formulated its
proposed revised capital structure for the Company, including the amount of
indebtedness that should be converted into LGE New Restructured Senior Note
versus New Common Stock.
LIQUIDATION AND GOING CONCERN ANALYSES
At a meeting of the Board on July 22, 1998, the Board considered certain
liquidation and going concern analyses with respect to the Company developed by
PJSC based upon information supplied by management of the Company and the views
of various experts relating to certain aspects of the Company's VSB
technologies. These analyses concluded that there was no value available to
holders of the Company's Equity Interests, and that the value offered holders of
Impaired Claims under the Prepackaged Plan was equal to or greater than the
amount that would be received by such holders in the hypothetical absolute
priority distribution of the Company's assets in bankruptcy, under both the
going concern valuation and the liquidation valuation. These analyses also
concluded that under Financial Restructuring, LGE is offered less with respect
to its unsecured Claims than are holders of the Old Subordinated Debentures (as
a percentage of such Claims). See "SPECIAL FACTORS -- Recommendation of the
Board."
In preparing the liquidation and going concern analyses, PJSC: (i) reviewed
the Business Plan Projections, dated June 26, 1998; (ii) reviewed the financial
terms and provisions of the Financial Restructuring; (iii) reviewed certain
historical, financial and other information for recent years and interim periods
that was publicly available or furnished to PJSC by the Company, including
information provided during discussions with representatives thereof; (iv)
compared certain financial and securities data of the Company with various other
companies deemed generally comparable to the operating business of the Company
whose securities are traded in public markets; and (v) conducted such other
financial studies, analyses and investigations as PJSC deemed appropriate for
purposes of preparing its analyses. The following is a brief summary of the
liquidation and going concern analyses. For purposes of this summary, "Company
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Peer Group" means Hitachi, Ltd., Matsushita Electric Industrial Co., Mitsubishi
Electronic Corp., Philips Electronics N.V., Pioneer Electronic Corporation and
Sony Corporation.
Although PJSC conducted a review and analysis of the Company's business,
operating assets and liabilities and business plans, PJSC assumed and relied on
the accuracy and completeness of all financial and other information furnished
to it by the Company and publicly available information. In addition, PJSC did
not independently verify management's projections in connection with its
analyses and, other than with respect to certain fixed assets, no independent
evaluations or appraisals of the Company's assets were sought or obtained.
Liquidation Analysis
The liquidation analysis presented to the Board is substantially identical
to the liquidation analysis set forth below. See "LIQUIDATION ANALYSIS."
Going Concern Analysis
The going concern analysis presented to the Board utilized a discounted
cash flow analysis to separately value the cash flows generated by the Company's
Business Plan Projections, net VSB royalties and net tuner patent royalties. In
the case of the Business Plan Projections, the going concern analysis applies a
range of discount rates from 12% to 16%. To arrive at a terminal value, the
going concern analysis utilizes a range of illustrative sales multiples derived
from the lowest end of the Company Peer Group's latest twelve months sales
multiples discounted by 50% to 66.6% (the "Sales Multiples Approach"). With
respect to VSB, the going concern analysis applies a 25% discount rate to net
VSB royalty income. With respect to tuner patent cash flows, the going concern
analysis applies discount rates ranging from 18% to 22% to net tuner patent cash
flows. In addition, the going concern analysis utilized the following material
assumptions and/or methodologies: (i) with respect to VSB, that the Company will
be able to utilize certain carry-forward tax attributes to offset future taxable
royalty income, (ii) with respect to VSB, that the Company will realize royalty
rates between $5.00/unit and $1.00/unit for different classes of consumer
products, including televisions, video recorders, DVD players/recorders,
converter boxes, satellite boxes, cable boxes, personal computers and computer
add-in cards, (iii) with respect to VSB, that the technology will receive, over
time, varying rates of adoption and absorption in the different classes of
consumer products, (iv) with respect to VSB, that a 25% discount rate applies to
projected royalty fee income cash flows through 2011, (v) with respect to VSB,
that potential value for international VSB royalties is excluded, (vi) with
respect to enterprise value, that the Company's operational performance and
timing of certain material actions will be consistent with the assumptions set
forth in the Business Plan Projections, and (vii) due to the unique character of
the Company's VSB technology, which is not yet commercialized, that the
enterprise value of the Company as a going concern and the domestic value of the
Company's VSB technology are separately valued, and then aggregated to determine
going concern value.
Under the going concern analysis presented to the Board by PJSC, the
Company's enterprise value (which includes indebtedness) was estimated at $125.0
million and domestic VSB technology value was estimated at $180.0 million, for a
total going concern value of $305.0 million.
The going concern and liquidation analyses referred to herein are based
upon a number of significant assumptions. While presented with numerical
specificity, these analyses are based upon a variety of assumptions (which the
Company believes are reasonable) and are subject to significant business,
economic, and competitive uncertainties and contingencies, many of which are
beyond the control of the Company. Consequently, the inclusion of these analyses
herein should not be regarded as a presentation by the Company (or PJSC) that
the values contained in the analyses would be realized, and actual values may
vary materially and adversely from those presented herein. Due to the fact that
such analyses are subject to significant uncertainty and are based upon
assumptions which may not prove to be correct, neither the Company nor any other
person (including PJSC) assumes any responsibility for their accuracy or
completeness. Neither the Company nor PJSC intends to update or otherwise revise
the going concern or liquidation analyses to reflect circumstances existing
after the date hereof or to reflect the occurrence of unanticipated events, even
in the
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event that any or all of the underlying assumptions are shown to be in error,
except as required by applicable law.
Other Board Review
Prior to the July 22, 1998 meeting of the Board, the Board and the Special
Committee reviewed certain preliminary liquidation and going concern analyses
also prepared by PJSC, including at the May 21, 1998 meetings of the Board. The
principal differences between the preliminary analyses previously reviewed by
the Board and the Special Committee and the analyses presented on July 22, 1998
are as follows: (i) the preliminary analyses estimated values as of January 1,
1998, while the final analyses estimated values as of January 1, 1999, the
assumed confirmation date of the Prepackaged Plan, (ii) the preliminary analyses
were generated using financial projections from a preliminary draft of the
Business Plan Projections, while the final analyses incorporated projections
from the Business Plan Projections dated June 26, 1998, (iii) with respect to
VSB, the final valuation analyses utilize reduced royalty revenue projections to
reflect projected royalty-free cross-licenses, which were not included in the
preliminary analyses, and (iv) the final valuation analyses substantially
reduced the projected value of LGE's secured claim against the Company arising
from the leveraged lease guaranty based on updated asset valuations of such
assets. In addition, with respect to the liquidation analyses, (A) the final
analysis utilized updated asset realization percentages derived from a more
detailed analysis of projected asset class recoveries by the Company's
management, and (B) the final analysis assumed that projected liquidation
recoveries from certain Mexican assets of the Company would be net of projected
liquidation and severance costs associated with such assets. With respect to the
going concern analyses, (A) the enterprise value in the preliminary analysis was
derived from a 14.0x earnings before income and taxes ("EBIT") multiple (the
median enterprise value multiple of last twelve months EBIT derived from the
Company Peer Group) and a 12% discount rate (the weighted average cost of
capital of the Company Peer Group), while the enterprise value for the final
analysis was derived from a Sales Multiples Approach, and (B) in the final
analysis, the Company's tuner patent technology was separately valued, in part
to better reflect the anticipated cessation of such royalties at the expiration
of their term or otherwise.
THE RESTRUCTURING AGREEMENT
Based upon the agreement in principle of the Board and LGE, in June of
1998, the Company and LGE began to negotiate the terms of a definitive agreement
to effectuate the Financial Restructuring. On August 7, 1998, the Company and
LGE executed the Restructuring Agreement.
The description of the Restructuring Agreement contained in this Disclosure
Statement describes the material terms of the Restructuring Agreement but does
not purport to be complete and is qualified in its entirety by reference to the
Restructuring Agreement, a copy of which is included as an exhibit to the
Registration Statement of which this Disclosure Statement forms a part and is
incorporated herein by reference.
The Transactions
In addition to the transactions contemplated by the Financial
Restructuring, the Restructuring Agreement provides that, upon the terms and
subject to the conditions set forth in the Restructuring Agreement, LGE may, at
the option of LGE and the Company, lend to the Company or provide indirect
credit support to the Company, such as a guarantee of financing provided by a
third-party lender, in an amount not to exceed $60 million, to the extent
necessary to enable the Company to implement the Operational Restructuring.
Agreements
Pursuant to the Restructuring Agreement, the Company has agreed to, and to
cause its subsidiaries to, use commercially reasonable efforts to, among other
things, consummate the Financial Restructuring and the other transactions
provided for in the Prepackaged Plan. The Company has also agreed, among other
things, (i) not to consent to any amendment of the Prepackaged Plan or the
Disclosure Statement without the prior written consent of LGE; (ii) to deliver
to LGE prior to August 31, 1998 an implementation program (the
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"Implementation Program"), reasonably satisfactory to LGE, for the
discontinuation of the manufacturing operations of the Company and its
Subsidiaries, the outsourcing of the production of the Company's products and
the maximization of the value of the VSB technology; (iii) to give LGE and its
representatives full access to all properties and records relating to the
Company and its Subsidiaries, keep LGE generally informed as to the Company's
affairs and deliver to LGE certain financial statements; (iv) to promptly notify
LGE if any information is requested from it or any negotiations or discussions
are sought to be initiated with the Company concerning any merger,
consolidation, business combination, liquidation, reorganization, sale of
substantial assets, sale of shares of capital stock, purchase of claims or
similar transactions involving the Company or any subsidiary or any division of
any thereof (an "Alternative Proposal") and promptly communicate to LGE the
terms of any proposal or inquiry which it may receive in respect of any
Alternative Proposal; (v) to deliver to LGE after the end of each fiscal month a
certificate of the Company restating certain representations and warranties
relating to the Business Plan Projections contained in the Restructuring
Agreement; and (vi) to pay LGE each month in arrears (x) all interest accruing
on amounts owed but unpaid by the Company to LGE under the Reimbursement
Agreement and (y) up to $2,635,468 of interest accruing on amounts owed but
unpaid by the Company to LGE under the Financial Support Agreement. The Company
has agreed to conduct business in the ordinary course and to use commercially
reasonable efforts to retain key employees and business relationships. The
Company has agreed not to, and to cause its subsidiaries not to, without the
consent of LGE, (i) acquire or agree to acquire any business or any assets
(other than inventory) that would be material to the Company; (ii) sell, lease,
license or otherwise dispose of any of the assets or properties of the Company
or its subsidiaries other than in the ordinary course of business or pursuant to
the Business Plan Projections; (iii) amend its Certificate of Incorporation or
By-laws; (iv) redeem or otherwise acquire any shares of its capital stock or
issue any capital stock or any option, warrant or right relating thereto; (v)
incur any liabilities, obligations or indebtedness for borrowed money or
guarantee any such liabilities, obligations or indebtedness; (vi) permit or
allow any of the assets or properties of the Company or any subsidiary to be
subject to any lien, subject to certain customary exceptions; (vii) cancel any
material indebtedness or waive any claims or rights of material value; (viii)
make any change in any method of accounting or accounting practice or policy;
(ix) modify, amend, terminate or permit the lapse of any material lease of real
property; (x) enter into any material contract or arrangement; (xi) enter into
any agreement or take any action in violation of the terms of the Restructuring
Agreement or the Restructuring; (xii) settle any material tax audit or make or
change any material tax election, (xiii) hire any new executive officers of the
Company or any of its subsidiaries; (xiv) subject to certain exceptions, grant
any employee of the Company or any of its subsidiaries an increase in
compensation, severance or termination pay, enter into any employment, severance
or termination agreement with any such employee or adopt any new benefit plan or
arrangement or amend any such plan; (xv) enter any new line of business; or
(xvi) agree, whether in writing or otherwise, to do any of the foregoing. The
Company has also agreed to, and to cause its subsidiaries to, (i) use
commercially reasonable efforts to take all actions to fulfill its obligations
in respect of the Restructuring Agreement; (ii) make all filings required under
any applicable law or regulation and use all reasonable efforts to obtain all
permits necessary to be obtained by the Company or any of its subsidiaries,
(iii) cooperate with LGE in exchanging information and supplying assistance in
connection with filings contemplated by the Restructuring Agreement; (iv) not
issue any press release or make any other public statement regarding the
Restructuring without the prior consent of LGE; and (v) perform all obligations
under and comply with all terms and provisions of the Leveraged Leases other
than obligations to pay "Basic Rent" under the Leveraged Leases. The Company has
agreed to promptly notify LGE in writing of any fact, condition, event or
occurrence that could reasonably be expected to result in the failure of any
conditions contained in the Restructuring Agreement to be satisfied.
Pursuant to the Restructuring Agreement, LGE has agreed: (i) subject to
compliance with applicable non-bankruptcy and bankruptcy laws, to vote all
Claims against and Equity Interests in the Company in favor of the Prepackaged
Plan; (ii) to use commercially reasonable efforts to take all actions in order
for it to fulfill its obligations under the Restructuring Agreement, including
making all filings required under any applicable law or regulation, obtaining
all permits necessary to be obtained by LGE or any of its subsidiaries, making
all necessary and desirable appearances before the Bankruptcy Court, and
promptly notifying the Company of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any conditions
contained in the Restructuring Agreement to be satisfied; and (iii) to cooperate
with the Company
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in exchanging information and supplying assistance in connection with filings
contemplated by the Restructuring Agreement and provide the Company with
information regarding LGE's performance and ability to perform under the
Restructuring Agreement.
Conditions to the Consummation of the Restructuring
Each party's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to the following conditions: (i) obtaining
necessary regulatory approvals; (ii) the absence of pending or threatened
litigation, injunctions or restraints in respect of the transactions
contemplated by the Prepackaged Plan or seeking material damages; (iii) the
confirmation by the Bankruptcy Court of the Prepackaged Plan and the existence
of a Final Order with respect to such confirmation; (iv) the notification of the
Company and LGE pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of
1976 and expiration of the applicable waiting period; and (v) to LGE's and the
Company's satisfaction, in their respective sole discretion, that the
Prepackaged Plan contain releases from the Company and its creditors of any
potential claims and liabilities against the individual members of the Board,
the Company and LGE and their respective affiliates and representatives.
The Company's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to the following additional conditions: (i)
the accuracy of LGE's representations and warranties; and (ii) LGE's performance
in all material respects of its obligations under the Restructuring Agreement.
LGE's obligation to consummate the transaction contemplated by the
Restructuring Agreement is subject to various additional conditions, which
include, in addition to certain other customary closing conditions, the
following: (i) the accuracy of the Company's representations and warranties;
(ii) the Company's performance in all material respects of its obligations;
(iii) the retention of Jeffrey P. Gannon and certain key employees, or
replacements who are reasonably satisfactory to LGE; (iv) obtaining new senior
financing by the Company of not less than $100 million on terms reasonably
satisfactory to LGE; (v) LGE's satisfaction with all material changes to the
Business Plan Projections and with the Company's actions under the
Implementation Program; (vi) the Company's operating results being consistent
with the Business Plan Projections; (vii) the absence of any material,
undisclosed, contingent liabilities on the part of the Company; (viii) LGE's
satisfaction with the Arthur Andersen LLP report relating to the Company's June
27, 1998 balance sheet; (ix) LGE's reasonable satisfaction with, and the
Company's filing with the Commission of, the Disclosure Statement; (x) LGE's
satisfaction with the purchase or other agreement with respect to certain
employee benefit plan arrangements and with the agreement relating to the
purchase by LGE of the Reynosa Assets as contemplated under the Prepackaged
Plan, and in the event that such purchase does not occur, the agreement relating
to the operation by LGE of such Reynosa Assets; (xi) the absence of a material
adverse effect on the business, properties, assets, results of operation,
liabilities, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole or on the ability of the Company or its
subsidiaries to consummate the transaction contemplated by the Restructuring
Agreement or to perform their respective obligations under the definitive
transaction agreements to be entered into in connection with the Restructuring
Agreement subsequent to the date of the Restructuring Agreement; (xii) the
absence of any increase or decrease of 20% or more in the United States/Republic
of Korea currency exchange rate from the rate existing on the date of the
Restructuring Agreement (or a suspension of, or limitation on, the markets
therefor), a declaration of a banking moratorium in the United States or the
Republic of Korea, any limitation by any regulatory authority or other event
that materially adversely affects the ability of LGE to consummate the
transactions contemplated by the Restructuring Agreement, or a commencement of a
war or other national or international calamity involving the United States or
the Republic of Korea; (xiii) LGE's satisfaction with any settlement
arrangements with respect to licensing of technology entered into by the Company
with the Sony Corporation or any of its affiliates; (xiv) LGE's determination,
in its sole discretion, that the aggregate tuner patent royalties between the
date of the consummation of the Prepackaged Plan and December 31, 2003 will not
be less than 70% of the aggregate amount of such royalties projected under the
Business Plan Projections; and (xv) the absence of any default or event of
default under any of the Company's financing arrangements or any other agreement
that is material to the Company to which the Company or any of its subsidiaries
is a party or by which any of them is bound.
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Waiver of Conditions
To the extent permitted by law, the Company and LGE may waive any of their
respective conditions set forth in the Restructuring Agreement without notice
to, or approval from, the Bankruptcy Court or any other party.
Termination by Either Party
The Restructuring Agreement may be terminated at any time prior to the
consummation of the Prepackaged Plan by mutual written consent of the Company
and LGE, or by either the Company or LGE if (i) the transactions contemplated by
the Restructuring Agreement shall not have occurred prior to December 15, 1998;
or (ii) any statute shall make consummating the transactions under the
Restructuring Agreement illegal, or any court or other regulatory authority
shall have issued a judgment, order, decree or ruling enjoining the consummation
of the transactions contemplated by the Restructuring Agreement and such
judgment, order, decree or ruling shall have become final and non-appealable.
Termination by LGE
The Restructuring Agreement may also be terminated by LGE if (i) the
Company fails to perform in any material respect any obligation or breaches any
representation or warranty, and the Company fails to perform such obligation or
cure any such breach capable of being cured within 30 days' notice by LGE; (ii)
the Board or the Special Committee withdraws or modifies, in a manner adverse to
LGE (as determined by LGE in its reasonable judgment), its approval or
recommendation of the Restructuring Agreement or the Restructuring; or (iii) any
condition to LGE's obligations under the Restructuring Agreement becomes
impossible to fulfill (other than as a result of any breach by LGE).
Termination by the Company
The Restructuring Agreement may be terminated by the Company if (i) LGE
fails to perform in any material respect any obligation or breaches any
representation or warranty, and LGE fails to perform such obligation or cure any
such breach capable of being cured within 30 days' notice by the Company; (ii)
any condition to the Company's obligations under the Restructuring Agreement
becomes impossible to fulfill (other than as a result of any breach by the
Company); or (iii) there is an Alternative Proposal which the Board in good
faith determines represents a superior transaction for the Company as compared
to the Financial Restructuring, and the Board determines, after consultation
with counsel, that failure to terminate the Restructuring Agreement would be
inconsistent with the compliance by the Board with its fiduciary duties imposed
by law; provided, however, that the Company may not terminate the Restructuring
Agreement (i) if the Alternative Proposal is subject to a financing condition,
unless the Board is of the opinion, after consultation with PJSC or another
nationally recognized investment banking firm, that the Alternative Proposal is
financeable, (ii) if, prior to or concurrently with any purported termination,
(x) the Company or the person or entity that made the Alternative Proposal (the
"New Investor") shall not have paid the Transaction Expenses (as defined below)
contemplated by the Restructuring Agreement and (y) the Company and the New
Investor shall not have entered into a legal, valid and binding agreement with
LGE pursuant to which such New Investor agrees to pay LGE the Transaction Fee
(as defined below) contemplated by the Restructuring Agreement upon the earlier
of (A) the consummation of such Alternative Proposal and (B) the termination of
such Alternative Proposal, or (iii) if the Company has not provided LGE with
five business days' prior written notice of its intent to so terminate the
Restructuring Agreement together with a summary of the material terms and
conditions of such Alternative Proposal.
Effect of Termination
Termination by either the Company or LGE will void the Restructuring
Agreement, without any liability or obligation on the part of LGE or the Company
with respect to the transactions contemplated under the Restructuring Agreement,
except to the extent that such termination results from the willful and material
breach by a party of any of its representations, warranties, covenants or
agreements set forth in the
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Restructuring Agreement, and except under circumstances in which the Transaction
Expenses and the Transaction Fee are due.
Transaction Expenses and Transaction Fee upon Termination under Certain
Circumstances
In the event that (i) the Board or the Special Committee shall have
withdrawn or modified, in a manner adverse to LGE, its approval of the
Restructuring Agreement or the transactions contemplated by the Restructuring
Agreement or by the Restructuring, and LGE terminates the Restructuring
Agreement, (ii) the Bankruptcy Court approves, or enters an order authorizing,
an offer, proposal or agreement to effect an Alternative Proposal, or (iii)
during the period ending twelve months after the termination of the
Restructuring Agreement, the Company consummates, becomes a party to or enters
into an agreement relating to, or publicly announces, an Alternative Proposal,
the Company shall promptly, but in no event later than three business days after
the first of such events to occur, reimburse LGE and its affiliates for all
reasonable out-of-pocket expenses and fees (including, without limitation, fees
and expenses payable to all banks, investment banking firms and other financial
institutions and their respective agents and counsel, for structuring the
transactions contemplated hereby and all reasonable fees of counsel,
accountants, experts and consultants to LGE and its affiliates, and all printing
and advertising expenses) incurred or accrued by it or on its behalf in
connection with the negotiation, preparation, execution and performance of the
Restructuring Agreement and the Restructuring (the "Transaction Expenses");
provided, however, that LGE shall not be entitled to such Transaction Expenses
if the Company terminates the Restructuring Agreement due to a material breach
by LGE of its obligations under the Restructuring Agreement.
In the event that during the twelve months after the termination of the
Restructuring Agreement the Company consummates, becomes a party to or enters
into an agreement relating to, or publicly announces, an Alternative Proposal,
the Company shall, or shall cause the New Investor to, pay LGE a transaction fee
of $8 million (the "Transaction Fee") upon the earlier of (x) the consummation
of such Alternative Proposal or (y) the termination of such Alternative
Proposal.
Withdrawal or Modification of Recommendations
Either the Board or the Special Committee may at any time withdraw or
modify its approval or recommendation of the Restructuring Agreement or the
transactions contemplated thereby or by the Restructuring in the event that it
determines, after consultation with counsel, that failure to so withdraw or
modify its recommendation would not be consistent with compliance with its
fiduciary duties imposed by law; provided, however, that such withdrawal or
modification shall not in any manner release the Company from its obligations
under the Restructuring Agreement unless LGE exercises its right to terminate
the Restructuring Agreement, in which case the termination and expense
provisions of the Restructuring Agreement shall govern.
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BY-LAWS
The Bankruptcy Code requires that upon the confirmation of a plan of
reorganization a debtor's charter documents must contain certain provisions
including a provision prohibiting the issuance of non-voting equity securities.
To comply with such requirement, the Prepackaged Plan provides that the Company
will file an amended Certificate of Incorporation with the Secretary of State of
the State of Delaware in accordance with the Delaware General Corporation Law
(the "Amended Certificate of Incorporation"). The Amended Certificate of
Incorporation will prohibit the issuance of nonvoting equity securities to the
extent required by section 1123(a) of the Bankruptcy Code, change the number of
authorized shares of New Common Stock to 1,000, change the par value of the New
Common Stock to $0.01 and eliminate the authorization of preferred stock. After
the Effective Date, New Zenith reserves the right to amend and restate its
Amended Certificate of Incorporation and other constituent documents as
permitted by the Delaware General Corporation Law. At present, the Company does
not contemplate any such amendments.
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INTERESTS OF CERTAIN PERSONS IN THE FINANCIAL RESTRUCTURING; CONFLICTS OF
INTEREST
In considering the recommendation of the Board with respect to the
Restructuring, holders of Impaired Claims should be aware that the Board and
members of the Company's management have certain interests described below,
which give rise to actual and potential conflicts of interest with respect to
the Prepackaged Plan. The Board was aware of these conflicts in making its
recommendation regarding the Restructuring to holders of the Old Subordinated
Debentures. However, in recommending the Restructuring, the Board itself is
acting upon the recommendation of the Special Committee, which is comprised
solely of independent directors and which the Board had established specifically
to mitigate against some of the conflicts of interests described below. See
"-- Events Leading to the Restructuring."
LGE Directors
The current Board consists of eleven directors. LGE and LG Semicon
beneficially own approximately 56.5% of the Old Common Stock (including vested
but unexercised stock options) and, pursuant to the Company's Charter and
Bylaws, LGE effectively has the power to elect all eleven members of the Board.
In addition, pursuant to the LGE Stock Purchase Agreement, LGE has the
contractual right to designate six members of the Board. Presently, six members
of the Board are officers of and/or affiliated with LGE and/or its affiliates.
Moreover, LGE itself is a creditor of the Company being the holder of the LGE
Claims and a guarantor on behalf of the Company on various credit instruments.
LGE also supplies products to and purchases products from the Company and has a
number of other relationships with the Company. See "-- Events Leading to the
Restructuring -- Other Transactions with LGE." As a result of the foregoing, LGE
has a conflict of interest.
Releases, Indemnifications and Limitations of Liability
In consideration of the contributions of certain parties to the Prepackaged
Chapter 11 Case, including, but not limited to, (i) the commitment and
obligation of LGE to provide the financial support necessary for Consummation of
the Prepackaged Plan, and (ii) the service of certain designated individuals to
facilitate the expeditious reorganization of the Company and the implementation
of the Restructuring, the Prepackaged Plan provides for certain waivers,
exculpation, releases and injunctions. The Prepackaged Plan provides an
injunction barring the commencement or continuation of any Claims released
pursuant to its terms.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, the D&O Releasees and the
Investor Releasees from any and all Claims and causes of action, whether known
or unknown, foreseen and unforeseen, existing or hereafter arising, that the
Company or its Subsidiaries would have been legally entitled to assert in their
own right or on behalf of the holder of any Claim or Equity Interest or other
person or entity against any of them relating to any event occurring on or
before the Effective Date of the Prepackaged Plan. The release of the D&O
Releasees by the Company and its Subsidiaries does not affect certain loans or
contracts such parties have entered into in the ordinary course of business.
In addition, the Prepackaged Plan provides that each holder of any Claim
that has accepted the Prepackaged Plan, whose Claim is part of a Class that has
accepted (or is deemed to accept) the Prepackaged Plan, or that is entitled to
receive a distribution of property under the Prepackaged Plan, is deemed to
release, upon the Effective Date, any and all Claims and causes of action,
whether known or unknown, foreseen and unforeseen, existing or hereafter
arising, that it would have been legally entitled to assert against the D&O
Releasees or the Investor Releasees relating to the Company or its Subsidiaries,
the Prepackaged Chapter 11 Case, or the negotiation, formulation and preparation
of the Prepackaged Plan and related documents.
The Prepackaged Plan also provides that the Company, its Subsidiaries, the
D&O Releasees, and the Investor Releasees shall be exculpated from any liability
to any person or entity (as defined in the Bankruptcy Code) for any act or
omission in connection with or related to the negotiation, formulation,
preparation and Confirmation of the Prepackaged Plan, the Consummation and
administration of the Prepackaged Plan, the Prepackaged Chapter 11 Case, or the
property distributed under the Prepackaged Plan, except by virtue of any willful
misconduct or gross negligence, as determined by a court of competent
jurisdiction.
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The releases and indemnification provisions provided by the Prepackaged
Plan create a conflict of interest for all of the Company's directors and
officers in that such provisions may cause the directors and officers to support
the Prepackaged Plan as opposed to any alternative that did not provide such
releases or indemnification.
Effect of Conflicts of Interest on the Board's Recommendation
Although the Board recognizes the existence of the conflicts of interest
described in the foregoing paragraphs, the Board does not believe that such
conflicts of interest had the effect of causing the terms of the Financial
Restructuring to be different in any material respect than such terms would have
been in the absence of such conflicts of interests. Moreover, the Board
established the Special Committee specifically to address and mitigate against
any potential conflicts of interest. See "-- Events Leading to the
Restructuring."
LIQUIDITY PENDING CONSUMMATION OF THE RESTRUCTURING
Until the Prepackaged Plan is implemented on the Effective Date, the
Company may be required to rely on its cash resources to operate the business of
the Subsidiaries, service certain of its debt and pay other costs. Currently,
the Company has access to funds under the Amended Citibank Credit Facility and
the LGE Demand Loan Facility to supplement cash flow from operations. In
addition, the Company is in discussions with potential lenders regarding DIP
financing during the Prepackaged Chapter 11 Case. As a result, the Company
believes that it will have sufficient cash resources to meet trade obligations,
cover operating and restructuring expenses, fund certain contingencies and
capital expenditures prior to the Effective Date. Upon commencement of the
Prepackaged Chapter 11 Case, the Company intends to seek Bankruptcy Court
approval to pay all pre-petition General Unsecured Claims, including trade
obligations, and intends to pay all post-petition operating expenses (including
trade obligations) in the ordinary course of business.
DISSENTERS' RIGHTS
There are no dissenters' rights available under applicable law with respect
to the Restructuring. If the Prepackaged Plan is confirmed by the Bankruptcy
Court and the Restructuring is consummated in accordance therewith, holders of
the Old Subordinated Debentures that do not vote in favor of the Prepackaged
Plan will nevertheless be bound by all the terms and conditions thereof.
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THE PREPACKAGED PLAN
GENERAL
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of its creditors and stockholders. In
addition to permitting rehabilitation of the debtor, chapter 11 seeks to promote
equality of treatment of creditors and equity security holders of equal rank
with respect to the distribution of a debtor's assets. In furtherance of these
two goals, upon the filing of a petition for reorganization under chapter 11,
section 362 of the Bankruptcy Code generally provides for an automatic stay of
substantially all acts and proceedings against the debtor and its property,
including all attempts to collect Claims or enforce liens that arose prior to
the commencement of the debtor's case under chapter 11.
The consummation of a plan of reorganization is the principal objective of
a chapter 11 reorganization case. A plan of reorganization sets forth the means
for satisfying Claims against, and Equity Interests in, a debtor. Confirmation
of a plan of reorganization by the Bankruptcy Court makes the plan binding upon
the debtor, any issuer of securities under the plan, any person acquiring
property under the plan and any creditor, equity security holder or general
partner in the debtor. Subject to certain limited exceptions, the confirmation
order discharges the debtor from any debt that arose prior to the date of
confirmation of the plan and substitutes therefor the obligations specified
under the confirmed plan. If sufficient votes for acceptance of the Prepackaged
Plan are received, the Company intends to file a chapter 11 reorganization case
and promptly seek Confirmation by the Bankruptcy Court of the Prepackaged Plan.
The Prepackaged Plan provides specified treatment to the various Classes of
Claims against and Equity Interests in the Company. The Company believes the
Prepackaged Plan provides treatment for all Classes of Claims and Equity holders
that reflects an appropriate resolution of their Claims and Equity Interests
taking into account the differing nature and priority (including applicable
contractual subordination) of such Claims and Equity Interests. The Bankruptcy
Court must find, however, that a number of statutory tests are met before it may
confirm the Prepackaged Plan. See "-- Confirmation Standards." Many of these
tests are designed to protect the interests of holders of Claims or Equity
Interests that do not vote to accept the Prepackaged Plan but that will be bound
by the provisions of the Prepackaged Plan if it is confirmed by the Bankruptcy
Court.
THE FOLLOWING IS A SUMMARY OF CERTAIN OF THE MORE SIGNIFICANT MATTERS TO
OCCUR EITHER PURSUANT TO OR IN CONNECTION WITH CONFIRMATION OF THE PREPACKAGED
PLAN, A COPY OF WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT AS ANNEX A AND TO
WHICH REFERENCE SHOULD BE MADE FOR A FULL STATEMENT OF ITS TERMS. THIS SUMMARY
ONLY HIGHLIGHTS CERTAIN SUBSTANTIVE PROVISIONS OF THE PREPACKAGED PLAN AND IS
NOT A COMPLETE DESCRIPTION OF, OR A SUBSTITUTE FOR, A FULL AND COMPLETE READING
OF THE PREPACKAGED PLAN, WHICH ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE
URGED TO REVIEW CAREFULLY. THE PREPACKAGED PLAN, IF CONFIRMED, WILL BE BINDING
UPON THE COMPANY AND ALL HOLDERS OF CLAIMS AND EQUITY INTERESTS. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PREPACKAGED PLAN.
The Prepackaged Plan defines two significant dates, the Confirmation Date
and the Effective Date. The "Confirmation Date" is the date on which the
Bankruptcy Court enters an Order confirming the Prepackaged Plan in its docket,
within the meaning of Bankruptcy Rules 5003 and 9021. The Effective Date is the
date selected by the Company on or after the Confirmation Date on which (a) no
stay of the Confirmation Order is in effect and (b) the conditions specified in
the Prepackaged Plan shall all have been satisfied or waived pursuant to the
Prepackaged Plan.
DURING THE PENDENCY OF THE BANKRUPTCY CASE THAT WILL BE FILED IN CONNECTION
WITH THE RESTRUCTURING, THE COMPANY INTENDS TO OPERATE ITS BUSINESS IN THE
ORDINARY COURSE OF BUSINESS AND TO MAKE PAYMENT IN FULL ON A TIMELY BASIS TO ALL
OF ITS GENERAL UNSECURED CREDITORS. THE COMPANY ALSO
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WILL SEEK APPROVAL IMMEDIATELY UPON THE FILING OF THE PETITION TO PAY IN FULL IN
THE ORDINARY COURSE OF BUSINESS THE PRE-PETITION CLAIM OF EACH HOLDER OF A
GENERAL UNSECURED CLAIM. MANAGEMENT EXPECTS THAT THE COMPANY WILL HAVE
SUFFICIENT FUNDS FROM OPERATIONS AND A DEBTOR IN POSSESSION CREDIT FACILITY TO
CONTINUE TO PAY ITS GENERAL UNSECURED CREDITORS IN THE ORDINARY COURSE OF
BUSINESS THROUGH THE CONCLUSION OF THE PREPACKAGED CHAPTER 11 CASE, AND TO HAVE
SUFFICIENT LIQUIDITY UNDER ITS LENDING FACILITIES AND FROM OPERATIONS TO MAKE
SUCH PAYMENTS THEREAFTER. Under the Prepackaged Plan, holders of General
Unsecured Claims will not be required to file proofs of claim with the
Bankruptcy Court, and it is not expected that they will be required to take any
other action to receive payment on their Claims.
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS UNDER THE PREPACKAGED PLAN
Section 1122 of the Bankruptcy Code requires that the Prepackaged Plan
classify the Claims against, and Equity Interests in, the Company. The
Bankruptcy Code also provides that, except for certain Claims classified for
administrative convenience, the Prepackaged Plan may place a Claim or Equity
Interest in a particular Class only if such Claim or Equity Interest is
substantially similar to the other Claims or Equity Interests of such Class. The
Company believes that all Claims and Equity Interests have been appropriately
classified in the Prepackaged Plan. The Company has elected to separately
classify General Unsecured Claims because this Class is comprised largely of
trade creditors. Many of these creditors are key suppliers of products and
services used by the Company. Accordingly, any impairment of these Claims could
be detrimental to the ability of the Company to obtain essential trade credit
and could substantially impair the ability of the Company to do business with
trade creditors whose goods and services are essential for the Company. Bank
Lender Claims have been separately classified because the Company believes that
LGE's guaranty of these Claims renders their legal and financial position
substantially unlike other unsecured Claims. LGE Claims have been separately
classified because LGE has voluntarily agreed to convert its debt to equity and
because LGE is an insider. LGE has consented to the separate classification of
its Claims as provided in the Prepackaged Plan. Finally, because the Old
Subordinated Debenture Indenture contains subordination provisions, the Old
Subordinated Debentures are not held by insiders, and the Old Subordinated
Debenture Claims are not guaranteed by LGE, the Company contends that the Old
Subordinated Debenture Claims are significantly different from the other
unsecured debt and therefore must be classified separately.
To the extent that the Bankruptcy Court finds that a different
classification is required for the Prepackaged Plan to be confirmed, the Company
would seek (i) to modify the Prepackaged Plan to provide for whatever reasonable
classification might be required for Confirmation and (ii) to use the
acceptances received from any holder of Claims pursuant to this solicitation for
the purpose of obtaining the approval of the Class or Classes of which such
holder ultimately is deemed to be a member. Any such reclassification of
holders, although subject to the notice and hearing requirements of the
Bankruptcy Code, could adversely affect the Class in which such holder was
initially a member, or any other Class under the Prepackaged Plan, by changing
the composition of such Class and the vote required for approval of the
Prepackaged Plan. There can be no assurance that the Bankruptcy Court, after
finding that a classification was inappropriate and requiring a
reclassification, would approve the Prepackaged Plan based upon such
reclassification. Except to the extent that modification of classification in
the Prepackaged Plan adversely affects the treatment of a holder of Claims and
requires resolicitation, the Company will, in accordance with the Bankruptcy
Code and the Bankruptcy Rules, seek a determination by the Bankruptcy Court that
acceptance of the Prepackaged Plan by any holder of Claims pursuant to this
solicitation will constitute a consent to the Prepackaged Plan's treatment of
such holder regardless of the Class as to which such holder is ultimately deemed
to be a member.
The Bankruptcy Code also requires that the Prepackaged Plan provide the
same treatment for each Claim or Equity Interest of a particular Class unless
the holder of a particular Claim or Equity Interest agrees to a less favorable
treatment of its Claim or Equity Interest. The Company believes it has complied
with the requirement of equal treatment.
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Only Classes that are impaired (as defined under section 1124 of the
Bankruptcy Code) under the Prepackaged Plan are entitled to vote to accept or
reject the Prepackaged Plan, unless the Class is deemed to have rejected the
Prepackaged Plan. As a general matter, a Class of Claims or Equity Interests is
considered to be "unimpaired" under a plan of reorganization if the plan does
not alter the legal, equitable and contractual rights of the holders of such
Claims or Equity Interests. Under the Bankruptcy Code, holders of Unimpaired
Claims are conclusively presumed to have accepted the Prepackaged Plan. Holders
of Claims or Equity Interests which do not receive or retain anything under the
Prepackaged Plan are deemed to have rejected the Prepackaged Plan.
The categories of Claims and Equity Interests listed below classify Claims
and Equity Interests for all purposes, including voting, confirmation and
distribution pursuant to the Prepackaged Plan and pursuant to sections 1122 and
1123(a)(1) of the Bankruptcy Code. A Claim or Equity Interest shall be deemed
classified in a particular Class only to the extent that the Claim or Equity
Interest qualifies within the description of that Class and shall be deemed
classified in a different Class to the extent that any remainder of such Claim
or Equity Interest qualifies within the description of such different Class. A
Claim or Equity Interest is in a particular Class only to the extent that such
Claim or Equity Interest is Allowed in that Class and has not been paid or
otherwise settled prior to the Effective Date. A Claim or Equity Interest is
"Allowed" if the Claim or Equity Interest is: (a) a Claim that has been
scheduled by the Company in its schedule of liabilities as other than disputed,
contingent or unliquidated and as to which the Company or other party in
interest has not filed an objection by the Effective Date; (b) a Claim that
either is not subject to a timely objection in accordance with the Bankruptcy
Code or disputed by the Company or has been allowed by a Final Order; (d) a
Claim that is allowed: (i) in any stipulation of amount and nature of Claim
executed prior to the Confirmation Date and approved by the Bankruptcy Court;
(ii) in any stipulation with the Company of amount and nature of Claim executed
on or after the Confirmation Date; or (iii) in any contract, instrument,
indenture or other agreement entered into or assumed in connection with the
Prepackaged Plan; (e) a Claim relating to a rejected executory contract or
unexpired lease that either (i) is not subject to a timely objection in
accordance with the Bankruptcy Code or disputed by the Company or (ii) has been
allowed by a Final Order, in either case only if a proof of Claim has been
deemed timely filed under the Prepackaged Plan; or (f) a Claim that is allowed
pursuant to the terms of the Prepackaged Plan.
The classification of Claims and Equity Interests pursuant to the
Prepackaged Plan is as follows:
<TABLE>
<CAPTION>
CLASS STATUS VOTING RIGHTS
----- ------ -------------
<S> <C> <C> <C>
Class 1 -- Other Priority Claims Unimpaired -- not entitled to vote
Class 2 -- Citibank Secured Claims Unimpaired -- not entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to vote
Class 4 -- Bank Lender Claims Impaired -- entitled to vote
Class 5 -- General Unsecured Claims Unimpaired -- not entitled to vote
Class 6 -- Old Subordinated Debenture Claims Impaired -- entitled to vote
Class 7 -- LGE Claims: Impaired -- entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 8 -- Equity Interests Impaired -- not entitled to vote;
deemed to reject
</TABLE>
The Prepackaged Plan divides Claims against the Company into eight Classes
and Equity Interests in the Company are in one Class. Distributions will be made
to persons holding Claims and Equity Interests in various Classes as described
below.
SUMMARY OF TREATMENT UNDER THE PREPACKAGED PLAN
A. Administrative Claims
Administrative Claims consist of the Claims for the costs and expenses of
administration under sections 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses in preserving
the estates of the Company following the commencement of the chapter 11 case and
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operating the business of the Company (such as wages, salaries or commissions
for services and payments for goods and other services and leased premises); (b)
compensation for legal, financial advisory, accounting and other services and
reimbursement of expenses awarded or allowed under sections 330(a) or 331 of the
Bankruptcy Code; and (c) all fees and charges assessed against the estate under
Chapter 123 of Title 28 United States Code, 28 U.S.C. sec.sec. 1911-1930.
Subject to the provisions of sections 330(a) and 331 of the Bankruptcy Code,
each holder of an Allowed Administrative Claim will be paid the full unpaid
amount of such Allowed Administrative Claim in cash on the Effective Date, or
upon such other terms as may be agreed upon by such holder and the Company or
otherwise upon order of the Bankruptcy Court; provided, however, that Allowed
Administrative Claims representing obligations incurred in the ordinary course
of business by the Company pursuant to the Prepackaged Plan will be paid or
performed by New Zenith when due in accordance with the terms and conditions of
the particular agreements governing such obligations.
B. Priority Tax Claims
The Bankruptcy Code provides for priority payment of certain other Claims,
subject to certain limitations, such as allowed unsecured Claims of governmental
units for certain taxes of the kind specified in section 507(a)(8) of the
Bankruptcy Code. On the Effective Date, each holder of a Priority Tax Claim due
and payable on or prior to the Effective Date shall be paid cash in an amount
equal to the amount of such Allowed Claim, or shall be paid on account of its
Allowed Claim on such other terms as have been or may be agreed upon by such
holder and the Company. The amount of any Priority Tax Claim that is not an
Allowed Claim or that is not otherwise due and payable on or prior to the
Effective Date, and the rights of the holder of such Claim, if any, to payment
in respect thereof shall (i) be determined in the manner in which the amount of
such Claim and the rights of the holder of such Claim would have been resolved
or adjudicated if the Prepackaged Chapter 11 Case had not been commenced, (ii)
survive the Effective Date and Consummation of the Prepackaged Plan as if the
Prepackaged Chapter 11 Case had not been commenced, and (iii) not be discharged
pursuant to section 1141 of the Bankruptcy Code. In accordance with section 1124
of the Bankruptcy Code, the Prepackaged Plan shall leave unaltered the legal,
equitable, and contractual rights of each holder of a Priority Tax Claim.
Class 1 -- Other Priority Claims
Classification: Other Priority Claims consist of all Claims accorded
priority in right of payment under section 507(a) of the Bankruptcy Code, other
than a Priority Tax Claim or Administrative Claims.
Treatment: The legal, equitable and contractual rights of the holders of
Other Priority Claims are unaltered by the Prepackaged Plan. Unless the holder
of such Claim and the Company agree to a different treatment, each holder of an
Allowed Other Priority Claim shall receive one of the following alternative
treatments, at the election of the Company:
(a) to the extent then due and owing on the Effective Date, such Claim will
be paid in full in cash by New Zenith;
(b) to the extent not due and owing on the Effective Date, such Claim (A)
will be paid in full in cash by New Zenith, or (B) will be paid in full
in cash by New Zenith when and as such Claim becomes due and owing in
the ordinary course of business; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any Other Priority Claim that existed
immediately prior to the filing of the Prepackaged Chapter 11 Case shall be
deemed cured upon the Effective Date.
Voting: Other Priority Claims are not impaired and the holders of Other
Priority Claims are conclusively deemed to have accepted the Prepackaged Plan
pursuant to section 1126(f) of the Bankruptcy Code. Therefore, the holders of
Other Priority Claims are not entitled to vote to accept or reject the
Prepackaged Plan.
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Class 2 -- Citibank Secured Claims
Classification: Citibank Secured Claims consist of all Claims arising from
or relating to the Amended Citibank Credit Facility.
Treatment: The legal, equitable and contractual rights of the holders of
Citibank Secured Claims are unaltered by the Prepackaged Plan. On the Effective
Date, unless the holder of such Claims and the Company agree to a different
treatment, at the election of the Company, the Allowed Citibank Secured Claims
(i) will be paid in full in cash by New Zenith or (ii) will be otherwise treated
in any other manner so that such Claims shall otherwise be rendered unimpaired
pursuant to section 1124 of the Bankruptcy Code.
Voting: Citibank Secured Claims are not impaired and the holders of
Citibank Secured Claims are conclusively deemed to have accepted the Prepackaged
Plan pursuant to section 1126(f) of the Bankruptcy Code. Therefore, the holders
of Citibank Secured Claims are not entitled to vote to accept or reject the
Prepackaged Plan.
Class 3 -- Other Secured Claims
Classification: Other Secured Claims consist of all Other Secured Claims
against the Company, other than secured Claims classified in a different Class.
Treatment: The legal, equitable and contractual rights of the holders of
Other Secured Claims are unaltered by the Prepackaged Plan. Unless the holder of
such Claim and the Company agree to a different treatment, each holder of an
Allowed Secured Claim shall receive one of the following alternative treatments,
at the election of the Company:
(a) the legal, equitable and contractual rights to which such Claim
entitled the holder thereof shall be unaltered by the Prepackaged Plan;
(b) the Company shall surrender all collateral securing such Claim to the
holder thereof, without representation or warranty by or recourse
against the Company or New Zenith; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any Secured Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed cured
upon the Effective Date.
Voting: Other Secured Claims are not impaired and the holders of Secured
Claims are conclusively deemed to have accepted the Prepackaged Plan pursuant to
section 1126(f) of the Bankruptcy Code. Therefore, the holders of Other Secured
Claims are not entitled to vote to accept or reject the Prepackaged Plan.
Class 4 -- Bank Lender Claims
Classification: Bank Lender Claims consist of the Claims of the Bank
Lenders arising from or relating to the Unsecured Bank Loans.
Treatment: Each holder of Bank Lender Claims shall receive its respective
New Bank Lender Note in full satisfaction of its Claims.
Voting: Bank Lender Claims are impaired and the holders of Bank Lender
Claims are entitled to vote to accept or reject the Prepackaged Plan.
Class 5 -- General Unsecured Claims
Classification: General Unsecured Claims consist of the unsecured Claims
that are not Bank Lender Claims, Old Subordinated Debenture Claims, or LGE
Tranche A Claims or LGE Tranche B Claims.
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Treatment: The legal, equitable and contractual rights of the holders of
General Unsecured Claims are unaltered by the Prepackaged Plan. Unless the
holder of such Claim and the Company agree to a different treatment, each holder
of an Allowed General Unsecured Claim shall receive one of the following
alternative treatments, at the election of the Company:
(a) to the extent then due and owing on the Effective Date, such Claim will
be paid in full in cash by New Zenith;
(b) to the extent not due and owing on the Effective Date, such Claim (X)
will be paid in full in cash by New Zenith, or (Y) will be paid in full
in cash by New Zenith when and as such Claim becomes due and owing in
the ordinary course of business; or
(c) such Claim will be otherwise treated in any other manner so that such
Claims shall otherwise be rendered unimpaired pursuant to section 1124
of the Bankruptcy Code.
Any default with respect to any General Unsecured Claim that existed
immediately prior to the filing of the Prepackaged Chapter 11 Case shall be
deemed cured upon the Effective Date.
Voting: General Unsecured Claims are not impaired and the holders of
General Unsecured Claims are conclusively deemed to have accepted the
Prepackaged Plan pursuant to section 1126(f) of the Bankruptcy Code. Therefore,
the holders of General Unsecured Claims are not entitled to vote to accept or
reject the Prepackaged Plan.
Class 6 -- Old Subordinated Debenture Claims
Classification: Old Subordinated Debenture Claims consist of the Claims of
holders of the Old Subordinated Debentures.
Treatment: If Class 6 accepts the Prepackaged Plan, on or as soon as
practicable after the Effective Date, each holder of an Allowed Old Subordinated
Debenture Claim shall receive, in full and final satisfaction of such Claim, a
pro rata distribution of the New Subordinated Debentures. If Class 6 rejects the
Prepackaged Plan, the holders of the Old Subordinated Debentures will not
receive or retain any property on account of their Claims.
Voting: Old Subordinated Debenture Claims are impaired and the holders of
Allowed Old Subordinated Debenture Claims are entitled to vote to accept or
reject the Prepackaged Plan.
Class 7 -- LGE Claims
Classification: The LGE Claims consist of the LGE Tranche A Claims and the
LGE Tranche B Claims. The division of the LGE Claims into two groups is for
distribution purposes only. The LGE Tranche A Claims consist of (i) the LGE
Leveraged Lease Claims and (ii) that portion of the LGE Reimbursement Claims and
the LGE Demand Loan Claims not classified as LGE Tranche B Claims. The LGE
Tranche B Claims consist of (i) the LGE Extended Payables Claims, not to exceed
$140 million; (ii) the LGE Reimbursement Claims, not to exceed $50 million;
(iii) the LGE Technical Services Claims; (iv) the LGE Guarantee Fee Claims; and
(v) the LGE Demand Loan Claims in an amount (if any) sufficient when aggregated
with the amounts described in clauses (i) through (iv) to equal $200 million. To
the extent the aggregate of the Claims described in items (i) through (iv) of
the preceding sentence exceeds $200 million, a portion of the LGE Reimbursement
Claims equal to such excess shall constitute LGE Tranche A Claims.
Treatment:
LGE Tranche A Claims -- On the Effective Date, or as soon thereafter as
practicable, LGE shall receive (A) the LGE New Restructured Senior Note, and (B)
the Reynosa Assets, in full and complete satisfaction of the Allowed LGE Tranche
A Claims.
LGE Tranche B Claims -- On the Effective Date, or as soon thereafter as
practicable, LGE shall receive 100% of the New Common Stock, in full and
complete satisfaction of the Allowed LGE Tranche B Claims.
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Voting: LGE Claims are impaired and the holder of the Allowed LGE Claims is
entitled to vote to accept or reject the Prepackaged Plan.
Class 8 -- Equity Interests
Classification: Class 8 consists of all Equity Interests of the Company,
including the Old Common Stock.
Treatment: On the Effective Date, the holders of Equity Interests shall
receive no distributions and retain no property under the Prepackaged Plan.
Voting: No distributions will be made to holders of Equity Interests nor
will such holders retain any property, and consequently such holders are deemed
to reject the Prepackaged Plan. Holders of Equity Interests are not entitled to
vote to accept or reject the Prepackaged Plan.
SUMMARY OF OTHER PROVISIONS OF THE PREPACKAGED PLAN
Releases
In consideration of the contributions of certain parties to the Prepackaged
Chapter 11 Case, including, but not limited to, (i) the commitment and
obligation of LGE to provide the financial support necessary for Consummation of
the Prepackaged Plan, and (ii) the service of certain designated individuals to
facilitate the expeditious reorganization of the Company and the implementation
of the Restructuring, the Prepackaged Plan provides for certain waivers,
exculpation, releases and injunctions. The Prepackaged Plan provides an
injunction barring the commencement or continuation of any Claims released
pursuant to its terms.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, (i) the D&O Releasees, and
(ii) the Investor Releasees, from any and all Claims and causes of action,
whether known or unknown, foreseen and unforeseen, existing or hereafter
arising, that the Company or its Subsidiaries would have been legally entitled
to assert in their own right or on behalf of the holder of any Claim or Equity
Interest or other person or entity against any of them relating to any event
occurring on or before the Effective Date of the Prepackaged Plan. The release
of the D&O Releasees by the Company and its Subsidiaries does not affect certain
loans or contracts such parties have entered into in the ordinary course of
business.
In addition, the Prepackaged Plan provides that each holder of any Claim
against the Company that has accepted the Prepackaged Plan, whose Claim is part
of a Class that has accepted (or is deemed to accept) the Prepackaged Plan, or
that is entitled to receive a distribution of property under the Prepackaged
Plan, is deemed to release, upon the Effective Date, any and all Claims and
causes of action, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, that it would have been legally entitled to assert against
the D&O Releasees and the Investor Releasees relating to the Company or its
Subsidiaries, the Prepackaged Chapter 11 Case, or the negotiation, formulation
and preparation of the Prepackaged Plan and related documents.
The Prepackaged Plan also provides that the Company, each of its
Subsidiaries, the D&O Releasees, and the Investor Releasees shall be exculpated
from any liability to any person or entity (as defined in the Bankruptcy Code)
for any act or omission in connection with or related to the negotiation,
formulation, preparation and Confirmation of the Prepackaged Plan, the
Consummation and administration of the Prepackaged Plan, the Prepackaged Chapter
11 Case, or the property distributed under the Prepackaged Plan, except by
virtue of any willful misconduct or gross negligence, as determined by a court
of competent jurisdiction.
It is a condition to LGE's obligations under the Restructuring Agreement
that the Investor Releasees receive the releases, waivers and injunctions as set
forth in the Prepackaged Plan. See "SPECIAL FACTORS -- Interests of Certain
Persons in the Financial Restructuring; Conflicts of Interest" and "-- The
Restructuring Agreement."
Executory Contracts and Unexpired Leases
Under the Bankruptcy Code, the Company may assume or reject executory
contracts and unexpired leases. As a general matter, an "executory contract" has
been determined to be a contract under which
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material performance (other than solely the payment of money) remains to be made
by each party. On the Effective Date, all executory contracts and unexpired
leases of the Company will be deemed assumed in accordance with the provisions
and requirements of sections 365 and 1123 of the Bankruptcy Code, except those
executory contracts and unexpired leases that (i) have been rejected by order of
the Bankruptcy Court, (ii) are the subject of a motion to reject pending on the
Effective Date, (iii) are identified on a list to be filed with the Bankruptcy
Court on or before the Confirmation Date, as to be rejected, or (iv) are
rejected pursuant to the terms of the Prepackaged Plan. All proofs of Claim with
respect to Claims arising from rejection must be filed with the Bankruptcy Court
within 60 days after the later of (i) the date of entry of an order of the
Bankruptcy Court approving such rejection and (ii) the Confirmation Date. Any
Claims not timely filed will be forever barred from assertion.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from or out of rejection, including,
but not limited to those arising under section 502 of the Bankruptcy Code, shall
be part of and included in the LGE Leveraged Lease Claims. Other than on account
of the LGE Leveraged Lease Claims, LGE shall not receive any property or
distribution arising from or related to such rejection. Except as otherwise
provided in the Restructuring Agreement, on the Effective Date, all property
that is the subject of the Leveraged Leases shall be vested in New Zenith free
and clear of all liens, claims and encumbrances.
Indemnification of Directors, Officers and Employees
The Prepackaged Plan provides that the obligations of the Company to
indemnify any person serving at any time on or prior to the Effective Date as
one of its directors, officers or employees by reason of such person's service
in such capacity, to the extent provided in the Company's constituent documents
or by written agreement or Delaware law, shall be deemed and treated as
executory contracts that are assumed by the Company as of the Effective Date.
Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the filing of the Prepackaged Chapter 11
Case.
Continued Corporate Existence and Vesting of Assets in New Zenith
The Company shall continue to exist after the Effective Date as a separate
corporate entity, with all the powers of a corporation under the laws of the
State of Delaware and without prejudice to any right to alter or terminate such
existence (whether by merger or otherwise) under such applicable state law.
Except as otherwise provided in the Prepackaged Plan, the Restructuring
Agreement, the LGE New Credit Facility, the LGE New Restructured Senior Note,
the New Subordinated Debentures, or any agreement, instrument or indenture
relating thereto, on and after the Effective Date, all property of the Company
and any property acquired by the Company under the Prepackaged Plan shall vest
in New Zenith, free and clear of all Claims, liens, charges, or other
encumbrances and Equity Interests. On and after the Effective Date, New Zenith
may operate its business and may use, acquire or sell property and compromise or
settle any Claims or Equity Interests, without supervision or approval by the
Bankruptcy Court and free of any restrictions of the Bankruptcy Code or
Bankruptcy Rules, other than those restrictions expressly imposed by the
Prepackaged Plan and the order of the Bankruptcy Court confirming the
Prepackaged Plan.
Amendments to Certificate of Incorporation and By-Laws
The Bankruptcy Code requires that upon the confirmation of a plan of
reorganization a debtor's charter documents must contain certain provisions
including a provision prohibiting the issuance of non-voting equity securities.
To comply with this requirement, the Prepackaged Plan provides that the Company
will file an Amended Certificate of Incorporation with the Secretary of State of
the State of Delaware in accordance with sections 102 and 103 of the Delaware
General Corporation Law. The Amended Certificates of Incorporation will prohibit
the issuance of nonvoting equity securities to the extent required by section
1123(a) of the Bankruptcy Code, change the number of authorized shares of New
Common Stock to 1,000, change the par value of the New Common Stock to $0.01 and
eliminate the authorization of preferred stock. After the
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Effective Date, New Zenith reserves the right to amend and restate its Amended
Certificate of Incorporation and other constituent documents as permitted by the
Delaware General Corporation Law. At present, the Company does not contemplate
any such amendments.
Retention of Jurisdiction by the Bankruptcy Court
Under the terms of the Prepackaged Plan, the Bankruptcy Court will retain
jurisdiction in the following instances notwithstanding entry of the
Confirmation Order or the occurrence of the Effective Date. The Bankruptcy Court
will retain exclusive jurisdiction over the reorganization proceedings relating
to the Company to: (i) allow, disallow, determine, liquidate, classify, estimate
or establish the priority or secured or unsecured status of any Claim, including
the resolution of any request for payment of any Administrative Claim and the
resolution of any and all objections to the allowance or priority of Claims;
(ii) grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Prepackaged Plan, for periods ending on or before the Effective Date; (iii)
resolve any matters related to the assumption, assumption and assignment or
rejection of any executory contract or unexpired lease to which the Company is a
party or with respect to which the Company may be liable and to hear, determine
and, if necessary, liquidate, any Claims arising therefrom, including those
matters related to the amendment after the Effective Date pursuant to the
Prepackaged Plan to add any executory contracts or unexpired leases to the list
of executory contracts and unexpired leases to be rejected; (iv) ensure that
distributions to holders of Allowed Claims are accomplished pursuant to the
provisions of the Prepackaged Plan, including ruling on any motion filed
pursuant to the Prepackaged Plan; (v) decide or resolve any motions, adversary
proceedings, contested or litigated matters and any other matters and grant or
deny any applications involving the Company that may be pending on the Effective
Date; (vi) enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Prepackaged Plan and all contracts,
instruments, releases, indentures and other agreements or documents created in
connection with the Prepackaged Plan or the Disclosure Statement; (vii) resolve
any cases, controversies, suits or disputes that may arise in connection with
the Consummation, interpretation or enforcement of the Prepackaged Plan or any
obligations incurred in connection with the Prepackaged Plan; (viii) issue
injunctions, enter and implement other orders or take such other actions as may
be necessary or appropriate to restrain interference with Consummation or
enforcement of the Prepackaged Plan; (ix) resolve any cases, controversies,
suits or disputes with respect to the releases, injunction and other provisions
contained in the Prepackaged Plan and enter such orders as may be necessary or
appropriate to implement such releases, injunction and other provisions; (x)
enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated; (xi) determine any other matters that may arise in connection with or
relate to the Prepackaged Plan, the Disclosure Statement, the Confirmation Order
or any contract, instrument, release, indenture or other agreement or document
created in connection with the Prepackaged Plan or the Disclosure Statement; and
(xii) enter an order and/or final decree concluding the Prepackaged Chapter 11
Case.
Cancellation of Securities and Agreements
On the Effective Date, the Old Subordinated Debentures and all Equity
Interests will be deemed cancelled. In addition, the Old Subordinated Debenture
Indenture will be cancelled and will have no further force or effect.
Issuance of New Securities and Execution of Certain Documents
On the Effective Date, New Zenith shall issue all securities, notes,
instruments, certificates, and other documents required to be issued pursuant to
the Prepackaged Plan, including, without limitation, the LGE New Restructured
Senior Note, the New Bank Lender Notes, the New Subordinated Debentures, and the
New Common Stock, all of which shall be distributed as provided in the
Prepackaged Plan. New Zenith shall execute and deliver such other agreements,
documents and instruments as are required to be executed pursuant to the terms
of the Prepackaged Plan.
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Management
The Prepackaged Plan provides for the executive officers of the Company
immediately before confirmation of the Prepackaged Plan to continue to serve
immediately after confirmation of the Prepackaged Plan in their respective
capacities. Upon the Effective Date, the Board shall consist of members elected
by LGE, the owner of 100% of the New Common Stock following Consummation of the
Prepackaged Plan.
Subordination
The classification and manner of satisfying all Claims and Equity Interests
and the respective distributions and treatments under the Prepackaged Plan takes
into account the relative priority of the Claims and Equity Interests in each
Class in connection with any contractual, legal or equitable subordination
rights relating thereto, whether arising under general principles of equitable
subordination, section 510(b) of the Bankruptcy Code or otherwise, and any and
all such rights are settled, compromised and released pursuant to the
Prepackaged Plan. Accordingly, without limitation, the Confirmation Order will
permanently enjoin, effective as of the Effective Date, all persons and entities
from enforcing or attempting to enforce any contractual, legal or equitable
subordination rights satisfied, compromised and settled under the Prepackaged
Plan.
Resolution of Disputed Claims
With respect to holders of Claims that are not Impaired Claims ("Unimpaired
Claims"), their legal, equitable and contractual rights will be unaltered by the
Prepackaged Plan. Consequently, it is anticipated that any disputes with respect
to such Claims will be resolved outside of the Prepackaged Chapter 11 Case. As
such, all General Unsecured Claims, including litigation against the Company,
will be substantially unaffected by the Prepackaged Chapter 11 Case and will
remain subject to all legal and equitable defenses of the Company. Nothing under
the Prepackaged Plan will affect the Company's rights, including, but not
limited to, all rights in respect of legal and equitable defenses to or setoffs
or recoupments against such Unimpaired Claims, except as expressly provided in
the Prepackaged Plan.
After the Confirmation Date, only the Company will have the authority to
file objections to Claims or settle, compromise, withdraw or litigate to
judgment objections to Claims. As of the Confirmation Date, the Company can
settle or compromise disputed Claims without Bankruptcy Court approval. The
Company reserves the right to ask the Bankruptcy Court to estimate any
contingent Claim regardless of whether there has been a previous objection to
such Claim. The estimated amount will be either the allowed amount or a maximum
limitation on such Claim, as determined by the Bankruptcy Court. If the
estimated amount constitutes a maximum limitation, the Company can pursue a
supplemental proceeding to object to the payment of such Claim.
Under the Prepackaged Plan, holders of Claims (other than Claims arising
from the rejection of executory contracts or unexpired leases) would not be
required to file proofs of Claim with the Bankruptcy Court. In order to utilize
the Claims disallowance procedures of the Bankruptcy Code against a holder of a
Claim, the Company would be required to schedule as disputed, unsold or
contingent any Claim to which it objects or to file a separate objection to such
Claim and to obtain an order from a court sustaining such objection.
Additionally, the Company would be permitted to object to or contest any Claim
in the Bankruptcy Court or in any appropriate non-bankruptcy forum, and, if such
Claim is discharged pursuant to the Prepackaged Plan, to assert as a defense
that such Claim has been discharged.
Distributions for Claims Allowed as of the Effective Date
Except as otherwise provided in the Prepackaged Plan or as may be ordered
by the Bankruptcy Court, distributions to be made on the Effective Date on
account of Claims that are allowed as of the Effective Date and are entitled to
receive distributions under the Prepackaged Plan shall be made on the Effective
Date or as soon thereafter as is practical. Distributions on account of Claims
that become Allowed Claims after the Effective Date shall be made pursuant to
the applicable provisions of the Prepackaged Plan described below.
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For purposes of determining the accrual of interest or rights in respect of
any other payment from and after the Effective Date, the LGE New Restructured
Senior Note, the New Bank Lender Notes, the New Subordinated Debentures, and the
New Common Stock to be issued under the Prepackaged Plan shall be deemed issued
as of the Effective Date regardless of the date on which they are actually
dated, authenticated or distributed; provided, however, that New Zenith shall
withhold any actual payment until such distribution is made and no interest
shall accrue or otherwise be payable on any such withheld amounts.
Distributions by the Company; Distributions with Respect to the Old
Subordinated Debentures
The Company shall make all distributions required under the Prepackaged
Plan. Notwithstanding provisions in the Prepackaged Plan regarding the
cancellation of the Old Subordinated Debenture Indenture, the Old Subordinated
Debenture Indenture shall continue in effect to the extent necessary to allow
the Company to receive and make distributions pursuant to the Prepackaged Plan
on account of the Old Subordinated Debentures.
Delivery and Distributions and Undeliverable or Unclaimed Distributions
Distributions to holders of Allowed Claims shall be made at the address of
the holder of such Claim as indicated on the records of the Company. Except as
otherwise provided by the Prepackaged Plan or the Bankruptcy Code with respect
to undeliverable distributions, distributions to holders of Citibank Secured
Claims, Bank Lender Claims and Old Subordinated Debenture Claims shall be made
in accordance with the provisions of the applicable indenture, participation
agreement, loan agreement or analogous instrument or agreement, and
distributions will be made to holders of record as of the close of business on
the business day immediately preceding the Effective Date (the "Distribution
Record Date").
If any distribution is returned to the Company as undeliverable, no further
distributions shall be made to such holder unless and until the Company is
notified in writing of such holder's then-current address. Undeliverable
distributions shall remain in the possession of the Company until such time as a
distribution becomes deliverable. Undeliverable distributions (including
interest and maturities on the New Subordinated Debentures) shall not be
entitled to any interest, dividends or other accruals of any kind.
Within 20 days after the end of each calendar quarter following the
Effective Date, the Company shall make all distributions that become deliverable
during the preceding calendar quarter.
Any holder of an Allowed Claim that does not assert a Claim pursuant to the
Prepackaged Plan for an undeliverable distribution within five years after the
Effective Date shall have its Claim for such undeliverable distribution
discharged and shall be forever barred from asserting any such Claim against New
Zenith or its respective property. As described in the Prepackaged Plan, in such
cases: (i) any cash held for distribution on account of such Claims shall be
property of New Zenith, free of any restrictions thereon; and (ii) any New
Subordinated Debentures held for distribution on account of such Claims shall be
cancelled and of no further force or effect. Nothing contained in the
Prepackaged Plan requires the Company to attempt to locate any holder of an
Allowed Claim.
In connection with the Prepackaged Plan, to the extent applicable, the
Company shall comply with all tax withholding and reporting requirements imposed
on it by any governmental unit, and all distributions pursuant to the
Prepackaged Plan shall be subject to such withholding and reporting
requirements.
Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
register for the Old Subordinated Debentures as maintained by the Company, the
trustee of the Old Subordinated Debenture Indenture, or their respective agents,
shall be closed and the transfer of the Old Subordinated Debentures, or any
interest therein, will be prohibited. Moreover, the Company shall have no
obligation to recognize the transfer of any Old Subordinated Debentures
occurring after the Distribution Record Date, and shall be entitled for all
purposes herein to recognize and deal only with those holders of record as of
the close of business on the Distribution Record Date.
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Minimum Distribution
The New Subordinated Debentures will be issued in denominations of $1,000
and integral multiples thereof. No New Subordinated Debenture will be issued in
a denomination of less than $1,000. In the event a holder of an Allowed Class 6
Claim is entitled to distribution of New Subordinated Debentures that is not an
integral multiple of $1,000, such distribution shall be aggregated by the
Company (or its agent), and as soon as practicable after the Effective Date,
such interests shall be sold by the Company (or its agent) in a commercially
reasonable manner and, upon the completion of such sale, the net proceeds
thereof shall be distributed (without interest) pro rata to the holders of
Allowed Class 6 Claims based upon the fraction of New Subordinated Debentures
each such holder would have been entitled to receive or deemed to hold had the
Company issued New Subordinated Debentures in integral multiples smaller than
$1,000, such distribution being in lieu of any other distribution thereon.
Setoffs
New Zenith may, pursuant to section 553 of the Bankruptcy Code or any other
applicable bankruptcy or non-bankruptcy law, set off against any Allowed Claim
and the distributions to be made pursuant to the Prepackaged Plan on account of
such Claim (before any distribution is made on account of such Claim), the
Claims, rights and causes of action of any nature that the Company or New Zenith
may hold against the holder of such Allowed Claim; provided, however, that
neither the failure to effect such a setoff nor the allowance of any Claim
hereunder shall constitute a waiver or release by the Company or New Zenith of
any such Claims, rights and causes of action that the Company or New Zenith may
possess against such holder.
Surrender of Cancelled Instruments or Securities
As a condition precedent to receiving any distribution pursuant to the
Prepackaged Plan on account of an Allowed Claim evidenced by the instruments,
securities or other documentation cancelled pursuant to the Prepackaged Plan,
the holder of such Claim shall tender the applicable instruments, securities or
other documentation evidencing such Claim to the Company. Any New Subordinated
Debentures or New Common Stock to be distributed pursuant to the Prepackaged
Plan on account of any such Claim shall, pending such surrender, be treated as
an undeliverable distribution.
Notes and Debentures
Each holder of an impaired Allowed Claim shall tender any notes or
debentures relating to such Claim to the Company in accordance with written
instructions to be provided to such holders by the Company as promptly as
practicable following the Effective Date. Such instructions shall specify that
delivery of such notes or debentures will be effected, and risk of loss and
title thereto will pass, only upon the proper delivery of such notes or
debentures with a letter of transmittal in accordance with such instructions.
Failure to Surrender Cancelled Instruments
Any holder that fails to surrender or is deemed to have failed to surrender
its Old Subordinated Debentures required to be tendered hereunder within five
years after the Effective Date shall have its Claim for a distribution pursuant
to the Prepackaged Plan on account of such Old Subordinated Debentures
discharged and shall be forever barred from asserting any such Claim against New
Zenith or its property.
Lost, Stolen, Mutilated or Destroyed Debt Securities
In addition to any requirements under the applicable note or debenture, or
any related agreement, any holder of a Claim evidenced by a note or debenture
that has been lost, stolen, mutilated or destroyed shall, in lieu of
surrendering such note or debenture, deliver to the Company: (1) evidence
satisfactory to the Company of the loss, theft, mutilation or destruction; and
(2) such security or indemnity as may be required by the Company to hold the
Company harmless from any damages, liabilities or costs incurred in treating
such individual as a holder of an Allowed Claim. Upon compliance with this
provision by a holder of a Claim
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evidenced by a note or debenture, such holder shall, for all purposes under the
Prepackaged Plan, be deemed to have surrendered such note or debenture.
CONDITIONS TO CONFIRMATION/CONSUMMATION
It is a condition to Confirmation of the Prepackaged Plan that all
provisions, terms and conditions of the Prepackaged Plan have been approved in
the Confirmation Order.
It is a condition to Consummation of the Prepackaged Plan that the
following conditions have been satisfied or waived pursuant to the Prepackaged
Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy
Court and duly entered on the docket for the Prepackaged Chapter 11 Case by
the Clerk of the Bankruptcy Court in form and substance acceptable to the
Company;
2. the Confirmation Order shall be a Final Order;
3. a revolving credit facility and letter of credit subfacility shall
be available to the Company in the amounts and on such terms and conditions
as set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
Waiver of Conditions
Other than as set forth in the Prepackaged Plan, the Company, in its sole
discretion, may waive any of the conditions to Confirmation of the Prepackaged
Plan and/or to Consummation of the Prepackaged Plan set forth in the Prepackaged
Plan at any time, without notice, without leave or order of the Bankruptcy
Court, and without any formal action other than proceeding to confirm and/or
consummate the Prepackaged Plan.
Effect of Non-occurrence of Conditions to Consummation
If the Confirmation Order is vacated, the Prepackaged Plan shall be null
and void in all respects and nothing contained in the Prepackaged Plan or the
Disclosure Statement shall: (1) constitute a waiver or release of any Claims by
or against, or any Equity Interests in, the Company; (2) prejudice in any manner
the rights of the Company; or (3) constitute an admission, acknowledgment, offer
or undertaking by the Company in any respects.
EFFECT OF CONSUMMATION OF THE PREPACKAGED PLAN
Vesting of Rights
Except as provided in the Prepackaged Plan and the Restructuring Agreement,
on the Effective Date all assets of the Company's bankruptcy estate shall vest
in New Zenith free and clear of all liens, claims and encumbrances.
Discharge
Except as provided in the Prepackaged Plan, the Restructuring Agreement or
in the LGE New Restructured Senior Note, the New Bank Lender Notes or the New
Subordinated Debentures, (1) the rights afforded in the Prepackaged Plan and the
treatment of all Claims and Equity Interests therein, shall be in exchange for
and in complete satisfaction, discharge and release of Claims and Equity
Interests of any nature whatsoever, including any interest accrued on such
Claims from and after the date the Company files the Prepackaged Chapter 11 Case
with the Bankruptcy Court ("Petition Date"), against the Company, or any of its
assets or properties, (2) on the Effective Date, all such Claims against, and
Equity Interests in the Company shall be satisfied, discharged and released in
full and (3) all persons and entities shall be precluded from asserting against
New Zenith, its successors or its assets or properties any other or further
Claims or
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Equity Interests based upon any act or omission, transaction or other activity
of any kind or nature that occurred prior to the Confirmation Date.
Binding Effect
The provisions of the Prepackaged Plan, if confirmed, will bind all holders
of Claims and Equity Interests regardless of whether they accept the Prepackaged
Plan or are entitled to vote with respect to the Prepackaged Plan. The
distributions provided for in the Prepackaged Plan, if any, will be in exchange
for and in complete satisfaction, discharge and release of all Impaired Claims
against and Equity Interests in the Company or any of its assets or properties,
including any Impaired Claim or Equity Interest accruing after the Petition Date
and prior to the Confirmation Date. All holders of Impaired Claims and Equity
Interests will be precluded from asserting any Claim against the Company or its
assets or properties based on any transaction or other activity of any kind that
occurred prior to the Confirmation Date.
MODIFICATION OF THE PREPACKAGED PLAN
Except as otherwise provided in the Restructuring Agreement, amendments to
the Prepackaged Plan may be made by the Company, subject to the limitations
contained in the Prepackaged Plan and in the Restructuring Agreement, either
before or after the Petition Date. Any amendments or modifications to the
Prepackaged Plan made after the Petition Date and before or after the
Confirmation Date shall be made in accordance with the provisions of section
1127 of the Bankruptcy Code and the Bankruptcy Rules. The Company reserves the
right to use acceptances to confirm any amendments to the Prepackaged Plan to
the extent permitted by law.
At all times the Company reserves the right in its sole discretion not to
file the Prepackaged Plan, or, if it files the Prepackaged Plan, to withdraw the
Prepackaged Plan at any time prior to confirmation, in which case the
Prepackaged Plan will be deemed to be null and void. In such an event, nothing
contained in the Prepackaged Plan or the Disclosure Statement will be deemed to
constitute a waiver or release of any Claims by or against the Company or any
other person, nor shall the Prepackaged Plan or the Disclosure Statement
prejudice in any manner the rights of the Company or constitute an admission,
acknowledgment, offer or undertaking by the Company in any respects.
INTENDED ACTIONS DURING THE PREPACKAGED CHAPTER 11 CASE
In addition to seeking Confirmation of the Prepackaged Plan, during the
pendency of the Prepackaged Chapter 11 Case, the Company intends to seek relief
from the Bankruptcy Court as to various matters, certain of which are described
below. While the Company believes each of the requests, if granted, would
facilitate the Prepackaged Chapter 11 Case, there can be no assurance that the
Bankruptcy Court will grant any such relief.
Provisions for Employees; Retention
The Company believes that salaries or wages, as the case may be, accrued
and unpaid vacation, health benefits, severance benefits and similar employee
benefits should be unaffected by the filing of the Prepackaged Chapter 11 Case.
The Company intends to seek the approval of the Bankruptcy Court, immediately
upon commencement of the Prepackaged Chapter 11 Case, to honor payroll checks
outstanding as of the Petition Date, to permit employees to utilize their paid
vacation time which was accrued prior to the filing and to continue paying
medical and other employee benefits under the applicable health plans. The
Company also intends to seek the authority to honor its employee retention
program. There can be no assurance, however, that any necessary approval will be
obtained. Employee Claims and benefits not paid or honored, as the case may be,
prior to the Consummation of the Prepackaged Plan, will be paid or honored upon
Consummation or as soon thereafter as such payment or other obligation becomes
due or payable. Employee benefit Claims that accrue prior to the Petition Date
will receive unimpaired treatment under the terms of the Prepackaged Plan.
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Cash Management
The Company believes it would be disruptive to the operations of its
Subsidiaries if it were forced to significantly change its cash management
system upon the commencement of the Prepackaged Chapter 11 Case. The Company
intends to seek relief from the Bankruptcy Court immediately upon commencement
of the Prepackaged Chapter 11 Case (i) to be authorized to maintain its cash
management system and (ii) to grant superpriority claims equal to the net cash
upstreamed to the Company, if any, by such Subsidiaries through the consolidated
cash management system during the Prepackaged Chapter 11 Case.
Retention of Professionals
The Company intends to seek authority to employ Jay Alix as its
restructuring advisor, PJSC as its financial advisor and investment banker,
Arthur Andersen LLP as its auditor, Kirkland & Ellis as its attorneys, and
Bozell Sawyer Miller Group as its public relations firm to the extent necessary.
Warranties and Customer Programs
The Company intends to seek authority to honor pre-petition warranty
obligations and pre-petition customer programs. The Company believes continuing
these services is essential to maintaining customer loyalty.
Customs Duties
The Company intends to seek authority to pay pre-petition customs duties
paid by its customs agents. The Company believes timely payment of these
expenses is necessary to maintain an efficient international shipping mechanism.
Insurance Programs
The Company intends to seek the authority to maintain and continue its
insurance programs, including workers' compensation, as such programs are
presently administered.
Trade Payables
The Company intends to seek the authority to pay all pre-petition trade
payables and to honor all obligations to its trade vendors.
Utility Service
The Company intends to seek an order restraining utilities from
discontinuing, altering or refusing service.
CONFIRMATION STANDARDS
Section 1129 of the Bankruptcy Code sets forth the requirements that must
be satisfied to confirm a plan of reorganization. A number of the more
significant Confirmation requirements are discussed below. The Company believes
that it has complied or will comply with each of these requirements.
Good Faith and Compliance with Law
The Bankruptcy Code requires that a plan of reorganization be proposed in
good faith and disclose certain relevant information regarding payments due and
the nature of compensation to insiders. The Company believes it has satisfied
these requirements and will seek a ruling to that effect from the Bankruptcy
Court in connection with Confirmation of the Prepackaged Plan.
Best Interests
Section 1129(a)(7) of the Bankruptcy Code requires that, with respect to
each Impaired Class, each member of such Class either (a) has accepted the
Prepackaged Plan, or (b) will receive or retain under the
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Prepackaged Plan on account of its Claim or Equity Interest property of a value,
as of the Effective Date, that is at least equal to the amount that such member
of the Class would receive or retain if the Company was liquidated under chapter
7 of the Bankruptcy Code. The Company believes that the Prepackaged Plan meets
this test and will seek appropriate findings from the Bankruptcy Court in
connection with the Confirmation of the Prepackaged Plan. See "SPECIAL
FACTORS -- Alternatives to Confirmation and Consummation of the Prepackaged
Plan -- Liquidation Under Chapter 7" and "LIQUIDATION ANALYSIS."
Feasibility
The Bankruptcy Court must also determine that the Prepackaged Plan is
feasible and is not likely to be followed by liquidation or further
reorganization of the Company. To determine whether the Prepackaged Plan meets
this requirement, the Company has analyzed their ability to meet their
obligations under the Prepackaged Plan. This analysis includes a forecast of
financial performance of the reorganized Company. Such forecast, together with
the underlying assumptions, is set forth below under "BUSINESS PLAN
PROJECTIONS." Based upon such forecast, the Company believes that it will have
the financial capability to satisfy its obligations following the Effective
Date. Accordingly, the Company will seek a ruling to that effect in connection
with the Confirmation of the Prepackaged Plan.
Prepackaged Plan Acceptance
The Bankruptcy Code requires, subject to certain exceptions, that the
Prepackaged Plan be accepted by all Impaired Classes of Claims and Equity
Interests. Classes of claims that are not "impaired" under a plan are deemed to
have accepted the plan and are not entitled to vote. The Bankruptcy Code defines
acceptance of a plan of reorganization by a class of claims as acceptance by
holders of at least 66 2/3% in dollar amount and more than one-half in number of
the Allowed Claims in that class, but for this purpose counts only those claims
that have been voted on the plan. Holders of claims who fail to vote or who
abstain will not be counted to determine the acceptance or rejection of the
Prepackaged Plan by any impaired class of claims. The Company may, however,
request Confirmation of the Prepackaged Plan even though some impaired Classes
have not accepted the Prepackaged Plan. See "-- Confirmation of the Prepackaged
Plan Without Acceptance by All Classes of Impaired Claims."
The Bankruptcy Code provides that acceptances obtained prior to the filing
of a petition will be effective in a chapter 11 case only if the pre-petition
solicitation of the acceptances complied with applicable non-bankruptcy law
governing the adequacy of disclosure or, if there is no such applicable
non-bankruptcy law, "adequate information" as defined under the Bankruptcy Code
is furnished in connection with the solicitation. The Company intends to use the
Ballots or Master Ballots received pursuant to this Solicitation to confirm the
Prepackaged Plan once it has filed its Prepackaged Chapter 11 Case. The Company
believes that this Solicitation complies with such applicable non-bankruptcy law
and otherwise contains "adequate information" and will seek appropriate findings
from the Bankruptcy Court in this regard.
CONFIRMATION OF THE PREPACKAGED PLAN WITHOUT ACCEPTANCE BY ALL CLASSES OF
IMPAIRED CLAIMS
The requirements for acceptance of the Prepackaged Plan by impaired Classes
are described under "-- Classification and Treatment of Claims and Equity
Interests under the Prepackaged Plan." The Bankruptcy Code also provides a
procedure by which the Prepackaged Plan may be confirmed despite the
non-acceptance of one or more Impaired Classes. This procedure is known as a
"cram down." If less than all of the impaired Classes accept the Prepackaged
Plan, the Prepackaged Plan may nevertheless be confirmed by the Bankruptcy Court
under section 1129(b) of the Bankruptcy Code, so long as at least one impaired
Class has affirmatively voted to accept the Prepackaged Plan, ignoring for this
purpose any acceptance by insiders of the Company as defined under the
Bankruptcy Code. To obtain Confirmation pursuant to section 1129(b) of the
Bankruptcy Code, the Company must demonstrate to the Bankruptcy Court that, as
to each non-accepting Class, the Prepackaged Plan "does not discriminate
unfairly" and is "fair and equitable." In general, a plan does not discriminate
unfairly if, among other things, it accords a dissenting class treatment
substantially equivalent to that accorded to other classes of equal rank, taking
into account for this purpose the effect of applicable subordination rights. The
Company believes that the Prepackaged Plan does not discriminate
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unfairly against any Class. The Bankruptcy Code establishes different "fair and
equitable" tests for secured creditors, unsecured creditors and interest holders
as follows:
1. Secured Creditors. A secured creditor in a dissenting class of
secured claims must retain the lien(s) securing its claim and receive under
the plan cash payments that total at least the allowed amount of the
secured claim and have a present value at least equal to the value of the
collateral securing such creditor's claim.
2. Unsecured Creditors. An unsecured creditor in a dissenting class of
unsecured claims must receive or retain under the plan property of a value
at least equal to the amount of its allowed claim, or the holders of the
claims or equity interests junior to the claims of the dissenting class of
unsecured creditors must neither receive nor retain any property under the
plan on account of such junior claim or interest.
3. Equity Interest Holders. An equity interest holder must receive or
retain under the plan property of a value equal to the greatest of the
allowed amount of any fixed liquidation preference to which such holder is
entitled, any fixed redemption price to which such holder is entitled, or
the value of such interest or the holder of any equity interest that is
junior to the equity interests of such class must neither receive nor
retain any property under the plan on account of such junior interest.
The Company will seek Confirmation of the Prepackaged Plan under section
1129(b) of the Bankruptcy Code in view of the deemed rejection by the holders of
Equity Interests. In the event that any impaired Class fails to accept the
Prepackaged Plan (other than the Equity Interest holders) in accordance with
section 1129(a)(8) of the Bankruptcy Code, the Company reserves the right (i) to
request that the Bankruptcy Court confirm the Prepackaged Plan in accordance
with section 1129(b) of the Bankruptcy Code and/or (ii) to modify the
Prepackaged Plan in accordance with the Prepackaged Plan. IN THE EVENT THAT
HOLDERS OF THE OLD SUBORDINATED DEBENTURES DO NOT APPROVE THE PREPACKAGED PLAN,
THE COMPANY INTENDS (AND THE PREPACKAGED PLAN SO PROVIDES) TO SEEK CONFIRMATION
OF THE PREPACKAGED PLAN UNDER THE "CRAM DOWN" PROVISIONS WITH RESPECT TO THE
CLASS COMPOSED OF THE HOLDERS OF THE OLD SUBORDINATED DEBENTURES. IF SUCH A
"CRAM DOWN" IS APPROVED BY THE BANKRUPTCY COURT, HOLDERS OF THE OLD SUBORDINATED
DEBENTURE CLAIMS WOULD RECEIVE NO DISTRIBUTION AND RETAIN NO PROPERTY. Any such
Confirmation would be subject to judicial approval of this solicitation and the
Prepackaged Plan, including as required under the "cram down" provisions of the
Bankruptcy Code. See "RISK FACTORS -- Certain Bankruptcy
Considerations -- Nonacceptance of the Prepackaged Plan -- Confirmation by Cram
Down."
CERTAIN CONSEQUENCES OF NON-ACCEPTANCE OF THE PREPACKAGED PLAN
If the requisite acceptances are not received by the Expiration Date, the
Company will be forced to evaluate options then available to it. Options
available to the Company could include extending the Solicitation period,
seeking non-consensual confirmation of the Prepackaged Plan on the basis
described above or on some other basis, submission of a revised prepackaged plan
of reorganization to its creditors and Equity Interest holders, filing for
protection under the Bankruptcy Code without a preapproved plan of
reorganization or pursuing a non-bankruptcy restructuring.
In the event a bankruptcy proceeding is commenced without the prior
acceptance of the Prepackaged Plan, there is a risk that the Prepackaged Plan
may be found not to satisfy the "cram down" standards and would not be
confirmed. In this scenario, there may be little, if any, value available for
distribution to unsecured creditors of the Company, including holders of the Old
Subordinated Debentures. Furthermore, there can be no assurance that the Company
would be able to emerge from such a proceeding under the Bankruptcy Code, in
which case the Company might be forced into a liquidation proceeding under
chapter 7 of the Bankruptcy Code. See "RISK FACTORS -- High Leverage and Recent
Operating Results; Independent Auditor's Report; and High Leverage" and
"-- Certain Bankruptcy Considerations -- Certain Risks of Nonconfirmation." If,
on the other hand, the requisite acceptances are obtained and the Prepackaged
Plan is confirmed, the treatment and settlement of Claims provided for in the
Prepackaged Plan for each Class of the Company's debt and equity securities will
be made to each holder of a Claim or Equity Interest, whether or not they have
voted to accept the Prepackaged Plan.
70
<PAGE> 83
In addition, the Prepackaged Plan may be confirmed if certain conditions
are met even if the Prepackaged Plan is not accepted by each Class of Claims
entitled to vote. As described above, the Prepackaged Plan provides for certain
alternative treatments in the event requisite approval of the Prepackaged Plan
by holders of the Old Subordinated Debentures is not obtained. The Company also
reserves the right to modify the terms of the Prepackaged Plan as necessary for
the confirmation of the Prepackaged Plan without acceptance by other Impaired
Classes. Such modification could result in a less favorable treatment to holders
of the Old Subordinated Debentures than the treatment currently provided in the
Prepackaged Plan or a distribution of no property. See "THE PREPACKAGED
PLAN -- Confirmation of the Prepackaged Plan Without Acceptance by All Classes
of Impaired Claims." However, except as described above with respect to a
"cram-down" of the Old Subordinated Debentures, the Company may choose not to
seek Confirmation of the Prepackaged Plan in the event one or more Classes of
Claims do not accept the Prepackaged Plan, but may choose instead to seek an
alternative means to restructure the Company, including the options described
above.
MARKET PRICES OF THE COMMON STOCK
The Old Common Stock was historically listed and traded on the NYSE. On May
21, 1998, the Company announced the terms of the Financial Restructuring. On May
22, 1998, the NYSE suspended trading of the Old Common Stock. The Old Common
Stock has traded in the over-the-counter market since that time. The following
table sets forth for the periods indicated the high and low trading prices per
share of Old Common Stock on the NYSE through May 21, 1998 and in the
over-the-counter market since May 22, 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. 7 1/2 5 7/8
Second Quarter............................................ 25 3/4 6 1/8
Third Quarter............................................. 17 1/2 8 1/8
Fourth Quarter............................................ 16 5/8 10 1/4
1997
First Quarter............................................. 12 1/2 9
Second Quarter............................................ 13 1/8 9 5/8
Third Quarter............................................. 12 15/16 9 3/4
Fourth Quarter............................................ 10 1/4 5 1/8
1998
First Quarter............................................. 7 3/4 5 7/16
Second Quarter (through May 21, 1998)..................... 6 13/16 5/8
Second Quarter (from May 22, 1998)........................ 23/32 1/4
Third Quarter (through August 5, 1998).................... 3/4 17/64
</TABLE>
71
<PAGE> 84
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES
The Old Subordinated Debentures were historically listed and traded on the
NYSE. On May 21, 1998, the Company announced the terms of the Financial
Restructuring. On May 22, 1998, the NYSE suspended trading of the Old
Subordinated Debentures. The following table sets forth, for the periods
indicated, the high and low trading price for each $1,000 principal amount of
the Old Subordinated Debentures on the NYSE Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. 69 7/8 68
Second Quarter............................................ 81 77 1/4
Third Quarter............................................. 86 82
Fourth Quarter............................................ 81 70 1/2
1997
First Quarter............................................. 79 3/4 72 1/2
Second Quarter............................................ 84 1/4 81 1/2
Third Quarter............................................. 85 76 1/4
Fourth Quarter............................................ 74 1/2 49
1998
First Quarter............................................. 75 57
Second Quarter (through May 21, 1998)..................... 71 1/4 20
</TABLE>
On May 21, 1998, the last trading day prior to the suspension of trading of
the Old Subordinated Debentures, the closing sales price of the Old Subordinated
Debentures on the New York Stock Exchange was $25 3/8.
72
<PAGE> 85
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) March 28, 1998 on an historical basis and
on a pro forma basis giving effect to the Financial Restructuring as if it had
occurred on March 28, 1998 and (ii) December 31, 1998 on a projected basis as if
the Financial Restructuring had not occurred and on a pro forma basis giving
effect to the Financial Restructuring as if it had occurred on December 31,
1998. The table should be read in conjunction with "ANNEX B -- MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Company's consolidated financial statements, including the notes thereto,
located elsewhere in this Disclosure Statement.
<TABLE>
<CAPTION>
PROJECTED
AS OF MARCH 28, 1998 AS OF DECEMBER 31, 1998
-------------------- ------------------------------
WITHOUT WITH
ACTUAL PRO FORMA RESTRUCTURING RESTRUCTURING
------- --------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash............................................ $ 23.2 $ 68.2 $ -- $ --
======= ======= ======= =======
LGE Extended Payables Claims.................... $ 133.7 $ -- $ 140.0 $ --
======= ======= ======= =======
Debt:
Bank Lender Claims............................ $ 102.0(1) $ 52.0(2) $ 52.0(2) $ 52.0(2)
Citibank Credit Facility...................... 38.3 38.3 -- --
Amended Citibank Credit Facility.............. -- -- 56.7 56.7
LGE Leveraged Lease Claims.................... -- -- 90.1 --
LGE Reimbursement Claims...................... -- -- 50.0 --
LGE Direct Loan Claims........................ -- -- 45.0 --
Old Subordinated Debentures (at face value)... 103.5 -- 103.5 --
New Subordinated Debentures (at face value)... -- 40.0 -- 40.0
LGE New Restructured Senior Note.............. -- 86.6 -- 96.8
------- ------- ------- -------
Total debt(3)............................... $ 243.8 $ 216.9 $ 397.3 $ 245.5
======= ======= ======= =======
Stockholders' equity:
Old Common Stock, $1.00 par value, 150,000,000
shares authorized, 67,525,447 shares issued
and outstanding(4).......................... $ 67.1 $ -- $ 67.1 $ --
New Common Stock, $0.01 par value, 1,000
shares authorized, 1,000 shares issued and
outstanding(5).............................. -- -- -- --
Additional paid-in capital, old............... 507.3 572.7 507.3 572.7
Additional paid-in capital, new............... -- 200.0 -- 200.0
Retained earnings (deficit)................... (699.5) (745.6) (886.1) (910.7)
Treasury stock................................ (1.7) -- (1.7) --
------- ------- ------- -------
Total stockholders' equity.................. $(126.8) $ 27.1 $(313.4) $(138.0)
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes the Company's credit facilities with Bank of America ($22.0), First
National Bank of Chicago-NBD ($30.0), Societe Generale ($20.0) and Credit
Agricole Indosuez ($30.0).
(2) Includes the Company's credit facilities with Bank of America ($22.0) and
Credit Agricole Indosuez ($30.0).
(3) As of March 28, 1998, the Company had two off balance sheet financing
vehicles: (i) the Citibank Receivables Facility, which was terminated and
replaced by the Amended Citibank Credit Facility; and (ii) the Leveraged
Leases, which have subsequently been terminated or restated to bring them
back on balance sheet. On March 28, 1998, the Citibank Receivables Facility
had $21 million of investors certificates outstanding which were funded via
a commingled commercial paper conduit managed by Citibank. On July 22, 1998,
LGE made a negotiated settlement payment of $90.1 million under the
guarantees of the Leveraged Leases. Zenith is obligated under documents
related to the Leveraged Leases for the repayment of this settlement amount.
(4) Excludes 5,721,401 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of June 30, 1998, of which 3,965,000 shares are
issuable to LGE and 1,756,401 shares are issuable to employees. There will
be no such options outstanding on a pro forma basis.
(5) New Common Stock does not show a value due to rounding in millions.
73
<PAGE> 86
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information of the Company for the five years ended December 31, 1997, and the
three-month periods ended March 28, 1998 and March 29, 1997. The selected annual
historical consolidated financial information presented below has been derived
from and should be read in conjunction with the Consolidated Financial
Statements of the Company and its Subsidiaries which were audited by Arthur
Andersen LLP, whose report with respect to certain of such financial statements
appears elsewhere in this Disclosure Statement. The selected unaudited
historical financial information for the three-month periods ended March 28,
1998 and March 29, 1997 has been derived from unaudited consolidated financial
statements prepared by the Company, which reflect all adjustment, consisting
only of normal recurring adjustments, that, in the opinion of the Company, are
necessary for a fair presentation. The following financial information should be
read in conjunction with "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION," "ANNEX
B -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Disclosure Statement. See "INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
(UNAUDITED)
MARCH 28, MARCH 29,
1998 1997 1997 1996 1995(1) 1994(1) 1993(1)
--------- --------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Net sales................... $220.7 $259.1 $1,173.1 $1,287.9 $1,273.9 $1,469.0 $1,228.2
Pre-tax income (loss)....... (37.8) (25.2) (300.2) (177.8) (98.5) (14.8) (93.2)
Net income (loss)........... (37.8) (25.2) (299.4) (178.0) (90.8) (14.5) (93.2)
Financial Position:
Total assets................ $499.7 $734.7 $ 527.7 $ 765.3 $ 700.7 $ 662.4 $ 568.5
Long term debt.............. 127.0 152.7 132.8 152.7 168.8 182.0 170.0
Stockholders' equity
(deficit)................ (126.8) 137.1 (85.3) 162.0 317.5 237.1 161.5
Per share of common stock:
Net income (loss)........... $(0.55) $(0.38) $ (4.49) $ (2.73) $ (1.85) $ (0.35) $ (2.89)
Book value (deficit)........ (1.89) 2.06 (1.27) 2.44 5.00 5.19 4.50
</TABLE>
- ---------------
(1) Restated to reflect the Company's change in its inventory costing method for
its picture tube inventories from LIFO to FIFO.
74
<PAGE> 87
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of March
28, 1998 set forth below has been prepared as if the Financial Restructuring had
been completed as of March 28, 1998. The unaudited pro forma statements of
consolidated operations for the year ended December 31, 1997 and the three
months ended March 28, 1998 set forth below have been prepared as if the
Financial Restructuring had been completed as of the first day of the respective
periods. Pro forma adjustments solely reflect the pro forma effects of the
Financial Restructuring. During 1998, the Company expects to incur certain
charges associated with its Operational Restructuring which are not included
herein. The Business Plan Projections included in this Disclosure Statement
include the projected financial statement impact of the Company's Restructuring
and should be read in conjunction with this pro forma financial information.
Upon consummation of the Financial Restructuring, the Company's consolidated
financial statements will continue to be accounted for on a historical basis.
"Fresh start" reporting has not been applied in the pro forma statements, since
upon consummation of the Financial Restructuring, no change in control will
occur as defined by the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code." The pro forma financial information should be read
in conjunction with "ANNEX B -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
Disclosure Statement. The pro forma financial data does not purport to represent
the Company's actual financial condition or results of operations had the
prepackaged Plan actually been completed on the date indicated, nor does it
project the Company's financial position or results of operations for any future
dates of periods.
75
<PAGE> 88
ZENITH ELECTRONICS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 28, 1998
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 23.2 $ 45.0(a) $ 68.2
Receivables, net.......................................... 16.0 -- 16.0
Inventories............................................... 127.1 -- 127.1
Transferor certificates................................... 103.4 -- 103.4
Other..................................................... 23.4 (3.6)(b) 19.8
------ ------- ------
Total current assets.............................. 293.1 41.4 334.5
Property, plant and equipment, net........................ 164.4 (36.4)(c) 128.0
Other..................................................... 42.2 (28.6)(b) 13.6
------ ------- ------
Total assets.................................... $499.7 $ (23.6) $476.1
====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $102.0 $ (50.0)(d) $ 52.0
Current portion of long-term debt......................... 14.8 (5.8)(e) 9.0
Accounts payable.......................................... 86.6 -- 86.6
Accounts payable to related party......................... 134.0 (133.7)(f) 0.3
Income taxes payable...................................... 0.7 -- 0.7
Other accrued expenses.................................... 144.6 -- 144.6
------ ------- ------
Total current liabilities......................... 482.7 (189.5) 293.2
====== ======= ======
Long-term debt.............................................. 127.0 28.8(g) 155.8
Other long term liabilities................................. 16.8 (16.8)(h) --
Stockholders' equity:
Preferred stock........................................... -- -- --
Old Common Stock.......................................... 67.1 (67.1)(i) --
New Common Stock.......................................... -- -- --
Old additional paid-in capital............................ 507.3 65.4(j) 572.7
New additional paid-in capital............................ -- 200.0(k) 200.0
Retained earnings (deficit)............................... (699.5) (46.1)(l) (745.6)
Old treasury stock........................................ (1.7) 1.7(i) --
------ ------- ------
Total stockholders' equity........................ (126.8) 153.9 27.1
------ ------- ------
Total liabilities and stockholders' equity...... $499.7 $ (23.6) $476.1
====== ======= ======
</TABLE>
NOTES TO THE PRO FORMA BALANCE SHEET
- ---------------
(a) Cash will increase by $45.0 million (the LGE Demand Note Claims) as the
Company receives direct secured loans from LGE. The cash is required to fund
operating losses through the remainder of the year. These loans will be
settled partially by the LGE New Restructured Senior Note as shown in
footnote (g) and partially through the issuance of New Common Stock as shown
below in footnote (k).
76
<PAGE> 89
(b) Other current and non-current assets will be reduced as a result of writing
off deferred charges (bank, attorney and guarantee fees) related to the
Leveraged Leases, the Old Subordinated Debentures and the LGE Extended
Payables Claims. These items will be written off as the corresponding
agreements will no longer be in place. The effect on equity of these
write-offs is shown in footnote (l).
<TABLE>
<CAPTION>
CURRENT NON-CURRENT
PORTION PORTION TOTAL
------- ----------- -----
<S> <C> <C> <C>
Leveraged Leases deferred charges............... $2.5 $26.8 $29.3
Old Subordinated Debentures deferred charges.... 0.1 0.8 0.9
LGE Extended Payables Claims deferred charges... 1.0 1.0 2.0
---- ----- -----
$3.6 $28.6 $32.2
==== ===== =====
</TABLE>
(c) Property, Plant and Equipment will be reduced by a total of $36.4 million as
a result of (i) $49.7 million (book value) of Reynosa Assets being
transferred by the Company to LGE under LGE Tranche A Claims, offset by (ii)
$13.3 million (fair value) of assets being received by the Company as a
result of Leveraged Lease assets returning back to the Company.
(d) Short-term debt will be reduced by $50.0 million as the Unsecured Bank Loans
are paid off by LGE. The Company will settle this obligation to LGE through
the issuance of New Common Stock as shown in footnote (k).
(e) Current portion of long-term debt will be reduced as the current portion
($5.8 million) of the Old Subordinated Debentures are retired. The
retirement of the long-term portion ($97.8 million) of the Old Subordinated
Debentures is presented below in footnote (g). The retirement of the Old
Subordinated Debentures will give rise to an extraordinary gain of $63.6
million. The effect on equity of this gain is shown in footnote (l).
(f) Accounts payable to related party will be reduced by $133.7 million as the
LGE Extended Payables Claims are settled through the issuance of New Common
Stock as shown in footnote (k).
(g) Long-term debt will increase by $28.8 million as a result of the following:
<TABLE>
<C> <S>
$(97.8) Retirement of long-term portion of the Old Subordinated
Debentures
40.0 Record New Subordinated Debentures at face value
86.6 Record new LGE New Restructured Senior Note*
- ------
$ 28.8
======
</TABLE>
* The $86.6 million LGE New Restructured Senior Note represents (i) the
Company's obligation to settle with LGE for the $82.1 million cost of
the Leveraged Lease equipment returned to the Company as referenced in
footnote (l), (ii) the Company's obligation to settle a portion ($36.9
million) of LGE Demand Loan Claims to the Company, offset by (iii) the
Company's transfer of $32.4 million (appraised value) of Reynosa
Assets.
(h) Other long-term liabilities will be reduced by $16.8 million as a result of
the following:
<TABLE>
<C> <S>
$ (8.2) Reduction of LGE payable related to LGE Technical Services
Claims settled via the issuance of New Common Stock
(8.6) Accelerated amortization of the deferred gain on the
Leveraged Leases
- ------
$(16.8)
======
</TABLE>
(i) The Old Common Stock ($67.1 million) and old treasury stock ($1.7 million)
are cancelled as part of the Financial Restructuring and the amounts are
transferred to old additional paid-in capital as shown in footnote (j).
(j) Old additional paid-in capital will increase by $65.4 million as a result of
the cancellation of Old Common Stock and old treasury stock as shown in
footnote (i).
77
<PAGE> 90
(k) New additional paid-in capital will increase by $200.0 million as a result
of the following:
<TABLE>
<C> <S>
$50.0 New Common Stock issued to LGE as settlement for LGE payoff
of Unsecured Bank Loans. See footnote (d).
133.7 New Common Stock issued to LGE as settlement for LGE
Extended Payables Claims. See footnote (f).
8.2 New Common Stock issued to LGE as settlement for LGE
Technical Services Claims. See footnote (h).
0.0 New Common Stock issued to LGE as settlement for LGE
Guarantee Fee Claims (at March 28, 1998).
8.1 New Common Stock issued to LGE as partial settlement for LGE
Demand Loan Claims to the Company. See footnote (a).
- ------
$200.0
======
</TABLE>
Note that 1,000 shares of New Common Stock with a par value of $0.01
will be issued, but an amount is not shown because the Pro Forma Balance
Sheet is presented in rounded millions.
(l) Retained earnings (deficit) will be reduced by $46.1 million as a result of
the following:
<TABLE>
<C> <S>
$ 63.6 Extraordinary gain on retirement of the Old Subordinated
Debentures. See footnotes (e) and (g).
8.6 Accelerated amortization of the deferred gain on the
Leveraged Leases. See footnote (h).
(29.3) Leveraged Leases deferred charges written off. See footnote
(b).
(0.9) Old Subordinated Debentures deferred charges written off.
See footnote (b).
(2.0) LGE Extended Payables Claims deferred charges written off.
See footnote (b).
(68.8) Loss on termination of Leveraged Leases: represents the
difference between the cost of the assets ($82.1 million)
and their fair value ($13.3 million).
(17.3) Write down of Reynosa Assets to fair market value.
- ------
$(46.1)
======
</TABLE>
78
<PAGE> 91
ZENITH ELECTRONICS CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 28, 1998 YEAR ENDED DECEMBER 31, 1997
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $220.7 $ -- $220.7 $1,173.1 $ -- $1,173.1
------ ----- ------ -------- ------ --------
Costs, expenses and other:
Cost of products sold................ 213.5 (2.5)(a) 211.0 1,180.5 (10.1)(a) 1,170.4
Selling, general and
administrative..................... 33.3 (2.6)(b) 30.7 178.3 -- 178.3
Engineering and research............. 10.8 -- 10.8 42.9 -- 42.9
Other operating expense (income),
net................................ (7.2) -- (7.2) 42.4 -- 42.4
------ ----- ------ -------- ------ --------
Operating income (loss)................ (29.7) 5.1 (24.6) (271.0) 10.1 (260.9)
Gain (loss) on asst sales, net......... (0.2) -- (0.2) (4.6) -- (4.6)
Interest expense....................... (8.2) 3.9(c) (4.3) (25.5) 8.0(c) (17.5)
Interest income........................ 0.3 -- 0.3 0.9 -- 0.9
------ ----- ------ -------- ------ --------
Income (loss) before income taxes...... (37.8) 9.0 (28.8) (300.2) 18.1 (282.1)
Income taxes (credit).................. -- -- -- (0.8) -- (0.8)
------ ----- ------ -------- ------ --------
Net income (loss)...................... $(37.8) $ 9.0 $(28.8) $ (299.4) $ 18.1 $ (281.3)
====== ===== ====== ======== ====== ========
Net income (loss) per common share..... $(0.55) $0.12 $(0.43) $ (4.49) $ 0.27 $ (4.22)
====== ===== ====== ======== ====== ========
</TABLE>
- ---------------
(a) Decrease in cost of products sold reflects the elimination of lease expense
related to the cancelled Leveraged Lease.
(b) Decrease in selling, general and administrative expenses reflects the
elimination of costs incurred as a direct result of the Company's efforts to
achieve a financial restructuring including costs to negotiate the
Restructuring Agreement, develop the operating plan and prepare this
disclosure and solicitation statement.
(c) Net reduction of interest expense as a result of the Financial Restructuring
has been estimated as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED 3/28/98 12/31/97
------------- ----------
<S> <C> <C>
Interest expense on the new debt:
LGE New Restructured Senior Note, at LIBOR
(adjusted quarterly) + 6.5%, (estimated herein
as 12%) (principal -- $96.8 million).......... $ 2.6 $10.4
New Subordinated Debentures (principal -- $40.0
million at face value)........................ 0.6 2.5
Reversal of actual interest expense:
A portion ($50.0 million) of the Unsecured Bank
Loans......................................... (0.8) (0.3)
Old Subordinated Debentures...................... (1.8) (6.9)
LGE Extended Payables............................ (3.1) (9.6)
Amortization of LGE Guarantee Fee Claims related
to various financing activities............... (1.4) (4.1)
----- -----
Net reduction in interest.......................... $(3.9) $(8.0)
===== =====
</TABLE>
79
<PAGE> 92
Note: The following items are non-recurring and as such are not presented in the
Pro Forma Statements of Consolidated Operations. Footnote references
relate to the Notes to the Pro Forma Balance Sheet.
<TABLE>
<C> <S>
$ 63.6 Extraordinary gain on retirement of the Old Subordinated
Debentures. See footnotes (e) and (g).
8.6 Accelerated amortization of the deferred gain on the
Leverage Lease. See footnote (h).
(29.3) Leveraged Leases deferred charges written off. See footnote
(b).
(0.9) Old Subordinated Debentures deferred charges written off.
See footnote (b).
(2.0) LGE Extended Payables Claims deferred charges written off.
See footnote (b).
(68.8) Loss on termination of Leveraged Leases: represents the
difference between the cost of the assets ($82.1 million)
and their fair value ($13.3 million).
(17.3) Write down of Reynosa Assets to fair market value.
- ------
$(46.1)
======
</TABLE>
80
<PAGE> 93
BUSINESS PLAN PROJECTIONS
In connection with the planning and development of the Prepackaged Plan,
the Business Plan Projections were prepared by the Company to present the
anticipated impact of the Prepackaged Plan and the Operational Restructuring.
The Business Plan Projections assume that the Prepackaged Plan will be
implemented in accordance with its terms. Because the projections are based on
forecasts of key economic variables, including without limitation estimated
domestic market television sales, the introduction of digital television
products, and the Company's ability to implement the Operational Restructuring
as planned, the estimates and assumptions underlying the Business Plan
Projections are inherently uncertain. Though considered reasonable by the
Company as of the date hereof, the Business Plan Projections are subject to
significant business, economic and competitive uncertainties. Accordingly, such
projections, estimates and assumptions are not necessarily indicative of current
values or future performance, which may be significantly less favorable or more
favorable than as set forth. The Business Plan Projections were substantially
completed in mid-1998.
The Business Plan Projections are only an estimate of future results of
operations, and actual results may vary considerably from the Business Plan
Projections. In addition, the uncertainties which are inherent in the Business
Plan Projections increase for later years in the projection period, due to the
increased difficulty associated with forecasting levels of economic activity and
corporate performance at more distant points in the future. Consequently, the
projected information included herein should not be regarded as a representation
by the Company, the Company's advisors or any other person that the projected
results will be achieved. The projections were not prepared with a view towards
public disclosure or compliance with Generally Accepted Accounting Principles,
the published guidelines of the Securities and Exchange Commission or the
American Institute of Certified Public Accountants regarding projections or
forecasts. Arthur Andersen LLP, the Company's independent auditors, have neither
examined, reviewed nor compiled the Business Plan Projections, and consequently
do not express an opinion or any other form of assurance with respect thereto.
The Company does not intend to update or otherwise revise the Business Plan
Projections to reflect circumstances existing after the date hereof or to
reflect the occurrence of unanticipated events, even in the event that any or
all of the underlying assumptions are shown to be in error, except as required
by applicable law.
The projections should be read together with the other information
contained herein under the headings "The Restructuring," "Selected Financial
Information," "Pro Forma Financial Information," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and related notes included
elsewhere in the Disclosure Statement.
Certain statements in this Disclosure Statement are forward-looking
statements that involve known and unknown risks, uncertainties and other factors
which may cause the actual results of the Company to be materially different
from any future results expressed or implied by such forward-looking statements.
Forward-looking statements include, among others, statements regarding the
ability of the Company to successfully implement the Restructuring and the
Business Plan Projections and the projected or assumed future operations and
financial results of the Company. Factors that may cause actual results of the
Company to differ from future results expressed or implied by forward-looking
statements 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; the risks described under the
caption "RISK FACTORS"; the ability of the Company to obtain confirmation of the
Prepackaged Plan; and the ability of the Company to successfully implement the
Restructuring and the Business Plan Projections. The Company claims the
protection of the disclosure liability safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
HOLDERS OF IMPAIRED CLAIMS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
BUSINESS PLAN PROJECTIONS IN DETERMINING WHETHER TO VOTE TO ACCEPT OR REJECT THE
PREPACKAGED PLAN. PLEASE REVIEW THE SECTION TITLED "RISK FACTORS" IN ORDER TO
GAIN MORE DETAIL ON THE POTENTIAL FACTORS WHICH COULD AFFECT THE COMPANY'S
ABILITY TO ACHIEVE THE PERFORMANCE INDICATED IN THE PROJECTIONS.
81
<PAGE> 94
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
PROJECTED
SECOND
ACTUAL THROUGH PROJECTED
FIRST FOURTH PROJECTED RESTRUCTURING PROJECTED
QUARTER QUARTERS UNADJUSTED ADJUSTMENTS ADJUSTED
------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Sales...................... $220.7 $ 769.0 $ 989.7 $ -- $ 989.7
Cost of products sold...... 213.5 715.6 929.1 9.3(a) 938.4
Selling, general and
administrative(q)........ 30.7 87.1 117.8 -- 117.8
Engineering and research... 10.8 27.6 38.4 -- 38.4
Restructuring expense...... 2.6 94.1 96.7(b) -- 96.7
Other operating expense
(income), net(c)......... (5.8) (17.6) (23.4) -- (23.4)
------ ------- ------- ------ -------
Operating income (loss).... (31.1) (137.8) (168.9) (9.3) (178.2)
Gain (loss) on asset
sales.................... (0.2) 19.1 18.9 -- 18.9
Finance guarantee fee
charge(d)................ -- (32.0) (32.0) (2.0) (34.0)
Interest expense, net...... (6.5) (36.1) (42.6) -- (42.6)
------ ------- ------- ------ -------
Income (loss) before
reorganization items..... (37.8) (186.8) (224.6) (11.3) (235.9)
Reorganization items....... -- -- -- 134.3(e) 134.3
Taxes on income/(income tax
benefit)................. -- -- -- -- --
------ ------- ------- ------ -------
Net earnings (loss) before
extraordinary items...... (37.8) (186.8) (224.6) (145.6) (370.2)
Extraordinary gain on debt
retirement............... -- -- -- 63.6(f) 63.6
Net earnings (loss)........ $(37.8) $(186.8) $(224.6) $(82.0) $(306.6)
====== ======= ======= ====== =======
Memo:
Operating income (loss).... $(31.1) $(137.8) $(168.9) $ (9.3) $(178.2)
Restructuring expense...... 2.6 94.1 96.7 -- 96.7
Depreciation and
Amortization............. 7.8 27.9 35.7 9.3 45.0
------ ------- ------- ------ -------
EBITDA(g).................. $(20.7) $ (15.8) $ (36.5) $ -- $ (36.5)
====== ======= ======= ====== =======
<CAPTION>
PROJECTED FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Sales...................... $916.0 $917.8 $961.9 $1,013.9 $1,039.9
Cost of products sold...... 858.8 840.2 869.6 912.3 931.5
Selling, general and
administrative(q)........ 100.3(q) 92.7 94.6 99.1 102.2
Engineering and research... 13.3 7.9 8.2 8.4 8.7
Restructuring expense...... -- -- -- -- --
Other operating expense
(income), net(c)......... (24.7) (35.9) (53.6) (75.2) (78.8)
------ ------ ------ -------- --------
Operating income (loss).... (31.7) 12.9 43.1 69.3 76.3
Gain (loss) on asset
sales.................... 35.8 -- -- -- --
Finance guarantee fee
charge(d)................ -- -- -- -- --
Interest expense, net...... (23.5) (25.6) (25.1) (23.7) (19.7)
------ ------ ------ -------- --------
Income (loss) before
reorganization items..... (19.4) (12.7) 18.0 45.6 56.6
Reorganization items....... -- -- -- -- --
Taxes on income/(income tax
benefit)................. -- -- -- -- --
------ ------ ------ -------- --------
Net earnings (loss) before
extraordinary items...... (19.4) (12.7) 18.0 45.6 56.6
Extraordinary gain on debt
retirement............... -- -- -- -- --
Net earnings (loss)........ $(19.4) $(12.7) $ 18.0 $ 45.6 $ 56.6
====== ====== ====== ======== ========
Memo:
Operating income (loss).... $(31.7) $ 12.9 $ 43.1 $ 69.3 $ 76.3
Restructuring expense...... -- -- -- -- --
Depreciation and
Amortization............. 9.0 2.7 3.2 3.6 3.9
------ ------ ------ -------- --------
EBITDA(g).................. $(22.7) $ 15.6 $ 46.3 $ 72.9 $ 80.2
====== ====== ====== ======== ========
</TABLE>
82
<PAGE> 95
ZENITH ELECTRONICS CORPORATION
PROJECTED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
ACTUAL PROJECTED PROJECTED PROJECTED
FIRST UNADJUSTED RESTRUCTURING ADJUSTED
QUARTER DECEMBER 31, ADJUSTMENTS DECEMBER 31,
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash....................... $ 23.4 $ -- $ -- $ --
Accounts receivable........ 130.5 149.0 -- 149.0
Inventory.................. 127.1 98.4 (9.3)(h) 89.1
Other current assets....... 23.4 15.1 -- 15.1
------ ------ ------- -------
Total current assets....... 304.4 262.5 (9.3) 253.2
Plant, property and
equipment, net........... 170.3 134.9 (61.9)(j) 73.0
Plant, property and
equipment, environmental
reserve.................. -- -- (23.9)(k) (23.9)
Other assets............... 36.1 6.2 (2.0)(l) 4.2
Other receivable........... -- 20.1(i) (20.1) --
------ ------ ------- -------
Total assets............... $510.8 $423.7 (117.2) $ 306.5
====== ====== ======= =======
LIABILITIES & DEFICIT:
Short-term debt............ $127.8 $299.6 $(183.3) $ 116.3
Accounts payable........... 80.6 49.2 -- 49.2
Accrued liabilities........ 145.3 140.8 -- 140.8
Restructuring.............. 0.1 1.4 57.0(m) 58.4
Long-term debt............. 127.0 97.8 39.0 136.8
Other liabilities.......... 16.7 8.3 (7.9)(n) 0.4
LGE Extended Payables
Claims................... 140.0 140.0 (140.0) 0.0
------ ------ ------- -------
Total liabilities.......... 637.5 737.1 (235.2) 501.9
Stockholders Equity........ (126.7) (313.4) 118.0(o) (195.4)
------ ------ ------- -------
Total liabilities and
stockholders' equity..... $510.8 $423.7 $(117.2) $ 306.5
====== ====== ======= =======
<CAPTION>
PROJECTED AS OF DECEMBER 31,
-----------------------------------------------
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash....................... $ -- $ -- $ -- $ -- $ 4.2
Accounts receivable........ 132.8 100.6 105.4 111.1 114.0
Inventory.................. 91.7 70.0 72.5 76.0 77.6
Other current assets....... 13.1 11.1 9.0 7.1 5.1
------- ------- ------- ------- -------
Total current assets....... 237.6 181.7 186.9 194.2 200.9
Plant, property and
equipment, net........... 12.4 14.7 16.5 17.9 19.0
Plant, property and
equipment, environmental
reserve.................. -- -- -- -- --
Other assets............... 4.2 4.2 4.2 4.2 4.2
Other receivable........... -- -- -- -- --
------- ------- ------- ------- -------
Total assets............... $ 254.2 $ 200.6 $ 207.6 $ 216.3 $ 224.1
======= ======= ======= ======= =======
LIABILITIES & DEFICIT:
Short-term debt............ 129.1 $ 105.6 $ 84.6 $ 48.0 $ --
Accounts payable........... 74.4 62.0 65.2 69.1 71.0
Accrued liabilities........ 99.8 92.4 92.4 92.4 92.5
Restructuring.............. 3.5 1.0 0.0 0.0 0.0
Long-term debt............. 135.7 147.7 161.1 161.1 161.1
Other liabilities.......... 26.5 19.4 13.8 9.6 6.8
LGE Extended Payables
Claims................... 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- -------
Total liabilities.......... 469.0 428.1 417.1 380.2 331.4
Stockholders Equity........ (214.8) (227.5) (209.5) (163.9) (107.3)
------- ------- ------- ------- -------
Total liabilities and
stockholders' equity..... $ 254.2 $ 200.6 $ 207.6 $ 216.3 $ 224.1
======= ======= ======= ======= =======
</TABLE>
83
<PAGE> 96
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998
---------------------------------
PROJECTED PROJECTED AS OF DECEMBER 31,
SECOND ----------------------------------------------
ACTUAL THROUGH FULL
FIRST FOURTH YEAR
QUARTER QUARTERS PROJECTED 1999 2000 2001 2002 2003
------- --------- --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA.............................. $(20.7) $ (15.8) $ (36.5) $(22.7) $ 15.6 $ 46.3 $ 72.9 $ 80.2
WORKING CAPITAL CHANGES:
Accounts receivable................. 1.9 (18.5) (16.6) 16.2 32.2 (4.8) (5.7) (2.8)
Inventory........................... 38.4 28.7 67.1 (2.6) 21.7 (2.5) (3.6) (1.6)
Accounts payable.................... (12.3) (31.4) (43.7) 25.2 (12.4) 3.2 3.8 1.9
Accrued liabilities................. 2.9 (4.5) (1.6) (41.0) (7.5) -- 0.1 0.1
Others, net......................... 6.8 (2.1) 4.7 4.2 (5.0) (3.6) (2.2) (0.9)
------ ------- ------- ------ ------ ------ ------ ------
Cash flow from operations before
restructuring charges............. 17.0 (43.6) (26.6) (20.7) 44.6 38.6 65.3 76.9
------ ------- ------- ------ ------ ------ ------ ------
Restructuring payments.............. (2.6) (26.5) (29.1) (54.9) (2.4) (1.0) -- --
Capital expenditures................ (3.9) (99.4) (103.3) (5.0) (5.0) (5.0) (5.0) (5.0)
Proceeds from asset sales, net...... -- 31.9 31.9 93.2 -- -- -- --
------ ------- ------- ------ ------ ------ ------ ------
FREE CASH FLOW FROM OPERATIONS...... 10.5 (137.6) (127.1) 12.6 37.2 32.6 60.3 71.9
Long-term debt
(service)/borrowing............... (5.8) (29.2) (35.0) (13.1) -- -- -- --
LGE Extended Payables Claims, net... (4.3) -- (4.3) -- -- -- -- --
Interest............................ (6.5) (36.1) (42.6) (12.3) (13.7) (11.6) (23.7) (19.7)
Change in cash position............. (23.4) 23.4 -- -- -- -- -- (4.2)
------ ------- ------- ------ ------ ------ ------ ------
Short-term debt
service/(borrowing)............... $(29.5) $(179.5) $(209.0) $(12.8) $ 23.5 $ 21.0 $ 36.6 $ 48.0
====== ======= ======= ====== ====== ====== ====== ======
</TABLE>
84
<PAGE> 97
ZENITH ELECTRONICS CORPORATION
PROJECTED DEBT STRUCTURE (P)
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1998 PROJECTED AS OF DECEMBER 31,
------------------------------------------------------- ------------------------------------------
ACTUAL PROJECTED PROJECTED PROJECTED
FIRST UNADJUSTED REORGANIZATION ADJUSTED
QUARTER DECEMBER 31, ADJUSTMENTS DECEMBER 31, 1999 2000 2001 2002 2003
------- ------------ -------------- ------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT:
Citibank Receivables
Facility................. $ 11.0 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Secured Tranche A (working
capital)................. -- 56.7 7.6 64.3 103.1 71.4 65.3 48.0 --
Bank Lender Claims......... 102.0 52.0 -- 52.0 -- -- -- -- --
LGE Leveraged Lease
Claims................... -- 90.1 (90.1) -- -- -- -- -- --
LGE Reimbursement Claims... -- 50.0 (50.0) -- -- -- -- -- --
LGE Demand Loan Claims..... -- 45.0 (45.0) -- -- -- -- -- --
LGE New Credit Support..... -- -- -- -- 26.0 34.2 19.3 -- --
------ ------ ------- ------ ------ ------ ------ ------ ------
113.0 293.8 (177.5) 116.3 129.1 105.6 84.6 48.0 --
Current portion of
long-term debt:
Old Subordinated
Debentures............. 5.8 5.8 (5.8)(f) -- -- -- -- -- --
LGE Demand Loan Claims... 9.0 -- -- -- -- -- -- -- --
------ ------ ------- ------ ------ ------ ------ ------ ------
TOTAL SHORT-TERM DEBT...... 127.8 299.6 (183.3) 116.3 129.1 105.6 84.6 48.0 --
====== ====== ======= ====== ====== ====== ====== ====== ======
LONG-TERM DEBT:
Old Subordinated
Debentures............... 97.8 97.8 (97.8)(f) -- -- -- -- -- --
New Subordinated
Debentures............... -- -- 40.0 40.0 40.0 40.0 40.0 40.0 40.0
LGE Demand Loan Claims..... 29.2 -- -- -- -- -- -- -- --
LGE New Restructured Senior
Note(r).................. -- -- 96.8 96.8 95.7 107.7 121.1 121.1 121.1
------ ------ ------- ------ ------ ------ ------ ------ ------
TOTAL LONG-TERM DEBT....... 127.0 97.8 39.0 136.8 135.7 147.7 161.1 161.1 161.1
====== ====== ======= ====== ====== ====== ====== ====== ======
TOTAL DEBT................. $254.8 $397.4 $(144.3) $253.1 $264.8 $253.3 $245.7 $209.1 $161.1
====== ====== ======= ====== ====== ====== ====== ====== ======
LGE EXTENDED PAYABLES
CLAIMS................... $140.0 $140.0 $(140.0) $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
85
<PAGE> 98
ZENITH ELECTRONICS CORPORATION
NOTES TO THE PROJECTED FINANCIAL STATEMENTS
For presentation purposes, it is assumed that the Company files and emerges
from chapter 11 in the fourth quarter of 1998, thus completing the financial
restructuring of the Company. All costs presented in the restructuring columns
of the statements are assumed to take place during the Reorganization Period.
However not all of the costs presented in that column relate directly to the
Financial Restructuring, rather some costs relate to the Operational
Restructuring which coincides with the timing of the Financial Restructuring.
(a) Cost of Sales increase represents the estimated provision required to write
down inventories of raw materials and work-in-process to net realizable
value upon shutdown of the manufacturing facilities.
(b) Restructuring expenses are as follows:
<TABLE>
<S> <C>
Professional Fees(i)........................................ $15.1
Melrose Park shift reduction(ii)............................ 1.5
Engineering staff reductions................................ 2.5
Relocation of Parts and Services business................... 1.3
Exit from Analog Set-Top Boxes.............................. 6.3
Loss on Leveraged Lease termination......................... 70.0
-----
Total............................................. $96.7
</TABLE>
- ---------------
(i) professional fees for advisors and consultants to assist in
formulating and implementing the Prepackaged Plan; and
(ii) various costs incurred to implement the Operational Restructuring
including staff reductions, facility closures, and product line
eliminations.
These costs are classified as Restructuring expenses because they are not
incurred during the Reorganization Period as defined above. The loss on the
termination of the Leveraged Lease is measured as the difference between
the liability to LGE, of $90.1 million, based upon its payment in
performance of its guarantee of the Leveraged Lease and the Other
Receivable. The Other Receivable is stated at the appraised value of the
assets to be received by the Company during the Reorganization Period.
(c) Other operating expense (income) includes royalty income from VSB and tuner
patent/other sources in amounts per year as follows:
<TABLE>
<CAPTION>
TUNER PATENT/
VSB(1) VSB(2) OTHER
------ ------ -------------
<S> <C> <C> <C>
1998......................................... $ -- $ -- $(28.6)
1999......................................... (2.5) (1.2) (28.0)
2000......................................... (8.2) (6.7) (28.0)
2001......................................... (15.7) (16.9) (28.0)
2002......................................... (27.3) (26.9) (28.0)
2003......................................... (33.3) (37.4) (14.9)
</TABLE>
- ---------------
(1) Royalties from televisions, VCRs, DVDs, and converter boxes.
(2) Royalties from personal computers, satellite boxes, cable boxes and
add-in cards for personal computers.
Royalty amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustments for costs or reductions relating
to development, marketing, legal costs, and potential additional cross
licensing, which costs are included elsewhere in components of the
Statement of Operations.
(d) Finance guarantee fees represent the accelerated write-off of unamortized
deferred charges (bank, attorney, and LGE guarantee fees) associated with
financing agreements terminated in the third quarter of 1998 and during the
Reorganization Period. These are non-cash amortization expenses.
86
<PAGE> 99
(e) Reorganization expenses of $134.3 are as follows:
<TABLE>
<S> <C>
Reorganization expenses(i):
Severance................................................. $ 44.7
Legal for plant closures.................................. 2.3
Outplacement.............................................. 1.1
Retention plan............................................ 4.3
Plant closure/exit costs.................................. 9.2
Purchase contracts........................................ 1.0
Professional fees......................................... 2.0
------
Reorganization.............................................. $ 64.6
Asset impairment(ii)........................................ 69.7
------
Total............................................. $134.3
</TABLE>
- ---------------
(i) estimated Reorganization expenses related to executing the Prepackaged
Plan and Business Plan Projections. The timing and amount of these
charges could vary significantly from the estimates presented
depending on the actual implementation of the Business Plan
Projections and the timing of the bankruptcy proceedings.
(ii) the estimated impairment, of $69.7 million, on property, plant and
equipment that occurs at the confirmation of the Prepackaged Plan. It
is measured as the difference between the book value of assets and the
estimated (by appraisal) fair value in an orderly liquidation,
including estimated environmental obligations.
(f) Extraordinary Gain represents the gain realized on the retirement of the
Old Subordinated Debentures at a discount from face value:
<TABLE>
<S> <C>
Old Subordinated Debentures before Restructuring (Current
portion).................................................. $ 5.8
Old Subordinated Debentures before restructuring (Long Term
portion).................................................. 97.8
less: New Subordinated Debentures (at face value)........... (40.0)
------
Gain.............................................. $ 63.6
</TABLE>
(g) EBITDA represents operating income (loss) including royalties before
interest expense, income taxes, depreciation and amortization, and
restructuring expenses. EBITDA is not intended to represent cash flow from
operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating cash
flow as an indication of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
(h) Inventory decrease represents the estimated provision required to
write-down inventories of raw materials and work-in-process to net
realizable value upon shutdown of the manufacturing facilities.
(i) Other Receivable, created at the third quarter termination of the Leveraged
Lease, represents the Company's rights, under the Restructuring Agreements.
The asset is stated at the appraised value (see also footnotes (b) and
(j)).
(j) Property, Plant and Equipment decreases are due to transferring a portion
of the Company's Reynosa Assets to LGE at an independently appraised value,
receiving the Leveraged Lease assets from LGE, transferring a portion of
the assets previously under the Leveraged Lease to LGE, and a charge for an
impairment of the assets. The asset impairment charge occurs during the
Reorganization Period because the timing and estimated valuations used to
estimate the charge are contingent upon the implementation of the
Prepackaged Plan.
<TABLE>
<S> <C>
Certain Reynosa Assets transferred to LGE................... $(32.4)
Other Receivable, from LGE, acquired at termination of
Leveraged Leases.......................................... 20.1
Reynosa Leveraged Lease assets transferred to LGE........... (8.0)
Asset Impairment per appraisal.............................. (41.6)
------
Total............................................. $(61.9)
</TABLE>
87
<PAGE> 100
(k) Property, plant and equipment Environmental Reserves are from the
additional asset impairment charge attributable to estimated environmental
obligations associated with manufacturing facilities still held by the
Company. After the disposal of the facilities, as the Company will retain
the liability for remediation, the Reserve will be reclassified to Other
Liabilities (see footnote (e)(ii) for further information).
(l) Other Assets decrease represents the write-off of the Long Term portion of
unamortized LGE guarantee fees on the LGE Extended Payables Claims. It is
assumed that the unamortized LGE guarantee fees will be expensed at the
time of the recapitalization of the Company and the termination of the
financing arrangements to which these costs relate. These are non-cash
amortization expenses.
(m) The Restructuring liability represents the accrued cash portion of estimated
Reorganization expenses referred to above in Note (e)(i), less payments
which were made in conjunction with executing the Prepackaged Plan.
<TABLE>
<S> <C>
Estimated cash reorganization charges....................... $ 62.4
Estimated cash payments made coincident with the Prepackaged
Plan...................................................... (5.4)
------
Total............................................. $(57.0)
</TABLE>
(n) Other Liabilities changes reflect:
i) the reduction in liabilities, of $6.3 million, owed to LGE for
research and development funding and miscellaneous LGE Technical
Services Claims support, plus
ii) the LGE Guarantee Fee Claims of $1.6 million.
(o) The change in equity is due to the conversion of debt to equity, and the
income statement related changes that arose out of executing the
Prepackaged Plan.
<TABLE>
<S> <C>
Conversion of debt to equity LGE Extended Payables Claims... $140.0
LGE Technical Services Claims............................. 10.5
LGE Guarantee Fee Claims.................................. 1.6
LGE Reimbursement Claims.................................. 47.9
------
Total debt converted........................................ $200.0
Total income statement effect (of Restructuring
Adjustments).............................................. (82.0)
------
Total change in equity...................................... $118.0
======
</TABLE>
(p) Assumes that the Company is able to refinance their current Amended
Citibank Credit Facility with new facilities titled Secured Tranche A
(Working Capital). The projections of borrowing availability are based on a
current proposed financing package offered by a potential lender.
(q) Selling, general and administrative expenses, in 1999, including $1.8
million in retention plan expenses.
(r) The LGE New Restructured Senior Note of $96.8 million represents the
Company's obligations under the following LGE Claims:
<TABLE>
<S> <C>
LGE Leveraged Lease Claims.................................. $ 90.1
Less: Leveraged Lease equipment retained by LGE (at
appraised value).......................................... (8.0)
LGE Demand Loan Claims...................................... 45.0
LGE Reimbursement Claim..................................... 2.1
Less: Reynosa Assets transferred by the Company to LGE
(at appraised value)...................................... (32.4)
------
$ 96.8
</TABLE>
Assumptions Underlying all Business Plan Projections
In 1998, the Company intends to operate as an integrated manufacturer and
distributor of consumer electronics products. In 1999 and for all years beyond
1999, the Company intends to operate as a sales, distribution and technology
company. The Business Plan Projections assume that in 1998 and for significant
88
<PAGE> 101
periods relating to the 1998 model year production requirements (which is a
12-month period beginning April 1, 1998), the Company will operate its own
manufacturing facilities in the United States and Mexico for the production of
significant portions of its product line. The Company has historically
outsourced some of its product lines and, for the 1998 model year, that
outsourcing includes VCRs, DVDs, small screen televisions and certain
accessories. In 1999 and for the 1999 model year and going forward, the Company
intends to outsource all or substantially all of its product lines. The Business
Plan Projections assume that the Company will obtain the balance of most 1998
model year requirements and some portion of its future outsourcing requirements
from the Reynosa Assets following Confirmation and the transfer of the Reynosa
Assets to LGE.
The Business Plan Projections also include certain assumptions concerning
the outsourcing initiatives of the Company under the Operational Restructuring.
The Business Plan Projections assume that the Company will be successful in
locating sources for all or substantially all of its intended product lines at
prices and with resulting margins to the Company as reflected in the Business
Plan Projections.
The Business Plan Projections include projected income, expenses and cash
requirements of the Company's consumer electronics core businesses for all
periods covered by the Business Plan Projections. The Business Plan Projections
do not include income, expenses or cash requirements of NWS after 1998, as the
plan assumes that all or a portion of those business lines will be sold during
1999. The Business Plan Projections incorporate the proceeds of the sale of
manufacturing facilities and also includes certain expenses associated with such
sales, including environmental clean-up costs, employee severance and relocation
expenses and brokerage fees associated with the sale of assets or operating
businesses. The Business Plan Projections contemplate that the Company will
outsource all or substantially all products and exit manufacturing during the
first quarter of 1999, and that all manufacturing facilities will be transferred
or sold to third parties by the third quarter of 1999. Equipment leases,
including the Leveraged Leases, are expected to be terminated and certain
charges associated with those terminations will be made against the Company's
capital structure.
Financing Assumptions
The Business Plan Projections include certain assumptions as to the amount,
availability and term of new working capital, fixed asset and revolving credit
facilities, all of which are based upon uncommitted proposals received from
credit providers in discussions with the Company at this time. The Business Plan
Projections also assume that the terms, including interest rates and maturity
dates, of the LGE New Credit Support, the LGE New Restructured Senior Note and
the New Subordinated Debentures will be as described herein.
Working Capital Assumptions
The Business Plan Projections assume certain inventory, accounts payable
and accounts receivable balances applicable to a typical sales and distribution
company, which are different from the historical performance of the Company.
The Business Plan Projections assume accounts receivable days outstanding
will be reduced from approximately 55 to 40 from 1998 through 2002; inventory
turns will increase from approximately 5 to 12 per year from 1998 through 2002;
and the accounts payable days outstanding will decrease from approximately 35 to
30 for the period of the Business Plan Projections. The Company believes that
such improvement in working capital measures will be required for the Company to
be successful in achieving the Business Plan Projections. Increased inventory
turns should be obtained as the Company only carries finished goods inventory
for the 1999 model year and beyond.
Property, Plant and Equipment Assumptions
Because the Company will be exiting manufacturing and dispose of many
capital assets, capital expenditures and depreciation are assumed to decrease
after 1998. Capital expenditures are assumed to be approximately $13 million in
1998 and decrease to $5 million per year from 1999 through 2002 while
depreciation decreases from $35.7 million in 1998 to approximately $3.9 million
in 2002. The Company assumes that it will require significantly less capital
expenditures than in prior years due to its planned exit
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<PAGE> 102
from manufacturing. The reduced capital expenditure budget is expected to be
enough to support a distribution organization.
Revenue Assumptions
The Business Plan Projections assume that the consumer electronics industry
for the term covered by the Business Plan Projections will be relatively stable
in terms of capacity and demand. The Business Plan Projections do not take into
account any possible economic downturn or other economic factors that would
significantly diminish total capacity or demand from current levels.
Historically, consumer electronics prices have declined from 2% to 6% per year,
depending upon screen sizes. Higher end, larger screen products have
historically exhibited erosion at lower rates or levels than small screen sizes.
Price erosion has accelerated in the higher end products in recent years. The
Business Plan Projections also anticipate the Company will be able to upgrade
its brand, so that the Company will experience price erosion at rates less than
historical industry standards for analog televisions, with accelerated price
erosion in digital products as those products become more widely produced and
available.
The Business Plan Projections for 1998 incorporate the product plan and
expected sales and margins for the current model year. The Business Plan
Projections for 1999 and 2000 reflect detailed product plans that have been
developed by the Company for those years, taking into consideration certain
product lines and product features of the 1998 model year and currently
available products and features not included in the Company's 1998 product line
which the Company intends to add to its lines in the future. For Business Plan
Projections in the years of 2001 and following, the Company has relied on
industry forecasts compiled by the Electronics Industry Association concerning
demand for screen size, features and products, and for overall market demand
during those periods. The Business Plan Projections for those years assume that
the Company's market share will remain constant with the Company's historical
market share, except that the Business Plan Projections contemplate that the
Company will focus its efforts in larger screen sizes and in digital products.
The Business Plan Projections assume that the Company will be able to achieve at
least a 4% to 7% share of the digital product market in the later years of the
projections. This digital market share would be lower than the Company's current
or projected market share in non-digital products.
Cost of Goods Assumptions
The Business Plan Projections assume that the Company will be able to
secure outsourced products in all or substantially all of its product lines and
that those products will be purchased by the Company at certain price ranges
which were derived from the Company's standard cost structure currently in use
and certain industry differentials currently known to exist relating to picture
tube prices. The Business Plan Projections also assume certain profit margins
will be obtainable by the Company over its costs of goods. The Business Plan
Projections assume that the Company will be able to obtain annual cost
improvements from sourced products from materials and manufacturing savings that
reflect historical cost improvements in the industry. The Company has assumed
that, with the exception of its Melrose Park operations, its historical costs
and cost improvements have been representative of overall industry trends. The
Company believes that improvements in the business can be obtained through
annual material cost savings and design-to-cost savings. As a result of applying
the cost of goods assumptions listed above, the Company projects the following
gross margins:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross Margin.............................. 6.1% 6.3% 8.5% 9.5% 10.0% 10.4%
</TABLE>
Other Cost Assumptions and General and Administrative Costs
In general, costs relating to overhead, general and administrative expenses
and other costs not directly related to the costs of goods have been developed
in the Business Plan Projections based on "green field" methodology. That is,
putting aside its current structure and operating methods, the Company has
developed a structure which it believes reflects what an industry leader in
consumer electronics would require in terms of head count, facilities, capital
expenditures and tooling, assuming a distribution and technology operation
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<PAGE> 103
without manufacturing. The Business Plan Projections reflect overhead, general
and administrative and other costs in accordance with the model developed.
Tax Assumptions
It is assumed that New Zenith will be able to utilize NOLs thus shielding
income from taxation for the projection period. As a result no income tax
liability is presented. Additionally the Company may or may not have enough
state tax NOLs available to shelter state income taxes.
Assumptions concerning VSB
The assumptions relating to VSB market absorption, royalty income levels
and royalty rate suggestions incorporated into the Business Plan Projections
were developed by the Company with the assistance of PJSC and certain industry
consultants knowledgeable about digital technologies. The Business Plan
Projections reflect cash flows expected from the incorporation of VSB
technologies into televisions, VCRs, DVDs, converter boxes, personal computers,
satellite boxes, cable boxes and add-in cards for personal computers.
The Business Plan Projections also include certain assumptions relating to
royalty-free cross licenses and other similar agreements with regard to the
Company's intellectual property, particularly its patents.
Assumptions concerning Asset Disposition
As part of its preparation for the Restructuring, the Company retained
certain nationally recognized professionals who inspected the Company's plants,
land, equipment and inventories and provided appraisal concerning the value of
these assets under circumstances approximating those contemplated in the
Operational Restructuring. Using those values, the Business Plan Projections
include proceeds, net of selling costs, from the sale of assets equal to $31.9
million in 1998 and $93.2 million in 1999. The Business Plan Projections also
assume that cash realized from the sale of assets will be used to repay credit
facilities then outstanding, as required by the anticipated terms of those
facilities.
In its assumptions concerning environmental costs associated with the
disposition of its manufacturing facilities and other real estate, the Company
retained environmental professionals to evaluate historical site use and to
estimate clean-up costs and reserves likely to be associated with such
disposition.
Assumptions concerning Certain Other Areas of the Company's Business
The Business Plan Projections assume that the Company's relative share of
the total consumer electronics market will not vary significantly from its
present market share during the term of the Business Plan Projections. As a
result, the Business Plan Projections also assume that the Company's service
business will not grow significantly during the terms of the Business Plan
Projections. The Business Plan Projections do assume that the Company will be
able to expand its current parts and accessories business significantly.
Historically, this segment of the Company's business has been underutilized. The
Business Plan Projections assume that the Company will continue to achieve
above-average margins (when compared to its television lines) in its parts and
accessories businesses.
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ACCOUNTING TREATMENT
The Restructuring will be accounted for in accordance with the requirements
of AICPA Statement of Position 90-7 "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code." Based upon the provisions of the SOP,
New Zenith will not qualify for "fresh start" reporting because a substantive
and non-temporary change in control in the Company will not occur. Assets will
be recorded at their historical cost prior to the Restructuring. Liabilities
compromised by the Prepackaged Plan will be adjusted to the present values of
amounts to be paid, determined at appropriate current interest rates.
Forgiveness of debt by unrelated third parties will be reported as an
extraordinary item in the Company's results of operations. Forgiveness of debt
due to related parties will be accounted for as a capital contribution.
LIQUIDATION ANALYSIS
General
If the Prepackaged Plan is not confirmed, and the Prepackaged Chapter 11
Case is converted to a case under chapter 7 of the Bankruptcy Code, a trustee
would be elected to liquidate the Company's assets. The proceeds of the
liquidation would be distributed to the respective holders of Allowed Claims
against the Company in accordance with the priorities established by the
Bankruptcy Code. The chapter 7 trustee would be entitled to a percentage fee for
his/her services which is based upon the total amount of funds disbursed to
parties in interest. Pursuant to section 326 of the Bankruptcy Code, the trustee
would be entitled to up to a 25% fee of the first $5,000 disbursed, up to a 10%
of the amounts disbursed between $5,000 and $50,000, up to a 5% of the amount
between $50,000 and $1 million, and reasonable compensation not to exceed 3% of
the amount disbursed in excess of $1 million. The trustee is also authorized to
retain professionals, including accountants and attorneys, to liquidate the
chapter 7 estate.
Under chapter 7, a secured creditor whose Claim is fully secured would be
entitled to full payment, including, without limitation, interest from the
proceeds of the sale of its collateral. Unless its Claim is nonrecourse, a
secured creditor whose collateral is insufficient to pay its Claim in full would
be entitled to assert an unsecured Claim for its deficiency. Claims entitled to
priority under the Bankruptcy Code would be paid in full before any distribution
to General Unsecured Creditors, including, without limitation, the chapter 7
trustee's fee and the amounts due to the professionals retained by the chapter 7
trustee. Funds, if any, remaining after payment of secured Claims and priority
Claims would be distributed pro rata to General Unsecured Creditors. If
subordination agreements were to be enforced, senior unsecured Claims would be
paid in full before any distribution would be made to subordinated creditors.
The Company believes that liquidation under chapter 7 would result in a
substantial diminution of the value of the estate because of (i) additional
administrative expenses involved in the appointment of trustees and attorneys,
accountants and other professionals to assist such trustees; (ii) additional
expenses and Claims, some of which would be entitled to priority, that would
arise by reason of the liquidation and from the rejection of leases and other
executory contracts in connection with a cessation of the Company's operations;
(iii) failure to realize the greater going-concern value of the Company's
assets; (iv) the erosion in value of the assets of the Company in the context of
expeditious liquidation required under chapter 7 and the "forced sale"
atmosphere that would prevail and (v) the costs attributable to the time value
of money resulting from what is likely to be a more protracted proceeding than
if the Prepackaged Plan is confirmed (because of the time required to liquidate
the assets of the Company, resolve claims and related litigation and prepare for
distributions).
The Liquidation Analysis
PJSC, at the direction of management, prepared the following hypothetical
chapter 7 liquidation analysis based upon information supplied by management of
the Company and the views of various experts relating to certain aspects of the
Company's VSB (as defined herein) technologies to assist holders of Impaired
Claims to reach their determination as to whether to accept or reject the
Prepackaged Plan. The liquidation analysis indicates the estimated values which
may be obtained by Classes of Claims and of Equity Interests if the
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<PAGE> 105
Company's assets are liquidated, pursuant to chapter 7, as an alternative to the
continued operation of the Company's businesses. The liquidation analysis set
forth below is provided solely to disclose the effects of a hypothetical
liquidation of the Company under chapter 7 of the Bankruptcy Code, subject to
the assumption set forth below. The liquidation analysis will be available for
inspection and copying at the principal executive offices of the Company during
its regular business hours by any interested holder of a Claim or Equity
Interests or his representative who has been so designated in writing.
Underlying the liquidation analysis are a number of estimates and
assumptions that, although developed and considered reasonable by management of
the Company, are inherently subject to economic and competitive uncertainties
and contingencies that are beyond the Company's control. Accordingly, there can
be no assurance that the values assumed in the liquidation analysis would be
realized if the Company were in fact liquidated. In addition, any liquidation
that would be undertaken would necessarily take place in future circumstances
which cannot currently be predicted. Accordingly, while the liquidation analysis
is necessarily presented with numerical specificity, if the Company were in fact
liquidated, the actual liquidation proceeds would likely vary from the amounts
set forth below. Such actual liquidation proceeds could be materially lower, or
higher, than the amounts set forth below and no representation or warranty can
be or is being made with respect to the actual proceeds that could be received
in a chapter 7 liquidation. The liquidation analysis has been prepared solely
for purposes of estimating the proceeds available in a chapter 7 liquidation of
the Company and does not represent values that may be appropriate for any other
purpose. Nothing contained in the liquidation analysis is intended or may
constitute a concession or admission of the Company for any other purpose.
The liquidation proceeds realized by the Company are heavily dependent upon
liquidation of inventories and sale of real properties, plants and equipment in
a timely and efficient manner. Consequently, the liquidation analysis assumes
that appropriate professionals would be employed to oversee the process of
disposition of the Company's assets. During the liquidation, the Company
believes there would be significant costs of the liquidation and employee
turnover. See notes accompanying the liquidation analysis.
The Company believes, based on the assumptions set forth herein, that the
value of the distributions offered to the members of each Class of Impaired
Claims under the Prepackaged Plan will be greater than the distribution such
creditors would receive in a liquidation under chapter 7.
Section 1129(a)(7)(A)(ii) of the Bankruptcy Code states that the Bankruptcy
Court shall confirm a plan of reorganization only if certain requirements are
met, including a requirement that each holder of an Impaired Claim or Equity
Interest who does not consent to the plan receive or retain property that has a
value at least equal to the distribution such holder would receive if the
company were liquidated under chapter 7 of the Bankruptcy Code.
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STATEMENT OF ASSETS AND LIQUIDATION PROCEEDS:
JANUARY 1, 1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED
RECOVERY
ESTIMATED BOOK AS A ESTIMATED
VALUE AS OF PERCENTAGE LIQUIDATION
NOTE JANUARY 1, 1999 OF BOOK VALUE
REFERENCE (UNAUDITED) VALUE (UNAUDITED)
----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash......................................... $ 0 0% $ 0
Accounts Receivable.......................... 149.0 65% 96.9
Inventories.................................. (e)
Finished Good.............................. 35.2 75% 26.4
Less Warranty........................... (23.3)
Net Finished Goods......................... 3.1
Work in Process............................ 10.8 5% 0.5
Raw Materials.............................. 43.1 20% 8.6
Fixed Assets................................. (f)(g) n/a 43.3
Brand and Technology Assets.................. (a)(b)(c)(d) n/a 135.8
-------
Total Assets................................. 288.2
Less Costs Associated with Liquidation:
Professional Fees.......................... (h) (24.0)
Corporate Overhead......................... (i) (24.8)
Trustee Fees............................... (j) (4.9)
Brokerage Fees............................. (k) (19.9)
Wind Down Costs............................ (l) (6.5)
WARN Act................................... (21.0)
Environmental.............................. (o) (24.5)
-------
Total Costs Associated with Liquidation...... (125.6)
Net Estimated Liquidation Proceeds Available
for Distribution........................... 162.7
</TABLE>
CALCULATION OF NET PROCEEDS AVAILABLE TO HOLDERS OF CLAIMS
UNDER PREPACKAGED PLAN AND IN A LIQUIDATION UNDER A HYPOTHETICAL CHAPTER 7
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
HYPOTHETICAL
CHAPTER 7 LIQUIDATION
-------------------------
CLAIM AMOUNT DISTRIBUTION % RECOVERY
------------ ------------ ----------
<S> <C> <C> <C>
Net Estimated Liquidation Proceeds Available for
Distribution............................................. $162.7
Citibank Secured Claims.................................... $ 84.5 $ 84.5 100.0%
LGE Secured Claims(m)...................................... $160.6 $ 78.2 48.7%
Other Priority Claims...................................... $ -- $ 0.0 0.0%
General Unsecured Claims................................... $ -- $ 0.0 0.0%
Old Subordinated Debenture Claims(n)....................... $103.5 $ 0.0 0.0%
LGE Unsecured Claims....................................... $228.6 $ 0.0 0.0%
Equity Interests........................................... n/a $ 0.0 0.0%
</TABLE>
The accompanying notes are an integral part of this liquidation analysis.
Unless otherwise stated, estimates were made by the Company's management. The
aggregate amount of Claims in certain Classes projected to receive no recovery
in the event of a chapter 7 liquidation are not expected due to the potentially
material amount of contingent and unliquidated Claims in such Classes.
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<PAGE> 107
(a) VSB TECHNOLOGY (TAX-AFFECTED): VSB value discounted to January 1, 1999,
assumes a sale to a third party and utilizes VSB royalty revenue, net of
development expenses, with the following adjustments: 38.0% tax rate
applied to net cash flows, 35.0% discount rate on net cash flows, and
royalty rates lower than the Business Plan Projections of VSB by
$0.50-$1.50 depending on the component (e.g., a $4.00 royalty fee for
television versus a $5.00 royalty fee in the Business Plan Projections).
Reflects reduction in income related to potential cross licenses.
(b) TRADEMARK AND DISTRIBUTION NETWORK: Value of trademark and distribution
network discounted to January 1, 1999. Assumes liquidation will occur
through the sale of Zenith's trademark and distribution network to a
strategic buyer who would absorb Zenith's market share at the assumed
strategic buyer's domestic EBIT (earnings before interest and taxes) margin
of 2.5%. Analysis assumes that a strategic buyer would discount projected
cash flows from the distribution network at a weighted average cost of
capital of 12.0% and utilize an incremental tax rate of 38.0%. Also assumes
that a liquidation would lead to a 50.0% reduction in Zenith's domestic
television market share to 5.0%, and a contraction in Zenith's overall
market share of 2.0% per year. Scenario assumes a 25 million unit domestic
television market and a $300 per television unit price. Assumed strategic
buyer EBIT margin based on comparable company median EBIT margin adjusted
to approximate a domestic television market EBIT margin. Value based on
perpetuity growth rate calculation.
(c) TUNER PATENT: Tuner patent cash flows discounted to January 1, 1999 at a
rate of 25.0%, assumes a sale to a third party and utilizes Business Plan
Projections of tuner patent cash flow, net of associated cost and expenses.
Valuation assumes a 38.0% tax rate.
(d) FLAT TENSIONS MASK AND OTHER INTANGIBLES: Flat tension mask represents
50.0% of Zenith management's estimate of fair market value. Other
intangibles relates primarily to touch screen technology.
(e) INVENTORIES: Value of total inventories estimated at January 1, 1999.
- Net Finished Goods are net of assumed present and future warranty claims
and administrative expenses estimated to be approximately $23.3 million.
- Analysis assumes no finished CRT's in inventory at January 1, 1999.
(f) REAL ESTATE:
- Domestic real estate at liquidation values provided by Insignia/ESG.
- Mexican gross real estate value at liquidation values provided by
Binzwanger/Bermudez.
- Mexican real estate and Mexican furniture, fixtures and equipment are
presented net of $44.2 million in Mexican severance, benefit and other
priority claims. Assumes reduction in Mexican real estate first, which
nets liquidation value of Mexican real estate to $0.0 million.
(g) FURNITURE, FIXTURE AND EQUIPMENT:
- Domestic furniture, fixture and equipment at liquidation values provided
by Greenwich Industrial Services.
- Mexican furniture, fixture and equipment at liquidation values provided
by Greenwich Industrial Services.
- Gross value of Mexican furniture, fixture and equipment of $34.3 million
has been reduced to $25.5 million by the balance of the Mexican
severance, benefit and other priority claims that were not met by the
value of the Mexican real estate.
- Mexican furniture, fixture and equipment includes $13.6 million
reflecting the liquidation value of certain leveraged lease equipment per
Greenwich Industrial Services.
(h) PROFESSIONAL FEES: Assumes a 4-year liquidation. Assumes fees of $2.0
million each month the first 6 months, $1.5 million for each of the next
six months, $1.2 million for the entire third year, and $0.6 million for
the fourth and final year.
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(i) TRUSTEE FEES: Assumed at 3.0% of net liquidation proceeds.
(j) BROKERAGE FEES: Assumes 6.0% of gross asset recovery and $44.2 million
Mexican claim addback adjustment.
(k) WIND DOWN COSTS: Assumes 12-month disposition period at $540,699 per month.
Includes real estate taxes plus on site security and wind down teams at
each location.
(l) WARN ACT: Assumes a current U.S. salaried domestic population of
approximately 1,105 at an average salary of $53,189 and a current U.S.
domestic hourly population of 1,814 with an average wage of $11.44 per
hour. Fringe Rates are 24% for salaried and 47% for hourly. Excludes
penalties for violation of the WARN Act.
(m) The LGE Secured Claims are as follows:
<TABLE>
<CAPTION>
CLAIM AMOUNT
----- -------------
<S> <C>
LGE Reimbursement Claims.................................... $50.0 million
LGE Demand Loan Claims...................................... $45.0 million
LGE Payment of Bank Lender Claims........................... $52.0 million
Secured portion of LGE Leveraged............................ $13.6 million
Lease Claims (representing the estimated liquidation value
of the equipment under the Leveraged Leases) per Greenwich
Industrial Services
</TABLE>
(n) The LGE Unsecured Claims are as follows:
<TABLE>
<CAPTION>
CLAIM AMOUNT
----- --------------
<S> <C>
LGE Extended Payables Claims................................ $140.0 million
Deficiency portion of LGE Leveraged......................... $ 76.5 million
Leases Claims
LGE Guarantee Fee Claims.................................... $ 1.6 million
LGE Technical Services Claims............................... $ 10.5 million
</TABLE>
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DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS
SHORT-TERM DEBT
Citibank Credit Facility and Amended Citibank Credit Facility
In April 1997, the Company obtained a three-year, $110 million revolving
credit facility, composed of a $45 million term tranche and a $65 million
revolving tranche, with a bank group syndicated by Citibank. This Citibank
Credit Facility replaced the Company's previous credit agreement with a lending
group which was syndicated by General Electric Capital Corporation ("GECC Credit
Facility"). Under the revolving credit line, the maximum commitment of funds
available for borrowing was limited by a defined borrowing base formula related
to eligible inventory. Initially, the facility was 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 Citibank Credit Facility contained certain covenants that had to be met
in order to remain in compliance with the facility, including financial
covenants that had to be maintained as of the end of each fiscal quarter. During
1997, the Company amended the Citibank Credit Facility to relax certain
financial covenants and to provide additional collateral. 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 the bank group 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 those covenants. In addition, there were
restrictions regarding investments, acquisitions, guarantees, transactions with
affiliates, sales of assets, mergers and additional borrowings, along with
limitations on liens, along with dividend payments on the Company's common
stock.
On June 29, 1998 the Citibank Credit Facility was amended and restated and
the Citibank Receivables Facility was terminated. The Amended Citibank Credit
Facility provides for up to $125.0 million of revolving loans, subject to
borrowing base restrictions, including up to $25.0 million in letters of credit
and up to $11.0 million in swing line loans. The revolving loans must be repaid
on or before the earlier of the Company's filing for bankruptcy or December 31,
1998. In addition, the Company is required to make repayments: (i) to the extent
of the excess of borrowings over the borrowing base and (ii) with the proceeds
of any sale of capital stock (other than upon exercise of certain options) or
assets (other than ordinary course sales of inventory and the sale of
undeveloped real estate it owns in Woodridge, Illinois).
At the Company's option, the interest rates applicable to the loans under
the Amended Citibank Credit Facility will be floating rate of interest measured
by reference to one or more of (i) the Base Rate (as defined in the Amended
Citibank Credit Facility) plus 2.0% per annum or (ii) the relevant Eurodollar
Rate (as defined in the Amended Citibank Credit Facility) plus 3.25%.
The obligations of the Company under the Amended Citibank Credit Facility
are secured by certain of the Company's assets, including its inventory
accounts, accounts receivable, deposit accounts, trademark property, tuning
patents, stock in subsidiaries and domestic properties, plant and equipment.
The Amended Citibank Credit Facility requires the Company to meet financial
tests regarding the amount of tuning patent royalties and the average
outstanding payables to LGE for products purchased in the ordinary course. The
Amended Citibank Credit Facility also contains covenants which, among other
things, restrict the ability of the Company and its Subsidiaries to incur
indebtedness, issue guarantees, incur liens, declare dividends or pay management
or consulting fees to affiliates, make loans and investments, engage in
transactions with affiliates, liquidate, sell assets or engage in mergers. The
Amended Citibank Credit Facility also requires the Company to satisfy certain
customary affirmative covenants.
The Amended Citibank Credit Facility contains certain customary events of
default, including payment defaults, breach of representations or warranties,
covenant defaults, a change of control, certain bankruptcy events with respect
to the Company or LGE, judgment defaults, violations under the Employee
Retirement Income Security Act ("ERISA") and cross-defaults to certain other
indebtedness.
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The LGE Demand Loan Facility
In March 1998, the Company entered into the LGE Demand Loan Facility, 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. In June 1998, this facility was
amended to provide that demand for repayment may not occur prior to December 31,
1998. Repayment is due in full at the end of the term. The facility is secured
by a second lien on the assets that secure the Company's obligations under the
Reimbursement Agreement and a second lien on the Company's VSB patents. As of
June 30, 1998, the Company had borrowed $30 million under the LGE Demand Loan
Facility.
Other Facilities
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 National Bank of Chicago-NBD ($30 million),
Societe Generale ($20 million) and Credit Agricole Indosuez ($30 million). As of
June 27, 1998, a total of $102 million was outstanding under these credit lines.
Amounts owed to First National Bank of Chicago-NBD and Societe Generale totaling
$50 million were paid by LGE pursuant to its guarantee on June 30, 1998. Under
the terms of the Reimbursement Agreement, the Company is obligated to pay back
LGE the amount paid by LGE plus interest.
The credit lines are guaranteed by LGE for which LGE has a Claim against
the Company for a fee in an amount up to 2% 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 Board and in the case of equity, the approval of the
Company's stockholders. Under the Reimbursement Agreement, the Company granted
certain second liens in favor of LGE to secure the Company's reimbursement
obligations with respect of the guarantees of LGE for borrowings under these
credit lines.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(DOLLARS IN MILLIONS)
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Maximum month-end borrowings................................ $72.0 $72.6 $69.5
Average daily borrowings.................................... 26.4 18.3 37.2
Weighted average interest rate.............................. 9.1% 8.8% 10.5%
</TABLE>
LONG-TERM DEBT
The components of long-term debt were:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
(DOLLARS IN MILLIONS)
----------------------
1997 1996
--------- ---------
<S> <C> <C>
6 1/4% Convertible Subordinated Debentures due 2011......... $109.3 $115.0
8.5% Senior Subordinated Convertible Debentures due 2000.... -- 23.8
8.5% Senior Subordinated Convertible Debentures due 2001.... 0.5 0.5
Term Loans.................................................. 38.3 31.2
------ ------
Total............................................. 148.1 170.5
Less current portion........................................ 15.3 17.8
------ ------
Total long-term debt.............................. $132.8 $152.7
====== ======
</TABLE>
98
<PAGE> 111
Old Subordinated Debentures
The Old 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 Old Subordinated
Debenture Indenture include annual sinking-fund payments of $5.75 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 April 1997, the Company redeemed at par value $5.75 million of the Old
Subordinated Debentures in accordance with the regular sinking fund procedures
set forth in the Old Subordinated Debenture Indenture. In April 1998, the
Company met its regular sinking fund requirements by purchasing $5.735 million
face value Old Subordinated Debentures in the open market and delivering those
securities for cancellation. The balance of the Company's 1998 required sinking
fund payment was satisfied by certain holders' elections to convert their Old
Subordinated Debentures to common stock.
Payment on Senior Subordinated Debentures
In December 1997 the Company redeemed the 8.5% 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% of such principal amount plus accrued interest through the
redemption date. The loss on extinguishment of this debt was not material.
In January, 1998, the Company redeemed the 8.5% Senior Subordinated
Convertible Debentures due January 2001. There was $0.5 million principal amount
of such debentures outstanding and the redemption price of such debentures was
104% of such principal amount plus accrued interest through the redemption date.
The loss on extinguishment of this debt was not material.
99
<PAGE> 112
DESCRIPTION OF NEW SUBORDINATED DEBENTURES
In satisfaction of all amounts owed with respect to the Old Subordinated
Debentures, the Company intends to issue New Subordinated Debentures pursuant to
an indenture (the "New Indenture") dated as of the Effective Date between the
Company and , as Trustee. The following description makes use of
terms described in the New Indenture.
The New Subordinated Debentures are to be issued under the New Indenture
and will represent unsecured general obligations of the Company, subordinate in
right of payment to certain other debt obligations of the Company. See
"-- Subordination of New Subordinated Debentures." The New Subordinated
Debentures will bear interest from , 1998, at the rate shown by
their title, payable on April 1 and October 1 in each year, commencing April 1,
1999, to holders of record at the close of business on the immediately preceding
March 15 and September 15. Interest will be paid by check mailed to such
holders. The New Subordinated Debentures mature on April 1, 2010.
Principal of and premium, if any, on the New Subordinated Debentures are
payable, and the New Subordinated Debentures may be presented for conversion,
transfer and exchange, at the office of the Trustee in and at the
office of its agent in . New Subordinated Debentures will be
issued in denominations of $1,000 and integral multiples of $1,000.
Redemption of New Subordinated Debentures
The New Subordinated Debentures may be redeemed at the option of the
Company, as a whole or from time to time in part, on not less than 20 nor more
than 60 days' notice.
If fewer than all the New Subordinated Debentures are to be redeemed, the
Trustee shall select, in such manner as in its sole discretion it shall deem
appropriate and fair, the New Subordinated Debentures or portions thereof to be
redeemed.
Subordination of New Subordinated Debentures
The indebtedness evidenced by the New Subordinated Debentures is
subordinate to the prior payment when due of the principal of and premium, if
any, and interest on all Senior Indebtedness (as defined herein). During the
continuance of any default with respect to Senior Indebtedness, or if any such
default would be caused by any payment upon or in respect of the New
Subordinated Debentures, no payment may be made by the Company upon or in
respect of the New Subordinated Debentures. Upon any distribution of assets of
the Company in any dissolution, winding up, liquidation or reorganization of the
Company, payment of the principal of and premium, if any, and interest on the
New Subordinated Debentures will be subordinated, to the extent and in the
manner set forth in the New Indenture, to the prior payment in full of all
Senior Indebtedness. At the present time, the New Subordinated Debentures are
subordinate to all of the Company's short-term and long-term debt (as defined in
the New Indenture). By reason of such subordination, in the event of the
Company's insolvency, holders of Senior Indebtedness may receive more, ratably,
and holders of the New Subordinated Debentures may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrence of any Event of Default (as defined in the attached New Indenture).
Definition of Senior Indebtedness
The term "Senior Indebtedness" is defined to mean the principal of and
premium, if any, and interest on the following, whether outstanding on the date
of execution of the New Indenture or thereafter incurred or created: (a)
indebtedness of the Company for money borrowed by the Company (including
purchase money obligations with an original maturity in excess of one year) or
evidenced by debentures (other than the New Subordinated Debentures), notes,
banker's acceptances or other corporate debt securities or similar instruments
issued by the Company; (b) obligations with respect to letter of credit; (c)
indebtedness of the Company constituting a guarantee of indebtedness of others
of the type referred to in the preceding clauses (a) and (b); or (d) renewals,
extensions or refunding of any of the indebtedness referred to in the preceding
100
<PAGE> 113
clauses (a), (b) and (c) unless, in the case of any particular indebtedness,
renewal, extension or funding, under the express provisions of the instrument
creating or evidencing the same, or pursuant to which the same is outstanding,
such indebtedness or such renewal, extension or refunding thereof is not
superior in right of payment to the New Subordinated Debentures.
Events of Default
An "Event of Default" is defined in the New Indenture as being: default in
payment of any principal of or premium on the New Subordinated Debentures;
default for 30 days in payment of any interest on the New Subordinated
Debentures; default for 90 days after notice in the observance or performance of
any other covenant in the New Indenture; failure to pay at maturity, or the
acceleration of, $5,000,000 or more in principal amount of any indebtedness for
money borrowed by the Company or any Subsidiary under the terms of the
instrument under which such indebtedness is outstanding if such acceleration is
not annulled or such indebtedness is not paid, within 10 days after written
notice; or certain events in bankruptcy, insolvency, or reorganization (each,
individually, an "Indenture Event of Default").
In case an Indenture Event of Default shall occur and be continuing, the
Trustee or the holders of not less than 25% in principal amount of the New
Subordinated Debentures then outstanding may declare the principal of all the
New Subordinated Debentures to be due and payable. The New Indenture provides
that the Trustee shall, within 90 days after the occurrence of a default, mail
to the holders of the New Subordinated Debentures notice of all uncured defaults
known to it (the term default to include the events specified above without
grace); provided, that, except in the case of default in the payment of
principal (or premium, if any) or interest on any of the New Subordinated
Debentures or in the making of any sinking fund payment, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders of the New
Subordinated Debentures.
The New Indenture includes a covenant that the Company will file with the
Trustee and the Commission, in accordance with the rules and regulations of the
Commission, such additional information, documents and reports with respect to
compliance by the Company with the conditions and covenants provided for the New
Indenture as may be required by such rules and regulations.
Subject to the provisions of the New Indenture relating to the duties of
the Trustee in case an Indenture Event of Default shall occur and be continuing,
the Trustee is under no obligation to exercise any of the rights or powers under
the New Indenture at the request, order or direction of any of the New
Subordinated Debenture holders, unless such New Subordinated Debenture holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
such provision for the indemnification of the Trustee and certain limitations
contained in the Indenture, the holders of a majority in principal amount of the
New Subordinated Debentures at the time outstanding shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
Modification of the New Indenture
The New Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than 66 2/3% in principal
amount of the New Subordinated Debentures at the time outstanding, to modify the
New Indenture or any supplemental indenture or the rights of the holders of the
New Subordinated Debentures, except that no such modification shall (i) extend
the fixed maturity of any New Subordinated Debenture, reduce the rate or extent
the time of payment of interest thereon, reduce the principal amount thereof or
redemption premium thereon or change the currency in which the New Subordinated
Debentures are payable, without the consent of the holder of each New
Subordinated Debenture so affected, or (ii) reduce the aforesaid percentage of
New Subordinated Debentures, the consent of the holders of which is required for
any such modification, without the consent of the holders of all of the New
Subordinated Debentures.
101
<PAGE> 114
Concerning the Trustee
is the Trustee under the New Indenture (the "Trustee").
Comparison of the Old Subordinated Debentures and the New Subordinated
Debentures
<TABLE>
<CAPTION>
OLD SUBORDINATED DEBENTURES NEW SUBORDINATED DEBENTURES
------------------------------------ ------------------------------------
<S> <C> <C>
Aggregate Principal Outstand- $103.5 million $40 million
ing Amount...................
Maturity Date.................. April 1, 2011 April 1, 2010
Interest....................... 6 1/4% per annum, payable in cash on 6 1/4% per annum, payable in cash on
April 1 and October 1 of each year April 1 and October 1 of each year
Redemption..................... The Old Subordinated Debentures may The New Subordinated Debentures may
be redeemed at the option of the be redeemed at the option of the
Company, in whole or in part, at a Company, in whole or in part, at
premium which declined to par on par.
April 1, 1996.
Conversion..................... The Old Subordinated Debentures are The New Subordinated Debentures are
convertible into shares of the not convertible.
Company's common stock at any time
prior to maturity at a conversion
price of $31.25 per share (subject
to adjustment).
Ranking; Security.............. The Old Subordinated Debentures are Same
subordinated to the prior payment
when due of all Senior Indebtedness
(as defined in the Old Subordinated
Debenture Indenture, including the
Citibank Secured Claims, the Other
Secured Claims, the Bank Lender
Claims, and certain LGE Claims) and
are not secured.
Sinking Fund................... The Company is required to provide None
through the operation of a sinking
fund for the retirement on April 1
in each of the years 1997 to and
including 2010 of 5% of the
principal amount of the Old Subordi-
nated Debentures at par. The Company
may increase any sinking fund
payment to retire up to an
additional 5% of the principal
amount of the Old Subordinated De-
bentures originally issued at par.
Events of Default.............. Events of Default with respect to Same
the Old Subordinated Debentures
include, among other things, default
in payment of payment of principal
or premium, default for 30 days in
payment of interest, default in the
performance of other covenants for
90 days after notice, the
acceleration of any indebtedness for
borrowed money of the Company or any
Subsidiary aggregating at least $5
million and not rescinded within 10
days after written notice, and
certain events of bankruptcy,
insolvency or reorganization.
Remedies....................... If an Event of Default occurs, the Same
Trustee or the holders of at least
25% in principal amount of all the
Old Subordinated Debentures then
outstanding may declare the
principal of all the Old
Subordinated Debentures due and
payable.
</TABLE>
102
<PAGE> 115
SUMMARY OF LGE NEW RESTRUCTURED SENIOR NOTE
As partial payment for certain obligations to LGE, the Company will issue
to LGE the LGE New Restructured Senior Note with the following terms:
Payment of Principal and Interest; Maturity
The LGE New Restructured Senior Note will be issued in an aggregate
principal amount equal to the aggregate amount of the LGE Tranche A Claims less
$32,379,300 and will mature on November 1, 2008. The LGE New Restructured Senior
Note will bear interest from the Effective Date, at a rate per annum equal to
LIBOR plus 6.5%, payable on February 1, May 1, August 1 and November 1 in each
year, commencing February 1, 1999, to holders of record at the close of business
on the immediately preceding January 15, April 15, July 15 and October 15.
Interest will be paid in cash only to the extent that the Company's ratio of
EBITDA to cash interest expense for the immediately preceding four fiscal
quarters exceeds 1.5; if such test is not met, interest will be payable by the
issuance of additional LGE New Restructured Senior Notes.
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the LGE New
Restructured Senior Note will be secured by a second lien on all assets of the
Company and its Subsidiaries other than receivables and inventory, junior only
to the lien granted pursuant to the LGE New Credit Facility. The LGE New
Restructured Senior Note will be guaranteed by each of the Company's
Subsidiaries.
Mandatory Prepayment
To the extent permitted under the Company's senior bank credit agreement
and subject to any restrictions set forth in other financing agreements executed
by the Company, the Company will be required to make mandatory prepayments on
the LGE New Restructured Senior Note, upon any sale of assets of the Company
(other than inventory sold in the ordinary course of the Company's business) and
to the extent the Company has excess cash (to be defined in a mutually
satisfactory manner) following payments under its other indebtedness, including
under the LGE New Credit Support.
Ranking
Except as otherwise agreed to by LGE and the Company, the indebtedness
evidenced by the LGE New Restructured Senior Note is pari passu with all Senior
Indebtedness of the Company existing at the Effective Date or incurred
thereafter and will rank senior to all subordinated indebtedness of the Company,
including the New Subordinated Debentures.
Events of Default
An "Event of Default" is defined in the LGE New Restructured Senior Note as
being: default in payment of any principal of or premium on the LGE New
Restructured Senior Note; default for 5 days in payment of any interest on the
LGE New Restructured Senior Note; default for 30 days after notice in the
observance or performance of any other covenant in the LGE New Restructured
Senior Note; failure to pay at maturity, or any event of default relating to $5
million or more in principal amount of any indebtedness for money borrowed by
the Company or any Subsidiary under the terms of the instrument under which such
indebtedness is outstanding if such acceleration is not annulled or such
indebtedness is not paid, within 10 days after written notice; or certain events
in bankruptcy, insolvency, or reorganization (each, individually, an "LGE
Restructured Notes Default").
In case an LGE Restructured Notes Default shall occur and be continuing,
the holders of not less than 25% in principal amount of the LGE New Restructured
Senior Note then outstanding may declare the principal of all the LGE New
Restructured Senior Note to be due and payable.
103
<PAGE> 116
Modification of the LGE New Restructured Senior Note
The LGE New Restructured Senior Note may be modified only with the consent
of the Company and the holders of not less than 66 2/3% in principal amount of
the LGE New Restructured Senior Note at the time outstanding, except that no
such modification shall (i) extend the fixed maturity of LGE New Restructured
Senior Note, reduce the rate or extend the date of payment of interest thereon,
reduce the principal amount thereof or redemption premium thereon or change the
currency in which the LGE New Restructured Senior Note is payable, without the
consent of all of the holders of LGE New Restructured Senior Note so affected,
or (ii) reduce the aforesaid percentage of LGE New Restructured Senior Note, the
consent of the holders of which is required for any such modification, without
the consent of the holders of all of the LGE New Restructured Senior Note.
SUMMARY OF LGE NEW CREDIT FACILITY
The LGE New Credit Support may, at the option of LGE and the Company, take
the form of a direct loan or a credit support, such as a guarantee of financing
provided by a third-party lender. If the LGE New Credit Support takes the form
of a direct loan, LGE and the Company will enter into a credit agreement (the
"LGE New Credit Facility"). The terms of the LGE New Credit Facility will be as
follows.
Principal Amount
The Company will be permitted to borrow under the LGE New Credit Facility
up to a maximum amount to be set by LGE and the Company on the Effective Date
based on the financing deemed necessary to enable the Company to execute the
Operational Restructuring. Such amount may not exceed $60 million.
Maturity
November 1, 2001.
Payment of Interest
The obligations of the Company under the LGE New Credit Facility will bear
interest from the Effective Date, at a rate per annum equal to LIBOR plus 6.5%,
payable on February 1, May 1, August 1 and November 1 in each year, commencing
, 199 . Interest will be paid in cash.
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the Company's
obligations under the LGE New Credit Facility will be secured by a first lien on
all assets of the Company and its Subsidiaries other than receivables and
inventory. The LGE New Credit Facility will be guaranteed by each of the
Company's Subsidiaries.
Mandatory Prepayment
The Company will be required to make mandatory prepayments on the LGE New
Credit Facility and reduce LGE's lending commitment thereunder upon any sale of
assets of the Company (other than inventory sold in the ordinary course of the
Company's business) and to the extent the Company has excess cash (to be defined
in a mutually satisfactory manner) following payments under its other
indebtedness.
Ranking
The obligations of the Company under the LGE New Credit Facility will rank
pari passu with all Senior Indebtedness of the Company existing at the Effective
Date or incurred thereafter and will rank senior to all subordinated
indebtedness of the Company (including the New Subordinated Debentures).
104
<PAGE> 117
Conditions to Issuance
LGE's obligation to enter into the LGE New Credit Facility is conditioned
upon the satisfaction or waiver of all of the conditions to LGE's obligations
under the Restructuring Agreement, including the Company's release of the
Investor Releasees from any and all Claims and liabilities.
Events of Default
An "Event of Default" is defined in the LGE New Credit Facility as being:
default in payment of any principal of or premium on the LGE New Credit
Facility; default for 5 days in payment of any interest on the LGE New Credit
Facility; default for 30 days after notice in the observance or performance of
any other covenant in the LGE New Credit Facility; failure to pay at maturity,
or any event of default relating to, $5,000,000 or more in principal amount of
any indebtedness for money borrowed by the Company or any Subsidiary under the
terms of the instrument under which such indebtedness is outstanding if such
acceleration is not annulled or such indebtedness is not paid, within 10 days
after written notice; or certain events in bankruptcy, insolvency, or
reorganization (each, individually, a "LGE New Credit Facility Event of
Default").
In case a LGE New Credit Facility Event of Default shall occur and be
continuing, the holders of not less than 25% in principal amount of the
indebtedness under the LGE New Credit Facility then outstanding may declare the
principal of all such indebtedness to be due and payable.
Modification of the LGE New Credit Facility
The LGE New Credit Facility may be modified only with the consent of the
Company and the holders of not less than 66 2/3% in principal amount of the
indebtedness under the LGE New Credit Facility at the time outstanding, except
that no such modification shall (i) extend the fixed maturity of LGE New Credit
Facility, reduce the rate or extent the time of payment of interest thereon,
reduce the principal amount thereof or redemption premium thereon or change the
currency in which obligations under the LGE New Credit Facility are payable, or
(ii) reduce the aforesaid percentage of indebtedness, the consent of the holders
of which is required for any such modification, without the consent of the
holders of all indebtedness outstanding under the LGE New Credit Facility.
105
<PAGE> 118
SOLICITATION; VOTING PROCEDURES
GENERAL
The Company, upon the terms and subject to the conditions set forth herein,
is soliciting an acceptance of the Prepackaged Plan from each person or entity
that is or was a beneficial interest holder, as of the Voting Record Date, of an
Impaired Claim. With respect to the Old Subordinated Debentures, this Disclosure
Statement, together with the accompanying forms of Ballot and Master Ballot,
envelope and other materials, are being furnished to the holders of the Old
Subordinated Debentures (i.e., holders whose respective names (or the names of
whose nominees) appear as of the Voting Record Date on the securityholder lists
maintained by the trustee (or its agent) under the Old Subordinated Debenture
Indenture or, if applicable, that are listed as participants in a clearing
agency's security position listing). If such persons or entities do not hold for
their own account, they should provide copies of this Disclosure Statement and
the appropriate Solicitation Materials to their customers and to beneficial
interest holders for whose account they hold. A beneficial interest holder is a
holder of a beneficial interest in a Claim that entitles such holder to rights
or benefits of ownership even though such holder may not be the holder of record
at the Voting Record Date. Securities owned beneficially would include not only
securities held by such beneficial interest holder for its own benefit in its
own name, but would also include securities held by others for such beneficial
interest holder's benefit, such as securities held by banks or other custodians,
brokers (whether in such beneficial interest holder's name, the nominee's name
or "street name"), executors, administrators or trustees, guardians,
attorneys-in-fact, officers of a corporation, general partners of a partnership
or other persons acting in a fiduciary or representative capacity. WITH RESPECT
TO THE OLD SUBORDINATED DEBENTURES, ANY BENEFICIAL INTEREST HOLDER THAT HAS NOT
RECEIVED THIS DISCLOSURE STATEMENT AND A BALLOT SHOULD CONTACT HIS, HER OR ITS
NOMINEE.
VOTING RECORD DATE
Consistent with the provisions of Rule 3018 of the Bankruptcy Rules, the
Company has fixed 5:00 p.m., New York City Time, on as the time
and date for determining which holders of Claims are eligible to vote on the
Prepackaged Plan pursuant to the procedures set forth herein.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
THE SOLICITATION PURSUANT TO THIS DISCLOSURE STATEMENT WILL EXPIRE ON
. TO BE COUNTED, BALLOTS AND, WHEN APPROPRIATE, MASTER BALLOTS
MUST BE RECEIVED BY 5:00 PM., NEW YORK CITY TIME, ON , UNLESS THE
COMPANY, IN ITS SOLE DISCRETION, EXTENDS OR WAIVES THE PERIOD DURING WHICH
BALLOTS AND MASTER BALLOTS WILL BE ACCEPTED BY THE COMPANY, IN WHICH CASE THE
TERM "EXPIRATION DATE" FOR SUCH SOLICITATION SHALL MEAN THE LAST TIME AND DATE
TO WHICH SUCH SOLICITATION IS EXTENDED.
Except to the extent the Company so determines or as permitted by the
Bankruptcy Court, Ballots and Master Ballots received after the Expiration Date
will not be accepted or counted in connection with the request for Confirmation
of the Prepackaged Plan.
The Company expressly reserves the right, at any time or from time to time,
to extend the period during which the Solicitation is open. During any extension
of the Solicitation, all Ballots and Master Ballots previously given will remain
subject to all the terms and conditions of the Solicitation, including the
revocation rights specified herein. To extend the Expiration Date, the Company
will notify the Solicitation Agent of any extension by oral or written notice
and will make a public announcement thereof, each at any time prior to 10:00
a.m., New York City Time, on the next business day after the previously
scheduled Expiration Date. Without limiting the means by which the Company may
choose to make any public announcement, the Company will not have any
obligation, unless otherwise required by law, to publish, advertise or otherwise
communicate any such public announcement other than by issuing a news release
through the Dow Jones News Service. There can be no assurance that the Company
will exercise its right to extend the Solicitation period for the receipt of
Ballots and Master Ballots.
106
<PAGE> 119
The Company expressly reserves the right to amend, at any time and from
time to time, the terms of the Solicitation or the Prepackaged Plan (subject to
compliance with the requirements of section 1127 of the Bankruptcy Code and the
Bankruptcy Rules and any applicable non-bankruptcy laws and, pursuant to the
Restructuring Agreement, the approval of LGE). If the Company makes a material
change in the terms of the Solicitation or the Prepackaged Plan, or if it waives
a material condition, the Company will disseminate additional solicitation
materials and will extend the Solicitation, in each case to the extent required
by law.
VOTING PROCEDURES AND OTHER REQUIREMENTS
Persons Entitled to Vote
The following Classes of Claims are impaired under the Prepackaged Plan and
all holders of Claims in such Classes as of the Voting Record Date are entitled
to vote to accept or reject the Prepackaged Plan upon the terms and subject to
the conditions set forth herein and in the Prepackaged Plan:
Class 4 -- Bank Lender Claims
Class 6 -- Old Subordinated Debenture Claims
Class 7 -- LGE Claims
To be entitled to vote to accept or reject the Prepackaged Plan, a person
must be the beneficial interest holder of a Claim in the impaired, voting Class
on the Voting Record Date, regardless of whether such Claims are held of record
on the Voting Record Date in such holder's name or in the name of such holder's
broker, dealer, commercial bank, trust Company or other nominee. For purposes of
determining whether the requisite number of acceptances is received to approve
the Prepackaged Plan, only votes which are cast at the direction of beneficial
interest holders in accordance with the procedures set forth herein may be
counted. The Ballots are being distributed to holders of Claims in Class 4,
Class 6 and Class 7. The Master Ballots are being distributed to holders of
Claims in Class 6.
Voting Procedures
Holders of Impaired Claims are requested to complete an appropriate Ballot
and, when appropriate, Master Ballot, in accordance with the instructions set
forth thereon and the procedures set forth below and in the Prepackaged Plan.
Beneficial Interest Holders
Any beneficial interest holder of Claims can vote on the Prepackaged Plan
through a nominee by following these instructions:
1. Provide all the applicable information on the Ballot in accordance
with the instructions set forth thereon, including the amount of the Claims
held.
2. Indicate acceptance or rejection of the Prepackaged Plan by
checking either the box entitled "Accepts the Prepackaged Plan" or "Rejects
the Prepackaged Plan" set forth on the Ballot.
3. Sign and date the Ballot and provide your name and mailing address
if different from the printed address which appears on the Ballot or if no
preprinted address appears on the Ballot. If you are completing the Ballot
on behalf of another entity, indicate the name of such entity, your
relationship with such entity and/or the capacity in which you are signing.
4. (a) If you hold Old Subordinated Debentures in "street name"
through a brokerage firm, bank, trust company or other source, return the
Ballot to the nominee as promptly as possible so that the nominee may
complete and submit a Master Ballot prior to the Expiration Date. If no
pre-addressed, postage-paid envelope was enclosed, contact the Solicitation
Agent for instructions.
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<PAGE> 120
(b) If you are both the beneficial interest holder and the record
holder of Claims return the Ballot directly to the Solicitation Agent in
the enclosed pre-addressed envelope so that it will be received prior to
the Expiration Date.
Brokerage Firms, Banks and Other Nominees
A brokerage firm which is the registered or record holder of the Old
Subordinated Debentures for a beneficial interest holder can vote on behalf of
such beneficial interest holder by (i) distributing a copy of this Disclosure
Statement, all appropriate Ballots and the other Solicitation Materials to such
beneficial interest holder for execution; (ii) collecting all such completed and
executed Ballots; (iii) completing a Master Ballot compiling the votes and other
information from the Ballots collected; and (iv) transmitting such Master Ballot
to the Solicitation Agent on or before the Expiration Date. A proxy intermediary
acting on behalf of a brokerage firm or bank may follow the procedures outlined
in the preceding sentence to vote on behalf of such beneficial interest holder.
Each brokerage firm, bank, or other nominee which submits a Master Ballot
must retain all ballots submitted to it by beneficial interest holders for
disclosure to the Bankruptcy Court, if so ordered.
Any Ballot submitted to a brokerage firm, proxy intermediary or other
nominee will not be counted until such nominee properly completes and delivers
to the Solicitation Agent a corresponding Master Ballot that reflects such
beneficial interest holder's vote. Any record holder which is also a beneficial
interest holder of the Old Subordinated Debentures should either (i) return a
Ballot to the Solicitation Agent or (ii) prepare and retain a Ballot and include
the information from such ballot on the Master Ballot submitted to the
Solicitation Agent.
Holders may receive multiple mailings containing Ballot(s), especially if
holders own Old Subordinated Debentures, in street name through more than one
broker, bank or other nominee. A beneficial interest holder that holds the Old
Subordinated Debentures through more than one broker, bank or other nominee must
so disclose on each ballot such holder completes and must cast the same vote on
the Prepackaged Plan on each ballot such holder completes. A beneficial interest
holder's vote either to accept or to reject the Prepackaged Plan will be counted
only once for each Class of Claims held by the holder, regardless of the number
of record holders through which such Claims are held. By executing a ballot, a
holder certifies, among other things, that, to the extent applicable, such
holder has disclosed any bifurcation of beneficial ownership of the Old
Subordinated Debentures and that such holder has cast the same vote on any
multiple ballots for holdings in a single Class of Claims. THE NAMES OF ALL
BROKER-DEALERS OR OTHER INTERMEDIARIES OR PERSONS THAT HOLD THE OLD SUBORDINATED
DEBENTURES FOR A BENEFICIAL INTEREST HOLDER SHOULD BE INDICATED ON THE BALLOTS.
AUTHORIZED SIGNATORIES (OTHER THAN BROKERAGE FIRMS AND OTHER PARTICIPANTS)
SHOULD SUBMIT SEPARATE BALLOTS FOR EACH BENEFICIAL INTEREST HOLDER FOR WHOM THEY
ARE VOTING.
Other
If a Ballot is signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations, or others acting in a fiduciary or
representative capacity, such persons should indicate such capacity when signing
in accordance with the procedures set forth under "Certifications" below and,
unless otherwise determined by the Company, must submit proper evidence
satisfactory to the Company of authority to so act on behalf of a beneficial
interest holder.
The Company, in its sole discretion, may waive any defect in any Ballot or
Master Ballot at any time, either before or after the close of voting, and
without notice. Except as provided below, unless the Ballot or Master Ballot
being furnished is timely submitted to the Solicitation Agent on or prior to the
Expiration Date together with any other documents required by such Ballot or
Master Ballot, as the case may be, the Company may, in its sole discretion,
reject such Ballot or Master Ballot as invalid and, therefore, decline to
utilize it in connection with seeking Confirmation of the Prepackaged Plan by
the Bankruptcy Court.
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In the event a Claim is disputed or designated under section 1126(e) of the
Bankruptcy Code, any vote to accept or reject the Prepackaged Plan cast with
respect to such Claim will not be counted for purposes of determining whether
the Prepackaged Plan has been accepted or rejected, unless the Bankruptcy Court
orders otherwise.
Certifications
For purposes of determining whether the requisite number of acceptances is
received to approve the Prepackaged Plan, only votes which are cast by or at the
direction of beneficial interest holders of Impaired Claims may be counted. By
executing and returning a Ballot, a person or entity (i) will certify to the
Bankruptcy Court and the Company that either (a) such person or entity is the
beneficial interest holder of the Claims or securities being voted or (b) such
person or entity is an authorized signatory for someone or some entity that or
which is a beneficial interest holder of the Claims or securities being voted;
(ii) will certify to the Bankruptcy Court and the Company that such person or
entity (or in the case of an authorized signatory, the beneficial interest
holder) has received a copy of this Disclosure Statement and Solicitation
Materials and will acknowledge that the Solicitation is being made pursuant to
the terms and conditions set forth therein; (iii) will certify to the record
holder, the Bankruptcy Court and the Company that either (a) such person or
entity has not submitted any other Ballots for such Class of Claims, as the case
may be, held in other accounts or other registered names or (b) such person or
entity has disclosed on each Ballot completed by such person or entity the
existence of Claims in the same Class held in other accounts, or other
registered names and the submission of other Ballots for such Claims; (iv) will
certify to the record holder, the Bankruptcy Court and the Company that such
person or entity has cast the same vote on every Ballot completed by such person
or entity with respect to holdings in a single Class of Claims; and (v) will
request that such person or entity (or in the case of an authorized signatory,
the beneficial interest holder) be treated as the record holder of such
securities for purposes of voting on the Prepackaged Plan.
A brokerage firm or other nominee which is a registered holder will
prepare, execute and deliver a Master Ballot to the Solicitation Agent to
reflect the votes of the beneficial interest holders it represents. By executing
and returning a Master Ballot, such nominee (i) will certify to the Bankruptcy
Court and the Company that (a) such nominee has received a copy of this
Disclosure Statement, Ballot and other Solicitation Materials and has delivered
the same to the beneficial interest holders listed thereon by such nominee, (b)
such nominee has received a completed and signed Ballot from each such
beneficial interest holder, (c) such nominee is the registered holder of the
securities being voted, (d) such nominee has been authorized by each such
beneficial interest holder to vote on the Prepackaged Plan, and (e) the
beneficial interest holder has certified to such nominee that such beneficial
interest holder has not submitted any other Ballots for such Class of Claims
held in other accounts or other registered names, or, if held in other accounts
or registered names, that the beneficial interest holder has certified to such
nominee that such beneficial interest holder has cast the same vote for such
Class of Claims, and such nominee will disclose such other accounts or
registered holders and such other ballots; (ii) will request that such nominee
be treated as the beneficial interest holder of the securities for purposes of
voting on the Prepackaged Plan, unless otherwise authorized by the Bankruptcy
Court; (iii) will disclose (a) the number of such beneficial interest holders,
(b) the respective principal amounts and issues of the Old Subordinated
Debentures owned, as the case may be, by each such beneficial interest holder,
(c) each beneficial interest holder's respective vote concerning the Prepackaged
Plan, (d) the customer account or other identification number for each such
beneficial interest holder; and (iv) will agree to maintain Ballots returned by
beneficial interest holders (whether properly completed or defective) for
disclosure to the Bankruptcy Court if so ordered.
Ballots
A separate form of Ballot and, when applicable, Master Ballot, is to be
used for each Class of Impaired Claims. Holders of Claims should take care to
use the correct Ballot(s) in voting on the Prepackaged Plan. See "-- Incomplete
Ballots." If any Ballots are damaged or lost, or if a holder has any questions
concerning this Solicitation, it may contact the Solicitation Agent at the
address or phone number listed on the back cover of this Disclosure Statement.
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Voting Multiple Claims
EACH BENEFICIAL INTEREST HOLDER WHICH HOLDS A CLAIM IN MORE THAN ONE CLASS
IS REQUIRED TO VOTE SEPARATELY WITH RESPECT TO EACH CLASS IN WHICH SUCH
BENEFICIAL INTEREST HOLDER HOLDS A CLAIM.
A separate Ballot of the appropriate form should be used to vote on the
Prepackaged Plan with respect to each Impaired Class of Claims. Votes must be
made on the appropriate Ballot in order to be counted. A beneficial interest
holder's vote on the Prepackaged Plan will be counted only once for each Class
of Claims held by the holder, regardless of the number of Ballots submitted for
such Class.
A holder may not split its vote within a Class of Impaired Claims. For
example, if a holder of the Old Subordinated Debentures is submitting a Ballot
as to the Old Subordinated Debentures which such holder beneficially owns, such
holder must vote all its Old Subordinated Debentures the same way (i.e., all
"Accepts the Prepackaged Plan" or "Rejects the Prepackaged Plan"). If a holder
of Claims in more than one Class executes one or more Ballots for only one such
Class, such holder's vote will count as a vote only once with respect to such
Class and will not count as a vote with respect to any Claims in other Classes
held by such holder.
Incomplete Ballots
It is important that all holders of Impaired Claims vote to accept or
reject the Prepackaged Plan, because under the Bankruptcy Code, for purposes of
determining whether the requisite acceptances have been received by an Impaired
Class of Claims, the vote will be tabulated based on the ratio of accepting
holders of Impaired Claims to all voting holders of Impaired Claims. Therefore,
it is possible that the Prepackaged Plan could be approved by any Impaired Class
of Claims with the affirmative vote of significantly less than two-thirds in
amount and one-half in number of the entire Class of Claims. Failure by a holder
of an Impaired Claim to submit a properly executed Ballot or Master Ballot (as
appropriate) or to indicate acceptance or rejection of the Prepackaged Plan in
accordance with the instructions set forth thereon and the procedures set forth
herein shall be deemed to constitute an abstention by such holder with respect
to a vote regarding the Prepackaged Plan, unless cured or waived. Abstentions as
a result of failing to submit a properly executed Ballot or Master Ballot (when
appropriate) or failing to indicate a vote either for acceptance or rejection of
the Prepackaged Plan will not be counted as votes for or against the Prepackaged
Plan. The Company, in its sole discretion, may waive any defect in any Ballot or
Master Ballot at any time, either before or after the close of voting, and
without notice. No assurance can be given, however, that the Bankruptcy Court
will recognize any such waiver.
AGREEMENTS UPON FURNISHING BALLOTS
The delivery of a Ballot or Master Ballot indicating a vote to accept the
Prepackaged Plan by a holder of an Impaired Claim pursuant to the procedures set
forth above will constitute an agreement between such holder and the Company to
accept (i) all the terms of, and conditions to, this Solicitation and (ii) all
the terms of the Prepackaged Plan.
METHOD OF DELIVERY OF BALLOTS
THE METHOD OF DELIVERY OF BALLOTS AND MASTER BALLOTS TO BE DELIVERED TO THE
SOLICITATION AGENT IS AT THE ELECTION AND RISK OF EACH HOLDER OF AN IMPAIRED
CLAIM. Except as otherwise provided herein, such delivery will be deemed made
only when actually received by the Solicitation Agent. Instead of effecting
delivery by mail, it is recommended, though not required, that such holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. NO BALLOTS OR MASTER BALLOTS SHOULD BE SENT
TO THE COMPANY, ANY INDENTURE TRUSTEE, OR THE COMPANY'S FINANCIAL OR LEGAL
ADVISORS.
WITHDRAWAL OF BALLOTS; REVOCATION
Any holder of Impaired Claims that has delivered a valid Ballot or Master
Ballot, as appropriate, voting on the Prepackaged Plan may withdraw such vote by
delivery of a written notice of withdrawal to the Solicitation Agent at any time
prior to the earlier of (i) the commencement by the Company of the
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Prepackaged Chapter 11 Case or (ii) the Expiration Date. Thereafter, Ballots or
Master Ballots may be revoked only with the approval of the Bankruptcy Court.
Votes cast pursuant to a Master Ballot may be withdrawn or modified on an
individual beneficial interest holder basis. In the case where more than one
timely, properly completed Ballot or Master Ballot relating to a particular
Class of Claims held by a particular holder is received, only the Ballot or
Master Ballot, as the case may be, which bears the latest date will be counted
for purposes of determining the vote.
A notice of withdrawal, to be valid, must (i) contain the description of
the Claim to which it relates and the aggregate principal amount represented by
such Claim, (ii) be signed by the holder of such Claim in the same manner as the
original Ballot or Master Ballot, (iii) contain a certification that the
withdrawing party was the beneficial interest holder of the Claim on the Voting
Record Date and possesses the right to withdraw the vote sought to be withdrawn
and (iv) be received by the Solicitation Agent in a timely manner as described
above. Prior to the filing of the Prepackaged Plan, the Company intends to
consult with the Solicitation Agent to determine whether any withdrawals of
Ballots were received. The Company expressly reserves the absolute right to
contest the validity of any such withdrawals of Ballots. See "-- Waivers of
Defects, Irregularities, Etc."
Unless otherwise determined by the Company or directed by the Bankruptcy
Court, a purported notice of withdrawal of a Ballot or Master Ballot which is
not received in a timely manner by the Solicitation Agent will not be effective
to withdraw a previously furnished Ballot or Master Ballot.
THE COMPANY WILL PAY ALL REASONABLE AND CUSTOMARY COSTS, FEES AND EXPENSES
RELATING TO THE SOLICITATION, INCLUDING WITHOUT LIMITATION, MAILING AND HANDLING
COSTS OF BROKERS, DEALERS, COMMERCIAL BANKS, TRUSTEES, INDENTURE TRUSTEES AND
OTHER NOMINEES. THE COMPANY WILL NOT PAY ANY INCENTIVE OR ACCEPTANCE FEES IN
CONNECTION WITH THE SOLICITATION.
SOLICITATION AGENT
The Company expects to hire as the Solicitation Agent in
connection with the Solicitation. The Company expects that the Solicitation
Agent will receive reasonable and customary compensation for services rendered
in connection with the Solicitation, will be reimbursed for reasonable
out-of-pocket expenses and will be indemnified against certain expenses in
connection therewith. All deliveries to the Solicitation Agent relating to the
Solicitation should be directed to one of the addresses set forth on the back
cover page of this Disclosure Statement. REQUESTS FOR INFORMATION OR ADDITIONAL
COPIES OF THIS DISCLOSURE STATEMENT, BALLOTS OR MASTER BALLOTS SHOULD BE
DIRECTED TO THE COMPANY, INVESTOR RELATIONS AT (847) 391-7010.
WAIVERS OF DEFECTS, IRREGULARITIES, ETC.
Unless otherwise directed by the Bankruptcy Court, all questions as to the
validity, form, eligibility (including time of receipt), acceptance and
revocation or withdrawal of Ballots or Master Ballots will be determined by the
Company in its sole discretion, which determination shall be final and binding.
The Company reserves the absolute right to reject any and all Ballots or Master
Ballots not in proper form, the acceptance of which, in the opinion of the
Company or its counsel, would not be in accordance with the provisions of the
Bankruptcy Code. The Company further reserves the right to waive any defects or
irregularities or conditions of delivery as to any particular Ballot unless
otherwise directed by the Bankruptcy Court. The Company's interpretation of the
terms and conditions of the Prepackaged Plan (including the Ballot or Master
Ballot and these respective Voting Instructions thereto), unless otherwise
directed by the Bankruptcy Court, shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with deliveries of
Ballots or Master Ballots must be cured within such time as the Company (or the
Bankruptcy Court) determines. Neither the Company nor any other person or entity
will be under any duty to provide notification of defects or irregularities with
respect to deliveries of Ballots or Master Ballots nor will any of them incur
any liabilities for failure to provide such notification. Unless otherwise
directed by the Bankruptcy Court, delivery of such Ballots or Master Ballots
will not be deemed to have been made until such irregularities have been cured
or waived. Ballots or Master Ballots previously furnished (and as to which any
irregularities have not theretofore been cured or waived) will not be counted.
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MANAGEMENT
The following tables set forth the name, age at June 30, 1998 and business
experience of each of the current directors and executive officers of the
Company. The Company's By-Laws currently provide for eleven directors, the terms
of office of which expire at the Annual Meetings of Stockholders. Successors to
any directors whose terms are expiring are elected to one year terms and hold
office until his or her successor is elected and qualified. The table captioned
"Directors of the Company" sets forth the year in which each director first
became a director of the Company. For information regarding the Old Common Stock
ownership of the Company's current directors and executive officers, see
"SECURITY OWNERSHIP -- Security Ownership of Certain Beneficial Owners." The
composition of the Board following the confirmation of the Prepackaged Plan has
not yet been determined. Following Confirmation, LGE will be the sole
shareholder of New Zenith and will have the right to determine the composition
of the Board of Directors of New Zenith.
CURRENT DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE BACKGROUND INFORMATION
---- --- -------- ----------------------
<S> <C> <C> <C>
T. Kimball Brooker........ 58 1989 President, Barbara Oil Company (investments and oil
and gas exploration) since 1989; Managing Director,
Chicago Office, Morgan Stanley & Company,
Incorporated, 1978-1988. Also Director of Cutler Oil
& Gas Corporation, Arthur J. Gallagher & Company and
Miami Corporation.
Ki-Song-Cho............... 48 1995 Managing Director, Overseas Sales of Display
Division of LG Electronics Inc. since December 1997.
Managing Director, President of North America
Operation, LG Electronics Inc. from November 1996 to
December 1997; Managing Director, Corporate Planning
& Coordination, LG Electronics Inc. from March 1995
to October 1996; Executive Director, Strategic
Planning Division, LG Electronics Inc. from 1992 to
1995. Employed by the Strategic Planning Division,
LG Electronics Inc. from 1989 to 1992.
Eugene B. Connolly........ 66 1995 Chairman Emeritus and former President and Chief
Executive Officer of USG Corporation and employed in
varying capacities with USG Corporation and its
affiliates since 1958; Director of the Pepper
Companies, Inc. and LaSalle National Bank; Advisory
Board member of Good Shepherd Hospital, Kellogg
Graduate School of Management, Northwestern
University and Indiana University School of
Business.
Robert A. Helman.......... 64 1996 Partner in the law firm of Mayer, Brown & Platt
since 1967; also Director, Northern Trust
Corporation, Dreyer's Grand Ice Cream, Inc. and the
Chicago Stock Exchange.
Cha Hong (John) Koo....... 51 1995 Vice-Chairman of the Board of Zenith Electronics
Corporation since November 1, 1996; President and
Chief Executive Officer of LG Electronics Inc. since
1995; Executive Vice President from 1991 to 1994;
Senior Managing Director from 1988 to 1991.
Seung Pyeong Koo.......... 56 1997 Executive Vice President of LG Electronics Inc.
since 1996 and a Director of LG Electronics Inc.
from 1996 to 1998; President of Display Division, LG
Electronics Inc. since 1992; Senior Managing
Director of LG Electronics Inc. from 1995 to 1996;
Managing Director of LG Electronics from 1991 to
1995, Vice President of TV Display Division 1990 to
1992.
</TABLE>
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<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE BACKGROUND INFORMATION
---- --- -------- ----------------------
<S> <C> <C> <C>
Hun Jo Lee................ 66 1995 Chairman of the Board of Zenith Electronics
Corporation since 1995; Advisor to LG Electronics
Inc. since 1998; Chairman of LG Academy from 1996 to
1998; Director of LG Electronics Inc. from 1989 to
1998; Chairman of LG Academy from 1996 to 1998;
Chairman and Chief Executive Officer of LG
Electronics Inc. from 1994 to 1995; Vice-Chairman
and Chief Executive Officer of LG Electronics Inc.
from 1993 to 1994; President and Chief Executive
Officer of LG Electronics Inc. from 1989 to 1993.
Andrew McNally IV......... 58 1990 Managing Director of Hammond, Kennedy, Whitney &
Company, Inc. (private equity investments). Former
Chairman and Chief Executive Officer and current
Director of Rand McNally & Company (printing,
publishing and map making); Director of Hubbell
Incorporated, Mercury Finance Company, Borg-Warner
Securities Corporation and Morgan Stanley Funds.
Yong Nam.................. 50 1995 Executive Vice President of LG Electronics Inc. and
President of Multi-media Division, LG Electronics
Inc. since December, 1997; Executive Vice President
of LG Group Chairman's Office from January 1997 to
December 1997; Senior Managing Director of LG Group
Chairman's Office in 1996; Managing Director of LG
Group Chairman's Office from 1993 to 1995.
Peter S. Willmott......... 61 1990 President and Chief Executive Officer of Zenith
Electronics Corporation from January 1997 to January
1998; Interim Chief Executive Officer from July 1996
to January 1997; Chairman and Chief Executive
Officer, Willmott Services, Inc. (retailing,
consulting and investing) since 1989; Chairman,
President and Chief Executive Officer, Carson Pirie
Scott & Company (retail and food service
industries), 1983-1989. Also Director of Federal
Express Corporation and Security Capital Group, Inc.
Nam Woo................... 49 1995 Senior Managing Director of LG Electronics Inc. and
President of North American Operations of LG
Electronics Inc. since January, 1998; Executive Vice
President of Zenith Electronics Corporation from
October 1997 to January 1998; Director of LG
Electronics Inc. from 1997 to 1998; Senior Managing
Director, Corporate Planning and Coordination, LG
Electronics Inc. from November 1996 to October 1997;
President of LG Electronics U.S.A. Inc. & North
American Operations from February 1995 to November
1997; President of European Operations of LG
Electronics Inc. from 1994 to 1995; Managing
Director of LG Electronics Inc. from 1994 to 1996;
Executive Director of LG Electronics Inc. from 1990
to 1994. Did not serve as a Director of the Company
during 1996.
</TABLE>
Mr. Helman is a partner in the law firm of Mayer, Brown & Platt which has
provided from time to time in the past and may continue to provide, legal
services to the Company and its Subsidiaries. Mayer, Brown & Platt also provides
legal services to LGE. Messrs. Cho, C.H. Koo, S.P. Koo, Woo and Nam are
employees of LGE, and Mr. Lee is a retired employee of LGE. Together with LG
Semicon, LGE collectively beneficially owns approximately 56.5% of the Company's
stock including vested but unexercised options. LGE has been in the past and is
expected to continue to be a significant customer and supplier of the Company.
See "CERTAIN TRANSACTIONS." USG Corporation, of which Mr. Connolly was formerly
the Chairman and
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Chief Executive Officer, implemented a "prepackaged" plan of reorganization
under the federal bankruptcy laws on May 6, 1993. Mr. McNally is a director of
Mercury Finance Company, against which an involuntary petition under chapter 11
of the Bankruptcy Code was filed on July 6, 1998 in the United States Bankruptcy
Court for the Northern District of Illinois.
BOARD AND COMMITTEE MEETINGS AND DIRECTORS' COMPENSATION
To permit the Board of the Company to more efficiently discharge its
duties, the Company has four standing Board Committees: the Executive Committee,
the Audit Committee, the Organization and Compensation Committee and the Stock
Compensation Committee. In addition, in March 1998 the Board established the
Special Committee. See "SPECIAL FACTORS -- Events Leading to the Restructuring."
Committee membership and functions are set out below. The Company does not
have a nominating committee.
The Executive Committee ("Executive Committee") currently consists of
Messrs. Nam (Chairman), Brooker, Connolly, Helman, McNally and Willmott. When
the Board is not in session, the Executive Committee has all of the authority of
the Board except with respect to certain matters such as amendments of the
Restated Certificate of Incorporation or By-Laws, mergers, dispositions of
substantially all of the assets of the Company, dissolution of the Company,
declaration of dividends or the election, compensation or removal of officers of
the Company or members of the Committee.
The Audit Committee of the Board currently consists of Messrs. McNally
(Chairman), Brooker and Connolly. The Committee nominates the Company's
independent auditors, reviews the auditing engagement, the fees charged by the
independent auditors and the Company's internal auditing program. The Committee
also reviews and monitors significant transactions between the Company and LGE.
In 1997, of the six meetings held by the Audit Committee, two were special
meetings in which the Audit Committee acted as a finance committee to consider
various financing alternatives for the Company.
The Organization and Compensation Committee ("Organization and Compensation
Committee") currently consists of Messrs. Connolly (Chairman), Helman and
McNally. The Committee establishes compensation policies, as well as salary
ranges, salaries and annual incentive awards for executives and approves
employment contracts.
The Stock Compensation Committee ("Stock Compensation Committee"), which
currently consists of Messrs. Connolly and McNally, authorizes grants of stock,
stock options and other equity-based awards under the Long-Term Equity
Compensation Plan.
Directors of the Company who are also employees of the Company, of LGE or
its affiliates receive no remuneration for serving on the Board or on any
Committees. Other directors are compensated at the rate of $18,000 per year,
payable in quarterly installments. The Chairman of the Audit Committee and the
Chairman of the Organization and Compensation Committee each receives $2,000
annually for serving in those capacities. In addition, directors who are not
employees of the Company, LGE or its affiliates receive $1,000 for each Board
meeting and for each Committee meeting attended. All directors are entitled to
be reimbursed for their expenses for attending Board or Committee meetings.
Under the terms of the Company's Long-Term Equity Compensation Plan, approved by
the stockholders in May 1997, directors are eligible to receive awards of stock
options, stock appreciation rights, restricted stock and performance
units/shares. Messrs. Brooker, Connolly, Helman and McNally were each granted an
option to purchase 2,000 shares of Company stock on July 18, 1997, at the market
price of the Company stock on that date. In 1987 the Company adopted a
contingent compensation plan for non-employee directors ("Contingent
Compensation Plan"). The number of phantom stock appreciation units granted to
each named non-employee director in previous years under the Contingent
Compensation Plan (all of which are vested) are as follows: Mr. Brooker, 3,000;
Messrs. McNally and Willmott, 2,000 each. The units are valued at the closing
price of the Company's common stock on the date of grant. Participants are paid
for each unit the amount by which the average price of a share of the Company's
common stock over the 20 trading days immediately preceding the distribution
date exceeds the grant price. Distributions may be, at the election of the
participant, in a lump sum, in five annual installments
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<PAGE> 127
or ten annual installments commencing on the distribution date. Participants may
elect a distribution date which is two years from the date of grant, or 30 days
after the participant ceases to be a director, or a specified date not earlier
than the participant's 65th birthday. Except for $143.75 distributed to Mr.
McNally in exchange for 1,000 units, no amounts have been distributed to current
directors pursuant to the Contingent Compensation Plan.
Directors who are not employees of the Company, LGE or its affiliates
participate in the retirement plan which provides for an annual retirement
benefit of $11,000 for such directors who have served on the Board for five
years and who retire after the age of 62 ("Directors' Retirement Plan"). For
purposes of the Directors' Retirement Plan, years of service on the Board do not
include periods during which the director is a salaried officer of the Company
or a subsidiary. The benefit is payable in equal quarterly installments during
the director's lifetime for a period equal to but not in excess of the number of
years of service on the Board. In the event of a change in control of the
Company, directors not continuing after a change in controls but otherwise
entitled to retirement benefits under the Directors' Retirement Plan are
entitled to receive, in a lump sum, the discounted present value of those
benefits.
CURRENT EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
---- --- -----------
<S> <C> <C>
Jeffrey P. Gannon............ 47 President and Chief Executive Officer, since January
1998. 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.
Edward J. McNulty............ 58 Senior Vice President and Chief Financial Officer since
June 1998. Previously Chief Financial Officer of General
Binding Corporation from 1984 to 1998.
Richard F. Vitkus............ 59 Senior Vice President, General Counsel since 1994.
Secretary since 1995. Previously Senior Vice President,
General Counsel, and Director of Corporate Development at
Vanstar Corporation (formerly ComputerLand Corporation)
from 1991 to 1994.
Robert N. Dangremond......... 55 Senior Vice President, Restructuring since June , 1998;
Acting Chief Financial Officer from January 1998 to June
1998. 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. Currently Mr. Dangremond is a
Director of AM International, Inc. and Envirodyne
Industries, Inc.
</TABLE>
Executive Retention Programs
In connection with the Restructuring, the Company has developed an
executive retention program comprised of competitive base salaries, retention
bonuses and short- and long-term incentive bonuses for fourteen key executives
(other than the President and Chief Executive Officer whose retention incentives
are part of his employment agreement). Such program was developed based on
benchmarked, publicly available studies of similar programs. The Company has set
salaries for its key executives at the 75th percentile of stand-alone companies
which are the same or greater in size. Retention bonuses have been set 50% of
base salaries for tier 1 and tier 2 executives and senior managers. Short-term
and long-term incentive bonuses are benchmarked at levels approximately equal to
those available in similarly sized companies. The short- and
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<PAGE> 128
long-term incentive bonuses have been divided into two tiers, with six key
executives in Tier 1 and eight key executives and senior managers in tier 2.
The aggregate amount of retention bonuses payable to the fourteen key
executives totals $1,193,612 and is payable in two equal installments on January
1, 1999 and July 1, 1999. The short-term incentive program for tier 1 executives
is targeted at 50% of base salary and has a maximum payment of 100% of base
salary for any individual. For tier 2 executives, the short-term incentive
program is targeted at 20 to 30% of base salary and has a maximum payment of 30
to 45% of base salary for any individual. tier 1 and tier 2 short-term incentive
programs have a maximum pay out value of approximately $1,310,644 and $448,072,
respectively, and are payable annually on March 31. The long-term incentive
program for tier 1 level executives is targeted at 225% of base salary, with a
maximum payment of 300% of base salary, and for tier 2 level executives, the
long-term incentive program is targeted at 100% of base salary, with a maximum
payment of 150% of base salary. All long-term incentive bonus payments are
payable on March 31, 2001.
The Company has also established retention bonus and stay bonus programs
covering approximately 175 other key managers and employees, with these plans
paying up to 33.3% of the base salaries of those employees. Stay bonuses are
provided to employees in operations targeted for disposition or closing under
the Business Plan Projections and are payable at the end of the relevant stay
period. Retention bonuses are payable in two equal installments on January 1,
1999 and July 1, 1999. Certain employees in areas of ongoing operations will
also be provided with limited short-term incentive programs. Those stay,
retention and short-term incentive programs have an aggregate estimated cost of
approximately $3.5 million to the Company.
Employment Agreements
Mr. Jeffrey P. Gannon was elected President and Chief Executive Officer of
the Company as of January 19, 1998. Mr. Gannon has entered into a three-year
employment agreement with the Company which expires on January 18, 2000. Mr.
Gannon's contract has been amended as part of plans relating to the
Restructuring. The employment agreement provides for: (a) a base salary of
$600,000 per year; (b) a guaranteed special annual bonus of $500,000, payable in
equal installments at the end of each quarter; (c) an annual target bonus,
$400,000 of which is guaranteed and which may be increased up to $600,000 for
achieving specific target performance objectives, payable in equal installments
at the end of each quarter; (d) long-term incentive plan cash payments equal to
$6 million if target performance is achieved or up to $12 million if the maximum
stated performance values are achieved; and (e) participation in various
insurance and benefit plans of the Company. The stock and option grants provided
under Mr. Gannon's original employment agreements were eliminated with the
amendment.
Upon termination of Mr. Gannon's employment other than for death,
disability, retirement or by the Company for cause, he shall be entitled to
receive (a) a lump sum cash payment equal to his base compensation and
guaranteed bonus for the remainder of the employment term; and (b) continuation
of certain benefits for a one-year period following his termination. In
addition, the Company has established a letter of credit for the benefit of Mr.
Gannon permitting him to draw against it under certain circumstances for his
base salary and guaranteed bonuses for the term of his employment agreement. A
subsidiary of LGE has provided a guarantee concerning Mr. Gannon's base salary
and guaranteed bonuses in the event the letter of credit is unavailable.
In connection with the Restructuring, the Company anticipates entering into
amended employment agreements (the "Employment Agreements") with a number of key
executives, including Richard F. Vitkus (the "Key Executives"). The Employment
Agreements will generally provide for an employment period which ends on
December 31, 2000. Each Employment Agreement provides for payment of a
non-recurring retention bonus of 50% of the Key Executives' salary in two
installments on each of January 1, 1999 and July 1, 1999, so long as the Key
Executive remains continuously in the Company's employ through the date such
installment is due. Upon either a non-renewal of the Employment Agreements by
the Company or upon termination of employment by the Company without cause, a
Key Executive will be entitled to receive (a) a lump sum severance payment equal
to, if the termination occurs prior to January 1, 2000, an amount equal to one
and one-half times the sum of the Key Executive's annual base compensation and
annual incentive compensation
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for the year in which termination occurs, or if the termination occurs after
January 1, 2000, an amount equal to one times the sum of the Key Executive's
base compensation and annual incentive compensation for the year in which
termination occurs; (b) a pro rata portion of the Key Executive's (i) targeted
annual incentive compensation for the year in which termination occurs and (ii)
long-term incentive compensation (based on the appropriate percentage of the Key
Executive's aggregate base compensation earned from January 1, 1998 through the
end of the month in which termination occurs, as determined by the Board after
prorating the applicable performance criteria through the end of the month in
which termination occurs on a straight-line basis over the three year period);
(c) continued coverage, or substantially equivalent coverage (for either one and
one-half years or one year, as determined according to the severance payment),
under all welfare plans including group medical and dental, health and accident,
long-term disability, short-term disability, group life insurance and executive
insurance in which the Key Executives were participating at the time of
termination (if the Company is unable to provide such continued coverage or
substantially similar coverage, the Company will pay the Key Executive a lump
sum cash amount equal to the present value of such benefits); and (c)
outplacement services not to exceed 15% of the Key Executive's base
compensation.
Upon termination of employment of any of the Key Executives within two
years after a change in control of the Company ("Change in Control Period"), the
Employment Agreements provide for various severance pay and benefits. Change in
control is defined in the Employment Agreements to exclude any further
acquisition by LGE and the Restructuring. During the Change in Control Period,
severance pay and benefits will not be paid if employment is terminated because
of death, disability or retirement, or by the Company for cause, or by the Key
Executive other than for good reason. Upon termination of employment during a
Change of Control Period, the Employment Agreements provide for (i) a pro rata
portion of the Key Executive's annual incentive compensation and long-term
incentive bonus, (ii) a lump sum payment equal to three times the highest annual
base compensation during the three full fiscal years prior to termination, (iii)
three times the greater of (A) the highest annual incentive compensation payable
during the three full fiscal years prior to termination and (B) the target
annual incentive compensation payable for the year in which termination occurs
and (iv) any retention bonuses not previously paid, whether or not then due.
Other provisions of the Employment Agreements require the Company to maintain
for the benefit of the Key Executive for a period of three years after
termination, all employee benefits including group medical and dental, health
and accident, long term disability and group life insurance in which the Key
Executive was participating at the time of termination. If the Company is unable
to provide such continued coverage or substantially similar coverage, the
Company will pay the Key Executive a lump sum cash amount equal to the present
value of such benefits. The Company shall also pay for outplacement services not
to exceed 15% of the Key Executive's base compensation.
The Employment Agreements further provide for payment of an amount
sufficient to put the Key Executive in the same after-tax position as if no
excise taxes imposed by Section 4999 of the Internal Revenue Code had been
imposed on any payments which are contingent on a change in control and which
equal or exceed three times the average taxable compensation for the prior five
years or their period of employment. The Company is obligated to reimburse the
Key Executive for legal fees and expenses incurred in successfully enforcing the
Employment Agreements.
Other employees of the Company may be parties to employment agreements that
will not be affected by the Restructuring or the Prepackaged Plan.
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SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Old and New Common Stock as of June 27, 1998 and after the
Restructuring by (i) all persons who are known by the Company to beneficially
own more than 5% of the outstanding shares of the common stock of the Company;
(ii) each director and Executive Officer of the Company; and (iii) all directors
and Executive Officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER
PRIOR TO RESTRUCTURING(1) RESTRUCTURING
-------------------------- -------------------
NAME NUMBER PERCENT(2) NUMBER PERCENT(2)
---- ----------- ----------- ------ ----------
<S> <C> <C> <C> <C>
LG Electronics Inc.................................. 12,059,800(3) 17.9% 1,000 100%
LG Semicon Co....................................... 26,095,200 38.6% 0 0
Richard F. Vitkus................................... 33,000(4) * 0 0
Peter S. Willmott................................... 25,000 * 0 0
T. Kimball Brooker.................................. 11,000 * 0 0
Andrew McNally IV................................... 8,000 * 0 0
Eugene B. Connolly.................................. 2,000 * 0 0
Robert A. Helman.................................... 1,000 * 0 0
Michael Ahn......................................... 0 0 0 0
Ramesh G. Amin...................................... 0 0 0 0
Ki-song-Cho......................................... 0 0 0 0
Roger A. Cregg...................................... 0 0 0 0
Cha Hong (John) Koo................................. 0 0 0 0
S.P. Koo............................................ 0 0 0 0
Hun Jo Lee.......................................... 0 0 0 0
Yong Nam............................................ 0 0 0 0
Dennis R. Winkleman................................. 0 0 0 0
Nam Woo............................................. 0 0 0 0
Directors and All Executive Officers as group (16
persons).......................................... 80,000 0 0 0
</TABLE>
- ---------------
* Less than 1%
(1) The "Zenith Stock Fund," a fund available under the Zenith Salaried
Retirement Savings Plan and the Zenith Hourly Profit-Sharing Retirement
Plans, held 705,730 shares of Old Common Stock as of June 30, 1998.
(2) Percentage based on shares issued and outstanding on June 27, 1998.
(3) As of June 27, 1998, LGE beneficially owned 12,059,800 shares directly as to
which it had sole voting and dispositive power. Such amount includes
1,586,000 shares obtainable through the exercise of stock options. LG
Semicon has given LGE an irrevocable proxy to vote the 26,095,200 shares
owned by LG Semicon as to which LG Semicon retains dispositive power.
(4) Includes 30,000 outstanding shares for Mr. Vitkus which are subject to
conditions of vesting (one-third vests on the third, fourth and fifth
anniversary of the May 21, 1996 grant date), forfeiture, restrictions on
sales, transfer and other dispositions.
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DESCRIPTION OF CAPITAL STOCK
OLD COMMON STOCK AND OLD PREFERRED STOCK
The Company is presently authorized to issue 150,000,000 shares of Old
Common Stock, par value $1.00 per share, and 8,000,000 shares of preferred
stock, par value $1.00 per share (the "Old Preferred Stock"). As of June 30,
1998, there were issued and outstanding 67,525,447 shares of Old Common Stock
and no shares of Old Preferred Stock. Except as may be otherwise required by
applicable law, the holders of the Old Common Stock vote together as a Class and
are entitled to one vote per share on any matter submitted to a vote of the
Company's stockholders. The issuance, designations, preferences and voting
rights of the Old Preferred Stock are as determined from time to time by the
Board. The shares of Old Common Stock have no preemptive or other subscription
rights and there are no conversion, redemption or sinking fund provisions with
respect to such shares.
NEW COMMON STOCK
Giving effect to the transactions contemplated by the Prepackaged Plan, the
Old Common Stock will be cancelled and, pursuant to the Amended Certificate of
Incorporation, the Company will be authorized to issue 1,000 shares of New
Common Stock, par value $0.01 per share. Immediately after the Restructuring,
there will be issued and outstanding 1,000 shares of New Common Stock, all of
which will be owned by LGE. Holders of the New Common Stock will be entitled to
one vote per share on any matter submitted to a vote of the Company's
stockholders. The shares of New Common will have no preemptive or other
subscription rights and there will be no conversion, redemption or sinking fund
provisions with respect to such shares.
DELAWARE ANTI-TAKEOVER LAW
The Company presently is (and, upon Consummation of the Restructuring, will
be) subject to the provisions of section 203 (the "Delaware anti-takeover law")
of the Delaware General Corporation Law (the "DGCL"). Under the Delaware
anti-takeover law, certain "business combinations" between a Delaware
corporation, whose stock generally is publicly traded or held of record by more
than 2,000 stockholders, and an "interested stockholder" are prohibited for a
three-year period following the date that such stockholder became an interested
stockholder, unless, among other conditions, (i) the corporation has elected in
its certificate of incorporation not to be governed by the Delaware
anti-takeover law, (ii) the business combination was approved by the board of
directors of the corporation before the other party to the business combination
became an interested stockholder, (iii) upon consummation of the transaction
that made it an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the commencement
of the transaction (excluding voting stock owned by directors who are also
officers or held in employee benefit plans in which the employees do not have a
confidential right to tender or vote stock held by the plan) or (iv) the
business combination was approved by the board of directors of the corporation
and ratified by 66 2/3% of the voting stock which the interested stockholder did
not own. The three-year prohibition also does not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation and
a person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors. The term "business combination" is defined
generally to include mergers or consolidations between a Delaware corporation
and an "interested stockholder," transactions with an "interested stockholder"
involving the assets or stock of the corporation or its majority-owned
subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as any person who becomes the beneficial owner of 15% or more of a
Delaware corporation's voting stock. The Delaware anti-takeover law could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
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CERTAIN TRANSACTIONS
The Company has several financings, supply and other arrangements with LGE
and its affiliates. See "SPECIAL FACTORS -- Events Leading to the
Restructuring -- Financing Transactions" and "-- Other Transactions with LGE."
In November 1995, a change in control of the Company occurred, in which LGE
and LG Semicon purchased shares of the Company pursuant to a combined tender
offer and purchase of newly issued shares of common stock from the Company. As
of June 30, 1998, LGE beneficially owned or held an irrevocable proxy to vote
38,155,000 shares of common stock of the Company which represents 56.5% of the
outstanding common stock. Because LGE owns and/or has the ability to vote 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, television-VCR combinations and components from LGE and LG
Semicon. 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 LG
Semicon 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.
Product and other sales: The Company sells televisions, picture tubes,
yokes and other manufactured subassemblies to LGE 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 to subsidiaries of LGE 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 such
subsidiary became 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 related to 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 television tuners. LGE's
payments to the Company in 1997 and 1996 under these agreements and licenses
were $0.6 million and $1.0 million, respectively.
Service Assistance: In 1996 and 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 in 1997 and were not material in 1996. In
addition, employees of LGE provided certain services to the Company at cost in
1997 that were covered under service agreements. The Company's obligations to
LGE for such services totaled $4.8 million. The Company currently leases space
from LGE subsidiaries (i) in Huntsville, Alabama, for its Parts & Service group,
(ii) in Ontario, California, for a warehouse and (iii) in San Jose, California,
for NWS. In addition, a U.S. affiliate of LGE has provided a guarantee of the
Company's obligations under the employment agreement and indemnity agreement
with Jeffrey P. Gannon, the Company's President and Chief Executive Officer.
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Financial Assistance: In March 1998, the Company entered into the LGE
Demand Loan Facility, 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. In June 1998,
this facility was amended to provide that, in the absence of an event of
default, demand for repayment may not occur prior to December 31, 1998.
Repayment is due in full at the end of the term. The facility is secured by a
second lien on the assets that secure the Company's obligations under the
Reimbursement Agreement and a second lien on the Company's VSB patents. In
October 1997, in conjunction with amendments to the Citibank Credit Facility,
LGE agreed to provide credit support for up to $160 million of third-party
financing in consideration of a credit support fee of approximately 2% of the
facilities actually obtained by the Company and guaranteed by LGE (to be paid in
cash or equity). With credit support from LGE, between November 1997 and
February 1998, the Company entered into the Unsecured Bank Loans pursuant to
which the Company borrowed approximately $102 million. In connection with the
Unsecured Bank Loans, the Company entered into the Reimbursement Agreement
pursuant to which the Company agreed to reimburse LGE for amounts paid pursuant
to the guarantees and granted liens, junior to the liens securing the Citibank
Credit Facility, in favor of LGE on the capital stock of the Company's domestic
subsidiaries and the Company's equipment, real property and certain intellectual
property of the Company and its Subsidiaries. In June 1998, LGE made payment
pursuant to demands on its guarantees in connection with $50 million of the
Unsecured Bank Loans.
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 subsidiaries of 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, $0.6 million of the liability to
subsidiaries of LGE remained and is included in other accrued expenses.
In April 1997, the Company and LGE entered into an arrangement whereby LGE
provided a vendor credit line to the Company, to finance the Company's purchase
of certain goods from LGE in the ordinary course of business. Prior to April
1997, the Company's accounts payables arising in the ordinary course of business
to LGE were extended for certain periods of time, but no formal arrangement was
in place. The amount of extended payables was $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.
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.
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.
Other Items: The Company currently leases space from an LGE subsidiary in
(i) Huntsville, Alabama, for its Parts and Service group, (ii) Ontario,
California, for a warehouse and (iii) San Jose, California, for NWS.
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APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
TO RESALES OF NEW SECURITIES
Certain holders of Claims are offered securities under the Prepackaged
Plan. Section 1145 of the Bankruptcy Code creates certain exemptions from the
registration and licensing requirements of federal and state securities laws
with respect to the distribution of securities pursuant to a plan of
reorganization as well as resales of the securities by certain recipients
thereof.
ISSUANCE OF NEW SUBORDINATED DEBENTURES UNDER THE PREPACKAGED PLAN
Section 1145 of the Bankruptcy Code exempts the issuance of securities
under a plan of reorganization from registration under the Securities Act, and
under state securities laws if three principal requirements are satisfied: (i)
the securities must be issued "under a plan" of reorganization by the debtor or
its successors under a plan or an affiliate participating in a joint plan of
reorganization with the debtor; (ii) the recipients of the securities must hold
a Claim against the debtor, an interest in the debtor or a Claim for an
administrative expense against the debtor; and (iii) the securities must be
issued entirely in exchange for the recipient's Claim against or interest in the
debtor, or "principally" in such exchange and "partly" for cash or property.
Although the issuance of the New Subordinated Debentures under the Prepackaged
Plan satisfies the requirements of section 1145(a) of the Bankruptcy Code and,
therefore, would be exempt from registration under federal and state securities
laws, under certain circumstances subsequent transfers of such securities may be
subject to registration requirements under such securities laws.
TRANSFERS OF NEW SUBORDINATED DEBENTURES
The New Subordinated Debentures to be issued pursuant to the Prepackaged
Plan may be freely transferred by most recipients thereof, and all resales and
subsequent transactions in the New Subordinated Debentures are exempt from
registration under federal and state securities laws, unless the holder is an
"underwriter" with respect to such securities. Section 1145(b) of the Bankruptcy
Code defines four types of "underwriters":
(i) persons who purchase a Claim against, an interest in, or a Claim
for administrative expense against the debtor with a view to distributing
any security received or to be received in exchange for such a Claim or
interest;
(ii) persons who offer to sell securities offered or sold under the
plan for the holders of such securities;
(iii) persons who offer to buy such securities from the holders of
such securities, if the offer to buy is (a) with a view to distributing
such securities and (b) made under an agreement made in connection with the
plan, with the consummation of the plan or with the offer or sale of
securities under the plan; and
(iv) a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in section 2(11) of the Securities Act.
Whether or not any particular person would be deemed to be an "underwriter"
or an "affiliate" with respect to the New Subordinated Debentures to be issued
pursuant to the Prepackaged Plan would depend upon various facts and
circumstances applicable to that person. Accordingly, the Company expresses no
view as to whether any person would be an "underwriter" or an "affiliate" with
respect to any security to be issued pursuant to the Prepackaged Plan.
GIVEN THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR PERSON MAY BE AN UNDERWRITER OR AN AFFILIATE, THE COMPANY MAKES NO
REPRESENTATIONS CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE NEW
SUBORDINATED DEBENTURES TO BE DISTRIBUTED PURSUANT TO THE PREPACKAGED PLAN. THE
COMPANY RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE NEW SUBORDINATED DEBENTURES
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH NEW
SUBORDINATED DEBENTURES.
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CERTAIN TRANSACTIONS BY STOCKBROKERS
Under section 1145(a)(4) of the Bankruptcy Code, stockbrokers are required
to deliver a copy of the Disclosure Statement (and supplements hereto, if any,
if ordered by the Bankruptcy Court) at or before the time of delivery of
securities issued under the Prepackaged Plan to their customers for the first 40
days after the Effective Date. This requirement specifically applies to trading
and other aftermarket transactions in such securities.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material U.S. federal income
tax consequences of the Prepackaged Plan to the Company and the holders of
certain Claims and Equity Interests of the Company. This summary is based upon
the Tax Code, the United States Treasury Department regulations promulgated
thereunder (the "Treasury Regulations"), judicial authority and current
administrative rulings and practice now in effect, all of which are subject to
change at any time (possibly with retroactive effect) or different
interpretations. Prospective participants in the Prepackaged Plan should be
aware that many of the tax consequences are unclear under existing law and, as a
result, many alternative tax consequences are possible. This summary does not
discuss all aspects of U.S. federal income taxation that may be relevant to a
particular holder in light of the holder's particular circumstances or to
holders subject to special treatment under the U.S. federal income tax laws
(including dealers in securities, foreign persons, life insurance companies,
tax-exempt organizations, financial institutions and taxpayers subject to the
alternative minimum tax), and it does not discuss any aspects of state, local or
foreign tax laws.
Due to the complexity of certain aspects of the Prepackaged Plan, the lack
of applicable legal precedent, the possibility of changes in the law, the
differences in the nature of the Claims (including Claims within the same
Class), the holder's status and methods of accounting (including holders within
the same Class) and the potential for disputes as to legal and factual matters
with the Internal Revenue Service ("IRS"), the tax consequences described herein
are subject to significant uncertainties.
NO RULING WILL BE SOUGHT FROM THE IRS, AND NO OPINION OF COUNSEL HAS BEEN
OR WILL BE SOUGHT, WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PREPACKAGED
PLAN. THE DISCUSSION SET FORTH BELOW IS FOR GENERAL INFORMATION ONLY. EACH
HOLDER IS URGED TO CONSULT WITH ITS OWN TAX ADVISOR REGARDING THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PREPACKAGED PLAN.
CONSEQUENCES TO HOLDERS OF THE OLD SUBORDINATED DEBENTURES
General
In general, a holder of an Old Subordinated Debenture will realize gain or
loss on the exchange of an Old Subordinated Debenture for a New Subordinated
Debenture in an amount equal to the difference between (i) the amount realized
(i.e., the "issue price" of the New Subordinated Debenture as described under
"Issue Price" below ("Issue Price")) in respect of the Old Subordinated
Debenture and (ii) his or her adjusted tax basis in the Old Subordinated
Debenture.
Whether or not a holder of an Old Subordinated Debenture will be required
or allowed to recognize the gain or loss realized on the exchange of such
debenture for a New Subordinated Debenture depends on whether the exchange
constitutes a tax-free recapitalization. This, in turn, depends upon whether the
Old and New Subordinated Debentures constitute "securities" for federal income
tax purposes. Whether an instrument constitutes a "security" is determined based
on all the facts and circumstances. Certain authorities have held that the
length of the term of a debt instrument is a factor in determining whether such
instrument is a security for federal income tax purposes. These authorities have
indicated that a term of less than five years is evidence that the instrument is
not a security, whereas a term of ten years or more is evidence that it is a
security. There are numerous other factors that could be taken into account in
determining whether a debt instrument is a security, including, among others,
the security for payment, the creditworthiness of the obligor, the subordination
or lack thereof to other creditors, the right to vote or otherwise participate
in the management of the obligor, convertibility of the instrument into an
equity interest of the obligor, whether payments of interest are fixed, variable
or contingent, and whether such payments are made on a current basis or accrued.
Since the Old Subordinated Debentures mature in 2011 and the New Subordinated
Debentures mature in 2010, both debentures have terms greater than ten years,
and it is likely that they will be treated as securities for federal income tax
purposes.
In general, if they are treated as securities, the exchange of the Old
Subordinated Debentures for New Subordinated Debentures will constitute a
recapitalization and a holder will not recognize any gain or loss on the
exchange, except that a holder will recognize gain, but not loss, to the extent
of the lesser of (i) the
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amount of gain realized or (ii) the amount of cash received (reduced by the
amount of such cash that is allocated to accrued but unpaid interest, as
discussed below). The tax basis of a holder of a New Subordinated Debenture
received in the exchange generally will be equal to the adjusted tax basis of
such holder in the Old Subordinated Debenture surrendered in the exchange
therefor increased by the gain, if any, recognized, and reduced by the amount of
cash received, by the holder. The holding period of a holder of a New
Subordinated Debenture received in the exchange generally will include the
holding period of such holder in the Old Subordinated Debenture surrendered in
exchange therefor (provided such Old Subordinated Debenture was held as a
capital asset at the time of the exchange).
If the Old and New Subordinated Debentures do not constitute securities,
the exchange will not constitute a recapitalization, and a holder will recognize
the entire amount of gain or loss realized, as discussed above. The tax basis of
a holder in a New Subordinated Debenture, in such case, will be equal to the
issue price of the New Subordinated Debenture at the time of the exchange (as
described in "-- Issue Price" below). In such event, the holding period of a
holder of a New Subordinated Debenture will begin on the day following the day
of the exchange.
Except for the amount of gain attributable to accrued market discount on an
Old Subordinated Debenture that was purchased with market discount (as described
in "-- Accrued Market Discount" below), any gain or loss recognized on the
exchange will be capital gain or loss if the Old Subordinated Debenture is a
capital asset in the hands of the holder. Such gain or loss will be long-term
capital gain or loss if the holder's holding period with respect to the Old
Subordinated Debenture surrendered exceeds one year at the time of the exchange.
Accrued Interest
Regardless of whether a holder of the Old Subordinated Debentures
recognizes gain on the exchange, such holder will be treated as receiving an
interest payment to the extent that a portion of a New Subordinated Debenture
received is allocable to accrued interest on an Old Subordinated Debenture
exchanged therefor. Accordingly, a holder of the Old Subordinated Debentures who
had not previously included such accrued interest in income would recognize
taxable income with respect to such interest payment, and a holder who had
previously included such accrued interest in income would recognize gain or loss
(or, possibly, a write-off against a reserve for bad debts) equal to the
difference between the holder's basis in such interest and the amount of the
payment.
Original Issue Discount
In general, a New Subordinated Debenture will be considered for federal
income tax purposes to be issued with original issue discount ("OID") if the
"stated redemption price at maturity" of the debenture exceeds its "issue price"
by more than a de minimis amount (0.25% of the stated redemption price at
maturity multiplied by the number of complete years from the issue date to the
maturity date). OID with respect to a New Subordinated Debenture is includible
in the income of a holder on a constant-yield-to-maturity basis, based on the
original yield-to-maturity of the debenture calculated by reference to its issue
price, regardless of the holder's method of accounting and regardless of when
interest is actually paid in cash. Accordingly, if a New Subordinated Debenture
is issued with OID, a holder of such a debenture may be required to take OID
into income prior to the receipt of cash payments with respect to the New
Subordinated Debenture.
The stated redemption price at maturity of a New Subordinated Debenture is
the aggregate of all payments due to the holder under such debenture at or
before its maturity date, other than "qualified stated interest." Qualified
stated interest is generally interest that is unconditionally payable in cash or
property (other than debt instruments of the issuer) at fixed intervals of one
year or less during the entire term of the instrument at certain specified
rates. See "-- Issue Price" below. It is unclear whether the stated redemption
price at maturity of a New Subordinated Debenture will exceed its issue price by
more than a de minimis amount at the time of its issuance.
The amount of OID, if any, allocable to an accrual period is an amount
equal to the excess, if any, of (a) the product of the New Subordinated
Debenture's "adjusted issue price" at the beginning of such accrual
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<PAGE> 138
period and its yield-to-maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the accrual
period) over (b) the sum of any qualified stated interest payments on the New
Subordinated Debenture allocable to the accrual period. The "adjusted issue
price" of a New Subordinated Debenture at the start of any accrual period is
equal to its issue price increased by the accrued OID for each prior accrual
period and reduced by any prior payments with respect to such debenture that
were not qualified stated interest payments.
If a New Subordinated Debenture is issued with OID, and if a holder's tax
basis on the issue date in a New Subordinated Debenture exceeds its issue price,
the debt instrument will be treated as having been acquired with "acquisition
premium," and the holder may be allowed to reduce its OID accruals with respect
to such debenture by the proportion of the aggregate amount of OID remaining to
be accrued that is represented by the amount of such excess.
Accrued Market Discount
A debt instrument has "market discount" if its stated redemption price at
maturity exceeds its tax basis in the hands of the holder immediately after its
acquisition, unless a statutorily defined de minimis exception applies. If the
exchange of an Old Subordinated Debenture with market discount for a New
Subordinated Debenture pursuant to the Prepackaged Plan does not qualify as a
recapitalization, a holder generally will recognize ordinary income on the
exchange equal to the lesser of (a) the holder's gain on the exchange and (b)
the amount of market discount that accrued during the holder's period of
ownership. This rule will not apply to a holder who had previously elected to
include market discount in income as it accrued for federal income tax purposes.
Amortizable Bond Premium
If the tax basis of an exchanging holder's New Subordinated Debenture
exceeds the debenture's stated redemption price at maturity, then such debenture
will not be treated as issued with OID and such excess will be "amortizable bond
premium." If the holder makes (or has made) a timely election under Section 171
of the Tax Code, such holder may amortize the bond premium, on a constant yield
basis, by offsetting the interest income from the New Subordinated Debenture.
If the holder of a New Subordinated Debenture makes an election to amortize
bond premium, the tax basis of the debt instrument must be reduced by the amount
of the aggregate amortization deductions allowable for the bond premium. Any
such election to amortize bond premium would apply to all debt instruments held
or subsequently acquired by the electing holder and cannot be revoked without
permission from the IRS.
Issue Price
The "issue price" of a New Subordinated Debenture issued pursuant to the
Prepackaged Plan is relevant in determining a holder's gain or loss on an
exchange and whether the debt instrument is issued with OID. The issue price of
a New Subordinated Debenture depends, in part, on whether the New Subordinated
Debentures or the Old Subordinated Debentures are publicly traded. In general,
the New Subordinated Debentures or the Old Subordinated Debentures will be
treated as publicly traded if, at any time during the 60-day period ending 30
days after the issue date of the New Subordinated Debentures (the "60-Day
Period"), a substantial amount of the New Subordinated Debentures or the Old
Subordinated Debentures are traded on an established market, as defined in
Treasury Regulations. Subject to certain exceptions, the New Subordinated
Debentures or the Old Subordinated Debentures will be treated as traded on an
established market if (1) either is listed on certain securities exchanges,
interdealer quotation systems, or designated foreign exchanges or boards of
trade, (2) either is traded on certain boards of trade that are designated as
contract markets or on an interbank market, (3) either appears on a system of
general circulation that provides a reasonable basis to determine fair market
value by disseminating either recent price quotations of identified brokers,
dealers or traders, or actual prices of recent sales transaction, or (4) price
quotations are readily available from brokers, dealers or traders. If the New
Subordinated Debentures or the Old Subordinated
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<PAGE> 139
Debentures are traded on an established market, the issue price of a New
Subordinated Debenture will be the fair market value of the New Subordinated
Debenture or the Old Subordinated Debenture for which it is issued, as the case
may be, on the issue date as determined by such trading.
The issue price of a New Subordinated Debenture that is neither publicly
traded nor issued for an Old Subordinated Debenture so traded will be its stated
principal amount if the New Subordinated Debenture provides for "adequate stated
interest," and otherwise will be its "imputed principal amount." In general, a
New Subordinated Debenture will have adequate stated interest so long as
interest is payable on the instrument at a rate at least equal to the
appropriate applicable federal rate ("AFR") published by the IRS. The "imputed
principal amount" of a New Subordinated Debenture is computed by discounting all
cash payments, including interest, required to be made under the New
Subordinated Debenture at the AFR. Because the AFR that will apply in
determining the issue price of a New Subordinated Debenture is presently
unknown, the Company cannot predict with certainty whether a New Subordinated
Debenture will have adequate stated interest. While the Company anticipates that
the interest rate payable under the terms of the New Subordinated Debentures
will exceed the AFR, it is possible that the interest rate will be less than the
AFR as of the issue date and that, in such an event, the issue price of a New
Subordinated Debenture will be its "imputed principal amount."
If the IRS were to contend successfully that either the New Subordinated
Debentures or the Old Subordinated Debentures are traded on an established
securities market during the 60-Day Period, then the issue price of a New
Subordinated Debenture could be materially less than the issue price that would
result if neither were publicly traded. In that event, a New Subordinated
Debenture could have OID or additional OID, as the case may be, that would be
includible in a holder's income.
Backup Withholding
A holder of a New Subordinated Debenture may be subject to backup
withholding at the rate of 31% with respect to "reportable payments," which
include payments in respect of interest or accrued OID, and the proceeds of a
sale, exchange or redemption of a New Subordinated Debenture. The Company will
be required to deduct and withhold the prescribed amount if (a) the holder fails
to furnish a taxpayer identification number ("TIN") to the Company in the manner
required, (b) the IRS notifies the Company that the TIN furnished by the holder
is incorrect, (c) there has been a failure of the holder to certify under
penalty of perjury that the holder is not subject to withholding under Section
3406(a)(1)(C) of the Tax Code, or (d) the holder is notified by the IRS that he
or she failed to report properly payments of interest and dividends and the IRS
has notified the Company that he or she is subject to backup withholding.
Amounts paid as backup withholding do not constitute an additional tax and
will be credited against the holder's U.S. federal income tax liabilities, so
long as the required information is provided to the IRS. The Company will report
to the holders of New Subordinated Debentures and to the IRS the amount of any
"reportable payments" for each calendar year and the amount of tax withheld, if
any, with respect to payments on such securities to any noncorporate holder
other than an "exempt recipient."
CONSEQUENCES TO HOLDERS OF OTHER CLAIMS
A holder of another Claim whose Claim is satisfied in full on the Effective
Date will recognize gain or loss for federal income tax purposes on the exchange
of such Claim for cash equal to the difference between (i) the amount realized
(i.e., the amount of cash received) in respect of such Claim and (ii) his or her
adjusted tax basis in such Claim.
A holder of any such Claim which is restructured, provided that such
restructuring does not result in a "significant modification" of the Claim for
federal income tax purposes, will not realize gain or loss as a result of the
Prepackaged Plan. However, a holder whose Claim is restructured or modified in a
way that is considered a "significant modification" for federal income tax
purposes, or who is treated as having received interest, damages, or other
income in connection with a restructuring or modification, will realize gain or
loss for U.S. federal income tax purposes. Such gain or loss will be recognized
unless such restructuring or modification constitutes a tax-free
recapitalization, which is unlikely.
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<PAGE> 140
If a holder receives property in satisfaction of his or her Claim, he or
she will be treated as receiving an interest payment to the extent that the
amount received is allocable to interest that accrued while he or she held the
Claim, regardless of whether the receipt of the property would otherwise result
in recognition of gain or loss. Accordingly, a holder who had not previously
included such accrual interest in income would recognize taxable income with
respect to such interest payment, and a holder who had previously included such
interest in income would recognize gain or loss (or, possibly, a write-off
against a reserve for bad debts) equal to the difference between the holder's
basis in such interest and the amount of the payment.
CONSEQUENCES TO HOLDERS OF EQUITY INTERESTS IN THE COMPANY
A holder of any Equity Interest in the Company cancelled under the
Prepackaged Plan will be allowed a worthless stock deduction in an amount equal
to the holder's adjusted basis in his or her Equity Interest. If the holder held
the Equity Interest as a capital asset, the loss will be treated as a loss from
the sale or exchange of such capital asset.
CONSEQUENCES TO LGE
LGE is a corporation not organized under the laws of the United States. The
transactions contemplated in the Prepackaged Plan may consequently have tax
ramifications to LGE under applicable U.S. and non-U.S. law.
CONSEQUENCES TO THE COMPANY
Realization of Cancellation of Indebtedness Income:
Generally, a debtor recognizes an amount of cancellation of debt ("COD")
income upon satisfaction of its outstanding indebtedness equal to the excess of
(i) the amount of the indebtedness discharged, over (ii) the issue price of any
new indebtedness issued, the amount of cash paid, and the fair market value of
any other consideration (including stock of the debtor) given in satisfaction of
the indebtedness. As discussed below, there is a bankruptcy exception to the
recognition of COD income which will apply to the Company in connection with the
Prepackaged Plan.
A debtor is not required to include COD income in gross income if the debt
discharge occurs in a Title 11 case. However, under the Tax Code the debtor
must, as of the first day of the next taxable year, reduce its tax attributes
(in general, first its NOL carryover and then tax credits and capital loss
carryovers, and then the tax basis of its assets) by the amount of COD income
excluded from gross income by this exception. As an exception to the order of
tax attribute reduction described above, a taxpayer can elect to reduce its tax
basis in its depreciable assets first, then its NOL carryforwards.
The Company believes that under the Prepackaged Plan it will realize
approximately $63.5 million of COD income attributable to the exchange of New
Subordinated Debentures for the Old Subordinated Debentures and possibly an
additional amount of COD income attributable to satisfaction of certain other
Claims. Because the COD income will be realized in a case filed under the
Bankruptcy Code, the Company will not be required to include the COD income in
taxable income, but will be required to reduce its NOL carryover by the amount
of the COD income. The Company had an estimated $835.6 million NOL carryover as
of December 31, 1997, which may be decreased by the amount of COD income
realized as a result of the Restructuring.
Section 382 Limitation
Generally, pursuant to Section 382 of the Tax Code, if there is an
"ownership change" with respect to a corporation with NOL carryovers, such
corporation will be subject to limitation (the "Section 382 Limitation") on its
use of any NOL carryover incurred prior to the ownership change to offset
taxable income earned in any year after the ownership change. Except as
discussed below, the Section 382 Limitation on such corporation's NOL carryover
will be equal to the product of (i) the net equity value of all of the
corporation's
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<PAGE> 141
stock immediately before the ownership change and (ii) the long-term tax-exempt
rate for the month in which the ownership change occurs. (The long-term tax
exempt rate for August 1998 is 5.15%).
If a corporation that undergoes an ownership change has a "net unrealized
built-in loss," subject to certain limitations, any "recognized built-in loss"
during the five-year period beginning with the date of the ownership change (the
"recognition period") is generally treated as a pre-change loss and is subject
to the Section 382 Limitation described above. If the corporation has a "net
unrealized built-in gain," subject to certain limitations, the Section 382
Limitation for any taxable year within the recognition period will be increased
by the "recognized built-in gain" for such taxable year. A net unrealized
built-in gain or net unrealized built-in loss exists to the extent the fair
market value of the corporation's assets is more or less, respectively, than the
aggregate adjusted tax basis of the its assets immediately before an ownership
change, provided the resulting net unrealized built-in gain or net unrealized
built-in loss is greater than the lesser of (i) 15% of the fair market value of
the corporation's assets or (ii) $10 million. Under current IRS administrative
policy, the amount of the COD income recognized upon an ownership change is
treated as an item of income attributable to the pre-change period under Section
382(h)(6) of the Tax Code, and such COD income is added to the gross fair market
value of the corporation's assets in determining whether the loss corporation
has a net unrealized built-in loss.
An "ownership change" occurs if the percentage of stock of the corporation
owned actually or constructively by one or more "5-percent shareholders"
increases by more than 50 percentage points on any "testing date" (taking into
account all relevant adjustments as of the end of a "testing date") as compared
to the lowest percentage of stock of the corporation owned by those 5%
shareholders at any time during the statutory "testing period" (generally, the
past three years or, if shorter, the period since the last ownership change).
Generally, a "testing date" is any date on which there is any change in the
ownership of stock that affects the percentage stock ownership of a 5%
shareholder. A "5% shareholder" is one who owns at least 5% of the stock of the
corporation, and all stock owned by shareholders who are not 5% shareholders
("Public shareholders") is generally treated as being owned by one 5%
shareholder.
The Company believes that the implementation of the Prepackaged Plan will
cause an ownership change for U.S. federal income tax purposes. As a result, to
the extent not reduced by the amount of realized COD income as discussed above,
the use of the remaining NOL carryover will be subject to the Section 382
Limitation unless the exception described below applies.
Section 382(l)(5) of the Tax Code provides a special rule applicable in the
case of a bankruptcy reorganization. If a corporation qualifies for, and does
not elect out of the application of Section 382(l)(5), Section 382 will not
limit the use of the corporation's NOL carryover on account of the ownership
change occurring as a result of the bankruptcy reorganization. The corporation
will qualify if the corporation's pre-bankruptcy shareholders and holders of
certain debt ("Qualifying Debt") own at least 50% of the stock of the
corporation after the bankruptcy reorganization. Qualifying Debt is a Claim
which (i) was held by the same creditor for at least 18 months prior to the
bankruptcy filing or (ii) arose in the ordinary course of a corporation's trade
or business and has been owned at all times by the same creditor. Indebtedness
will be treated as arising in the ordinary course of a corporation's trade or
business if such indebtedness is incurred by the corporation in connection with
the normal, usual or customary conduct of the corporation's business. For the
purpose of determining whether a Claim constitutes Qualifying Debt, special
rules may apply to treat a subsequent transferee as the transferor creditor.
The Company believes that the exchanges contemplated by the Prepackaged
Plan will qualify for the bankruptcy reorganization exception under Section
382(l)(5). However, since rules relating to Section 382(l)(5) are extremely
complicated, there can be no assurance that the exchanges will qualify for such
tax treatment, that the IRS will not challenge the Company's conclusion or that
a court will sustain such conclusion if challenged by the IRS.
If the exchanges contemplated by the Prepackaged Plan qualify for the tax
treatment under Section 382(l)(5), the Company's NOL carryover will be available
for future use without any Section 382 Limitation (subject to any pre-existing
Section 382 Limitation and after reduction of the Company's NOL carryover by the
aggregate amount of all interest deductions in respect of debt exchanged for
Company stock
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during the three prior taxable years and a portion of the current taxable year
ending on the Effective Date). However, under Section 382(l)(5), such NOL
carryover will not survive a subsequent ownership change if such ownership
change occurs during the 2-year period immediately following Consummation of the
Prepackaged Plan.
If the exchanges do not qualify for the tax treatment under Section
382(1)(5) or the Company elects not to utilize Section 382(l)(5), the Company's
use of its NOL carryover to offset taxable income earned after the ownership
change will be subject to the Section 382 Limitation. Since the Company will be
in bankruptcy, however, Section 382(l)(6) of the Tax Code will generally apply.
Under Section 382(l)(6), the Section 382 Limitation will be calculated by
reference to the net equity value of the Company's stock immediately after the
ownership change (rather than immediately before the ownership change, as is the
case for non-bankruptcy ownership changes). In such case, since it is unclear
what the net equity value of the Company immediately after the exchanges
contemplated by the Prepackaged Plan will be, the Company's use of its NOL
carryover may be substantially limited after the ownership change.
The rules regarding ownership changes are very complicated, and although
the Company believes there will be an ownership change upon consummation of the
Prepackaged Plan, it is possible that such change will not constitute an
ownership change. In such case, any change after the Effective Date that affects
the percentage stock ownership of a 5% shareholder may trigger an ownership
change upon such event. If the Company is not in bankruptcy at such time,
neither the Section 382(l)(5) nor Section 382(l)(6) exception will be available,
and the Company's use of its NOL carryover will be subject to the general
Section 382 Limitation as described above.
Applicable High Yield Discount Obligations
In general, OID, if any, on the New Subordinated Debentures will not be
deductible until paid by the Company if the New Subordinated Debentures are
treated as "applicable high yield discount obligations" ("AHYDOs"). Under the
AHYDO rules contained in Sections 163(e) and 163(i) of the Tax Code, if the New
Subordinated Debentures have a term of more than five years, "significant" OID
(as defined in the Tax Code), and a yield to maturity of 5% or more in excess of
the AFR in effect for the month that includes the issue date, interest
deductions in respect of OID accruing on such debenture will be deferred until
amounts in respect of such OID are paid in cash. Moreover, to the extent the
yield to maturity of an AHYDO exceeds the AFR in effect for the month that
includes the issue date plus 6%, the deduction for a ratable portion of the OID
will be permanently disallowed (the "Disqualified OID").
It is not expected that the New Subordinated Debentures will be AHYDOs.
However, if the Old Subordinated Debentures or New Subordinated Debentures are
treated as traded on an established securities market within the 60-Day Period,
it is possible that the New Subordinated Debentures may be treated as AHYDOs.
Accordingly, in such an event, the Company would not be permitted to deduct any
OID in respect of the New Subordinated Debentures until such OID is paid. In
addition, the Company will be denied OID deductions in respect of a ratable
portion of the OID equal to any Disqualified OID.
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PREPACKAGED PLAN ARE
COMPLEX. THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CERTAIN CLAIMS
AND EQUITY INTERESTS IN LIGHT OF SUCH HOLDER'S PARTICULAR CIRCUMSTANCES AND
INCOME TAX SITUATION. ALL HOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY THE
PREPACKAGED PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF ANY CHANGE IN APPLICABLE TAX LAWS.
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ESTIMATED FEES AND EXPENSES
The estimated fees and expenses expected to be incurred by the Company and
LGE in connection with the Restructuring are approximately $24.4 million.
ESTIMATED COSTS AND FEES OF THE COMPANY
<TABLE>
<S> <C>
Investment banking fees and expenses........................ $ 5,700,000
Bank transaction fees and expenses.......................... 3,200,000
Fees of other advisors...................................... 4,000,000
Legal fees and expenses..................................... 3,200,000
Accounting fees and expenses................................ 500,000
Printing and mailing fees................................... 500,000
Fees relating to new securities............................. 250,000
Miscellaneous............................................... 250,000
-----------
Total............................................. $17,600,000
===========
</TABLE>
ESTIMATED COSTS AND FEES OF LGE
<TABLE>
<S> <C>
Investment banking fees and expenses........................ $ 2,000,000
Fees of other advisors...................................... 700,000
Legal fees and expenses..................................... 4,000,000
Accounting fees and expenses................................ 100,000
-----------
Total............................................. $ 6,800,000
===========
</TABLE>
ADVISORS
PJSC has been engaged by the Company in connection with the Restructuring.
PJSC was chosen to act as financial advisor and investment banker in the
Restructuring because of its experience in the restructuring of other public
companies in similar types of transactions. For its services as financial
advisor and investment banker, PJSC will receive (i) a fixed monthly cash
advisory fee, a portion of which will be applied against future transaction
fees, and (ii) transaction fees based upon (a) successful completion of a
refinancing or new financing transaction ($2.25 million); (b) restructuring or
replacement of certain existing debt ($1.0 million); and (c) other transactions,
including asset dispositions or mergers (in which case the fee would be based on
a graduated, decreasing percentage of total consideration).
Jay Alix was engaged by the Company based on its prior experience in the
restructuring of other public companies in similar types of transactions. Robert
N. Dangremond, a principal with Jay Alix, served as the Company's Acting Chief
Financial Officer from January 1998 to June 1998, and currently serves as the
Company's Senior Vice President, Restructuring. See "SPECIAL FACTORS -- Events
Leading to the Restructuring." For its services, Jay Alix receives a fixed
monthly fee plus expenses, and on successful completion of the Financial
Restructuring, will receive a success fee ($1.0 million).
LEGAL MATTERS
Certain legal matters in connection with the New Subordinated Debentures
offered hereby will be passed upon by Kirkland & Ellis, counsel to the Company.
EXPERTS
The Company's annual historical audited financial statements included in
this Disclosure Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations (Unaudited) Three
Months Ended March 28, 1998, March 29, 1997............... F-2
Consolidated Balance Sheets (Unaudited) March 28, 1998,
December 31, 1997......................................... F-3
Consolidated Statements of Cash Flows (Unaudited)........... F-4
Notes to Consolidated Financial Statements (Unaudited)...... F-5
Statements of Consolidated Operations and Retained Earnings
(Deficit) for the Years Ended December 31, 1997, 1996 and
1995...................................................... F-8
Consolidated Balance Sheets at December 31, 1997 and 1996... F-9
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-10
Notes to Consolidated Financial Statements.................. F-11
Report of the Independent Auditors.......................... F-26
</TABLE>
F-1
<PAGE> 145
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 28, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
Net sales................................................... $220.7 $ 259.1
------ -------
Costs, expenses and other:
Cost of products sold..................................... 213.5 246.5
Selling, general and administrative....................... 33.3 28.1
Engineering and research.................................. 10.8 10.8
Other operating expense (income), net (Note 2)............ (7.2) (7.1)
------ -------
Operating income (loss)..................................... (29.7) (19.2)
Gain (loss) on asset sales, net............................. (0.2) --
Interest expense............................................ (8.2) (6.3)
Interest income............................................. 0.3 0.3
------ -------
Income (loss) before income taxes........................... (37.8) (25.2)
Income taxes (credit)....................................... -- --
------ -------
Net Income (loss)........................................... $(37.8) $ (25.2)
====== =======
Net income (loss) per share of common stock (Note 3)........ $(0.55) $ (0.38)
====== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE> 146
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
IN MILLIONS
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 31, MARCH 29,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 23.2 $ -- $ --
Receivables, net of allowance for doubtful accounts of
$ -- , $ -- and $5.7, respectively..................... 16.0 21.7 186.6
Inventories (Note 5)...................................... 127.1 165.5 229.6
Transferor certificates................................... 103.4 99.7 --
Other..................................................... 23.4 26.3 9.5
------- ------- -------
Total current assets.............................. 293.1 313.2 425.7
Property, plant and equipment, net.......................... 164.4 171.1 298.9
Other....................................................... 42.2 43.4 10.1
------- ------- -------
Total assets...................................... $ 499.7 $ 527.7 $ 734.7
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt (Note 6).................................. $ 102.0 $ 72.0 $ 34.4
Current portion of long-term debt (Note 6)................ 14.8 15.3 15.7
Accounts payable (Note 7)................................. 220.6 237.2 243.6
Income taxes payable...................................... 0.7 0.7 1.1
Accrued expenses.......................................... 144.6 141.7 150.1
------- ------- -------
Total current liabilities......................... 482.7 466.9 444.9
Long-term liabilities....................................... 16.8 17.0 --
Long-term debt (Note 6)..................................... 127.0 132.8 152.7
Stockholders' equity:
Preferred stock........................................... -- -- --
Common stock.............................................. 67.1 67.1 66.5
Additional paid-in capital................................ 507.3 507.3 459.8
Retained earnings (deficit)............................... (699.5) (661.7) (387.5)
Treasury stock............................................ (1.7) (1.7) (1.7)
------- ------- -------
Total stockholders' equity........................ (126.8) (89.0) 137.1
------- ------- -------
Total liabilities and stockholders' equity........ $ 499.7 $ 527.7 $ 734.7
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE> 147
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
IN MILLIONS
<TABLE>
<CAPTION>
INCREASE (DECREASE)
IN CASH
THREE MONTHS ENDED
----------------------
MARCH 28, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(37.8) $(25.2)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation.............................................. 9.9 10.1
Loss on asset sales, net.................................. 0.2 --
Changes in assets and liabilities:
Current accounts.......................................... 18.9 58.6
Other assets.............................................. 1.2 1.8
Other liabilities......................................... (0.2) --
------ ------
Net cash provided (used) by operating activities.......... (7.8) 45.3
------ ------
Cash flows from investing activities:
Capital additions......................................... (2.7) (30.7)
Proceeds from asset sales................................. 10.0 --
------ ------
Net cash provided (used) by investing activities.......... 7.3 (30.7)
------ ------
Cash flows from financing activities:
Short-term borrowings, net................................ 30.0 (12.6)
Proceeds from issuance of common stock, net............... -- 0.1
Principal payments on long-term debt...................... (6.3) (2.1)
------ ------
Net cash provided (used) by financing activities.......... 23.7 (14.6)
------ ------
Increase in cash............................................ 23.2 --
Cash at beginning of period................................. -- --
------ ------
Cash at end of period....................................... $ 23.2 $ --
====== ======
Increase (decrease) in cash attributable to changes in
current accounts:
Receivables, net.......................................... $ 5.7 $ 21.7
Transferor certificates................................... (13.9) --
Income taxes, net......................................... -- (0.2)
Inventories............................................... 38.4 26.1
Other assets.............................................. 2.9 1.6
Accounts payable and accrued expenses..................... (14.2) 9.4
------ ------
Net change in current accounts............................ $ 18.9 $ 58.6
====== ======
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest.................................................. $ 6.7 $ 4.3
Income taxes.............................................. -- --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE> 148
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE ONE -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
("financial statements") have been prepared in accordance with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission. The accuracy of the amounts in the financial
statements is in some respects dependent upon facts that will exist, and
procedures that will be performed by the company, later in the year. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial statements have been included and are of a normal, recurring nature.
For further information, refer to the consolidated financial statements and
notes thereto included in the company's Form 10-K for the year ended December
31, 1997.
NOTE TWO -- OTHER OPERATING EXPENSE (INCOME)
Royalty income accrued in relation to tuning system patents was $6.3
million and $6.7 million for the three months ended March 28, 1998 and March 29,
1997, respectively. These amounts are included in Other Operating Expense
(Income).
NOTE THREE -- EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the company computed earnings per share by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per share, assuming
conversion of the 6 1/4 percent convertible subordinated debentures and
outstanding stock options are not presented because the effect of the assumed
conversion is antidilutive. The weighted average number of shares was 67.0
million and 66.5 million for the three months ended March 28, 1998 and March 29,
1997, respectively.
NOTE FOUR -- CHANGE IN ACCOUNTING ESTIMATE
During the second quarter of 1997, the company changed its accounting
policy for most tooling expenditures. The old policy was to charge most tooling
expenditures to expense in the period acquired. The new policy is to defer the
tooling charges incurred subsequent to March 29, 1997, over a 20-month period in
order to more appropriately match the costs with their period of benefit. The
accounting policy for picture tube tooling remains the same, which is to
amortize that tooling over a four year period. This change was accounted for as
a change in accounting estimate effected by a change in accounting principle and
as such is accounted for on a prospective basis. The change increased tooling
costs by $.8 million and increased the loss per share by 1 cent for the three
months ended March 28, 1998.
NOTE FIVE -- INVENTORIES
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 31, MARCH 29,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
Raw materials and work-in-process......... $ 94.0 $ 96.9 $154.8
Finished goods............................ 33.1 68.6 74.8
------ ------ ------
Total inventories............... $127.1 $165.5 $229.6
====== ====== ======
</TABLE>
NOTE SIX -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS; LONG-TERM DEBT
In 1997 the company obtained certain financing commitments. One of the
commitments is a three-year $110.0 million credit facility with Citicorp
composed of a $45.0 million term loan and a $65.0 million revolving credit line.
The term loan requires scheduled quarterly principal payments of $2.3 million
with a balloon
F-5
<PAGE> 149
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
payment of $20.3 million at maturity in 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 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. The financial covenants (as
amended) include a minimum EBITDA amount, a current ratio test, a funded debt/
total capitalization ratio test, a tuning patent royalties test and a LG
Electronics Inc. ("LGE") payable test. As a result of a waiver obtained from
Citicorp in March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of 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 existing waiver in June 1998. Those additional
future waivers requests are intended to extend to a period subsequent to March
1999. There are no assurances that such waivers or amendments will be granted.
Between November 1997 and February 1998 the company entered into a series
of financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), First Chicago NBD ($30 million), Societe Generale ($20
million) and Credit Agricole ($30 million). As of March 28, 1998, a total of
$102.0 million was outstanding 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. As of March 28, 1998, no
amounts were outstanding under the facility. See Note Seven for further
discussion.
In January 1998 the company redeemed its 8.5 percent Senior Subordinated
Convertible Debentures due January 2001. There was $0.5 million principal amount
of such debentures outstanding and the redemption price of such debentures was
104 percent of such principal amount plus accrued interest through the
redemption date. The loss on extinguishment of this debt was not material.
NOTE SEVEN -- 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 March 28, 1998,
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
the three months ended March 28, 1998 and March 29, 1997.
Product purchases: In the ordinary course of business, the company
purchases VCRs, TV-VCR combinations and components from LGE and its affiliates.
The company purchased $7.8 million and $11.1 million of these items during the
three months ended March 28, 1998 and March 29, 1997, respectively.
F-6
<PAGE> 150
ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Sales of products purchased from LGE and its affiliates contributed $20.1
million and $25.3 million to sales during the three months ended March 28, 1998
and March 29, 1997, respectively.
Product and other sales: The company sells TVs, picture tubes, yokes and
other manufactured subassemblies to LGE and its affiliates. Sales by the company
to LGE and its affiliates were $11.0 million and $6.5 million during the three
months ended March 28, 1998 and March 29, 1997, respectively.
Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45.0 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.
Accounts payable included $134.0 million and $122.3 million to LGE and its
affiliates as of March 28, 1998 and March 29, 1997, respectively. In April 1997,
the company and LGE entered into an arrangement whereby the company's accounts
payables arising in the ordinary course of business to LGE would be extended for
certain periods of time. Prior to April 1997, the company's accounts payables
arising in the ordinary course of business to LGE were extended for certain
periods of time, but no formal arrangement was in place. The amount of extended
payables was $133.7 million and $111.6 million as of March 28, 1998 and March
29, 1997, respectively. The company is charged interest on the extended period
at negotiated rates. The amount of receivables from LGE and its affiliates was
not material as of March 28, 1998 and March 29, 1997.
F-7
<PAGE> 151
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Net sales................................................. $1,173.1 $1,287.9 $1,273.9
-------- -------- --------
Costs, Expenses and Other
Cost of products sold..................................... 1,180.5 1,257.0 1,188.8
Selling, general and administrative (Note Four)........... 178.3 167.8 128.8
Engineering and research.................................. 42.9 46.7 43.5
Other operating expense (income), net (Notes One, Three
and Ten)............................................... 42.4 (26.3) (30.1)
Restructuring and other charges (Note Seven).............. -- 9.3 21.6
-------- -------- --------
Income
Operating income (loss)................................... (271.0) (166.6) (78.7)
Gain (loss) on asset sales, net........................... (4.6) 0.3 (1.7)
Interest expense.......................................... (25.5) (15.1) (19.9)
Interest income........................................... 0.9 3.6 1.8
-------- -------- --------
Income (loss) before income taxes......................... (300.2) (177.8) (98.5)
Income taxes (credit) (Note Eight)........................ (0.8) 0.2 (7.7)
-------- -------- --------
Net income (loss)................................. $ (299.4) $ (178.0) $ (90.8)
======== ======== ========
Per Share
Income (loss) per common share (Note Eighteen)............ $ (4.49) $ (2.73) $ (1.85)
======== ======== ========
Retained Earnings (Deficit)
Balance at beginning of year.............................. $ (362.3) $ (184.3) $ (93.5)
Net income (loss)......................................... (299.4) (178.0) (90.8)
-------- -------- --------
Retained earnings (deficit) at end of year........ $ (661.7) $ (362.3) $ (184.3)
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-8
<PAGE> 152
ZENITH ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash (Note One)........................................... $ -- $ --
Receivables, net of allowance for doubtful accounts of $--
and $6.2............................................... 21.7 208.3
Inventories (Note Eleven)................................. 165.5 255.7
Transferor Certificates (Note Twelve)..................... 99.7 --
Other..................................................... 26.3 11.1
------- -------
Total current assets................................... 313.2 475.1
Noncurrent Assets
Property, plant and equipment, net (Note Thirteen)........ 171.1 278.3
Other (Note Six).......................................... 43.4 11.9
------- -------
Total assets...................................... $ 527.7 $ 765.3
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt (Note Fifteen)............................ $ 72.0 $ 47.0
Current portion of long-term debt (Note Sixteen).......... 15.3 17.8
Accounts payable.......................................... 91.3 109.6
Accounts payable to related party (Note Six).............. 145.9 124.5
Compensation and retirement benefits (Note Nineteen)...... 41.2 43.2
Product warranties........................................ 18.3 32.1
Co-op advertising and merchandising programs.............. 30.6 20.5
Income taxes payable...................................... 0.7 1.3
Other accrued expenses.................................... 51.6 54.6
------- -------
Total current liabilities.............................. 466.9 450.6
Noncurrent Liabilities
Long-term liabilities (Note Six).......................... 17.0 --
Long-term debt (Note Sixteen)............................. 132.8 152.7
Stockholders' Equity
Preferred stock, $1 par value; 8,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $1 par value; 150,000,000 shares authorized;
67,130,628 and 66,564,119 shares issued................ 67.1 66.6
Additional paid-in capital................................ 507.3 459.4
Retained earnings (deficit)............................... (661.7) (362.3)
Cost of 105,181 common shares in treasury................. (1.7) (1.7)
------- -------
Total stockholders' equity (Note Seventeen)............ (89.0) 162.0
------- -------
Total liabilities and stockholders' equity........ $ 527.7 $ 765.3
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-9
<PAGE> 153
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)......................................... $(299.4) $(178.0) $(90.8)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation......................................... 38.0 35.0 32.1
Charge for asset impairment.......................... 63.7 -- --
Employee retirement plan contribution in stock....... 4.9 5.3 --
(Gain) loss on asset sales, net...................... 4.6 (.3) 1.7
Charge for donated services.......................... 2.2 -- --
Other................................................ .5 1.6 .5
Changes in assets and liabilities:
Current accounts................................... 149.4 116.4 19.9
Other assets....................................... 3.6 (3.9) 3.4
Other liabilities.................................. 7.6 -- --
------- ------- ------
Net cash used by operating activities..................... (24.9) (23.9) (33.2)
------- ------- ------
Cash Flows from Investing Activities
Capital additions......................................... (82.5) (129.0) (51.9)
Proceeds from asset sales................................. 187.7 4.3 2.9
Distribution of Investor Certificates..................... (84.0) -- --
------- ------- ------
Net cash provided (used) by investing activities.......... 21.2 (124.7) (49.0)
------- ------- ------
Cash Flows from Financing Activities
Short-term borrowings, net................................ 25.0 47.0 --
Proceeds from issuance of long-term debt.................. 45.0 -- 40.0
Proceeds from issuance of common stock, net............... 1.1 15.7 170.7
Principal payments on long-term debt...................... (67.4) (7.3) (44.2)
------- ------- ------
Net cash provided by financing activities................. 3.7 55.4 166.5
------- ------- ------
Cash
Increase (decrease) in cash............................... -- (93.2) 84.3
Cash at beginning of year................................. -- 93.2 8.9
------- ------- ------
Cash at end of year....................................... $ -- $ -- $ 93.2
======= ======= ======
Changes in Current Assets and Liabilities
Increase (decrease) in cash attributable to changes in:
Receivables, net..................................... 186.6 $ (7.5) $ 10.2
Transferor Certificates.............................. (110.7) -- --
Income taxes, net.................................... (0.6) .1 (6.0)
Inventories.......................................... 90.2 (53.1) 51.4
Other assets......................................... (9.7) (3.3) 2.2
Accounts payable and accrued expenses................ (6.4) 180.2 (37.9)
------- ------- ------
Net change in current accounts..................... $ 149.4 $ 116.4 $ 19.9
======= ======= ======
Supplemental Disclosure
Supplemental disclosure of cash flow information --
Cash paid (refunded) during the period for:
Interest................................................ $ 24.8 $ 14.1 $ 20.6
Income taxes............................................ (9.3) .9 (.1)
Non-cash activity:
Asset and additional paid-in capital recorded related to
guarantee fee......................................... $ 39.7 $ -- $ --
Liability recorded related to deferred gain on sale
leaseback............................................. 10.2 -- --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-10
<PAGE> 154
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
F-11
<PAGE> 155
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.
F-12
<PAGE> 156
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
F-13
<PAGE> 157
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.
F-14
<PAGE> 158
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.
F-15
<PAGE> 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and 1996, accounts payable included $145.9 million
and $124.5 million, respectively, to LGE and its affiliates. The amount of
receivables from LGE and its affiliates was not material as of December 31, 1997
and 1996.
The company currently leases space from an LGE subsidiary in (i)
Huntsville, Alabama, for its Parts & Service group, (ii) Ontario, California,
for a warehouse and (iii) San Jose, California, for its Network Systems group.
NOTE SEVEN -- RESTRUCTURING AND OTHER CHARGES:
During the fourth quarter of 1996, the company recorded $9.3 million of
restructuring charges. The restructuring was composed of $5.2 million of charges
related to severance costs associated with employment reductions (mostly in the
company's U.S. salaried workforce) and $4.1 million of charges associated with
the shutdown of the company's wholly-owned Canadian distributor. Substantially
all of the provisions were related to cash expenditures made during 1997.
During the fourth quarter of 1995, the company recorded charges totaling
$3.6 million that were incurred as a consequence of the LGE purchase of common
stock as described in Note Six. During the second quarter of 1995, the company
recorded a charge of $18.0 million primarily to restructure its core Consumer
Electronics and Network Systems business. The major elements of the
restructuring related to severance expenses associated with employment
reductions, primarily in the company's U.S. salaried workforce and costs
associated with realigned distribution activities as the company changed to
direct-to-retail distribution on a nationwide basis. The remaining charges
related to other non-recurring items, including certain environmental, legal and
other regulatory matters, along with trade receivable write-offs (primarily for
accounts in Mexico as a result of the December 1994 peso devaluation).
NOTE EIGHT -- INCOME TAXES:
The components of income taxes (credit) were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Currently payable (refundable):
Federal................................................ $ .1 $-- $(7.8)
State.................................................. (.9) .2 .1
---- -- -----
Total income taxes (credit)............................ $(.8) $.2 $(7.7)
==== == =====
</TABLE>
The $7.7 million income tax credit in 1995 included a $7.5 million tax
refund (including interest) due the company as a result of certain foreign tax
credit issues in audits of prior years. The company received this tax refund
during 1997.
The statutory federal income tax rate and the effective tax rate are
compared below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................... (35.0)% (35.0)% (35.0)%
State income taxes, net............................... -- -- .1
Foreign tax effects................................... 2.2 1.0 1.5
Tax benefits not recognized subject to future
realization......................................... 32.8 34.0 33.5
Net operating loss carryback/refund................... -- -- (8.4)
----- ----- -----
Effective tax rate.................................... (--)% (--)% (8.3)%
===== ===== =====
</TABLE>
F-16
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Loss carryforwards......................................... $ 353.5 $ 228.2
Inventory valuation........................................ 22.6 23.8
Transferor certificate valuation reserve................... 14.6 --
PP&E valuation reserve..................................... 22.9 --
Product warranty........................................... 9.4 11.5
Co-op advertising.......................................... 3.7 6.3
Merchandising.............................................. 2.6 3.8
Other...................................................... 35.6 38.0
------- -------
Deferred tax assets................................... 464.9 311.6
------- -------
Depreciation............................................... 3.4 (6.6)
Other...................................................... (1.3) 5.5
------- -------
Deferred tax liabilities.............................. 2.1 (1.1)
------- -------
Valuation allowance........................................ (467.0) (310.5)
------- -------
Net deferred tax assets............................... $ -- $ --
======= =======
</TABLE>
The valuation allowance was established since the realization of these
assets cannot be reasonably assured, given the company's recurring losses.
As of December 31, 1997, the company had $835.6 million of total net
operating loss carryforwards (NOLs) available for federal income tax purposes
(which expire from 2004 through 2011) and unused tax credits of $3.9 million
(which expire from 2000 through 2002).
The stock purchase by LGE described in Note Six created an "ownership
change" of the company for federal income tax purposes, with the effect that the
company's annual usage of its NOLs will be limited to approximately $27 million,
which represents the product of (i) a tax-exempt rate of return announced
monthly by the Internal Revenue Service (5.75 percent for ownership changes
occurring in the month of November 1995) and (ii) the value of the company
immediately before the ownership change, as determined under applicable tax
regulations. This limitation applies to approximately $481 million of the
company's available NOL carryovers, which represents the losses generated prior
to the "ownership change". The company's remaining loss carryovers are not
subject to this limitation. In addition, this limitation, appropriately
modified, will also apply to the company's utilization of most of its tax credit
carryovers. The effect of this annual limit will depend upon the generation of
sufficient taxable income in the future and certain other factors.
NOTE NINE -- GEOGRAPHIC SEGMENT DATA:
The company's operations involve a dominant industry segment -- the design,
development, manufacture and distribution of video products, including color TV
sets, VCRs and other consumer electronics products, color picture tubes, cable
TV products and parts and accessories for these products.
F-17
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Domestic companies........................... $1,144.9 $1,221.4 $1,212.7
Foreign companies............................ 28.2 66.5 61.2
-------- -------- --------
Total net sales.............................. $1,173.1 $1,287.9 $1,273.9
======== ======== ========
Income (loss) before income taxes:
Domestic companies........................... $ (195.3) $ (171.5) $ (94.5)
Foreign companies............................ (4.9) (6.3) (4.0)
-------- -------- --------
Total income (loss) before income taxes...... $ (300.2) $ (177.8) $ (98.5)
======== ======== ========
Identifiable assets:
Domestic companies........................... $ 405.1 $ 615.5 $ 548.5
Foreign companies............................ 122.6 149.8 152.2
-------- -------- --------
Total identifiable assets.................... $ 527.7 $ 765.3 $ 700.7
======== ======== ========
</TABLE>
Foreign operations consist of manufacturing and sales subsidiaries in
Mexico, a distribution subsidiary in Canada (which was closed in December 1996)
and a purchasing office in Taiwan. Sales to affiliates are principally accounted
for at amounts based on local costs of production plus a reasonable return.
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million
(11 percent) in 1996. No other customer accounted for 10 percent or more of net
sales.
NOTE TEN -- OTHER OPERATING EXPENSE (INCOME):
Major manufacturers of TVs and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses expire in
2003). Royalty income related to the tuning system patents was $26.0 million,
$26.6 million, and $25.9 million in 1997, 1996 and 1995, respectively, and is
included in Other operating expense (income). See Note Three for further
discussion on Other operating expense (income).
NOTE ELEVEN -- INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Raw materials and work-in-process......................... $ 96.9 $152.1
Finished goods............................................ 68.6 103.6
------ ------
Total inventories......................................... $165.5 $255.7
====== ======
</TABLE>
NOTE TWELVE -- TRANSFEROR CERTIFICATES:
The Financial Accounting Standards Board issued FAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
in 1996. The accounting standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement was adopted by the company during the second quarter of 1997 in
connection with the three-year
F-18
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
trade receivables securitization that was entered into in April 1997. Pursuant
to the new statement, the trade receivable securitization was accounted for as a
sale of receivables.
Transferor certificates represent the company's retained interest in the
pool of saleable receivables that have been sold by the company to a
special-purpose trust, but can not or have not yet been sold to outside
investors in the commercial paper market via a multi-seller conduit pursuant to
the trade receivables securitization agreement. Outside investors hold investor
certificates which evidence their ownership of a portion of the assets contained
in the special multi-purpose trust. Transferor certificates are valued at
historical cost not to exceed their net realizable value. This cost approximates
the value of the previous carrying amount (prior to transfer), allocated between
the assets sold and the retained interest, based on their relative fair values
at the date of the transfer, as required by FAS 125.
NOTE THIRTEEN -- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Land....................................................... $ 2.7 $ 9.9
Buildings.................................................. 147.9 135.5
Machinery and equipment.................................... 640.9 696.6
------- -------
791.5 842.0
Less accumulated depreciation.............................. (562.0) (563.7)
Less valuation reserve..................................... (58.4) --
------- -------
Total property, plant and equipment, net................... $ 171.1 $ 278.3
======= =======
</TABLE>
At December 31, 1997, the company reclassed $8.7 million of property
pending disposal out of Property, Plant and Equipment into Other Noncurrent
Assets. Included in this amount is $6.0 million of land, which is the primary
reason for the 1997 decrease in land, when compared to 1996.
NOTE FOURTEEN -- SALE LEASEBACK TRANSACTION:
In April 1997 the company entered into an $87 million sale-leaseback
transaction whereby the company sold and leased back new and existing
manufacturing equipment in its Melrose Park, Ill., plant and in its Reynosa and
Juarez, Mexico, facilities. The result of the sale was a $10.2 million gain for
the company, which was deferred and is being amortized over the 12 1/2 year
lease term
The related lease is being accounted for as an operating lease. The rental
expense under this lease in 1997 was $8.1 million. The minimum lease payments
required by the lease over the next five years are as follows (in million):
<TABLE>
<S> <C>
Year ending December 31:
1998................................................. $ 12.3
1999................................................. 10.6
2000................................................. 9.6
2001................................................. 9.7
2002................................................. 9.7
Thereafter........................................... 78.6
------
Total minimum lease payments......................... $130.5
======
</TABLE>
F-19
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's payment obligations, along with certain other items under the
lease agreement are fully guaranteed by LGE (see discussion in Note Six). The
sale-leaseback agreement contains financial penalties which would be triggered
if the company was to terminate the lease early.
NOTE FIFTEEN -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS:
In April 1997, the company obtained a $65 million revolving credit line
with Citicorp. This facility replaces the company's previous credit agreement
with General Electric Capital Corporation. Under the revolving credit line, the
maximum commitment of funds available for borrowing is limited by a defined
borrowing base formula related to eligible inventory. The facility is secured by
the company's inventory, domestic fixed assets, stock of the company's
subsidiaries and tuner patent royalties, along with the related patents,
licenses and other general intangibles. Interest on borrowings is based on
market rates.
The credit line contains certain covenants that must be met in order to
remain in compliance with the facility, including financial covenants that must
be maintained as of the end of each fiscal quarter. During 1997, the company
amended the credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt / total capitalization ratio test, a tuning patent royalties test
and an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. In addition, there are
restrictions regarding investments, acquisitions, guaranties, transactions with
affiliates, sales of assets, mergers and additional borrowings, along with
limitations on liens. The credit agreement prohibits dividend payments on the
company's common stock, restricts dividend payments on any of its preferred.
Between November 1997 and February 1998 the company entered into a series
of new financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), the First Chicago NBD ($30 million), Societe Generale
($20 million) and Credit Agricole ($30 million). As of December 31, 1997, a
total of $72.0 million was outstanding under these credit lines.
The credit lines are guaranteed by LGE for which LGE will receive a fee in
an amount up to 2 percent of the face amount of the loan, in the form of cash or
the company's equity and subject to the approval of the Finance Committee of the
company's Board of Directors and in the case of equity, the approval of the
company's shareholders. The company granted liens in favor of LGE on the capital
stock of the company's domestic subsidiaries and on the company's intellectual
property (other than tuning patents, tuning patent royalties and related license
agreements) to secure the guaranties of LGE for borrowings under these credit
lines.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. See Note Six for further
discussion.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Maximum month-end borrowings........................... $72.0 $72.6 $69.5
Average daily borrowings............................... 26.4 18.3 37.2
Weighted average interest rate......................... 9.1% 8.8% 10.5%
</TABLE>
F-20
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE SIXTEEN -- LONG-TERM DEBT:
The components of long-term debt were:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
6 1/4 percent convertible subordinated debentures due
2011...................................................... $109.3 $115.0
8.5 percent senior subordinated convertible debentures due
2000...................................................... -- 23.8
8.5 percent senior subordinated convertible debentures due
2001...................................................... .5 .5
Term Loan................................................... 38.3 31.5
------ ------
148.1 170.5
Less current portion........................................ 15.3 17.8
------ ------
Total long-term debt................................... $132.8 $152.7
====== ======
</TABLE>
The 6 1/4 percent convertible subordinated debentures are unsecured general
obligations, subordinate in right of payment to certain other debt obligations,
and are convertible into common stock at $31.25 per share. Terms of the
debenture agreement include annual sinking-fund payments of $5.8 million
beginning in April 1997 and provisions which could result in the acceleration of
their payment in the event the company is in default on provisions of other debt
agreements. The debentures are redeemable at the option of the company, in whole
or in part, at specified redemption prices at par or above.
In December 1997 the company redeemed the 8.5 percent Senior Subordinated
Convertible Debentures due November 2000. There was $23.8 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The loss on extinguishment of this debt was not
material.
The 8.5 percent debentures due 2001 are unsecured general obligations,
subordinate in right of payment to certain other debt obligations, and are
convertible into shares of common stock at an initial conversion price of $10.00
per share. Subsequent to December 31, 1997, the company redeemed the 8.5 percent
Senior Subordinated Convertible Debentures due January 2001. There was $.5
million principal amount of such debentures outstanding and the redemption price
of such debentures was 104 percent of such principal amount plus accrued
interest through the redemption date. The loss on extinguishment of this debt
was not material.
In April 1997 the company entered into a $45 million term loan with
Citicorp. This facility replaces the company's previous credit term loan with
General Electric Capital Corporation. The term loan requires scheduled quarterly
principal payments of $2.3 million with a balloon payment of $20.3 million at
maturity. The facility is secured by the company's inventory, domestic fixed
assets, stock of the company's subsidiaries and tuner patent royalties, along
with the related patents, licenses and other general intangibles. Interest on
borrowings is based on market rates.
The term loan contains certain covenants that must be met in order to
remain in compliance with the facility, including financial covenants that must
be maintained as of the end of each fiscal quarter. During 1997, the company
amended the credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt/total capitalization ratio test, a tuning patent royalties test and
an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. The long-term portion of
the term loan has been classified in the accompanying balance sheet based on the
company's intention to seek additional waivers or amendments for any future
noncompliance prior to the expiration of the March 1998 waiver in June 1998 that
extent to a period subsequent to January 1, 1999. There are no assurances that
such waivers or amendments will be granted.
F-21
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the term loan contains restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets, mergers
and additional borrowings, along with limitations on liens. The term loan
prohibits dividend payments on the company's common stock and restricts dividend
payments on any of its preferred stock.
The fair value of long-term debt is $90.8 million as of December 31, 1997,
as compared to the carrying amount of $132.8 million. The fair value of the
6 1/4 percent convertible subordinated debentures is based on the quoted market
price from the New York Stock Exchange. The fair value of the 8.5 percent
convertible senior subordinated debentures is based on the quoted price obtained
from third party financial institutions. The fair value of the term loan
approximates the carrying value as interest on the loan is based on market
rates. As of December 31, 1997, the company's credit agreement and term loan
would not allow the company to extinguish the long-term debt through purchase
and thereby realize the gain.
NOTE SEVENTEEN -- STOCKHOLDERS' EQUITY:
Changes in stockholders' equity accounts are shown below:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY
STOCK CAPITAL SHARES
------ ---------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, December 31, 1994.................... $45.7 $285.4 $ (.5)
Sales of common stock....................... 17.8 152.6 --
Stock issued for stock options.............. -- .3 --
Other....................................... -- 1.7 (1.2)
----- ------ -----
Balance, December 31, 1995.................... 63.5 440.0 (1.7)
Stock issued for benefit plans................ .8 4.5 --
Stock issued for stock options................ 1.9 13.9 --
Other....................................... .4 1.0 --
----- ------ -----
Balance, December 31, 1996.................... 66.6 459.4 (1.7)
Stock issued for benefit plans................ .5 4.4 --
Stock issued for stock options................ .1 1.0 --
Paid in capital -- LGE guarantee.............. -- 39.7 --
Paid in capital -- LGE services............... -- 2.2 --
Other......................................... (.1) .6 --
----- ------ -----
Balance, December 31, 1997.................... $67.1 $507.3 $(1.7)
===== ====== =====
</TABLE>
During 1997, the company entered into certain transactions with LGE that
effected paid in capital. These transaction dealt with the granting of stock
options and donated services. See Note Six for further discussion on these
items.
During 1996, the company sold 1.9 million shares of authorized but unissued
common stock to employees of the company via the exercise of previously issued
stock options. During 1995, the company sold 16.5 million shares of authorized
but unissued common stock to LGE for a price of $10 per share (see Note Six for
further discussion). Also during 1995 the company sold 1.3 million shares of
authorized but unissued shares of common stock to investors under registration
statements that had been filed with the Securities and Exchange Commission.
The company has authorized 8 million shares of preferred stock of which
none are issued or outstanding as of December 31, 1997. The Board of Directors
of the company is authorized to issue the preferred stock from time to time in
one or more series and to determine all relevant terms of each such series,
including but not limited to the following (i) whether and upon what terms, the
shares of such series would be redeemable; (ii) whether a sinking fund would be
provided for the redemption of the shares of such series and, if so, the
F-22
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms thereof; and (iii) the preference, if any, to which shares of such series
would be entitled in the event of voluntary or involuntary liquidation of the
company.
NOTE EIGHTEEN -- STOCK OPTIONS AND AWARDS:
Stock Options: The 1987 Stock Incentive Plan, which expired in April 1997,
and the Long Term Equity Compensation Plan, approved by the company's
shareholders in May 1997, authorize the granting of incentive and non-qualified
stock options and restricted stock awards to key management personnel. The
purchase price of shares under option is the market price of the shares on the
date of grant. Options expire 10 years from the date granted. The company
accounts for employee stock options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value of options at their grant dates consistent with the
method of FAS 123, the company's net income (loss) and earnings (loss) per share
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss):
As reported.................................. $(299.4) $(178.0) $(90.8)
Pro forma.................................... (301.1) (179.1) (92.5)
Earnings (loss) per share:
As reported.................................. $ (4.49) $ (2.73) $(1.85)
Pro forma.................................... (4.52) (2.75) (1.88)
</TABLE>
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of the pro forma cost to be expected in future years.
A summary of the status of the company's outstanding stock options at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
NON-EMPLOYEES EMPLOYEES
------------------ ------------------------------------------------------------
1997 1997 1996 1995
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at January
1............................ -- $ -- 968 $ 9.92 2,588 $ 8.25 2,027 $8.66
Options granted................ 3,965 0.01 952 11.10 456 12.54 738 7.16
Options exercised.............. -- -- (154) 7.80 (1,889) 8.33 (38) 7.69
Options canceled............... -- -- (260) 11.20 (187) 9.30 (139) 8.66
----- ----- ----- ------ ------ ------ ----- -----
Options outstanding at December
31........................... 3,965 $0.01 1,506 $10.66 968 $ 9.91 2,588 $8.25
===== ===== ===== ====== ====== ====== ===== =====
Options exercisable at December
31........................... 793 $0.01 486 $ 9.05 427 $ 8.27 2,081 $8.34
Shares available for grant at
December 31.................. N/A 1,340 1,329 1,269
</TABLE>
The non-employee stock options were granted to LGE during 1997. See Note
Six for further discussion.
Of the employee options outstanding at December 31, 1997, 516,300 had
exercise prices between $6.25 and $10.69, with a weighted average exercise price
of $8.30 and a weighted average remaining contractual life of 6.52 years. The
remaining 989,500 had exercise prices between $11.00 and $14.75, with a weighted
average exercise price of $11.90 and a weighted average remaining contractual
life of 9.05 years.
F-23
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model, using the following assumptions;
weighted average risk-free interest rates of 5.76 percent, 6.25 percent and 6.83
percent for grants in 1997,1996, and 1995, respectively; zero expected dividend
yields, and expected volatility of 43.69 percent for 1997 and 62.35 percent for
years 1996 and 1995. A 3.5 year estimated life was used for all employee grants.
The weighted average fair value of employee options granted during 1997, 1996
and 1995 was $11.16, $13.93 and $7.16, respectively.
Restricted stock awards: The company had 234,500 and 270,090 restricted
stock awards issued and outstanding as of December 31, 1997 and 1996,
respectively. The market value of the restricted shares is deferred in the
additional paid-in capital account and is generally amortized over the years the
restrictions lapse. The 1996 increase in restricted stock was caused by
issuances to new members of the company's management. Total compensation expense
in 1997 and 1996, related to these awards, was not material.
NOTE NINETEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS:
Virtually all employees in the United States are eligible to participate in
noncontributory defined contribution retirement plans after completing one full
year of service. The plans provide for an annual minimum contribution of between
3 and 6 percent of employees' eligible compensation, based partially on
employees' contribution to the plans. Contributions above the minimum could be
required based upon profits in excess of a specified return on net worth.
Retirement plan expenses were $7.8 million, $8.6 million, $8.8 million and in
1997, 1996 and 1995, respectively. The company's 1997 contribution to the
retirement plans will be made during 1998. The company's 1996 and 1995
contributions to the retirement plans were partially funded through the issuance
of approximately 466,535 and 782,000 shares, respectively, of the company's
common stock.
Employees in Mexico are covered by government-mandated plans, the costs of
which are accrued by the company.
Benefits payable to employees when they leave the company other than by
reason of retirement did not have a material effect on the financial statements
of the company.
NOTE TWENTY -- EARNINGS PER SHARE:
In accordance with FAS 128, "Earnings Per Share", the company computed
earnings per share by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the year. Diluted earnings (loss)
per share, assuming conversion of the 6 1/4 percent convertible subordinated
debentures, the 8.5 percent Senior Subordinated Convertible Debentures due 2001
and outstanding stock options are not presented because the effect of the
assumed conversion is antidilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss).............................. $(299.4) $(178.0) $(90.8)
Weighted average common shares outstanding..... 66.6 65.2 49.2
Earnings per share............................. $ (4.49) $ (2.73) $(1.85)
</TABLE>
NOTE TWENTY ONE -- CONTINGENCIES:
The company is involved in various legal actions, environmental matters,
patent claims, and other proceedings relating to a wide range of matters that
are incidental to the conduct of its business. In addition, the company remains
liable for certain retained obligations of a discontinued business, principally
income and other taxes prior to the closing of the sale. Furthermore, the
company has been named as a defendant in certain cases which relate to keyboards
allegedly manufactured or designed by the company for the discontinued business.
F-24
<PAGE> 168
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.
F-25
<PAGE> 169
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
F-26
<PAGE> 170
ANNEX A -- THE PREPACKAGED PLAN
[IMPORTANT: A BANKRUPTCY CASE HAS NOT BEEN
COMMENCED AS OF THE DATE OF THE DISTRIBUTION OF THIS DOCUMENT]
IN THE UNITED STATES BANKRUPTCY COURT
IN RE:
ZENITH ELECTRONICS CORPORATION,
DEBTOR,
CHAPTER 11
CASE NO. 98- ( )
------------------------
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
------------------------
JAMES H.M. SPRAYREGEN
MATTHEW N. KLEIMAN
ANUP SATHY
KIRKLAND & ELLIS
200 E. Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
Counsel to
ZENITH ELECTRONICS CORPORATION,
debtor and debtor-in-possession
Dated: [ ]
A-1
<PAGE> 171
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION, COMPUTATION OF TIME AND
GOVERNING LAW.................................................... 4
A. Rules of Interpretation, Computation of Time and Governing
Law......................................................... 4
B. Defined Terms............................................... 4
ARTICLE II.
ADMINISTRATIVE AND PRIORITY TAX CLAIMS........................... 11
A. Administrative Claims....................................... 11
B. Priority Tax Claims......................................... 11
ARTICLE III.
CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND EQUITY
INTERESTS........................................................ 12
A. Summary..................................................... 12
B. Classification and Treatment................................ 12
C. Special Provision Governing Unimpaired Claims............... 15
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN.............................. 15
A. Voting Classes.............................................. 15
B. Acceptance by Impaired Classes.............................. 15
C. Presumed Acceptance of Plan................................. 15
D. Presumed Rejection of Plan.................................. 15
E. Non-Consensual Confirmation................................. 15
ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN............................. 15
A. Continued Corporate Existence and Vesting of Assets in the
Reorganized Debtor.......................................... 15
B. Cancellation of Notes, Instruments, Debentures, Common Stock
and Stock Options........................................... 16
C. Issuance of New Securities; Execution of Related
Documents................................................... 16
D. Corporate Governance, Directors and Officers, and Corporate
Action...................................................... 16
E. LGE New Credit Support...................................... 17
F. Sources of Cash for Plan Distribution....................... 17
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES............ 17
A. Assumption of Executory Contracts and Unexpired Leases...... 17
B. Claims Based on Rejection of Executory Contracts or
Unexpired Leases............................................ 17
C. Cure of Defaults for Executory Contracts and Unexpired
Leases Assumed.............................................. 18
D. Indemnification of Directors, Officers and Employees........ 18
E. Compensation and Benefit Programs........................... 18
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS............................... 18
A. Distributions for Claims Allowed as of the Effective Date... 18
B. Distributions by the Reorganized Debtor; Distributions with
Respect to Debt Securities.................................. 18
</TABLE>
A-2
<PAGE> 172
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
C. Delivery and Distributions and Undeliverable or Unclaimed
Distributions............................................... 19
D. Distribution Record Date.................................... 19
E. Timing and Calculation of Amounts to be Distributed......... 20
F. Minimum Distribution........................................ 20
G. Setoffs..................................................... 20
H. Surrender of Canceled Instruments or Securities............. 20
I. Lost, Stolen, Mutilated or Destroyed Debt Securities........ 21
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS......................... 21
A. Prosecution of Objections to Claims......................... 21
B. Estimation of Claims........................................ 21
C. Payments and Distributions on Disputed Claims............... 21
ARTICLE IX.
CONDITIONS PRECEDENT TO CONFIRMATION AND CONSUMMATION OF THE
PLAN............................................................. 22
A. Condition Precedent to Confirmation......................... 22
B. Conditions Precedent to Consummation........................ 22
C. Waiver of Conditions........................................ 22
D. Effect of Non-occurrence of Conditions to Consummation...... 22
ARTICLE X.
RELEASE, INJUNCTIVE AND RELATED PROVISIONS....................... 22
A. Subordination............................................... 22
B. Limited Releases by the Debtor.............................. 23
C. Limited Releases by Holder of Claims........................ 23
D. Preservation of Rights of Action............................ 23
E. Exculpation................................................. 23
F. Injunction.................................................. 24
ARTICLE XI.
RETENTION OF JURISDICTION........................................ 24
ARTICLE XII.
MISCELLANEOUS PROVISIONS......................................... 25
A. Dissolution of Committee(s)................................. 25
B. Payment of Statutory Fees................................... 25
C. Discharge of Debtor......................................... 25
D. Modification of Plan........................................ 25
E. Revocation of Plan.......................................... 25
F. Successors and Assigns...................................... 25
G. Reservation of Rights....................................... 25
H. Section 1146 Exemption...................................... 25
I. Further Assurances.......................................... 26
J. Service of Documents........................................ 26
K. Filing of Additional Documents.............................. 26
</TABLE>
A-3
<PAGE> 173
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Pursuant to chapter 11, title 11 of the United States Code, 11 U.S.C.
sec.sec. 101 et seq., Zenith Electronics Corporation, debtor and
debtor-in-possession in the above-captioned and numbered case, hereby
respectfully proposes the following Prepackaged Plan of Reorganization under
Chapter 11 of the Bankruptcy Code:
ARTICLE I.
DEFINED TERMS, RULES OF INTERPRETATION,
COMPUTATION OF TIME AND GOVERNING LAW
A. Rules of Interpretation, Computation of Time and Governing Law
1. For purposes of the Plan: (a) whenever from the context it is
appropriate, each term, whether stated in the singular or the plural, shall
include both the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender include the masculine, feminine and the neuter gender;
(b) any reference in the Plan to a contract, instrument, release, indenture or
other agreement or document being in a particular form or on particular terms
and conditions means that such document shall be substantially in such form or
substantially on such terms and conditions; (c) any reference in the Plan to an
existing document or exhibit Filed, or to be Filed, means such document or
exhibit, as it may have been or may be amended, modified or supplemented; (d)
unless otherwise specified, all references in the Plan to Sections, Articles and
Exhibits are references to Sections, Articles and Exhibits of or to the Plan;
(e) the words "herein" and "hereto" refer to the Plan in its entirety rather
than to a particular portion of the Plan; (f) captions and headings to Articles
and Sections are inserted for convenience of reference only and are not intended
to be a part of or to affect the interpretation of the Plan; (g) the rules of
construction set forth in section 102 of the Bankruptcy Code shall apply; and
(h) any term used in capitalized form in the Plan that is not defined herein but
that is used in the Bankruptcy Code or the Bankruptcy Rules shall have the
meaning assigned to such term in the Bankruptcy Code or the Bankruptcy Rules, as
the case may be.
2. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply.
3. Except to the extent that the Bankruptcy Code or Bankruptcy Rules are
applicable, and subject to the provisions of any contract, instrument, release,
indenture or other agreement or document entered into in connection with the
Plan, the rights and obligations arising under the Plan shall be governed by,
and construed and enforced in accordance with, the laws of the State of in which
the Bankruptcy Court resides, without giving effect to the principles of
conflict of laws thereof.
B. Defined Terms
Unless the context otherwise requires, the following terms shall have the
following meanings when used in capitalized form in the Plan:
1. "Administrative Claim" means a Claim for costs and expenses of
administration under section 503(b), 507(b) or 1114(e)(2) of the Bankruptcy
Code, including: (a) the actual and necessary costs and expenses incurred after
the Petition Date of preserving the Estate and operating the business of the
Debtor (such as wages, salaries or commissions for services and payments for
goods and other services and leased premises); (b) compensation for legal,
financial advisory, accounting and other services and reimbursement of expenses
awarded or allowed under section 330(a) or 331 of the Bankruptcy Code; and (c)
all fees and charges assessed against the Estate under chapter 123 of title 28
United States Code, 28 U.S.C. sec.sec. 1911-1930.
2. "Allowed" means, with respect to any Claim, except as otherwise provided
herein: (a) a Claim that has been scheduled by the Debtor in its schedule of
liabilities as other than disputed, contingent or unliquidated and as to which
the Debtor or other party in interest has not Filed an objection by the
Effective Date; (b) a Claim that either is not a Disputed Claim or has been
allowed by a Final Order; (d) a Claim that
A-4
<PAGE> 174
is allowed: (i) in any stipulation of amount and nature of Claim executed prior
to the Confirmation Date and approved by the Bankruptcy Court; (ii) in any
stipulation with the Debtor of amount and nature of Claim executed on or after
the Confirmation Date; or (iii) in any contract, instrument, indenture or other
agreement entered into or assumed in connection with the Plan; (e) a Claim
relating to a rejected executory contractor unexpired lease that either (i) is
not a Disputed Claim or (ii) has been allowed by a Final Order, in either case
only if a proof of Claim has been Filed by the Bar Date or has otherwise been
deemed timely Filed under applicable law; or (f) a Claim that is allowed
pursuant to the terms of this Plan.
3. "Allowed . . . Claim" means an Allowed Claim in the particular Class
described.
4. "Amended Certificate of Incorporation" means the Certificate of
Incorporation of the Reorganized Debtor, as restated as described in Article
V.D.1 of the Plan, the form of which shall be Filed on or before the
Confirmation Date.
5. "Amended Citibank Credit Agreement" means that certain Amended and
Restated Credit Agreement dated June 29, 1998 among the Corporation, the Lenders
designated therein, Citibank, N.A., as Issuing Bank, and Citicorp North America,
Inc., as Agent for the Issuing Bank and the Lenders, together with all related
notes, certificates, security agreements, mortgages, pledges, indemnities,
collateral assignments, undertakings, guaranties, and other instruments and
documents, as each may have been amended or modified from time to time.
6. "Ballot Date" means the date stated in the Voting Instructions by which
all Ballots must be received.
7. "Ballots" mean the ballots accompanying the Disclosure Statement upon
which Holders of Impaired Claims shall indicate their acceptance or rejection of
the Plan in accordance with the Plan and the Voting Instructions.
8. "Bank Lender Claims" means the Claims of the Bank Lenders arising from
or relating to the Bank Loans.
9. "Bank Lenders" means each of (a) Bank of America National Trust and
Savings Association, and (b) Credit Agricole Indosuez, Seoul Branch.
10. "Bank Loans" means each of the financial accommodations provided by the
Bank Lenders to the Corporation, including, but not necessary limited to,
pursuant to (a) that certain Advance Account Agreement dated October 29, 1997 by
and between the Corporation and Bank of America National Trust and Savings
Association, and (b) that certain Loan Agreement dated December 31, 1997 by and
between the Corporation and Credit Agricole Indosuez, Seoul Branch.
11. "Bankruptcy Code" means title I of the Bankruptcy Reform Act of 1978,
as amended from time to time, as set forth in sections 101 et seq. of title 11
of the United States Code, and applicable portions of titles 18 and 28 of the
United States Code.
12. "Bankruptcy Court" means the United States District Court having
jurisdiction over the Prepackaged Chapter 11 Case and, to the extent of any
reference made pursuant to section 157 of title 28 of the United States Code
and/or the General Order of such District Court pursuant to section 151 of title
28 of the United States Code, the bankruptcy unit of such District Court.
13. "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure, as
amended from time to time, as applicable to the Prepackaged Chapter 11 Case,
promulgated under 28 U.S.C. sec. 2075 and the General, Local and Chambers Rules
of the Bankruptcy Court.
14. "Bar Date" means the Bar Date for Filing of proofs of claim with
respect to executory contracts and unexpired leases which are rejected pursuant
to this Plan or otherwise pursuant to section 365 of the Bankruptcy Code.
15. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
A-5
<PAGE> 175
16. "Business Day" means any day, other than a Saturday, Sunday or "legal
holiday" (as defined in Bankruptcy Rule 9006(a)).
17. "By-Laws" mean the By-Laws of the Reorganized Debtor, the form of which
shall be Filed on or before the Confirmation Date.
18. "Cash" means cash and cash equivalents.
19. "Causes of Action" mean all actions, causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills, specialities,
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages or judgments.
20. "Citibank Secured Claims" means all Claims arising from or relating to
the Amended Citibank Credit Agreement.
21. "Claim" means a claim (as defined in section 101(5) of the Bankruptcy
Code) against the Debtor, including, but limited to: (a) any right to payment
from the Debtor whether or not such right is reduced to judgment, liquidated,
unliquidated, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured or unsecured; or (b) any right to an equitable remedy for
breach of performance if such performance gives rise to a right of payment from
the Debtor, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.
22. "Claim Holder" or "Claimant" means the Holder of a Claim.
23. "Class" means a category of Holders of Claims or Equity Interests as
set forth in Article III of the Plan.
24. "Committee" or "Committees" means a statutory official committee (or
committees, if more than one) appointed in the Prepackaged Chapter 11 Case
pursuant to section 1102 of the Bankruptcy Code, if any.
25. "Common Stock" means the authorized common stock of the Corporation.
26. "Confirmation" means the entry of the Confirmation Order, subject to
all conditions specified in Article IX.A of the Plan having been (i) satisfied
or (ii) waived pursuant to Article IX.C.
27. "Confirmation Date" means the date upon which the Confirmation Order is
entered by the Bankruptcy Court in its docket, within the meaning of Bankruptcy
Rules 5003 and 9021.
28. "Confirmation Order" means the order of the Bankruptcy Court confirming
the Plan pursuant to section 1129 of the Bankruptcy Code.
29. "Consummation" means the occurrence of the Effective Date.
30. "Corporation" means Zenith Electronics Corporation, a Delaware
corporation.
31. "Creditor" means any Holder of a Claim.
32. "D&O Releasees" means all officers, directors, employees, attorneys,
financial advisors, accountants, investment bankers, agents and representatives
of the Debtor and its subsidiaries who served in such capacity on or after
January 1, 1998, in each case in their capacity as such.
33. "Debtor" means the Corporation, as debtor in the Prepackaged Chapter 11
Case.
34. "Debtor in Possession" means the Corporation, as debtor in possession
in the Prepackaged Chapter 11 Case.
35. "Delaware General Corporation Law" means title 8 of the Delaware Code,
as now in effect or hereafter amended.
36. "Disclosure Statement" means the Disclosure Statement and Proxy
Statement-Prospectus for the Solicitation of Votes for the Prepackaged Plan of
the Corporation dated [ ], as amended, supplemented, or modified
from time to time, describing the Plan, that is prepared and distributed in
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accordance with sections 1125, 1126(b) and/or 1145 of the Bankruptcy Code and
Bankruptcy Rule 3018 and/or other applicable law.
37. "Disputed" means, with respect to any Claim or Equity Interest, any
Claim or Equity Interest: (a) listed on the Schedules as unliquidated, disputed
or contingent; or (b) as to which the Debtor or any other party in interest have
interposed a timely objection or request for estimation in accordance with the
Bankruptcy Code and the Bankruptcy Rules or is otherwise disputed by the Debtor
in accordance with applicable law, which objection, request for estimation or
dispute has not been withdrawn or determined by a Final Order.
38. "Distribution Record Date" means the close of business on the Business
Day immediately preceding the Effective Date.
39. "Effective Date" means the date selected by the Corporation which is a
Business Day after the Confirmation Date on which: (a) no stay of the
Confirmation Order is in effect, and (b) all conditions specified in both
Article IX.A and IX.B of the Plan have been (i) satisfied or (ii) waived
pursuant to Article IX.C.
40. "Entity" means an entity as defined in section 101(15) of the
Bankruptcy Code.
41. "Equity Interest" means any equity interest of the Corporation,
including, but not limited to, all issued, unissued, authorized or outstanding
shares or stock (including the Common Stock), together with any warrants,
options or contract rights to purchase or acquire such interests at any time.
42. "Estate" means the estate of the Debtor created by section 541 of the
Bankruptcy Code upon the commencement of the Prepackaged Chapter 11 Case.
43. "File" or "Filed" means file or filed with the Bankruptcy Court in the
Prepackaged Chapter 11 Case.
44. "Final Decree" means the decree contemplated under Bankruptcy Rule
3022.
45. "Final Order" means an order or judgment of the Bankruptcy Court, or
other court of competent jurisdiction with respect to the subject matter, which
has not been reversed, stayed, modified or amended, and as to which the time to
appeal or seek certiorari has expired and no appeal or petition for certiorari
has been timely taken, or as to which any appeal that has been taken or any
petition for certiorari that has been or may be filed has been resolved by the
highest court to which the order or judgment was appealed or from which
certiorari was sought.
46. "General Unsecured Claim" means any Unsecured Claim that is not a Bank
Lender Claim, Old Subordinated Debenture Claim, LGE Tranche A Claim or LGE
Tranche B Claim.
47. "Holder" means a Person or Entity holding an Equity Interest or Claim,
and with respect to a vote on the Plan, means the Beneficial Holder as of the
Voting Record Date or any authorized signatory who has completed and executed a
Ballot or on whose behalf a Master Ballot has been completed and executed in
accordance with the Voting Instructions.
48. "Impaired Claim" means a Claim classified in an Impaired Class.
49. "Impaired Class" means each of Classes 4, 6, 7 and 8 as set forth in
Article III of the Plan.
50. "Investor Releasees" means LGE and LG Semicon Co., Ltd. and their
current and former parents, subsidiaries and affiliates and their respective
officers, directors, employees, attorneys, financial advisors, accountants,
investment bankers, agents and representatives, in each case in their capacity
as such.
51. "Leveraged Lease (Melrose Park)" means that certain Lease Agreement
dated as of March 26, 1997 by and among Fleet Bank as Owner Trustee for Zenith
Electronics Equipment Owner Trustee 1997-I, as Lessor, and the Corporation, as
Lessee, as supplemented by that certain Lease Supplement dated April 2, 1997 by
and between Fleet Bank, as Lessor, and the Corporation, as Lessee, together with
all related notes, certificates, security agreements, mortgages, pledges,
indemnities, collateral assignments, undertakings, guaranties, and other
instruments and documents, as each may have been amended or modified from time
to
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time, including, but not limited to, that certain Participation Agreement dated
as of March 26, 1997 by and among the Corporation, as Lessee, General Foods
Credit Corporation, as Owner Participant, Fleet Bank, as Owner Trustee, the
Lenders designated therein, and First Security Bank, National Association, as
Indenture Trustee.
52. "Leveraged Lease (Mexico)" means that certain Lease Agreement dated as
of March 26, 1997 by and among Fleet Bank as Owner Trustee for Zenith
Electronics Equipment Owner Trustee 1997-II, as Lessor, and Zenith Electronics
Corporation of Texas, as Lessee, as supplemented by that certain Lease
Supplement dated April 2, 1997 by and between Fleet Bank, as Lessor, and Zenith
Electronics Corporation of Texas, as Lessee, together with all related notes,
certificates, security agreements, mortgages, pledges, indemnities, collateral
assignments, undertakings, guaranties, and other instruments and documents, as
each may have been amended or modified from time to time, including, but not
limited to, that certain Participation Agreement dated as of March 26, 1997 by
and among Zenith Electronics Corporation of Texas, as Lessee, General Foods
Credit Corporation, as Owner Participant, Fleet Bank, as Owner Trustee, the
Lenders designated therein, and First Security Bank, National Association, as
Indenture Trustee, and, that certain Parent Guaranty dated March 26, 1997 by and
among the Debtor, the Owner Trustee, and Owner Participant, the Indenture
Trustee and the Lenders.
53. "Leveraged Leases" means the Leveraged Lease (Melrose Park) and the
Leveraged Lease (Mexico).
54. "LGE" means LG Electronics Inc., a corporation organized under the laws
of the Republic of Korea.
55. "LGE Bank Guarantees" means each of the guarantees from LGE to the Bank
Lenders issued in connection with the Bank Loans.
56. "LGE Claims" means the LGE Tranche A Claims and the LGE Tranche B
Claims, to be restructured as provided in the Restructuring Agreement.
57. "LGE Demand Loan Claims" means any and all Claims of LGE against the
Debtor relating to that certain $45,000,000 Demand Note issued by the Debtor to
LGE on March 31, 1998, together with all related notes, certificates, security
agreements, mortgages, pledges, indemnities, collateral assignments,
undertakings, guaranties, and other instruments and documents, as each may have
been amended or modified from time to time.
58. "LGE Extended Payables Claims" means any and all Claims of LGE against
the Debtor arising under or relating to that certain vendor credit line extended
by LGE to the Debtor pursuant to that certain Financial Support Agreement dated
March 31, 1997 by and between the Debtor and LGE.
59. "LGE Guaranty Fee Claims" means any and all Claims of LGE against the
Debtor arising from or relating to any and all fees payable by the Debtor to LGE
on account of LGE issuing the LGE Bank Guarantees.
60. "LGE Leveraged Lease Claims" means any and all Claims of LGE against
the Debtor relating to the Leveraged Leases, including, but not limited to,
Claims relating to (a) that certain Guaranty dated as of March 26, 1997 from LGE
to the parties designated therein, relating to the Leveraged Lease (Melrose
Park), (b) that certain Guaranty dated as of March 26, 1997 from LGE to the
parties designated therein, relating to the Leveraged Lease (Mexico), (c) those
certain Guaranty Payment Agreements each dated as of July 17, 1998, by and
between LGE, the Indenture Trustee, the Lenders, the Owner Participant and the
Owner Trustee, as acknowledged and agreed to by the Debtor.
61. "LGE New Credit Support" means, at the option of LGE and Debtor, either
(a) a line of credit to be made available to the Debtor by LGE on or after the
Effective Date, (b) a guarantee or other credit support to be provided by LGE to
a third-party lender to support credit provided by such lender to the Debtor on
or after the Effective Date, or (c) a combination of both (a) and (b), in all
cases in an aggregate amount not to exceed $60,000,000, to be provided to the
Debtor, if at all, on the terms and conditions of the Restructuring Agreement.
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62. "LGE Reimbursement Claims" means any and all claims of LGE against the
Debtor arising from or relating to the Reimbursement Agreement or the LGE Bank
Guarantees, other than the LGE Guaranty Fee Claims.
63. "LGE New Restructured Senior Note" means that certain new secured note
in a principal amount equal to the aggregate amount of the LGE Tranche A Claims
minus $32,379,300, bearing interest at LIBOR plus 6.5%, and maturing on November
1, 2008 to be issued to LGE on account of the LGE Tranche A Claims in Class 7,
as provided in the Restructuring Agreement, the form of which shall be Filed on
or before the Confirmation Date. Interest on the LGE New Restructured Senior
Note will be paid in cash only to the extent that the Debtor's ratio of EBITDA
to cash interest expense for the immediately preceding four fiscal quarters
exceeds 1.5; if such test is not met, interest will be payable by the issuance
of additional LGE New Restructured Senior Notes.
64. "LGE Technical Services Fee Claims" means any and all Claims of LGE
against the Debtor relating to servicing fees resulting from LGE's provision of
certain technical and other related services to the Debtor in connection with
the Debtor's research and development activities.
65. "LGE Tranche A Claims" means those Claims against the Debtor held by
LGE arising from or relating to (a) the LGE Leveraged Lease Claims, and (b) that
portion of the LGE Reimbursement Claims and the LGE Demand Loan Claims not
classified as LGE Tranche B Claims.
66. "LGE Tranche B Claims" means Claims against the Debtor equal to
$200,000,000 held by LGE arising from or relating to (a) the LGE Extended
Payables Claims (but not to exceed $140,000,000), (b) the LGE Reimbursement
Claims (but not to exceed $50,000,000), (c) the LGE Technical Services Fee
Claims, (d) the LGE Guaranty Fee Claims, and (e) the LGE Demand Loan Claims in
an amount sufficient when aggregated with the Claims described in items (a)
through (d) to equal $200,000,000. To the extent the aggregate of the Claims
described in items (a) through (d) of this paragraph exceed $200,000,000, a
portion of the LGE Reimbursement Claims equal to such excess shall constitute
LGE Tranche A Claims.
67. "Master Ballots" mean the master ballots accompanying the Disclosure
Statement upon which Holders of Impaired Claims and Common Stock shall indicate
the acceptance or rejection of the Plan in accordance with the Voting
Instructions.
68. "New Bank Lender Notes" means those certain term notes issued by the
Reorganized Debtor to be distributed to the Holders of Allowed Claims in Class
4, with a maturity of one year from the Effective Date, the form of which shall
be Filed on or before the Confirmation Date.
69. "New Common Stock" means the 1000 shares of Common Stock of the
Reorganized Debtor, par value $0.01 per share, authorized pursuant to the
Amended Certificate of Incorporation.
70. "New Subordinated Debentures" means those certain $40,000,000 of new
6 1/4% Subordinated Debentures due 2010 issued by the Reorganized Debtor,
offered to the Holders of Allowed Claims in Class 6, the form of which shall be
Filed on or before the Confirmation Date.
71. "Nominee" means any Beneficial Holder whose securities were registered
or held of record in the name of his broker, dealer, commercial bank, trust
company, savings and loan or other nominee.
72. "Old Subordinated Debenture Claims" means all Claims arising from or
related to the Old Subordinated Debentures or the Old Subordinated Debenture
Indenture.
73. "Old Subordinated Debentures" mean the 6 1/4% Convertible Subordinated
Debentures due 2011, issued by the Corporation under the Old Senior Subordinated
Debenture Indenture.
74. "Old Subordinated Debenture Indenture" means the Indenture, dated as of
April 1, 1986 between the Corporation and State Street Bank & Trust Company, as
trustee, relating to the Old Subordinated Debentures.
75. "Other Priority Claims" mean any Claim accorded priority in right of
payment under section 507(a) of the Bankruptcy Code, other than a Priority Tax
Claim or an Administrative Claim.
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76. "Other Secured Claims" mean, collectively, all Secured Claims against
the Debtor held by any Person or Entity, other than Claims classified in Class 2
or Class 7.
77. "Person" means a person as defined in section 101(41) of the Bankruptcy
Code.
78. "Petition Date" means the date on which the Debtor filed its petition
for relief commencing the Prepackaged Chapter 11 Case.
79. "Plan" or "Prepackaged Plan" means this Chapter 11 Prepackaged Plan of
Reorganization, either in its present form or as it may be altered, amended,
modified or supplemented from time to time in accordance with the Plan, the
Bankruptcy Code and the Bankruptcy Rules.
80. "Prepackaged Chapter 11 Case" means the case under chapter 11 of the
Bankruptcy Code, commenced by the Debtor in the Bankruptcy Court.
81. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
82. "Pro Rata" means proportionately so that with respect to an Allowed
Claim, the ratio of (a) (i) the amount of property distributed on account of a
particular Allowed Claim to (ii) the amount of the Allowed Claim, is the same as
the ratio of (b) (i) the amount of property distributed on account of all
Allowed Claims of the Class in which the particular Allowed Claim is included to
(ii) the amount of all Allowed Claims in that Class.
83. "Professionals" means a Person or Entity (a) employed pursuant to a
Final Order in accordance with sections 327 and 1103 of the Bankruptcy Code and
to be compensated for services rendered prior to the Effective Date, pursuant to
sections 327, 328, 329, 330 and 331 of the Bankruptcy Code, or (b) for which
compensation and reimbursement has been allowed by the Bankruptcy Court pursuant
to section 503(b)(4) of the Bankruptcy Code.
84. "Reimbursement Agreement" means that certain Reimbursement Agreement
dated as of November 3, 1997 by and between the Debtor and LGE, together with
all related notes, certificates, security agreements, mortgages, pledges,
indemnities, collateral assignments, undertakings, guaranties, and other
instruments and documents, as each may have been amended or modified from time
to time, pursuant to which the Debtor agreed to reimburse LGE for amounts paid
pursuant to the LGE Bank Guarantees.
85. "Reorganized Debtor" means the Debtor and the Debtor in Possession, or
any successor thereto, by merger, consolidation, or otherwise, on and after the
Effective Date.
86. "Restructuring Agreement" means that certain Restructuring Agreement
dated as of August 7, 1998 by and between the Debtor and LGE (as amended or
supplemented from time to time), a copy of which is set forth as an exhibit to
the Disclosure Statement.
87. "Reynosa Assets" means that certain property, plant and equipment owned
by a subsidiary or subsidiaries of the Debtor located in Reynosa, Tamaulipas,
Mexico, as specifically set forth in the Restructuring Agreement.
88. "Reynosa Purchase Agreement" means that certain agreement, dated the
Effective Date, among LGE, Zenith Electronics Corporation of Texas and Partes de
Television de Reynosa, pursuant to which the Reynosa Assets will be transferred
to LGE or its affiliate, as specifically set forth in the Restructuring
Agreement.
89. "Schedules" mean the schedules of assets and liabilities, schedules of
executory contracts, and the statement of financial affairs as the Bankruptcy
Court requires the Debtor to file pursuant to section 521 of the Bankruptcy
Code, the Official Bankruptcy Forms and the Bankruptcy Rules, as they may be
amended and supplemented from time to time.
90. "Secured Claim" means (a) a Claim that is secured by a lien on property
in which the Estate has an interest, which lien is valid, perfected and
enforceable under applicable law or by reason of a Final Order, or that is
subject to setoff under section 553 of the Bankruptcy Code, to the extent of the
value of the Claim
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Holder's interest in the Estate's interest in such property or to the extent of
the amount subject to setoff, as applicable, as determined pursuant to section
506(a) of the Bankruptcy Code, or (b) a Claim Allowed under this Plan as a
Secured Claim.
91. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
92. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
93. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
94. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority Claim.
95. "Voting Agent" means [ ].
96. "Voting Instructions" mean the instructions for voting on the Plan
contained in the section of the Disclosure Statement entitled "SOLICITATION;
VOTING PROCEDURES" and in the Ballots and the Master Ballots.
97. "Voting Record Date" means [ ].
ARTICLE II.
ADMINISTRATIVE AND PRIORITY TAX CLAIMS
A. Administrative Claims
Subject to the provisions of section 330(a) and 331 of the Bankruptcy Code,
each Holder of an Allowed Administrative Claim will be paid the full unpaid
amount of such Allowed Administrative Claim in Cash on the Effective Date, or
upon such other terms as may be agreed upon by such Holder and the Reorganized
Debtor or otherwise upon order of the Bankruptcy Court; provided, however, that
Allowed Administrative Claims representing obligations incurred in the ordinary
course of business or otherwise assumed by the Debtor pursuant to the Plan will
be assumed on the Effective Date and paid or performed by the Reorganized Debtor
when due in accordance with the terms and conditions of the particular
agreements governing such obligations.
B. Priority Tax Claims
On the Effective Date, each Holder of a Priority Tax Claim due and payable
on or prior to the Effective Date shall be paid Cash in an amount equal to the
amount of such Allowed Claim, or shall be paid on account of its Allowed Claim
on such other terms as have been or may be agreed upon by such Holder and the
Debtor. The amount of any Priority Tax Claim that is not an Allowed Claim or
that is not otherwise due and payable on or prior to the Effective Date, and the
rights of the Holder of such Claim, if any, to payment in respect thereof shall
(i) be determined in the manner in which the amount of such Claim and the rights
of the Holder of such Claim would have been resolved or adjudicated if the
Prepackaged Chapter 11 Case had not been commenced, (ii) survive the Effective
Date and Consummation of the Plan as if the Prepackaged Chapter 11 Case had not
been commenced, and (iii) not be discharged pursuant to section 1141 of the
Bankruptcy Code. In accordance with section 1124 of the Bankruptcy Code, the
Plan shall leave unaltered the legal, equitable, and contractual rights of each
Holder of a Priority Tax Claim.
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ARTICLE III.
CLASSIFICATION AND TREATMENT
OF CLASSIFIED CLAIMS AND EQUITY INTERESTS
A. Summary
The categories of Claims and Equity Interests listed below classify Claims
and Equity Interests for all purposes, including voting, confirmation and
distribution pursuant to the Plan and pursuant to sections 1122 and 1123(a)(1)
of the Bankruptcy Code. A Claim or Equity Interest shall be deemed classified in
a particular Class only to the extent that the Claim or Equity Interest
qualifies within the description of that Class and shall be deemed classified in
a different Class to the extent that any remainder of such Claim or Equity
Interest qualifies within the description of such different Class. A Claim or
Equity Interest is in a particular Class only to the extent that such Claim or
Equity Interest is Allowed in that Class and has not been paid or otherwise
settled prior to the Effective Date.
The classification of Claims and Equity Interests pursuant to this Plan is
as follows:
<TABLE>
<CAPTION>
CLASS STATUS VOTING RIGHTS
----- ---------- --------------------
<S> <C> <C> <C>
Class 1 -- Other Priority Claims Unimpaired -- not entitled to vote
Class 2 -- Citibank Secured Claims Unimpaired -- not entitled to vote
Class 3 -- Other Secured Claims Unimpaired -- not entitled to vote
Class 4 -- Bank Lender Claims Impaired -- entitled to vote
Class 5 -- General Unsecured Claims Unimpaired -- not entitled to vote
Class 6 -- Old Subordinated Debenture Claims Impaired -- entitled to vote
Class 7 -- LGE Claims: Impaired -- entitled to vote
LGE Tranche A Claims
LGE Tranche B Claims
Class 8 -- Equity Interests Impaired -- not entitled to vote
</TABLE>
B. Classification and Treatment
1. Class 1 -- Other Priority Claims
(a) Classification: Class 1 consists of all Other Priority Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 1 Claims are unaltered by the Plan. Unless the Holder of
such Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 1 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date, such
Claim will be paid in full in Cash by the Reorganized Debtor;
(ii) to the extent not due and owing on the Effective Date, such
Claim (A) will be paid in full in Cash by the Reorganized Debtor, or (B)
will be paid in full in Cash by the Reorganized Debtor when and as such
Claim becomes due and owing in the ordinary course of business; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
Any default with respect to any Class 1 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed
cured upon the Effective Date.
(c) Voting: Class 1 is not impaired and the Holders of Class 1 Claims
are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 1
are not entitled to vote to accept or reject the Plan.
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2. Class 2 -- Citibank Secured Claims
(a) Classification: Class 2 consists of the Citibank Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 2 Claims are unaltered by the Plan. On the Effective Date,
unless the Holder of such Claim and the Debtor agree to a different
treatment, at the election of the Debtor, the Allowed Class 2 Claims (i)
will be paid in full in Cash by the Reorganized Debtor or (ii) will be
otherwise treated in any other manner so that such Claims shall otherwise
be rendered unimpaired pursuant to section 1124 of the Bankruptcy Code.
(c) Voting: Class 2 is not impaired and the Holders of Class 2 Claims
are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 2
are not entitled to vote to accept or reject the Plan.
3. Class 3 -- Other Secured Claims
(a) Classification: Class 3 consists of the Other Secured Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 3 Claims are unaltered by the Plan. Unless the Holder of
such Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 3 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) the legal, equitable and contractual rights to which such Claim
entitles the Holder thereof shall be unaltered by the Plan;
(ii) the Debtor shall surrender all collateral securing such Claim
to the Holder thereof, without representation or warranty by or recourse
against the Debtor or the Reorganized Debtor; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
Any default with respect to any Class 3 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed cured
upon the Effective Date.
(c) Voting: Class 3 is not impaired and the Holders of Class 3 Claims
are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 3
are not entitled to vote to accept or reject the Plan.
4. Class 4 -- Bank Lender Claims
(a) Classification: Class 4 consists of the Claims of Holders of Bank
Lender Claims.
(b) Treatment: On the Effective Date, unless the respective Holder of
such Claim and the Debtor agree to a different treatment, each Holder of a
Bank Lender Claim shall receive its respective New Bank Lender Note in full
satisfaction of its Claims.
(c) Voting: Class 4 is impaired and the Holders of Allowed Class 4
Claims are entitled to vote to accept or reject the Plan.
5. Class 5 -- General Unsecured Claims
(a) Classification: Class 5 consists of the Claims of Holders of
General Unsecured Claims.
(b) Treatment: The legal, equitable and contractual rights of the
Holders of Class 5 Claims are unaltered by the Plan. Unless the Holder of
such Claim and the Debtor agree to a different treatment, each Holder of an
Allowed Class 5 Claim shall receive one of the following alternative
treatments, at the election of the Debtor:
(i) to the extent then due and owing on the Effective Date, such
Claim will be paid in full in Cash by the Reorganized Debtor;
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(ii) to the extent not due and owing on the Effective Date, such
Claim (A) will be paid in full in Cash by the Reorganized Debtor, or (B)
will be paid in full in Cash by the Reorganized Debtor when and as such
Claim becomes due and owing in the ordinary course of business; or
(iii) such Claim will be otherwise treated in any other manner so
that such Claims shall otherwise be rendered unimpaired pursuant to
section 1124 of the Bankruptcy Code.
Any default with respect to any Class 5 Claim that existed immediately
prior to the filing of the Prepackaged Chapter 11 Case shall be deemed
cured upon the Effective Date.
(c) Voting: Class 5 is not impaired and the Holders of Class 5 Claims
are conclusively deemed to have accepted the Plan pursuant to section
1126(f) of the Bankruptcy Code. Therefore, the Holders of Claims in Class 5
are not entitled to vote to accept or reject the Plan.
6. Class 6 -- Old Subordinated Debenture Claims
(a) Classification: Class 6 consists of the Claims of Holders of Old
Subordinated Debentures.
(b) Treatment: If Class 6 accepts the Plan, on or as soon as
practicable after the Effective Date, each Holder of an Allowed Old
Subordinated Debenture Claim shall receive, in full and final satisfaction
of such Claim, a pro rata distribution of the New Subordinated Debentures;
provided, however, if Class 6 rejects the Plan, the Holders of Old
Subordinated Debentures will not receive or retain any property on account
of their Old Subordinated Debentures.
(c) Voting: Class 6 is impaired and the Holders of Allowed Class 6
Claims are entitled to vote to accept or reject the Plan.
7. Class 7 -- LGE Claims
(a) Classification: Class 7 consists of the LGE Claims (but excluding
any other Claim or any Equity Interests held by LGE).
(b) Treatment:
(i) LGE Tranche A Claims -- On the Effective Date, or as soon
thereafter as practicable, LGE shall receive (A) the LGE New
Restructured Senior Note, and (B) the Reynosa Assets, in full and
complete satisfaction of the Allowed LGE Tranche A Claims. In connection
with the delivery of the Reynosa Assets, on or before the Effective
Date, the Reorganized Debtor shall cause its subsidiaries, Zenith
Electronics Corporation of Texas and Partes de Television de Reynosa, to
enter into the Reynosa Purchase Agreement.
(ii) LGE Tranche B Claims -- On the Effective Date, or as soon
thereafter as practicable, LGE shall receive 100% of the New Common
Stock, in full and complete satisfaction of the Allowed LGE Tranche B
Claims.
(c) Voting: Class 7 is impaired and the Holder of the Allowed Class 7
Claims is entitled to vote to accept or reject the Plan.
8. Class 8 -- Equity Interests
(a) Classification: Class 8 consists of all Equity Interests.
(b) Treatment: On the Effective Date, the Holders of Equity Interests
shall neither receive any distributions nor retain any property under the
Plan. All Common Stock issued before the Petition Date will be canceled.
(c) Voting: Class 8 is impaired, but because no distributions will be
made to Holders of Class 8 Equity Interests nor will such Holders retain
any property, such Holders are deemed to reject the Plan pursuant to
section 1126(g) of the Bankruptcy Code. Class B is not entitled to vote to
accept or reject the Plan.
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C. Special Provision Governing Unimpaired Claims
Except as otherwise provided in the Plan, including as provided in Article
X, nothing under the Plan shall affect the Debtor's or the Reorganized Debtor's
rights in respect of any Unimpaired Claims, including, but not limited to, all
rights in respect of legal and equitable defenses to or setoffs or recoupments
against such Unimpaired Claims.
ARTICLE IV.
ACCEPTANCE OR REJECTION OF THE PLAN
A. Voting Classes
Each Holder of an Allowed Claim in Classes 4, 6, and 7 shall be entitled to
vote to accept or reject the Plan.
B. Acceptance by Impaired Classes
An Impaired Class of Claims shall have accepted the Plan if (a) the Holders
(other than any Holder designated under section 1126(e) of the Bankruptcy Code)
of at least two-thirds in amount of the Allowed Claims actually voting in such
Class have voted to accept the Plan and (b) the Holders (other than any Holder
designated under section 1126(e) of the Bankruptcy Code) of more than one-half
in number of the Allowed Claims actually voting in such Class have voted to
accept the Plan.
C. Presumed Acceptance of Plan
Classes 1, 2, 3, and 5 are unimpaired under the Plan, and, therefore,
conclusively are presumed to have accepted the Plan pursuant to section 1126(f)
of the Bankruptcy Code.
D. Presumed Rejection of Plan
Class 8 is impaired and shall receive no distributions, and, therefore, is
presumed to have rejected the Plan pursuant to section 1126(g) of the Bankruptcy
Code.
E. Non-Consensual Confirmation
The Debtor will seek Confirmation of the Plan under section 1129(b) of the
Bankruptcy Code, to the extent applicable, in view of the deemed rejection by
Class 8. In the event that any Impaired Class of Claims shall fail to accept the
Plan in accordance with section 1129(a)(8) of the Bankruptcy Code, the Debtor
reserves the right (a) to request that the Bankruptcy Court confirm the Plan in
accordance with section 1129(b) of the Bankruptcy Code and/or (b) to modify the
Plan in accordance with Article XII.D of the Plan. In addition, as set forth in
Article III.B.6(b), if Class 6 rejects the Plan, the Holders of Old Subordinated
Debentures will not receive or retain any property on account of their Old
Subordinated Debentures.
ARTICLE V.
MEANS FOR IMPLEMENTATION OF THE PLAN
A. Continued Corporate Existence and Vesting of Assets in the Reorganized Debtor
The Debtor shall, as a Reorganized Debtor, continue to exist after the
Effective Date as a separate corporate entity, with all the powers of a
corporation under the laws of the State of Delaware and without prejudice to any
right to alter or terminate such existence (whether by merger or otherwise)
under such applicable state law. Except as otherwise provided in the Plan, the
Restructuring Agreement, the LGE New Restructured Senior Note, the New
Subordinated Debentures, or any agreement, instrument or indenture relating
thereto, on or after the Effective Date, all property of the Estate, and any
property acquired by the Debtor or the Reorganized Debtor under the Plan, shall
vest in the Reorganized Debtor, free and clear of all Claims, liens, charges, or
other encumbrances and Equity Interests. On and after the Effective Date, the
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Reorganized Debtor may operate its business and may use, acquire or dispose of
property and compromise or settle any Claims or Equity Interests, without
supervision or approval by the Bankruptcy Court and free of any restrictions of
the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly
imposed by the Plan and the Confirmation Order. In accordance with section
1109(b) of the Bankruptcy Code, nothing in this Article V shall preclude any
party in interest from appearing and being heard on any issue in the Prepackaged
Chapter 11 Case.
B. Cancellation of Notes, Instruments, Debentures, Common Stock and Stock
Options
On the Effective Date, except to the extent provided otherwise in the Plan,
(i) all notes, instruments, certificates, and other documents evidencing the
Citibank Secured Claims, LGE Claims, Other Secured Claims, and Bank Lender
Claims, (ii) the Old Subordinated Debentures, and (iii) all Equity Interests,
including all Common Stock, shall be canceled and deemed terminated. On the
Effective Date, except to the extent provided otherwise in the Plan, any
indenture relating to any of the foregoing, including, without limitation, the
Old Subordinated Debenture Indenture, shall be deemed to be canceled, as
permitted by section 1123(a)(5)(F) of the Bankruptcy Code.
C. Issuance of New Securities; Execution of Related Documents
On the Effective Date, the Reorganized Debtor shall issue all securities,
notes instruments, certificates, and other documents required to be issued
pursuant to the Plan, including, without limitation, the LGE New Restructured
Senior Note, the New Bank Lender Notes, the New Subordinated Debentures, and the
New Common Stock, each of which shall be distributed as provided in the Plan.
The Reorganized Debtor shall execute and deliver such other agreements,
documents and instruments as are required to be executed pursuant to the terms
of the Plan or the Restructuring Agreement.
D. Corporate Governance, Directors and Officers, and Corporate Action
1. Amended Certificate of Incorporation
On the Effective Date, the Reorganized Debtor will file its Amended
Certificate of Incorporation with the Secretary of the State of Delaware in
accordance with sections 102 and 103 of the Delaware General Corporation Law.
The Amended Certificate of Incorporation will, among other things, prohibit the
issuance of nonvoting equity securities to the extent required by section
1123(a) of the Bankruptcy Code, change the number of authorized shares of New
Common Stock to 1,000, change the par value of the New Common Stock to $0.01 and
eliminate the authorization of preferred stock. After the Effective Date, the
Reorganized Debtor may amend and restate its Amended Certificate of
Incorporation and other constituent documents as permitted by the Delaware
General Corporation Law.
2. Directors and Officers of the Reorganized Debtor
Subject to any requirement of Bankruptcy Court approval pursuant to section
1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the initial
officers of the Reorganized Debtor shall be the officers of the Debtor
immediately prior to the Effective Date. On the Effective Date, LGE will be the
sole shareholder of the Reorganized Debtor, and will have the right to determine
the composition of the board of directors of the Reorganized Debtor. Pursuant to
section 1129(a)(5), the Debtor will disclose, on or prior to the Confirmation
Date, identity and affiliations of any Person proposed to serve on the initial
board of directors of the Reorganized Debtor, and, to the extent such Person is
an Insider, the nature of any compensation for such Person. The classification
and composition of the board of directors shall be consistent with the Amended
Certificate of Incorporation. Each such director and officer shall serve from
and after the Effective Date pursuant to the terms of the Amended Certificate of
Incorporation, other constituent documents and the Delaware General Corporation
Law.
3. Corporate Action
On the Effective Date, the adoption of the Amended Certificate of
Incorporation or similar constituent documents, the amendment of the By-laws,
the selection of directors and officers for the Reorganized Debtor, and all
actions contemplated by the Plan and the Restructuring Agreement shall be
authorized and approved
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in all respects (subject to the provisions of the Plan). All matters provided
for in the Plan and the Restructuring Agreement involving the corporate
structure of the Debtor or the Reorganized Debtor, and any corporate action
required by the Debtor or the Reorganized Debtor in connection with the Plan,
shall be deemed to have occurred and shall be in effect, without any requirement
of further action by the security holders or directors of the Debtor or the
Reorganized Debtor. On the Effective Date, the appropriate officers of the
Reorganized Debtor and members of the board of directors of the Reorganized
Debtor are authorized and directed to issue, execute and deliver the agreements,
documents, securities and instruments contemplated by the Plan in the name of
and on behalf of the Reorganized Debtor.
E. LGE New Credit Support
On or after the Effective Date, pursuant to the terms and conditions of the
Restructuring Agreement, LGE will provide the Debtor with the LGE New Credit
Support.
F. Sources of Cash for Plan Distribution
All Cash necessary for the Reorganized Debtor to make payments pursuant to
the Plan shall be obtained from existing Cash balances, the operations of the
Debtor or Reorganized Debtor, or post-confirmation borrowing under other
available facilities of the Debtor or Reorganized Debtor, including, without
limitation, to the extent available, the LGE New Credit Support. The Reorganized
Debtor may also make such payments using Cash received from its subsidiaries
through the Reorganized Debtor's consolidated cash management system and from
advances or dividends from such subsidiaries in the ordinary course.
ARTICLE VI.
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
A. Assumption of Executory Contracts and Unexpired Leases
Immediately prior to the Effective Date, all executory contracts or
unexpired leases of the Reorganized Debtor will be deemed assumed in accordance
with the provisions and requirements of sections 365 and 1123 of the Bankruptcy
Code except those executory contracts and unexpired leases that (1) have been
rejected by order of the Bankruptcy Court, (2) are the subject of a motion to
reject pending on the Effective Date, (3) are identified on a list to be filed
with the Bankruptcy Court on or before the Confirmation Date, as to be rejected,
or (4) are rejected pursuant to the terms of the Plan. Entry of the Confirmation
Order by the Bankruptcy Court shall constitute approval of such assumptions and
rejections pursuant to sections 365(a) and 1123 of the Bankruptcy Code.
Notwithstanding anything to the contrary contained herein, on the Effective
Date, the Leveraged Leases shall be deemed rejected pursuant to section 365(a)
of the Bankruptcy Code. Any Claim arising from such rejection, including, but
not limited to, those Claims arising under section 502 of the Bankruptcy Code,
shall be part of and are included in the LGE Leveraged Lease Claims. Other than
on account of the LGE Leveraged Lease Claims, LGE shall not receive any property
or distribution arising from or related to such rejection. Except as provided in
the Restructuring Agreement, on the Effective Date, all property that is the
subject of the Leveraged Leases shall be vested in the Reorganized Debtor free
and clear of all liens, claims and encumbrances.
B. Claims Based on Rejection of Executory Contracts or Unexpired Leases
All proofs of claim with respect to Claims arising from the rejection of
executory contracts or unexpired leases, if any, must be Filed with the
Bankruptcy Court within sixty (60) days after the date of entry of an order of
the Bankruptcy Court approving such rejection. Any Claims arising from the
rejection of an executory contract or unexpired lease not Filed within such
times will be forever barred from assertion against the Debtor or Reorganized
Debtor, its estate and property unless otherwise ordered by the Bankruptcy Court
or provided in this Plan, all such Claims for which proofs of claim are required
to be Filed will be, and will be treated as, General Unsecured Claims subject to
the provisions of Article VIII hereof.
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C. Cure of Defaults for Executory Contracts and Unexpired Leases Assumed
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default shall be satisfied, pursuant to
section 365(b)(1) of the Bankruptcy Code, by payment of the default amount in
Cash on the Effective Date or on such other terms as the parties to such
executory contracts or unexpired leases may otherwise agree. In the event of a
dispute regarding: (1) the amount of any cure payments, (2) the ability of the
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (3) any other matter pertaining to
assumption, the cure payments required by section 365(b)(1) of the Bankruptcy
Code shall be made following the entry of a Final Order resolving the dispute
and approving the assumption.
D. Indemnification of Directors, Officers and Employees
The obligations of the Debtor to indemnify any Person or Entity serving at
any time on or prior to the Effective Date as one of its directors, officers or
employees by reason of such Person's or Entity's service in such capacity, or as
a director, officer or employee of any other corporation or legal entity, to the
extent provided in the Debtor's constituent documents or by a written agreement
with the Debtor or the Delaware General Corporation Law, shall be deemed and
treated as executory contracts that are assumed by the Debtor pursuant to the
Plan and section 365 of the Bankruptcy Code as of the Effective Date.
Accordingly, such indemnification obligations shall be treated as General
Unsecured Claims, and shall survive unimpaired and unaffected by entry of the
Confirmation Order, irrespective of whether such indemnification is owed for an
act or event occurring before or after the Petition Date.
E. Compensation and Benefit Programs
Except as otherwise expressly provided hereunder, all employment and
severance policies, and all compensation and benefit plans, policies, and
programs of the Debtor applicable to its employees, retirees and non-employee
directors and the employees and retirees of its subsidiaries, including, without
limitation, all savings plans, retirement plans, health care plans, disability
plans, severance benefit plans, incentive plans, and life, accidental death, and
dismemberment insurance plans are treated as executory contracts under the Plan
and on the Effective Date will be assumed pursuant to the provisions of sections
365 and 1123 of the Bankruptcy Code.
ARTICLE VII.
PROVISIONS GOVERNING DISTRIBUTIONS
A. Distributions for Claims Allowed as of the Effective Date
1. Except as otherwise provided in this Article VII or as may be ordered by
the Bankruptcy Court, distributions to be made on the Effective Date on account
of Claims that are allowed as of the Effective Date and are entitled to receive
distributions under the Plan shall be made on the Effective Date. Distributions
on account of Claims that become Allowed Claims after the Effective Date shall
be made pursuant to Articles VII.C and VIII.C below.
2. For purposes of determining the accrual of interest or rights in respect
of any other payment from and after the Effective Date, the LGE New Restructured
Senior Note, the New Bank Lender Notes, the New Subordinated Debentures, and the
New Common Stock to be issued under the Plan shall be deemed issued as of the
Effective Date regardless of the date on which they are actually dated,
authenticated or distributed; provided, however, that the Reorganized Debtor
shall withhold any actual payment until such distribution is made and no
interest shall accrue or otherwise be payable on any such withheld amounts.
B. Distributions by the Reorganized Debtor; Distributions with Respect to Debt
Securities
The Reorganized Debtor shall make all distributions required under the
Plan. Notwithstanding the provisions of Article V.B above regarding the
cancellation of the Old Subordinated Debenture Indenture, the Old Subordinated
Debenture Indenture shall continue in effect to the extent necessary to allow
the
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Reorganized Debtor to receive and make distributions pursuant to the Plan on
account of the Old Subordinated Debentures. Each indenture trustee providing
services related to distributions to the Holders of Allowed Old Subordinated
Debenture Claims shall receive, from the Reorganized Debtor, with such approval
as the Bankruptcy Court may require, reasonable compensation for such services
and reimbursement of reasonable out-of-pocket expenses incurred in connection
with such services. These payments shall be made on terms agreed to with the
Reorganized Debtor.
C. Delivery and Distributions and Undeliverable or Unclaimed Distributions
1. Delivery of Distributions in General
Distributions to Holders of Allowed Claims shall be made at the address of
the Holder of such Claim as indicated on records of the Debtor. Except as
otherwise provided by the Plan or the Bankruptcy Code with respect to
undeliverable distributions, distributions to Holders of Citibank Secured
Claims, LGE Claims, Bank Lender Claims, and Old Subordinated Debenture Claims
shall be made in accordance with the provisions of the applicable indenture,
participation agreement, loan agreement or analogous instrument or agreement,
and distributions will be made to Holders of record as of the Distribution
Record Date.
2. Undeliverable Distributions
(a) Holding of Undeliverable Distributions. If any Allowed Claim
Holder's distribution is returned to Reorganized Debtor as undeliverable,
no further distributions shall be made to such Holder unless and until the
Reorganized Debtor is notified in writing of such Holder's then-current
address. Undeliverable distributions shall remain in the possession of the
Reorganized Debtor pursuant to this Article VII.C until such time as a
distribution becomes deliverable. Undeliverable cash (including interest
and maturities on the New Subordinated Debentures) shall not be entitled to
any interest, dividends or other accruals of any kind.
(b) After Distributions Become Deliverable. Within 20 days after the
end of each calendar quarter following the Effective Date, the Reorganized
Debtor shall make all distributions that become deliverable during the
preceding calendar quarter.
(c) Failure to Claim Undeliverable Distributions. Any Holder of an
Allowed Claim that does not assert a Claim pursuant to the Plan for an
undeliverable distribution within five years after the Effective Date shall
have its Claim for such undeliverable distribution discharged and shall be
forever barred from asserting any such Claim against the Reorganized Debtor
or its property. In such cases: (i) any Cash held for distribution on
account of such Claims shall be property of the Reorganized Debtor, free of
any restrictions thereon; and (ii) any New Subordinated Debentures held for
distribution on account of such Claims shall be canceled and of no further
force or effect. Nothing contained in the Plan shall require the
Reorganized Debtor to attempt to locate any Holder of an Allowed Claim.
(d) Compliance with Tax Requirements. In connection with the Plan, to
the extent applicable, the Reorganized Debtor shall comply with all tax
withholding and reporting requirements imposed on it by any governmental
unit, and all distributions pursuant to the Plan shall be subject to such
withholding and reporting requirements.
D. Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
register for the Old Subordinated Debentures as maintained by the Debtor, the
trustee of the Old Subordinated Debenture Indenture, or their respective agents,
shall be closed and the transfer of Old Subordinated Debentures, or any interest
therein, will be prohibited. Moreover, the Reorganized Debtor shall have no
obligation to recognize the transfer of any Old Subordinated Debentures
occurring after the Distribution Record Date, and shall be entitled for all
purposes herein to recognize and deal only with those Holders of record as of
the close of business on the Distribution Record Date.
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E. Timing and Calculation of Amounts to be Distributed
On the Effective Date, each Holder of an Allowed Claim against the Debtor
shall receive the full amount of the distributions that the Plan provides for
Allowed Claims in the applicable Class. Beginning on the date that is 20
calendar days after the end of the calendar quarter following the Effective Date
and 20 calendar days after the end of each calendar quarter thereafter,
distributions shall also be made, pursuant to Article VIII.C below, to Holders
of Disputed Claims in any such Class whose Claims were allowed during the
preceding calendar quarter. Such quarterly distributions shall also be in the
full amount that the Plan provides for Allowed Claims in the applicable Class.
F. Minimum Distribution
The New Subordinated Debentures will be issued in denominations of $1,000
and integral multiples thereof. No New Subordinated Debenture will be issued in
a denomination of less than $1,000. In the event a Holder of an Allowed Class 6
Claim is entitled to distribution of New Subordinated Debentures that is not an
integral multiple of $1,000, such distribution shall be aggregated by the
Company (or its agent), and as soon as practicable after the Effective Date,
such interests shall be sold by the Company (or its agent) in a commercially
reasonable manner and, upon the completion of such sale, the net proceeds
thereof shall be distributed (without interest) pro rata to the Holders of
Allowed Class 6 Claims based upon the fraction of New Subordinated Debentures
each such Holder would have been entitled to receive or deemed to hold had the
Company issued New Subordinated Debentures in integral multiples smaller than
$1,000, such distribution being in lieu of any other distribution thereon.
G. Setoffs
The Reorganized Debtor may, pursuant to section 553 of the Bankruptcy Code
or applicable non-bankruptcy law, set off against any Allowed Claim and the
distributions to be made pursuant to the Plan on account of such Claim (before
any distribution is made on account of such Claim), the claims, rights and
causes of action of any nature that the Debtor or Reorganized Debtor may hold
against the Holder of such Allowed Claim; provided, however, that neither the
failure to effect such a setoff nor the allowance of any Claim hereunder shall
constitute a waiver or release by the Debtor or Reorganized Debtor of any such
claims, rights and causes of action that the Debtor or Reorganized Debtor may
possess against such Holder.
H. Surrender of Canceled Instruments or Securities
As a condition precedent to receiving any distribution pursuant to the Plan
on account of an Allowed Claim evidenced by the instruments, securities or other
documentation canceled pursuant to Article V.B above, the Holder of such Claim
shall tender the applicable instruments, securities or other documentation
evidencing such Claim to the Reorganized Debtor. Any New Bank Lender Notes, New
Subordinated Debentures or New Common Stock to be distributed pursuant to the
Plan on account of any such Claim shall, pending such surrender, be treated as
an undeliverable distribution pursuant to Article VII.C above.
1. Notes and Debentures
Each Holder of an Old Subordinated Debenture Claim shall tender its Old
Subordinated Debenture relating to such Claim to the Reorganized Debtor in
accordance with written instructions to be provided to such Holders by the
Reorganized Debtor as promptly as practicable following the Effective Date. Such
instructions shall specify that delivery of such Old Subordinated Debenture will
be effected, and risk of loss and title thereto will pass, only upon the proper
delivery of such Old Subordinated Debentures with a letter of transmittal in
accordance with such instructions. All surrendered Old Subordinated Debentures
shall be marked as canceled.
2. Failure to Surrender Canceled Instruments
Any Holder of Old Subordinated Debentures that fails to surrender or is
deemed to have failed to surrender the applicable Old Subordinated Debentures
required to be tendered hereunder within five years after the Effective Date
shall have its Claim for a distribution pursuant to the Plan on account of such
Old Subordinated Debenture discharged and shall be forever barred from asserting
any such Claim against the
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Reorganized Debtor or its respective property. In such cases, any New
Subordinated Debentures held for distribution on account of such Claim shall be
disposed of pursuant to the provisions set forth above in Article VII.C.
I. Lost, Stolen, Mutilated or Destroyed Debt Securities
In addition to any requirements under the Old Subordinated Debenture
Indenture, or any related agreement, any Holder of a Claim evidenced by an Old
Subordinated Debenture that has been lost, stolen, mutilated or destroyed shall,
in lieu of surrendering such Old Subordinated Debenture, deliver to the
Reorganized Debtor: (1) evidence satisfactory to the Reorganized Debtor of the
loss, theft, mutilation or destruction; and (2) such security or indemnity as
may be required by the Reorganized Debtor to hold the Reorganized Debtor
harmless from any damages, liabilities or costs incurred in treating such
individual as a Holder of an Allowed Claim. Upon compliance with this Article
VII.I by a Holder of a Claim evidenced by an Old Subordinated Debenture, such
Holder shall, for all purposes under the Plan, be deemed to have surrendered
such note or debenture.
ARTICLE VIII.
PROCEDURES FOR RESOLVING DISPUTED CLAIMS
A. Prosecution of Objections to Claims
After the Confirmation Date, the Debtor and the Reorganized Debtor shall
have the exclusive authority to File objections, settle, compromise, withdraw or
litigate to judgment objections to Claims. From and after the Confirmation Date,
the Debtor and the Reorganized Debtor may settle or compromise any Disputed
Claim without approval of the Bankruptcy Court.
B. Estimation of Claims
The Debtor or the Reorganized Debtor may, at any time, request that the
Bankruptcy Court estimate any contingent or unliquidated Claim pursuant to
section 502(c) of the Bankruptcy Code regardless of whether the Debtor or the
Reorganized Debtor has previously objected to such Claim or whether the
Bankruptcy Court has ruled on any such objection, and the Bankruptcy Court will
retain jurisdiction to estimate any Claim at any time during litigation
concerning any objection to any Claim, including during the pendency of any
appeal relating to any such objection. In the event that the Bankruptcy Court
estimates any contingent or unliquidated Claim, that estimated amount will
constitute either the allowed amount of such Claim or a maximum limitation on
such Claim, as determined by the Bankruptcy Court. If the estimated amount
constitutes a maximum limitation on such Claim, the Debtor or Reorganized Debtor
may elect to pursue any supplemental proceedings to object to any ultimate
payment on such Claim. All of the aforementioned Claims objection, estimation
and resolution procedures are cumulative and not necessarily exclusive of one
another. Claims may be estimated and subsequently compromised, settled,
withdrawn or resolved by any mechanism approved by the Bankruptcy Court.
C. Payments and Distributions on Disputed Claims
Notwithstanding any provision in the Plan to the contrary, except as
otherwise agreed by the Reorganized Debtor in its sole discretion, no partial
payments and no partial distributions will be made with respect to a Disputed
Claim until the resolution of such disputes by settlement or Final Order.
Subject to the provisions of this Article VIII.C, as soon as practicable after a
Disputed Claim becomes an Allowed Claim, the Holder of such Allowed Claim will
receive all payments and distributions to which such Holder is then entitled
under the Plan. Notwithstanding the foregoing, any Person or Entity who holds
both an Allowed Claim(s) and a Disputed Claim(s) will receive the appropriate
payment or distribution on the Allowed Claim(s), although, except as otherwise
agreed by the Reorganized Debtor in its sole discretion, no payment or
distribution will be made on the Disputed Claim(s) until such dispute is
resolved by settlement or Final Order.
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ARTICLE IX.
CONDITIONS PRECEDENT TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
A. Condition Precedent to Confirmation
It shall be a condition to Confirmation of the Plan that the following
condition shall have been satisfied or waived pursuant to the provisions of
Article IX.C of the Plan: approval of all provisions, terms and conditions of
the Prepackaged Plan in the Confirmation Order.
B. Conditions Precedent to Consummation
It shall be a condition to Consummation of the Plan that the following
conditions shall have been satisfied or waived pursuant to the provisions of
Article IX.C of the Plan:
1. the Confirmation Order shall have been signed by the Bankruptcy
Court and duly entered on the docket for the Prepackaged Chapter 11 Case by
the Clerk of the Bankruptcy Court in form and substance acceptable to the
Debtor;
2. the Confirmation Order shall be a Final Order;
3. a revolving credit facility and letter of credit subfacility shall
be available to the Debtor in the amounts and on such terms and conditions
as set forth in the Restructuring Agreement; and
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof.
C. Waiver of Conditions
Other than the condition precedent to Consummation set forth in Article
IX.B.4, which may not be waived without the consent of LGE, the Debtor, in its
sole discretion, may waive any of the conditions to Confirmation of the Plan
and/or to Consummation of the Plan set forth in Articles IX.A and IX.B of the
Plan at any time, without notice, without leave or order of the Bankruptcy
Court, and without any formal action other than proceeding to confirm and/or
consummate the Plan.
D. Effect of Non-occurrence of Conditions to Consummation
If the Confirmation Order is vacated, the Plan shall be null and void in
all respects and nothing contained in the Plan or the Disclosure Statement
shall: (1) constitute a waiver or release of any Claims by or against, or any
Equity Interests in, the Debtor; (2) prejudice in any manner the rights of the
Debtor, or (3) constitute an admission, acknowledgment, offer or undertaking by
the Debtor in any respects.
ARTICLE X.
RELEASE, INJUNCTIVE AND RELATED PROVISIONS
A. Subordination
The classification and manner of satisfying all Claims and Equity Interests
and the respective distributions and treatments under the Plan take into account
and/or conform to the relative priority and rights of the Claims and Equity
Interests in each Class in connection with any contractual, legal and equitable
subordination rights relating thereto whether arising under general principles
of equitable subordination, section 510(b) of the Bankruptcy Code or otherwise,
and any and all such rights are settled, compromised and released pursuant to
the Plan. The Confirmation Order shall permanently enjoin, effective as of the
Effective Date, all Persons and Entities from enforcing or attempting to enforce
any such contractual, legal and equitable subordination rights satisfied,
compromised and settled pursuant to this Article X.A.
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B. Limited Releases by the Debtor
Except as otherwise specifically provided in the Plan, for good and
valuable consideration, including, but not limited to, the commitment and
obligation of the Investor Releasees to provide the financial support necessary
for consummation of the Plan, including the financial accommodations reflected
in the LGE New Credit Support, the obligations and undertakings of the Investor
Releasees set forth in the Restructuring Agreement, including LGE's agreement to
the treatment of its Claims and Equity Interests as provided in the Plan, and
the service of the D&O Releasees to facilitate the expeditious reorganization of
the Debtor and the implementation of the restructuring contemplated by the Plan,
on and after the Effective Date, the Investor Releasees and the D&O Releasees
are released by the Debtor and the Reorganized Debtor and its subsidiaries from
any and all claims (as defined in section 101(5) of the Bankruptcy Code),
obligations, rights, suits, damages, causes of action, remedies and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, in law, equity or otherwise, that the Debtor or its
subsidiaries would have been legally entitled to assert in their own right
(whether individually or collectively) or on behalf of the Holder of any Claim
or Equity Interest or other Person or Entity, based in whole or in part upon any
act or omission, transaction, agreement, event or other occurrence taking place
on or before the Effective Date, except in the case of the D&O Releasees, for
claims or liabilities (i) in respect of any loan, advance or similar payment by
the Debtor or its subsidiaries to any such Person, or (ii) in respect of any
contractual obligation owed by such Person to the Debtor or its subsidiaries.
C. Limited Releases by Holder of Claims
On and after the Effective Date, each Holder of a Claim (i) who has
accepted the Plan, (ii) whose Claim is in a Class that has accepted or is deemed
to have accepted the Plan pursuant to section 1126 of the Bankruptcy Code, or
(iii) who is entitled to receive a distribution of property under the Plan,
shall be deemed to have unconditionally released the Investor Releasees and the
D&O Releasees from any and all claims (as defined in section 101(5) of the
Bankruptcy Code), obligations, rights, suits, damages, causes of action,
remedies and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, that
such Person or Entity would have been legally entitled to assert (whether
individually or collectively), based in whole or in part upon any act or
omission, transaction, agreement, event or other occurrence taking place on or
before the Effective Date in any way relating or pertaining to (x) the Debtor or
the Reorganized Debtor, (y) the Debtor's Prepackaged Chapter 11 Case, or (z) the
negotiation, formulation and preparation of the Plan, the Restructuring
Agreement or any related agreements, instruments or other documents.
D. Preservation of Rights of Action
Except as otherwise provided in the Plan or in any contract, instrument,
release, indenture or other agreement entered into in connection with the Plan,
in accordance with section 1123(b) of the Bankruptcy Code, the Reorganized
Debtor shall retain and may exclusively enforce any claims, rights and Causes of
Action that the Debtor or Estate may hold against any Person or Entity. The
Reorganized Debtor may pursue such retained claims, rights or causes of action,
as appropriate, in accordance with the best interests of the Reorganized Debtor.
On the Effective Date, the Reorganized Debtor shall be deemed to waive and
release any claims, rights or Causes of Action arising under sections 544, 547,
548, 549 and 550 of the Bankruptcy Code held by the Reorganized Debtor against
any Person or Entity.
E. Exculpation
The Debtor, the Reorganized Debtor, the Investor Releasees, the D&O
Releasees, and the Committee(s) and its members and Professionals (acting in
such capacity) shall neither have nor incur any liability to any Person or
Entity for any act taken or omitted to be taken in connection with or related to
the formulation, preparation, dissemination, implementation, administration,
Confirmation or Consummation of the Plan, the Disclosure Statement or any
contract, instrument, release or other agreement or document created or entered
into in connection with the Plan, including the Restructuring Agreement, or any
other act taken or omitted to be taken in connection with the Debtor's
Prepackaged Chapter 11 Case; provided, however, that the foregoing provisions of
this Article X.E shall have no effect on the liability of any Person or Entity
that results from any
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such act or omission that is determined in a Final Order to have constituted
gross negligence or willful misconduct.
F. Injunction
From and after the Effective Date, all Persons and Entities are permanently
enjoined from commencing or continuing in any manner, any suit, action or other
proceeding, on account of or respecting any claim, obligation, debt, right,
Cause of Action, remedy or liability released or to be released pursuant to this
Article X.
ARTICLE XI.
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order and the occurrence of
the Effective Date, the Bankruptcy Court shall retain such jurisdiction over the
Prepackaged Chapter 11 Case after the Effective Date as legally permissible,
including jurisdiction to:
A. Allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any Claim, including the
resolution of any request for payment of any Administrative Claim and the
resolution of any and all objections to the allowance or priority of Claims;
B. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or the
Plan, for periods ending on or before the Effective Date;
C. Resolve any matters related to the assumption, assumption and assignment
or rejection of any executory contract or unexpired lease to which the Debtor is
a party or with respect to which the Debtor may be liable and to hear, determine
and, if necessary, liquidate, any Claims arising therefrom, including those
matters related to the amendment after the Effective Date pursuant to Article VI
above to add any executory contracts or unexpired leases to the list of
executory contracts and unexpired leases to be rejected;
D. Ensure that distributions to Holders of Allowed Claims are accomplished
pursuant to the provisions of the Plan, including ruling on any motion Filed
pursuant to Article VII;
E. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor that may be pending on the Effective Date;
F. Enter such orders as may be necessary or appropriate to implement or
consummate the provisions of the Plan and all contracts, instruments, releases,
indentures and other agreements or documents created in connection with the Plan
or the Disclosure Statement;
G. Resolve any cases, controversies, suits or disputes that may arise in
connection with the Consummation, interpretation or enforcement of the Plan or
any Person's or Entity's obligations incurred in connection with the Plan;
H. Issue injunctions, enter and implement other orders or take such other
actions as may be necessary or appropriate to restrain interference by any
Person or Entity with Consummation or enforcement of the Plan, except as
otherwise provided herein;
I. Resolve any cases, controversies, suits or disputes with respect to the
releases, injunction and other provisions contained in Article X and enter such
orders as may be necessary or appropriate to implement such releases, injunction
and other provisions;
J. Enter and implement such orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
K. Determine any other matters that may arise in connection with or relate
to the Plan, the Disclosure Statement, the Confirmation Order or any contract,
instrument, release, indenture or other agreement or document created in
connection with the Plan or the Disclosure Statement; and
L. Enter an order and/or final decree concluding the Prepackaged Chapter 11
Case.
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ARTICLE XII.
MISCELLANEOUS PROVISIONS
A. Dissolution of Committee(s)
On the Effective Date, the Committee(s) shall dissolve and members shall be
released and discharged from all rights and duties arising from, or related to,
the Prepackaged Chapter 11 Case.
B. Payment of Statutory Fees
All fees payable pursuant to section 1930 of title 28 of the United States
Code, as determined by the Bankruptcy Court at the hearing pursuant to section
1128 of the Bankruptcy Code, shall be paid on or before the Effective Date.
C. Discharge of Debtor
Except as otherwise provided herein or in the LGE New Restructured Senior
Note, the New Bank Lender Notes or the New Subordinated Debentures, (1) the
rights afforded in the Plan and the treatment of all Claims and Equity Interests
therein, shall be in exchange for and in complete satisfaction, discharge and
release of Claims and Equity Interests of any nature whatsoever, including any
interest accrued on such Claims from and after the Petition Date, against the
Debtor and the Debtor in Possession, or any of its assets or properties, (2) on
the Effective Date, all such Claims against, and Equity Interests in the Debtor
shall be satisfied, discharged and released in full and (3) all Persons and
Entities shall be precluded from asserting against the Reorganized Debtor, its
successors or its assets or properties any other or further Claims or Equity
Interests based upon any act or omission, transaction or other activity of any
kind or nature that occurred prior to the Confirmation Date.
D. Modification of Plan
Subject to the limitations contained herein, (1) the Debtor reserves the
right, in accordance with the Bankruptcy Code and the Bankruptcy Rules, to amend
or modify the Plan prior to the entry of the Confirmation Order and (2) after
the entry of the Confirmation Order, the Debtor or the Reorganized Debtor, as
the case may be, may, upon order of the Bankruptcy Court, amend or modify the
Plan, in accordance with section 1127(b) of the Bankruptcy Code, or remedy any
defect or omission or reconcile any inconsistency in the Plan in such manner as
may be necessary to carry out the purpose and intent of the Plan.
E. Revocation of Plan
The Debtor reserves the right, at any time prior to the entry of the
Confirmation Order, to revoke and withdraw the Plan.
F. Successors and Assigns
The rights, benefits and obligations of any Person or Entity named or
referred to in the Plan shall be binding on, and shall inure to the benefit of
any heir, executor, administrator, successor or assign of such Person or Entity.
G. Reservation of Rights
Except as expressly set forth herein, this Plan shall have no force or
effect unless the Bankruptcy Court shall enter the Confirmation Order. None of
the filing of this Plan, any statement or provision contained herein, or the
taking of any action by the Debtor with respect to this Plan shall be or shall
be deemed to be an admission or waiver of any rights of the Debtor with respect
to the Holders of Claims or Equity Interests prior to the Effective Date.
H. Section 1146 Exemption
Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer,
or exchange of any security under the Plan, or the making or delivery of an
instrument of transfer under this Plan, may not be taxed under any law imposing
a stamp tax or similar tax.
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I. Further Assurances
The Debtor, the Reorganized Debtor, LGE and all Holders of Claims receiving
distributions under the Plan and all other parties in interest shall, from time
to time, prepare, execute and deliver any agreements or documents and take any
other actions as may be necessary or advisable to effectuate the provisions and
intent of this Plan.
J. Service of Documents
Any pleading, notice or other document required by the Plan to be served on
or delivered to the Reorganized Debtor shall be sent by first class U.S. mail,
postage prepaid to:
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025-2493
Attn: General Counsel
with copies to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, Illinois 60601
Attn: James H.M. Sprayregen, Esq.
K. Filing of Additional Documents
On or before the Effective Date, the Debtor may file with the Bankruptcy
Court such agreements and other documents as may be necessary or appropriate to
effectuate and further evidence the terms and conditions of the Plan.
Respectfully Submitted,
ZENITH ELECTRONICS CORPORATION
By:
Name:
Title:
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ANNEX B -- CERTAIN HISTORICAL INFORMATION REGARDING ZENITH
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of the Company's results of operations
and financial condition for the first three months of 1998 compared with the
first three months of 1997, set forth below, have largely been excerpted from
the Company's Quarterly Report on Form 10-Q for the quarter ended March 28,
1998. Management's discussion and analysis of the Company's results of
operations and financial condition for the fiscal years 1997, 1996 and 1995,
also set forth below, have largely been excerpted from the Company's 1997 Annual
Reports on Form 10-K. Accordingly, such discussions generally do not reflect the
financial impact of the Restructuring and should therefore be read in
conjunction with the information contained in "PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION," "SELECTED CONSOLIDATED FINANCIAL DATA" and the Company's
Consolidated Financial Statements and related notes thereto contained elsewhere
in this Disclosure Statement. See "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA."
RESULTS OF OPERATIONS: FIRST QUARTER OF 1998 COMPARED TO FIRST QUARTER OF 1997
The Company reported a first-quarter 1998 net loss of $37.8 million, or 55
cents per share, compared with a net loss of $25.2 million, or 38 cents per
share, in the first quarter of 1997. Total first-quarter sales were $220.7
million in 1998 compared with $259.1 million in 1997. Consumer electronics sales
declined in the 1998 quarter compared with the same period last year, driven
largely by continued soft demand for direct-view color television sets. The
sales decline also reflected planned sales reductions in lower-margin television
products and VCRs.
Sales of NWS products increased in the first quarter of 1998 quarter
compared with the first quarter of 1997 due to shipments of digital set-top
boxes and cable modems, which more than offset lower analog set-top box sales.
Selling, general and administrative expenses were $33.3 million in the
first quarter of 1998, compared with $28.1 million in the first quarter of 1997.
A major driver of the increase related to outside consulting and legal fees
incurred to support the development of the Company's operational and financial
restructuring plan.
Results for the first quarter of 1998 included $6.3 million of accrued
royalty revenues from tuning system licenses. These revenues were $6.7 million
in the first quarter of 1997.
Interest expense was $8.2 million in the first quarter of 1998, compared
with $6.3 million in the first quarter of 1997. The change resulted from higher
funding requirements for Company operations. To assist in funding these
requirements, the Company entered into various financing transactions.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 28, 1998, $7.8 million of cash was used
by operating activities principally to fund $27.7 million of net losses from
operations, as adjusted for depreciation and a loss on asset sales. This was
partially offset by a $18.9 million change in current accounts which was
principally composed of a $38.4 million decrease in inventories offset by a
$14.2 million decrease in accounts payable and accrued expenses.
During the three months ended March 28, 1998, $7.3 million of cash was
provided by investing activities. This was composed of $10.0 million of cash
received from the sale of receivables under the Citibank Receivables Facility,
offset by $2.7 million of cash used for capital additions. The capital additions
of $2.7 million during the first three months of 1998 were significantly lower
than the $30.7 million spent during the same period in 1997. The decrease was
the result of spending in 1997 related to projects primarily in the color
picture tube area, which included new automated production processes and the
addition of new production lines for computer display tubes. The Company is
planning a significant reduction in capital investment projects during 1998.
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During the three months ended March 28, 1998, $23.7 million of cash was
provided by financing activities. This was composed of $30.0 million of
borrowings under one of the Company's new short-term unsecured credit
agreements, offset by cash used to pay the current portion ($5.8 million) of the
Old Subordinated Debentures and cash used to redeem the Company's 8.5% Senior
Subordinated Convertible Debentures due January 2001 ($0.5 million).
As of March 28, 1998, the Company had $377.5 million of interest-bearing
obligations which consisted of: (i) $133.7 million of extended-term payables
with LGE, (ii) $103.5 million of the Old Subordinated Debentures (the current
portion of which was $5.8 million), (iii) $102.0 million payable under various
unsecured and uncommitted credit facilities and (iv) a $38.3 million term loan
with Citicorp (the current portion of which was $9.0 million).
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 February 1998 the Company obtained a new $30 million unsecured and
uncommitted credit facility through a line of credit with Credit Agricole. In
total, between November 1997 and February 1998, 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 National Bank of Chicago-NBD
($30 million) and Societe Generale ($20 million) in addition to the Credit
Agricole Indosuez facility. The credit lines are guaranteed by LGE for which LGE
will receive a fee in an amount up to 2% 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, on the
Company's intellectual property (other than tuner patents, patent royalties and
related license agreements) and certain other Company assets to secure the
guarantees of LGE for borrowings under these credit lines. As of June 27, 1998,
$102 million in loans were outstanding under these lines. On June 30, 1998, LGE
made payment to lenders on its guarantee of $50 million of the loans
outstanding.
The Company disclosed in its 1997 Annual Report on Form 10-K (the "1997
10-K") that it is developing a broad operational and financial restructuring
plan. See "SPECIAL FACTORS -- Events Leading to the Restructuring."
Following the filing of the 1997 10-K, the NYSE contacted the Company
regarding the continuing listing status of its Old Common Stock. The Company's
Old Common Stock and the Old Subordinated Debentures have been delisted from the
NYSE, although the Company believes that such securities continue to be traded
in the over-the-counter market.
RESULTS OF OPERATIONS FOR 1995-1997
Revenues
Sales in 1997 were $1,173 million down 9% from 1996 sales of $1,288
million. Sales in 1996 increased 1% 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) ("Consumer Electronics") and NWS.
In Consumer Electronics, the color television market remains extremely
competitive. Price competition continued during 1997 and 1996 forcing the
Company to reduce color television prices in each year to maintain sales volumes
and market share. This price competition may continue to adversely affect the
Company's performance.
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Consumer Electronics sales decreased 7% in 1997 from 1996 primarily due to
soft demand for direct-view color television 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 television unit sales to dealers
(including projection television) decreased by 4% in 1997 to 24.5 million units
(following a decrease of 3% to 25.5 million units in 1996 and a decrease of 4%
to 26.2 million units in 1995). The Zenith brand remains one of the top three
U.S. color television 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 3% 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 television unit
sales to dealers declined. As a result, the Company's market share increased
slightly during 1996. The industry color television unit sales to dealers
(including projection televisions) decreased by 3% to 25.5 million units in 1996
(following a decrease of 4% to 26.2 million units in 1995 and an increase of 10%
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 NWS, 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. NWS 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.
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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% in 1997, 13% in 1996 and 10% 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 $43 million in 1997,
$47 million in 1996 and $44 million in 1995. These expenses as a percentage of
revenues were approximately 4% 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 television 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 sold 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 sold. 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
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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 NWS 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
Old Common Stock.
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
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
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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 Old 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 Claims 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 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 television 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 Citibank.
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 Citibank Receivables
Facility) 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
television 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.
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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 Old 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% 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%
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 Old 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 GECC Term
Loan.
The 1995 increase in cash provided was due to the Company selling $171
million of Old Common Stock to investors, principally the sale at $10 per share
of 16.5 million shares to LGE in November. In addition, the Company sold 1.3
million shares to investors under a shelf registration statement. Cash also was
provided during 1995 as the Company entered into a Term Loan Agreement for $40
million. Cash was used during 1995 as the Company repurchased $43 million
principal amount of its 8.5% Convertible Senior Subordinated Debentures due 2000
and 2001, at par plus accrued interest. This repurchase resulted from the
exercise by certain holders of the debentures of the right to require repurchase
of all or a portion of the debentures following a change of control of the
Company, which occurred upon the purchase of a controlling interest in the
Company by LGE.
FINANCIAL CONDITION
As of March 28, 1998, the Company had $377.5 million of interest-bearing
obligations which consisted of: (i) $133.7 million of extended-term payables
with LGE; (ii) $103.5 million of the Old Subordinated Debentures due 2011 (the
current portion of which was $5.8 million); (iii) $102 million payable under
various unsecured and uncommitted credit facilities; and (iv) a $38.3 million
term loan with Citicorp (the current portion of which was $9 million). In
addition, the Company had $1 million aggregate principal amount of 8.5% 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 with GECC. 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 the bank group, 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.
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A second commitment is a three year trade receivables securitization which
is provided through a Citibank 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
GECC. 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.
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, $0.6 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 National Bank of Chicago-NBD ($30 million), Societe
Generale ($20 million) and Credit Agricole Indosuez ($30 million). The credit
lines are guaranteed by LGE for which LGE will receive a fee in an amount up to
2% 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 guarantees of LGE for borrowings under these credit lines. As a
result of this financing, the Company redeemed, in December 1997, its 8.5%
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% of such principal amount plus accrued interest
through the redemption date. The Company also called for redemption, in January,
1998 its 8.5% 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. The facility was amended June 30, 1998
to allow demand for repayment anytime after December 31, 1998. Repayment is due
in full at
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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.
READINESS FOR THE YEAR 2000
The Company is currently evaluating its computer-based systems, facilities
and products to determine whether they are "Year 2000 Ready." The Company is
employing a combination of internal resources and outside consultants to
coordinate and implement its Year 2000 Readiness initiatives. The Company has
established a Company-wide Year 2000 Task Force, led by the Company's technology
group, with representation from 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.
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BUSINESS
The following discussion of the business of the Company has largely been
excerpted from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. Accordingly, the following discussion does not reflect
the Restructuring and should therefore be read in conjunction with the
information contained in "PURPOSES AND EFFECTS OF THE RESTRUCTURING." For
financial information with respect to the Company's industry segments, see
"INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- Significant Accounting
Policies and Practices."
GENERAL
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 television 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 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 NWS products which include digital and analog set-top boxes
and cable modems, interactive television and data communication products which
are sold primarily to cable television 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
television price reductions during the 1980s and 1990s, and also reflected
earlier recessionary conditions in the United States. In addition, the Company
has invested significant amounts in engineering and research in recent years,
which amounts have been expensed as incurred.
In November 1995, a change in control of the Company occurred, in which LGE
purchased shares of the Company pursuant to a combined tender offer and purchase
of newly issued shares of Old Common Stock from the Company. As of March 28,
1998, LGE and LG Semicon owned 38,155,000 shares, including vested but
unexercised options, of Old Common Stock of the Company, which represents 56.5%
of the outstanding Old 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 HDTV and digital television related inventions. To the
extent these inventions are incorporated into the HDTV standard adopted by the
Federal Communications Commission, the Company expects to receive royalties from
these patents. In addition, royalties have been and may be received from these
patents for non-HDTV applications as well. Major manufacturers of television
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. The loss of any
substantial portion of the Company's patent royalties would have a material
adverse effect on the Company's business, financial condition, results of
operations, ability to implement the Operational Restructuring and ability to
meet its creditor obligations.
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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 television and
during the Christmas holiday season. During each of the last three years,
approximately 55% of the Company's net sales were recorded in the second half of
the year and approximately 30% of the Company's net sales were recorded in the
fourth quarter of the year.
MAJOR CUSTOMERS
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12%) in 1997, $187.2 million (15%) in 1996, and $172.1 million (14%) in
1995. Sales to a second customer, Sears, Roebuck and Company, accounted for
$132.4 million (11%) in 1997 and $140.9 million (11%) in 1996. No other customer
accounted for 10% or more of net sales.
COMPETITIVE CONDITIONS
Competitive factors in North America include price, performance, quality,
brand strength and reputation, variety of products and features offered,
marketing and sales capabilities, manufacturing costs, and service and support.
The Company's major product areas, including the color television market, are
highly competitive. The Company's major competitors are significantly larger,
100% foreign-owned companies, generally with greater worldwide television 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 in "-- Legal Proceedings."
EMPLOYEES
At March 31, 1998, the Company employed approximately 9,500 people, of whom
approximately 6,340 were hourly workers covered by collective bargaining
agreements.
At March 31, 1998, approximately 3,340 of the Company's employees were
located in the Chicago, Illinois, area, of whom approximately 2,080 were
represented by unions. Approximately 6,160 of the Company's employees are
located in Mexico, of whom approximately 4,250 were 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 believes that it has good relations with its employees.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information regarding foreign and domestic operations is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Sales:
Domestic companies..................................... $1,144.9 $1,221.4 $1,212.7
Foreign companies...................................... 28.2 66.5 61.2
-------- -------- --------
Total net sales................................ $1,173.1 $1,287.9 $1,273.9
======== ======== ========
Income (loss) before income taxes:
Domestic companies..................................... $ (195.3) $ (171.5) $ (94.5)
Foreign companies...................................... (4.9) (6.3) (4.0)
-------- -------- --------
Total income (loss) before income taxes........ $ 200.2) $ (177.8) $ (98.5)
======== ======== ========
Identifiable assets:
Domestic companies..................................... $ 405.1 $ 615.5 $ 548.5
Foreign companies...................................... 122.6 149.8 152.2
-------- -------- --------
Total identifiable assets...................... $ 527.7 $ 765.3 $ 700.7
======== ======== ========
</TABLE>
Foreign operations consist of manufacturing and sales subsidiaries in
Mexico, a distribution subsidiary in Canada (which was closed in December 1996)
and a purchasing office in Taiwan. Sales to affiliates are principally accounted
for at amounts based on local costs of production plus a reasonable return.
Export sales are less than 10% of consolidated net sales.
Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12%) in 1997, $187.2 million (15%) in 1996, and $172.1 million (14%) in
1995. Sales to a second customer, Sears, Roebuck and Company, accounted for
$132.4 million (11%) in 1997 and $140.9 million (11%) in 1996. No other customer
accounted for 10% or more of net sales.
The Company's product lines are dependent on the continuing operations of
the Company's manufacturing and assembly facilities located in Mexico.
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PROPERTIES OF THE COMPANY
The Company utilizes a total of approximately 5.2 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.
<TABLE>
<CAPTION>
SQUARE FEET
LOCATION NATURE OF OPERATION (IN MILLIONS)
-------- ------------------- -------------
<S> <C> <C>
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 (0.4 million
square feet is leased by the Company)
Fort Worth, El Paso, McAllen, Nine locations -- warehouses/offices (0.8 million 0.9
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 NWS products
Taiwan One location -- purchasing office --
---
Total
===
</TABLE>
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.
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SUBSIDIARIES
The companies listed below are the significant subsidiaries of the Company.
<TABLE>
<CAPTION>
ORGANIZED UNDER
NAME OF COMPANY LAWS OF
--------------- ---------------
<S> <C>
DOMESTIC
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/Inteq, Inc. Delaware
Zenith Video Tech Corporation Delaware
Zenith Video Tech Corporation -- Florida Delaware
INTERNATIONAL
Zenith Radio Canada, Ltd. Canada
Zenith Taiwan Corporation Taiwan
Zenith Electronics (Ireland), Ltd. Ireland
Zenith Electronics (Europe), Ltd. United Kingdom
Cableproductos de Chihuahua, S.A. de C.V. Mexico
Zenith Partes De Matamoras, 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
Telson, S.A. de D.V. Mexico
Zenco de Chihuahua, S.A. de C.V. Mexico
Radio Componentes de Mexico, S.A. de C.V. Mexico
</TABLE>
LEGAL PROCEEDINGS
Litigation
In June 1998, a licensee of the Company's tuner patents filed suit against
the Company seeking a declaratory judgment that the Company's tuner patents were
invalid and unenforceable, or that the plaintiff's use of certain technologies
in its current products did not infringe on the Company's tuner patents. The
complaint seeks the return of previously paid royalties. The plaintiff is also
seeking a preliminary injunction precluding the Company from terminating its
licensing agreement and allowing it to pay future royalties into an escrow. The
court has denied the plaintiff's request for a temporary restraining order
against the Company. The case was filed in the U.S. District Court in Los
Angeles.
In June 1998, the Company's president and chief executive officer, its
directors, and an affiliate of LGE were named as defendants in a suit filed by a
shareholder in a state court in New Jersey entitled Vengrove v. Gannon, et al.
The suit alleges breach of fiduciary duties by the directors, the officer and
the LGE affiliate arising out of the Company and the Board's actions related to
the Financial Restructuring and Prepackaged Plan. The plaintiff seeks to be
certified as a class representative and the suit designated as a class action.
The suit seeks to enjoin the defendants from proceeding with the cancellation of
the Old Common Stock held by minority shareholders or compensation for such
cancellation.
In May 1997, the Company's directors 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
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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 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 twelve 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
appellate court reversed the decision and remanded the case for retrial on both
liability and damages with an opinion favorable to the Company.
Environmental Litigation
In April 1998, the Company received a Notice of Intent to Commence Action
under the Resource Conservation and Recovery Act of 1984 to effect a remediation
of hazardous waste at a former research facility located in Menlo Park,
California. The plaintiff's limited investigation to date has revealed
contamination allegedly arising out of the Company's operations at the Facility.
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. The case is in
very preliminary stages.
Environmental Matters
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 eight 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 Fisher-Calo Superfund Site in Kingsbury,
Indiana, 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. The Company has
finalized a Consent Decree 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.
In a letter dated August 13, 1997, the United States Environmental
Protection Agency ("US EPA") gave notice to Zenco de Chihuahua and,
subsequently, Zenith Electronics Corporation of Texas, wholly-owned
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subsidiaries of 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 $85,000 in 1998. In
the event the investigation costs exceed $850,000, the 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. 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 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.
Pursuant to the terms of a lease agreement, the Company is obligated to
conduct an investigation and possible remediation of a former manufacturing
facility located in Chicago, Illinois. The Company will share the cost of the
investigation with the property's owner but will be obligated to pay the entire
cost of any remedial activities at the site.
The Company is currently conducting a closure of a hazardous waste
incinerator and is required to conduct long-term groundwater monitoring and
post-closure care at a former manufacturing facility located in Springfield,
Missouri.
In 1997, the Company entered into an agreement with the Illinois Attorney
General to settle violations of various air permit regulations. The total
penalty imposed was $458,000, payable in two installments. The second
installment of $152,000 is due in August, 1998.
In 1997, the Company settled a lawsuit in which it was named as a
potentially responsible party at a hazardous waste site located in New Jersey.
The total settlement of $140,000 is payable over 4 years. The first payment of
$27,000 was made in January, 1998.
Employment Cases
The Company has a number of employment Claims, charges or lawsuits alleging
various types of discrimination. There are eleven age discrimination lawsuits in
Texas arising out of restructurings that took place in 1995 and 1996. The
remaining matters are charges filed with various state and federal agencies.
Product Liability
The Company is the defendant in a number of products liability cases,
including cases alleging wrongful death or severe injury resulting from alleged
defects in the Company's products. The Company has undertaken defenses in such
cases. The Company is self-insured for a portion of its products liability
claims and has established reserves at a level that it believes are appropriate
to the cases commenced.
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EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following Summary Compensation Table sets forth, for the periods
indicated, the cash compensation and certain other components of compensation of
those persons who were, at December 31, 1997, the chief executive officer of the
Company and the other four most highly compensated executive officers of the
Company. The table includes the former Chief Executive Officer of the Company,
Peter S. Willmott, who left the Company in January, 1998, and two former
executive officers of the Company, Ramesh Amin and Dennis Winkleman, who left
the Company in 1997, whose compensation would have placed them in the group of
the four other most highly compensated officers of the Company had they been
executive officers as of December 31, 1997. Those listed in the table are
hereinafter referred to as the "Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($)(2) (#) (3)
- --------------------------- ---- --------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Peter S. Willmott......... 1997 775,000 0 0 1,612,500 100,000 4,800
Former President and 1996 539,192 0 0 0 2,000 0
Chief Executive Officer 1995 0 0 0 0 2,000 0
Michael Ahn............... 1997 337,992 0 0 0 0 0
Former Senior Vice 1996 118,040 0 0 0 0 0
President............... 1995 0 0 0 0 0 0
Ramesh G. Amin............ 1997 333,340 200,000 0 0 60,000 329,381(5)
Former Executive Vice 1996 25,000 120,000(4) 0 0 0 0
President 1995 0 0 0 0 0 0
Roger A. Cregg............ 1997 300,000 37,500 0 0 35,000 6,682
Former Executive Vice 1996 190,909 150,000(4) 0 525,000 37,500 0
President and Chief 1995 0 0 0 0 0 0
Executive Officer
Richard F. Vitkus......... 1997 229,999 23,000 0 0 25,000 9,600
Senior Vice President, 1996 218,333 14,000 0 420,000 30,000 9,000
General Counsel and 1995 191,000 60,000(4) 0 0 22,500 4,335
Secretary
Dennis R. Winkleman....... 1997 130,004 15,000 0 0 25,000 0
Former Vice President 1996 118,750 8,500(4) 0 0 35,000 0
1995 0 0 0 0 0 0
</TABLE>
- ---------------
(1) Other Annual Compensation does not reflect the value of perquisites and
other personal benefits since such compensation does not exceed minimum
disclosure thresholds.
(2) The share unit and restricted stock values shown in the table are based on
the closing price of the Company's Old Common Stock on the date of grant. As
of December 31, 1997, Mr. Cregg held an aggregate of 37,500 shares of
restricted stock valued at $203,887, Mr. Vitkus held an aggregate of 30,000
shares of restricted stock valued at $163,110 and Mr. Willmott held an
aggregate of 37,500 share units valued at $203,887. Mr. Cregg's restricted
stock was not vested when he left the Company, and, therefore, the
restricted stock was forfeited. Mr. Willmott's share units were forfeited as
part of his negotiated separation payment. See "Employment Agreements."
(3) The amount reflects the annual contribution to the Company's defined
contribution plan for Messrs. Cregg, Vitkus and Willmott. Since Messrs.
Cregg and Willmott were not fully vested at the time of their termination of
employment, the Company contributions were forfeited.
(4) Pursuant to separate agreements, Messrs. Amin, Cregg, Vitkus and Winkleman
were guaranteed bonuses relating to their initial employment.
(5) In connection with Mr. Amin's termination of employment with the Company, he
entered into a Termination Agreement which provides for severance payments
in lieu of those set forth in his employment agreement. The amount
represents 1997 payments of $15,384 of accrued vacation pay, severance pay
of $66,667, $2,834 of imputed income for Company paid term life insurance
premiums, $102,500 for loss of sale of residence, $105,190 tax gross-up for
relocation related expenses and $36,806
B-17
<PAGE> 213
for relocation expenses. The Termination Agreement provides for three 1998
severance payments of $200,000 each, payment on January 1, 1998, March 1,
1998 and June 1, 1998. Mr. Amin is also entitled to outplacement service not
to exceed $25,000 and continued group health benefits until the earlier of
December 31, 1998, or the date when Mr. Amin becomes covered under another
health benefit plan.
EMPLOYMENT AGREEMENTS
Of the Executive Officers listed above, the only Executive Officer who is
currently an employee of the Company is Mr. Vitkus, who has a three year
employment agreement which was effective on January 1, 1997 and which expires on
December 31, 1999. See "MANAGEMENT -- Current Executive Officers of the Company.
OPTION/SAR GRANTS IN 1997
Shown below is information regarding 1997 grants of stock options to the
Executive Officers. No stock appreciation rights (SARs) were granted to the
Executive Officers during 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) IN 1997 ($/SHARE)(2) DATE VALUE($)(3)
---- ------------- ---------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Peter S. Willmott............. 100,000 10.5% $11.00 4/22/07 $916,000
Michael Ahn................... 0 0 -- -- --
Ramesh G. Amin................ 60,000 6.3% $11.25 4/22/07 $558,600
Roger A. Cregg................ 35,000 3.6% $11.25 4/22/07 $325,850
Richard F. Vitkus............. 25,000 2.6% $11.25 4/22/07 $232,750
Dennis R. Winkleman........... 25,000 2.6% $11.25 4/22/07 $232,750
</TABLE>
- ---------------
(1) Except for Mr. Willmott, all options granted and reported in this table have
the following terms: each option vests over a three year period, with
one-third of the shares each becoming exercisable on the first, second and
third anniversary after the date of grant. 50% of Mr. Willmott's options
vested on January 1, 1998, and the remaining 50% were to be vested on
December 31, 1998. Since Mr. Willmott has left the Company, all of his stock
options have now been forfeited.
(2) Exercise price is the fair market value of the shares of the Company's Old
Common Stock on the date of grant.
(3) The Black-Scholes option pricing model has been used to calculate the
present value of the options as of the date of grant. In calculating grant
date present values for options granted January 2, 1997 and April 22, 1997
as set forth in the table, factors of 75% and 73% respectively, have been
assigned to the volatility of the Old Common Stock based on weekly closing
stock market quotations for the three years preceding the date of grant, no
dividend yield on the Old Common Stock has been assumed, the risk-free rate
of return has been fixed at 6.54% and 6.84%, respectively, the rate for a
ten year U.S. Treasury Note on the date of grant and the exercise of the
options has been assumed to occur at the end of the actual option term of
ten years. There is no assurance that these assumptions will prove to be
true in the future. Consequently, the actual value, if any, that an
executive may realize will depend on the Old Common Stock price on the date
the option is exercised. There is no assurance the value realized by an
executive will be at or near the value estimated by the Black-Scholes model.
B-18
<PAGE> 214
AGGREGATED OPTION/SAR EXERCISES IN 1997 AND YEAR-END OPTION/SAR VALUES
Shown below is information concerning the exercise in 1997 of options to
purchase Company Old Common Stock by the Executive Officers and the unexercised
options to purchase Company Old Common Stock held by the Executive Officers at
December 31, 1997. No Executive Officers exercised SARs in 1997 and no such
Officer currently holds any SARs.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
SHARES ACQUIRED VALUE YEAR-END(#) AT FISCAL YEAR-END($)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- --------------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Peter S. Willmott........ 0 0 60,000/0 0/0
Michael Ahn.............. 0 0 0 0/0
Ramesh G. Amin........... 0 0 0 0/0
Roger A. Cregg........... 0 0 0 0/0
Richard F. Vitkus........ 0 0 18,000/30,000 0/0
Dennis R. Winkleman...... 11,667 $61,981 0/0 0/0
</TABLE>
- ---------------
(1) The exercise price of options held by the Executive Officers exceeds $5,437
(the closing price of the Company's Old Common Stock on December 31, 1997).
B-19
<PAGE> 215
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any persons who are, or
are threatened to be made, parties 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 such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
or are threatened to be made, a party to any threatened, pending or completed
action or suit by or in the right of the corporation by reason of the fact that
such person was a director, officer, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director has actually and reasonably incurred.
Article VI of the Certificate of Incorporation, as amended and restated, of
the Company provides that no director of the corporation shall be liable to the
corporation or its stockholders for monetary damages arising from a breach of
fiduciary duty owed to the corporation or its stockholders to the fullest extent
permitted by the Delaware General Corporation Law. However, unless and except
permitted by applicable law, such provisions of Article VI shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of Delaware, (iv)
for any transaction from which the director derived an improper personal
benefit, or (v) for any act or omission occurring prior to the date Article VI
became effective.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that the Company shall indemnify and hold harmless, to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but in the case of any such amendment, only
to the extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment), each person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding") by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided below with respect
to proceedings to enforce rights to indemnification, the corporation shall
II-1
<PAGE> 216
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board. The right to indemnification is a contract right and
includes the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (advancement
of expenses); provided, however, that, if and to the extent that the Delaware
General Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such indemnitee, including,
without limitation, service to an employee benefit plan) shall be made only upon
delivery to the corporation of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined that such indemnitee is not entitled to be indemnified for such
expenses. The corporation may, by action of its Board, provide indemnification
to employees and agents of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that if a Claim is not paid in full by the corporation within
thirty days after a written Claim has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the Claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
Claim. It shall be a defense to any such action (other than an action brought to
enforce a Claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under the General Corporation Law of Delaware
for the corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the corporation. Neither the failure
of the corporation (including its Board, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law of Delaware, nor an actual determination by the
corporation (including its Board, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in Article VII shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Restated Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Article VII of the Certificate of Incorporation, as amended and restated,
further provides that the corporation may maintain insurance, at its own
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expenses,
liability or loss under the Delaware General Corporation Law.
All of the directors and officers of the Company are covered by insurance
policies maintained and held in effect by such corporation against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(3a) Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992)
(3b) Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 4, 1993 (incorporated
by reference to Exhibit 4(l) of the Company's Quarterly
Report on Form 10-Q for the quarter ended April 3, 1993)
(3c) By-Laws of the Company, as amended (incorporated by
reference to Exhibit (3c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
</TABLE>
II-2
<PAGE> 217
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(4a) Amended and Restated Credit Agreement dated as of June 29,
1998, among Zenith Electronics Corporation, Citibank N.A.,
Citicorp North America, Inc. and the other lenders named
(4c) 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)
(4d) Note Agreement dated as of March 31, 1998, between Zenith
Electronics Corporation and LG Electronics Inc.
(incorporated by reference to Exhibit (4a) to the Company's
Quarterly Report on Form 10-Q for the period ended March 28,
1998)
+(4e) Form of Indenture with respect to New Subordinated
Debentures
+(4f) Form of LGE Secured Notes
+(4g) Form of LGE New Restructured Senior Note
+5(a) Opinion of Kirkland & Ellis
*(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)
*(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
(incorporated by reference to Exhibit (10j) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)
*(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 (incorporated by reference to Exhibit
(10m) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
</TABLE>
II-3
<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(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 (incorporated by
reference to Exhibit (10s) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
(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 (incorporated by reference to Exhibit
(10u) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
(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)
(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)
</TABLE>
II-4
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(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 (incorporated by reference to Exhibit (10ad) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
*(10ae) Employment Agreement, dated January 12, 1998, between
Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
*(10af) Stock Option Agreement, Dated January 12, 1998, between
Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10a) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
*(10ag) Restricted Stock Award Agreement, Dated January 12, 1998,
between Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10b) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
(10ah) Restructuring Agreement, dated August 7, 1998, between
Zenith Electronics Corporation and LG Electronics, Inc.
+*(10ai) Employment Agreement, dated August , 1998, between Zenith
Electronics Corporation and Richard F. Vitkus
+*(10aj) Amendment dated August , 1998 to Employment Agreement
between Zenith Electronics Corporation and Jeffrey P. Gannon
(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
(23a) Consent of Independent Public Accountants
+(23b) Consent of Kirkland & Ellis (included in Exhibit 5a)
(27a) Financial Data Schedule for the three months ended March 28,
1998
(27b) Financial Data Schedule for the twelve months ended December
31, 1997
(99a) Valuation Report, dated May 21, 1998, prepared by Peter J.
Solomon Company, Ltd.
(99b) Valuation Report, dated July 22, 1998, prepared by Peter J.
Solomon Company, Ltd. (Confidential Treatment Requested)
</TABLE>
- ---------------
* Represents a management contract, compensation plan or arrangement.
+ To be filed by amendment.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
II-5
<PAGE> 220
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered,
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a Claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a directors, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first Class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 221
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
duly caused this Registration Statement on Form S-4 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Village of Glenview, State
of Illinois, on the 10th day of August, 1998.
ZENITH ELECTRONICS CORPORATION
By: /s/ JEFFREY P. GANNON
--------------------------------------
Jeffrey P. Gannon
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on the 10th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JEFFREY P. GANNON President and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
Jeffrey P. Gannon
/s/ EDWARD J. MCNULTY Chief Financial Officer (Principal Financial
- --------------------------------------------- Officer)
Edward J. McNulty
/s/ LAWRENCE D. PANOZZO Director of Corporate Accounting and Planning
- --------------------------------------------- (Principal Accounting Officer)
Lawrence D. Panozzo
/s/ HUN JO LEE Chairman of the Board
- ---------------------------------------------
Hun Jo Lee
/s/ T. KIMBALL BROOKER Director
- ---------------------------------------------
T. Kimball Brooker
/s/ KI-SONG CHO Director
- ---------------------------------------------
Ki-Song Cho
/s/ EUGENE B. CONNOLLY Director
- ---------------------------------------------
Eugene B. Connolly
/s/ ROBERT A. HELMAN Director
- ---------------------------------------------
Robert A. Helman
/s/ CHA HONG (JOHN) KOO Director
- ---------------------------------------------
Cha Hong (John) Koo
/s/ SEUNG PYEONG KOO Director
- ---------------------------------------------
Seung Pyeong Koo
/s/ ANDREW MCNALLY IV Director
- ---------------------------------------------
Andrew McNally IV
</TABLE>
II-7
<PAGE> 222
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ YONG NAM Director
- ---------------------------------------------
Yong Nam
/s/ PETER S. WILLMOTT Director
- ---------------------------------------------
Peter S. Willmott
/s/ NAM WOO Director
- ---------------------------------------------
Nam Woo
</TABLE>
II-8
<PAGE> 223
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
(3a) Restated Certificate of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992)
(3b) Certificate of Amendment to Restated Certificate of
Incorporation of the Company dated May 4, 1993 (incorporated
by reference to Exhibit 4(l) of the Company's Quarterly
Report on Form 10-Q for the quarter ended April 3, 1993)
(3c) By-Laws of the Company, as amended (incorporated by
reference to Exhibit (3c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
(4a) Amended and Restated Credit Agreement dated as of June 29,
1998, among Zenith Electronics Corporation, Citibank N.A.,
Citicorp North America, Inc. and the other lenders named
(4c) 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)
(4d) Note Agreement dated as of March 31, 1998, between Zenith
Electronics Corporation and LG Electronics Inc.
(incorporated by reference to Exhibit (4a) to the Company's
Quarterly Report on Form 10-Q for the period ended March 28,
1998)
+(4e) Form of Indenture with respect to New Subordinated
Debentures
+(4f) Form of LGE Secured Notes
+(4g) Form of LGE New Restructured Senior Note
+5(a) Opinion of Kirkland & Ellis
*(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)
</TABLE>
<PAGE> 224
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
*(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)
*(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
(incorporated by reference to Exhibit (10j) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997)
*(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 (incorporated by reference to Exhibit
(10m) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
(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 (incorporated by
reference to Exhibit (10s) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
(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 (incorporated by reference to Exhibit
(10u) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
(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)
(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 (incorporated by reference to Exhibit (10ad) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997)
*(10ae) Employment Agreement, dated January 12, 1998, between
Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
*(10af) Stock Option Agreement, Dated January 12, 1998, between
Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10a) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
*(10ag) Restricted Stock Award Agreement, Dated January 12, 1998,
between Jeffrey P. Gannon and Zenith Electronics Corporation
(incorporated by reference to Exhibit (10b) to the Company's
Quarterly Report on Form 10-Q for the period ended March 27,
1998)
(10ah) Restructuring Agreement, dated August 7, 1998, between
Zenith Electronics Corporation and LG Electronics, Inc.
+*(10ai) Employment Agreement, dated August , 1998, between Zenith
Electronics Corporation and Richard F. Vitkus
</TABLE>
<PAGE> 226
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
+*(10aj) Amendment dated August , 1998 to Employment Agreement
between Zenith Electronics Corporation and Jeffrey P. Gannon
(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
(23a) Consent of Independent Public Accountants
+(23b) Consent of Kirkland & Ellis (included in Exhibit 5a)
(27a) Financial Data Schedule for the three months ended March 28,
1998
(27b) Financial Data Schedule for the twelve months ended December
31, 1997
(99a) Valuation Report, dated May 21, 1998, prepared by Peter J.
Solomon Company, Ltd.
(99b) Valuation Report, dated July 22, 1998, prepared by Peter J.
Solomon Company, Ltd. (Confidential Treatment Requested)
</TABLE>
- ---------------
* Represents a management contract, compensation plan or arrangement.
+ To be filed by amendment.
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
ZENITH ELECTRONICS CORPORATION
(Name of Issuer)
ZENITH ELECTRONICS CORPORATION
LG ELECTRONICS INC.
(Name of Persons Filing Statement)
6 1/4% CONVERTIBLE SUBORDINATE DEBENTURES DUE 2011
(Name of Persons Filing Statement)
989349AB1
(CUSIP Number of Class of Securities)
Edward J. McNulty Chan-Ho Lee
Zenith Electronics Corporation LG Electronics Inc.
1000 Milwaukee Avenue LG Twin Towers, 20, Yoido - dong
Glenview, Illinois 60025-2493 Youngdungpo -gu, Seoul, Korea, 150-721
Telephone: (847) 391-7000 Telephone: 011-82-2-3777-3049
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
Copies to:
Richard F. Vitkus Steven R. Gross
Zenith Electronics Corporation Debevoise & Plimpton
1000 Milwaukee Avenue 875 Third Avenue
Glenview, Illinois New York, New York 10022
60025-2493 (212) 909-6586
(847) 391-7000
Michael G. Timmers
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
This statement is filed in connection with (check the appropriate box):
a. |X| The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. |X| The filing of registration statement under the Securities Act of 1933.
c. |_| A tender offer.
d. |_| None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
---------------------- --------------------
$103,500,000 $10,178
- --------------------------------------------------------------------------------
*The transaction valuation has been calculated pursuant to Rule 0-11(b)(2)
|X| Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount previously paid: $10,178
Form or Registration No: Form S-4 Registration Statement
Filing Party: Zenith Electronics Corporation
Date Filed: August 10, 1998
================================================================================
<PAGE> 2
INTRODUCTION
This Rule 13E-3 Transaction Statement (this "Statement") relates to a
Disclosure Statement and Proxy Statement- Prospectus (the "Registration
Statement") for the solicitation of votes for the Prepackaged Plan of
Reorganization (the "Prepackaged Plan") of Zenith Electronics Corporation, a
Delaware corporation (the "Issuer"). The purpose of the Prepackaged Plan is to
reduce the Issuer's debt service obligations, facilitate future borrowing to
fund liquidity needs and permit the Issuer to implement a restructuring of its
operations. The Prepackaged Plan will reduce the Issuer's overall debt and other
obligations by approximately $300 million by exchanging (i) $200 million of debt
and other liabilities owed to LG Electronics Inc. (the "Affiliate") for all of
the newly issued common stock, par value $.01 per share, of the reorganized
Issuer (the "New Common Stock"), (ii) the 6 1/4% Convertible Subordinated
Debentures due 2011 (the "Old Subordinated Debentures") in an aggregate
principal amount of $103.5 million plus accrued interest thereon for the 6 1/4%
Senior Subordinated Debentures due 2010 (the "New Subordinated Debentures") of
the reorganized Issuer in an aggregate principal amount of $40 million and (iii)
approximately $32.4 million of indebtedness to the Affiliate for certain
property, plant and equipment owned by the Issuer's subsidiaries located in
Reynosa, Tamaulipas, Mexico, which have an appraised value equal to such amount.
In addition, as a consequence of the Prepackaged Plan, the common stock, par
value $1.00 par value, of the Issuer (the "Old Common Stock"), together with all
outstanding options, warrants or rights to acquire shares of common stock, will
be cancelled and the holders of the Old Common Stock (including the Affiliate
and its affiliate) will receive no distributions and retain no property under
the Prepackaged Plan in respect of their holdings of the Old Common Stock.
The cross reference sheet on the following pages, which is being supplied
pursuant to General Instruction F to Schedule 13E-3, shows the location in the
Registration Statement of the information required to be included in response to
the items of this Statement. The information set forth in the Registration
Statement, which is attached hereto as Exhibit (d)(1), is incorporated herein by
reference in its entirety, and responses to each item herein are qualified in
their entirety by such reference. The Registration Statement will be completed
and, if appropriate, amended prior to the time it is first sent or given to
securityholders. This Statement will be amended to reflect such completion or
amendment to the Registration Statement.
<PAGE> 3
CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
All references are to portions of the Proxy Statement which are
incorporated herein and made a part hereof by reference.
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION REGISTRATION STATEMENT
<S> <C>
1. Issuer and Class of Security
Subject to the Transaction
(a) Front Page of Registration Statement; "SUMMARY--The
Company"; "SPECIAL FACTORS--Going Private
Transaction"
(b) Front page of Registration Statement; "SPECIAL
FACTORS--Going Private Transaction"
(c) Front Page of Registration Statement; "MARKET PRICES
OF THE OLD SUBORDINATED DEBENTURES"
(d) and (e) *
(f) "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--Long-Term Debt"
2. Identity and Background.
(a) - (g) "SUMMARY--The Company"; "MANAGEMENT"
3. Past Contacts, Transactions or Negotiations.
(a) "SPECIAL FACTORS--Events Leading to the to
Restructuring"; "CERTAIN TRANSACTIONS"
(b) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "--LGE Agreements Related to
Common Stock"; "CERTAIN TRANSACTIONS"
4. Terms of the Transaction
(a) "SUMMARY--The Prepackaged Plan"; "SPECIAL
FACTORS--The Restructuring Agreement";
"THE PREPACKAGED PLAN--Classification and
Treatment of Claims and Equity Interests under
the Prepackaged Plan";
"ANNEX A--THE PREPACKAGED PLAN"
(b) *
5. Plans or Proposals of the Issuer or Affiliate.
(a) *
(b) "RISK FACTORS--Certain Risks Relating to the Business
Plan Projections"; "--Risks Associated with Proposed
Operational Restructuring"
</TABLE>
- --------------
* Not applicable or answer is negative.
i
<PAGE> 4
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION REGISTRATION STATEMENT
<S> <C>
(c) "MANAGEMENT"; "THE PREPACKAGED
PLAN--Summary of Other Provisions of the Prepackaged
Plan--Amendments to Certificate of Incorporation and By-
Laws"
(d) "SPECIAL FACTORS--Liquidity Pending Consummation of
the Restructuring"; "DESCRIPTION OF DEBT AND
CREDIT ARRANGEMENTS"
(e) "RISK FACTORS--Risks Associated with Proposed
Operational Restructuring"; "THE PREPACKAGED PLAN--Summary
of Other Provisions of the Prepackaged Plan--Amendments to
Certificate of Incorporation and By-Laws"
(f) and (g) *
6. Source and Amount of Funds or Other Consideration.
(a), (c) and (d) *
(b) "ESTIMATED FEES AND EXPENSES"
7. Purpose(s), Alternatives, Reasons and Effects.
(a) "SPECIAL FACTORS--Purposes and Effects of the
Financial Restructuring"
(b) and (c) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "--Alternatives to Confirmation and
Consummation of the Prepackaged Plan";
"--Recommendation of the Board"; "--LGE's Position
Regarding the Financial Restructuring"; "--Liquidation and
Going Concern Analyses"; "LIQUIDATION ANALYSIS"
(d) "SPECIAL FACTORS--Purposes and Effects of the
Financial Restructuring"; "CERTAIN U.S. FEDERAL
INCOME TAX CONSIDERATIONS"; "HISTORICAL AND
PRO FORMA CAPITALIZATION"; "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION"
8. Fairness of the Transaction. "SPECIAL FACTORS--Recommendation of the Board"; "--LGE's
(a) and (b) Position Regarding the Financial Restructuring";
"--Liquidation and Going Concern Analyses";
"LIQUIDATION ANALYSIS"
(c) "SPECIAL FACTORS--Recommendation of the Board"
"SUMMARY--Voting Procedures"; "THE
PREPACKAGED PLAN--Confirmation Standards";
"--Confirmation of the Prepackaged Plan Without
Acceptance by All Classes of Impaired Claims";
"--Certain Consequences of Non Acceptance of the
Prepackaged Plan"
(d) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "--Recommendation of the Board"
</TABLE>
- --------------
* Not applicable or answer is negative.
ii
<PAGE> 5
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION REGISTRATION STATEMENT
<S> <C>
------------------ ----------------------
(e) "SPECIAL FACTORS--Recommendation of the Board "
(f) *
9. Reports, Opinions, Appraisals and Certain "SPECIAL FACTORS--Events Leading
Negotiations. to the Restructuring"; "--Recommendation of the
(a), (b) and (c) Board"; "--LGE's Position Regarding the Financial
Restructuring"; "--Liquidation and Going Concern Analyses";
"LIQUIDATION ANALYSIS"
10. Interest in Securities of the Issuer.
(a) and (b) *
11. Contracts, Arrangements or Understandings "SPECIAL FACTORS--LGE Agreements Related to
with Respect to the Issuer's Securities. Common Stock"; "--The Restructuring Agreement"
12. Present Intention and Recommendation of
Certain Persons with Regard to the Transaction.
(a) and (b) "SPECIAL FACTORS--Recommendation of the Board";
"--LGE's Position Regarding the Financial Restructuring"
13. Other Provisions of the Transaction.
(a) "SPECIAL FACTORS--Dissenters' Rights"
(b) and (c) *
14. Financial Information.
(a) and (b) "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA"; "PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION"
15. Persons and Assets Employed, Retained or
Utilized.
(a) *
(b) "SOLICITATION; VOTING PROCEDURES--Solicitation
Agent"
16. Additional Information. *
</TABLE>
- --------------
* Not applicable or answer is negative.
iii
<PAGE> 6
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The Issuer of the class of equity securities which is the subject of
this Statement is Zenith Electronics Corporation, the principal executive office
of which is located at 1000 Milwaukee Avenue, Glenview, Illinois 60025- 2493.
The information set forth in the Front Page of the Registration Statement,
"SUMMARY--The Company" and "SPECIAL FACTORS--Going Private Transaction" of the
Registration Statement is incorporated herein by reference.
(b) The title of the equity securities subject to this Rule 13e-3
transaction is the 6 1/4% Convertible Subordinated Debentures due 2011 (the "Old
Subordinated Debentures"). As of August 6, 1998, the aggregate principal amount
of the outstanding Old Subordinated Debentures was $103.5 million. The Issuer
had approximately 285 holders of record of the Old subordinated Debentures as of
June 30, 1998. The information set forth in the Front Page of the Registration
Statement and "SPECIAL FACTORS--Going Private Transaction" of the Registration
Statement is incorporated herein by reference.
(c) The information set forth in the Front Page of the Registration
Statement and "MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES" of the
Registration Statement is incorporated herein by reference.
(d) Not Applicable.
(e) None.
(f) This information set forth in "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--Long-Term Debt" of the Registration Statement is incorporated
herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a) - (g) This Statement is being filed jointly by the Issuer and the
Affiliate. See Annex 1 to this Statement. The information set forth in
"SUMMARY--The Company" and "MANAGEMENT" of the Registration Statement is
incorporated herein by reference.
None of the persons with respect to whom information is provided in
response to this Item was, during the past five years, convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or was, during
the past five years, a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring" and "CERTAIN TRANSACTIONS" of the Registration Statement is
incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring", "--LGE Agreements Related to Common Stock" and "CERTAIN
TRANSACTIONS" of the Registration Statement is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in "SUMMARY--The Prepackaged Plan", "SPECIAL
FACTORS--The Restructuring Agreement", "THE PREPACKAGED PLAN--Classification and
Treatment of Claims and Equity Interests under the Prepackaged Plan" and "ANNEX
A--THE PREPACKAGED PLAN" of the Registration Statement is incorporated herein by
reference.
(b) None.
iv
<PAGE> 7
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) Not applicable.
(b) The information set forth in "RISK FACTORS--Certain Risks Relating to
the Business Plan Projections" and "--Risks Associated with Proposed Operational
Restructuring" of the Registration Statement is incorporated herein by
reference.
(c) The information set forth in "MANAGEMENT" and "THE PREPACKAGED
PLAN--Summary of Other Provisions of the Prepackaged Plan--Amendments to
Certificate of Incorporation and By-Laws" of the Registration Statement is
incorporated herein by reference.
(d) The information set forth in "SPECIAL FACTORS--Liquidity Pending
Consummation of the Restructuring" and "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS" of the Registration Statement is incorporated herein by reference.
(e) The information set forth in "RISK FACTORS--Risks Associated with
Proposed Operational Restructuring" and "THE PREPACKAGED PLAN--Summary of Other
Provisions of the Prepackaged Plan--Amendments to Certificate of Incorporation
and By-Laws" of the Registration Statement is incorporated herein by reference.
(f) and (g) Not applicable.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a), (c) and (d) Not applicable.
(b) The information set forth in "ESTIMATED FEES AND EXPENSES" of the
Registration Statement is incorporated herein by reference.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The information set forth in "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring" of the Registration Statement is incorporated
herein by reference.
(b) and (c) The information set forth in "SPECIAL FACTORS--Events Leading
to the Restructuring", "--Alternatives to Confirmation and Consummation of the
Prepackaged Plan", "--Recommendation of the Board", "--LGE's Position Regarding
the Financial Restructuring", "--Liquidation and Going Concern Analyses" and
"LIQUIDATION ANALYSIS" of the Registration Statement is incorporated herein by
reference.
(d) The information set forth in "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring", "CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS",
"HISTORICAL AND PRO FORMA CAPITALIZATION" and "PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION" of the Registration Statement is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) and (b) The information set forth in "SPECIAL FACTORS--Recommendation
of the Board","--LGE's Position Regarding the Financial Restructuring",
"--Liquidation and Going Concern Analyses" and "LIQUIDATION ANALYSIS" of the
Registration Statement is incorporated herein by reference.
(c) The information set forth in "SPECIAL FACTORS--Recommendation of the
Board"; "SUMMARY--Voting Procedures", "THE PREPACKAGED PLAN--Confirmation
Standards","--Confirmation of the Prepackaged Plan Without Acceptance by All
Classes of Impaired Claims" and "--Certain Consequences of Non-Acceptance of the
Prepackaged Plan" of the Registration Statement is incorporated herein by
reference.
v
<PAGE> 8
(d) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring" and "--Recommendation of the Board" of the Registration Statement
is incorporated herein by reference.
(e) The information set forth in "SPECIAL FACTORS--Recommendation of the
Board" of the Registration Statement is incorporated herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a), (b) and (c) The information set forth in "SPECIAL FACTORS--Events
Leading to the Restructuring", "--Recommendation of the Board", "--LGE's
Position Regarding the Financial Restructuring", "--Liquidation and Going
Concern Analyses" and "LIQUIDATION ANALYSIS" of the Registration Statement is
incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) None.
(b) Not applicable.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in "SPECIAL FACTORS--LGE Agreements Related to
Common Stock" and "--The Restructuring Agreement" of the Registration Statement
is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) and (b) The information set forth in "SPECIAL FACTORS--Recommendation
of the Board" and "--LGE's Position Regarding the Financial Restructuring" of
the Registration Statement is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "SPECIAL FACTORS--Dissenters' Rights" of
the Registration Statement is incorporated herein by reference.
(b) and (c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) and (b) The information set forth in "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA" and "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION" of the
Registration Statement is incorporated herein by reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Not applicable.
(b) The information set forth in "SOLICITATION; VOTING
PROCEDURES--Solicitation Agent" of the Registration Statement is incorporated
herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
Not applicable.
vi
<PAGE> 9
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct
as of August 10, 1998.
ZENITH ELECTRONICS CORPORATION
By: /s/ Jeffrey P. Gannon
------------------------------------------
Name: Jeffrey P. Gannon
Title: President and Chief Executive Officer
LG ELECTRONICS INC.
By: /s/ Cha Hong (John) Koo
-----------------------------------------
Name: Cha Hong (John) Koo
Title: President and Chief Executive Officer
vii
<PAGE> 10
ANNEX 1
ITEM 2. IDENTITY AND BACKGROUND.
This Statement is being jointly filed by LG Electronics Inc., a
corporation organized under the laws of the Republic of Korea, who may be deemed
to be an affiliate of Issuer (the "Affiliate").
The Affiliate is engaged in the consumer electronics business. The address
of the principal business and principal office of the Affiliate is LG Twin
Towers, 20, Yoido-dong, Youngdungpo-gu, Seoul, Korea 150-721. Set forth below
with respect to each executive officer and director of the Affiliate is such
individual's name, present principal occupation, material positions held during
the last five years (and the name of any corporation or other organization in
which such position was carried on) and business address. All of the person
listed below are citizens of Korea.
<TABLE>
<CAPTION>
Name Present Material Positions Held During the Past Business Address
---- Principal Five Years ----------------
Occupation ----------
----------
<S> <C> <C> <C> <C>
Cha Hong President & 1/95 - Present President & CEO, LG Electronics Inc. LG Electronics
(John) Koo CEO, LG 11/95 - Present Director, Zenith Electronics Corporation Inc.,
Electronics Inc. 2/91 - Present Director, LG Electronics Inc. 20, Yoido-dong,
1/94 - 12/94 Executive VP & CEO, LG Electronics Inc. Youngdungpo-gu,
3/91 - 12/93 Executive VP, LG Electronics Inc. Seoul 150-721,
Korea
Bon Moo Chairman, LG 3/98 - Present Chairman, LG Electronics Inc. LG Electronics
Koo Electronics Inc. Chairman, LG Chemical Ltd. Inc.,
2/91 - 2/98 Director, LG Electronics Inc. 20, Yoido-dong,
1/95 - 12/97 Chairman, LG Group Youngdungpo-gu,
1/89 - 12/94 Vice Chairman, LG Group Seoul 150-721,
Korea
Byung Chul Executive Vice 12/97 - Present Executive Vice President & CFO, LG LG Electronics
Jung President & Electronics Inc. Inc.,
CFO, LG 2/97 - Present Director, LG Electronics Inc. 20, Yoido-dong,
Electronics Inc. 7/96 - 11/97 Executive VP, LG Electronics Inc. Youngdungpo-gu,
2/94 - 6/96 Executive VP, LG International Corp. Seoul 150-721,
1/93 - 1/94 Senior Managing Director, LG Semicon Korea
Co., Ltd.
Chang Soo Chairman, LG 2/95 - Present Director, LG Electronic Inc. LG Cable &
Huh Cable & 3/95 - Present Chairman, LG Cable & Machinery Ltd. Machinery Ltd.,
Machinery Ltd. 1/93- 2/95 Executive Vice President, LG Industrial 20, Yoido-dong,
Systems Co. Youngdungpo-gu,
Seoul 150-721,
Korea
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Name Present Material Positions Held During the Past Business Address
---- Principal Five Years ----------------
Occupation ----------
-----------
<S> <C> <C> <C> <C>
Yong Chin Research 3/98 - Present Director, LG Electronics Inc. Korea Institute of
Kim Advisor, Korea 7/97 - Present Research Advisor, Korea Institute of Public Public Finance,
Institute of 12/96 - 3/97 Finance 402 Ildong
Public Finance 8/96 - 11/96 Minister, Ministry of Science & Building, 60,
1/95 - 8/96 Technology Yangjae-dong,
5/94 - 12/94 Officer, Office of The Prime Minister Seocho-gu, Seoul
12/93 - 4/94 Superintendent, Bank Supervisory Office 137-130, Korea
10/90 - 11/93 Vice Minister, Ministry of Finance
Commissioner, Korea Customs Service
Assistant Minister, Ministry of Finance
Moon Ho President, LG- 3/98 - Present Director, LG Electronics Inc. LG-Caltex Oil
Lee Caltex Oil 2/95 - 2/97 Director, LG Electronics Inc. Corporation,
Corporation 3/95 - Present President, LG-Caltex Oil Corporation 20, Yoido-dong,
3/91 - 2/95 Executive VP, LG-Caltex Oil Corporation Youngdungpo-gu,
Seoul 150-721,
Korea
Kee Rek Vice Chairman 12/97 - Present Vice Chairman & CEO, LG Management LG Management
Sohn & CEO, LG Development Institute Development
Management 3/98 - Present Director, LG Electronics Inc. Institute, 165,
Development 1/94 - 11/97 President, LG Precision Co. Haewol-ri,
Institute 1/93 - 12/93 Executive VP, LG International Corp. Majang-Myun,
Echun-city,
Gyunggi-do 467-
810, Korea
Byung Nak Professor, 3/98 - Present Director, LG Electronics Inc. Seoul National
Song School of 1/93 - Present Professor, School of Economics, Seoul University,
Economics, National University School of
Seoul National 1/93 - Present Chairman, Institute of Energy Economics Economics, 56-1,
University Sinlim-dong,
Kwanak-gu,
Seoul 151-010,
Korea
Seung Executive VP, 7/96 - Present Executive VP, LG Electronics Inc. LG Electronics
Pyeong Koo LG Electronics 10/97 - Present Director, Zenith Electronics Corporation Kumi Plant,
Inc. 10/92 - Present President of Display Division, LG 184, Gongdan-
Electronics Inc. dong
2/96 - 3/98 Director, LG Electronics Inc. Kumi-city,
3/95 - 6/96 Senior Managing Director, LG Electronics Gyungbuk-do
Inc. 730-030, Korea
3/91 - 2/95 Managing Director, LG Electronics Inc.
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Name Present Material Positions Held During the Past Business Address
----- Principal Five Years ----------------
Occupation ----------
----------
<S> <C> <C> <C> <C>
Yong Nam Executive VP, 12/97 - Present Executive VP, LG Electronics Inc. LG Electronics
LG Electronics 1/97 - 12/97 Executive VP, LG Group Chairman's Office Pyungtaek
Inc. 1/96 - 12/96 Senior Managing Director, LG Group Campus,
Chairman's Office 19-1, Cheongho-
11/95 - Present Director, Zenith Electronics Corporation ri, Jinwhi-myun,
1/93 - 12/95 Managing Director, LG Group Chairman's Pyungtaek-city,
Office Gyunggi-do 451-
713, Korea
Seon Dong Executive VP, 1/96 - Present Executive VP, LG Electronics Inc. LG Electronics
Kim LG Electronics 2/97 - 3/98 Director, LG Electronics Inc. LCD Plant,
Inc. 2/94 - 2/96 Director, LG Electronics Inc. 642, Jinpyung-
1/93 - 12/95 Senior Managing Director, LG Electronics dong,
Inc. Kumi-city,
Gyungbuk-do
730-360, Korea
Ssang Su Executive VP, 3/98 - Present Executive VP, LG Electronics Inc. LG Electronics
Kim LG Electronics 2/95 - 3/98 Director, LG Electronics Inc. Changwon Plant,
Inc. 3/96 - 2/98 Senior Managing Director, LG Electronics 76, Sungsan-
Inc. dong,
1/93 - 2/96 Managing Director, LG Electronics Inc. Changwon-city,
Gyungnam-do
641-713, Korea
Eun Jun Lee Executive VP, 1/95 - Present Executive VP, LG Electronics Inc. LG Electronics,
LG Electronics 2/94 - 3/98 Director, LG Electronics Inc. Inc., 8 Temasek
Inc. 1/93 - 12/94 Senior Managing Director, LG Electronics Boulevard, #26-
Inc. 03 Suntec Tower
3, Singapore
038988
Woo Hyun Executive VP 1/98 - Present Executive VP & CTO, LG Electronics Inc. LG Electronics
Paik & CTO, LG Executive VP, Tiernan Communication Inc. Inc.,
Electronics Inc. 9/96 - 5/97 Executive VP, General Instrument 20, Yoido-dong,
3/96 - 8/96 Senior VP, Qualcomm Inc. Youngdungpo-gu,
4/95 - 2/96 Senior VP, General Instrument Seoul 150-721,
6/78 - 3/95 Korea
Hong Gwang Executive VP, 12/96 - Present Executive VP, LG Electronics Inc. LG Electronics
Hahn LG Electronics 2/95 - 3/98 Director, LG Electronics Inc. Inc.,
Inc. 8/93 - 11/96 Senior Managing Director, LG Electronics, 20, Yoido-dong,
1/93 - 7/93 Inc. Youngdungpo-gu,
Managing Director, LG Electronics Inc. Seoul 150-721,
Korea
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Name Present Material Positions Held During the Past Business Address
----- Principal Five Years ----------------
Occupation ----------
----------
<S> <C> <C> <C> <C>
Yong Ak Ro President, LG 3/95 - Present President, LG Electronics China, LG LG Electronics
Electronics Electronics Inc. China,
China 1/93 - 2/95 Director, LG Electronics Inc. 16F China Travel
1/93 - 2/95 Executive VP, LG Electronics Inc. Service Tower,
No. 2, Bei
San Huan Road,
Beijing 100028,
China
Kun Hi Yu President, LG 3/98 - Present President, LG Production Engineering LG Electronics
Production Research Center, LG Electronics Inc. Pyungtaek
Engineering 1/93 - 2/98 Executive VP, LG Production Technology Campus,
Research Center, LG Electronics Inc. 19-1, Cheongho-
Center ri, Jinwhi-myun,
Pyungtaek-city,
Gyunggi-do 451-
713, Korea
Chang Soo President, LG 1/97 - Present President, LG Corporate Institute of LG Corporate
Kim Corporate Technology, LG Electronics Inc. Institute of
Institute of 2/93 - 2/95 Director, LG Electronics Inc. Technology, 16,
Technology 1/93 - 12/96 Executive VP, LG Electronics Research Woomyun-dong,
Center, LG Electronics, Inc. Seocho-gu, Seoul
137-724, Korea
</TABLE>
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a) Not applicable.
(b)(1) Preliminary Valuation Report, dated May 21, 1998, prepared
by Peter J. Solomon Company, Ltd. (incorporated by
reference to Exhibit 99a to the Issuer's Registration Statement
on Form S-4 dated the date hereof).
(b)(2) Valuation Report, dated July 22, 1998, prepared by Peter J.
Solomon Company, Ltd. (incorporated by reference to Exhibit
99b to the Issuer's Registration Statement on Form S-4 dated
the date hereof).
(c)(1) Restructuring Agreement, dated as of August 6,
1998, by and between Zenith Electronics
Corporation and LG Electronics Inc.
(incorporated by reference to Exhibit 10ah
to the Issuer's Registration Statement on
Form S-4 dated the date hereof).
(c)(2) Agreement, dated as of March 25, 1997, between LG
Semicon Co., Ltd. and LG Electronics Inc.
(d) Registration Statement of Zenith Electronics
Corporation on Form S-4 dated the date hereof.
(e) and (f) Not applicable.
<PAGE> 1
RESTRUCTURING AGREEMENT
RESTRUCTURING AGREEMENT, dated as of August 7, 1998 (this "Agreement"), by
and between ZENITH ELECTRONICS CORPORATION, a Delaware corporation (the
"Company"), and LG ELECTRONICS INC., a corporation organized under the laws of
the Republic of Korea ("LGE");
WHEREAS, LGE and one of its affiliates collectively own 38,155,000 shares
of common stock, par value $1 per share, of the Company (the "Old Common
Stock"), representing approximately 55% of the outstanding Old Common Stock,
and LGE owns vested and unvested options to purchase additional shares of Old
Common Stock at a price of $.01 per share (the "Options");
WHEREAS, from time to time LGE and the Company have entered into certain
contractual arrangements and LGE has provided financial support to the Company;
WHEREAS, on June 30, 1998, LGE paid $50 million to certain of the
Company's creditors to satisfy a portion of LGE's guarantee obligation in
respect of loans extended by such creditors to the Company;
WHEREAS, pursuant to the Reimbursement Agreement (as defined in Section
1), the Company is required to reimburse LGE for amounts paid by LGE under such
guarantees and to pay interest at the rate specified therein to LGE on such
amounts from the date of payment by LGE to the date of reimbursement by the
Company;
WHEREAS, on July 22, 1998, LGE paid $90,086,653.58 to certain of the
Company's creditors to satisfy the obligations of the Company under the
Leveraged Lease Documents (as defined in Section 1);
WHEREAS, pursuant to the Financial Support Agreement (as defined in
Section 1), the Company is required to reimburse LGE for amounts paid by LGE to
satisfy the Company's obligations under the Leveraged Lease Documents and to
pay interest at the rate specified therein to LGE on such amounts from the date
of payment by LGE to the date of reimbursement by the Company;
WHEREAS, a special committee of the Board of Directors of the Company
composed of independent directors (the "Special Committee") considered in
detail various proposals for the reorganization of the Company and negotiated
with LGE with respect to several proposed restructuring plans;
WHEREAS, the Special Committee made certain recommendations to the full
Board of Directors of the Company;
<PAGE> 2
WHEREAS, the Board of Directors of the Company has determined that it is
in the best interests of the Company to restructure the business and operations
of the Company (the "Operational Restructuring") as contemplated by the
Business Plan and Projections, dated June 26, 1998 (the "Operating Plan"),
prepared by the management of the Company (a copy of which is attached hereto
as Annex A);
WHEREAS, the Board of Directors of the Company has determined that it is
in the best interests of the Company to alter the capital structure of the
Company in accordance with the terms of the Outline for Proposed Restructuring
of Zenith Electronics Corporation dated May 21, 1998 (the "Proposal") a copy of
which is attached as Annex B, and such modifications to the Proposal as may be
further mutually agreed to by the Company and LGE through confirmation of a
plan of reorganization (the "Plan"), under the Bankruptcy Code (as defined
below) using acceptances of the Plan to be solicited (the "Plan Solicitation")
from the requisite holders of claims against, and interests in, the Company
pursuant to Section 1125 of the Bankruptcy Code (the "Financial
Restructurings," and together with the Operational Restructuring, the
"Restructuring");
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein set forth, upon the terms and subject to the conditions set forth
herein, the parties agree as follows:
ARTICLE I
1. Definitions. As used in this Agreement, the following terms shall have
the following meanings (each such meaning to be equally applicable to both the
singular and plural forms of the respective terms so defined):
"Alternative Proposal" has the meaning set forth in Section 6.8.
"Bankruptcy Code" means Title 11 of the United States Code, as amended,
and the rules and orders thereunder.
"Bankruptcy Court" means the United States Bankruptcy Court for the
District of Delaware.
"Closing" has the meaning set forth in Section 3.
"Closing Date" has the meaning set forth in Section 3.
"Code" means the Internal Revenue Code of 1986, as amended.
- 2 -
<PAGE> 3
"Company Disclosure Letter" means the Disclosure Letter, dated the
date of this Agreement, from the Company to LGE.
"Company SEC Documents" has the meaning set forth in Section 4.4.
"Confirmation Order" has the meaning set forth in Section 4.3.
"Cumulative Funding Requirement" means cash flow from operations before
restructuring changes, plus interest expense and capital expenditures, in each
case as set forth in the Operating Plan.
"Disclosure Letters" means the Company Disclosure Letter and the LG
Disclosure Letter.
"EBITDA" means, for any period, the sum of:
(i) the net income (or net loss) of the Company (determined in
accordance with GAAP) for such period, without giving effect to any GAAP
extraordinary gains or losses and without deduction for Restructuring
Charges; plus (or minus)
(ii) to the extent that any of the items referred to in any of clauses
(A) through (D) below were deducted or added in calculating such net
income:
(A) interest expense and Guarantee of Finance Fee Amortization
of the Company for such period;
(B) federal, state or local income tax expense of the Company
with respect to operations for such period;
(C) the amount of all depreciation and amortization and other
non-cash charges for such period; and
(D) non-cash gains or losses from the sale or disposal of
property (other than inventory).
"Environmental Laws" means any and all applicable federal, state, local
or municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees or requirements of any Regulatory Authority regulating, relating to or
imposing liability or standards of conduct concerning protection of human
health or the environment, including without limitation, Hazardous Materials,
as now or may at any time during the term hereof be in effect.
- 3 -
<PAGE> 4
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any entity that is treated as a single employer
with the Company for purposes of Section 414 of the Code.
"ERISA Plan" means an employee benefit plan within the meaning of
Section 3(3) of ERISA or any other material benefit plan maintained for
employees of the Company or any of its ERISA Affiliates.
"Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
"Financial Restructuring" has the meaning set forth in the tenth whereas
clause.
"Financial Support Agreement" means the Financial Support Agreement,
dated March 31, 1997, as amended, between the Company and LGE.
"GAAP" means generally accepted accounting principles in the United
States as in effect from time to time.
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances, petroleum products
(including crude oil or any fraction thereof), polychlorinated biphenyls,
urea-formaldehyde insulation, asbestos containing materials defined or
regulated as such in or under any Environmental Law.
"HDTV Patents" shall mean all of the Company's United States patents and
patent applications relating to its digital vestigial side band technology or
relating to and used in connection with HDTV or digital television technology
of the Company.
"Implementation Program" has the meaning set forth in Section 6.7.
"Intellectual Property" means, with respect to any person, collectively,
such person's Patent Property and Trademark Property.
"Leveraged Lease Documents" means (i) the Participation Agreement, dated
as of March 26, 1997, by and among the Company, General Foods Credit
Corporation ("General Foods"), Fleet National Bank ("Fleet") as owner trustee
and the lenders party thereto, and the Lease Agreement, dated as of March 26,
1997, by and among the Company and Fleet as owner trustee, and the other
agreements and documents executed and delivered in connection therewith, and
(ii) the Participation Agreement, dated as of March 26, 1997, by and among
Zenith Texas, General Foods, Fleet as owner trustee and the lenders party
thereto, and the Lease Agreement, dated as of March 26, 1997, by and among
Zenith Texas and Fleet as owner
- 4 -
<PAGE> 5
trustee, and the other agreements and documents executed and delivered in
connection therewith.
"LGE Disclosure Letter" means the Disclosure Letter, dated the date of
this Agreement, from LGE to the Company.
"Lien" has the meaning set forth in Section 4.2.
"Material Adverse Effect" means a material adverse effect on the
business, properties, assets, results of operations, liabilities, condition
(financial or otherwise) or prospects of the Company and its subsidiaries taken
as a whole or on the ability of the Company or its subsidiaries to consummate
the transactions contemplated by this Agreement, including the Restructuring,
or to perform their respective obligations under the definitive transaction
agreements to be entered into in connection herewith.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
"New Investor" has the meaning set forth in Section 11.1(d)(iii).
"New Salaried Employee Documents" has the meaning set forth in Section
6.6.
"Note Agreement" means the Note Agreement, dated March 31, 1998, between
the Company and LGE, as amended by the First Amendment to the Note Agreement,
dated as of June 21, 1998, between the Company and LGE.
"Old Common Stock" has the meaning set forth in the first whereas
clause.
"Operating Plan" has the meaning set forth in the ninth whereas clause.
"Operational Restructuring" has the meaning set forth in the ninth
whereas clause.
"Options" has the meaning set forth in the first whereas clause.
"Patent Property" shall mean, with respect to any person:
(i) all of such person's patents (including, with respect to the
Company, the Tuner Patents and HDTV Patents), patent applications
(including, without limitation, all patents and patent applications in
preparation for filing) and patent disclosures throughout the world,
including without limitation, with respect to the Company, each
- 5 -
<PAGE> 6
patent and patent application referred to in Part A-1 of Section 4.14 of
the Company Disclosure Letter;
(ii) all reissues, divisions, continuations, continuations-in-part,
revisions, extensions, renewals and reexaminations of any of the items
described in clause (i) of this definition; and
(iii) all patent licenses of such person (whether as licensee or
licensor), including, with respect to the Company, each patent license
referred to in Part A-2 of Section 4.14 of the Company Disclosure Letter.
"Plan" has the meaning set forth in the tenth whereas clause.
"Plan Disclosure Documents" means the Disclosure Statement and Proxy
Statement-Prospectus (as amended or supplemented and including documents
incorporated by reference therein), to be used in connection with the Plan
Solicitation by the Company and the Rule 13e-3 Transaction Statement (as
amended or supplemented and including documents incorporated by reference
therein) filed jointly by the Company and LGE.
"Plan Solicitation" has the meaning set forth in the tenth whereas
clause.
"Property" shall mean any real property or personal property, plant,
building, facility, structure, underground storage tank or unit, equipment,
inventory or other asset owned, leased or operated by the Company or any of its
subsidiaries (including, without limitation, any surface water thereon or
adjacent thereto, and soil and groundwater thereunder).
"Regulatory Authority" means any court or government, administrative
agency or commission or other governmental or regulatory authority or agency,
federal, state, local or foreign.
"Reimbursement Agreement" means the Reimbursement Agreement, dated
November 3, 1997, between the Company and LGE, together with the other
agreements and documents executed and delivered in connection therewith (as
amended, modified or supplemented from time to time), pursuant to which the
Company agreed to repay amounts paid by LGE (as guarantor of the Company's
obligations) to certain of the Company's third party creditors.
"Restructuring Charges" means charges incurred by the Company to execute
the Operating Plan and the Plan that are of the type included in "Restructuring
Charges" in the Operating Plan and determined on a basis consistent with the
principles used to prepare the Operating Plan.
- 6 -
<PAGE> 7
"Reportable Event" shall have the meaning set forth in Section 4043(c)
of ERISA and the regulations thereunder.
"Representatives" has the meaning set forth in Section 6.6.
"Restructuring" has the meaning set forth in the tenth whereas clause.
"Reynosa Assets" means all of the right, title and interest of Zenith
Reynosa and Zenith Texas in and to (i) the land and buildings that comprise
Zenith Reynosa's production facilities # 12, #13 and #27 in Reynosa, Mexico,
(ii) all of the fixtures, equipment, personal property and other assets located
therein and identified in Section 1(a) of the Company Disclosure Letter and
(iii) all agreements relating to access thereto.
"Reynosa Leveraged Lease Assets" means all of its right, title and
interest of Zenith Reynosa and Zenith Texas in and to the assets subject to the
Leveraged Lease Documents located at Zenith Reynosa's production facility # 27
in Reynosa, Mexico to the extent set forth on Section 1(b) of the Company
Disclosure Letter. The Reynosa Leveraged Lease Assets have a fair market value
in place equal to $8,000,750.00.
"Reynosa Operating Agreement" has the meaning set forth in Section 2(b).
"Reynosa Purchase Agreement" has the meaning set forth in Section 2(b).
"Securities Act" means the Securities Act of 1933, as amended.
"SEC" means the Securities and Exchange Commission.
"Senior Secured PIK Notes" means the Senior Secured PIK Notes of the
Company having the terms set forth on Annex C.
"Special Committee" has the meaning set forth in the seventh whereas
clause.
"Taxes" means any net income, alternative minimum, accumulated earnings,
personal holding company, gross income, asset, gross receipts, sales, use,
goods and services, ad valorem, value added, mortgage, conveyance, transfer,
customs duties, franchise, capital stock, net worth, capital, profits, license,
withholding, payroll, employment, unemployment insurance, social security,
disability, workers' compensation, health care, excise, stamp, property, rent,
occupancy, occupational, documentary, recording, premium, severance,
environmental or windfall profit tax, duty, governmental fee or other like
assessment or charge, together with all interest or penalties thereon and
additions thereto, imposed by any taxing authority.
- 7 -
<PAGE> 8
"Tax Return" means any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Trademark" shall have the meaning ascribed to that term in the
definition of Trademark Property.
"Trademark Property" shall mean, with respect to any person:
(i) all of such person's trademarks, trade names, corporate names,
company names, business names, fictitious business names, trade styles,
service marks, certification marks, collective marks, logos, trade dress
other source of business identifiers, prints and labels on which any of
the foregoing have appeared or appear, designs and general intangibles of
a like nature (all of the foregoing items in this clause (i) being
collectively called a "Trademark"), now existing anywhere in the world
or hereafter adopted or acquired, whether currently in use or not,
whether or not registered, all registrations and recordings thereof and
all applications in connection therewith, whether pending or in
preparation for filing, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any
office or agency of the United States of America or any State thereof or
any foreign country, including, with respect to the Company, those
referred to in Part B-1 of Section 4.14 of the Company Disclosure Letter;
(ii) all reissues, extensions, renewals, translations, adaptations,
derivations and combinations of any of the items described in clause (i)
of this definition;
(iii) all Trademark licenses and other agreements providing such
person with the right to use any of the types of items referred to in
clauses (i) and (ii) of this definition, including, with respect to the
Company, each Trademark license referred to in Part B-2 of Section 4.14
of the Company Disclosure Letter;
(iv) all of the goodwill of the business connected with the use of,
and symbolized by the items described in, clauses (i) and (ii) of this
definition;
(v) the right to sue third parties for past, present and future
infringements of any Trademark property described in clauses (i) or (ii)
of this definition and, to the extent applicable in clause (iii) of this
definition; and
(vi) all proceeds of, and rights associated with, the foregoing,
including any claim by such person against third parties for past,
present or future infringement or dilution of any Trademark, Trademark
registration or (to the extent applicable and if permitted by applicable
law) Trademark license, referred to on clause (iii) of this definition,
or for any injury to the goodwill associated with the use of any such
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<PAGE> 9
Trademark or for breach or enforcement of any Trademark license, and all
rights corresponding thereto throughout the world.
"Transaction Expenses" has the meaning set forth in Section 11.3(a).
"Transaction Fee" has the meaning set forth in Section 11.3(b).
"Tuner Patents" shall mean, collectively, U.S. Patent No. 4,002,986,
U.S. Patent No. 4,317,227, U.S. Patent No. 4,516,170, and U.S. Patent
No. 4,598,425, together with all applications, reissues, divisions,
continuations, continuations-in-part, revisions, extensions, renewals and
reexaminations relating thereto; and "Tuner Patent" shall mean any one of the
foregoing.
"Zenith Reynosa" means Partes de Television de Reynosa, a Mexican
sociedad anonima de capital variable and a wholly-owned subsidiary of the
Company.
"Zenith Texas" means Zenith Electronics Corporation of Texas, a Texas
corporation and a wholly-owned subsidiary of the Company.
ARTICLE II
2. The Transactions. Upon the terms and subject to the conditions set
forth herein, on the Closing Date, pursuant to the Plan,
(a) LGE will purchase from the Company, and the Company will issue to
LGE, shares of newly issued common stock, par value $.01 per share, of the
Company (the "New Common Stock"), representing 100% of the New Common Stock, in
exchange for the forgiveness by LGE of $200 million of LGE claims consisting of
(i) unsecured claims for amounts outstanding as of the Closing Date up to $140
million arising out of the delivery of goods to the Company in the ordinary
course of business, (ii) a $50 million secured claim pursuant to the
Reimbursement Agreement, (iii) an unsecured claim for all servicing fees (the
"Technical Service Fees") accrued and unpaid through the Closing Date resulting
from LGE's provision of certain technical and other related services to the
Company in connection with the Company's research and development activities,
(iv) an unsecured claim for guarantee fees accrued and unpaid through the
Closing Date payable to LGE under the Reimbursement Agreement and (v) a
portion, if any, of the secured claim pursuant to the Note Agreement sufficient
when aggregated with the amounts described in clauses (i), (ii), (iii) and (iv)
of this Section 2(a) to equal $200 million, provided, that if the aggregate
amount of the claims described in clauses (i), (ii), (iii) and (iv) of this
Section 2(a) exceeds $200 million, then a portion of the secured claim pursuant
to the Reimbursement Agreement in the amount of such excess shall be exchanged
for an equal principal amount of Senior Secured PIK Notes;
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<PAGE> 10
(b) LGE or one of its subsidiaries and Zenith Reynosa and Zenith Texas
will enter into an agreement (the "Reynosa Purchase Agreement") pursuant to
which Zenith Reynosa and Zenith Texas will sell to LGE or one of its affiliates
the Reynosa Assets in exchange for the release by LGE of claims equal to
$32,364,300.00 as reimbursement for the payment by LGE of the Company's and
Zenith Texas' obligations to certain third party creditors under the Leveraged
Lease Documents, provided, however, that if the transactions contemplated by
this Section 2(b) would have adverse Tax or other consequences that are
unacceptable to either the Company or LGE or result in the payment of severance
in excess of the amount included in the Operating Plan, then (i) the Company
shall retain the Reynosa Assets, (ii) the Company and LGE shall enter into an
agreement with respect to the operation by LGE of such Reynosa Assets and the
Reynosa Leveraged Lease Assets (the "Reynosa Operating Agreement") and (iii)
the $32,364,300.00 of LGE claims that would have been exchanged for the Reynosa
Assets under this Section 2(b) shall be exchanged for an equal principal amount
of Senior Secured PIK Notes;
(c) LGE will purchase from the Company, and the Company will issue to
LGE, Senior Secured PIK Notes in a principal amount equal to and in exchange
for the forgiveness by LGE of claims equal to the aggregate of (i) a secured
claim for amounts owed LGE pursuant to the Reimbursement Agreement, if any,
other than the $50 million exchanged for New Common Stock under Section 2(a),
(ii) a $49,721,603.58 claim as reimbursement for the payment by LGE of the
obligations of the Company and Zenith Texas to certain third party creditors
under the Leveraged Lease Documents, plus accrued but unpaid interest on such
amount from July 22, 1998 through the date of filing of the Prepackaged Plan
with the Bankruptcy Court, and (iii) the amount of the secured claim pursuant
to the Note Agreement remaining after conversion of the portion of the claim
exchanged for New Common Stock pursuant to Section 2(a);
(d) each share of Old Common Stock owned by LGE and its affiliate and
the Options owned by LGE will be canceled, and LGE and its affiliate will have
no rights or claims against the Company in respect of such canceled Old Common
Stock and Options;
(e) LGE will agree to lend or provide additional credit support to the
Company in an amount necessary to enable the Company to execute the Operating
Plan according to its terms, not to exceed $60 million, on terms mutually
acceptable to LGE and the Company;
(f) LGE will transfer to the Company all of its right, title and
interest in the equipment subject to the Leveraged Lease Documents other than
the Reynosa Leveraged Lease Assets, provided, however, if the Company and LGE do
not enter into the Reynosa Purchase Agreement, then LGE will also transfer to
the Company the Reynosa Leveraged Lease Assets in exchange for Senior Secured
PIK Notes in a principal amount of $8,000,750.00; and
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<PAGE> 11
(g) LGE's claims (if any) other than those described under Sections
2(a), 2(b), 2(c), 2(d) and 2(f) shall be treated as unimpaired general unsecured
claims under the Plan.
ARTICLE III
3.1 Closing. At the Closing, subject to the terms and conditions of this
Agreement, the Company and LGE shall consummate the transactions contemplated
by Section 2 hereof. The closing (the "Closing") shall take place at the
offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, IL 60601, at
10:00 a.m., Chicago time, as promptly as practicable following the satisfaction
or waiver of the conditions to Closing set forth in Sections 8, 9 and 10
hereof, or at such other place and time as the parties may mutually agree. The
Company shall give LGE three business days prior written notice of the date the
Closing is scheduled to occur. The "Closing Date" shall be the date the
Closing occurs.
3.2 No Survival. The sole and exclusive recourse and remedy for a
material breach of a representation or warranty shall be the non-breaching
party's right pursuant to Section 9(a) or 10(a), as the case may be, not to
consummate the transactions contemplated hereby. At Closing all
representations and warranties shall expire, and in any case, result in no
future liability for the Company or LGE or their respective subsidiaries,
officers, directors and employees.
ARTICLE IV
4. Representations and Warranties of the Company. The Company represents
and warrants to LGE that:
4.1 Organization; Authorization; Enforceability. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution, delivery
and performance by it of this Agreement have been duly authorized by all
requisite corporate action on its part. This Agreement has been duly executed
and delivered by it and constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms.
4.2 No Conflicts. The execution, delivery and performance of this
Agreement by it will not: (x) conflict with or violate its organizational
documents; or (y) subject to the governmental filings and approvals referred to
in Section 4.3 and in the case of clauses (y)(i) and (y)(ii) as would not
reasonably be likely to result in or have a Material Adverse Effect, (i) breach
or violate any statute, law, rule, regulation, judgment, order or decree
applicable to it or any of its subsidiaries or by which any of their respective
properties are bound or affected, (ii) result in any breach of, or constitute a
default or give rise to any right of termination,
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<PAGE> 12
revocation, cancellation, acceleration or increased payments under (with or
without the giving of notice or the lapse of time or both), any note, mortgage,
agreement, contract, indenture, permit, lease, license, commitment,
understanding or other arrangement to which it or any of its subsidiaries is a
party or by which it or any of its subsidiaries or any of their respective
properties or assets are bound or affected, or (iii) result in the creation or
imposition of any lien, mortgage, security interest, restriction or other
encumbrance (a "Lien") on it or any of its subsidiaries or any of their
respective assets or properties.
4.3 Consents. Except for (i) applicable requirements of the Securities
Act, the Exchange Act, and filings under state securities or "blue sky" laws,
(ii) approval by the Bankruptcy Court of the Plan and this Agreement and the
entry by the Bankruptcy Court of an order confirming the Plan (the
"Confirmation Order"), (iii) filing with the Secretary of State of the State of
Delaware of the Certificate of Amendment of the Certificate of Incorporation of
the Company with respect to the amendments contemplated by this Agreement, and
(iv) as set forth in Section 4.3 of the Company Disclosure Letter, no consent,
approval or authorization of, or filing with or notification to, any Regulatory
Authority or any third party is required on its part in connection with the
execution, delivery or performance of this Agreement.
4.4 SEC Documents. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
under the Securities Act and the Exchange Act since December 31, 1995 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (i) complied in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act, as applicable, and the rules and regulations thereunder, and (ii) did not,
at the time it was filed, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.5 Financial Statements; Absence of Undisclosed Liabilities. The
financial statements of the Company included in the Company SEC Documents
complied as to form, as of their respective dates of filing with the SEC, in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be indicated
in the notes thereto) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal recurring year-end audit adjustments). Except
as set forth in Section 4.5 of the Company Disclosure Letter or as reflected in
such financial statements or in the notes thereto, neither the Company nor any
of its subsidiaries has any liabilities of any nature, whether known or
unknown, absolute, accrued, contingent or otherwise and whether due
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<PAGE> 13
or to become due, that, individually or in the aggregate, have had or are
reasonably likely to have or result in a Material Adverse Effect.
4.6 Plan Disclosure Documents. The Plan Disclosure Documents will not,
at the date mailed by the Company to the creditors and equity security holders
of the Company, the date the Bankruptcy Court enters the Confirmation Order or
the Closing Date, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Plan Disclosure Documents will comply as to form in
all material respects with the provisions of the Securities Act, the Exchange
Act and the Bankruptcy Code and all other rules, regulations, orders or decrees
thereunder.
4.7 Confirmation of Plan. To the knowledge of the officers of the
Company, the Company has not taken any action, or failed to take any action,
which might prevent, materially impede or delay or result in the revocation of
(i) the confirmation of the Plan (as provided in Section 1144 of the Bankruptcy
Code), (ii) a full and complete discharge (to the fullest extent possible under
Section 1141(d) of the Bankruptcy Code) of the debts of the Company intended to
be discharged under the Plan, and (iii) the vesting upon the entry of the
Confirmation Order of the property of the Company in the reorganized Company
free and clear of all claims and interests of creditors and equity security
holders except as otherwise provided in the Plan.
4.8 Compliance with Law. Except as disclosed in the Company SEC Documents
or the Plan Disclosure Documents, neither the Company nor any of its
subsidiaries is in violation of or default under (i) any statute, law,
regulation, rule, judgment, order or decree of any Regulatory Authority
applicable to the Company or any of its subsidiaries or by which any of the
Company or its subsidiaries or any of their respective assets or properties are
bound or affected or (ii) any note, mortgage, indenture, contract, agreement,
permit, lease, license, commitment, understanding or other arrangement to which
the Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of their respective assets or properties are
bound or affected, and neither the Company nor any of its subsidiaries has
received any notice alleging noncompliance, except with reference to all the
foregoing where the failure to be in compliance would not, individually or in
the aggregate, have or result in a Material Adverse Effect.
4.9 Environmental Matters. Except as set forth in the Company SEC
Documents and in Section 4.9 of the Company Disclosure Letter:
(a) To the best of the Company's and its subsidiaries' knowledge, after
reasonably diligent inquiry, the Property does not contain, in, on or under,
including, without limitation, the soil and groundwater thereunder, any
Hazardous Materials in violation of Environmental Laws or in amounts that could
give rise to liability under Environmental Laws.
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<PAGE> 14
(b) The Company and each of its subsidiaries is in material compliance
with all applicable Environmental Laws, and there is no contamination or
violation of any Environmental Law which could materially interfere with the
continued operation of any of the Properties or have or result in a Material
Adverse Effect.
(c) Neither the Company nor any of the Company's subsidiaries has
received from any Regulatory Authority or other person or entity any complaint,
or notice of violation, alleged violation, investigation or advisory action or
notice of potential liability regarding matters of environmental protection or
permit compliance under applicable Environmental Laws with regard to the
Properties, nor is the Company aware that any such notice is pending or
threatened.
(d) Hazardous Materials have not been generated, treated, stored,
disposed of, at, on or under any of the Property in violation of any
Environmental Laws or in a manner that could give rise to material liability
under Environmental Laws nor have any Hazardous Materials been transported or
disposed of from any of the Properties to any other location in violation of
any Environmental Laws or in a manner that could give rise to material
liability under Environmental Laws.
(e) Neither the Company nor any of its subsidiaries is a party to any
administrative actions or judicial proceedings pending under any Environmental
Law with respect to any of the Properties, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law
with respect to any of the Properties.
(f) There has been no release or threat of release of Hazardous
Materials into the environment at or from any of the Properties, or arising
from or relating to the operations of the Company or any of its subsidiaries, in
violation of Environmental Laws or in amounts that could give rise to material
liability under Environmental Laws.
(g) All information, reports, and other papers and data furnished by
the Company to LGE relating to (x) the environmental conditions on, under or
about the Properties currently or formerly owned, leased, operated to used by
the Company or any of its subsidiaries or any predecessor in interest thereto
and (y) any Hazardous Materials used, managed, handled, transported, treated,
generated, stored, discharged, emitted, or otherwise released by the Company or
any of its subsidiaries or any other person or entity on, under about or from
any Properties currently or formerly owned or leased, or otherwise in
connection with the use or operation of any of the Properties of the Company or
any of its subsidiaries, or their respective businesses and operations were, at
the time the same were so furnished, (i) to the extent prepared by third
parties, to the best of the Company's knowledge, and (ii) to the extent
prepared by the Company, complete and correct in all material respects in light
of all such information, reports and other papers and data taken as a whole at
such time. No fact is
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<PAGE> 15
currently known to the officers of the Company which had or resulted in, or
could reasonably be expected to have or result in a Material Adverse Effect.
4.10 Title to New Common Stock. Assuming the entry of the Confirmation
Order, all shares of New Common Stock issued at the Closing pursuant to this
Agreement, will have been duly authorized by all necessary corporate action on
the part of the Company, and, upon such issuance, such shares of New Common
Stock will be validly issued, fully paid and nonassessable, and the issuance of
such shares will not be subject to preemptive rights of any other stockholder
of the Company.
4.11 ERISA Matters. Except as set forth in the Company SEC Documents or
Section 4.11 of the Company Disclosure Letter,
(a) The Company and each ERISA Affiliate and each of their respective
ERISA Plans are in substantial compliance with ERISA and the Code and neither
the Company nor any of its ERISA Affiliates has incurred any accumulated
funding deficiency with respect to any such ERISA Plan within the meaning of
ERISA or the Code. The Company and each of its ERISA Affiliates have complied
with all material requirements of ERISA Sections 601 through 608 and Code
Section 4980B. Neither the Company nor, to the best of the Company's
knowledge, any of its ERISA Affiliates has made any promises of retirement or
other benefits to employees, except as set forth in the ERISA Plans. Neither
the Company nor any of its ERISA Affiliates has incurred any material liability
to the Pension Benefit Guaranty Corporation in connection with any such ERISA
Plan. The assets of each such ERISA Plan which is subject to Title IV of ERISA
are sufficient to provide the benefits under such ERISA Plan, the payment of
which the Pension Benefit Guaranty Corporation would guarantee if such ERISA
Plan were terminated, and such assets are also sufficient to provide all other
"benefit liabilities" (as defined in ERISA Section 4001(a)(16)) due under the
plan upon termination. No Reportable Event has occurred and is continuing with
respect to any such ERISA Plan. No such ERISA Plan or trust created
thereunder, or party in interest (as defined in Section 3(14) of ERISA, or any
fiduciary (as defined in Section 3(21) of ERISA), has engaged in a "prohibited
transaction" (as such term is defined in Section 406 of ERISA or Section 4975
of the Code) which would subject such ERISA Plan or any other ERISA Plan of the
Company or any of its ERISA Affiliates, any trust created thereunder, or any
such party in interest or fiduciary, or any party dealing with any such ERISA
Plan or any such trust to any material penalty or tax on "prohibited
transactions" imposed by Section 502 of ERISA or Section 4975 of the Code.
Neither the Company nor any of its ERISA Affiliates is a participant in or is
obligated to make any payment to a Multiemployer Plan.
(b) Neither the approval or execution of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i)
entitle any individual to severance pay or (ii) accelerate the time of payment
or vesting of, or increase the amount of, compensation due to any individual
(other than in the form of Old Common Stock).
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<PAGE> 16
(c) Except as set forth in Section 4.11(c) of the Company Disclosure
Letter, there is no strike, walkout or other work stoppage or lockout pending
or, to the knowledge of the Company, threatened against or affecting the
business of the Company or any of its subsidiaries.
4.12 Taxes. Except set forth in Section 4.12 of the Company Disclosure
Letter, all Tax Returns in respect of the Company and its subsidiaries required
to be filed on or before the Closing Date have (or by the Closing Date will
have) been duly and timely filed, except to the extent the failure to file any
such Tax Return would not, individually or in the aggregate, have or result in
a Material Adverse Effect. Except as set forth in Section 4.12 of the Company
Disclosure Letter, all Taxes (whether or not shown on such Tax Returns) due and
payable with respect to the Company and its subsidiaries on or before the
Closing Date have (or by the Closing Date will have) been duly and timely paid.
All Taxes required to be withheld by the Company or any of its subsidiaries on
or before the Closing Date have (or by the Closing Date will have) been duly
and timely withheld and properly paid to the applicable taxing authority.
4.13 Operating Plan. The projections contained in the Operating Plan
represent the Company's good faith estimate of the results of its operations
both before and after the Restructuring for which it believes it has a
reasonable basis. The Company believes that the assumptions which underlie the
projections continue to be reasonable in light of current circumstances.
4.14 Intellectual Property; Licenses. Except as set forth in Section 4.5
of the Company Disclosure Letter, the Company possesses adequate Intellectual
Property to continue to conduct its business as heretofore conducted by it or
as projected to be conducted in the Operating Plan, and all Intellectual
Property existing on the date hereof, together with in the case of patents and
Trademarks, the date of issuance thereof, is listed in Section 4.14 of the
Company Disclosure Letter. With respect to Intellectual Property of the
Company unless such Intellectual Property has become obsolete or is no longer
used or useful in the conduct of the business of the Company:
(a) it is valid and enforceable, is subsisting, and has not been
adjudged invalid or unenforceable, in whole or in part;
(b) the Company has made all necessary filings and recordations to
protect its interest therein, including, without limitation, recordations of
all of its interest in its Patent Property and Trademark Property in the United
States Patent and Trademark Office and, to the extent necessary for the
conduct of the Company's business, in corresponding offices throughout the
world;
(c) except as set forth in Section 4.5 of the Company Disclosure
Letter, the Company is the exclusive owner of the entire and unencumbered
right, title and interest in and
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<PAGE> 17
to such Intellectual Property owned by it and no claim has been made that the
use of any of its owned Intellectual Property does or may violate the asserted
rights of any third party; and
(d) the Company has performed, and the Company will continue to
perform, all acts, and the Company has paid and will continue to pay, all
required fees and taxes, to maintain each and every item of such Intellectual
Property in full force and effect throughout the world, as applicable.
The Company owns directly or is entitled to use, by license or otherwise, all
patents, Trademarks, copyrights, mask works, licenses, technology, know-how,
processes and rights with respect to any of the foregoing used in, necessary
for or of importance to the conduct of the Company's business.
4.15 Year 2000. The replacement of business critical software or other
solutions necessary to address the year 2000 issue in respect of such software
is expected to be completed by December 31, 1999. The projected cost to the
Company and its subsidiaries of such replacement or other solution is properly
reflected in the Operating Plan.
ARTICLE V
5.0 Representations and Warranties of LGE. LGE represents and warrants to
the Company that:
5.1 Organization; Authorization; Enforceability. It is a corporation duly
organized and validly existing under the laws of the Republic of Korea and has
all requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance by
it of this Agreement have been duly authorized by all requisite corporate
action on its part. This Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation, enforceable against it
in accordance with its terms.
5.2 No Conflicts. The execution, delivery and performance of this
Agreement by it will not (i) conflict with or violate its organizational
documents or (ii) subject to the governmental filings and approvals referred to
in Section 5.3, breach or violate any statute, law, rule, regulation, judgment,
order or decree applicable to it or any of its subsidiaries or by which any of
their respective properties are bound or affected.
5.3 Consents. Except for (i) applicable requirements of the Securities
Act, the Exchange Act and filings under state securities or "blue sky" laws,
(ii) approval by the Bankruptcy Court of the Plan and this Agreement and the
entry by the Bankruptcy Court of the Confirmation Order, (iii) filing with the
Secretary of State of the State of Delaware of the Certificate of Amendment of
the Certificate of Incorporation of the Company with respect to
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<PAGE> 18
the amendments contemplated by this Agreement, and (iv) as set forth in Section
5.3 of the LGE Disclosure Letter, no consent, approval or authorization of, or
filing with or notification to, any Regulatory Authority (including, without
limitation, any Korean Regulatory Authority) or any third party is required on
its part in connection with the execution, delivery or performance of this
Agreement.
5.4 Plan Disclosure Documents. Those portions of the Plan Disclosure
Documents made in reliance upon and in conformity with information furnished to
the Company by LGE in writing for use in connection with the preparation
thereof will not, at the date mailed by the Company to the creditors and equity
security holders of the Company, the date the Bankruptcy Court enters the
Confirmation Order or the Closing Date, contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Company
acknowledges that the portions of the Plan Disclosure Documents set forth in
Section 5.4 of the LGE Disclosure Letter constitute the only information
furnished in writing by LGE.
ARTICLE VI
6.0 Agreements of the Company.
6.1 Reorganization Proceedings. The Company shall, and shall cause its
subsidiaries to, use commercially reasonable efforts to consummate the
Financial Restructuring, including, without limitation:
(a) the preparation and filing of the Plan Disclosure Documents with
the SEC as soon as practicable after the date hereof and in no event later than
August 10, 1998, and the clearance of the Plan Disclosure Documents by the SEC;
(b) subject to Section 6.4, the preparation and filing of supplements
or amendments to the Plan Disclosure Documents with the SEC and the clearance of
such supplements or amendments to the Disclosure Statement by the SEC if at any
time prior to the Closing Date any fact, event or development should occur or
exist that is required under the Securities Act, the Exchange Act or the
Bankruptcy Code or the rules and regulations thereunder to be set forth in a
supplement or amendment to the Plan Disclosure Documents;
(c) the solicitation and receipt of the acceptances of the requisite
holders of claims against the Company pursuant to the Plan Solicitation;
(d) the filing with, and approval of, the Bankruptcy Court of the Plan
Disclosure Documents;
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<PAGE> 19
(e) the confirmation of the Plan under the Bankruptcy Code using the
acceptances of the Plan received by the Company pursuant to the Plan
Solicitation; and
(f) the consummation of the transactions provided for in the Plan,
including, without limitation, the transactions described in Section 2 of this
Agreement.
6.2 Compliance with Bankruptcy Code. The Company shall, and shall cause
its subsidiaries, to the extent applicable, to, comply in all material respects
with the Bankruptcy Code and all other laws, rules, regulations, decrees and
orders promulgated thereunder in connection with obtaining the Confirmation
Order.
6.3 Consummation of the Plan. The Company shall, and shall cause its
subsidiaries to, use commercially reasonable efforts to obtain, and shall
obtain, and shall refrain from taking any action that would be likely to
prevent, materially impede or delay or result in the revocation of (i) the
entry by the Bankruptcy Court of the Confirmation Order; (ii) the full and
complete discharge (to the fullest extent possible under Section 1141(d) of the
Bankruptcy Code) of the debts of the Company intended to be discharged under
the Plan; and (iii) the vesting upon the entry of the Confirmation Order of the
property of the Company in the reorganized Company free and clear of all claims
and interests of creditors and equity security holders except as otherwise
provided in the Plan.
6.4 Amendments to Plan and Plan Disclosure Documents. The Company shall
not consent to any amendment or supplement to, or modification of, the Plan or
the Plan Disclosure Documents without the prior written consent of LGE.
6.5 Conduct of the Business. From the date hereof until the Closing Date,
except to the extent that LGE otherwise consents in writing or except as
contemplated or permitted by the Operating Plan or the Financial Restructuring,
(a) the Company shall, and shall cause its subsidiaries to, conduct business in
the ordinary course in substantially the same manner as presently conducted and
use commercially reasonable efforts to keep available the services of Jeffrey
P. Gannon and his "Tier 1" and "Tier 2" reports and to preserve the
relationships with key customers, suppliers and others having business dealings
with the Company or its subsidiaries, and (b) the Company shall not, and shall
cause its subsidiaries not to:
(i) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets (other than inventory) in any such case, that would be
material to the Company;
(ii) sell, lease, license, encumber or otherwise dispose of,
or agree to sell, lease, license, encumber or otherwise dispose of, any of the
assets or properties of the Company or its subsidiaries other than in the
ordinary course of business or pursuant to the
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<PAGE> 20
Operating Plan or to existing contractual obligations set forth in Section
6.5(ii) of the Company Disclosure Letter for the sale or other disposition of
equipment;
(iii) amend its Certificate of Incorporation, By-laws or other
organizational documents, except as set forth in the Plan;
(iv) redeem or otherwise acquire any shares of its capital
stock or issue any capital stock or any option, warrant or right relating
thereto;
(v) incur any liabilities, obligations or indebtedness for
borrowed money or guarantee any such liabilities, obligations or indebtedness;
(vi) permit, allow or suffer any of the assets or properties
of the Company or any subsidiary to be subject to any Lien other than Liens (A)
securing debt reflected on the balance sheet of the Company as of December 31,
1997 or the notes thereto or contained in the Company SEC Documents, (B)
referred to in Section 6.5 of the Company Disclosure Letter, (C) for Taxes not
yet due or payable or being contested in good faith, (D) that constitute
mechanics', carriers', workmens' or like Liens, Liens arising under original
purchase price conditional sales and other similar contracts and equipment
leases with third parties entered into in the ordinary course, (E) incurred in
the ordinary course of business consistent with past practice in connection
with workers' compensation, unemployment insurance and social security,
retirement and other legislation and in the case of Liens described in clauses
(B), (C), (D) or (E) that, individually or in the aggregate, would not
reasonably be expected to have or result in a Material Adverse Effect;
(vii) cancel any material indebtedness (individually or in the
aggregate) or waive any claims or rights of material value;
(viii) make any change in any method of accounting or
accounting practice or policy, except as may be required by GAAP;
(ix) modify, amend, terminate or permit the lapse of any
material lease of real property (except modifications or amendments associated
with renewals of leases in the ordinary course of business consistent with
past practice of the Company);
(x) enter into any material contract or arrangement;
(xi) enter into any agreement or take any action in violation
of the terms of this Agreement or the Restructuring;
(xii) settle any material tax audit, make or change any
material tax election;
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<PAGE> 21
(xiii) hire any new executive officers of the Company or any
of its subsidiaries;
(xiv) except as contemplated by the New Salaried Employee
Documents, (A) grant any director, executive officer or other employee of the
Company or any of its subsidiaries any increase in compensation, except, in the
case of employees who are not executive officers or directors, normal salary
increases consistent with past practice or as was required under employment
agreements or arrangements in effect as of the date of the most recent audited
financial statements included in the Company SEC Documents, (B) grant any such
director, executive officer or other employee any severance or termination pay,
except as was required under any employment, severance or termination
agreements or arrangements or plans in effect as of the date of the most
recent audited financial statements included in the Company SEC Documents,
(C) enter into any employment, severance or termination agreement with, or
adopt any plan or arrangement covering, any such director, executive officer,
or employee or (D) adopt any new benefit plan or arrangement (including,
without limitation, an employee benefit plan, a bonus plan, a severance plan
or any equity-based plan) or amend any such plan, except as required by law;
(xv) enter any new line of business; or
(xvi) agree, whether in writing or otherwise, to do any of the
foregoing.
For purposes for this Section 6.5 only, "material" means involving $5 million
or more.
6.6 Employee Matters. On or before August 21, 1998, the Company shall
complete all documents reasonably necessary to implement the newly adopted
compensation, retention and incentive plan for its salaried employees (the "New
Salaried Employee Documents") and such documents shall be satisfactory in form
and substance to LGE.
6.7 Implementation of Operating Plan. The Company shall use its best
efforts to deliver to LGE on August 7, 1998 detailed programs (the
"Implementation Program") (including in all cases, specific actions and
deadlines for such actions and material economic terms) reasonably satisfactory
to LGE for the achievement of each of the following in a manner consistent in
all material respects with the Operating Plan:
(i) the discontinuation of the manufacturing operations of the
Company and its subsidiaries;
(ii) the outsourcing of the production of the Company's products
(including the sourcing of televisions from the Reynosa facility to be
transferred to an LGE affiliate ("LGE Reynosa") on the Closing Date and the
sourcing by LGE Reynosa from a third party of color picture tubes in quantities
and at prices necessary to permit LGE Reynosa to provide such televisions); and
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<PAGE> 22
(iii) the implementation of strategies to maximize the value
of vestigial side band technology.
If the Company does not deliver the final Implementation Program by August 7,
1998, it shall deliver a progress report on such date and deliver the final
Implementation Program to LGE as soon as practicable thereafter, and in any
event prior to August 31, 1998.
6.8 Access and Information. So long as this Agreement remains in effect,
the Company will (and will cause each of its subsidiaries, and each of the
accountants, counsel, consultants, officers, directors, employees, agents and
representatives (the "Representatives") of or to any of the Company and its
subsidiaries, to) give LGE and its Representatives, subject to existing
confidentiality agreements and to be used only for the purposes of this
Agreement and the transactions contemplated hereby, full access during
reasonable business hours to all of their respective properties, assets, books,
contracts, commitments, reports and records relating to the Company and its
subsidiaries, excluding such material which is attorney-client privilege or
attorney work product, and furnish to them, subject to existing confidentiality
agreements and to be used only for the purposes of this Agreement and the
transactions contemplated hereby, all such documents, records and information
with respect to the properties, assets and business of the Company and its
subsidiaries and copies of any work papers relating thereto, excluding such
material which is subject to attorney-client privilege or attorney work
product, as LGE shall from time to time reasonably request. The Company will
keep LGE generally informed as to the affairs of the Company and its
subsidiaries. In addition, the Company shall deliver to LGE, not later than
the 20th business day following the end of each fiscal month prior to the
Closing, financial statements for the Company and its consolidated subsidiaries
as of the end of such fiscal month, together with a certificate of the chief
financial officer of the Company demonstrating in reasonable detail that the
Company is in compliance with the financial covenants set forth in Section
10(f) of this Agreement. The Company will promptly notify LGE if any
information is requested from it or any negotiations or discussions are sought
to be initiated with the Company concerning any merger, consolidation, business
combination, liquidation, reorganization, sale of substantial assets, sale of
shares of capital stock, purchase of claims or similar transactions involving
the Company or any subsidiary or any division of any thereof (an "Alternative
Proposal"), and will promptly communicate to LGE the terms of any proposal or
inquiry which it may receive in respect of any Alternative Proposal.
6.9 Further Actions. The Company shall, and shall cause each of its
subsidiaries to:
(a) use commercially reasonable efforts to take or cause to be taken
all actions, and to do or cause to be done all other things, necessary, proper
or advisable in order for it to fulfill and perform its obligations in respect
of this Agreement, or otherwise to consummate and make effective the
transactions contemplated hereby;
(b) as promptly as practicable, (i) make, or cause to be made, all
filings and submissions required under any applicable law or regulation, and
give such reasonable
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<PAGE> 23
undertakings as may be required in connection therewith, and (ii) use all
reasonable efforts to obtain or make, or cause to be obtained or made, all
permits necessary to be obtained or made by the Company or any of its
subsidiaries, in each case in connection with this Agreement, the Plan, or the
consummation of the other transactions contemplated hereby or thereby;
(c) coordinate and cooperate with LGE in exchanging such information
and supplying such reasonable assistance as may be reasonably requested by LGE
in connection with the filings and other actions contemplated by this Agreement;
(d) not issue any press release or make any other public statement
regarding the Restructuring without the prior consent of LGE or except as
otherwise required by law (provided that in such an event the Company shall
give advance notice to LGE of any such release or statement); and
(e) the Company shall promptly notify LGE in writing of any fact,
condition, event or occurrence that could reasonably be expected to result in
the failure of any of the conditions contained in Sections 8, 9 and 10 to be
satisfied, promptly upon becoming aware of the same.
6.10 Operating Plan. As soon as practicable after the end of each fiscal
month, and in no event later than the 20th business day after the end thereof,
the Company shall deliver to LGE a certificate of the Company, duly executed by
the President, the chief financial officer and the restructuring officer,
restating the representations and warranties contained in Section 4.13 of the
Agreement.
6.11 Leveraged Lease Documents. From the date hereof through the Closing,
except as otherwise consented to in writing by LGE, the Company and its
subsidiaries shall perform all of their respective obligations under and comply
with all terms and provisions of the Leveraged Lease Documents other than its
obligation to pay Basic Rent (as defined therein) thereunder.
6.12 Interest Charges. The Company will pay LGE each month in arrears (a)
all interest accruing on amounts owed but unpaid by the Company to LGE under
the Reimbursement Agreement and (b) up to $2,635,468 of interest accruing on
amounts owed but unpaid by the Company to LGE under the Financial Support
Agreement.
ARTICLE VII
7.0 Agreements of LGE.
7.1 Voting. Subject to compliance with applicable bankruptcy and
non-bankruptcy laws, LGE hereby agrees to vote all claims against and interests
in the Company that it holds in favor of the Plan to effectuate this Agreement
and the Financial Restructuring.
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<PAGE> 24
7.2 Further Action. LGE shall, and shall cause each of its subsidiaries
to, use commercially reasonable efforts to take or cause to be taken all
actions, and to do or cause to be done all other things, necessary, proper or
advisable in order for it to fulfill and perform its obligations in respect of
this Agreement, or otherwise to consummate and make effective the transactions
contemplated hereby, including without limitation:
(a) as promptly as practicable, (i) make, or cause to be made, all
filings and submissions required under any applicable law or regulation
(including any Korean law or regulation), and give such reasonable
undertakings as may be required in connection therewith, and (ii) use all
reasonable efforts to obtain or make, or cause to be obtained or made, all
permits necessary to be obtained or made by LGE or any of its subsidiaries,
including such permits as are required from any Korean Regulatory Authority,
in each case in connection with this Agreement, the Plan, or the consummation
of the other transactions contemplated hereby or thereby.
(b) make all necessary and desirable appearances before the Bankruptcy
Court and participate in the bankruptcy case;
(c) make in a timely fashion all necessary and desirable applications
and notices to any applicable entities in the United States for approval of this
Agreement and the transactions contemplated hereby, including, if applicable,
notice in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976;
(d) promptly notify the Company in writing of any fact, condition,
event, or occurrence that could reasonable be expected to result in the
failure of any of the conditions contained in Sections 8 and 9 to be satisfied,
promptly upon becoming aware of the same; and
(e) to obtain, and to refrain from taking any action that would be
likely to prevent, materially impede or delay or result in the revocation of
(i) the entry by the Bankruptcy Court of the Confirmation Order; (ii) the full
and complete discharge (to the fullest extent possible under Section 1141(d) of
the Bankruptcy Code) of the debts of the Company intended to be discharged under
the Plan; and (iii) the vesting upon the entry of the Confirmation Order of the
property of the Company in the reorganized Company free and clear of all claims
and interests of creditors and equity security holders in accordance with the
Plan.
7.3 Information. So long as this Agreement remains in effect, LGE shall
coordinate and cooperate with the Company or its agents in exchanging such
information and supplying such reasonable assistance as may be reasonably
requested by the Company in connection with the filings and other actions
contemplated in this Agreement. LGE shall also, as the Company may from time
to time reasonably request, timely provide the Company with any requested
information regarding LGE's performance under this Agreement, LGE's ability to
perform under this Agreement, LGE's ability to satisfy the conditions set forth
in Section 9, and other matters in any way related to this Agreement and the
transactions contemplated hereby.
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<PAGE> 25
7.4 Release of Zenith Texas. LGE hereby agrees to release Zenith Texas
upon consummation of the transactions contemplated by Sections 2(b) and 2(c)
from any claims of LGE against Zenith Texas arising as a result of the
satisfaction by LGE of Zenith Texas' obligations under the Leveraged Lease
Documents.
ARTICLE VIII
8.0 Conditions to Obligations of the Parties. The Company and LGE shall
perform their obligations under this Agreement and implement the transaction
contemplated hereby in good faith and in accordance with the standards of fair
dealing. The obligations of the Company and LGE to consummate the transactions
contemplated to occur at the Closing shall be subject to the satisfaction or
waiver prior to the Closing of each of the following conditions; any of which
may be waived by the written consents of the Company and LGE to the extent
permitted by applicable law without the necessity for notice to, or approval
from, the Bankruptcy Court or any other party.
(a) Approvals. All material authorizations, permits, consents, orders or
approvals of, or registrations, declarations or filings with, or expirations of
applicable waiting periods imposed by, any Regulatory Authority (including,
without limitation, the United States and the Republic of Korea) necessary for
the consummation of the transactions contemplated hereby (collectively, the
"Requisite Approvals"), shall have been obtained or filed or shall have
occurred, and such Requisite Approvals shall not contain any condition or
restriction that is reasonably likely to have or result in a Material Adverse
Effect or impair the Company's ability to carry on its business as contemplated
by the Operating Plan.
(b) No Litigation, Injunctions, or Restraints. Consummation of the
transactions contemplated hereby or by the Plan shall not have been restrained,
enjoined or otherwise prohibited or made illegal by any applicable law, rule or
regulation, including any order, injunction, decree or judgment of any
Regulatory Authority; and no such law, rule, regulation, order, injunction,
decree or judgment that would have such an effect shall have been promulgated,
entered, issued or determined by any Regulatory Authority to be applicable to
this Agreement or the Plan. No action or proceeding shall be pending or
threatened by any Regulatory Authority or other person or entity on the Closing
Date before any Regulatory Authority to restrain, enjoin or otherwise prevent
the consummation of the transactions contemplated hereby or by the Plan or to
recover any material damages or to obtain other material relief as a result of
such transactions, or that otherwise relates to the application of such law,
rule or regulation.
(c) Confirmation of Plan and Entry of Confirmation Order. The Plan shall
have been confirmed by the Bankruptcy Court and the Confirmation Order, in form
and substance satisfactory to LGE and the Company, shall have been entered.
Any motion for rehearing or reconsideration of the Confirmation Order shall
have been denied or withdrawn.
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<PAGE> 26
The time allowed for appeals of the Confirmation Order shall have expired
without any appeal having been taken or, if the Confirmation Order shall have
been appealed, a final order of the district court having jurisdiction to hear
such appeal shall have affirmed the Confirmation Order and the time allowed to
appeal from such affirmance or to seek review or rehearing thereof shall have
expired and no further hearing, appeal or petition for certiorari can be taken
or granted. The Confirmation Order shall not have been modified, amended,
dissolved, revoked or rescinded, shall be in full force and effect on the
Closing Date and, without the necessity of any further action or proceedings by
the Company, the Bankruptcy Court shall have (x) as of the date of the
Confirmation Order and as of the Closing Date, effected a full and complete
discharge and release of, and thereby extinguished, all debts of the Company
(to the fullest extent possible under Section 1141(d)(1) of the Bankruptcy
Code) except as otherwise provided in the Plan and (y) vested the property of
the Company in the reorganized Company, free and clear of all claims and
interests of creditors and equity security holders except as otherwise provided
in the Plan and the Confirmation Order. The Plan shall have been substantially
consummated (other than the occurrence of the Closing hereunder).
(d) HSR Act Notification. The notifications of the Company and LGE
pursuant to the HSR Act, if any, shall have been made and the applicable
waiting period and any extensions thereof shall have expired or been
terminated.
(e) Releases. The Plan will contain releases, satisfactory in form and
substance to LGE and the Company in their respective sole discretion, from the
Company and its creditors of any and all claims and liabilities against the
individual members of the Company's Board of Directors, the Company and LGE and
their respective associates, affiliates, subsidiaries, officers, directors,
stockholders, representatives, employees, attorneys, financial or investment
advisors, consultants, accountants or agents, and their respective successors
and assigns.
ARTICLE IX
9.0 Conditions to the Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver prior to the Closing of each of
the following conditions, any of which may be waived in writing by the Company
by notice to LGE, without the necessity for notice to, or approval from, the
Bankruptcy Court or any other party:
(a) Representations and Warranties. The representations and warranties of
LGE set forth in this Agreement that are qualified as to materiality shall be
true and correct, and those that are not so qualified shall be true and correct
in all material respects, as of the date of this Agreement and as of the time
of the Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to materiality
shall be true and
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<PAGE> 27
correct and those that are not so qualified shall be true and correct in all
material respects, on and as of such earlier date), and the Company shall have
received a certificate signed by a duly authorized officer of LGE to such
effect.
(b) Performance of Obligations. LGE shall have performed or complied in
all material respects with all obligations and covenants required to be
performed or complied with by it under this Agreement.
ARTICLE X
10.0 Conditions to the Obligations of LGE. The obligations of LGE to
consummate the transactions contemplated to occur at the Closing shall be
subject to the satisfaction or waiver prior to the Closing of each of the
following conditions, any of which may be waived in writing by the LGE by
notice to Company, without the necessity for notice to, or approval from, the
Bankruptcy Court or any other party:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true
and correct in all material respects, as of the date of this Agreement and as
of the time of the Closing as though made at and as of such time, except to the
extent such representations and warranties expressly relate to an earlier date
(in which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such earlier
date), and LGE shall have received a certificate of the Company signed by the
chief executive officer and chief financial officer of the Company to such
effect.
(b) Performance of Obligations. The Company shall have performed or
complied in all material respects with all obligations and covenants required
to be performed or complied with by the Company under this Agreement, and LGE
shall have received a certificate of the Company signed by the chief executive
officer and chief financial officer of the Company to such effect.
(c) Management. Jeffrey P. Gannon and his "Tier 1" and "Tier 2" reports
shall not have resigned or indicated an intention to resign or, if any such
officer or employee shall have resigned, the Company shall have engaged a
replacement reasonably satisfactory to LGE.
(d) New Financing. The Company shall have entered into definitive
documentation with third parties for new senior financing on the terms
reasonably satisfactory to LGE in an amount of not less than $100 million and
such definitive documentation shall be reasonably satisfactory in form and
substance to LGE.
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<PAGE> 28
(e) Operating Plan. (i) All material changes to the Operating Plan shall
be satisfactory to LGE.
(ii) The Company shall have implemented the programs
contemplated by the Implementation Program in a manner satisfactory to LGE.
(iii) The Company and its subsidiaries shall have entered into, as
contemplated by the timetable in the Operating Plan, binding commitments for
the sale or liquidation of those non-essential assets to be disposed of
pursuant to the Operating Plan prior to the Closing Date at prices consistent
with the assumptions set forth in the Operating Plan for the 1999 fiscal year.
(f) Operating Results. The Company's operating results shall be
consistent with the Operating Plan in the following respects:
(i) the projected Cumulative Funding Requirement from April 1, 1998
through December 31, 1998 shall not exceed $94 million;
(ii) the actual Cumulative Funding Requirement for any three-month
period commencing with the three-month period beginning April 1, 1998 shall
not have exceeded the projections in the Operating Plan by more than 20%;
(iii) the projected cumulative EBITDA (loss) from April 1, 1998
through December 31, 1998 shall not exceed $(33) million; and
(iv) the actual EBITDA (loss) for any three-month period commencing
with the three-month period beginning April 1, 1998 shall not have exceeded
the loss projected by the Operating Plan by more than 20%.
(g) Contingent Liabilities. The Company shall not have any material
contingent liabilities (including environmental liabilities) other than
liabilities disclosed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 included in the Company SEC Documents or in
Section 4.5 of the Company Disclosure Letter.
(h) Condition of Assets. On or before August 11, 1998, Arthur Andersen
LLP ("AA") shall have issued a report on certain accounts of the Company as of
the June 27, 1998 balance sheet of the Company, which report shall cover the
items described in a letter, dated June 15, 1998, from AA to Ian G. Woods and
Robert N. Dangremond, and which report shall be satisfactory to LGE.
(i) Restructuring Costs. Actual and projected cash Restructuring Charges
from January 1, 1998 through December 31, 1998 shall not exceed $39 million and
the sum of
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<PAGE> 29
the projected cash Restructuring Charges and non-cash accruals for
environmental costs for 1998 and 1999 will not exceed $127 million.
(j) Plan Disclosure Documents. The Company shall have filed with the SEC
the Plan Disclosure Documents, which shall be reasonably satisfactory in form
and substance to LGE.
(k) Definitive Agreements. The Company and LGE shall have (i) entered
into the Reynosa Purchase Agreement, which shall contain provisions identifying
the products to be provided by LGE or its affiliate from the Reynosa facility
to the Company and the prices at which such products will be supplied, or the
Reynosa Operating Agreement, as the case may be, and (ii) the New Salaried
Employee Documents, all of which shall be satisfactory in form and substance to
LGE.
(l) Opinion of the Company's Counsel. LGE shall have received opinions
dated the Closing Date of the general counsel of the Company, and special
counsel to the Company, in form and substance reasonably satisfactory to LGE.
(m) Corporate Proceedings. All corporate proceedings of the Company and
its subsidiaries in connection with the transactions contemplated by this
Agreement and the Financial Restructuring, and all documents and instruments
incident thereto, shall be satisfactory in form and substance to LGE and its
counsel, and LGE and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
(n) Material Adverse Effect. No state of facts, event, change or
development shall exist or have occurred which would reasonably be expected to
have or result in a Material Adverse Effect subsequent to the date of this
Agreement.
(o) Calamities. There shall not have occurred (i) any increase or
decrease of 20% or more in the United States/Republic of Korea currency
exchange rate from the rate existing on the date hereof or a suspension of, or
limitation on, the markets therefor, (ii) a declaration of a banking moratorium
or any suspension of payments in respect of banks in the United States or the
Republic of Korea, (iii) any limitation (whether or not mandatory) by any
Regulatory Authority or other event that materially adversely affects the
ability of LGE to consummate the transactions contemplated hereby, or (iv) a
commencement of a war or armed hostilities or other national or international
calamity involving the United States or the Republic of Korea.
(p) Settlement. Any settlement arrangements with respect to licensing of
technology entered into by the Company with the Sony Corporation or any of its
affiliates shall be satisfactory in form and substance to LGE.
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<PAGE> 30
(q) Tuner Patent Royalties. LGE shall have determined in its sole
discretion that the aggregate tuner patent royalties between the Closing Date
and December 31, 2003 will not be less than 70% of the aggregate amount of such
royalties projected under the Operating Plan.
(r) Cross Defaults. No default or event of default shall have occurred
and be continuing under any of the Company's financing arrangements or any
other agreement that is material to the Company to which the Company or any of
its subsidiaries is a party or by which any of them is bound.
ARTICLE XI
11.1 Termination. This Agreement may be terminated at any time prior to
the Closing:
(a) by mutual written consent of LGE and the Company;
(b) by LGE or the Company:
(i) if the Closing shall not have occurred prior to December 15, 1998,
provided, that the right to terminate this Agreement pursuant to this clause
(i) shall not be available to any party whose failure to fulfill any obligation
under this Agreement results in the failure of the Closing to occur; or
(ii) if there shall be any statute, law, regulation or rule that makes
consummating the transactions contemplated hereby illegal or if any court or
other Regulatory Authority of competent jurisdiction shall have issued a
judgment, order, decree or ruling, or shall have taken such other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby and such judgment, order, decree or ruling
shall have become final and non-appealable;
(c) by LGE:
(i) if the Company shall have failed to perform in any material respect
any of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or shall
have breached in any material respect any representation or warranty not so
qualified, and the Company has failed to perform such obligation or cure any
such breach capable of being cured, within 30 days of its receipt of written
notice thereof from LGE, and such failure to perform shall not have been waived
in accordance with the terms of this Agreement;
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<PAGE> 31
(ii) if the Board of Directors of the Company or the Special Committee
withdraws or modifies (or publicly announces its intention to do so, or
resolves to do so) in a manner adverse to LGE (as determined by LGE in its
reasonable judgment) its approval or recommendation of this Agreement or the
transactions contemplated hereby or by the Restructuring; or
(iii) if any of the conditions set forth in Sections 8 and 10 shall become
impossible to fulfill (other than as a result of any breach by LGE of the terms
of this Agreement) and shall not have been waived in accordance with the terms
of this Agreement;
(d) by the Company:
(i) if LGE shall have failed to perform in any material respect any of its
obligations hereunder or shall have breached in any respect any representation
or warranty contained herein qualified by materiality or shall have breached in
any material respect any representation or warranty not so qualified, and LGE
have failed to perform such obligation or cure any such breach capable of being
cured, within 30 days of its receipt of written notice thereof from the
Company, and such failure to perform shall not have been waived in accordance
with the terms of this Agreement;
(ii) if any of the conditions set forth in Sections 8 and 9 shall become
impossible to fulfill (other than as a result of any breach by the Company of
the terms of this Agreement) and shall not have been waived in accordance with
the terms of this Agreement; or
(iii) if there is an Alternative Proposal which the Board of Directors in
good faith determines represents a superior transaction for the Company as
compared to the Financial Restructuring and the Board of Directors determines,
after consultation with counsel, that failure to terminate this Agreement would
be inconsistent with the compliance by the Board of Directors with its
fiduciary duties imposed by law; provided, however, that the right to terminate
this Agreement pursuant to this Section 11.1(d) shall not be available (i) if
the Alternative Proposal is subject to a financing condition, unless the Board
of Directors is of the opinion, after consultation with Peter J. Solomon &
Company or another nationally recognized investment banking firm, that the
Alternative Proposal is financeable, or (ii) if, prior to or concurrently with
any purported termination pursuant to this Section 11.1(d), (x) the Company or
the person or entity that made the Alternative Proposal (the "New Investor")
shall not have paid the expenses and fees contemplated by Section 11.3 and (y)
the Company and the New Investor shall not have entered into a legal, valid and
binding agreement with LGE pursuant to which such New Investor agrees to pay
LGE the Transaction Fee contemplated by Section 11.3 upon the earlier of (A)
the consummation of such Alternative Proposal and (B) the termination of such
Alternative Proposal, or (iii) if the Company has not provided LGE with five
business days' prior written notice of its intent to so terminate this
Agreement together with a summary of the material terms and conditions of such
Alternative Proposal.
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11.2 Effect of Termination. In the event of termination of this Agreement
by either the Company or LGE as provided in Section 11, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of LGE or the Company with respect to the transactions contemplated
under this Agreement, other than the provisions of this Article XI and Article
XII and except to the extent that such termination results from the wilful and
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
11.3 Expenses; Transaction Fee. (a) In the event that (i) the Board of
Directors of the Company or the Special Committee shall have withdrawn or
modified in a manner adverse to LGE its approval of this Agreement or the
transactions contemplated hereby or by the Restructuring and LGE terminates the
Agreement pursuant to Section 11(c)(ii), or (ii) the Bankruptcy Court approves,
or enters an order authorizing, an offer, proposal or agreement to effect an
Alternative Proposal, or (iii) during the period ending twelve months after the
termination of this Agreement, the Company consummates, becomes a party to or
enters into an agreement relating to or publicly announces, an Alternative
Proposal, the Company shall promptly, but in no event later than three business
days after the first of such events to occur, reimburse LGE and its affiliates
for all reasonable out-of-pocket expenses and fees (including, without
limitation, fees and expenses payable to all banks, investment banking firms
and other financial institutions and their respective agents and counsel, for
structuring the transactions contemplated hereby and all reasonable fees of
counsel, accountants, experts and consultants to LGE and its affiliates, and
all printing and advertising expenses) incurred or accrued by it or on its
behalf in connection with the negotiation, preparation, execution and
performance of this Agreement and the Restructuring (the "Transaction
Expenses"), provided, however, that LGE shall not be entitled to such
Transaction Expenses if the Company terminates this Agreement due to a material
breach by LGE of its obligations under this Agreement.
(b) In the event that during the twelve months after the termination of
this Agreement the Company consummates, becomes a party to or enters into an
agreement relating to, or publicly announces, an Alternative Proposal, the
Company shall, or shall cause the New Investor to, pay LGE a transaction fee of
$8 million (the "Transaction Fee") upon the earlier of (x) the consummation of
such Alternative Proposal or (y) the termination of such Alternative Proposal.
(c) The Transaction Expenses and Transaction Fee, if any, payable pursuant
to this Section 11.3 shall not be subject to any offset, return, recoupment or
counterclaim. The Company and LGE agree that the provisions of this Section
11.3 are commercially reasonable and necessary to induce LGE to enter into and
consummate the transactions contemplated hereby.
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<PAGE> 33
ARTICLE XII
12.1 Notices. All notices and other communications made in connection
with this Agreement shall be in writing and shall be deemed to have been duly
given if (a) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, (b) transmitted by hand delivery, (c) sent
by next-day or overnight mail or delivery, (d) transmitted by facsimile or (e)
sent by telecopy or telegram, addressed as follows:
(i) if to LGE,
LG Electronics Inc.
LG Twin Towers
20, Yoido-dong
Youngdungpo-gu
Seoul, Korea 150-721
Telecopy: 011-82-2-3777-5303
Telephone: 011-82-2-3777-3049
Attention: Chief Financial Officer
and to:
LG Electronics Inc.
6133 North River Road
Rosemont, IL 600118
Telecopy: 847-692-3576
Telephone: 847-692-4630
Attention: Nam K. Woo
with copies to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Telephone: (212) 909-6586
Attention: Steven R. Gross, Esq.
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<PAGE> 34
(ii) if to the Company,
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, IL 60025-2493
Telecopy: (847) 391-8584
Telephone: (847) 391-8064
Attention: Richard F. Vitkus, General Counsel
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Telecopy: (312) 861-2200
Telephone: (312) 861-2200
Attention: James H.M. Sprayregen
or, in each case, at such other address as may be specified in writing to the
other party hereto in accordance with this Section 12.1.
12.2 Governing Law. This agreement shall be governed by the internal laws
of the State of Delaware without giving effect to the conflict of laws rules
thereof.
12.3 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any of the provisions of this Agreement were
not to be performed in accordance with the terms hereof and that the parties
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at law or equity.
12.4 Miscellaneous. This Agreement (including the Annexes hereto) and
the Disclosure Letters constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof. In the event of any conflict between
this Agreement and the Commitment Letter between the Company and LGE relating
to the subject matter of Section 2(e), this Agreement shall govern. If any
term, provision, covenant or restriction of this Agreement is held by a court
of competent jurisdiction to be invalid, void or unenforceable, the remainder
of the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, successors and permitted
assigns. Nothing in this Agreement shall confer any rights upon any person or
entity other than the parties hereto and their respective heirs, successors and
permitted assigns. No consequential, punitive or exemplary damages shall under
any circumstances be recoverable by either party in respect of any claim
pursuant to this Agreement or in connection with the
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<PAGE> 35
consummation of or any failure to consummate the transactions contemplated
hereby. This Agreement may be executed in counterparts, each of which shall be
deemed an original and all of which shall together constitute one and the same
instrument. The headings contained in this Agreement are for purposes of
convenience only and shall not affect the meaning or interpretation of this
Agreement. None of the terms of this Agreement may be waived, altered or
amended except by an instrument in writing duly executed by the parties hereto.
No failure or delay in exercising any right, power or privilege hereunder will
operate as a waiver thereof, nor will any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity or otherwise. All information set forth in
any of the Annexes hereto or in any Section of the Company Disclosure Letter
shall be deemed as if also set forth in each and all of the Annexes hereto and
each and all Sections of the Company Disclosure Letter, whether actually set
forth therein or not. The Company and LGE agree that the representations and
warranties and the Operating Plan of the Company shall not be affected or
deemed waived, modified, qualified or supplemented by reason of (i) any
disclosure by the Company or any of its advisors, consultants or
representatives to LGE or any of LGE's advisors, consultants or representatives
(other than as set forth in this Agreement, the Company Disclosure Letter
hereto or in the Company SEC Documents as of the date hereof), (ii) any
investigation made by or on behalf of LGE or any of its advisors, consultants
or representatives or (iii) the fact that LGE or any of such advisors,
consultants or representatives knew or should have known that any such
representation or warranty or the Operating Plan is or might be inaccurate.
12.5 Recommendations. Notwithstanding anything else contained in this
Agreement, either the Board of Directors of the Company or the Special Committee
may at any time withdraw or modify its approval or recommendation of this
Agreement or the transactions contemplated hereby or by the Restructuring in the
event that it determines, after consultation with counsel, that failure to so
withdraw or modify its recommendation would not be consistent with compliance
with its fiduciary duties imposed by law; provided, however, that such
withdrawal or modification shall not in any manner release the Company from its
obligations under this Agreement unless LGE exercises its right to terminate
this Agreement pursuant to Section 11.1(c)(ii), in which case Article XI shall
govern.
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<PAGE> 36
IN WITNESS WHEREOF, the Company and LGE have caused this Agreement to be
duly executed as of the day and year first above written.
ZENITH ELECTRONICS CORPORATION
By /s/ JEFFREY P. GANNON
------------------------
Name: Jeffrey P. Gannon
Title: President and Chief Executive Officer
LG ELECTRONICS INC.
By /s/ CHA HONG (JOHN) KOO
------------------------
Name: Cha Hong (John) Koo
Title: President and Chief Executive Officer
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<PAGE> 37
Annexes
Annex A Operating Plan
Annex B The Proposal
Annex C Terms of Senior Secured PIK Notes
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<PAGE> 38
Annex C
PRINCIPAL TERMS OF SENIOR SECURED PIK NOTES
Issuer: The Company
Maturity: Tenth anniversary of Closing Date.
Rate: LIBOR + 6.5% payable quarterly.
Interest will be payable in cash only to
the extent that the EBITDA/Cash Interest
Expense Ratio for the immediately
preceding four fiscal quarters exceeds
1.5. Otherwise interest will be payable
in kind.
Ranking: Pari passu with all existing and future
senior debt of the Company and senior to
all subordinated debt of the Company.
Collateral and Guarantees: Second lien on all assets of the Company
and its subsidiaries other than
receivables and inventory. Guaranteed
by each of the Company's subsidiaries.
Mandatory Prepayments: On sale of assets and out of excess cash.
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