<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
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<S> <C> <C> <C> <C>
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- ----------------------------------------------------------------------------------------------------------------------
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
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TABLE OF CONTENTS
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PAGE
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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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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
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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.
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<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.
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<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.
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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
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("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
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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."
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<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
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<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.
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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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<PAGE> 48
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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<PAGE> 49
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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<PAGE> 77
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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<PAGE> 78
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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<PAGE> 79
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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<PAGE> 80
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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<PAGE> 81
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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<PAGE> 82
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.
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<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>
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<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.
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<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
89
<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
90
<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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<PAGE> 106
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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<PAGE> 108
(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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<PAGE> 109
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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<PAGE> 110
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>
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<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.
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<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
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<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.
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<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.
107
<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.
108
<PAGE> 121
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.
109
<PAGE> 122
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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<PAGE> 124
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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<PAGE> 125
<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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<PAGE> 126
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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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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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.
127
<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
128
<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
129
<PAGE> 142
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.
130
<PAGE> 143
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.
131
<PAGE> 144
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.
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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.
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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
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<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: [ ]
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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>
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<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>
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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
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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.
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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.
B-12
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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.
B-13
<PAGE> 209
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
B-14
<PAGE> 210
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
B-15
<PAGE> 211
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
$27,000 was made in January, 1998.
Employment Cases
The Company has a number of employment Claims, charges or lawsuits alleging
various types of discrimination. There are eleven age discrimination lawsuits in
Texas arising out of restructurings that took place in 1995 and 1996. The
remaining matters are charges filed with various state and federal agencies.
Product Liability
The Company is the defendant in a number of products liability cases,
including cases alleging wrongful death or severe injury resulting from alleged
defects in the Company's products. The Company has undertaken defenses in such
cases. The Company is self-insured for a portion of its products liability
claims and has established reserves at a level that it believes are appropriate
to the cases commenced.
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<PAGE> 212
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following Summary Compensation Table sets forth, for the periods
indicated, the cash compensation and certain other components of compensation of
those persons who were, at December 31, 1997, the chief executive officer of the
Company and the other four most highly compensated executive officers of the
Company. The table includes the former Chief Executive Officer of the Company,
Peter S. Willmott, who left the Company in January, 1998, and two former
executive officers of the Company, Ramesh Amin and Dennis Winkleman, who left
the Company in 1997, whose compensation would have placed them in the group of
the four other most highly compensated officers of the Company had they been
executive officers as of December 31, 1997. Those listed in the table are
hereinafter referred to as the "Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) 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
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<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.
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<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).
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<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
Exhibit 4(a)
AMENDED AND RESTATED
CREDIT AGREEMENT
among
ZENITH ELECTRONICS CORPORATION, as Borrower,
THE LENDERS SIGNATORY HERETO,
CITIBANK, N.A. as Issuing Bank
and
CITICORP NORTH AMERICA, INC., as Agent for the Issuing Bank and
the Lenders
June 29, 1998
<PAGE> 2
AMENDED AND RESTATED
CREDIT AGREEMENT
among
ZENITH ELECTRONICS CORPORATION, as Borrower,
THE LENDERS SIGNATORY HERETO,
CITIBANK, N.A. as Issuing Bank
and
CITICORP NORTH AMERICA, INC., As Agent
For the Foregoing Lenders
Index
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS.........................................................2
ARTICLE 2 THE LOANS AND THE LETTERS OF CREDIT................................33
Section 2.1 Extension of Credit........................................33
Section 2.2 Manner of Borrowing and Disbursement of Loans..............35
Section 2.3 Interest...................................................39
Section 2.4 Fees.......................................................41
Section 2.5 Prepayment/Reduction of Commitment.........................42
Section 2.6 Repayment..................................................43
Section 2.7 Notes; Loan Accounts.......................................44
Section 2.8 Manner of Payment..........................................44
Section 2.9 Reimbursement..............................................46
Section 2.10 Pro Rata Treatment.........................................47
Section 2.11 Application of Payments....................................48
Section 2.12 Use of Proceeds............................................49
Section 2.13 All Obligations to Constitute One Obligation..............49
Section 2.14 Maximum Rate of Interest...................................49
Section 2.15 Letters of Credit..........................................50
ARTICLE 3 CONDITIONS PRECEDENT...............................................55
Section 3.1 Conditions Precedent to Initial Advance....................55
Section 3.2 Conditions Precedent to Each Advance.......................58
Section 3.3 Conditions Precedent to Each Letter of Credit..............59
ARTICLE 4 REPRESENTATIONS AND WARRANTIES.....................................60
Section 4.1 General Representations and Warranties.....................60
Section 4.4 Survival of Representations and Warranties, etc............72
ARTICLE 5 GENERAL COVENANTS..................................................72
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.1 Preservation of Existence and Similar Matters..............72
Section 5.2 Compliance with Applicable Law.............................72
Section 5.3 Maintenance of Properties..................................73
Section 5.4 Accounting Methods and Financial Records...................73
Section 5.5 Insurance..................................................73
Section 5.6 Payment of Taxes and Claims................................74
Section 5.7 Visits and Inspections.....................................74
Section 5.8 Conduct of Business........................................74
Section 5.9 ERISA......................................................75
Section 5.10 Lien Perfection............................................75
Section 5.11 Location of Collateral; Consignment of Inventory...........75
Section 5.12 Protection of Collateral...................................76
Section 5.13 Assignments and Records of Accounts........................77
Section 5.14 Administration of Accounts.................................77
Section 5.15 The Blocked Account........................................78
Section 5.16 Further Assurances.........................................79
Section 5.17 Broker's Claims............................................80
Section 5.18 Indemnity..................................................80
Section 5.19 Environmental Matters......................................80
Section 5.20 Warehouse Arrangement......................................81
Section 5.22 Post Closing Deliveries....................................81
ARTICLE 6 INFORMATION COVENANTS..............................................82
Section 6.1 Monthly Financial Statements and
Section 6.2 Intentionally Omitted......................................82
Section 6.3 Performance Certificates...................................82
Section 6.4 Access to Accountants......................................83
Section 6.5 Additional Reports.........................................83
Section 6.6 Notice of Litigation and Other Matters.....................84
ARTICLE 7 NEGATIVE COVENANTS.................................................86
Section 7.1 Indebtedness...............................................87
Section 7.2 Guaranties.................................................87
Section 7.3 Liens......................................................88
Section 7.4 Restricted Payments and Purchases..........................88
Section 7.5 Investments................................................88
Section 7.6 Affiliate Transactions.....................................89
Section 7.7 Liquidation; Change in Ownership, Name, or Year;
Disposition or Acquisition of Assets; Etc..................90
Section 7.8 Intentionally Omitted......................................91
Section 7.9 Intentionally Omitted......................................92
Section 7.10 Intentionally Omitted......................................92
Section 7.11 Intentionally Omitted......................................92
Section 7.12 Intentionally Omitted......................................92
Section 7.13 Intentionally Omitted......................................92
Section 7.14 Tuning Patent Royalties; LGE Payable.......................92
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.15 Sales and Leasebacks.......................................92
Section 7.16 Amendment and Waiver.......................................92
Section 7.17 ERISA Liability............................................92
Section 7.18 Prepayments................................................93
Section 7.19 Negative Pledge............................................93
ARTICLE 8 DEFAULT............................................................93
Section 8.1 Events of Default..........................................93
Section 8.2 Remedies...................................................98
ARTICLE 9 THE AGENT.........................................................100
Section 9.1 Appointment and Authorization.............................100
Section 9.2 Interest Holders..........................................100
Section 9.3 Consultation with Counsel.................................100
Section 9.4 Documents.................................................100
Section 9.5 Agent and Affiliates......................................100
Section 9.6 Responsibility of the Agent...............................101
Section 9.7 Action by Agent...........................................101
Section 9.8 Notice of Default or Event of Default.....................101
Section 9.9 Responsibility Disclaimed.................................102
Section 9.10 Indemnification...........................................102
Section 9.11 Credit Decision...........................................103
Section 9.12 Successor Agent...........................................103
Section 9.13 Agent May File Proofs of Claim............................104
Section 9.14 Collateral................................................104
Section 9.15 Release of Collateral.....................................104
ARTICLE 10 MISCELLANEOUS.....................................................105
Section 10.1 Notices...................................................105
Section 10.2 Expenses..................................................106
Section 10.3 Waivers...................................................107
Section 10.4 Set-Off...................................................108
Section 10.5 Assignment................................................108
Section 10.6 Counterparts..............................................111
Section 10.7 Governing Law.............................................111
Section 10.8 Severability..............................................111
Section 10.9 Headings..................................................111
Section 10.10 Source of Funds...........................................111
Section 10.11 Entire Agreement..........................................111
Section 10.12 Amendments and Waivers....................................111
Section 10.13 Other Relationships.......................................112
Section 10.14 Pronouns..................................................112
Section 10.15 Disclosure................................................112
Section 10.16 Replacement of Lender.....................................113
ARTICLE 11 YIELD PROTECTION..................................................113
Section 11.1 Eurodollar Rate Basis Determination.......................113
Section 11.2 Illegality................................................113
Section 11.3 Increased Costs...........................................114
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 11.4 Effect On Other Advances..................................116
Section 11.5 Capital Adequacy..........................................116
ARTICLE 12 JURISDICTION, VENUE AND WAIVER OF JURY TRIAL......................117
Section 12.1 Jurisdiction and Service of Process.......................117
Section 12.2 Consent to Venue..........................................117
Section 12.3 Waiver of Jury Trial......................................118
</TABLE>
iv
<PAGE> 6
EXHIBITS
Exhibit A - Form of Assignment and Assumption Agreement
Exhibit B - Form of Blocked Account Letter
Exhibit C - Form of Borrowing Base Certificate
Exhibit D - Form of Note
Exhibit E - Form of Request for Advance
Exhibit F - Form of Request for Issuance of Letter of Credit
Exhibit G - Copy of Security Agreement and First Amendment
Exhibit H - Form of Loan Certificate
Exhibit I - Form of Performance Certificate
Exhibit J - Form of Subsidiary Guaranty
Exhibit K - Form of Subsidiary Security Agreement
SCHEDULES
Schedule A-1 - Additional Unsecured Debt
Schedule C-1 - Commitment Ratios
Schedule P-1 - Liens
Schedule S-1 - Salomon Lease Transaction
Schedule 4.1(c)-1 - Subsidiaries
Schedule 4.1(c)-2 - Partnerships/Joint Ventures
Schedule 4.1(d) - Outstanding Capital Stock Ownership
Schedule 4.1(h) - Material Contracts; Collective Bargaining
Schedule 4.1(l) - Investments/Guaranties as of the Agreement Date
Schedule 4.1(m) - Litigation
Schedule 4.1(o) - Intellectual Property
Schedule 4.1(u) - Insurance
Schedule 4.1(w)-1 - Leased Real Property
Schedule 4.1(w)-2 - Owned Real Property
Schedule 4.1(x) - Environmental Matters
Schedule 4.2 - Accounts
Schedule 5.11 - Location of Collateral
Schedule 5.15(d) - Bank Accounts
Schedule 7.6 - Affiliate Transactions
Annex 1 - Agenda of Closing Documents
v
<PAGE> 7
AMENDED AND RESTATED
CREDIT AGREEMENT
among
ZENITH ELECTRONICS CORPORATION, as Borrower,
THE LENDERS SIGNATORY HERETO,
Citibank, N.A. as Issuing Bank
and
CITICORP NORTH AMERICA, INC., As Agent
For the Foregoing Lenders,
dated as
of the 29th day of June, 1998:
W I T N E S S E T H:
WHEREAS, the Borrower, the Issuing Bank, the Agent, and the other financial
institutions (the "Previous Banks") listed on the signature pages of that
certain Credit Agreement, dated as of March 31, 1997 (as amended, the "Original
Credit Agreement") were parties to the Original Credit Agreement; and
WHEREAS, the Borrower has decided to terminate the Receivables
Securitization and the sale of its Accounts under the Receivables Purchase
Agreement; and
WHEREAS, at the request of the Borrower, the Agent, the Issuing Bank and
the Lenders have agreed to increase the Commitment to $125,000,000, to make
Loans against certain assets of the Borrower, including the Borrower's
Accounts, and to otherwise amend and restate the Original Credit Agreement in
its entirety as set forth herein; and
WHEREAS, the Borrower acknowledges and agrees that the Liens granted to
the Lenders, the Issuing Bank, the Agent, and the Previous Banks pursuant to
the Original Credit Agreement or otherwise, shall remain outstanding and in
full force and effect in accordance with the terms of the Original Credit
Agreement, as renewed, amended or restated pursuant to the Loan Documents (as
defined herein) and shall continue to secure the Obligations (as defined
herein); and
WHEREAS, the Borrower acknowledges and agrees that (i) the Obligations (as
defined herein) represent, among other things, the amendment, restatement, and
modification of the Obligations (as defined in the Original Loan Agreement)
arising in connection with the Original Credit Agreement and the other Loan
Documents (as defined in the Original Credit Agreement) executed in
<PAGE> 8
connection therewith; (ii) the parties hereto intend that the Original Credit
Agreement and the other Loan Documents (as defined in the Original Credit
Agreement) executed in connection therewith and the Collateral pledged
thereunder shall secure, without interruption or impairment of any kind, all
existing Obligations under the Original Credit Agreement and the other Loan
Documents (as defined in the Original Credit Agreement) executed in connection
therewith as so amended, restated, and modified hereunder, together with all
other Obligations hereunder; (iii) all Liens evidenced by the Original Credit
Agreement and the other Loan Documents (as defined in the Original Credit
Agreement) executed in connection therewith are hereby ratified, confirmed and
continued; (iv) the Loan Documents (as defined herein) are intended to restate,
renew, amend and modify the Original Credit Agreement and the other Loan
Documents (as defined in the Original Credit Agreement) executed in connection
therewith; and (v) this Agreement shall not constitute a novation and shall in
no way adversely affect or impair the priority of the Liens granted by the
Original Credit Agreement and the other Loan Documents (as defined in the
Original Credit Agreement); and
WHEREAS, the parties hereto intend that the provisions of the Original
Credit Agreement and the other Loan Documents (as defined in the Original
Credit Agreement) executed in connection therewith, to the extent restated,
amended and modified hereby, are hereby superseded and replaced by the
provisions hereof and of the Loan Documents (as defined herein);
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, the parties hereto agree that the Original Credit
Agreement is amended and restated to read in its entirety as follows:
ARTICLE 1
DEFINITIONS
For the purposes of this Agreement:
"Account Debtor" shall mean any Person who is obligated under an Account.
"Accounts" shall mean all accounts, contract rights, chattel paper,
instruments, drafts, acceptances and documents of the Borrower or any of the
Borrower's Subsidiaries arising from the sale or lease of goods or the
provision of services or the
2
<PAGE> 9
license of Intellectual Property by the Borrower or any of the Borrower's
Subsidiaries in the ordinary course of its business, whether secured or
unsecured, and whether now existing or hereafter created or arising, and
"Account" shall mean any one of the foregoing.
"Additional Unsecured Debt" shall mean the unsecured Funded Debt
consisting of revolving credit lines made available to be borrowed by the
Borrower, which are provided to the Borrower by one or more lenders, in an
aggregate principal amount not exceeding $160 million, and on terms and
conditions substantially similar to those set forth on Schedule A-1 attached
hereto, and evidenced by documentation in form and substance, acceptable to the
Agent in its sole discretion. As of the Agreement Date, all Additional
Unsecured Debt of the Borrower is listed on Schedule A-1.
"Advance" or "Advances" shall mean amounts of the Loans advanced by the
Lenders to the Borrower pursuant to Section 2.2 hereof on the occasion of any
borrowing.
"Affiliate" shall mean any Person directly or indirectly controlling,
controlled by, or under common control with the Borrower, and any Person who is
a director, officer, or partner of the Borrower. For purposes of this
definition, "control", when used with respect to any Person, includes, without
limitation, the direct or indirect beneficial ownership of ten percent (10%) or
more of the outstanding voting securities or voting equity of such Person or
the power to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise.
"Agent" shall mean Citicorp North America, Inc., a Delaware corporation,
acting as Agent for the Lenders and the Issuing Banks, and any successor agent
appointed pursuant to Section 9.12.
"Agent's Office" shall mean the office of the Agent located at 399 Park
Avenue, 6th Floor, Zone 4, New York, NY 10043, or such other office as may be
designated pursuant to the provisions of Section 10.1 of this Agreement.
"Aggregate Credit Obligations" shall mean, as of any particular time, the
sum of (a) the aggregate principal amount of all Revolving Loans then
outstanding, plus (b) the aggregate amount of all Letter of Credit Obligations
then outstanding, plus (c) the aggregate amount of all Swing Loans then
outstanding.
"Agreement" shall mean this Agreement.
3
<PAGE> 10
"Agreement Date" shall mean the date as of which this Agreement is dated.
"Applicable Law" shall mean, in respect of any Person, all provisions of
constitutions, statutes, rules, regulations, and orders of governmental bodies
or regulatory agencies applicable to such Person, and all final orders and
decrees of all courts and arbitrators in proceedings or actions to which the
Person in question is a party or by which it is bound.
"Assignment and Assumption Agreement" shall mean that certain form of
Assignment and Assumption Agreement attached hereto as Exhibit A, pursuant to
which each Lender may, as further provided in Section 10.5 hereof, sell or
participate a portion of its Loans or Commitment.
"Assignment of Notes" shall mean that certain Assignment of Notes dated
March 31, 1997, executed by the Borrower and Microcircuits, pursuant to which
the Borrower and Microcircuits each pledge to the Agent, for its benefit and
the benefit of the Issuing Banks and the Lenders, all of their respective
right, title and interest in and to the Finance Corp. Subordinated Notes and
certain other promissory notes held by the Borrower, as the same may be amended
or modified from time to time.
"Authorized Signatory" shall mean such senior personnel of the Borrower as
may be duly authorized and designated in writing by the Borrower to execute
documents, agreements, and instruments on behalf of the Borrower.
"Available Letter of Credit Amount" shall mean, as of any particular time,
an amount equal to the lesser of (a) $25,000,000, and (b) the Available
Commitment.
"Available Commitment" shall mean, as of any particular time, (a) the
amount of the Commitment minus (b) the Aggregate Credit Obligations then
outstanding.
"Bankruptcy Code" shall mean the United States Bankruptcy Code (11 U.S.C.
Section 101 et seq.), as now or hereafter amended, and any successor statute.
"Base Rate" shall mean, at any time, a fluctuating and floating rate per
annum equal to the higher of:
(i) the highest rate of interest announced publicly by Citibank in
New York, New York from time to time, as Citibank's base rate; and
4
<PAGE> 11
(ii) the sum (adjusted to the nearest one-quarter of one percent
(0.25%) or, if there is no nearest one-quarter of one percent (0.25%), to
the next higher one-quarter of one percent (0.25%) of (A) one-half of one
percent (0.50%) per annum plus (B) the rate per annum obtained by dividing
(I) the latest three-week moving average of secondary market morning
offering rates in the United States for three-month certificates of deposit
of major United States money market banks, such three-week moving average
(adjusted to the basis of a year of 360 days) being determined weekly on
each Monday (or, if such day is not a Business Day, on the next succeeding
Business Day) for the three-week period ending on the previous Friday (or,
if such day is not a Business Day, on the next preceding Business Day) by
Citibank on the basis of such rates reported by certificate of deposit
dealers to, and published by, the Federal Reserve Bank of New York, or, if
such publication shall be suspended or terminated, on the basis of
quotations for such rates received by Citibank from three (3) New York
certificate of deposit dealers of recognized standing selected by Citibank,
by (II) a percentage equal to one hundred percent (100%) minus the average
of the daily percentages specified during such three-week period by the
Federal Reserve Board (or any successor) for determining the maximum
reserve requirement (including, but not limited to, any emergency,
supplemental or other marginal reserve requirement) for Citibank in respect
of liabilities which consist of or which include (among other liabilities)
three-month nonpersonal U.S. Dollar time deposits in the United States Plus
(C) the average during such three-week period of the daily net annual
assessment rates estimated by Citibank for determining the then current
annual assessment payable by Citibank to the Federal Deposit Insurance
Corporation (or any successor) for insuring deposits of Citibank in the
United States; and
(iii) for any day one-half of one percent (1/2%) per annum above the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or if such
rate is not so published for any day which is a Business Day, the average
of the quotation for such day on such transactions received by Citibank
from three Federal funds brokers of recognized standing selected by it;
5
<PAGE> 12
but in no event higher than the maximum rate permitted by Applicable Law. Each
change in the Base Rate shall take effect simultaneously with the corresponding
change in the applicable rate described in clause (i), (ii) or (iii).
"Base Rate Advance" shall mean an Advance which the Borrower requests to
be made as a Base Rate Advance or which is reborrowed as a Base Rate Advance,
in accordance with the provisions of Section 2.2 hereof.
"Blocked Account" shall have the meaning set forth in Section 5.15 hereof.
"Blocked Account Letter" shall mean any letter agreement executed by a
Blocked Account depository bank and the Agent and acknowledged and agreed to by
the Borrower, in the form of Exhibit B hereto, as such letter agreements may be
amended, supplemented or otherwise modified from time to time.
"Borrower" shall mean Zenith Electronics Corporation, a Delaware
corporation.
"Borrowing Base" shall mean, at any particular time, the sum of:
(a) up to 75% of the remainder of Eligible Accounts less the
Warranty/Advertising Reserve; plus
(b) up to 60% of the Value of Eligible Finished Goods VCR Inventory;
plus
(c) up to 50% of the Value of Eligible Finished Goods TV and Other
Inventory; plus
(d) up to 35% of the Value of Eligible Picture Tube Inventory; plus
(e) (i) the lesser of (x) 65% of the value of the Tuning Patents, and
(y) $34,000,000 (provided, however, commencing September 30,
1998, and on the last day of each calendar quarter thereafter,
such $34,000,000 advance amount shall be reduced by $2,250,000),
minus (ii) the Funai Reserve; plus
(f) the amount of $25,000,000 in connection with the Other Assets;
provided, however, (i) the Agent reserves the right to reduce
such advance amount against the Other Assets if, in its
reasonable determination, there is a material reduction in
6
<PAGE> 13
the value of the Other Assets, and (ii) such advance amount shall
be permanently reduced by the Net Cash Proceeds received in
connection with the sale of the Glenview property, as set forth
in Section 7.7; minus
(g) the amount of reserves which the Agent shall have established, in
its reasonable discretion, for such purposes as the Agent shall
have deemed necessary, including, without limitation, reserves
for (i) price adjustments and damages; (ii) obsolescence of
Inventory; (iii) special order goods and deferred shipment sales;
(iv) accrued but unpaid ad valorem and personal property tax
liability; and(v) market value declines.
"Borrowing Base Certificate" shall mean a certificate of an Authorized
Signatory of the Borrower substantially in the form of Exhibit C attached
hereto.
"Borrowing Base Deficiencies" shall mean any condition wherein the
Aggregate Credit Obligations exceed the Borrowing Base as set forth on the most
recent Borrowing Base Certificate delivered to the Agent and the Lenders or as
otherwise determined by the Agent.
"Business Day" shall mean any day excluding Saturday, Sunday and any day
which is a legal holiday under the laws of the State of Illinois or the State
of New York or is a day on which banking institutions located in either of such
states are closed; provided, however, that when used with reference to a
Eurodollar Advance (including the making, continuing, prepaying or repaying of
any Eurodollar Advance), the term "Business Day" shall also exclude any day in
which banks are not open for dealings in deposits of United States dollars on
the London interbank market.
"Capital Expenditures" shall mean, for any period, on a consolidated basis
for the Borrower and the Borrower's Subsidiaries, the aggregate of all
expenditures made by the Borrower or any of the Borrower's Subsidiaries during
such period that, in conformity with GAAP, are required to be included in or
reflected on the consolidated balance sheet as a capital asset of the Borrower
or any of the Borrower's Subsidiaries, including Capitalized Lease Obligations.
"Capital Stock" shall mean, as applied to any Person, any capital stock of
such Person, regardless of class or designation, and all warrants, options,
purchase rights, conversion or
7
<PAGE> 14
exchange rights, voting rights, calls or claims of any character with respect
thereto.
"Capitalized Lease Obligation" shall mean that portion of any obligation
of a Person as lessee under a lease which at the time would be required to be
capitalized on the balance sheet of such lessee in accordance with GAAP.
"Change of Control" shall mean any change in the ownership of the
Borrower's Capital Stock that results in less than a majority of the Borrower's
outstanding Voting Stock being owned beneficially by the LGE Group.
"Citibank" shall mean Citibank, N.A., a national banking association.
"Clearing Account" shall mean Account No. 4072-6121 (or such other account
number established by the Agent for purposes of Section 5.15 hereof) maintained
by the Agent at Citibank, N.A. pursuant to Section 5.15 of this Agreement, and
over which the Agent has the sole and exclusive access and control for
withdrawal purposes pursuant to Section 5.15 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" shall mean all property pledged as collateral security for
the Obligations pursuant to the Security Documents or otherwise, and all other
property of the Borrower or any Material Subsidiary that is now or hereafter in
the possession or control of the Agent, the Issuing Banks or any Lender or on
which the Agent, the Issuing Banks or any Lender has been granted a Lien.
"Commercial Letter of Credit" shall mean a documentary letter of credit
issued in respect of the purchase of goods or services by the Borrower in the
ordinary course of its business.
"Commitment" shall mean the several obligations of the Lenders to advance
as Revolving Loans the aggregate amount of up to $125,000,000 to the Borrower
on or after the Agreement Date, in accordance with their respective Commitment
Ratios, pursuant to the terms hereof, and as such amount may be reduced from
time to time, pursuant to the terms hereof.
"Commitment Ratios" shall mean the percentage in which the Lenders are
severally bound to make Advances of Revolving Loans to the Borrower under the
Commitment, which, as of the Agreement
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Date, are set forth (together with dollar amounts thereof) on Schedule C-1
attached hereto.
"Current Assets" shall mean, with respect to the Borrower and the
Borrower's Subsidiaries taken on a consolidated basis, the aggregate amount of
all assets which would, in accordance with GAAP, properly be classified as
current assets; provided, however, such method of determination shall be
modified where in conflict with the following: Current Assets will include only
those assets which may, in the ordinary course of business, be reasonably
converted into cash within a period of one (1) year from the date as of which
such computation is being made, and Current Assets will exclude (a) loans and
advances to or receivables due from employees or officers of the Borrower, and
(b) all deferred assets, other than prepaid items such as insurance, taxes,
interest, commissions, rents, royalties, and similar items.
"Current Liabilities" shall mean, with respect to the Borrower and the
Borrower's Subsidiaries, taken on a consolidated basis, the aggregate amount of
all current obligations, as determined in accordance with GAAP, but in any
event shall include the total amount of the LGE Payable and the total amount of
the Loans, each in the amount outstanding on the date as of which such
computation is being made, and all obligations except those having a maturity
date which is more than one (1) year from the date as of which such computation
is being made.
"Customer Disputes" shall mean all instances in which a customer of the
Borrower has affirmatively asserted grounds for nonpayment of an Account,
including, without limitation, any rejection of goods by an Account Debtor, any
repossession of goods by the Borrower, any return of goods to the Borrower by
any Account Debtor, or any claim by an Account Debtor of non-conformity of
goods, total or partial failure of delivery, set off, counterclaim, or breach
of warranty or any other claim which is inconsistent with the Borrower's
warranties in regard to the Accounts set forth in Section 4.2 of this
Agreement.
"Date of Issue" shall mean the date on which an Issuing Bank issues a
Letter of Credit pursuant to Section 2.15 hereof.
"Default" shall mean any Event of Default, and any of the events specified
in Section 8.1 hereof regardless of whether there shall have occurred any
passage of time or giving of notice (or both) that would be necessary in order
to constitute such event an Event of Default.
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"Default Rate" shall mean a simple per annum interest rate equal to, (a)
with respect to outstanding principal, the sum of (i) the applicable Interest
Rate Basis, plus (ii) the applicable Interest Rate Margin plus (iii) two
percent (2%), and (b) with respect to all other Obligations, the sum of (i) the
Base Rate, plus (ii) the applicable Interest Rate Margin with respect to Base
Rate Advances, plus (iii) two percent (2%).
"Dividends" shall mean, any direct or indirect distribution, dividend, or
payment to any Person on account of any Capital Stock of the Borrower or any of
the Borrower's Subsidiaries.
"Eligible Accounts" shall mean, at any particular date, the Accounts of
the Borrower:
(a) which are not unpaid for more than sixty (60) days from the
original due date shown on the invoice for the same, and (ii) which are not
unpaid for more than one hundred fifty (150) days from the date on which the
Borrower first transmitted such invoice to the Account Debtor thereunder;
(b) as to which the applicable Account Debtor has been sent an
invoice within ten (10) days after such Accounts have been entered on the
financial records of the Borrower;
(c) which are not owed by an Account Debtor with respect to whom more
than fifty percent (50%) of the Accounts of such Account Debtor are more than
sixty (60) days past due;
(d) which are not owed by an Account Debtor who is an Affiliate or an
employee of the Borrower;
(e) which are not owed by an Account Debtor who has disputed its
liability with respect to such Accounts (to the extent of such disputed amount);
(f) which arise at the time that title to the goods is transferred to
the Account Debtor (FOB warehouse);
(g) which are not subject to any other Customer Disputes;
(h) which are not owed by an Account Debtor which is a federal, state
or local governmental entity or agency, unless all required procedures for the
effective collateral assignment of the Account under the Assignment of Claims
Act of 1940 shall have been complied with, to the satisfaction of the Agent;
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<PAGE> 17
(i) which are not owed by an Account Debtor located outside the
United States of America, unless the Account is supported by a letter of credit
which is issued or confirmed by a United States bank or other financial
institution the publicly traded unsecured long term indebtedness of which is
rated "A2" or better by Moody's Investor's Service, Inc. or "A" or better by
Standard & Poor's or by a bank or other financial institution which is otherwise
acceptable to the Agent in the Agent's reasonable discretion or insured by the
Federal Deposit Credit Insurance Association;
(j) which are not owed by an Account Debtor: (i) which has commenced
a voluntary case under the federal bankruptcy laws, as now constituted or
hereafter amended; (ii) which has made an assignment for the benefit of
creditors; (iii) as to which a decree or order for relief has been entered by a
court having jurisdiction in the premises in an involuntary case under the
federal bankruptcy laws, as now constituted or hereafter amended; (iv) as to
which any other petition or other application for relief under the federal
bankruptcy laws has been filed; (v) which has failed, suspended business, ceased
to be solvent; or (vi) which has consented to or suffered the appointment of a
receiver, trustee, liquidator or custodian for it or for all or a significant
portion of its assets or affairs;
(k) which are not owed by any Account Debtor which is located in the
State of New Jersey, the State of West Virginia, or the State of Minnesota,
unless the Borrower has qualified as a foreign corporation authorized to
transact business in such state or has filed all required reports, including,
without limitation, a "notice of business activities report," with the
appropriate officials in the respective State for the then current year or is
otherwise exempt from such filings pursuant to applicable state law;
(l) which are not owed by an Account Debtor which, in the Agent's
reasonable credit judgment, does not have a satisfactory credit standing in
relation to the amount of credit extended to such Account Debtor;
(m) which are bona fide, valid and enforceable obligations of the
Account Debtor thereunder;
(n) as to which the Borrower has performed all of its obligations
then required to have been performed, including, without limitation, the
delivery of merchandise or rendition of services applicable to such Account;
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(o) which are not owed by an Account Debtor with whom the Borrower
has an agreement or understanding for any deduction from the Account, except for
discounts or allowances which are made in the ordinary course of business for
prompt payment and which discounts or allowances are reflected in the
calculation of the face value of each invoice related to such Account and except
for cooperating advertising allowances which are included in the
Warranty/Advertising Reserve;
(p) which are not evidenced by any promissory note, chattel paper or
instrument, except such notes, chattel paper or instruments which shall have
been delivered by the Borrower to the Agent;
(q) which are subject to a valid and continuing first priority Lien
in favor of the Agent and the Lenders pursuant to the Loan Documents as to which
all action necessary or desirable to perfect such security interest shall have
been taken, and to which the Borrower has good and marketable title, free and
clear of any Liens (other than Liens in favor of the Agent and the Lenders);
(r) to the extent any such Account owing by (i) Sears or Circuit
City, together with all other Accounts owing by such Person, does not exceed in
the aggregate twenty percent(20%) of all Accounts of the Borrower, and (ii) any
other Account Debtor, together with all other Accounts owing by such Account
Debtor, does not exceed in the aggregate ten percent (10%) of all Accounts of
the Borrower; and
(s) each Account otherwise satisfying the requirements of
subparagraphs (a) through (r) above will be reduced by any contra account
balances for amounts then due to the applicable Account Debtor from the
Borrower.
"Eligible Finished Goods TV and Other Inventory" shall mean, as of any
particular time, the portion of the Inventory which constitutes finished goods
and which: (a) is a television or any other Inventory (except a video cassette
recorder) manufactured or purchased by the Borrower; (b) in the opinion of the
Agent, is not obsolete, slow-moving, unmerchantable, and is readily salable in
its current form; (c) is new and does not constitute any finished goods that
were returned to the Borrower due to defect or damage; (d) fulfills each and
every one of the Inventory Eligibility Requirements; and (e) is not Eligible
Picture Tube Inventory or Eligible Finished Goods VCR Inventory.
"Eligible Finished Goods VCR Inventory" shall mean, as of any particular
time, the portion of the Inventory which
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constitutes finished goods and which: (a) is a video cassette recorder
manufactured or purchased by the Borrower; (b) in the opinion of the Agent, is
not obsolete, slow-moving, unmerchantable, and is readily salable in its current
form; (c) is new and does not constitute any finished goods that were returned
to the Borrower due to defect or damage; (d) fulfills each and every one of the
Inventory Eligibility Requirements; and (e) is not Eligible Picture Tube
Inventory or Eligible Finished Goods TV and Other Inventory.
"Eligible Inventory" shall mean Eligible Picture Tube Inventory, Eligible
Finished Goods TV and Other Inventory and Eligible Finished Goods VCR
Inventory.
"Eligible Picture Tube Inventory" shall mean, as of any particular time,
the portion of the Inventory of the Borrower which constitutes color television
picture tubes and which: (a) was manufactured or purchased by the Borrower; (b)
in the opinion of the Agent, is not obsolete, slow-moving, unmerchantable, and
is readily salable in its current form; (c) is new and does not constitute any
finished goods that were returned to the Borrower due to defect or damage; (d)
fulfills each and every one of the Inventory Eligibility Requirements; and (e)
is not Eligible Finished Goods VCR Inventory or Eligible Finished Goods TV and
Other Inventory.
"Environmental Laws" shall mean any and all applicable federal, state,
local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, decrees or requirements of any Governmental Authority regulating,
relating to or imposing liability or standards of conduct concerning
environmental protection matters, including without limitation, Hazardous
Materials, as now or may at any time during the term hereof be in effect.
"Equipment" shall mean all machinery, apparatus, equipment, fittings,
furniture, fixtures, motor vehicles and other tangible personal property (other
than Inventory) of every kind and description used in the Borrower's operations
or owned by the Borrower or in which the Borrower has an interest, whether now
owned or hereafter acquired by the Borrower and wherever located, and all
parts, accessories and special tools and all increases and accessions thereto
and substitutions and replacements therefor.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
in effect on the Agreement Date and as such Act may be amended thereafter from
time to time.
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<PAGE> 20
"ERISA Affiliate" shall mean any "affiliate" of the Borrower within the
meaning of Section 414 of the Code.
"Eurodollar Advance" shall mean an Advance which the Borrower requests to
be made as a Eurodollar Advance or which is reborrowed as a Eurodollar Advance,
in accordance with the provisions of Section 2.2 hereof.
"Eurodollar Advance Period" shall mean, for each Eurodollar Advance, each
one, two, three or six month period, as selected by the Borrower pursuant to
Section 2.2 hereof, during which the applicable Eurodollar Rate (but not the
applicable Interest Rate Margin) shall remain unchanged. Notwithstanding the
foregoing, however: (i) any applicable Eurodollar Advance Period which would
otherwise end on a day which is not a Business Day shall be extended to the
next succeeding Business Day, unless such Business Day falls in another
calendar month, in which case such Eurodollar Advance Period shall end on the
next preceding Business Day; (ii) any applicable Eurodollar Advance Period
which begins on a day for which there is no numerically corresponding day in
the calendar month during which such Eurodollar Advance Period is to end shall
(subject to clause (i) above) end on the last day of such calendar month; and
(iii) no Eurodollar Advance Period shall extend beyond the Maturity Date or
such earlier date as would interfere with the repayment obligations of the
Borrower under Section 2.6 hereof. Interest shall be due and payable with
respect to any Advance as provided in Section 2.3 hereof.
"Eurodollar Basis" shall mean a simple per annum interest rate equal to
the quotient of (i) the Eurodollar Rate divided by (ii) one minus the
Eurodollar Reserve Percentage, stated as a decimal. The Eurodollar Basis shall
be rounded upward to the nearest one sixteenth of one percent (1/16%) and, once
determined, shall remain unchanged during the applicable Eurodollar Advance
Period, except for changes to reflect adjustments in the Eurodollar Reserve
Percentage.
"Eurodollar Rate" shall mean, for any Eurodollar Advance Period, the
average (rounded upward to the nearest one sixteenth of one percent (1/16%)) of
the interest rates per annum at which deposits in United States dollars for
such Eurodollar Advance Period are offered by the principal office of Citibank
in London, England to prime banks in the London interbank market at
approximately 11:00 a.m. (New York time) two (2) Business Days before the first
day of such Eurodollar Advance Period, in an amount approximately equal to the
principal amount of, and for a length of time approximately equal to the
Eurodollar Advance Period for, the Eurodollar Advance sought by the Borrower.
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<PAGE> 21
"Eurodollar Reserve Percentage" shall mean the percentage which is in
effect from time to time under Regulation D of the Board of Governors of the
Federal Reserve System, as such regulation may be amended from time to time, as
the maximum reserve requirement applicable with respect to Eurocurrency
Liabilities (as that term is defined in Regulation D), whether or not any
Lender has any Eurocurrency Liabilities subject to such reserve requirement at
that time. The Eurodollar Basis for any Eurodollar Advance shall be adjusted
as of the effective date of any change in the Eurodollar Reserve Percentage.
"Event of Default" shall mean any of the events specified in Section 8.1
hereof, provided that any requirement for notice or lapse of time, or both, has
been satisfied.
"Fee Letter" shall mean that certain fee letter of even date herewith
executed by the Borrower and addressed to the Agent.
"Finance Corp." shall mean Zenith Finance Corporation, a Delaware
corporation and a Subsidiary of the Borrower.
"Finance Corp. Subordinated Note" shall mean those certain subordinated
promissory notes dated March 31, 1997 issued by Finance Corp. in favor of the
Borrower and Microcircuits, respectively, pursuant to the Receivables
Securitization.
"Foreign Exchange Agreement" shall mean a foreign currency exchange
hedging product agreement providing foreign currency exchange protection, and
arising at any time between the Borrower, on the one hand, and the Agent (or an
Affiliate of the Agent), or one or more of the Lenders (or an Affiliate of a
Lender), on the other hand, as such agreement may be modified, supplemented or
amended, and in effect from time to time.
"Funai Litigation" shall mean Case No. Cv 98-4809-ER, pending in the
United States District Court, Central District of California, styled as Funai
Electric Co., Ltd. Vs. Zenith Electronics Corporation, or any successor case or
conversion thereof and shall include any appeal thereof.
"Funai Reserve" shall mean a reserve in the amount of $4,500,000;
provided, however, such reserve shall be reduced to zero upon the entry of an
order denying the request of the plaintiff in the Funai Litigation to deposit
into escrow all royalties which are subject of such litigation and shall remain
at zero thereafter until the entry of any order, settlement, or consent decree
requiring such an escrow arrangement.
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"Funded Debt" shall mean, with respect to the Borrower or any of the
Borrower's Subsidiaries on a consolidated basis, all obligations, liabilities
and indebtedness of the types described in subsections (a) through (e) of the
definition of Indebtedness set forth herein, including, but not limited to, the
LGE Debt, the Additional Unsecured Debt, and all obligations under the Loan
Documents and the Subordinated Debentures.
"GAAP" shall mean, as in effect from time to time, United States generally
accepted accounting principles consistently applied.
"Glenview Property" shall mean that certain real property owned by the
Borrower consisting of approximately 39,821 acres, including the building and
improvements located thereon, and located at 1000 North Milwaukee Avenue,
Glenview, Illinois.
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
government.
"Guaranty" or "guaranteed," as applied to an obligation (each a "primary
obligation"), shall mean and include (a) any guaranty, direct or indirect, in
any manner, of any part or all of such primary obligation, and (b) any
agreement, direct or indirect, contingent or otherwise, the practical effect of
which is to assure in any way the payment or performance (or payment of damages
in the event of non-performance) of any part or all of such primary obligation,
including, without limiting the foregoing, any reimbursement obligations as to
amounts drawn down by beneficiaries of outstanding letters of credit, and any
obligation of any Person, whether or not contingent, (i) to purchase any such
primary obligation or any property or asset constituting direct or indirect
security therefor, (ii) to advance or supply funds (1) for the purchase or
payment of such primary obligation or (2) to maintain working capital, equity
capital or the net worth, cash flow, solvency or other balance sheet or income
statement condition of any other Person, (iii) to purchase property, assets,
securities or services primarily for the purpose of assuring the owner or
holder of any primary obligation of the ability of the primary obligor with
respect to such primary obligation to make payment thereof or (iv) otherwise to
assure or hold harmless the owner or holder of such primary obligation against
loss in respect thereof.
"Hazardous Materials" shall mean any hazardous materials, hazardous
wastes, hazardous constituents, hazardous or toxic
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<PAGE> 23
substances, petroleum products (including crude oil or any fraction thereof),
friable asbestos containing materials defined or regulated as such in or under
any Environmental Law.
"HDTV Patents" shall mean all of the Borrower's United States patents and
patent applications for VSB technology or relating to and used in connection
with the high definition television technology of the Borrower.
"Immaterial Subsidiary" shall mean any domestic or foreign Subsidiary of
the Borrower, now existing or hereafter created, which owns assets (including
stock but excluding intercompany receivables) having an aggregate book value
not exceeding $750,000, and which is not material to the conduct of the
Borrower's business operations.
"Indebtedness" shall mean, with respect to the Borrower and the Borrower's
Subsidiaries, (a) any obligation for borrowed money; (b) any obligation
evidenced by bonds, debentures, notes or other similar instruments; (c) any
obligation to pay the deferred purchase price of property or for services
(other than in the ordinary course of business); (d) any Capitalized Lease
Obligation; (e) any obligation or liability of others secured by a Lien on
property owned by the Borrower or such Subsidiary, whether or not such
obligation or liability is assumed; (f) any obligation under any Interest Hedge
Agreement or Foreign Exchange Agreement; (g) any Guaranty (except items of
shareholders' equity or Capital Stock or surplus or general contingency or
deferred tax reserves); (h) any letter of credit issued for the account of the
Borrower or such Subsidiary; and (i) any other obligation or liability which is
required by GAAP to be shown as a liability on a consolidated balance sheet of
the Borrower and its Subsidiaries (other than reserves required under GAAP).
"Intellectual Property" means, with respect to any Person, collectively,
such Person's Patent Property and Trademark Property.
"Intellectual Property Security Agreements" shall mean, collectively, that
(a) certain Patent Collateral Assignment and Security Agreement dated March 31,
1997 between the Borrower and the Agent, pursuant to which the Borrower grants
to the Agent, on its behalf and on behalf of the Issuing Banks and the Lenders,
a security interest in all of the Borrower's right, title, and interest in and
to the Tuning Patents, all License Agreements, all Tuning Patent Royalties and
proceeds thereof, (b) certain Patent Collateral Assignment and Security
Agreement dated March 31, 1998 between the Borrower and the Agent, pursuant to
which the Borrower grants to the Agent on its behalf and on behalf of
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<PAGE> 24
the Issuing Banks and the Lenders, a security interest on all of the Borrower's
right, title and interest in and to the HDTV Patents and proceeds thereof, and
(c) certain Trademark Collateral Security Agreement dated March 31, 1997 between
the Borrower and the Agent, pursuant to which the Borrower grants to the Agent,
on its behalf and on behalf of the Issuing Banks and the Lenders, a security
interest in all of the Borrower's right, title, and interest in and to its
Trademark Property, and shall include any supplement to any of the foregoing.
"Interest Hedge Agreements" shall mean the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
Person calculated by applying a fixed or a floating rate of interest on the
same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements.
"Interest Rate Basis" shall mean the Base Rate or the Eurodollar Basis, as
appropriate.
"Interest Rate Margin" shall mean, (i) with respect to Base Rate Advances,
two percent (2%), and (ii) with respect to Eurodollar Advances, three and
one-quarter percent(3.25%).
"Inventory" shall mean all goods, merchandise and other personal property
owned and held for sale, and all raw materials, work or goods in process,
materials and supplies of every nature which contribute to the finished
products of the Borrower and any of the Borrower's Subsidiaries in the ordinary
course of its business, whether now owned or hereafter acquired by the Borrower
and any of the Borrower's Subsidiaries.
"Inventory Eligibility Requirements" shall mean that the Inventory:
(a) is owned solely by the Borrower;
(b) conforms to all of the warranties and representations regarding the
same which are set forth in this Agreement or any of the other Loan Documents;
(c) is located in the continental United States either (i) on real
property owned by the Borrower, or (ii) on leased premises in regard to which
the landlord, warehouseman or bailee thereof shall have executed and delivered
to the Agent an
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agreement, which shall be in form and substance acceptable to the Agent, waiving
any lien rights such landlord, warehouseman or bailee may hold in regard to the
Borrower's property in favor of the Lenders;
(d) is not subject to any claim of reclamation, or Lien, adverse claim,
interest or right of any other Person;
(e) consists of finished goods (which may include color television picture
tubes) purchased or manufactured by the Borrower in the ordinary course of its
business and does not consist of Inventory in transit, work in process or raw
materials;
(f) has not been consigned to or by any Person;
(g) is in good condition and meets all standards imposed by any Person
having regulatory authority over such goods, its use and/or sale, is not
obsolete, and is currently saleable in the normal course of the Borrower's
business;
(h) does not include any Inventory scheduled for return to vendors, excess
Inventory, slow-moving or obsolete Inventory, clearance Inventory, damaged
goods, display items, packaging materials, labels, name plates or similar
supplies, cash discounts, sample Inventory or shrinkage;
(i) is not located at any vendor/trade show;
(j) is not in the possession of LGE;
(k) has not been removed from regular stock for quality rework or other
corporate engineering matters;
(l) is personal property in which the Borrower has granted a valid and
continuing first Lien in favor of the Agent and the Lenders pursuant to the
Security Documents, and as to which all action necessary to perfect such
security interest shall have been taken; and
(m) is not covered, in whole or in part, by any security agreement,
financing statement, equivalent security or Lien instrument or continuation
statement which is on file or of record in any public office, except such as may
have been filed in favor of the Agent and the Lenders pursuant to the Security
Documents.
"Issuing Banks" shall mean Citibank, N.A., and any other Person who
hereafter may be designated as an Issuing Bank
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pursuant to an Assignment and Assumption Agreement or otherwise; and "Issuing
Bank" shall mean any one of the foregoing.
"Lenders" shall mean those lenders whose names are set forth on the
signature pages hereof under the heading "Lenders" and any assignees of the
Lenders who hereafter become parties hereto pursuant to and in accordance with
Section 10.5 hereof; and "Lender" shall mean any one of the foregoing Lenders.
"Letter of Credit Commitment" shall mean the several obligations of the
Issuing Banks to issue Letters of Credit in an aggregate face amount from time
to time not to exceed $25,000,000.
"Letter of Credit Obligations" shall mean, at any time, the sum of (a) an
amount equal to the aggregate undrawn and unexpired amount (including the
amount to which any such Letter of Credit can be reinstated pursuant to the
terms hereof) of the then outstanding Letters of Credit and (b) an amount equal
to the aggregate drawn, but unreimbursed drawings of any Letters of Credit.
"Letter of Credit Reserve Account" shall mean any account maintained by
the Agent for the benefit of any Issuing Bank, the proceeds of which shall be
applied as provided in Section 8.2(d) hereof.
"Letters of Credit" shall mean either Standby Letters of Credit or
Commercial Letters of Credit issued by Issuing Banks on behalf of the Borrower
from time to time in accordance with Section 2.15 hereof.
"LGE" shall mean LG Electronics Inc., a corporation organized under the
laws of the Republic of Korea.
"LGE Debt" shall mean the Funded Debt consisting of (a) a $45 million
credit line made available to be advanced to the Borrower by LGE, evidenced by
that certain promissory note dated as of March 31, 1998, and (b) an additional
credit line made available to be advanced to the Borrower by LGE after the
Agreement Date in an aggregate principal amount not exceeding $60 million, and
on terms and conditions, and evidenced by documentation (including, without
limitation, an amendment to the Subordination Agreement) in form and substance,
acceptable to the Agent in its sole discretion.
"LGE Group" shall mean LGE and any other Person that, directly or
indirectly, is controlled by LGE. For purposes of this definition,
"controlled" with respect to LGE means the
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possession, direct or indirect, of the power either (a) to vote more than 50% of
the Voting Stock of such Person or (b) to direct or cause the direction of the
management and policies of such Person, whether through the ownership of Voting
Stock, by contract or otherwise.
"LGE Obligations" shall mean all indebtedness of the Borrower to LGE in
connection with the LGE Debt, the Reimbursement Agreement, and the Subrogation
Obligations, and any document or instrument securing or evidencing the same.
"LGE Payable" shall mean, at any time, the aggregate outstanding account
payable of the Borrower to LGE arising from the Borrower's purchases from LGE
in the ordinary course of the Borrower's business.
"License Agreements" shall mean all agreements, whether now or hereafter
in existence, between the Borrower, as licensor, and any other Person, as
licensee, pursuant to which the Borrower grants to such Person any license or
other right in connection with any Tuning Patent.
"Lien" shall mean, with respect to any property, any mortgage, lien,
pledge, negative pledge agreement, assignment, charge, security interest, title
retention agreement, levy, execution, seizure, attachment, garnishment, or
other encumbrance of any kind in respect of such property, whether or not
choate, vested, or perfected.
"Loan Account" shall have the meaning set forth in Section 2.7 hereof.
"Loan Documents" shall mean this Agreement, the Notes, the Security
Documents, the Blocked Account Letters, the Set-Off Waiver Letter, the Fee
Letter, all reimbursement agreements relating to Letters of Credit issued
hereunder, all landlord, warehouseman or bailee waiver agreements in favor of
the Agent, all legal opinions or reliance letters issued by counsel to the
Borrower in connection herewith, all Requests for Advance, all Requests for
Issuance of Letters of Credit, all Borrowing Base Certificates, Interest Hedge
Agreements between the Borrower, on the one hand, and the Agent (or an
affiliate of the Agent) or one or more of the Lenders (or an affiliate of a
Lender), on the other hand, Foreign Exchange Agreements and all other
documents, instruments, certificates, and agreements executed or delivered in
connection with or contemplated by this Agreement, including, without
limitation, any security agreements or guaranty agreements from the Borrower's
Subsidiaries to the Agent, the Lenders and the Issuing Banks.
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"Loans" shall mean, collectively, the amounts advanced by the Lenders to
the Borrower under the Commitment, not to exceed the amount of the Commitment,
and evidenced by the Notes, and shall include the Revolving Loans and the Swing
Loans.
"Majority Lenders" shall mean Lenders (whose voting rights hereunder have
not been restricted pursuant to Section 2.2(e) hereof) the total of whose
Commitment Ratios equals or exceeds fifty-one percent (51%) of the Commitment
Ratios of all Lenders entitled to vote hereunder.
"Material Subsidiaries" shall mean Zenith Electronics Corporation of
Texas, a Texas corporation, Zenith Video Tech Corporation-Florida, a Delaware
corporation, Zenith Video Tech Corporation, a Delaware corporation, and any
other domestic Subsidiary of the Borrower, now or hereafter created, which owns
assets (including stock but excluding intercompany receivables) having an
aggregate book value in excess of $750,000; and "Material Subsidiary" shall
include any one of the foregoing, provided, however, Zenith Electronics
Corporation of Arizona shall not be deemed to be a "Material Subsidiary" unless
it owns assets (including stock but excluding intercompany receivables) having
an aggregate book value in excess of $1,500,000.
"Materially Adverse Effect" shall mean any materially adverse effect (a)
upon the business, assets, liabilities, condition (financial or otherwise), or
results of operations of the Borrower, or (b) upon the ability of the Borrower
to perform under this Agreement or any other Loan Document by the Borrower, or
(c) upon the rights, benefits or interests of the Agent, the Lenders or the
Issuing Banks in or to this Agreement, any other Loan Document or the
Collateral, in each case, resulting from any act, omission, situation, status,
event, or undertaking, either singly or taken together.
"Maturity Date" shall mean December 31, 1998, or such earlier date as
payment of the Loans shall be due (whether by acceleration or otherwise).
"Mexican Subsidiaries" shall mean Cable Productos de Chihuahua, S.A. de
C.V., Electro Partes de Matamoros, S.A. de C.V., Partes de Television de
Reynosa, S.A. de C.V., Radio Componentes de Mexico, S.A. de C.V., and Zenco de
Chihuahua, S.A. de C.V., and "Mexican Subsidiary" shall mean any one of the
foregoing.
"Microcircuits" shall mean Zenith Microcircuits Corporation, a Delaware
corporation that was merged with and into the Borrower
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on or about December 31, 1997, with the Borrower being the surviving entity.
"Mortgage" shall mean, collectively, that certain Mortgage, Deed of Trust,
Fixture Financing Statement, Assignment of Leases and Rents and Financing
Statement dated December 5, 1997, by and among the Borrower, Zenith Electronics
Corporation of Texas, the Agent, the Issuing Bank and a trustee, and recorded
in Cook County, Illinois and Hidalgo County, Texas, as modified by that certain
First Modification to Mortgage, Deed of Trust, Fixture Financing Statement,
Assignment of Leases and Rents and Financing Statement of even date herewith,
and any other similar document executed by the Borrower or any Material
Subsidiary after the Agreement Date.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
"Necessary Authorizations" shall mean all material authorizations,
consents, permits, approvals, licenses, and exemptions from, and all filings
and registrations with, and all reports to, any Governmental Authority whether
federal, state, local, and all agencies thereof, which are required for the
conduct of the businesses and the ownership (or lease) of the properties and
assets of the Borrower.
"Net Cash Proceeds" shall mean, with respect to any sale, lease, transfer
or other disposition of assets by the Borrower or any issuance by the Borrower
of any Capital Stock or the incurrence by the Borrower of any Funded Debt
(other than the Obligations), the aggregate amount of cash received for such
assets or Capital Stock, or as a result of such Funded Debt, net of reasonable
and customary transaction costs properly attributable to such transaction and
payable by the Borrower in connection with such sale, lease, transfer or other
disposition of assets or the issuance of any Capital Stock or the incurrence of
any Funded Debt, including without limitation, sales commissions and
underwriting discounts.
"Net Income" shall mean, for any period, the consolidated net income (or
deficit) of the Borrower and the Borrower's Subsidiaries for such period,
determined in accordance with GAAP.
"Notes" shall mean those certain revolving promissory notes of even date
in the aggregate principal amount of $125,000,000, issued by the Borrower to
each of the Lenders and substantially in the form of Exhibit D attached hereto,
and any extensions, renewals or amendments to, or replacements of, the
foregoing.
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"Obligations" shall mean (a) all payment and performance obligations of
the Borrower to the Lenders, the Issuing Banks, and the Agent under this
Agreement and the other Loan Documents (including all Letter of Credit
Obligations and including any interest, fees and expenses that, but for the
provisions of the Bankruptcy Code, would have accrued), as they may be amended
from time to time, or as a result of making the Loans or issuing the Letters of
Credit, (b) the obligation to pay an amount equal to the amount of any and all
damages which the Issuing Banks, the Lenders and the Agent, or any of them, may
suffer by reason of a breach by the Borrower of any obligation, covenant, or
undertaking with respect to this Agreement or any other Loan Document, and (c)
any obligations of the Borrower to the Agent (or an affiliate of the Agent) or
any Lender (or an affiliate of a Lender) under any Interest Hedge Agreement or
Foreign Exchange Agreement permitted hereunder.
"Old Notes" shall mean the "Notes," as defined in the Original Credit
Agreement.
"Original Credit Agreement" shall have the meaning set forth in the
recitals hereto.
"Other Assets" shall mean, collectively, the HDTV Patents, and all
Equipment and real property owned by the Borrower and located in the United
States, provided the Agent has a perfected first priority security interest in
and lien on such asset.
"Patent Property" shall mean, with respect to any Person:
(i) all of such Person's patents (including, with respect to the
Borrower, the Tuning 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 Borrower, each patent and
patent application referred to in Part A-1 of Schedule 4.1(o);
(ii) all reissues, divisions, continuations, continuations-in-part,
revisions, extensions, renewals and reexaminations of any of the items
described in clause (a) of this definition; and
(iii) all patent licenses of such Person(whether as licensee or
licensor), including, with respect to the Borrower, each patent license
referred to in Part A-2 of Schedule 4.1(o).
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"Payment Date" shall mean the last day of each Eurodollar Advance Period
for a Eurodollar Advance.
"Permitted Amount" shall have the meaning set forth in Section 7.11.
"Permitted Liens" shall mean, as applied to any Person:
(a) Any Lien in favor of the Agent, the Issuing Banks or the Lenders given
to secure the Obligations;
(b) (i) Liens on real estate for real estate taxes not yet delinquent and
(ii) Liens for taxes, assessments, judgments, governmental charges or levies, or
claims not yet delinquent or the non-payment of which is being diligently
contested in good faith by appropriate proceedings and for which adequate
reserves have been set aside on such Person's books;
(c) Liens of carriers, warehousemen, mechanics, laborers, suppliers,
workers and materialmen incurred in the ordinary course of business for sums not
yet due or being diligently contested in good faith, if such reserve or
appropriate provision, if any, as shall be required by GAAP shall have been made
therefor;
(d) Liens incurred in the ordinary course of business in connection with
worker's compensation and unemployment insurance or other types of social
security benefits;
(e) Easements, rights-of-way, restrictions, and other similar encumbrances
on the use of real property which do not interfere with the ordinary conduct of
the business of such Person;
(f) Purchase money security interests provided that such Lien attaches
only to the asset so purchased by the Borrower and secures only Indebtedness
incurred by the Borrower in order to purchase such asset, but only to the extent
permitted by Section 7.1(d) hereof;
(g) Deposits to secure the performance of bids, trade contracts, tenders,
sales, leases, statutory obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business;
(h) Liens on assets of the Borrower on the Agreement Date as more fully
set forth on Schedule P-1, attached hereto; and
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(i) Liens in favor of LGE on the Capital Stock of the Borrower's domestic
Subsidiaries and on the HDTV Patents, Trademark Property, real estate and
Equipment located in the United States of the Borrower and its Material
Subsidiaries securing the LGE Debt and the Reimbursement Agreement; provided
such Liens are at all times fully subordinated to the prior Liens of the Agent
(for its benefit and the benefit of the Lenders) on such assets pursuant to the
Subordination Agreement.
"Person" shall mean an individual, corporation, partnership, trust, joint
stock company, limited liability company, unincorporated organization, or a
government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan within the meaning of Section
3(3) of ERISA or any other plan maintained for employees of any Person or any
Affiliate of such Person.
"Pledge Agreement" shall mean that certain Pledge Agreement dated March
31, 1997 executed by the Borrower in favor of the Agent, pursuant to which the
Borrower pledged to the Agent, for its benefit and for the benefit of the
Issuing Banks and the Lenders, all of the Borrower's right, title and interest
in and to the Capital Stock of its domestic Subsidiaries, and including any
supplement thereto executed in accordance with Section 7.7(g) hereof, as the
same may be amended, supplemented or modified from time to time.
"Pooling and Servicing Agreement" shall mean that Pooling and Servicing
Agreement dated March 31, 1997 executed by and among the Borrower, Finance
Corp., and the Receivables Trustee, together with the Series 1997-1 Supplement
thereto, as amended, supplemented or otherwise modified.
"Previous Banks" shall have the meaning set forth in the recitals hereto.
"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 Borrower or any of
the Borrower's Subsidiaries (including, without limitation, any surface water
thereon or adjacent thereto, and soil and groundwater thereunder).
"Receivables Purchase Agreements" shall mean the Receivables Purchase
Agreement, dated March 31, 1997, between the Borrower and Finance Corp. and the
Receivables Purchase Agreement, dated March 31, 1997, between Microcircuits and
Finance Corp.
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"Receivables Sales Agreement" shall mean that certain Receivables
Assignment Agreement of even date herewith, executed by the Receivables
Trustee, and Finance Corp., and transferring to the Borrower their interest in
the Receivables and Transferor Receivables (as such terms are defined in the
Pooling and Servicing Agreement).
"Receivables Securitization" shall mean the transactions described and
contemplated in the Securitization Documents.
"Receivables Trustee" shall mean Bankers Trust Company, or any other
Person serving as trustee under the Zenith Trade Receivables Master Trust 1997.
"Reimbursement Agreement" shall mean that certain Reimbursement Agreement
by and between the Borrower and LGE dated as of November 3, 1997, as amended by
that certain First Amendment to Reimbursement Agreement dated as of January 27,
1998.
"Reimbursement Obligations" shall mean the payment obligations of the
Borrower under Section 2.15(d) hereof.
"Replacement Event" shall have the meaning ascribed thereto in Section
10.16 hereof.
"Reportable Event" shall have the meaning set forth in Section 4043(c) of
ERISA and the regulations thereunder, but shall not include any event which is
not subject to the thirty (30) day notice requirement of such regulations other
than 29 Code of Federal Regulations Sections 2615.11, 2615.12 and 2615.19.
"Request for Advance" shall mean any certificate signed by an Authorized
Signatory requesting an Advance hereunder which will increase the aggregate
amount of the Loans outstanding, which certificate shall be denominated a
"Request for Advance," and shall be in substantially the form of Exhibit E
attached hereto. Each Request for Advance shall, among other things, specify
the date of the Advance, which shall be a Business Day, the amount of the
Advance, and the type of Advance.
"Request for Issuance of Letter of Credit" shall mean any certificate
signed by an Authorized Signatory requesting that an Issuing Bank issue a
Letter of Credit hereunder, which certificate shall be in substantially the
form of Exhibit F attached hereto, and shall, among other things, (a) specify
that the requested Letter of Credit is either a Commercial Letter of Credit or
a Standby Letter of Credit, (b) the stated amount of
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the Letter of Credit (which shall be in United States Dollars), (c) the
effective date (which shall be a Business Day) for the issuance of such Letter
of Credit, (d) the date on which such Letter of Credit is to expire (which shall
be a Business Day and which shall be subject to Section 2.15(a) hereof), (e) the
Person for whose benefit such Letter of Credit is to be issued, (f) other
relevant terms of such Letter of Credit, and (g) the Available Letter of Credit
Amount as of the scheduled date of issuance of such Letter of Credit.
"Restricted Payment" shall mean (a) Dividends and (b) any payment of any
management, consulting or similar fees payable by the Borrower or any of the
Borrower's Subsidiaries to any Affiliate.
"Restricted Purchase" shall mean any payment on account of the purchase,
redemption, or other acquisition or retirement of any shares of Capital Stock
of the Borrower or any Subsidiary of the Borrower.
"Revolving Loans" shall mean, collectively, the amounts advanced from time
to time by the Lenders to the Borrower under the Commitment, not to exceed the
amount of the Commitment, and evidenced by the Notes.
"Salomon Lease Transaction" shall mean those certain leveraged lease
financings of certain of the Borrower's and Zenith Electronics Corporation of
Texas's manufacturing equipment used in the production of color television
picture tubes, computer display tubes and color projection television tubes,
and of certain plastic molding equipment, arranged for the Borrower and Zenith
Electronic Corporation of Texas by Salomon Brothers and consummated on March
31, 1997, as more fully described on Schedule S-1 hereto.
"Securitization Documents" shall mean the Receivables Purchase Agreements,
the Pooling and Servicing Agreement, the Finance Corp. Subordinated Notes, and
any other agreement, document or instrument entered into by the Borrower,
Microcircuits, Finance Corp. or the Agent in connection with the Receivables
Securitization.
"Security Agreement" shall mean that certain Security Agreement dated
March 31, 1997 between the Borrower and the Agent, on its behalf and on behalf
of the Issuing Banks and the Lenders, as amended by that certain First
Amendment to Security Agreement dated as of December 5, 1997, copies of which
are attached as Exhibit G hereto, as the same may be amended or modified from
time to time hereafter.
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"Security Documents" shall mean, collectively, the Security Agreement, the
Pledge Agreement, the Assignment of Notes, the Intellectual Property Security
Agreements, the Subsidiary Guaranty, the Subsidiary Security Agreement, the
Mortgage, the Subordination Agreement, all UCC-1 financing statements and any
other document, instrument or agreement granting Collateral for the
Obligations, as the same may be amended or modified from time to time.
"Set-Off Waiver Letter" shall mean that certain letter agreement dated
March 31, 1997 executed by LGE in favor of the Agent and pursuant to which LGE
waives all rights to set-off against amounts owed to the Borrower, in form and
substance satisfactory to the Agent.
"Settlement Date" shall have the meaning set forth in Section 2.2(f).
"Standby Letter of Credit" shall mean a Letter of Credit issued to support
obligations of the Borrower incurred in the ordinary course of its business,
and which is not a Commercial Letter of Credit.
"Subordinated Debentures" shall mean those certain 6.25% Convertible
Subordinated Debentures issued by the Borrower, due April 1, 2011 in an
aggregate principal amount not exceeding $115,000,000, and governed by that
certain Indenture dated as of April 1, 1986, between the Borrower and The First
National Bank of Boston, as trustee (as amended prior to the Agreement Date).
"Subordination Agreement" shall mean, collectively, (a) that certain
Subordination Agreement dated as of November 5, 1997, by and among the
Borrower, the Agent and LGE, as amended by that certain First Amendment to
Subordination Agreement dated as of March 31, 1998, and as further amended by
that certain Second Amendment to Subordination Agreement of even date herewith,
and (b) that certain Subordination Agreement date as of November 5, 1997, by
and among the Agent, LGE, Microcircuits, and the Material Subsidiaries, as
amended by that certain First Amendment to Subordination Agreement dated as of
March 31, 1998, and as further amended by that certain Second Amendment to
Subordination Agreement of even date herewith.
"Subrogation Obligations" shall mean all obligations of the Borrower to
LGE arising from LGE's payment of all sums due by the Borrower in connection
with the Salomon Lease Transaction, pursuant to LGE's guaranty of the Salomon
Lease Transaction.
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"Subsidiary" shall mean, as applied to any Person, (a) any corporation of
which fifty percent (50%) or more of the outstanding stock (other than
directors' qualifying shares) having ordinary voting power to elect a majority
of its board of directors, regardless of the existence at the time of a right of
the holders of any class or classes of securities of such corporation to
exercise such voting power by reason of the happening of any contingency, or any
partnership of which fifty percent (50%) or more of the outstanding partnership
interests is at the time owned by such Person, or by one or more Subsidiaries of
such Person, or by such Person and one or more Subsidiaries of such Person, and
(b) any other entity which is controlled or capable of being controlled by such
Person, or by one or more Subsidiaries of such Person, or by such Person and one
or more Subsidiaries of such Person.
"Subsidiary Guaranty" shall mean that certain Guaranty Agreement executed
by each Material Subsidiary dated March 31, 1997, a copy of which is attached
hereto as Exhibit J, and shall include any supplement to the Guaranty Agreement
executed in accordance with Section 7.7(g) hereof, as the same may be modified,
amended or supplemented from time to time.
"Subsidiary Security Agreement" shall mean that certain Subsidiary
Security Agreement executed by and among Microcircuits, each Material
Subsidiary and the Agent dated March 31, 1997, as amended by that certain First
Amendment to Subsidiary Security Agreement dated as of December 5, 1997, copies
of which are attached hereto as Exhibit K, and shall include any supplement
thereto executed in accordance with Section 7.7(g) hereof, as the same may be
supplemented, modified or amended from time to time.
"Super-Majority Lenders" shall mean Lenders (whose voting rights hereunder
have not been restricted pursuant to Section 2.2(e) hereof) the total of whose
Commitment Ratios equals or exceeds eighty-seven percent (87%) of the
Commitment Ratios of all Lenders entitled to vote hereunder.
"Swing Bank" shall mean Citicorp USA, Inc., a Delaware corporation, or any
other Lender who shall agree with the Agent to act as Swing Bank.
"Swing Loans" shall mean any Loans made to the Borrower by the Swing Bank
from time to time, in accordance with Section 2.2(f) hereof.
"Trademark" shall have the meaning ascribed to that term in the definition
of Trademark Property.
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"Trademark Property" shall mean, with respect to any Person:
(a) 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 (a) 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 Borrower, those referred to in Part B-1 of Schedule
4.1(o);
(b) all reissues, extensions, renewals, translations, adaptations,
derivations and combinations of any of the items described in clause (a) of
this definition;
(c) all Trademark licenses and other agreements providing such Person
with the right to use any of the types of items referred to in clauses (a)
and (b) of this definition, including, with respect to the Borrower, each
Trademark license referred to in Part B-2 of Schedule 4.1(o);
(d) all of the goodwill of the business connected with the use of,
and symbolized by the items described in, clauses (a) and (b) of this
definition;
(e) the right to sue third parties for past, present and future
infringements of any Trademark property described in clauses (a) or (b) of
this definition and, to the extent applicable in clause (c) of this
definition; and
(f) 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 in clause (c) of this definition, or for any injury to
the goodwill associated with the use of any such Trademark or for breach or
enforcement of any
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Trademark license, and all rights corresponding thereto throughout the
world.
"Tuning Patent Royalties" shall mean all amounts to be paid by any licensee
to the Borrower in connection with the license of any Tuning Patent under any
License Agreement.
"Tuning 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 "Tuning Patent" shall mean any of the foregoing.
"Uniform Customs" shall mean the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, as the same may be amended from time to time.
"Value" shall mean, at any particular date: (a) the lower of the fair
market value of the Eligible Inventory and its cost, valued in accordance with
the "First-In, First-Out" method of accounting, minus (b) an amount which is
equal to the amount of reserves which, under FASB No. 48, "Revenue recognition
when the right of return exists," the Borrower shall be required to take in
regard to the amount identified in subparagraph (a) hereof.
"Voting Stock" shall mean the Capital Stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are ordinarily,
in the absence of contingencies, entitled to vote for the election of directors
(or persons performing similar functions) of such Person, even if the right so
to vote has been suspended by the happening of such a contingency.
"Warranty/Advertising Reserve" shall mean the amount of reserves which the
Agent shall have established, in its reasonable discretion, in connection with
the Borrower's warranty expenses and cooperative advertising.
"Wholly-Owned Subsidiary" shall mean any direct or indirect Subsidiary of a
Person where such Person's ownership of such Subsidiary is through ownership of
100% of all issued and
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outstanding Capital Stock (or other ownership interests, but excluding any
directors qualifying shares) and warrants, options or rights to purchase Capital
Stock (or other ownership interests) at all levels.
"Woodridge Property" shall mean that certain real property owned by the
Borrower consisting of approximately 69.94 acres of undeveloped industrial
property located in the Village of Woodridge, Will County, Illinois.
Each definition of a Loan Document in this Article 1 shall include such
instrument or agreement as modified, amended, or supplemented from time to time
with, if required, the prior written consent of the Majority Lenders, except as
provided in Section 10.12 hereof, and except where the context otherwise
requires, definitions imparting the singular shall include the plural and vice
versa. Except where otherwise specifically restricted, reference to a party to
a Loan Document includes that party and its successors and assigns. An Event
of Default shall "exist", "continue" or be "continuing" until such Event of
Default has been waived in writing in accordance with Section 10.12 hereof.
All terms used herein which are defined in Article 9 of the Uniform Commercial
Code in effect in the State of New York on the date hereof and which are not
otherwise defined herein shall have the same meanings herein as set forth
therein. All accounting terms used herein without definition shall be used as
defined under GAAP. All financial calculations hereunder shall, unless
otherwise stated, be determined for the Borrower on a consolidated basis with
its Subsidiaries.
ARTICLE 2
THE LOANS AND THE LETTERS OF CREDIT
Section 2.1 Extension of Credit. Subject to the terms and conditions of,
and in reliance upon the representations and warranties made in, this Agreement
and the other Loan Documents, the Lenders have extended and agree, severally in
accordance with their respective Commitment Ratios and not jointly, to extend
credit in an aggregate principal amount not to exceed ONE HUNDRED TWENTY-FIVE
MILLION DOLLARS ($125,000,000) to the Borrower, as hereinafter provided.
(a) The Revolving Loans. The Lenders agree, severally in accordance with
their respective Commitment Ratios relating to the Commitment and not jointly,
upon the terms and subject to the conditions of this Agreement, to lend and
relend to the Borrower, prior to the Maturity Date, amounts which in the
aggregate at any
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one time outstanding do not exceed the lesser of (i) the Borrowing Base and (ii)
the Commitment. Subject to the terms and conditions hereof and prior to the
Maturity Date, Advances under the Commitment may be repaid and reborrowed from
time to time on a revolving basis.
(b) INTENTIONALLY OMITTED
(c) The Letters of Credit. Subject to the terms and conditions hereof
each Issuing Bank agrees, severally in accordance with their respective Letter
of Credit Commitments and not jointly, to issue Letters of Credit for the
account of the Borrower pursuant to Section 2.15 hereof in an aggregate
outstanding face amount (i) for all Issuing Banks, not to exceed the Letter of
Credit Commitment at any time, and (ii) for any individual Issuing Bank, not to
exceed such Issuing Bank's Letter of Credit Commitment.
(d) The Swing Loans. Subject to the terms and conditions hereof, the
Swing Bank, in its sole discretion, may from time to time after the Agreement
Date but prior to the Maturity Date, make Swing Loans to the Borrower in an
aggregate principal amount not to exceed at any time outstanding the least of
(i) the Swing Bank's pro rata share (in accordance with its Commitment Ratio) of
the Available Commitment, (ii) the excess of (x) the Swing Bank's pro rata share
(in accordance with its Commitment Ratio) of the Commitment over (y) the sum of
the aggregate outstanding principal amount of Swing Loans and Revolving Loans
made by it and the Swing Bank's pro rata share (in accordance with its
Commitment Ratio) of the outstanding Letter of Credit Obligations, and (iii)
$11,000,000.
(e) Overadvances; Borrowing Base Deficiencies. If at any time the
Aggregate Credit Obligations exceed the Borrowing Base, the Commitment or any
other applicable limitation set forth in this Agreement, such Aggregate Credit
Obligations shall nevertheless constitute Obligations that are secured by the
Collateral and are entitled to all benefits thereof. In no event, however,
shall the Borrower have the right whatsoever to (i) receive any Revolving Loan,
(ii) receive any Swing Loan, or (iii) request the issuance of any Letter of
Credit if, before or after giving effect thereto, there shall exist a Default or
a Borrowing Base Deficiency. In the event that (1) the Lenders, in their sole
and absolute discretion, shall make any Revolving Loans, or (2) any Issuing Bank
shall, in its sole and absolute discretion (subject to the terms and conditions
set forth in this Agreement), agree to the issuance of any Letter of Credit, or
(3) the Swing Bank, in its sole and absolute discretion (subject to the terms
and conditions set forth in this Agreement), shall make any Swing Loan, which in
any such case gives rise to a
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Borrowing Base Deficiency, the Borrower shall make, on demand, a payment on
the Obligations to be applied to the Revolving Loans, the Swing Loans and the
Letter of Credit Reserve Account, as appropriate, in an aggregate principal
amount equal to such Borrowing Base Deficiency. Additionally, in no event
shall the Borrower have the right to receive any Advance of a Revolving Loan in
an amount which exceeds the lesser of (i) the Borrowing Base and (ii) the
Available Commitment.
Section 2.2 Manner of Borrowing and Disbursement of Loans.
(a) Choice of Interest Rate, etc. Any Advance shall, at the option of the
Borrower, be made either as a Base Rate Advance or as a Eurodollar Advance
(except any initial Advance made on the Agreement Date or on the first two (2)
Business Days after the Agreement Date shall be made as Base Rate Advance);
provided, however, that (i) if the Borrower fails to give the Agent written
notice specifying whether an Advance is to be repaid or reborrowed on a Payment
Date, such Advance shall be repaid and then reborrowed as a Base Rate Advance
on the Payment Date, and (ii) the Borrower may not select a Eurodollar Advance
(A) with respect to the Swing Loans, (B) with respect to an Advance, the
proceeds of which are to reimburse an Issuing Bank pursuant to Section 2.15
hereof, or (C) if, at the time of such Advance, a Default or an Event of
Default has occurred and is continuing. Any notice given to the Agent in
connection with a requested Advance hereunder shall be given to the Agent prior
to 11:00 a.m. (New York time) in order for such Business Day to count toward
the minimum number of Business Days required. The Agent shall, upon reasonable
request of the Borrower from time to time, provide to the Borrower such
information with regard to the Eurodollar Rate Basis as may be so requested.
(b) Base Rate Advances.
(i) Initial and Subsequent Advances. The Borrower shall give the
Agent in the case of Base Rate Advances not later than 11:00 a.m.
(New York time) on the Business Day of a proposed Advance, irrevocable
prior notice by telephone or telecopy and shall confirm any such telephone
notice with a written Request for Advance; provided, however, that the
failure by the Borrower to confirm any notice by telephone or telecopy
with a Request for Advance shall not invalidate any notice so given.
(ii) Repayments and Reborrowings. The Borrower may repay or prepay a
Base Rate Advance and (a) at any time reborrow all or a portion of the
principal amount thereof as
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one or more Base Rate Advances, (b) upon at least two (2) Business Days'
irrevocable prior written notice to the Agent, reborrow all or a portion
of the principal thereof as one or more Eurodollar Advances, or (c) not
reborrow all or any portion of such Base Rate Advance. Upon the date
indicated by the Borrower, such Base Rate Advance shall be so repaid and,
as applicable, reborrowed.
(iii) Miscellaneous. Notwithstanding any other provision of this
Agreement which may be construed to the contrary, each Base Rate Advance
shall be in a principal amount of no less than $1,000,000 and in an
integral multiple of $100,000 in excess thereof; provided, however, each
Base Rate Advance that is a Swing Loan shall be in a principal amount of
not less than $100,000 unless a lower amount is permitted by the Swing
Bank in its sole discretion from time to time.
(c) Eurodollar Advances.
(i) Initial and Subsequent Advances. The Borrower shall give the
Agent in the case of Eurodollar Advances at least two (2) Business Days'
irrevocable prior notice by telephone or telecopy and shall immediately
confirm any such telephone notice with a written Request for Advance;
provided, however, that the failure by the Borrower to confirm any notice
by telephone or telecopy with a Request for Advance shall not invalidate
any notice so given. The Agent, whose determination shall be conclusive,
shall determine the available Eurodollar Bases as of the second (2nd)
Business Day prior to the date of the requested Advance and shall promptly
notify the Borrower of the same and the Borrower shall promptly confirm in
writing receipt of such notification. The Eurodollar Advance Period for
each Eurodollar Advance shall in all events be either one, two, three or
six months. Failure by the Borrower to confirm any telephonic notice in
writing shall not invalidate any notice so given. Upon receipt of such
notice from the Borrower, the Agent shall promptly notify each Lender by
telephone or telecopy of the contents thereof.
(ii) Repayments and Reborrowings. At least two (2) Business Days
prior to each Payment Date for a Eurodollar Advance, the Borrower shall
give the Agent written notice specifying whether all or a portion of any
Eurodollar Advance outstanding on the Payment Date (a) is to be repaid and
then reborrowed in whole or in part as a new Eurodollar Advance, in which
case such notice shall also specify the Eurodollar Advance Period which
the Borrower shall have
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selected for such new Eurodollar Advance, (b) is to be repaid and then
reborrowed in whole or in part as a Base Rate Advance, or (c) is to be
repaid and not reborrowed. Upon such Payment Date such Eurodollar Advance
will, subject to the provisions hereof, be so repaid and, as applicable,
reborrowed.
(iii) Miscellaneous. Notwithstanding any term or provision of this
Agreement which may be construed to the contrary, each Eurodollar Advance
shall be in a principal amount of no less than $5,000,000 and in an
integral multiple of $1,000,000 in excess thereof, and at no time shall
the aggregate number of all Eurodollar Advances then outstanding exceed
four (4).
(d) Notification of Lenders. Upon receipt of a (i) Request for Advance or
a telephone or telecopy request for Advance, (ii) notification from an Issuing
Bank that a draw has been made under any Letter of Credit, or (iii) notice from
the Borrower with respect to any outstanding Advance prior to the Payment Date
for such Advance, the Agent shall promptly notify each Lender by telephone or
telecopy of the contents thereof and the amount of each Lender's portion of any
such Advance. Each Lender shall, not later than 2:00 p.m. (New York time) on
the date specified for such Advance in such notice, make available to the Agent
at the Agent's office, or at such account as the Agent shall designate, the
amount of such Lender's portion of the Advance in immediately available funds.
(e) Disbursement. Prior to 3:00 p.m. (New York time) on the date of an
Advance hereunder, the Agent shall, subject to the satisfaction of the
conditions set forth in Article 3 hereof, disburse the amounts made available
to the Agent by the Lenders in like funds by transferring the amounts so made
available by deposit into the Borrower's account maintained with Citibank or by
wire transfer pursuant to the Borrower's instructions. Unless the Agent shall
have received notice from a Lender prior to 12:30 p.m. (New York time) on the
date of any Advance that such Lender will not make available to the Agent such
Lender's ratable portion of such Advance, the Agent may assume that such Lender
has made or will make such portion available to the Agent on the date of such
Advance and the Agent may, in its sole discretion and in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent such Lender shall not have so made such ratable portion
available to the Agent, such Lender agrees to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to
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the Agent, (x) for the first two Business Days, at the rate on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published for such day by the Federal Reserve Bank
of New York, and (y) thereafter, at the Base Rate. If such Lender shall repay
to the Agent such corresponding amount, such amount so repaid shall constitute
such Lender's portion of the applicable Advance for purposes of this Agreement
and if both such Lender and the Borrower shall pay and repay such corresponding
amount, the Agent shall promptly relend to the Borrower such corresponding
amount. If such Lender does not repay such corresponding amount immediately
upon the Agent's demand therefor, the Agent shall notify the Borrower and the
Borrower shall immediately pay such corresponding amount to the Agent. The
failure of any Lender to fund its portion of any Advance shall not relieve any
other Lender of its obligation, if any, hereunder to fund its respective
portion of the Advance on the date of such borrowing, but no Lender shall be
responsible for any such failure of any other Lender. In the event that a
Lender for any reason fails or refuses to fund its portion of an Advance in
violation of this Agreement, then, until such time as such Lender has funded
its portion of such Advance, or all other Lenders have received payment in full
(whether by repayment or prepayment) of the principal and interest due in
respect of such Advance, such non-funding Lender shall (i) have no right to
vote regarding any issue on which voting is required or advisable under this
Agreement or any other Loan Document, and (ii) shall not be entitled to receive
any payments of principal, interest or fees from the Agent (or the other
Lenders) in respect of its Loans.
(f) Special Provisions Pertaining to Swing Loans.
(i) The Borrower shall give the Agent written notice in the form of a
Request for Advance, or notice by telephone or telecopy no later than
11:00 a.m. (New York time) on the date on which the Borrower wishes
to receive an Advance of any Swing Loan followed immediately by a Request
for Advance; provided, however, that the failure by the Borrower to
confirm any notice by telephone or telecopy with a Request for Advance
shall not invalidate any notice so given. If the Swing Bank, in its sole
discretion, elects to make the requested Swing Loan, the Advance shall be
made on the date specified in the notice or the Request for Advance and
such notice or Request for Advance shall specify (i) the amount of the
requested Advance, and (ii) instructions for the disbursement of the
proceeds of the requested Advance. The Swing Bank shall have no duty or
obligation to make any Swing Loans hereunder and the Swing Bank shall not
make any Swing Loans unless, on the date of the requested Advance
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thereof, the Borrower satisfies each of the conditions precedent to an
Advance set forth in Section 3.2 hereof. In the event the Swing Bank in
its sole and absolute discretion elects to make any requested Swing Loan,
the Swing Bank shall make the proceeds of such Swing Loan available to the
Borrower by deposit of U.S. dollars in same day funds by wire transfer in
accordance with the applicable notice or Request for Advance.
(ii) The Agent shall notify each Lender no less frequently than weekly,
as determined by the Agent, of the principal amount of Swing Loans
outstanding as of 3:00 p.m. (New York City time) as of such date and each
Lender's pro rata share thereof. Each Lender shall before 2:00 p.m. (New
York City time) on the next Business Day (the "Settlement Date") make
available to the Agent, in immediate available funds, the amount of its
pro rata share of such principal amount of Swing Loans outstanding. Upon
such payment by a Lender, such Lender shall be deemed to have made a
Revolving Loan to the Borrower, notwithstanding any failure of the
Borrower to satisfy the conditions in Section 3.2. The Agent shall use
such funds to repay the principal amount of Swing Loans to the Swing Bank.
All interest due on the Swing Loans prior to the Settlement Date shall be
payable to the Swing Bank. Additionally, If at any time any Swing Loans
are outstanding, any of the events described in clauses (g) or (h) of
Section 8.1 hereof shall have occurred, then each Lender shall
automatically upon the occurrence of such event and without any action on
the part of the Swing Bank, the Borrower, the Agent or the Lenders be
deemed to have purchased an undivided participation in the principal and
interest of all Swing Loans then outstanding in an amount equal to such
Lender's Commitment Ratio and each Lender shall, notwithstanding such
Event of Default, immediately pay to the Agent for the account of the
Swing Bank in immediately available funds, the amount of such Lender's
participation (and upon receipt thereof, the Swing Bank shall deliver to
such Lender a loan participation certificate dated the date of receipt of
such funds in such amount). The disbursement of funds in connection with
the settlement of Swing Loans hereunder shall be subject to the terms and
conditions of Section 2.2(e) hereof.
Section 2.3 Interest.
(a) On Loans. Interest on the Loans, subject to Section 2.3(b) hereof,
shall be payable as follows:
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(i) On Base Rate Advances. Interest on each Base Rate Advance shall
be computed for the actual number of days elapsed on the basis of a
hypothetical year of 360 days and shall be payable monthly in arrears on
the first day of each calendar month, commencing on July 1, 1998.
Interest on Base Rate Advances then outstanding shall also be due and
payable on the Maturity Date. Interest shall accrue and be payable on
each Base Rate Advance made with respect to the Revolving Loans at the
simple per annum interest rate equal to the sum of (A) the Base Rate, and
(B) the applicable Interest Rate Margin in effect for Base Rate Advances.
(ii) On Eurodollar Advances. Interest on each Eurodollar Advance
shall be computed on the basis of a hypothetical 360-day year for the
actual number of days elapsed and shall be payable in arrears on (x) the
Payment Date for such Advance, and (y) if the Eurodollar Advance Period
for such Advance is greater than three (3) months, on each three month
anniversary of such Advance. Interest on Eurodollar Advances then
outstanding shall also be due and payable on the Maturity Date. Interest
shall accrue and be payable on each Eurodollar Advance made with respect
to the Revolving Loans at a rate per annum equal to the sum of (A) the
Eurodollar Basis applicable to such Eurodollar Advance, and (B) the
applicable Interest Rate Margin in effect for Eurodollar Advances.
(b) Upon Default. Upon the occurrence of an Event of Default and at the
election of the Majority Lenders, interest on the outstanding Obligations shall
accrue at the Default Rate from the date of such Event of Default. Interest
accruing at the Default Rate shall be payable on demand and in any event on the
Maturity Date and shall accrue until the earliest to occur of (i) waiver of the
applicable Event of Default in accordance with Section 10.12 hereof, (ii)
agreement by the Majority Lenders to rescind the charging of interest at the
Default Rate, or (iii) payment in full of the Obligations. The Lenders shall
not be required to (i) accelerate the maturity of the Loans, (ii) terminate the
Commitment, or (iii) exercise any other rights or remedies under the Loan
Documents in order to charge interest hereunder at the Default Rate.
(c) Computation of Interest. In computing interest on any Advance, the
date of making the Advance shall be included and the date of payment shall
be excluded; provided, however, that if an Advance is repaid on the date that
it is made, one (1) day's interest shall be due with respect to such Advance.
Section 2.4 Fees.
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(a) Fee Letter. The Borrower agrees to pay to the Agent, for its benefit
and the benefit of the Lenders, such fees as are set forth in the Fee Letter.
(b) Unused Line Fee. The Borrower agrees to pay to the Lenders, in
accordance with the Lenders' Commitment Ratios, an unused line fee on the
Available Commitment for each day from the Agreement Date through the Maturity
Date (or the date of any earlier prepayment in full of the Obligations), at a
rate of one-half of one percent (.50%) per annum. Such unused line fee shall
be computed on the basis of a hypothetical year of 360 days for the actual
number of days elapsed, shall be payable quarterly in arrears for each quarter
on the first day of the immediately succeeding calendar quarter, commencing on
July 1, 1998, and if then unpaid, on the Maturity Date (or the date of any
earlier prepayment in full of the Obligations), and shall be fully earned when
due and non-refundable when paid.
(c) Letter of Credit Fees.
(i) The Borrower shall pay to the Lenders, in accordance with the
Lenders' respective Commitment Ratios, a fee on the stated amount of any
outstanding Letters of Credit for each day from the Date of Issue through
the Maturity Date (or the date of any earlier prepayment in full of the
Obligations) at a rate of three percent (3.0%) per annum on the amount of
the Letter of Credit Obligations. Such Letter of Credit fee shall be
computed on the basis of a hypothetical year of 360 days for the actual
number of days elapsed, shall be payable monthly in arrears for each month
on the first day of the succeeding calendar month, commencing on July 1,
1998, and if then unpaid, on the Maturity Date (or the date of any earlier
prepayment in full of the Obligations), and shall be fully earned when due
and non-refundable when paid.
(ii) The Borrower shall also pay to each Issuing Bank, (A) a fee on the
stated amount of each Letter of Credit issued by such Issuing Bank for
each day from the Date of Issue through the expiration date of each
such Letter of Credit (or any earlier prepayment in full of the
Obligations) at a rate of one-quarter of one percent (.25%) per annum,
which fee shall be computed on the basis of a hypothetical year of 360
days for the actual number of days elapsed, shall be payable monthly in
arrears for each month on the first day of the next succeeding month,
commencing on July 1, 1998, and, if unpaid on the Maturity Date (or any
earlier prepayment in full of the Obligations), and (B) a
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fee in the amount of $125.00 for issuing, amending and renewing any Letter
of Credit, which fee shall be due and payable on the date of each
issuance, amendment or renewal of any Letter of Credit. Each of the
foregoing fees shall be fully earned when due, and non-refundable when
paid.
Section 2.5 Prepayment/Reduction of Commitment.
(a) The principal amount of any Base Rate Advance may be prepaid in full
or in part at any time upon written notice to the Agent not later than 11:00
a.m. (New York time) on the Business Day of such prepayment, without penalty;
and the principal amount of any Eurodollar Advance may be prepaid prior to the
applicable Payment Date, upon two (2) Business Days' prior written notice to
the Agent, provided that the Borrower shall reimburse the Lenders and the
Agent, on the earlier of demand or the Maturity Date, for any loss or
out-of-pocket expense incurred by the Lenders or the Agent in connection with
such prepayment, as set forth in Section 2.9 hereof. Each notice of prepayment
shall be irrevocable. Upon receipt of any notice of prepayment, the Agent
shall promptly notify each Lender of the contents thereof by telephone or
telecopy and of such Lender's portion of the prepayment. Notwithstanding the
foregoing, the Borrower shall not make any prepayment of the Revolving Loans
unless and until the balance of the Swing Loans then outstanding is zero. Other
than with respect to the Swing Loans and amounts required to be applied to the
Loans pursuant to Section 5.15 hereof, prepayments of principal hereunder (a)
with respect to Base Rate Advances, shall be in minimum amounts of $1,000,000
and integral multiples of $100,000 in excess thereof, and (b) with respect to
Eurodollar Rate Advances shall be in minimum amounts of $5,000,000 and integral
multiples of $1,000,000 in excess thereof.
(b) The Borrower shall have the right, at any time and from time to time
after the Agreement Date and prior to the Maturity Date, upon at least three
(3) Business Days' prior written notice to the Agent, without premium or
penalty, to cancel or reduce permanently all or a portion of the Commitment on
a pro rata basis among the Lenders in accordance with the Commitment Ratios,
provided that any such partial reduction shall be made in an amount not less
than $5,000,000 and in integral multiples of $1,000,000 in excess thereof. As
of the date of cancellation or reduction set forth in such notice, the
Commitment shall be permanently reduced to the amount stated in the Borrower's
notice for all purposes herein, and the Borrower shall pay to the Agent for the
account of the Lenders the amount necessary to reduce the principal amount of
the Revolving Loans then outstanding to not more than the amount of the
Commitment as so reduced, together with accrued interest on the amount so
prepaid and the unused
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line fee set forth in Section 2.4(b) accrued through the date of the reduction
with respect to the amount reduced, and shall reimburse the Agent and the
Lenders for any loss or out-of-pocket expense incurred by any of them in
connection with such payment as set forth in Section 2.9.
Section 2.6 Repayment.
(a) The Revolving Loans. The principal balance of all Revolving Loans then
outstanding shall be due and payable in full on the Maturity Date and as may be
required by Section 2.6(c) hereof. Notwithstanding the foregoing, however, in
the event that at any time and for any reason there shall exist a Borrowing
Base Deficiency, the Borrower shall immediately pay to the Agent an amount
equal to the Borrowing Base Deficiency, which payment shall constitute a
mandatory payment of the Revolving Loans hereunder.
(b) INTENTIONALLY OMITTED
(c) Other Mandatory Repayments.
(i) In the event that after the Agreement Date, the Borrower shall
issue any Capital Stock (other than in connection with the exercise
of employee or LGE stock options), shall sell any of its assets (other
than sales of Inventory in the ordinary course of its business and other
than the sales of the Woodridge Property and the Glenview Property to the
extent, but only to the extent, the Borrower is permitted to retain the
Net Cash Proceeds from such sales pursuant to Section 7.7(b)) or shall
incur any Funded Debt(other than the Obligations, the LGE Obligations and
the Additional Unsecured Debt), one hundred percent (100%) of the Net Cash
Proceeds received by the Borrower from such issuance, sale or incurrence
shall be paid on the date of receipt of the proceeds thereof by the
Borrower to the Lenders as a mandatory payment of the Revolving Loans.
The Commitment shall be permanently reduced by the amount of the payment
of the Revolving Loans due hereunder (except for any payment in connection
with the sale of the Woodridge Property or the Glenview Property, as more
fully set forth in Section 7.7(b)), whether or not such payment is made.
Nothing in this Section shall authorize the Borrower to issue any Capital
Stock, sell any assets or incur any Funded Debt except as expressly
permitted by this Agreement.
(ii) INTENTIONALLY OMITTED.
(iii) INTENTIONALLY OMITTED.
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Section 2.7 Notes; Loan Accounts.
(a) The Loans shall be repayable in accordance with the terms and
provisions set forth herein, and shall be evidenced by the Notes. One
each of the Notes shall be payable to the order of each Lender in accordance
with the respective Commitment Ratio of such Lender. The Notes shall be issued
by the Borrower to the Lenders and shall be duly executed and delivered by
Authorized Signatories. The Notes amend, renew, extend, replace, are
substituted for and supersede in their entirety, but do not extinguish, the Old
Notes issued to the Lenders. Contemporaneously with the execution of this
Agreement, such Old Notes will be marked "AMENDED, RENEWED, RESTATED, EXTENDED,
REPLACED AND SUPERSEDED" and shall be held by the Agent solely for collateral
realization purposes and in no event shall such Old Notes be subject to
collection by the Agent or by any other Person.
(b) The Agent may open and maintain on its books in the name of the
Borrower a loan account with respect to the Loans and interest thereon (the
"Loan Account"). The Agent shall debit such Loan Account for the principal
amount of each Advance made by it on behalf of the Lenders, accrued interest
thereon, and all other amounts which shall become due from the Borrower
pursuant to this Agreement and shall credit Loan Account for each payment which
the Borrower shall make in respect to the Obligations. The records of the
Agent with respect to such Loan Account shall be conclusive evidence of the
Loans and accrued interest thereon, absent manifest error.
Section 2.8 Manner of Payment.
(a) When Payments Due.
(i) Each payment (including any prepayment) by the Borrower on
account of the principal of or interest on the Loans, fees, and any other
amount owed to the Lenders or the Agent under this Agreement, the Notes,
or the other Loan Documents shall be made not later than 12:00 noon (New
York time) on the date specified for payment under this Agreement or any
other Loan Document to the Agent at the Agent's Office, for the account of
the Lenders or the Agent, as the case may be, in lawful money of the
United States of America in immediately available funds. Any payment
received by the Agent after 12:00 noon (New York time) shall be deemed
received on the next Business Day. In the case of a payment for the
account of a Lender, the Agent will promptly thereafter distribute the
amount so received in like funds
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to such Lender. If the Agent shall not have received any payment from
the Borrower as and when due, the Agent will promptly notify the Lenders
accordingly.
(ii) If any payment under this Agreement or any of the Notes shall be
specified to be made upon a day which is not a Business Day, it shall be
made on the next succeeding day which is a Business Day, and such
extension of time shall in such case be included in computing interest and
fees, if any, in connection with such payment.
(b) No Deduction.
(i) The Borrower agrees to pay principal, interest, fees, and all
other amounts due hereunder or under the Notes without set-off or
counterclaim or any deduction whatsoever. If the Borrower shall hereafter
be required by law to deduct any taxes from or in respect of any sum
payable hereunder or under any Note to any Lender, any Issuing Bank or the
Agent, (A) the sum payable shall be increased as may be necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.8(b)), such Lender, Issuing
Bank or the Agent (as the case may be) receives an amount equal to the sum
it would have received had no such deductions been made, (B) the Borrower
shall make such deductions and (C) the Borrower shall pay the full amount
deducted to the relevant taxation authority or other authority in
accordance with Applicable Law.
(ii) Each Lender agrees to deliver to the Borrower and the Agent from
time to time, a true and correct certificate executed in duplicate by a
duly authorized officer of such Lender before or promptly upon the
occurrence of any event requiring a change in the most recent certificate
previously delivered by it to the Borrower and the Agent pursuant to this
Section 2.8(b). The execution and delivery hereof by a Lender shall be
deemed to be a certification that such Lender falls within subsection (A)
below, and no further certificates need to be delivered by such Lender
until the occurrence of one of the events set forth in the preceding
sentence. Each certificate required to be delivered pursuant to this
Section 2.8(b) shall certify as to one of the following:
(A) that such Lender shall continue to receive payments
hereunder without deduction or withholding of United States federal
income tax;
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(B) that such Lender cannot continue to receive payments
hereunder without deduction or withholding of United States federal
income tax as specified therein but does not require additional
payments because it is entitled to recover the full amount of any such
deduction or withholding from a source other than the Borrower or from
a tax credit or exemption; or
(C) that such Lender is no longer capable of receiving
payments hereunder without deduction or withholding of United
States federal income tax as specified therein by reason of a change
in law (including the Code or applicable tax treaty) after the later
of the Agreement Date or the date on which a Lender became a Lender
pursuant to Section 10.5 hereof and that it is not capable of
recovering the full amount of the same from a source other than the
Borrower or from a tax credit or exemption.
(c) Inadequate Payments. If on the date on which any amount shall be due
and payable by the Borrower in regard to the Obligations, the amount
received by the Agent from the Borrower or withdrawn by the Agent from the
Clearing Account pursuant to Section 5.15(c) hereof shall not be adequate to
pay the amount which shall be so due and payable, then the Agent shall be
authorized, but shall not be obligated, to make a Base Rate Advance on behalf
of the Lenders to the Borrower by crediting the amount of such Base Rate
Advance to the Loan Account hereof pursuant to the provisions of Section 2.7(b)
hereof, whereupon the Agent shall debit the Loan Account hereof in a like
amount in payment of the part of the Obligations which shall then be due and
payable. No further authorization, direction or approval by the Borrower shall
be required to be given by the Borrower for the Agent to take the action
described in this Section 2.8(c).
Section 2.9 Reimbursement. Whenever any Lender shall sustain or incur any
losses or out-of-pocket expenses in connection with (i) failure by the Borrower
to borrow or reborrow any Eurodollar Advance, or reborrow any Advance as a
Eurodollar Advance, in each case, after having given notice of its intention to
borrow in accordance with Section 2.2 hereof (whether by reason of the election
of the Borrower not to proceed or the non-fulfillment of any of the conditions
set forth in Article 3), or (ii) prepayment of any Eurodollar Advance in whole
or in part, the Borrower agrees to pay to such Lender, upon the earlier of such
Lender's demand or the Maturity Date, an amount sufficient to compensate such
Lender for all such losses and-out-of-pocket expenses. Such Lender's good
faith determination of the amount
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of such losses and out-of-pocket expenses, absent manifest error, shall be
binding and conclusive. Losses subject to reimbursement hereunder shall
include, without limiting the generality of the foregoing, expenses incurred by
any Lender or any participant of such Lender permitted hereunder in connection
with the re-employment of funds prepaid, repaid, not borrowed, or paid, as the
case may be, and any lost profit of such Lender or any participant of such
Lender over the remainder of the Eurodollar Advance Period for such prepaid
Advance.
Section 2.10 Pro Rata Treatment.
(a) Advances. Each Advance with respect to the Revolving Loans from the
Lenders under this Agreement shall be made pro rata on the basis of their
respective Commitment Ratios.
(b) Payments. Each payment and prepayment of the principal of the
Revolving Loans and each payment of interest on the Revolving Loans
received from the Borrower shall be made by the Agent to the Lenders pro rata
on the basis of their respective unpaid principal amounts outstanding
immediately prior to such payment or prepayment (except in cases when a
Lender's right to receive payments is restricted pursuant to Section 2.2(e)
hereof). If any Lender shall obtain any payment (whether involuntary, through
the exercise of any right of set-off, or otherwise) on account of the Revolving
Loans in excess of its ratable share of the Loans under its Commitment Ratio
(or in violation of any restriction set forth in Section 2.2(e) hereof), such
Lender shall forthwith purchase from the other Lenders such participation in
the Loans made by them as shall be necessary to cause such purchasing Lender to
share the excess payment ratably with each of them; provided, however, that if
all or any portion of such excess payment is thereafter recovered from such
purchasing Lender, such purchase from each Lender shall be rescinded and such
Lender shall repay to the purchasing Lender the purchase price to the extent of
such recovery without interest thereon unless the Lender obligated to repay
such amount is required to pay interest. The Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this Section
2.10(b) may, to the fullest extent permitted by law, exercise all its rights of
payment (including the right of set-off) with respect to such participation as
fully as if such Lender were the direct creditor of the Borrower in the amount
of such participation.
Section 2.11 Application of Payments.
(a) Payments Prior to Acceleration. Prior to the acceleration of the
Obligations under Section 8.2 hereof, and
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other than with respect to payments required to be made pursuant to Section
2.6(c) hereof (which shall be applied as set forth in Section 2.6(c) hereof),
if some but less than all amounts due from the Borrower are received by the
Agent, the Agent shall distribute such amounts in the following order of
priority: FIRST, to the payment of interest then due and payable on the Swing
Loans and the Revolving Loans; SECOND, to the payment of principal then due and
payable on the Swing Loans, THIRD, to the payment of principal then due and
payable on the Revolving Loans; FOURTH, to the payment of any fees then due and
payable to the Agent hereunder or under any other Loan Document; FIFTH, to the
payment of any fees then due and payable to the Lenders and the Issuing Banks
hereunder or under any other Loan Documents; SIXTH, to the extent of any Letter
of Credit Obligations then outstanding, to the Letter of Credit Reserve
Account; SEVENTH, to the payment of all other Obligations not otherwise
referred to in this Section 2.11(a) then due and payable hereunder or under the
other Loan Documents; and EIGHTH, to the costs and expenses (including
attorneys' fees and expenses), if any, incurred by the Agent in the collection
of such amounts under this Agreement or any of the other Loan Documents.
(b) Payments Subsequent to Acceleration. Subsequent to the acceleration of
the Obligations under Section 8.2 hereof, payments and prepayments with respect
to the Obligations made to the Agent, the Lenders, the Issuing Banks or
otherwise received by the Agent, any Lender, any Issuing Bank (from realization
on Collateral or otherwise) shall be distributed in the following order of
priority (subject, as applicable, to Section 2.10 hereof): FIRST, to the costs
and expenses (including attorneys' fees and expenses), if any, incurred by the
Agent, any Lender, any Issuing Bank in the collection of such amounts under
this Agreement or of the Loan Documents, including, without limitation, any
costs incurred in connection with the sale or disposition of any Collateral;
SECOND, to the payment of interest then due and payable on the Swing Loans;
THIRD, to the payment of the principal of any Swing Loans then outstanding;
FOURTH, to any fees then due and payable to the Agent under this Agreement or
any other Loan Document; FIFTH, to any fees then due and payable to the Lenders
and the Issuing Banks under this Agreement or any other Loan Document; SIXTH,
to the payment of interest then due and payable on the Revolving Loans;
SEVENTH, to the payment of principal of the Revolving Loans then outstanding;
EIGHTH, to the extent of any Letter of Credit Obligations then outstanding, to
the Letter of Credit Reserve Account; NINTH, to the payment of any obligation
under any Interest Hedge Agreement and any Foreign Exchange Agreement between
the Borrower, on the one hand, and the Agent (or an affiliate of the Agent) or
one or more Lenders (or an affiliate of a Lender), on the other hand; TENTH, to
any other
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Obligations not otherwise referred to in this Section 2.11(b); ELEVENTH, to
damages incurred by the Agent or any Lender by reason of any breach hereof or
of any other Loan Document; and TWELFTH, upon satisfaction in full of all
Obligations to the Borrower or as otherwise required by the Subordination
Agreement or law.
Section 2.12 Use of Proceeds. The proceeds of the Loan shall be used by the
Borrower as follows:
(a) The proceeds of the initial Advance of Revolving Loans hereunder shall
be used on the Agreement Date to refinance existing Indebtedness under the
Original Credit Agreement and the Receivable Securitization and to fund
transaction costs, and for other general corporate purposes.
(b) The balance of the proceeds of the Loans shall be used to fund capital
expenditures and for the Borrower's general operating capital needs and other
general corporate purposes to the extent not inconsistent with the provisions
of this Agreement.
Section 2.13 All Obligations to Constitute One Obligation. All Obligations
shall constitute one general obligation of the Borrower and shall be secured by
the Agent's security interest (on behalf of the Lenders and the Issuing Banks)
and Lien upon all of the Collateral, and by all other security interests and
Liens heretofore, now or at any time hereafter granted by the Borrower to the
Agent and the Lenders, to the extent provided in the Security Documents under
which such Lien arises.
Section 2.14 Maximum Rate of Interest. In no contingency or event
whatsoever shall the aggregate of all amounts deemed interest on the Loans
and charged or collected pursuant to the terms of this Agreement or pursuant to
the Notes exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable
thereto. In the event that such a court determines that the Lenders have
charged or received interest hereunder in excess of the highest applicable
rate, the rate in effect hereunder shall automatically be reduced to the
maximum rate permitted by Applicable Law and the Lenders shall promptly refund
to the Borrower any interest received by them in excess of the maximum lawful
rate or, if so requested by the Borrower, shall apply such excess to the
principal balance of the Obligations. It is the intent hereof that the
Borrower not pay or contract to pay, and that the Lenders not receive or
contract to receive, directly or indirectly in any manner whatsoever, interest
in excess of that which may be paid by the Borrower under Applicable Law.
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Section 2.15 Letters of Credit.
(a) Subject to the terms and conditions hereof, each Issuing Bank, on
behalf of the Lenders, and in reliance on the agreements of the Lenders set
forth in subsection (c) below, hereby agrees to issue one or more Letters of
Credit up to an aggregate face amount equal to such Issuing Bank's pro rata
share of the Letter of Credit Commitment; provided, however, that the Issuing
Banks shall not issue any Letter of Credit unless the conditions precedent to
the issuance thereof set forth in Section 3.3 hereof have been satisfied, and
shall not issue any Letter of Credit if any Default then exists or would be
caused thereby or if, after giving effect to such issuance, the Available
Commitment would be less than zero or there would exist a Borrowing Base
Deficiency; and provided further, however, that at no time shall the total
Letter of Credit Obligations outstanding hereunder exceed the Letter of Credit
Commitment. Each Letter of Credit shall (1) be denominated in U.S. dollars,
and (2) expire no later than the earlier to occur of (A) the Maturity Date, and
(B) 180 days after its date of issuance. Each Letter of Credit shall be
subject to the Uniform Customs and, to the extent not inconsistent therewith,
the laws of the State of New York. The Issuing Banks shall not at any time be
obligated to issue, or cause to be issued, any Letter of Credit if such
issuance would conflict with, or cause such Issuing Bank to exceed any limits
imposed by, any Applicable Law.
(b) The Borrower may from time to time request that an Issuing Bank issue a
Letter of Credit. The Borrower shall execute and deliver to the Agent and
applicable Issuing Bank a Request for Issuance of Letter of Credit for each
Letter of Credit to be issued by such Issuing Bank, not later than 12:00 noon
(New York time) on the fifth (5th) Business Day preceding the date on which the
requested Letter of Credit is to be issued, or such shorter notice as may be
acceptable to the Issuing Bank and the Agent. Upon receipt of any such Request
for Issuance of Letter of Credit, subject to satisfaction of all conditions
precedent thereto as set forth in Section 3.3 hereof, the Issuing Bank shall
process such Request for Issuance of Letter of Credit and the certificates,
documents and other papers and information delivered to it in connection
therewith in accordance with its customary procedures and shall promptly issue
the Letter of Credit requested thereby. The Issuing Bank shall furnish a copy
of such Letter of Credit to the Borrower and the Agent following the issuance
thereof. The Borrower shall pay or reimburse the Issuing Bank for normal and
customary costs and expenses incurred by such Issuing Bank in issuing,
effecting payment under, amending or otherwise administering the Letters of
Credit.
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(c) Immediately upon the issuance by an Issuing Bank of a Letter of
Credit and in accordance with the terms and conditions of this Agreement,
such Issuing Bank shall be deemed to have sold and transferred to each Lender,
and each Lender shall be deemed irrevocably and unconditionally to have
purchased and received from such Issuing Bank, without recourse or warranty, an
undivided interest and participation, to the extent of such Lender's Commitment
Ratio, in such Letter of Credit and the obligations of the Borrower with
respect thereto (including, without limitation, all Letter of Credit
Obligations with respect thereto). At such time as the Agent shall be notified
by the Issuing Bank that the beneficiary under any Letter of Credit has drawn
on the same, the Agent shall promptly notify the Borrower and each Lender, by
telephone or telecopy, of the amount of the draw and, in the case of each
Lender, such Lender's portion of such draw amount as calculated in accordance
with its Commitment Ratio.
(d) The Borrower hereby agrees to immediately reimburse an Issuing Bank for
amounts paid by such Issuing Bank in respect of draws under a Letter of Credit.
In order to facilitate such repayment, the Borrower hereby irrevocably
requests the Lenders, and the Lenders hereby severally agree, on the terms and
conditions of this Agreement (other than as provided in Article 2 hereof with
respect to the amounts of, the timing of requests for, and the repayment of
Advances hereunder and in Article 3 hereof with respect to conditions precedent
to Advances hereunder), with respect to any drawing under a Letter of Credit,
to make a Base Rate Advance on each day on which a draw is made under any
Letter of Credit and in the amount of such draw, and to pay the proceeds of
such Advance directly to the Issuing Bank to reimburse the Issuing Bank for the
amount paid by it upon such draw. Each Lender shall pay its share of such Base
Rate Advance by paying its portion of such Advance to the Agent in accordance
with Section 2.2(e) hereof and its Commitment Ratio, without reduction for any
set-off or counterclaim of any nature whatsoever and regardless of whether any
Default or Event of Default then exists or would be caused thereby. The
disbursement of funds in connection with a draw under a Letter of Credit
pursuant to this Section hereunder shall be subject to the terms and conditions
of Section 2.2(e) hereof. The obligation of each Lender to make payments to
the Agent, for the account of the Issuing Bank, in accordance with this Section
2.15 shall be absolute and unconditional and no Lender shall be relieved of its
obligations to make such payments by reason of noncompliance by any other
Person with the terms of the Letter of Credit or for any other reason (other
than the gross negligence of the Issuing Bank in paying such Letter of Credit,
as determined by a final
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non-appealable judgment of a court of competent jurisdiction). The Agent shall
promptly remit to the Issuing Bank the amounts so received from the other
Lenders. Any overdue amounts payable by the Lenders to the Issuing Bank in
respect of a draw under any Letter of Credit shall bear interest, payable on
demand, (x) for the first two Business Days, at the rate on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers, as published for such day by the Federal Reserve Bank of
New York, and (y) thereafter, at the Base Rate.
(e) The Borrower agrees that each Advance by the Lenders to reimburse the
Issuing Bank for draws under any Letter of Credit, shall, for all purposes
hereunder, be deemed to be a Base Rate Advance under the Commitment and shall
be payable and bear interest in accordance with all other Base Rate Advances of
Revolving Loans.
(f) Borrower agrees that any action taken or omitted to be taken by an
Issuing Bank in connection with any Letter of Credit, except for such actions
or omissions as shall constitute gross negligence or willful misconduct on the
part of such Issuing Bank as determined by a final non-appealable judgment of a
court of competent jurisdiction, shall be binding on the Borrower as between
the Borrower and the Issuing Bank, and shall not result in any liability of the
Issuing Bank to the Borrower. The obligation of the Borrower to reimburse an
Issuing Bank for a drawing under any Letter of Credit or the Lenders for
Advances made by them to Issuing Banks on account of draws made under the
Letters of Credit shall be absolute, unconditional and irrevocable, and shall
be paid strictly in accordance with the terms of this Agreement under all
circumstances whatsoever, including, without limitation, the following
circumstances:
(i) Any lack of validity or enforceability of any Loan Document;
(ii) Any amendment or waiver of or consent to any departure from any
or all of the Loan Documents;
(iii) Any improper use which may be made of any Letter of Credit or any
improper acts or omissions of any beneficiary or transferee of any Letter
of Credit in connection therewith;
(iv) The existence of any claim, set-off, defense or any right which
the Borrower may have at any time against any beneficiary or any
transferee of any Letter of Credit (or Persons for whom any such
beneficiary or any such
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transferee may be acting), any Lender or any other Person, whether in
connection with any Letter of Credit, any transaction contemplated by any
Letter of Credit, this Agreement, or any other Loan Document, or any
unrelated transaction;
(v) Any statement or any other documents presented under any
Letter of Credit proving to be insufficient, forged, fraudulent or
invalid in any respect or any statement therein being untrue or inaccurate
in any respect whatsoever;
(vi) The insolvency of any Person issuing any documents in connection
with any Letter of Credit;
(vii) Any breach of any agreement between the Borrower and any
beneficiary or transferee of any Letter of Credit;
(viii) Any irregularity in the transaction with respect to which any
Letter of Credit is issued, including any fraud by the beneficiary or any
transferee of such Letter of Credit;
(ix) Any errors, omissions, interruptions or delays in transmission
or delivery of any messages, by mail, cable, telegraph, wireless or
otherwise, whether or not they are in code;
(x) Any act, error, neglect or default, omission, insolvency or
failure of business of any of the correspondents of the Issuing Bank;
(xi) Any other circumstances arising from causes beyond the control
of the Issuing Bank;
(xii) Payment by the Issuing Bank under any Letter of Credit against
presentation of a sight draft or a certificate which does not comply with
the terms of such Letter of Credit, provided that such payment shall not
have constituted gross negligence or willful misconduct of the Issuing
Bank as determined by a final non-appealable judgment of a court of
competent jurisdiction; and
(xiii) Any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
(g) If any change in Applicable Law, any change in the interpretation or
administration thereof, or any change in compliance with Applicable Law by the
Issuing Bank as a result of any request or directive of any Governmental
Authority, central
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bank or comparable agency (whether or not having the force of law) after
the Agreement Date shall (i) impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit, capital adequacy, assessment or other
requirements or conditions against letters of credit issued by the Issuing Bank
or (ii) impose on the Issuing Bank any other condition regarding this Agreement
or any Letter of Credit or any participation therein, and the result of any of
the foregoing in the determination of the Issuing Bank is to increase the cost
to the Issuing Bank of issuing or maintaining any Letter of Credit or
purchasing or maintaining any participation therein, then, on the earlier of
the Maturity Date or a date not more than five (5) days after demand by the
Issuing Bank, the Borrower agrees to pay to the Issuing Bank, from time to time
as specified by the Issuing Bank, such additional amount or amounts as the
Issuing Bank determines will compensate it for such increased costs, from the
date such change or action is effective, together with interest on each such
amount from the Maturity Date or the date demanded, as applicable, until
payment in full thereof at the Base Rate. A certificate as to such increased
cost incurred by the Issuing Bank as a result of any event referred to in this
paragraph submitted by the Issuing Bank to the Borrower shall be conclusive,
absent manifest error, as to the amount thereof.
(h) The Borrower will indemnify and hold harmless the Agent, each Issuing
Bank and each other Lender and each of their respective employees,
representatives, officers and directors from and against any and all claims,
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever
(including reasonable attorneys' fees) which may be imposed on, incurred by or
asserted against the Agent, such Issuing Bank or any such other Lender in any
way relating to or arising out of the issuance of a Letter of Credit, except
that the Borrower shall not be liable to the Agent, any Issuing Bank or any
such Lender for any portion of such claims, liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements resulting from the gross negligence or willful misconduct of the
Agent, such Issuing Bank or such Lender, as the case may be, as determined by a
final non-appealable judgment of a court of competent jurisdiction. This
Section 2.15(h) shall survive termination of this Agreement.
(i) Each Lender shall be responsible (to the extent the Issuing Bank is not
reimbursed by the Borrower) for its pro rata share (based on such Lender's
Commitment Ratio) of any and all reasonable out-of-pocket costs, expenses
(including reasonable legal fees) and disbursements which may be incurred or
made by
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the Issuing Bank in connection with the collection of any amounts due under,
the administration of, or the presentation or enforcement of any rights
conferred by any Letter of Credit, the Borrower's or any guarantor's
obligations to reimburse draws thereunder or otherwise. In the event the
Borrower shall fail to pay such expenses of the Issuing Bank within fifteen
(15) days of demand for payment by the Issuing Bank, each Lender shall
thereupon pay to the Issuing Bank its pro rata share (based on such Lender's
Commitment Ratio) of such expenses within ten (10) days from the date of the
Issuing Bank's notice to the Lenders of the Borrower's failure to pay;
provided, however, that if the Borrower shall thereafter pay such expenses, the
Issuing Bank will repay to each Lender the amounts received from such Lender
hereunder.
ARTICLE 3
CONDITIONS PRECEDENT
Section 3.1 Conditions Precedent to Initial Advance. The obligations of
the Lenders to undertake the Commitment and to make the initial Advance
hereunder, and the obligation of the Issuing Banks to issue the initial Letter
of Credit hereunder, are subject to the prior fulfillment of each of the
following conditions:
(a) The Agent or the Lenders, as appropriate, shall have received each of
the following, in form and substance satisfactory to the Agent and the Lenders:
(i) This duly executed Agreement;
(ii) A duly executed Note to the order of each Lender in the amount
of such Lender's pro rata share of the Commitment;
(iii) Such duly executed amendments to the other Loan Documents (as
defined in the Original Loan Agreement), as determined by the Agent to
be necessary or appropriate, including, but not limited to, the Mortgage
and the Subordination Agreement;
(iv) A ratification of the Subsidiary Guaranty and Subsidiary Security
Agreement duly executed by the Material Subsidiaries;
(v) The opinions of Kirkland & Ellis, as counsel to the Borrower
and the Material Subsidiaries, addressed to
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each Lender, the Issuing Bank and the Agent and satisfactory to them,
dated the Agreement Date;
(vi) The opinion of Richard F. Vitkus, as general counsel to the
Borrower and the Material Subsidiaries, addressed to each Lender, the
Issuing Bank and the Agent and satisfactory to them, dated the Agreement
Date;
(vii) The duly executed Request for Advance for the initial Advance
of the Loans;
(viii) A duly executed Borrowing Base Certificate dated as of the
Agreement Date;
(ix) A loan certificate signed by an Authorized Signatory of the
Borrower in substantially the form of Exhibit H attached hereto,
including a certificate of incumbency with respect to each Authorized
Signatory of the Borrower, together with appropriate attachments which
shall include, without limitation, the following: (A) a copy of the
Certificate of Incorporation of the Borrower certified to be true,
complete and correct by the Secretary of State for the State of Delaware,
(B) a true, complete and correct copy of the By-Laws of the Borrower, (C)
a true, complete and correct copy of the resolutions of the Borrower
authorizing the borrowing hereunder and the execution, delivery and
performance by the Borrower of the Loan Documents, and (D) certificates of
good standing from each jurisdiction in which the Borrower does business;
(x) A loan certificate from each Material Subsidiary signed by an
Authorized Signatory of such Material Subsidiary in substantially the form
of Exhibit H attached hereto, including a certificate of incumbency with
respect to each Authorized Signatory of such Material Subsidiary, together
with appropriate attachments which shall include, without limitation, the
following: (A) a copy of the Certificate of Incorporation of such
Material Subsidiary certified to be true, complete and correct by the
Secretary of State for the jurisdiction of its incorporation, (B) a true,
complete and correct copy of the By-Laws of such Material Subsidiary, (C)
a true, complete and correct copy of the resolutions of such Material
Subsidiary authorizing the execution, delivery and performance of each
Loan Document to which it is a party, and (D) certificates of good
standing from each jurisdiction in which such Material Subsidiary is
qualified to do business;
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(xi) A duly executed General Release, releasing the Agent, the
Issuing Bank and the Previous Banks from all claims, liability and
causes of action arising in connection with the Original Credit Agreement
prior to the Agreement Date;
(xii) Audited financial statements for the Borrower for its 1997
fiscal year, unaudited financial statements for the Borrower for the
month ending April 30, 1998, and pro-forma financial statements for the
Borrower's 1998 fiscal year on a month by month basis;
(xiii) Copies of certificates of insurance and the related insurance
policies covering the assets of the Borrower and otherwise meeting the
requirements of Section 5.5 hereof;
(xiv) Copies of any pay-off letters, termination statements, canceled
mortgages and the like required by the Agent in connection with the
removal of any Liens (other than Permitted Liens) against the assets of
the Borrower or any Material Subsidiary;
(xv) Lien search results with respect to the Borrower and all
Material Subsidiaries from all appropriate jurisdictions and filing
offices (including search results from the United States Patent and
Trademark Office regarding the Tuning Patents);
(xvi) Evidence satisfactory to the Agent that the Liens granted
pursuant to the Security Documents will be first priority perfected
Liens on the Collateral (subject only to Permitted Liens);
(xvii) Except as previously disclosed to the Agent and the Lenders
in writing (including in information delivered to the Agent and the
Lenders pursuant to Section 6.5(c)), no change in the business, assets,
management, operations, financial condition or prospects of the Borrower
shall have occurred since April 30, 1998, which change, in the judgment of
the Agent and the Lenders, will have a Materially Adverse Effect;
(xviii) Payment of all fees and expenses payable to the Agent, the
affiliates of the Agent and the Lenders in connection with the execution
and delivery of this Agreement, including, without limitation, fees and
expenses of counsel to the Agent;
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(xix) The duly executed Receivables Sale Agreement and such other
evidence satisfactory to the Agent and the Lenders that the Receivables
Securitization and all other transactions contemplated by the
Securitization Documents have been terminated, and that the Borrower (in
its own capacity and as successor to Microcircuits) and Finance Corp. have
been released from all obligations thereunder;
(xx) Evidence reasonably satisfactory to the Agent and the Lenders
that no Default or Event of Default exists under the Subordinated
Debentures, [the Reimbursement Agreement, or the LGE Debt] or will be
caused by the Borrower's execution of this Agreement or the Loan
Documents; and
(xxi) All such other documents listed on the Agenda of Closing
Documents attached hereto as Annex 1, and such other documents and
evidence as the Agent may reasonably request, certified by an appropriate
governmental official or an Authorized Signatory if so requested.
(b) The Agent shall be satisfied with the Borrower's cash management system
and shall have received duly executed Blocked Account Letters as required by
Section 5.15.
(c) The Agent and the Lenders shall have received evidence reasonably
satisfactory to the Majority Lenders that all Necessary Authorizations are in
full force and effect and are not subject to any pending or threatened reversal
or cancellation, and the Agent and the Lenders shall have received a
certificate of an Authorized Signatory so stating.
(d) All of the representations and warranties of the Borrower under this
Agreement shall be true and correct, both before and after giving effect to the
application of the proceeds of the initial Advance.
Section 3.2 Conditions Precedent to Each Advance. The obligation of the
Lenders to make each Advance, including the initial Advance, hereunder (but
excluding Advances, the proceeds of which are to reimburse (i) the Swing Bank
for Swing Loans or (ii) an Issuing Bank for amounts drawn under a Letter of
Credit), is subject to the fulfillment of each of the following conditions
immediately prior to or contemporaneously with such Advance:
(a) All of the representations and warranties of the Borrower under this
Agreement, which, pursuant to Section 4.4 hereof, are made at and as of the
time of such Advance, shall be true and correct at such time, both before and
after giving effect to the application of the proceeds of the Advance, and the
Agent shall have received a certificate (which may be a Request
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for Advance) to that effect signed by an Authorized Signatory of the Borrower
and dated the date of such Advance;
(b) The incumbency of the Authorized Signatories shall be as stated in the
certificate of incumbency contained in the certificate of the Borrower
delivered pursuant to Section 3.1(a) or as subsequently modified and reflected
in a certificate of incumbency delivered to the Agent and the Lenders;
(c) The most recent Borrowing Base Certificate which shall have been
delivered to the Agent pursuant to Section 6.5(a) hereof shall
demonstrate that, after giving effect to the making of such Advance, no
Borrowing Base Deficiency shall exist;
(d) There shall not exist on the date of such Advance and after giving
effect thereto, a Default or an Event of Default hereunder; and
(e) The Agent and the Lenders shall have received all such other
certificates, reports, statements, opinions of counsel, or other documents as
the Agent or Lenders may reasonably request and all other conditions to the
making of such Advance which are set forth in this Agreement shall have been
fulfilled.
The Borrower hereby agrees that the delivery of any Request for Advance
hereunder shall be deemed to be the certification of the Authorized Signatory
thereof that there does not exist, on the date of the making of the Advance and
after giving effect thereto, a Default or an Event of Default hereunder.
Section 3.3 Conditions Precedent to Each Letter of Credit. The obligation
of the Issuing Banks to issue each Letter of Credit (including the initial
Letter of Credit) hereunder is subject to the fulfillment of each of the
following conditions immediately prior to or contemporaneously with the
issuance of such Letter of Credit:
(a) All of the representations and warranties of the Borrower under this
Agreement, which, pursuant to Section 4.4 hereof, are made at and as of the
time of the issuance of such Letter of Credit, shall be true and correct at
such time, both before and after giving effect to the issuance of the Letter of
Credit, and the Agent shall have received a certificate (which may be a Request
for Issuance of Letter of Credit) to that effect signed by an Authorized
signatory of the Borrower and dated the date of the issuance of such Letter of
Credit;
(b) The incumbency of the Authorized Signatories shall be as stated in the
certificate of incumbency contained in the
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certificate of the Borrower delivered pursuant to Section 3.1(a) or as
subsequently modified and reflected in a certificate of incumbency delivered to
the Agent and the Lenders;
(c) The most recent Borrowing Base Certificate which shall have been
delivered to the Agent pursuant to Section 6.5(a) hereof shall
demonstrate that, after giving effect to the making of such Letter of Credit,
no Borrowing Base Deficiency shall exist;
(d) There shall not exist on the date of issuance of such Letter of Credit,
and after giving effect thereto, a Default or an Event of Default; and
(e) The Agent and the Issuing Bank shall have received all such other
certificates, reports, statements, opinions of counsel, or other documents as
the Agent or Issuing Bank may reasonably request and all other conditions to
the issuance of such Letter of Credit which are set forth in this Agreement
shall have been fulfilled.
The Borrower hereby agrees that the delivery of any Request for Issuance of a
Letter of Credit hereunder shall be deemed to be the certification of the
Authorized Signatory thereof that there does not exist, on the date of issuance
of the Letter of Credit and after giving effect thereto, a Default or an Event
of Default hereunder.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1 General Representations and Warranties. In order to induce the
Agent, the Lenders and the Issuing Banks to enter into this Agreement and to
extend the Loans and issue the Letters of Credit to the Borrower, the Borrower
hereby agrees, represents, and warrants that:
(a) Organization; Power; Qualification. Each of the Borrower and the
Borrower's Subsidiaries is a corporation duly organized, validly existing, and
in good standing under the laws of their respective states of incorporation,
has the corporate power and authority to own or lease and operate its
properties and to carry on its business as now being and hereafter proposed to
be conducted, and is duly qualified and is in good standing as a foreign
corporation, and authorized to do business, in each jurisdiction in which the
character of its properties or the
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nature of its business requires such qualification or authorization.
(b) Authorization; Enforceability. The Borrower and each of the Borrower's
Material Subsidiaries has the power and has taken all necessary corporate
action to authorize it to execute, deliver, and perform this Agreement and each
of the other Loan Documents to which it is a party in accordance with the terms
thereof and to consummate the transactions contemplated hereby and thereby.
This Agreement and each of the other Loan Documents to which the Borrower is a
party has been duly executed and delivered by the Borrower, and is, and each of
the other Loan Documents to which the Borrower is a party is, a legal, valid
and binding obligation of the Borrower, enforceable in accordance with its
terms.
(c) Partnerships; Joint Ventures; Subsidiaries. Neither Borrower nor any
of its Subsidiaries is a partner or joint venturer in any partnership or joint
venture other than (i) the Borrower's Subsidiaries listed on Schedule 4.1(c)-1
and (ii) the partnerships and joint ventures listed on Schedule 4.1(c)-2.
Schedule 4.1(c)-2 sets forth, for each partnership or joint venture that is not
a Subsidiary of Borrower, a complete and accurate statement of (a) the
percentage ownership of each such partnership or joint venture by Borrower or
any of its Subsidiaries, (b) the state or other jurisdiction of formation or
incorporation, as appropriate, of each such partnership or joint venture, (c)
each state in which each such partnership or joint venture is qualified to do
business on the date of this Agreement and (d) all of each such partnership's
or joint venture's trade names, trade styles or doing business forms on the
date of this Agreement. Except as set forth on Schedule 4.1(c)-1 attached
hereto, the Borrower has no Subsidiaries.
(d) Capital Stock and Related Matters. The authorized Capital Stock of
Borrower consists of one hundred million (100,000,000) shares of common stock,
$1.00 par value per share, of which sixty-seven million five hundred
twenty-five thousand four hundred forty seven (67,525,447) shares were issued
and outstanding as of March 18, 1998, and are fully paid and non-assessable. As
of the Agreement Date, all holders of five percent (5%) or more of such Capital
Stock, together with a description of such Capital Stock held by such Person,
are listed on Schedule 4.1(d). Except as described on Schedule 4.1(d) attached
hereto, the Borrower has outstanding no stock or securities convertible into or
exchangeable for any shares of its Capital Stock, nor are there any preemptive
or similar rights to subscribe for or to purchase, or any other rights to
subscribe for or to purchase, or any options for the purchase of, or any
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agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments, or claims of any character relating to, any Capital Stock
or any stock or securities convertible into or exchangeable for any Capital
Stock. The Borrower is not subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of its Capital Stock or
to register any shares of its Capital Stock, and there are no agreements
restricting the transfer of any shares of the Borrower's Capital Stock.
(e) Compliance with laws, etc., of Agreement, Other Loan Documents, and
Contemplated Transactions. The execution, delivery, and performance of this
Agreement and each of the other Loan Documents in accordance with the terms
thereof and the consummation of the transactions contemplated hereby and
thereby do not and will not (i) violate any Applicable Law, (ii) conflict with,
result in a breach of, or constitute a default under the certificate of
incorporation or by-laws of the Borrower or any Material Subsidiary or under
any indenture, agreement, or other instrument to which the Borrower or any
Material Subsidiary is a party or by which the Borrower or any Material
Subsidiary or any of their respective properties may be bound, or (iii) result
in or require the creation or imposition of any Lien upon or with respect to
any property now owned or hereafter acquired by the Borrower or any Material
Subsidiary except Permitted Liens.
(f) Necessary Authorizations. The Borrower and each Material Subsidiary
have obtained all Necessary Authorizations, and all such Necessary
Authorizations are in full force and effect. None of said Necessary
Authorizations is the subject of any pending or, to the best of the Borrower's
knowledge, threatened attack or revocation, by the grantor of the Necessary
Authorization. Neither the Borrower nor any Material Subsidiary is required to
obtain any additional Necessary Authorizations in connection with the
execution, delivery, and performance, in accordance with the terms of this
Agreement or any other Loan Document, and the borrowing hereunder.
(g) Title to Properties. The Borrower and each of the Borrower's
Subsidiaries has good, marketable, and legal title to, or a valid leasehold
interest in, all of its properties and assets (including, without limitation,
the Accounts), and none of such properties or assets is subject to any Liens
(other than Permitted Liens) which detract from the value of such properties or
assets or interferes with the business or operations of the Borrower and the
Borrower's Subsidiaries as presently conducted or proposed to be conducted.
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(h) Material Contracts; Labor Matters. Schedule 4.1(h) contains a complete
list, as of the date of this Agreement, of each contract or agreement to which
Borrower or any Material Subsidiary is a party which is material to its
respective business, financial condition, operations, prospects or property
and, upon the request of the Agent or any Lender, the Borrower will provide the
Agent or such Lender, as applicable, with a copy of any such contract or
agreement. Except as disclosed on Schedule 4.1(h): (a) no labor contract to
which Borrower or any Material Subsidiary is a party or is otherwise subject is
scheduled to expire prior to the Maturity Date; (b) neither Borrower nor any
Material Subsidiary has, within the two-year period preceding the date of this
Agreement, taken any action which would have constituted or resulted in a
"plant closing" or "mass layoff" within the meaning of the Federal Worker
Adjustment and Retraining Notification Act of 1988 or any similar applicable
federal, state or local law, and Borrower has no reasonable expectation that
any such action is or will be required at any time prior to the Maturity Date;
and (c) on the Agreement Date (i) neither Borrower nor any Material Subsidiary
is a party to any labor dispute (other than any immaterial disputes with
Borrower's or such Material Subsidiary's employees as individuals and not
affecting Borrower's or such Material Subsidiary's relations with any labor
group or its workforce as a whole) and (ii) there are no pending or, to the
Borrower's knowledge, threatened strikes or walkouts relating to any labor
contracts to which Borrower or any Material Subsidiary is a party or is
otherwise subject. Except as set forth on Schedule 4.1(h) attached hereto,
none of the employees of the Borrower or any of the Borrower's Subsidiaries is
a party to any collective bargaining agreement with the Borrower or any of the
Borrower's Subsidiaries.
(i) Taxes. All federal, state, and other tax returns of the Borrower and
each of the Borrower's Subsidiaries required by law to be filed have been duly
filed, and all federal, state, and other taxes, assessments, and other
governmental charges or levies upon the Borrower and each of the Borrower's
Subsidiaries and any of their respective properties, income, profits, and
assets, which are due and payable, have been paid, except any payment of any of
the foregoing which the Borrower or any of the Borrower's Subsidiaries, as
applicable, are currently contesting in good faith by appropriate proceedings
and with respect to which reserves in conformity with GAAP have been provided
on the books of the Borrower or the Borrower's Subsidiaries, as the case may
be. The charges, accruals, and reserves on the books of the Borrower and each
of the Borrower's Subsidiaries in respect of taxes are, in the reasonable
judgement of the Borrower, adequate. Neither the Borrower nor any of the
Borrower's Subsidiaries are
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being audited, or have knowledge of any pending audit, by the Internal Revenue
Service or any other taxing authority.
(j) Financial Statements. The Borrower has furnished, or caused to be
furnished, to the Lender financial statements for the Borrower and the
Borrower's Subsidiaries on a consolidated basis which are complete and correct
in all material respects and present fairly in accordance with GAAP the
financial position of the Borrower and the Borrower's Subsidiaries on a
consolidated basis as at December 31, 1997, and the results of operations for
the periods then ended. Except as disclosed in such financial statements,
neither the Borrower nor any of the Borrower's Subsidiaries has any material
liabilities, contingent or otherwise, and there are no material unrealized or
anticipated losses of the Borrower or any of the Borrower's Subsidiaries which
have not heretofore been disclosed in writing to the Lenders.
(k) No Adverse Change. Since April 30, 1998, there has occurred no event
(except as previously disclosed to the Agent and the Lenders in writing
(including in information delivered to the Agent and the Lenders pursuant to
Section 6.5(c)), which could reasonably be expected to have a Materially
Adverse Effect.
(l) Investments and Guaranties. As of the Agreement Date, the Borrower
does not own the Capital Stock, partnership interests or other securities of or
equity interests in, or have outstanding loans or advances to, or guaranties of
the obligations of, any Person, except as reflected in the financial statements
referred to in Section 4.1(j) above or disclosed on Schedule 4.1(l).
(m) Liabilities, Litigation, etc. Except for liabilities incurred in the
normal course of business, neither the Borrower nor any of the Borrower's
Subsidiaries has any material (individually or in the aggregate) liabilities,
direct or contingent, except as disclosed or referred to in the financial
statements referred to in Section 4.1(j) above or with respect to the
Obligations, the Subordinated Debentures, the LGE Debt or the Additional
Unsecured Debt. As of the Agreement Date, except as described on Schedules
4.1(m) and 4.1(x) attached hereto, there is no litigation, legal or
administrative proceeding, investigation, or other action of any nature pending
or, to the knowledge of the Borrower, threatened against or affecting the
Borrower or any of the Borrower's Subsidiaries or any of their respective
properties which could reasonably be expected to result in any judgment against
or liability of the Borrower or such Subsidiary in excess of $100,000. None of
such litigation disclosed on Schedules 4.1(m) and 4.1(x), individually or
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collectively, could reasonably be expected to have a Materially Adverse Effect.
The Borrower knows of no unusual or unduly burdensome restriction, restraint,
or hazard relative to the business or properties of the Borrower or any of the
Borrower's Subsidiaries that is not customary for or generally applicable to
similarly situated businesses in the same industry as the Borrower and the
Borrower's Subsidiaries.
(n) ERISA. The Borrower and each ERISA Affiliate and each of their
respective Plans are in substantial compliance with ERISA and the Code and
neither the Borrower nor any of its ERISA Affiliates incurred any accumulated
funding deficiency with respect to any such Plan within the meaning of ERISA or
the Code. The Borrower and each of its ERISA Affiliates have complied with all
material requirements of ERISA Sections 601 through 608 and Code Section 4980B.
Neither the Borrower nor, to the best of the Borrower's knowledge, any of its
ERISA Affiliates has made any promises of retirement or other benefits to
employees, except as set forth in the Plans. Neither the Borrower nor any of
the Borrower's Subsidiaries has incurred any material liability to the Pension
Benefit Guaranty Corporation in connection with any such Plan. The assets of
each such Plan which is subject to Title IV of ERISA are sufficient to provide
the benefits under such Plan, the payment of which the Pension Benefit Guaranty
Corporation would guarantee if such 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 Plan. No such 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 Plan or any other Plan of
the Borrower 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
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 Borrower nor any of its ERISA Affiliates is a participant in or is
obligated to make any payment to a Multiemployer Plan.
(o) Intellectual Property; Licenses. Borrower possesses adequate
Intellectual Property to continue to conduct its business as heretofore
conducted by it, 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 on Schedule 4.1(o). With respect to Intellectual Property
of the Borrower unless such Intellectual Property has become
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obsolete or is no longer used or useful in the conduct of the business of the
Borrower:
(i) it is valid and enforceable, is subsisting, and has not been
adjudged invalid or unenforceable, in whole or in part;
(ii) Borrower 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 Borrower's business, in corresponding offices
throughout the world;
(iii) Except as set forth on Schedule 4.1(o), Borrower is the exclusive
owner of the entire and unencumbered right, title and interest in and 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
(iv) Borrower has performed, and Borrower will continue to perform,
all acts, and Borrower 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.
Borrower 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 Borrower's business.
(p) Compliance with Law; Absence of Default. Each of the Borrower and the
Borrower's Subsidiaries is in material compliance with all Applicable Laws and
with all of the provisions of its certificate of incorporation and by-laws, and
no event has occurred or has failed to occur which has not been remedied or
waived, the occurrence or non-occurrence of which (i) constitutes (x) a
Default or (y) a default by the Borrower or any of the Borrower's Subsidiaries
under the Subordinated Debentures, or any other indenture, agreement, or other
instrument (other than any agreement or instrument evidencing the LGE
Obligations or the Salomon Lease Transaction), or any judgment, decree, or
order to which the Borrower or any of the Borrower's Subsidiaries is a party or
by which the Borrower or any of the Borrower's Subsidiaries or any of their
respective
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properties may be bound ; or (ii) has resulted in the acceleration by LGE
of any LGE Obligation or any action by LGE to collect any LGE Obligation or
exercise or enforce any right or remedy under the Reimbursement Agreement, the
LGE Debt or any document evidencing or securing any LGE Obligation.
(q) Casualties; Taking of Properties, etc. Since March 31, 1997, neither
the business nor the properties of the Borrower or any of the Borrower's
Subsidiaries has been materially and adversely affected as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident, strike or
other labor disturbance, embargo, requisition or taking of property or
cancellation of contracts, permits or concessions by any domestic or foreign
government or any agency thereof, riot, activities of armed forces, or acts of
God or of any public enemy.
(r) Accuracy and Completeness of Information. All information, reports,
and other papers and data relating to the Borrower or any of the Borrower's
Subsidiaries furnished to the Agent and the Lenders were, at the time the same
were so furnished, (i) to the extent prepared by third parties, to the best of
Borrower's knowledge, and (ii) to the extent prepared by the Borrower, 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 currently
known to the Borrower which has, or could reasonably be expected to have, a
Materially Adverse Effect. With respect to projections, estimates and
forecasts given to the Lenders, such projections, estimates and forecasts are
based on the Borrower's good faith assessment of the future of the business at
the time made. The Borrower had a reasonable basis for such assessments at the
time made.
(s) Compliance with Regulations G, T, U, and X. Neither the Borrower nor
any of the Borrower's Subsidiaries is engaged principally or as one of its
important activities in the business of extending credit for the purpose of
purchasing or carrying, and neither the Borrower nor any of the Borrower's
Subsidiaries owns or presently intends to acquire, any "margin security" or
"margin stock" as defined in Regulations G, T, U, and X (12 C.F.R. Parts 221
and 224) of the Board of Governors of the Federal Reserve System (herein called
"margin stock"). None of the proceeds of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin stock or for
the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase or carry margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of said
Regulations G, T, U, and X. Neither the Borrower nor any bank acting on its
behalf has taken
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or will take any action which might cause this Agreement or the Notes to
violate Regulation G, T, U, or X or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities Exchange
Act of 1934, in each case as now in effect or as the same may hereafter be in
effect. If so requested by the Agent, the Borrower will furnish the Agent with
(i) a statement or statements in conformity with the requirements of Federal
Reserve Forms G-3 and/or U-1 referred to in Regulations G and U of said Board
of Governors and (ii) other documents evidencing its compliance with the margin
regulations, including without limitation an opinion of counsel in form and
substance satisfactory to the Agent. Neither the making of the Loans nor the
use of proceeds thereof will violate, or be inconsistent with, the provisions
of Regulation G, T, U, or X of said Board of Governors.
(t) Intentionally Omitted.
(u) Insurance. The Borrower and each of its Subsidiaries have insurance
meeting the requirements of Section 5.5 hereof, and such insurance policies are
in full force and effect. As of the Agreement Date, all insurance maintained
by the Borrower is fully described on Schedule 4.1(u) hereto.
(v) Broker's or Finder's Commissions. No broker's or finder's fee or
commission will be payable with respect to the issuance of the Notes, and no
other similar fees or commissions will be payable by the Borrower for any other
services rendered to the Borrower ancillary to the transactions contemplated
herein.
(w) Real Property. All real property leased by the Borrower or any
Material Subsidiary as of the Agreement Date, and the name of the lessor of
such real property, is set forth in Schedule 4.1(w)-1. The leases of Borrower
or such Material Subsidiary are valid, enforceable and in full force and
effect, and have not been modified or amended, except as otherwise set forth in
Schedule 4.1(w)-1. The Borrower or such Material Subsidiary is the sole holder
of the lessee's interests under such leases, and has the right to pledge and
assign the same except as qualified in Schedule 4.1(w)-1. Neither Borrower nor
such Material Subsidiary has made any pledge or assignment of any of it rights
under such leases except as set forth in Schedule 4.1(w)-1 and, there is no
default or condition which, with the passage of time or the giving of notice,
or both, would constitute a material default on the part of any party under
such leases. All real property owned by the Borrower or any Material
Subsidiary as of the Agreement Date is set forth in Schedule 4.1(w)-2. As of
the Agreement Date, the Borrower or
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such Material Subsidiary does not own, lease or use any real property other
than as set forth on Schedule 4.1(w). The Borrower and each Material
Subsidiary owns good and marketable fee simple title to all of its owned real
property, and none of its respective owned real property is subject to any
Liens, except Permitted Liens. Neither the Borrower nor such Material
Subsidiary owns or holds, or is obligated under or a party to, any option,
right of first refusal or any other contractual right to purchase, acquire,
sell, assign or dispose of any real property owned or leased by it.
(x) Environmental Matters. Except as is described on Schedule 4.1(x)
attached hereto:
(i) To the best of the Borrower'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.
(ii) The Borrower and each of the Borrower's 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 impair the financial condition of the Borrower and the Borrower's
Subsidiaries on a consolidated basis.
(iii) Neither the Borrower nor any of the Borrower's Subsidiaries has
received from any Governmental Authority 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 Borrower aware that any such notice is pending.
(iv) 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.
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(v) Neither the Borrower nor any of its Subsidiaries is a party to any
governmental 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.
(vi) To the best of the Borrower's and its Subsidiaries' knowledge,
after reasonably diligent inquiry, 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 Borrower, in violation of Environmental Laws or in amounts that could
give rise to material liability under Environmental Laws.
(y) OSHA. All of the Borrower's and the Borrower Subsidiaries' operations
are conducted in all material respects in compliance with all applicable rules
and regulations promulgated by the Occupational Safety and Health
Administration of the United States Department of Labor.
(z) Name of Borrower. The Borrower and the Material Subsidiaries have not
changed their respective names within the preceding five (5) years from the
Agreement Date, nor has the Borrower or any Material Subsidiary transacted
business under any other name or trade name.
(a)(a) Investment Company Act. Neither the Borrower nor any of the
Borrower's Subsidiaries is required to register under the provisions of the
Investment Company Act of 1940, as amended, and neither the entering into or
performance by the Borrower of this Agreement nor the issuance of the Notes
violates any provision of such Act or requires any consent, approval, or
authorization of, or registration with, any governmental or public body or
authority pursuant to any of the provisions of such Act.
Section 4.2 Representations and Warranties Relating to Eligible Accounts.
With respect to all Eligible Accounts, the Borrower hereby warrants and
represents to the Agent, the Lenders and the Issuing Bank that:
(a) They are genuine and in all respects what they purport to be, and
they are not evidenced by judgments;
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(b) They arise out of completed, bona fide sales and deliveries of
goods or rendition of services by the Borrower in the ordinary course of
its business and in accordance with the terms and conditions of all
purchase orders, contracts or other documents relating thereto and forming
a part of the contract between Borrower and the Account Debtors;
(c) They are for liquidated amounts maturing as stated in the duplicate
invoice covering such sale or rendition of services, copies of which have
been furnished or are available to the Agent;
(d) Except as set forth on Schedule 4.2, the Borrower has made no
agreement with any Account Debtor thereunder for any deduction therefrom,
except discounts or allowances which are granted by the Borrower in the
ordinary course of its business for prompt payment and which are reflected
in the calculation of the net amount of each respective invoice related
thereto;
(e) Except as set forth on Schedule 4.2, there are no facts, events or
occurrences of which the Borrower has knowledge which in any way impair the
validity or enforceability thereof or which will reduce the amount payable
thereunder from the face amount of the invoice and statements delivered to
the Agent with respect thereto;
(f) Except as set forth on Schedule 4.2, to the best of Borrower's
knowledge, the Account Debtors thereunder (i) had the capacity to contract
at the time any contract or other document giving rise to the Accounts were
executed and (ii) such Account Debtors are solvent; and
(g) Except as set forth on Schedule 4.2, the Borrower has no knowledge
of any fact or circumstance which would impair the validity or
collectibility of the Accounts, and to the best of Borrower's knowledge
there are no proceedings or actions which are threatened or pending
against any Account Debtor thereunder which might result in any material
adverse change in such Account Debtor's financial condition or the
collectibility of such Account.
Section 4.3 Representations and Warranties Relating to Inventory. Except
as specifically disclosed to and acknowledged by the Agent in writing, with
respect to all Eligible Inventory, the Agent may rely upon all statements,
warranties, or representations made in any Borrowing Base Certificate in
determining the classification of such Inventory and in
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determining which items of Inventory listed in such Borrowing base Certificate
meet the Inventory Eligibility Requirements.
Section 4.4 Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement shall be deemed to be
made, and shall be true and correct, at and as of the Agreement Date and the
date of each Advance or issuance of a Letter of Credit hereunder, except to the
extent previously fulfilled in accordance with the terms hereof and to the
extent subsequently inapplicable. All representations and warranties made
under this Agreement shall survive, and not be waived by, the execution hereof
by the Lenders, the Issuing Banks, and the Agent, any investigation or inquiry
by any Lender, or the Agent or the making of any Advance or the issuance of any
Letter of Credit under this Agreement.
ARTICLE 5
GENERAL COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Borrower shall have the right to borrow, or have Letters of Credit issued,
hereunder (whether or not the conditions to borrowing have been or can be
fulfilled), and unless the Majority Lenders shall otherwise consent in writing:
Section 5.1 Preservation of Existence and Similar Matters. The Borrower
will, and will cause each of the Borrower's Subsidiaries (other than the
Immaterial Subsidiaries and except in connection with a merger permitted by
Section 7.7(e) provided the Agent receives thirty (30) day's prior written
notice of any such merger) to (i) preserve and maintain their respective
existence, rights, franchises, licenses, and privileges in their respective
jurisdiction of incorporation including, without limitation, all Necessary
Authorizations material to its business, and (ii) qualify and remain qualified
and authorized to do business in each jurisdiction in which the character of
their respective properties or the nature of their respective business requires
such qualification or authorization.
Section 5.2 Compliance with Applicable Law. The Borrower will comply, and
will cause each of the Borrower's Subsidiaries to comply, in all material
respects with the requirements of all Applicable Law.
Section 5.3 Maintenance of Properties. The Borrower will maintain and will
cause each of the Borrower's Subsidiaries to maintain or cause to be maintained
in the ordinary course of
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business in good repair, working order, and condition, normal wear and tear,
removal from service for routine maintenance and repair and disposal of
obsolete Equipment excepted, all properties used or useful in their respective
businesses (whether owned or held under lease), and from time to time make or
cause to be made all needed and appropriate repairs, renewals, replacements,
additions, betterments, and improvements thereto.
Section 5.4 Accounting Methods and Financial Records. The Borrower will
maintain and will cause each of the Borrower's Subsidiaries to maintain a
system of accounting established and administered in accordance with GAAP, and
will keep and will cause each of the Borrower's Subsidiaries to keep adequate
records and books of account in which complete entries will be made in
accordance with such accounting principles consistently applied and reflecting
all transactions required to be reflected by such accounting principles.
Section 5.5 Insurance. The Borrower will maintain and will cause each of
the Borrower's Subsidiaries to maintain insurance including, but not limited to,
public liability, product and manufacturer's liability, business interruption
and fidelity coverage insurance, in such amounts and against such risks as
would be customary for companies in the same industry and of comparable size as
the Borrower from responsible companies having and maintaining an A.M. Best
rating of "A minus" or better and being in a size category of VI or larger or
otherwise acceptable to the Agent. In addition to the foregoing, the Borrower
further agrees to maintain and pay for insurance upon all goods constituting
Collateral wherever located, in storage or in transit in vehicles, including
goods evidenced by documents, covering casualty, hazard, public liability and
such other risks and in such amounts as would be customary for companies in the
same industry and of comparable size as the Borrower, from responsible
companies having and maintaining an A.M. Best rating of "A minus" or better and
being in a size category of VI or larger or otherwise acceptable to the Agent
to insure the Lenders' interest in such Collateral. All such property
insurance policies shall name the Agent as loss payee and all liability
insurance policies shall name the Agent as additional insured. Borrower shall
deliver the original certificates of insurance evidencing that the required
insurance is in force together with satisfactory lender's loss payable and
additional insured, as applicable, endorsements. Each policy of insurance or
endorsement shall contain a clause requiring the insurer to give not less than
thirty (30) days' prior written notice to the Agent in the event of
cancellation or modification of the policy for any reason whatsoever and a
clause that the interest of the Agent shall not be impaired or invalidated by
any act or neglect
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of the Borrower or owner of the Collateral nor by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If the
Borrower fails to provide and pay for such insurance, the Agent may, at the
Borrower's expense, procure the same, but shall not be required to do so. The
Borrower agrees to deliver to the Agent, promptly as rendered, true copies of
all reports made in any reporting forms to insurance companies.
Section 5.6 Payment of Taxes and Claims. The Borrower will pay and
discharge, and will cause each of the Borrower's Subsidiaries to pay and
discharge, all taxes, assessments, and governmental charges or levies imposed
upon them or upon their respective incomes or profits or upon any properties
belonging to them prior to the date on which penalties attach thereto, and all
lawful claims for labor, materials and supplies which have become due and
payable and which by law have or may become a Lien upon any of their respective
Property; except that, no such tax, assessment, charge, levy, or claim need be
paid which is being contested in good faith by appropriate proceedings and for
which adequate reserves shall have been set aside on the appropriate books, but
only so long as such tax, assessment, charge, levy, or claim does not become a
Lien or charge other than a Permitted Lien and no foreclosure, distraint, sale,
or similar proceedings shall have been commenced and remain unstayed for a
period thirty (30) days after such commencement. The Borrower shall timely
file and will cause each of the Borrower's Subsidiaries timely to file all
information returns required by federal, state, or local tax authorities.
Section 5.7 Visits and Inspections. The Borrower will permit and will
cause each of the Borrower's Subsidiaries to permit representatives of the
Agent, the Issuing Banks and each Lender to (a) visit and inspect the
properties of the Borrower and each of the Borrower's Subsidiaries during
normal business hours, (b) inspect and make extracts from and copies of its
books and records, and (c) discuss with its respective principal officers its
businesses, assets, liabilities, financial positions, results of operations,
and business prospects relating to the Borrower; provided, however, if no
Default then exists hereunder, the Agent, any Issuing Bank or any Lender shall
give the Borrower reasonable prior notice of such visit or inspection.
Section 5.8 Conduct of Business. The Borrower shall continue, and shall
cause each Material Subsidiary to continue, to engage in business of the same
general type as now respectively conducted by it.
Section 5.9 ERISA. The Borrower shall at all times make, or cause to be
made, prompt payment of contributions required to meet the minimum funding
standards set forth in ERISA with
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respect to its and its ERISA Affiliates' Plans; furnish to the Agent, promptly
upon the Agent's request therefor, copies of any annual report required to be
filed pursuant to ERISA in connection with each such Plan of it and its ERISA
Affiliates; notify the Agent as soon as practicable of any Reportable Event and
of any additional act or condition arising in connection with any such Plan
which the Borrower believes might constitute grounds for the termination thereof
by the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan;
and furnish to the Agent, promptly upon the Agent's request therefor, such
additional information concerning any such Plan as may be reasonably requested
by the Agent.
Section 5.10 Lien Perfection. The Borrower agrees to, and will cause each
Material Subsidiary to, execute all Uniform Commercial Code financing
statements, and amendments and continuation statements thereto, provided for by
Applicable Law together with any and all other instruments, assignments or
documents and shall take such other action as may be required to perfect or
continue the perfection of the Agent's (on behalf of the Lenders and the
Issuing Banks) security interest in the Collateral. The Borrower hereby
authorizes the Agent to execute and file any such financing statement on the
Borrower's behalf to the extent permitted by Applicable Law.
Section 5.11 Location of Collateral; Consignment of Inventory.
(a) All Collateral, other than Inventory in transit, will at all times be
kept by the Borrower at one or more of the business locations set forth in
Schedule 5.11 and shall not, without the prior written approval of the Agent,
be moved therefrom except, prior to an Event of Default (i) sales of Inventory
in the ordinary course of business; (ii) sales or other dispositions of assets
permitted pursuant to Section 7.7 hereof; and (iii) the storage of Inventory at
locations within the continental United States other than those specified on
Schedule 5.11 hereto if (A) the Borrower gives the Agent written notice of the
new storage location outside of (x) the state, or (y) if the Uniform Commercial
Code as in effect in such state has a county filing requirement, the county, in
which it is currently stored at least thirty (30) days prior to storing
Inventory at such location, (B) the Lenders' security interest in such
Inventory is and continues to be a duly perfected, first priority Lien thereon,
(C) neither the Borrower's nor the Agent's right of entry upon the premises
where such Inventory is stored or its right to remove the Inventory therefrom,
is in any way restricted, (D) the owner of such premises agrees with the Agent
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not to assert any landlord's, bailee's or other Lien in respect of the
Inventory for unpaid rent or storage charges, and (E) all negotiable documents
and receipts in respect of any Collateral maintained at such premises are
promptly delivered to the Agent;
(b) No Inventory will be consigned to any Person without the Agent's
prior written consent, and, if such consent is given, the Borrower shall, prior
to the delivery of any Inventory on consignment, (i) provide the Agent with all
consignment agreements to be used in connection with such consignment, all of
which shall be acceptable to the Agent, (ii) prepare, execute and file
appropriate financing statements with respect to any consigned Inventory,
showing the Agent as assignee, (iii) conduct a search of all filings made
against the consignee in all jurisdictions in which any consigned Inventory is
to be located and deliver to the Agent copies of the results of all such
searches and (iv) notify, in writing, all the creditors of the consignee which
are or may be holders of Liens in the Inventory to be consigned that the
Borrower expects to deliver certain Inventory to the consignee, all of which
Inventory shall be described in such notice by item or type.
Section 5.12 Protection of Collateral. All insurance expenses and
expenses of protecting, storing, warehousing, insuring, handling, maintaining
and shipping the Collateral (including, without limitation, all rent payable
by the Borrower to any landlord of any premises where any of the Collateral may
be located), and any and all excise, property, sales, and use taxes imposed by
any state, federal, or local authority on any of the Collateral or in respect
of the sale thereof, shall be borne and paid by the Borrower. If the Borrower
fails to promptly pay any portion thereof when due, the Lenders may, at their
option, but shall not be required to, make a Base Rate Advance for such purpose
and pay the same directly to the appropriate Person. The Borrower agrees to
reimburse the Lenders promptly therefor with interest accruing thereon daily at
the Default Rate provided in this Agreement. All sums so paid or incurred by
the Lenders for any of the foregoing and all reasonable costs and expenses
(including attorneys' fees, legal expenses, and court costs) which the Lenders
may incur in enforcing or protecting the Lien on or rights and interest in the
Collateral or any of its rights or remedies under this or any other agreement
between the parties hereto or in respect of any of the transactions to be had
hereunder until paid by the Borrower to the Lenders with interest at the
Default Rate, shall be considered Obligations owing by the Borrower to the
Lenders hereunder. Such Obligations shall be secured by all Collateral and by
any and all other collateral, security, assets, reserves, or funds of the
Borrower in or coming into the hands or inuring to the benefit of the Lenders.
Neither
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the Agent nor the Lenders shall be liable or responsible in any way for
the safekeeping of any of the Collateral or for any loss or damage thereto
(except for reasonable care in the custody thereof while any Collateral is in
the Lenders' actual possession) or for any diminution in the value thereof, or
for any act or default of any warehouseman, carrier, forwarding agency, or
other person whomsoever, but the same shall be at the Borrower's sole risk.
Section 5.13 Assignments and Records of Accounts. Upon the occurrence
of an Event of Default and if so requested by the Agent, the Borrower shall
execute and deliver to the Agent formal written assignments of all of the
Accounts weekly, which shall include all Accounts that have been created since
the date of the last assignment, together with copies of invoices or invoice
registers related thereto. The Borrower shall keep accurate and complete
records of the Accounts and all payments and collections thereon.
Section 5.14 Administration of Accounts.
(a) The Agent retains the right after the occurrence of an Event of
Default to notify the Account Debtors that the Accounts have been assigned to
the Agent and to collect the Accounts directly in its own name and to charge the
collection costs and expenses, including attorneys' fees, to the Borrower. The
Agent has no duty to protect, insure, collect or realize upon the Accounts or
preserve rights in them. The Borrower irrevocably makes, constitutes and
appoints the Agent as the Borrower's true and lawful attorney and agent-in-fact
to endorse the Borrower's name on any checks, notes, drafts or other payments
relating to, the Accounts which come into the Agent's possession or under the
Agent's control as a result of its taking any of the foregoing actions.
Additionally, the Agent shall have the right to collect and settle or adjust
all disputes and claims directly with the Account Debtor and to compromise the
amount or extend the time for payment of the Accounts upon such terms and
conditions as the Agent may deem advisable, and to charge the deficiencies,
reasonable costs and expenses thereof, including attorney's fees, to the
Borrower.
(b) If an Account includes a charge for any tax payable to any
governmental taxing authority, the Lenders are authorized, in their sole
discretion, to pay the amount thereof to the proper taxing authority for the
account of the Borrower and to make a Base Rate Advance to the Borrower to pay
therefor. The Borrower shall notify the Agent if any Account includes any tax
due to any governmental taxing authority and, in the absence of such notice, the
Agent shall have the right to retain the full proceeds of the
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Account and shall not be liable for any taxes to any governmental taxing
authority that may be due by the Borrower by reason of the sale and delivery
creating the Account.
(c) Whether or not a Default or an Event of Default has occurred, any of
the Agent's officers, employees or agents shall have the right, at any time or
times hereafter, in the name of the Lenders, or any designee of the Lenders or
the Borrower, to verify the validity, amount or other matter relating to any
Accounts by mail, telephone, telegraph or otherwise. The Borrower shall
cooperate fully with the Agent and the Lenders in an effort to facilitate and
promptly conclude any such verification process.
Section 5.15 The Blocked Account.
(a) The Borrower shall establish and maintain one or more special
lockboxes or blocked accounts (each, a "Blocked Account") owned by the Borrower
with such bank(s) as may be selected by the Borrower and approved by the Agent
and which shall provide that all proceeds of the Collateral which shall be
received in such Blocked Account shall be remitted in immediately available
funds to the Clearing Account. Each such Blocked Account bank shall agree to
the Agent's standard Blocked Account Letter or such variation thereof as shall
be mutually satisfactory to the Agent and such bank. All amounts which shall be
deposited into any Blocked Account shall immediately be under the sole dominion
and exclusive control of the Agent, on behalf of the Issuing Banks and Lenders,
and the Borrower shall have no right to withdraw such amounts, and all of the
Blocked Account Letters shall so provide.
(b) The Borrower shall cause all proceeds of Collateral to be promptly
deposited directly into a Blocked Account or the Clearing Account.
Additionally, the Borrower shall cause all Tuning Patent Royalties and other
payments to be made to the Borrower under any License Agreement to be promptly
deposited by the obligor thereof directly into the Blocked Account (and the
Borrower has issued such payment instructions to all licensees under such
License Agreements in effect as of the Agreement Date and will issue such
payment instructions to all licensees under any License Agreement entered into
after the Agreement Date). In the event that the Borrower shall at any time
receive any remittances of any of the foregoing directly, the Borrower shall
hold the same as trustee for the Agent, shall segregate such remittances from
its other assets, and shall promptly deposit the same into the Clearing
Account. All cash, cash equivalents, checks, notes, drafts or similar items of
payment received by the Borrower otherwise than as provided elsewhere in this
Section
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5.15 (b) shall be deposited into the Clearing Account, the Blocked Account or
an account which pursuant to Section 5.15(d) hereof is subject to a Blocked
Account Letter.
(c) On the Business Day on which any amount is deposited into the
Clearing Account in immediately available funds the Agent shall withdraw such
amount from the Clearing Account, deposit the same in the Loan Account, and
apply the same against the Obligations in the manner provided for in Section
2.11 hereof; provided, however, and notwithstanding the foregoing, that unless
an Event of Default then exists, no money on deposit in the Clearing Account
shall be applied against any Eurodollar Advance if such application would
constitute a prepayment of such Eurodollar Advance prior to its Payment Date,
and such funds shall be retained in the Clearing Account (and will be invested
by the Agent in overnight deposits for the Borrower's account) until the earlier
of (i) such Payment Date, (ii) the next Business Day on which additional
Obligations arise, or (iii) the occurrence of an Event of Default, at which time
such amount shall be applied to such Eurodollar Advance or such Obligations (in
accordance with the provisions of Section 2.11 hereof), as the case may be;
provided further, however, that unless an Event of Default then exists, if at
any time there are no Revolving Loans outstanding, any funds on deposit in the
Clearing Account at such time shall be delivered to the Borrower upon the
Borrower's request.
(d) The Borrower shall not open any other deposit account unless the
depository bank for such account shall have entered into an agreement with the
Agent substantially in the form of the Blocked Account Letters. As of the
Agreement Date, all bank accounts of the Borrower are listed on Schedule
5.15(d).
Section 5.16 Further Assurances. The Borrower will promptly cure, or
cause to be cured, defects in the creation and issuance of any of the Notes and
the execution and delivery of the Loan Documents (including this Agreement),
resulting from any act or failure to act by the Borrower or any of the
Borrower's Subsidiaries or any employee or officer thereof. The Borrower at
its expense will promptly execute and deliver to the Agent and the Lenders, or
cause to be executed and delivered to the Agent and the Lenders, all such other
and further documents, agreements, and instruments in compliance with or
accomplishment of the covenants and agreements of the Borrower in the Loan
Documents, including this Agreement, or to correct any omissions in the Loan
Documents, or more fully to state the obligations set out herein or in any of
the Loan Documents, or to obtain any consents, all as may be necessary or
appropriate in connection therewith as may be reasonably requested.
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Section 5.17 Broker's Claims. The Borrower hereby indemnifies and agrees
to hold the Agent and each of the Lenders harmless from and against any and all
losses, liabilities, damages, costs and expenses which may be suffered or
incurred by the Agent and each of the Lenders in respect of any claim, suit,
action or cause of action now or hereafter asserted by a broker or any Person
acting in a similar capacity arising from or in connection with the execution
and delivery of this Agreement or any other Loan Document or the consummation
of the transactions contemplated herein or therein.
Section 5.18 Indemnity. The Borrower will indemnify and hold harmless the
Agent, the Issuing Banks and each of the Lenders and each of their respective
employees, representatives, officers and directors from and against any and all
claims, liabilities, investigations, losses, damages, actions, and demands by
any party against the Agent, the Lenders, or any of them resulting from any
breach or alleged breach by the Borrower of any representation or warranty made
hereunder, or otherwise arising out of the Commitment or the making,
administration or enforcement of the Loan Documents and the Loans; unless, with
respect to any of the above, the Agent, the Lenders, or any of them are finally
judicially determined to have acted or failed to act with gross negligence or
wilful misconduct. This Section 5.18 shall survive termination of this
Agreement.
Section 5.19 Environmental Matters. The conduct of each of the Borrower's
and its Subsidiary's business operations will not materially violate any
Environmental Laws, and the Borrower will not use or permit any other party to
use any Hazardous Materials at any of its places of business except such
materials as are incidental to the Borrower's or such Subsidiary's normal
course of business, maintenance and repairs, and then only in material
compliance with all applicable Environmental Laws. The Borrower shall apply
for and/or timely renew all permits required for the business operations at its
places of business. The Borrower shall promptly notify the Agent in writing of
(i) any and all enforcement, cleanup, remedial, removal, or other governmental
or regulatory actions instituted, completed or threatened in writing pursuant
to any applicable Environmental Law; and (ii) all claims made or threatened by
any third party against the Borrower or any Subsidiary of the Borrower relating
to damages, contribution, cost recover compensation, loss or injury resulting
from any Hazardous Materials which, in either case, could reasonably be
expected to result in liability under Environmental Laws in excess of $400,000.
The Borrower shall promptly notify the Agent of any remedial action taken by
the Borrower or any Subsidiary of
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the Borrower pursuant to Environmental Laws with respect to the Borrower's or
such Subsidiary's business operations.
Section 5.20 Warehouse Arrangement. The Borrower shall at all times make
any payments due and owing to GATX Logistics, Inc. pursuant to any warehousing
agreement at the time such payments are due (subject to applicable grace
periods contained therein), and shall otherwise comply with all material
provisions of any such warehousing agreement. The Borrower acknowledges that
the Agent shall establish a reserve against the Borrowing Base in an amount
equal to the greater of (a) $1,500,000, and (b)(i) the monthly average during
the previous three (3) month period of all fees or other compensation payable
to GATX Logistics, Inc. by the Borrower, multiplied by (ii) three. At the time
the financial statements are furnished pursuant to Section 6.1, for so long as
the provisions of this Section 5.20 remain in effect, the Borrower will include
in the certificate to be delivered pursuant to Section 6.3 information with
respect to the amount of all such fees and other compensation paid by the
Borrower to GATX Logistics Inc. for each of the three (3) previous fiscal
months. Within five (5) days after the Agreement Date, the Borrower shall
provide the Agent with copies of all warehousing agreements with GATX
Logistics, Inc., and shall thereafter promptly provide the Agent with copies of
all amendments thereto and any new warehousing agreements entered into after
the Agreement Date with GATX Logistics, Inc. The provisions of this Section
5.20 shall be of no further effectiveness upon the earlier to occur of (a)
receipt by the Agent of a Lien waiver agreement executed by GATX Logistics,
Inc. in form and substance reasonably acceptable to the Agent, and (b) receipt
of an opinion in form and substance reasonably acceptable to the Agent opining
that under Applicable Law or the applicable agreements GATX Logistics, Inc. has
no Lien.
Section 5.21 Dissolution of Finance Corp. The Borrower shall take all
actions necessary to cause Finance Corp. to dissolve itself or otherwise
terminate and wind up its business, and transfer all of its assets to the
Borrower, and provide the Agent with evidence of the same, by no later than
July 31, 1998.
Section 5.22 Post Closing Deliveries. The Borrower shall deliver to the
Agent (a) within forty five (45) days after the Agreement Date, an appraisal and
a Phase I environmental audit report, each in form and substance satisfactory
to the Agent, for each parcel of real property owned by the Borrower and
located in the United States; (b) within twenty (20) days after the Agreement
date, copies of employment contracts for key management level employees of the
Borrower; and (c) within thirty (30) days
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after the Agreement date, duly executed supplements to the Intellectual
Property Security Agreements, and such other documents and instruments,
including amendments to UCC-1 financing statements, as is necessary to grant
to the Agent, for the benefit of the Lenders, a first priority security
interest in any HDTV Patents or Trademarks of the Borrower not already subject
to such security interest.
ARTICLE 6
INFORMATION COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Borrower has a right to borrow, or have Letters of Credit issued, hereunder
(whether or not the conditions to borrowing have been or can be fulfilled) and
unless the Majority Lenders shall otherwise consent in writing, the Borrower
will furnish or cause to be furnished to each Lender and to the Agent at their
respective offices:
Section 6.1 Monthly Financial Statements and Information. Within thirty
(30) days after each fiscal month end in each year of the Borrower, the balance
sheet of the Borrower as at the end of such fiscal month, and the related
statement of income and related statement of cash flows of the Borrower for
such fiscal month and for the elapsed portion of the year ended with the last
day of such fiscal month, all of which shall be on a consolidated basis with
the Borrower's Subsidiaries and certified by the Authorized Signatory of the
Borrower, in his or her opinion, to present fairly, in accordance with GAAP,
the financial position of the Borrower, as at the end of such period and the
results of operations for such period, and for the elapsed portion of the year
ended with the last day of such period, subject only to normal year-end
adjustments.
Section 6.2 Intentionally Omitted.
Section 6.3 Performance Certificates. At the time the financial statements
are furnished pursuant to Section 6.1 for the months of September and December,
a certificate of an Authorized Signatory of the Borrower in the form of Exhibit
I attached hereto:
(a) Setting forth as at the end of such quarter all domestic Subsidiaries
of the Borrower (other than the Material Subsidiaries) and the total book value
of assets owned by each such Subsidiary; and
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(b) Stating that, to the best of his or her knowledge, no Default
or Event of Default has occurred as at the end of such quarter or year, as the
case may be, or, if a Default or an Event of Default has occurred, disclosing
each such Default or Event of Default and its nature, when it occurred, whether
it is continuing, and the steps being taken by the Borrower with respect to such
Default or Event of Default.
Section 6.4 Access to Accountants. The Borrower hereby authorizes the
Agent to communicate directly with the Borrower's independent public
accountants and authorizes these accountants to disclose to the Agent any and
all financial statements and other supporting financial data, including matters
relating to the annual audit and copies of any arrangement letter with respect
to its business, financial condition and other affairs. On or before the
Agreement Date, the Borrower shall deliver to its independent public
accountants a letter authorizing and instructing them to comply with the
provisions of this Section 6.4.
Section 6.5 Additional Reports.
(a) By Tuesday of each week, the Borrower shall deliver to the Agent and
to any Lender requesting the same, a Borrowing Base Certificate as of the
immediately preceding Saturday which shall be in such form as shall be
satisfactory to the Agent, (i) setting forth the amount of Inventory owned by
the Borrower, and specifically setting forth the amount of Eligible Finished
Goods VCR Inventory, Eligible Finished Goods TV and Other Inventory and
Eligible Picture Tube Inventory, (ii) containing a categorical breakdown of all
Accounts, and (iii) listing any new HDTV Patent obtained by the Borrower, and
disclosing any material impairment in the value of any HDTV Patent or of any
other Other Asset. Within fifteen (15) days after the end of each month, the
Borrower shall deliver to the agent and to the Lenders, in form acceptable to
the Agent, a detailed aged trial balance of all Accounts existing as of the
last day of the preceding month, specifying the names, addresses, face value,
dates of invoices and due dates for each Account Debtor obligated on an Account
so listed and all other information necessary to calculate Eligible Accounts as
of such last day of the preceding month, and, upon the Agent's request
therefor, copies of proof of delivery and the original copy of all documents,
including, without limitation, repayment histories and present status reports
relating to the Accounts so scheduled and such other matters and information
relating to the status of then existing Accounts as the Agent shall reasonably
request. If at any time or times any Account Debtor returns any Inventory to
the Borrower, the shipment of which generated an Account on which such Account
Debtor is
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obligated in excess of $2,000,000, the Borrower shall notify the Agent of same
immediately, specifying the reason for such return and the location and
condition of the returned Inventory.
(b) Promptly upon receipt thereof, the Borrower shall deliver to the
Agent and the Lenders copies of all final reports, if any, submitted to the
Borrower by its independent public accountants in connection with any annual or
interim audit of the Borrower or any of the Borrower's Subsidiaries, including,
without limitation, any final management report prepared in connection with any
annual audit;
(c) Promptly after the sending thereof, the Borrower shall deliver to the
Agent and the Lenders copies of all financial statements, reports and other
information which the Borrower or any of the Borrower's Subsidiaries sends to
any holder of its Indebtedness or its securities or which the Borrower or any
of the Borrower's Subsidiaries files with the Securities and Exchange
Commission or any national securities exchange;
(d) The Borrower shall deliver to the Agent on behalf of the Lenders
promptly after the same become available copies of the semi-annual unaudited
and annual audited balance sheet of LGE as at the end of each such period,
respectively, and the related statements of income and cash flows of LGE for
such period, all on a consolidated and consolidating basis with LGE's
Subsidiaries;
(e) From time to time and promptly upon each request the Borrower shall
deliver to the Agent on behalf of the Lenders such data, certificates, reports,
statements, opinions of counsel, documents, or further information regarding
the business, assets, liabilities, financial position, projections, results of
operations, or business prospects of the Borrower or any of the Borrower's
Subsidiaries as the Agent may reasonably request.
Section 6.6 Notice of Litigation and Other Matters.
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(a) Within five (5) Business Days of the Borrower's obtaining knowledge of
the institution of, or written threat of, any action, suit, governmental
investigation or arbitration proceeding against the Borrower or any of the
Borrower's Subsidiaries or any Property, which action, suit, governmental
investigation or arbitration proceeding exposes, in the Borrower's reasonable
judgment, the Borrower or any of the Borrower's Subsidiaries to liability in an
aggregate amount in excess of $400,000, the Borrower shall notify the Agent,
and the Lenders of the occurrence thereof, and the Borrower shall provide such
additional information with respect to such matters as the Agent or the Lenders
may reasonably request (including the information required by Section 6.6 (j);
provided, however, that if the claim is covered by insurance and the insurer
has acknowledged coverage and assumed the defense of such suit, the payment or
value must be $400,000 in excess of the insurance coverage;
(b) The Borrower shall notify the Agent and the Lenders within five (5)
Business Days of the Borrower becoming aware of (i) any labor dispute which may
result in claims or losses from operations greater than $400,000 in the
aggregate not covered by insurance to which the Borrower or any of the
Borrower's Subsidiaries may become a party, including, without limitation, any
strikes, lockouts or other disputes relating to their respective plants and
other facilities and (ii) any liability greater than $400,000 in the aggregate
not covered by insurance and incurred with respect to any closing of any plant
or other facility of the Borrower or any of the Borrower's Subsidiaries;
(c) Within (i) one (1) Business Day of the demand by any lender of any
Additional Unsecured Debt, or by LGE in connection with the LGE Debt, the
Reimbursement Agreement or any other LGE Obligation, for the repayment of all
or any portion of the principal thereof, the Borrower shall notify the Agent
and the Lenders of the occurrence thereof, and (ii) three (3) Business Days' of
the occurrence of any default (whether or not the Borrower has received notice
thereof from any other Person) on Indebtedness of the Borrower or any
Subsidiary of the Borrower which singly, or in the aggregate exceed $1,000,000,
the Borrower shall notify the Agent and the Lenders of the occurrence thereof;
(d) Within fifteen (15) days of the occurrence of any default on any
Indebtedness of any Person owed to the Borrower, which singly or in the
aggregate exceeds $2,000,000, the Borrower shall notify the Agent and the
Lenders of the occurrence thereof;
(e) Promptly upon the Borrower's receipt of notice or the pendency of any
proceeding for the condemnation or other taking
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of any real property of the Borrower or any of the Borrower's Subsidiaries, the
Borrower shall notify the Agent and the Lenders of the occurrence thereof;
(f) Promptly upon the Borrower's receipt of notice of any material adverse
change with respect to the business, assets, liabilities, financial position,
or results of operations of the Borrower or any of the Borrower's Subsidiaries,
other than changes in the ordinary course of business which have not had and
are not likely to have a Materially Adverse Effect, the Borrower shall notify
the Agent and the Lenders of the occurrence thereof;
(g) Promptly following any (i) Default under any Loan Document, or any
default by the Borrower under any Subordinated Debenture, the LGE Debt, the
Reimbursement Agreement or any other LGE Obligation or the Additional Unsecured
Debt, or (ii) default under any other agreement (other than those referenced in
clause (i) of this Section 6.6 (h) above) to which the Borrower or any of the
Borrower's Subsidiaries is a party or by which any of their respective
properties is bound which could reasonably be expected to have a Materially
Adverse Effect, then the Borrower shall notify the Agent and the Lenders of the
occurrence thereof giving in each case the details thereof and specifying the
action proposed to be taken with respect thereto;
(h) Promptly following the occurrence of any event subsequent to the
Agreement Date which, if such event had occurred prior to the Agreement Date,
would have constituted an exception to the representation and warranty in
Section 4.1(x) of this Agreement, the Borrower shall notify the Agent and the
Lenders of the occurrence thereof;
(i) Promptly following the occurrence of any Reportable Event or a
"prohibited transaction" (as such term is defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Plan of the Borrower or any of
its ERISA Affiliates or the institution or threatened institution by the
Pension Benefit Guaranty Corporation of proceedings under ERISA to terminate or
to partially terminate any such Plan or the commencement or threatened
commencement of any litigation regarding any such Plan or naming it or the
trustee of any such Plan with respect to such Plan (other than claims for
benefits in the ordinary course of business), the Borrower shall notify the
Agent and the Lenders of the occurrence thereof; and
(j) Promptly following the filing or service of any material pleadings, or
the entry of any order, judgment or other ruling in the Funai Litigation, the
Borrower shall provide copies of such pleadings, order, judgment or other
ruling to the Agent and the Lenders (except to the extent such documents are
filed
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under seal, protected by court order or otherwise required to be maintained as
confidential by the court).
ARTICLE 7
NEGATIVE COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Borrower has a right to borrow, or have Letters of Credit issued, hereunder
(whether or not the conditions to borrowing have been or can be fulfilled) and
unless the Majority Lenders shall otherwise give their prior consent in
writing:
Section 7.1 Indebtedness. The Borrower will not create, assume, incur, or
otherwise become or remain obligated in respect of, or permit to be
outstanding, and will not permit any of the Borrower's Subsidiaries to create,
assume, incur, or otherwise become obligated in respect of, or permit to be
outstanding, any Indebtedness except:
(a) Indebtedness under this Agreement and the other Loan Documents;
(b) Indebtedness under the Subordinated Debentures;
(c) Trade or accounts payable and/or similar obligations, and accrued
expenses, incurred in the ordinary course of business, other than for borrowed
money;
(d) Indebtedness secured by Permitted Liens described in clause (f) of
the definition of Permitted Liens set forth in Article 1 hereof and Capitalized
Lease Obligations, collectively, not to exceed the aggregate principal amount
of $6,000,000 at any time;
(e) the LGE Obligations;
(f) Guaranties permitted by Section 7.2; and
(g) (i) the Additional Unsecured Debt, and (ii) other unsecured
Indebtedness incurred by the Borrower not to exceed $2,000,000 in the aggregate
outstanding from time to time.
Section 7.2 Guaranties. The Borrower will not at any time guarantee or
enter into or assume any Guaranty, or be obligated with respect to, or permit
to be outstanding, any Guaranty and will not permit any of the Borrower's
Subsidiaries at any time to guarantee or enter into or assume any Guaranty, or
be obligated
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with respect to, or permit to be outstanding, any Guaranty, in each case other
than (a) obligations under repurchase agreements of the Borrower entered into
in connection with the sale of products in the ordinary course of business of
the Borrower, (b) obligations under agreements to indemnify persons or entities
which have issued bid or performance bonds or letters of credit in the ordinary
course of business of the Borrower securing performance by the Borrower of
activities permissible hereunder, (c) obligations under agreements of the
Borrower entered into in connection with the acquisition of services, supplies,
and equipment in the ordinary course of business of the Borrower, (d) the
Borrower may guaranty Indebtedness of any Material Subsidiary permitted to be
incurred by such Material Subsidiary under clause (c) or (d) of Section 7.1
hereof, (e) endorsements of instruments in the ordinary course of business, and
(f) other obligations of any Affiliate, which do not exceed $1,000,000 in the
aggregate outstanding at any time.
Section 7.3 Liens. The Borrower will not create, assume, incur, or permit
to exist or to be created, assumed, or permitted to exist, directly or
indirectly, and will not permit any of the Borrower's Subsidiaries to create,
assume, incur, or permit to exist or to be created, assumed, or permitted to
exist, directly or indirectly, any Lien on any of its property, real or
personal, now owned or hereafter acquired, except for Permitted Liens.
Section 7.4 Restricted Payments and Purchases. The Borrower shall not
directly or indirectly declare or make, and shall not permit any of the
Borrower's Subsidiaries to directly or indirectly declare or make, any
Restricted Payment or Restricted Purchase, or set aside any funds for any such
purpose; provided, however, the Borrower's Subsidiaries may make Restricted
Payments to the Borrower.
Section 7.5 Investments. The Borrower will not make and will not permit
any of its Subsidiaries to make any loan or advance to, or otherwise acquire for
consideration evidences of Indebtedness, Capital Stock, partnership interests
or other securities of or equity interests in any third party, except that (a)
the Borrower may purchase or otherwise acquire and own and may permit any of
its Subsidiaries to purchase or otherwise acquire and own, (i) marketable,
direct obligations of the United States of America and its agencies maturing
within three hundred sixty-five (365) days of the date of purchase, (ii)
commercial paper issued by corporations, each of which shall (A) have a
consolidated net worth of at least $250,000,000, and (B) conduct substantially
all of its business in the United States of America, which commercial paper
will mature within one hundred eighty (180) days from the date of the original
issue thereof and
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is rated "P-1" or better by Moody's Investors Service, Inc., or "A-1+" or
better by Standard & Poor's Corporation, (iii) certificates of deposit
maturing within three hundred sixty-five (365) days of the date of purchase and
issued by a United States national or state bank having deposits totaling more
than $250,000,000, and whose short-term debt is rated "P-1" or better by Moody's
Investors Service, Inc. or "A-1+" or better by Standard & Poor's Corporation,
and (iv) up to $100,000 per institution and up to $1,000,000 in the aggregate
in (A) short-term obligations issued by any local commercial bank or trust
company located in those areas where the Borrower conducts its business, whose
deposits are insured by the Federal Deposit Insurance Corporation, or (B)
commercial bank-insured money market funds, or any combination of investments
described in clauses (A) and (B); (b) the Borrower may hold the Investments in
existence on the Agreement Date and described on Schedule 4.1(l); (c) so long
as no Default or Event of Default shall have occurred and be continuing, the
Borrower may convert any of its Accounts that are in excess of ninety (90) days
past due into notes or equity interests from the applicable Account Debtor so
long as the Agent is granted a first priority security interest in such equity
or note which Lien is perfected contemporaneously with the conversion of such
Account to equity or notes, (d) the Borrower may hold the Finance Corp.
Subordinated Notes, (e) the Borrower may hold the Capital Stock of its
Subsidiaries in existence on the Agreement Date or formed in accordance with
Section 7.7(g), and (f) the Borrower may make loans or advances to any Material
Subsidiary and any Material Subsidiary may make loans or advances to any other
Material Subsidiary.
Section 7.6 Affiliate Transactions. The Borrower shall not, and shall not
permit its Subsidiaries to, enter into or be a party to any agreement or
transaction with any Affiliate except (a) the Borrower and its Material
Subsidiaries may purchase Inventory from any Mexican Subsidiary in the ordinary
course of business and in a manner consistent with past business practices;
provided, that the amount advanced to any Mexican Subsidiary for such Inventory
production, together with the cash on hand or on deposit held by such Mexican
Subsidiary, shall not exceed the cash needs of such Mexican Subsidiary for
working capital during the period of seven consecutive days following any date
of determination, (b) as listed on Schedule 7.6 hereto, or (c) in the ordinary
course of and pursuant to the reasonable requirements of the Borrower's or such
Subsidiaries business and upon fair and reasonable terms that are no less
favorable to the Borrower or to such Subsidiary than it would obtain in a
comparable arms length transaction with a Person not an Affiliate of Borrower,
and on terms consistent with the business relationship of Borrower or such
Subsidiary and such Affiliate
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prior to the Agreement Date, if any; provided that any contracts, purchase
orders, or other transactions between the Borrower or any Material Subsidiary,
on one hand, and any Affiliate, on the other hand, that provide for payments
in excess of $3,000,000 in a single contract, purchase order or transaction or
a series of related contracts, purchase orders or transactions shall be
summarized in a quarterly report prepared by the Borrower certified by an
Authorized Signatory of the Borrower and delivered to the Agent within
forty-five (45) days following the last day of each fiscal quarter. Nothing
contained in this Agreement shall prohibit increases in compensation and
benefits for officers and employees of the Borrower or any of the Borrower's
Subsidiaries which are customary in the industry or consistent with the past
business practice of the Borrower or any of the Borrower's Subsidiaries, or
payment of customary directors' fees and indemnities.
Section 7.7 Liquidation; Change in Ownership, Name, or Year; Disposition or
Acquisition of Assets; Etc. The Borrower shall not, and shall not permit any
of the Borrower's Subsidiaries to, at any time:
(a) Liquidate or dissolve itself (or suffer any liquidation or dissolution)
or otherwise wind up its business; provided, however, that Finance Corp. shall
(as provided in Section 5.21), and Productos Magneticos de Chihuahau, S.A. de
C.V., Telson, S.A. de C.V. and any Immaterial Subsidiary may, dissolve or
liquidate;
(b) Sell, lease, abandon, transfer or otherwise dispose of, in a single
transaction or a series of related transactions, any assets, property or
business except for the sale of Inventory in the ordinary course of business at
the fair market value thereof and for cash or cash equivalents and except for
physical assets used, consumed or otherwise disposed of in the ordinary course
of business; provided, however, that (i) the Borrower may sell or otherwise
dispose of assets (other than Collateral) with a sale value not greater than
$1,000,000 in the aggregate for all such assets that may be sold during any
year if the Net Cash Proceeds from such sale are applied to the Loans as
required by Section 2.6(c), (ii) the Borrower may sell the Woodridge Property
provided (A) the Borrower receives gross proceeds from such sale of not less
than $6,000,000, (B) the Borrower delivers to the Agent a copy of the closing
statement for such sale promptly after the consummation thereof, and (C) any
Net Cash Proceeds in excess of $6,500,000 received by the Borrower in
connection with such sale shall be paid on the date of receipt thereof by the
Borrower to the Lenders as a mandatory repayment of the Revolving Loans (but
such payment shall not reduce the Commitment), and (iii) the Borrower may sell
the Glenview Property provided (A) no
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Event of Default then exists, (B) the Borrower receives Net Cash Proceeds from
such sale of not less than $20,000,000, (C) the Borrower delivers to the Agent
a copy of the closing statement for such sale promptly after the consummation
thereof,(D) Net Cash Proceeds in an amount of $20,000,000 received by the
Borrower in connection with such sale shall be paid on the date of receipt
thereof by the Borrower to the Lenders as a mandatory repayment of the
Revolving Loans (but such payment shall not reduce the Commitment), and any Net
Cash Proceeds in excess of $20,000,000 are retained by the Borrower for general
corporate purposes, and (E) the advance amount in connection with the Other
Assets set forth in clause (f) of the Borrowing Base is permanently reduced by
$20,000,000;
(c) Become a partner or joint venturer with any third party;
(d) Acquire (i) all or any substantial part of the assets, property or
business of, or (ii) any assets that constitute a division or operating unit of
the business of, any other Person;
(e) Merge or consolidate with any other Person, except that any Subsidiary
of the Borrower may be merged into or consolidated with the Borrower or another
Wholly-Owned Subsidiary of the Borrower; provided that the Borrower is the
surviving entity in any such merger or consolidation, or if the Borrower is not
a party to such merger or consolidation but any Material Subsidiary is a
party to such merger or consolidation, the surviving entity is a Material
Subsidiary;
(f) Change its corporate name without giving the Agent thirty (30) days
prior written notice of its intention to do so and complying with all reasonable
requirements of the Lenders in regard thereto;
(g) Create any Subsidiary, except for the creation of a Wholly-Owned
Subsidiary of the Borrower provided; that (i) such Subsidiary is organized
under the laws of a jurisdiction within the United States of America, (ii) (A)
if such Subsidiary is or becomes a Material Subsidiary, such Subsidiary
executes at the time of its creation (or within thirty (30) days after it
becomes a Material Subsidiary) a Supplement to the Subsidiary Guaranty in favor
of the Agent, the Issuing Banks and the Lenders in the form of Exhibit J
attached hereto and a Supplement to the Subsidiary Security Agreement in favor
of the Agent, the Issuing Banks and the Lenders in the form of Exhibit K
attached hereto, (B) if such Subsidiary is a domestic Subsidiary, the Borrower
executes an amendment to the Pledge Agreement for purposes of pledging the
stock of such Subsidiary to the Agent pursuant to the terms of
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the Pledge Agreement, and (C) if such Subsidiary is a domestic Subsidiary, or
is or becomes a Material Subsidiary, the Borrower and such Subsidiary take all
steps required and execute all necessary documents (including UCC-1 financing
statements) to perfect the security interest of the Agent in the Capital Stock
of such domestic Subsidiary and the assets of such Material Subsidiary, and
(iii) no Default exists immediately prior to or after the creation of such
Subsidiary; or
(h) Change its year-end for accounting purposes from the calendar year ending
December 31.
Section 7.8 Intentionally Omitted.
Section 7.9 Intentionally Omitted.
Section 7.10 Intentionally Omitted.
Section 7.11 Intentionally Omitted.
Section 7.12 Intentionally Omitted.
Section 7.13 Intentionally Omitted.
Section 7.14 Tuning Patent Royalties; LGE Payable.
(a) As of the fiscal quarter ended June 30, 1998, and each fiscal quarter
end thereafter, the aggregate amount of Tuning Patent Royalties received by the
Borrower during the immediately preceding twelve (12) month period shall not be
less than $18,000,000.
(b) As of the fiscal month ended June 30, 1998, and each fiscal month end
thereafter, the aggregate average outstanding amount of the LGE Payable during
the immediately preceding six (6) month period shall not be less than
$85,000,000.
Section 7.15 Sales and Leasebacks. The Borrower will not enter into and
will not permit any of the Borrower's Subsidiaries to enter into any arrangement
(other than the Salomon Lease Transaction), directly or indirectly, with any
third party whereby the Borrower or such Subsidiary shall sell or transfer any
property, real or personal, whether now owned or hereafter acquired, and
whereby the Borrower or such Subsidiary shall then or thereafter rent or lease
as lessee such property or any part thereof or other property which the
Borrower or such Subsidiary intends to use for substantially the same purpose
or purposes as the property sold or transferred.
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Section 7.16 Amendment and Waiver. The Borrower shall not, without the
prior written consent of the Majority Lenders, enter into any amendment of, or
agree to or accept any waiver which would adversely affect the rights of the
Agent, the Lenders and the Issuing Banks under this Agreement or any other Loan
Document, of (a) its certificate of incorporation and by-laws, (b) the
Subordinated Debentures, or (c) the Reimbursement Agreement and any document
evidencing or securing the Reimbursement Agreement, Additional Unsecured Debt
or LGE Debt.
Section 7.17 ERISA Liability. The Borrower and each of the Borrower's
Subsidiaries shall not fail to meet all of the applicable minimum funding
requirements of ERISA and the Code, without regard to any waivers thereof, and,
to the extent that the assets of any of its Plans would be less than an amount
sufficient to provide all accrued benefits payable under such Plans, shall make
the maximum deductible contributions allowable under the Code. Neither the
Borrower nor any of the Borrower's Subsidiaries shall (a) become a participant
in any Multiemployer Plan after the Agreement Date, or (b) withdraw from any
Multiemployer Plan if such withdrawal would result in material liability to the
Borrower or any Subsidiary.
Section 7.18 Prepayments. The Borrower shall not prepay, redeem, defease or
purchase in any manner, or deposit or set aside funds for the purpose of any of
the foregoing, make any payment in respect of principal of, or make any payment
in respect of interest on, (a) the LGE Payable; provided, however, that so long
as no Default or Event of Default is then existing or would be caused thereby,
the Borrower may make current payments of accounts due on the LGE Payable, and
the accrued interest thereon, if the outstanding aggregate balance of the LGE
Payable remains equal to or greater than the amount required by Section
7.14 (b); and (b) any Funded Debt (including the Subordinated Debentures),
except the Borrower may (i) make regularly scheduled payments of principal or
interest required in accordance with the terms of the instruments governing any
Funded Debt permitted hereunder, and (ii) make payments with respect to the
Obligations; provided, however, the Borrower shall not make any payments
(whether with respect to principal, interest, or otherwise) on or in connection
with (x) the Subordinated Debentures if such payments would violate the
subordination provisions of the Subordinated Debentures and (y) the Additional
Unsecured Debt, the Reimbursement Agreement or the LGE Debt if such payments
would violate the Subordination Agreement.
Section 7.19 Negative Pledge. The Borrower shall not, directly or
indirectly, enter into any agreement (other than the Loan Documents) with any
Person that prohibits or restricts or
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limits the ability of the Borrower to create, incur, pledge, or suffer to exist
any Lien upon any assets of the Borrower.
ARTICLE 8
DEFAULT
Section 8.1 Events of Default. Each of the following shall constitute an
Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule, or regulation of any
governmental or non-governmental body:
(a) Any representation or warranty made under this Agreement shall prove
incorrect or misleading in any material respect when made or deemed to have
been made pursuant to Section 4.4 hereof;
(b) The Borrower shall default in the payment of any principal or interest
under the Notes, or any of them, or any reimbursement obligations with respect
to any Letter of Credit, or any fees payable hereunder or under the other Loan
Documents;
(c) The Borrower shall default in the performance or observance of any
agreement or covenant contained in Sections 5.5, 5.7, 5.9, 5.10, 5.11, 5.12,
5.13, 5.14, 5.15, 5.18, 5.20, 5.21 or 5.22, or in Article 6 or Article 7 hereof
or in any Security Document;
(d) The Borrower shall default in the performance or observance of (i)
Section 5.19 hereof, and such default shall not be cured to the Majority
Lenders' satisfaction within a period of ten (10) days from the date that the
Borrower knew or should have known of the occurrence of such default, or (ii)
any other agreement or covenant contained in this Agreement not specifically
referred to elsewhere in this Section 8.1, and such default shall not be cured
to the Majority Lenders' satisfaction within a period of thirty (30) days from
the date that the Borrower knew or should have known of the occurrence of such
default;
(e) There shall occur any default in the performance or observance of any
agreement or covenant or breach of any representation or warranty contained in
any of the other Loan Documents (other than this Agreement or the Security
Documents or as otherwise provided in this Section 8.1) which shall not be
cured to the Majority Lenders' satisfaction within the applicable
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cure period, if any, provided for in such Loan Document, or, if there is no
applicable cure period set forth in such Loan Document, within a period of
thirty (30) days from the date that the Borrower knew or should have known of
the occurrence of such default;
(f) There shall occur any Change of Control of the Borrower;
(g) There shall be entered a decree or order for relief in respect of the
Borrower or any of the Borrower's Subsidiaries under the Bankruptcy Code, or
any other applicable federal or state bankruptcy law or other similar law, or
appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator,
or similar official of the Borrower or any of the Borrower's Subsidiaries, or
of any substantial part of their respective properties, or ordering the
winding-up or liquidation of the affairs of the Borrower or any of the
Borrower's Subsidiaries, or an involuntary petition shall be filed against the
Borrower or any of the Borrower's Subsidiaries, and a temporary stay entered,
and (i) such petition and stay shall not be diligently contested, or (ii) any
such petition and stay shall continue undismissed for a period of sixty (60)
consecutive days;
(h) Any of the Borrower or any of the Borrower's Subsidiaries shall file a
petition, answer, or consent seeking relief under the Bankruptcy Code, or any
other applicable federal or state bankruptcy law or other similar law, or the
Borrower or any of the Borrower's Subsidiaries shall consent to the institution
of proceedings thereunder or to the filing of any such petition or to the
appointment or taking of possession of a receiver, liquidator, assignee,
trustee, custodian, sequestrator, or other similar official of the Borrower or
any of the Borrower's Subsidiaries, or of any substantial part of their
respective properties, or the Borrower or any of the Borrower's Subsidiaries
shall fail generally to pay their respective debts as they become due, or the
Borrower or any of the Borrower's Subsidiaries shall take any action in
furtherance of any such action;
(i) There shall be entered a decree or order for relief in respect of LGE
(or any other direct or indirect holding company between the Borrower and LGE
holding five percent (5%) or more of the Capital Stock of the Borrower or of
any class thereof) under the Bankruptcy Code, or any other applicable federal
or state bankruptcy law or other similar law (including without limitation the
laws of Korea), or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator, or similar official of LGE (or any other direct or
indirect holding company between
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the Borrower and LGE holding five percent (5%) or more of the Capital Stock of
the Borrower or of any class thereof), or of any substantial part of their
respective properties, or ordering the winding-up or liquidation of the affairs
of LGE (or any other direct or indirect holding company between the Borrower
and LGE holding five percent (5%) or more of the Capital Stock of the Borrower
or of any class thereof), or an involuntary petition shall be filed against LGE
(or any other direct or indirect holding company between the Borrower and LGE
holding five percent (5%) or more of the Capital Stock of the Borrower or of
any class thereof), and a temporary stay entered, and (i) such petition and
stay shall not be diligently contested, or (ii) any such petition and stay
shall continue undismissed for a period of sixty (60) consecutive days;
(j) LGE (or any other direct or indirect holding company between the
Borrower and LGE holding five percent (5%) or more of the Capital Stock of the
Borrower or of any class thereof) shall file a petition, answer, or consent
seeking relief under the Bankruptcy Code, or any other applicable federal or
state bankruptcy law or other similar law (including, without limitation, the
laws of Korea), or LGE (or any other direct or indirect holding company between
the Borrower and LGE holding five percent (5%) or more of the Capital Stock of
the Borrower or of any class thereof) shall consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment or taking of possession of a receiver, liquidator, assignee,
trustee, custodian, sequestrator, or other similar official of LGE (or any
other direct or indirect holding company between the Borrower and LGE holding
five percent (5%) or more of the Capital Stock of the Borrower or of any class
thereof), or of any substantial part of their respective properties, or LGE (or
any other direct or indirect holding company between the Borrower and LGE
holding five percent (5%) or more of the Capital Stock of the Borrower or of
any class thereof) shall fail generally to pay their respective debts as they
become due, or LGE (or any other direct or indirect holding company between the
Borrower and LGE holding five percent (5%) or more of the Capital Stock of the
Borrower or of any class thereof) shall take any action in furtherance of any
such action;
(k) A final judgment (other than a money judgment fully covered by insurance
as to which the insurance company has acknowledged coverage) shall be entered
by any court against any of the Borrower or any of the Borrower's Subsidiaries
for the payment of money which exceeds $1,000,000, or a warrant of attachment
or execution or similar process shall be issued or levied against property of
any of the Borrower or any of the Borrower's Subsidiaries pursuant to a final
judgment which,
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together with all other such property of the Borrower and the Borrower's
Subsidiaries subject to other such process, exceeds in value $1,000,000 in the
aggregate, and if, within sixty (60) days after the entry, issue, or levy
thereof, such judgment, warrant, or process shall not have been paid or
discharged or stayed pending appeal, or if, after the expiration of any such
stay, such judgment, warrant, or process shall not have been paid or discharged;
(l) There shall be at any time any "accumulated funding deficiency," as
defined in ERISA or in Section 412 of the Code, with respect to any Plan
maintained by any of the Borrower and its ERISA Affiliates, or to which the
Borrower or any of its ERISA Affiliates has any liabilities, or any trust
created thereunder; or a trustee shall be appointed by a United States District
Court to administer any such Plan; or the Pension Benefit Guaranty Corporation
shall institute proceedings to terminate any such Plan; or any of the Borrower
and its ERISA Affiliates shall incur any liability to the Pension Benefit
Guaranty Corporation in connection with the termination of any such Plan; or
any Plan or trust created under any Plan of any of the Borrower and its ERISA
Affiliates shall engage in a non-exempt "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) which would
subject any such Plan, any trust created thereunder, any trustee or
administrator thereof, or any party dealing with any such Plan or trust to any
material tax or penalty on "prohibited transactions" imposed by Section 502 of
ERISA or Section 4975 of the Code or the Borrower or any of its ERISA
Affiliates shall enter into or become obligated after the Agreement Date to
contribute to a Multiemployer Plan;
(m) (i) LGE shall accelerate or otherwise demand repayment of any obligation
under the Reimbursement Agreement, the LGE Debt or any other LGE Obligation, or
LGE shall take any action to collect any LGE Obligation or exercise or enforce
any right or remedy under the Reimbursement Agreement, the LGE Debt, or any
document evidencing or securing any LGE Obligation, or LGE shall terminate the
LGE Debt line of credit; or (ii) there shall occur any default (after the
expiration of any applicable cure period) under any indenture, agreement, or
instrument evidencing Indebtedness(other than the LGE Obligations and the
Salomon Lease Transaction) of the Borrower or any of the Borrower's
Subsidiaries in an aggregate principal amount exceeding $2,000,000, including,
without limitation, the Subordinated Debentures; or (iii) there shall occur any
default (after the expiration of any applicable cure period) under the Salomon
Lease Transaction and all obligations of the Borrower under the Salomon Lease
Transaction shall not be satisfied by LGE within three (3)
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Business Days thereafter; provided, the documentation setting forth and
evidencing LGE's payment of such obligations, and subrogation to any rights of
the lessor thereunder, and the Subrogation Obligations, shall be in form and
substance reasonably acceptable to the Agent
(n) All or any portion of any Security Document shall at any time and for
any reason be declared to be null and void, or a proceeding shall be commenced
by the Borrower or any of its Affiliates, or by any governmental authority
having jurisdiction over the Borrower or any of its Affiliates, seeking to
establish the invalidity or unenforceability thereof (exclusive of questions of
interpretation of any provision thereof), or the Borrower or any of its
Affiliates shall deny that it has any liability or obligation for the payment
of principal or interest purported to be created under any Loan Document;
(o) There shall occur any event or occurrence which, singly or when
aggregated with other events or occurrences, has a Materially Adverse Effect;
(p) Any Tuning Patent, any License Agreement relating thereto or any of the
Borrower's right, title or interest in and to such Tuning Patent or License
Agreement, shall become invalid or shall be terminated or shall otherwise no
longer be enforceable by or for the benefit of the Borrower;
(q) Any lender of any Additional Unsecured Debt shall accelerate such
Additional Unsecured Debt or otherwise demand the repayment of all or part of
the outstanding principal balance thereof (whether from the Borrower, LGE or
any other obligor thereon) and such Additional Unsecured Debt is not (A)
refinanced or otherwise replaced with Funded Debt having substantially similar
terms, and evidenced by documentation in form and substance acceptable to the
Agent, within three (3) Business Days, or (B) satisfied by LGE within three (3)
Business Days; or
(r) LGE shall revoke or otherwise rescind any guaranty of LGE of any
Additional Unsecured Debt or shall contest the validity or enforceability of
the Subordination Agreement.
Section 8.2 Remedies. If an Event of Default shall have occurred and
shall be continuing, in addition to the rights and remedies set forth elsewhere
in this Agreement and the Loan Documents:
(a) With the exception of an Event of Default specified in Section 8.1(g) or
(h), the Agent, at the direction of the Majority Lenders, shall (i) terminate
the Commitments and the
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Letter of Credit Commitment, or (ii) declare the principal of and interest on
the Loans and the Notes and all other Obligations to be forthwith due and
payable without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived, anything in this Agreement or in the Notes
to the contrary notwithstanding, or both.
(b) Upon the occurrence and continuance of an Event of Default specified in
Sections 8.1(g) or (h), such principal, interest, and other Obligations shall
thereupon and concurrently therewith become due and payable, and the
Commitments and the Letter of Credit Commitment, shall forthwith terminate, all
without any action by the Agent or the Lenders or the Majority Lenders or the
holders of the Notes and without presentment, demand, protest, or other notice
of any kind, all of which are expressly waived, anything in this Agreement or
in the Notes to the contrary notwithstanding.
(c) The Agent, with the concurrence of the Majority Lenders, shall exercise
all of the post-default rights granted to it and to them under the Loan
Documents or under Applicable Law. The Agent, for the benefit of itself, the
Issuing Banks and the Lenders, shall have the right to the appointment of a
receiver for the Property of the Borrower, and the Borrower hereby consents to
such rights and such appointment and hereby waives any objection the Borrower
may have thereto or the right to have a bond or other security posted by the
Agent, the Issuing Banks or the Lenders in connection therewith.
(d) In regard to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of any acceleration of the
Obligations pursuant to the provisions of this Section 8.2, the Borrower shall
promptly upon demand by the Agent deposit in a Letter of Credit Reserve Account
opened by Agent for the benefit of the Issuing Bank an amount equal to the
aggregate then undrawn and unexpired amount of such Letter of Credit
Obligations. Amounts held in such Letter of Credit Reserve Account shall be
applied by the Agent to the payment of drafts drawn under such Letters of
Credit, and the unused portion thereof after such Letters of Credit shall have
expired or been fully drawn upon, if any, shall be applied to repay other
obligations of the Borrower hereunder and under the Notes in the manner set
forth in Section 2.11 hereof. Pending the application of such deposit to the
payment of the Reimbursement Obligations, the Agent shall, to the extent
reasonably practicable, invest such deposit in an interest bearing open account
or similar available savings deposit account and all interest accrued thereon
shall be held with such deposit as additional security for the Reimbursement
Obligations. After all such Letters of
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Credit shall have expired or been fully drawn upon, all Reimbursement
Obligations shall have been satisfied, and all other Obligations shall have
been paid in full, the balance, if any, in such Letter of Credit Reserve
Account shall be returned to the Borrower. Except as expressly provided
hereinabove, presentment, demand, protest and all other notices of any kind are
hereby expressly waived by the Borrower.
(e) Intentionally Omitted;
(f) The rights and remedies of the Agent, the Issuing Banks and the Lenders
hereunder shall be cumulative, and not exclusive.
ARTICLE 9
THE AGENT
Section 9.1 Appointment and Authorization. Each Lender hereby irrevocably
appoints and authorizes, and hereby agrees that it will require any transferee
of any of its interest in its Loans and in its Notes irrevocably to appoint and
authorize, the Agent to take such actions as its agent on its behalf and to
exercise such powers hereunder as are delegated by the terms hereof, together
with such powers as are reasonably incidental thereto. Neither the Agent nor
any of its directors, officers, employees, or agents shall be liable for any
action taken or omitted to be taken by it hereunder or in connection herewith,
except for its own gross negligence or willful misconduct as determined by a
final non-appealable order of a court of competent jurisdiction.
Section 9.2 Interest Holders. The Agent may treat each Lender, or the
Person designated in the last notice filed with the Agent under this Section
9.2, as the holder of all of the interests of such Lender in its Loans and in
its Notes until written notice of transfer, signed by such Lender (or the Person
designated in the last notice filed with the Agent) and by the Person
designated in such written notice of transfer, in form and substance
satisfactory to the Agent, shall have been filed with the Agent.
Section 9.3 Consultation with Counsel. The Agent may consult with legal
counsel selected by it and shall not be liable to any Lender or any Issuing
Bank for any action taken or suffered by it in good faith in reliance on the
advice of such counsel.
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Section 9.4 Documents. The Agent shall not be under any duty to examine,
inquire into, or pass upon the validity, effectiveness, or genuineness of this
Agreement, any Note, or any instrument, document, or communication furnished
pursuant hereto or in connection herewith, and the Agent shall be entitled to
assume that they are valid, effective, and genuine, have been signed or sent by
the proper parties, and are what they purport to be.
Section 9.5 Agent and Affiliates. With respect to the Commitment and
Loans, the Lender which is affiliated with the Agent shall have the same rights
and powers hereunder as any other Lender, and the Agent and its other affiliates
may accept deposits from, lend money to, and generally engage in any kind of
business with the Borrower or any Affiliates of, or Persons doing business
with, the Borrower, as if it were not affiliated with the Agent and without any
obligation to account therefor. The Lender and the Issuing Banks acknowledge
that the Agent and its affiliates have other lending and investment
relationships with the Borrower and its Affiliates, and in the future may enter
into additional such relationships.
Section 9.6 Responsibility of the Agent. The duties and obligations of the
Agent under this Agreement are only those expressly set forth in this
Agreement. The Agent shall be entitled to assume that no Default or Event of
Default has occurred and is continuing unless it has actual knowledge, or has
been notified by the Borrower, of such fact, or has been notified by a Lender
that such Lender considers that a Default or an Event of Default has occurred
and is continuing, and such Lender shall specify in detail the nature thereof
in writing. The Agent shall provide each Lender with copies of such documents
received from the Borrower as such Lender may reasonably request.
Section 9.7 Action by Agent.
(a) The Agent shall be entitled to use its discretion with respect to
exercising or refraining from exercising any rights which may be vested in it
by, and with respect to taking or refraining from taking any action or actions
which it may be able to take under or in respect of, this Agreement, unless the
Agent shall have been instructed by the Majority Lenders to exercise or refrain
from exercising such rights or to take or refrain from taking such action,
provided that the Agent shall not exercise any rights under Section 8.2 (a) of
this Agreement without the approval of the Majority Lenders. The Agent shall
incur no liability under or in respect of this Agreement with respect to
anything which it may do or refrain from doing in the reasonable
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exercise of its judgment or which may seem to it to be necessary or desirable
in the circumstances.
(b) The Agent shall not be liable to the Lenders or to any Lender in acting
or refraining from acting under this Agreement in accordance with the
instructions of the Majority Lenders, and any action taken or failure to act
pursuant to such instructions shall be binding on all Lenders.
Section 9.8 Notice of Default or Event of Default. In the event that the
Agent or any Lender shall acquire actual knowledge, or shall have been notified
in writing, of any Default or Event of Default, the Agent or such Lender shall
promptly notify the Lenders and the Agent, and the Agent shall take such action
and assert such rights under this Agreement as the Majority Lenders shall
request in writing, and the Agent shall not be subject to any liability by
reason of its acting pursuant to any such request. If the Majority Lenders
shall fail to request the Agent to take action or to assert rights under this
Agreement in respect of any Default or Event of Default within ten (10) days
after their receipt of the notice of any Default or Event of Default from the
Agent, or shall request inconsistent action with respect to such Default or
Event of Default, the Agent may, but shall not be required to, take such action
and assert such rights (other than rights under Article 8 hereof) as it deems
in its discretion to be advisable for the protection of the Lenders, except
that, if the Majority Lenders have instructed the Agent not to take such action
or assert such right, in no event shall the Agent act contrary to such
instructions.
Section 9.9 Responsibility Disclaimed. The Agent shall not be under any
liability or responsibility whatsoever as Agent:
(a) To the Borrower or any other Person or entity as a consequence of any
failure or delay in performance by or any breach by, any Lender or Lenders of
any of its or their obligations under this Agreement;
(b) To any Lender or Lenders, as a consequence of any failure or delay in
performance by, or any breach by, the Borrower or any other obligor of any of
its obligations under this Agreement or the Notes or any other Loan Document;
or
(c) To any Lender or Lenders for any statements, representations, or
warranties in this Agreement, or any other document contemplated by this
Agreement or any information provided pursuant to this Agreement, any other
Loan Document, or any other document contemplated by this Agreement, or for the
validity, effectiveness, enforceability, or sufficiency of this
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Agreement, the Notes, any other Loan Document, or any other document
contemplated by this Agreement.
Section 9.10 Indemnification. The Lenders agree to indemnify the Agent
(to the extent not reimbursed by the Borrower) pro rata in accordance with their
Commitment Ratios from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, investigations, costs, expenses
(including fees and expenses of experts, agents, consultants, and counsel), or
disbursements of any kind or nature (whether or not the Agent is a party to any
such action, suit or investigation) whatsoever which may be imposed on,
incurred by, or asserted against the Agent in any way relating to or arising
out of this Agreement, any other Loan Document, or any other document
contemplated by this Agreement or any action taken or omitted by the Agent
under this Agreement, any other Loan Document, or any other document
contemplated by this Agreement, except that no Lender shall be liable to the
Agent for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses, or disbursements
resulting from the gross negligence or willful misconduct of the Agent as
determined by a final non-appealable order of a court of competent
jurisdiction. The provisions of this Section 9.10 shall survive the
termination of this Agreement.
Section 9.11 Credit Decision. Each Lender represents and warrants to each
other and to the Agent that:
(a) In making its decision to enter into this Agreement and to make its
Advances it has independently taken whatever steps it considers necessary to
evaluate the financial condition and affairs of the Borrower and that it has
made an independent credit judgment, and that it has not relied upon
information provided by the Agent; and
(b) So long as any portion of the Loans remains outstanding, it will
continue to make its own independent evaluation of the financial condition and
affairs of the Borrower.
Section 9.12 Successor Agent. Subject to the appointment and acceptance
of a successor Agent as provided below, the Agent may resign at any time by
giving written notice thereof to the Lenders and the Borrower. Upon any such
resignation, the Majority Lenders shall have the right to appoint a successor
Agent (with the consent of the Borrower if no Event of Default then exists).
If no successor Agent shall have been so appointed by the Majority Lenders, and
shall have accepted such appointment
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within thirty (30) days after the retiring Agent's giving of notice of
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent which shall be any Lender or a commercial bank organized under
the laws of the United States of America or any political subdivision thereof
which has combined capital and reserves in excess of $250,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges, duties, and obligations of the retiring Agent, and
the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article 9.12 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting
as the Agent.
Section 9.13 Agent May File Proofs of Claim. The Agent may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Agent (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Agent, its agents,
financial advisors and counsel), the Lenders and the Issuing Banks allowed in
any judicial proceedings relative to the Borrower or any Material Subsidiary,
or any of their respective creditors or property, and shall be entitled and
empowered to collect, receive and distribute any monies, securities or other
property payable or deliverable on any such claims and any custodian in any
such judicial proceedings is hereby authorized by each Lender and Issuing Bank
to make such payments to the Agent and, in the event that the Agent shall
consent to the making of such payments directly to the Lenders and the Issuing
Banks, to pay to the Agent any amount due to the Agent for the reasonable
compensation, expenses, disbursements and advances of the Agent, its agents,
financial advisors and counsel, and any other amounts due the Agent under
Section 10.2 hereof. Nothing contained in the Loan Agreement or the Loan
Documents shall be deemed to authorize the Agent to authorize or consent to or
accept or adopt on behalf of any Lender or any Issuing Bank any plan of
reorganization, arrangement, adjustment or composition affecting the Notes, the
Letters of Credit or the rights of any holder thereof, or to authorize the
Agent to vote in respect of the claim of any Lender of any Issuing Bank in any
such proceeding.
Section 9.14 Collateral. The Agent is hereby authorized to hold all
Collateral pledged pursuant to any Loan Document and to act on behalf of the
Lenders and the Issuing Banks, in its own capacity and through other agents
appointed by it, under the Security Documents; provided, that the Agent shall
not agree to
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the release of any Collateral except in accordance with the terms hereof.
Section 9.15 Release of Collateral.
(a) Each Lender and each Issuing Bank hereby directs, in accordance with the
terms of this Agreement, the Agent to release or to subordinate any Lien held
by the Agent for the benefit of the Lenders and the Issuing Banks:
(i) against all of the Collateral, upon final and indefeasible payment in
full of the Obligations and termination of this Agreement; or
(ii) against any part of the Collateral sold or disposed of by the
Borrower if such sale or disposition is permitted by Sections 7.7 or 7.15
hereof or is otherwise consented to by the requisite Lenders for such release
as set forth in Section 10.12 hereof, as certified to the Agent by the
Borrower in a certificate of an Authorized Signatory.
(b) Each Lender and each Issuing Bank hereby directs the Agent to execute
and deliver or file such termination and partial release statements and do such
other things as are necessary to release Liens to be released pursuant to this
Section 9.15 promptly upon the effectiveness of any such release. Upon request
by the Agent at any time, the Lenders and the Issuing Banks will confirm in
writing the Agent's authority to release particular types or items of
Collateral pursuant to this Section 9.15.
ARTICLE 10
MISCELLANEOUS
Section 10.1 Notices.
(a) All notices and other communications under this Agreement shall be in
writing and shall be deemed to have been given five (5) days after deposit in
the mail, designated as certified mail, return receipt requested, post-prepaid,
or one (1) day after being entrusted to a reputable commercial overnight
delivery service, or when delivered to the telegraph office or sent out by
telex or telecopy addressed to the party to which such notice is directed at its
address determined as provided in this Section 10.1. All notices and other
communications under this Agreement shall be given to the parties hereto at the
following addresses:
(i) If to the Borrower, to it at:
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Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Attn: Manager Banking and Finance
Telecopy No.: (847) 391-8876
with copies to (which copies shall only be required to be
sent in connection with a notice under Article 8 hereof):
Zenith Electronics Corporation
1000 Milwaukee Avenue
Glenview, Illinois 60025
Attn: General Counsel
Telecopy No.: (847) 391-8876
and
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attn: James H.M. Sprayregen, Esq.
Telecopy No.: (312) 861-2200
(ii) If to the Agent, to it at:
Mr. Tom Halsch
Citicorp North America, Inc.
399 Park Avenue
6th Floor Zone 4
New York, New York 10043
Telecopy No.: (212) 793-1290
with a copy to:
Chris D. Molen, Esq.
Paul, Hastings, Janofsky & Walker
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308
Telecopy No.: (404) 815-2424
(iii) If to the Lenders, to them at the addresses
set forth on the signature pages hereof.
(iv) If to the Issuing Banks, at the addresses
set forth on the signature pages hereof.
Copies shall be provided to persons other than parties hereto only in the case
of notices under Article 8 hereof.
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(b) Any party hereto may change the address to which notices shall be
directed under this Section 10.1 by giving ten (10) days' written notice of
such change to the other parties.
Section 10.2 Expenses. The Borrower agrees to promptly pay:
(a) All reasonable out-of-pocket expenses of the Agent in connection with
the preparation, negotiation, execution, and delivery of this Agreement and the
other Loan Documents, the transactions contemplated hereunder and thereunder,
and the making of the initial Advance hereunder, including, but not limited to,
the fees and disbursements of counsel for the Agent, and reasonably allocated
costs for services of internal counsel for the Agent;
(b) All reasonable out-of-pocket expenses of the Agent in connection with
the administration of the transactions contemplated in this Agreement or the
other Loan Documents, and the preparation, negotiation, execution, and delivery
of any waiver, amendment, or consent by the Lenders relating to this Agreement
or the other Loan Documents, including, but not limited to, all reasonable
out-of-pocket expenses of the Agent in connection with its quarterly field
audits, and the fees and disbursements of counsel for the Agent and reasonably
allocated costs for services of internal counsel for the Agent;
(c) All reasonable out-of-pocket costs and expenses of the Agent, the
Issuing Banks and any Lender in connection with any restructuring, refinancing,
or "work out" of the transactions contemplated by this Agreement, and of
obtaining performance under this Agreement or the other Loan Documents, and all
out-of-pocket costs and expenses of collection if default is made in the payment
of the Notes, which in each case shall include fees and out-of-pocket expenses
of counsel for the Agent, the Issuing Banks and any Lender, and the fees and
out-of-pocket expenses of any experts, agents, or consultants of the Agent,
including in each case, but without in any way limiting the generality of the
foregoing reasonably allocated costs for service of their internal counsel; and
(d) All taxes, assessments, general or special, and other charges levied on,
or assessed, placed or made against any of the Collateral, the Notes or the
Obligations.
Section 10.3 Waivers. The rights and remedies of the Agent and the Lenders
under this Agreement and the other Loan Documents shall be cumulative and not
exclusive of any rights or remedies which they would otherwise have. No
failure or delay by the Agent, the Issuing Banks, the Majority Lenders or the
Lenders in exercising any right shall operate as a waiver of such right.
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The Agent and the Lenders expressly reserve the right to require strict
compliance with the terms of this Agreement in connection with any funding of
a request for an Advance. In the event the Lenders decide to fund a request
for an Advance at a time when the Borrower is not in strict compliance with the
terms of this Agreement, such decision by the Lenders shall not be deemed to
constitute an undertaking by the Lenders to fund any further requests for
Advances or preclude the Lenders from exercising any rights available to the
Lenders under the Loan Documents or at law or equity. Any waiver or indulgence
granted by the Lenders or by the Majority Lenders shall not constitute a
modification of this Agreement, except to the extent expressly provided in such
waiver or indulgence, or constitute a course of dealing by the Lenders at
variance with the terms of the Agreement such as to require further notice by
the Lenders of the Lenders' intent to require strict adherence to the terms of
the Agreement in the future. Any such actions shall not in any way affect the
ability of the Lenders, in their discretion, to exercise any rights available
to them under this Agreement or under any other agreement, whether or not the
Lenders are party, relating to the Borrower.
Section 10.4 Set-Off. In addition to any rights now or hereafter granted
under Applicable Law and not by way of limitation of any such rights, except to
the extent limited by Applicable Law, upon the occurrence of a Default or an
Event of Default and during the continuation thereof, the Lenders and any
subsequent holder or holders of the Notes are hereby authorized by the Borrower
at any time or from time to time, without notice to the Borrower or to any other
Person, any such notice being hereby expressly waived, to set-off and to
appropriate and apply any and all deposits (general or special, time or demand,
including, but not limited to, Indebtedness evidenced by certificates of
deposit, in each case whether matured or unmatured) and any other Indebtedness
at any time held or owing by the Lenders or such holder to or for the credit or
the account of the Borrower, against and on account of the obligations and
liabilities of the Borrower, to the Lenders or such holder under this
Agreement, the Notes, and any other Loan Document, including, but not limited
to, all claims of any nature or description arising out of or connected with
this Agreement, the Notes, or any other Loan Document, irrespective of whether
or not (a) the Lenders or the holder of the Notes shall have made any demand
hereunder or (b) the Lenders shall have declared the principal of and interest
on the Loans and Notes and other amounts due hereunder to be due and payable as
permitted by Section 8.2 and although said obligations and liabilities, or any
of them, shall be contingent or unmatured. Any sums obtained by any Lender or
by any subsequent holder of the Notes shall be subject to the application of
payments provisions of Article 2 hereof. Upon direction by the Agent, with the
consent of the
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Majority Lenders, each Lender holding deposits of the Borrower shall exercise
its set-off rights as so directed.
Section 10.5 Assignment.
(a) The Borrower may not assign or transfer any of its rights or obligations
hereunder, under the Notes or under any other Loan Document without the prior
written consent of each Lender.
(b) Each of the Lenders may at any time enter into assignment agreements or
participations with one or more other banks or other Persons pursuant to which
each Lender may assign or participate its interest under this Agreement and the
other Loan Documents, including, its interest in any particular Advance or
portion thereof, provided, that (1) all assignments (other than assignments
described in clause (2) herein and in Section 10.12 (b) hereof) shall be in
minimum principal amounts of the lesser of (X) $5,000,000, and (Y) the amount
of such Lender's Commitment (in a single assignment only), (2) each Lender may
sell assignments or participations of up to one hundred percent (100%) of its
interest hereunder to (A) one or more Affiliates of such Lender, or (B) any
Federal Reserve Bank as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank (no assignment under this clause (B) shall
relieve such Lender from its obligations hereunder), and (3) all assignments
(other than assignments described in clause (2) herein and in Section 10.12(b)
hereof) and participations hereunder shall be subject to the following
additional terms and conditions:
(i) No assignment (except assignments permitted in Section 10.5(b)(2)
hereof) shall be sold without the prior consent of the Agent and, if no
Event of Default then exists, the Borrower, which consents shall not be
unreasonably withheld;
(ii) Any Person purchasing a participation or an assignment of the Loans
from any Lender shall be required to represent and warrant that its purchase
shall not constitute a "prohibited transaction" (as defined in Section
4.1(n) hereof);
(iii) The Borrower, the Lender, and the Agent agree that assignments
permitted hereunder (including the assignment of any Advance or portion
thereof) may be made with all voting rights, and shall be made pursuant to
an Assignment and Assumption Agreement. An administrative fee of $2,500
shall be payable to the Agent by the assigning Lender at the time of any
assignment hereunder;
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(iv) No participation agreement shall confer any rights under this
Agreement or any other Loan Document to any purchaser thereof, or relieve
any issuing Lender from any of its obligations under this Agreement, and all
actions hereunder shall be conducted as if no such participation had been
granted; provided, however, that any participation agreement may confer on
the participant the right to approve or disapprove decreases in the rate of
interest or fees to the Lenders, increases in the advance rates set forth in
the definition of "Borrowing Base" herein, increases in the principal amount
of such participant's pro rata share of the Commitment and extensions of the
Maturity Date for, or the date for any scheduled payment of principal,
interest or fees on, the Loans;
(v) Each Lender agrees to provide the Agent and the Borrower with prompt
written notice of any issuance of participation or assignments of its
interests hereunder;
(vi) No assignment, participation or other transfer of any rights
hereunder or under the Notes shall be effected that would result in any
interest requiring registration under the Securities Act of 1933, as amended,
or qualification under any state securities law;
(vii) No such assignment may be made to any bank or other financial
institution (x) with respect to which a receiver or conservator (including,
without limitation, the Federal Deposit Insurance Corporation, the
Resolution Trust Company or the Office of Thrift Supervision) has been
appointed or (y) that is not "adequately capitalized" (as such term is
defined in Section 131(b) (1) (B) of the Federal Deposit Insurance
Corporation Improvement Act as in effect on the Agreement Date); and
(viii) If applicable, each Lender shall, and shall cause each of its
assignees to provide to the Agent on or prior to the Agreement Date or
effective date of any assignment, as the case may be, an appropriate
Internal Revenue Service form as required by Applicable Law supporting such
Lender's position that no withholding by the Borrower or the Agent for U.S.
income tax payable by such Lender in respect of amounts received by it
hereunder is required. For purposes of this Agreement, an appropriate
Internal Revenue Service form shall mean Form 1001 (Ownership Exemption or
Reduced Rate Certificate of the U.S. Department of Treasury), or Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States), or any successor or
related forms adopted by the relevant U.S. taxing authorities.
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(c) Except as specifically set forth in Section 10.5(b) hereof, nothing in
this Agreement or the Notes, expressed or implied, is intended to or shall
confer on any Person other than the respective parties hereto and thereto and
their successors and assignees permitted hereunder and thereunder any benefit
or any legal or equitable right, remedy or other claim under this Agreement or
the Notes.
(d) Anything in this Agreement to the contrary notwithstanding, in the case
of any participation, all amounts payable by the Borrower under the Loan
Documents shall be calculated and made in the manner and to the parties hereto
as if no such participation had been sold.
Section 10.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same
instrument.
Section 10.7 Governing Law. This Agreement and the Loan Documents shall be
construed in accordance with and governed by the laws of the State of New York,
except to the extent otherwise provided in the Loan Documents.
Section 10.8 Severability. Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof in that jurisdiction or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 10.9 Headings. Headings used in this Agreement are for convenience
only and shall not be used in connection with the interpretation of any
provision hereof.
Section 10.10 Source of Funds. Notwithstanding the use by the Lenders of
the Base Rate and the Eurodollar Rate as reference rates for the determination
of interest on the Loans, the Lenders shall be under no obligation to obtain
funds from any particular source in order to charge interest to the Borrower at
interest rates tied to such reference rates.
Section 10.11 Entire Agreement. Except as otherwise expressly provided
herein, this Agreement and the other documents described or contemplated herein
embody the entire Agreement and understanding among the parties hereto and
thereto and supersede all prior agreements, understandings, and conversations
relating to the subject matter hereof and thereof. The Borrower represents and
warrants to the Agent and each of the Lenders that it has read the provisions of
this Section 10.11 and discussed the provisions of this Section 10.11 and the
rest of the Loan
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Agreement with counsel for the Borrower, and the Borrower acknowledges and
agrees that the Agent and each of the Lenders are expressly relying upon such
representations and warranties of the Borrower (as well as the other
representations and warranties of the Borrower set forth in Section 4.1 hereof)
in entering into this Agreement.
Section 10.12 Amendments and Waivers.
(a) Neither this Agreement nor any term hereof may be amended orally, nor
may any provision hereof be waived orally but only by an instrument in writing
signed by the Majority Lenders and, in the case of an amendment, also by the
Borrower, except that the consent of the Super-Majority Lenders shall be
required for any increase of the advance rates set forth in the definition of
"Borrowing Base" herein, and the consent of each of the Lenders shall be
required for (i) any increase in the amount of the Commitment, (ii) any sale or
release of any material Collateral except as permitted hereunder or any release
of any guarantor of the Obligations, (iii) any extensions of the Maturity Date,
the date of payment of interest or principal or fees, or reduction of principal
(without a corresponding payment with respect thereto), or reduction in the
rate of interest or fees due to the Lenders hereunder, and (iv) any amendment
of this Section 10.12 or of the definition of "Majority Lenders" or
"Super-Majority Lenders", and, in the case of an amendment with respect to any
of the foregoing, the consent of the Borrower.
(b) Each Lender grants to the Agent the right to purchase all (but not less
than all) of such Lender's Commitment, Letter of Credit Commitment, the Loans
and Letter of Credit Obligations owing to it and the Notes held by it and all
of its rights and obligations hereunder and under the other Loan Documents at a
price equal to the aggregate amount of outstanding Loans and Letter of Credit
Obligations owed to such Lender (together with all accrued and unpaid interest
and fees owed to such Lender), which right may be exercised by the Agent if
such Lender refuses to execute any amendment, waiver or consent which requires
the written consent of all of the Lenders and to which the Majority Lenders,
the Agent and the Borrower have agreed. Each Lender agrees that if the Agent
exercises its option hereunder, it shall promptly execute and deliver an
Assignment and Assumption Agreement and other agreements and documentation
necessary to effectuate such assignment. The Agent may assign its purchase
rights hereunder to any assignee if such assignment complies with the
requirements of Section 10.5(b)(i), (ii), (vi), (vii) and (ix).
Section 10.13 Other Relationships. No relationship created hereunder or
under any other Loan Document shall in any way affect the ability of the Agent,
each Issuing Bank and each
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<PAGE> 119
Lender to enter into or maintain business relationships with the Borrower, or
any of its Affiliates, beyond the relationships specifically contemplated by
this Agreement and the other Loan Documents.
Section 10.14 Pronouns. The pronouns used herein shall include, when
appropriate, either gender and both singular and plural, and the grammatical
construction of sentences shall conform thereto.
Section 10.15 Disclosure. Subject to Section 10.16 hereof, the Borrower
agrees that the Agent shall have the right to issue press releases regarding the
making of the Loans to the Borrower pursuant to the terms of this Agreement.
Section 10.16 Replacement of Lender. In the event that a Replacement
Event occurs and is continuing with respect to any Lender, the Borrower may
designate another financial institution (such financial institution being herein
called a "Replacement Lender") acceptable to the Agent, and which is not the
Borrower or an Affiliate of the Borrower, to assume such Lender's Commitment
hereunder, to purchase the Loans and participations of such Lender and such
Lender's rights hereunder and (if such Lender is an Issuing Bank) to issue
Letters of Credit in substitution for all outstanding Letters of Credit issued
by such Lender, without recourse to or representation or warranty by, or
expense to, such Lender for a purchase price equal to the outstanding principal
amount of the Loans payable to such Lender plus any accrued but unpaid interest
on such Loans and accrued but unpaid commitment fees and letter of credit fees
owing to such Lender, and upon such assumption, purchase and substitution, and
subject to the execution and delivery to the Agent by the Replacement Lender of
documentation satisfactory to the Agent (pursuant to which such Replacement
Lender shall assume the obligations of such original Lender under this
Agreement), the Replacement Lender shall succeed to the rights and obligations
of such Lender hereunder and such Lender shall no longer be a party hereto or
have any rights hereunder provided that the obligations of the Borrower to
indemnify such Lender with respect to event occurring or obligations arising
before such replacement shall survive such replacement. "Replacement Event"
means, with respect to any Lender, the commencement of or the talking of
possession by, a receiver, custodian, conservator, trustee or liquidator of
such Lender, or the declaration by the appropriate regulatory authority that
such Lender is insolvent.
ARTICLE 11
YIELD PROTECTION
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Section 11.1 Eurodollar Rate Basis Determination. Notwithstanding anything
contained herein which may be construed to the contrary, if with respect to any
proposed Eurodollar Rate Advance for any Eurodollar Advance Period, the Agent
determines that deposits in dollars (in the applicable amount) are not being
offered to the Agent in the relevant market for such Eurodollar Advance Period,
the Agent shall forthwith give notice thereof to the Borrower and the Lenders,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such situation no longer exist, the obligations of the Lenders to make
such types of Eurodollar Rate Advances shall be suspended.
Section 11.2 Illegality. If any applicable law, rule, or regulation, or
any change therein, or any interpretation or change in interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration thereof, or
compliance by any Lender with any request or directive (whether or not having
the force of law) of any such authority, central bank, or comparable agency,
shall make it unlawful or impossible for any Lender to make, maintain, or fund
its Eurodollar Rate Advances, such Lender shall so notify the Agent, and the
Agent shall forthwith give notice thereof to the other Lenders and the
Borrower. Before giving any notice to the Agent pursuant to this Section 11.2,
such Lender shall designate a different lending office if such designation will
avoid the need for giving such notice and will not, in the judgment of such
Lender, be otherwise disadvantageous to such Lender. Upon receipt of such
notice, notwithstanding anything contained in Article 2 hereof, the Borrower
shall repay in full the then outstanding principal amount of each affected
Eurodollar Rate Advance of such Lender, together with accrued interest thereon,
either (a) on the last day of the then current Eurodollar Advance Period
applicable to such Eurodollar Rate Advance if such Lender may lawfully continue
to maintain and fund such Eurodollar Rate Advance to such day or (b)
immediately if such Lender may not lawfully continue to fund and maintain such
Eurodollar Rate Advance to such day. Concurrently with repaying each affected
Eurodollar Rate Advance of such Lender, notwithstanding anything contained in
Article 2 hereof, the Borrower shall borrow a Base Rate Advance (or the other
type of Eurodollar Rate Advance, if available) from such Lender, and such
Lender shall make such Advance in an amount such that the outstanding principal
amount of the Note held by such Lender shall equal the outstanding principal
amount of such Note immediately prior to such repayment.
Section 11.3 Increased Costs.
(a) If after the Agreement Date any applicable law, rule, or regulation, or
any change therein, or any interpretation or change in interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency
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<PAGE> 121
charged with the interpretation or administration thereof or compliance by any
Lender with any request or directive (whether or not having the any such
authority, central bank, or comparable agency:
(i) Shall subject any Lender to any tax, duty, or other charge with
respect to its obligation to make Eurodollar Rate Advances, or its Eurodollar
Rate Advances, or shall change the basis of taxation of payments to any
Lender of the principal of or interest on its Eurodollar Rate Advances or in
respect of any other amounts due under this Agreement in respect of its
Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances
(except for changes in the rate of tax on the overall net income of such
Lender imposed by the jurisdiction in which such Lender's principal executive
office is located); or
(ii) Shall impose, modify, or deem applicable any reserve (including,
without limitation, any imposed by the Board of Governors of the Federal
Reserve System, but excluding any included in an applicable Eurodollar
Reserve Percentage), special deposit, capital adequacy, assessment, or other
requirement or condition against assets of, deposits with or for the account
of, or commitments or credit extended by any Lender, or shall impose on any
Lender or the eurodollar interbank borrowing market any other condition
affecting its obligation to make such Eurodollar Rate Advances or its
Eurodollar Rate Advances; and the result of any of the foregoing is to
increase the cost to such Lender of making or maintaining any such
Eurodollar Rate Advances, or to reduce the amount of any sum received or
receivable by the Lender under this Agreement or under its Notes with
respect thereto, and such increase is not given effect in the determination
of the Eurodollar Rate then,
on the earlier of demand by such Lender or the Maturity Date, the Borrower
agrees to pay to such Lender such additional amount or amounts as will
compensate such Lender for such increased costs. Each Lender will promptly
notify the Borrower and the Agent of any event of which it has knowledge,
occurring after the date hereof, which will entitle such Lender to compensation
pursuant to this Section 11.3 and will designate a different lending office if
such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole judgment of such Lender, be otherwise
disadvantageous to such Lender.
(b) A certificate of any Lender claiming compensation under this Section
11.3 and setting forth the additional amount or amounts to be paid to it
hereunder and calculations therefor shall be conclusive in the absence of
manifest error. In
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<PAGE> 122
determining such amount, such Lender may use any reasonable averaging and
attribution methods. If any Lender demands compensation under this Section
11.3, the Borrower may at any time, upon at least five (5) Business Days' prior
notice to such Lender, prepay in full the then outstanding affected Eurodollar
Rate Advances of such Lender, together with accrued interest thereon to the
date of prepayment, along with any reimbursement required under Section 2.9
hereof. Concurrently with prepaying such Eurodollar Rate Advances the Borrower
shall borrow a Base Rate Advance, or a Eurodollar Rate Advance not so affected,
from such Lender, and such Lender shall make such Advance in an amount such
that the outstanding principal amount of the Notes held by such Lender shall
equal the outstanding principal amount of such Notes immediately prior to such
prepayment.
Section 11.4 Effect On Other Advances. If notice has been given pursuant
to Section 11.1, 11.2 or 11.3 suspending the obligation of any Lender to make
any type of Eurodollar Rate Advance, or requiring Eurodollar Rate Advances of
any Lender to be repaid or prepaid, then, unless and until such Lender notifies
the Borrower that the circumstances giving rise to such repayment no longer
apply, all Advances which would otherwise be made by such Lender as to the type
of Eurodollar Rate Advances affected shall, at the option of the Borrower, be
made instead as Base Rate Advances.
Section 11.5 Capital Adequacy. If after the date hereof, any Lender or
Issuing Bank (or any affiliate of the foregoing) shall have reasonably
determined that the adoption of any applicable law, governmental rule,
regulation or order regarding the capital adequacy of banks or bank holding
companies, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by such Lender or Issuing Bank (or any affiliate of the foregoing) with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such governmental authority, central bank or comparable agency,
has or would have the effect of reducing the rate of return on such Lender's or
Issuing Bank's (or any affiliate of the foregoing) capital as a consequence of
such Lender's or Issuing Bank's Commitment or Obligations hereunder to a level
below that which it could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's or Issuing Bank's (or any
affiliate of the foregoing) policies with respect to capital adequacy
immediately before such adoption, change or compliance and assuming that such
Lender's or Issuing Bank's (or any affiliate of the foregoing) capital was
fully utilized prior to such adoption, change or compliance), then, upon demand
by such Lender or Issuing Bank, the Borrower shall immediately pay to such
Lender or Issuing Bank such
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<PAGE> 123
additional amounts as shall be sufficient to compensate such Lender or Issuing
Bank for any such reduction actually suffered; provided, however, that there
shall be no duplication of amounts paid to a Lender pursuant to this sentence
and Section 11.3 hereof. A certificate of such Lender or Issuing Bank setting
forth the amount to be paid to such Lender or Issuing Bank by the Borrower as a
result of any event referred to in this paragraph shall, absent manifest error,
be conclusive.
ARTICLE 12
JURISDICTION, VENUE AND WAIVER OF JURY TRIAL
Section 12.1 Jurisdiction and Service of Process. For purposes of any
legal action or proceeding brought by the Agent or the Lenders with respect to
this Agreement or any other Loan Document, the Borrower hereby irrevocably
submits to the personal jurisdiction of the federal and state courts sitting in
the state of New York and hereby irrevocably designates and appoints, as its
authorized agent for service of process in the State of New York, CT
Corporation System, whose address is [1633 Broadway, New York, New York 10019,]
or such other person as the Borrower shall designate hereafter by written
notice given to the Agent. The consent to jurisdiction herein shall not be
exclusive. The Agent, the Lenders and the Issuing Banks shall for all purposes
automatically, and without any act on their part, be entitled to treat such
designee of the Borrower as the authorized agent to receive for and on behalf
of the Borrower service of writs, or summons or other legal process in the
State of New York, which service shall be deemed effective personal service on
the Borrower served when delivered, whether or not such agent gives notice to
the Borrower; and delivery of such service to its authorized agent shall be
deemed to be made when personally delivered or four (4) Business Days after
mailing by registered or certified mail addressed to such authorized agent.
The Borrower further irrevocably consents to service of process in any such
action or proceeding by the mailing of copies thereof by registered or
certified mail to the Borrower at the address set forth above, such service to
become effective four (4) Business Days after such mailing. In the event that,
for any reason, such agent or his or her successors shall no longer serve as
agent of the Borrower to receive service of process in the State of New York,
the Borrower shall serve and advise the Agent thereof so that at all times the
Borrower will maintain an agent to receive service of process in the State of
New York on behalf of the Borrower with respect to this Agreement and all other
Loan Documents. In the event that, for any reason, service of legal process
cannot be made in the manner described above, such service may be made in such
manner as permitted by law.
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<PAGE> 124
Section 12.2 Consent to Venue. The Borrower hereby irrevocably waives any
objection it would make now or hereafter for the laying of venue of any suit,
action, or proceeding arising out of or relating to this Agreement or any other
Loan Document brought in the federal courts of the United States of America
sitting in New York, New York, and hereby irrevocably waives any claim that any
such suit, action, or proceeding has been brought in an inconvenient forum.
Section 12.3 Waiver of Jury Trial. THE BORROWER AND EACH OF THE AGENT, THE
LENDERS AND THE ISSUING BANKS TO THE EXTENT PERMITTED BY APPLICABLE LAW WAIVE,
AND OTHERWISE AGREE NOT TO REQUEST, A TRIAL BY JURY IN ANY COURT AND IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM OF ANY TYPE IN WHICH THE BORROWER, ANY OF
THE LENDERS, THE ISSUING BANKS, THE AGENT, OR ANY OF THEIR RESPECTIVE
SUCCESSORS OR ASSIGNS IS A PARTY, AS TO ALL MATTERS AND THINGS ARISING DIRECTLY
OR INDIRECTLY OUT OF THIS AGREEMENT, ANY OF THE NOTES OR THE OTHER LOAN
DOCUMENTS AND THE RELATIONS AMONG THE PARTIES LISTED IN THIS ARTICLE 12.
[remainder of page intentionally left blank]
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<PAGE> 125
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers, all as of the day and
year first above written.
BORROWER: ZENITH ELECTRONICS CORPORATION
By:________________________
Name: Kevin F. Brindley
Its: Treasurer
(SEAL)
AGENT: CITICORP NORTH AMERICA, INC.
By:________________________
Name: Thomas M. Halsch
Its: Vice President
ISSUING BANK: CITIBANK, N.A.
By:______________________
Name: Thomas M. Halsch
Its: Attorney-in-Fact
Address: 399 Park Avenue
6th Floor
Zone 4
New York, New York 10043
LENDERS: CITICORP USA, INC.
By:______________________
Name: Thomas M. Halsch
Its: Attorney-in-Fact
Address: 399 Park Avenue
6th Floor
Zone 4
New York, New York 10043
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
<PAGE> 126
BANK BOSTON, N.A.
By: ___________________
Name: Ellen L. Heath
Its: Director
Address: 100 Federal Street
Mail Stop 01-09-06
Boston, Massachusetts 02110
HELLER FINANCIAL, INC.
By: __________________
Name: Thomas Bukowski
Its: Vice President
Address: 101 Park Avenue
10th Floor
New York, New York 10178
BNY FINANCIAL CORPORATION
By: ___________________
Name: Stephen V. Magiante
Its: Vice President
Address: 1290 Avenue of the Americas
New York, New York 10104
SANWA BUSINESS CREDIT CORPORATION
By: ___________________
Name: Peter L. Skavla
Its: Vice President
Address: 500 Glenpointe Centre West
4th Floor
Teaneck, New Jersey 07666
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
<PAGE> 127
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: ___________________
Name: Steven Fischer
Its: Senior Vice President
Address: 555 Theodore Fremd Avenue
Rye, New York 10580
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: ___________________
Name: Michael P. Baranowski
Its: Vice President
Address: 245 S. Los Robles Avenue
Suite 600
Pasadena, California 91101
<PAGE> 128
Schedule C-1
Commitment Ratios
I. LOANS
<TABLE>
<CAPTION>
Commitment
Lender Commitment Ratio Principal Amount
- ------ ---------------- ----------------
<S> <C> <C>
Citicorp USA, Inc. 22.2% $27,700,000
Bank Boston, N.A. 12.2% $15,300,000
Heller Financial, Inc. 12.4% $15,500,000
Sanwa Business Credit
Corporation 16.0% $20,000,000
Transamerica Business
Credit Corporation 12.4% $15,500,000
Wells Fargo Bank,
National Association 12.4% $15,500,000
BNY Financial
Corporation 12.4% $15,500,000
------------------- --------------
Totals: 100% $125,000,000
=================== ================
</TABLE>
II. LETTERS OF CREDIT
Issuing Banks Letter of Credit Commitment %
- -------------- ------------------------------
Citibank, N.A. 100%
<PAGE> 1
EXHIBIT 10ah
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
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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.
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<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.
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"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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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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(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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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.
- 29 -
<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;
- 30 -
<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.
- 31 -
<PAGE> 32
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.
- 32 -
<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.
- 33 -
<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
- 34 -
<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.
- 35 -
<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
- 36 -
<PAGE> 37
Annexes
Annex A Operating Plan
Annex B The Proposal
Annex C Terms of Senior Secured PIK Notes
- 1 -
<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.
- 1 -
<PAGE> 1
EXHIBIT 21
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>
<PAGE> 1
EXHIBIT 23A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports made a part of Zenith Electronics Corporation's Registration Statement
on Form S-4 filed in August 1998.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
August 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-28-1998
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 16
<ALLOWANCES> 0
<INVENTORY> 127
<CURRENT-ASSETS> 293
<PP&E> 794
<DEPRECIATION> 630
<TOTAL-ASSETS> 500
<CURRENT-LIABILITIES> 483
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> (194)
<TOTAL-LIABILITY-AND-EQUITY> 500
<SALES> 221
<TOTAL-REVENUES> 221
<CGS> 214
<TOTAL-COSTS> 214
<OTHER-EXPENSES> 44
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (38)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 22
<ALLOWANCES> 0
<INVENTORY> 166
<CURRENT-ASSETS> 313
<PP&E> 792
<DEPRECIATION> 562
<TOTAL-ASSETS> 528
<CURRENT-LIABILITIES> 467
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> (156)
<TOTAL-LIABILITY-AND-EQUITY> 528
<SALES> 1,173
<TOTAL-REVENUES> 1,173
<CGS> 1,181
<TOTAL-COSTS> 1,181
<OTHER-EXPENSES> 221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> (300)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (299)
<EPS-PRIMARY> (4.49)
<EPS-DILUTED> (4.49)
</TABLE>
<PAGE> 1
EXHIBIT 99a
PROJECT ELECTRO
PRESENTATION TO BOARD OF DIRECTORS
MAY 21, 1998
PETER J. SOLOMON COMPANY
LIMITED
<PAGE> 2
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
________________________________________________________________________________
This presentation has been prepared by Peter J. Solomon Company Limited ("PJSC")
from materials and information supplied (whether orally or in writing) by Zenith
Electronics Corporation ("Zenith" or the "Company").
This presentation includes certain statements, estimates and projections
provided by the Company with respect to the historical and anticipated future
performance of the Company and certain potential strategic alternatives. Such
statements, estimates and projections contain or are based on significant
assumptions and subjective judgments made by Company management ("Management").
These assumptions and judgments may or may not be correct, and there can be no
assurance that any projected results are attainable or will be realized. PJSC
has not attempted to verify any such statements, estimates and projections, and
as such, PJSC makes no representation or warranty as to, and assumes no
responsibility for, their accuracy or completeness or for the effect which any
such inaccuracy or incompleteness may have on the results or judgments
contained in this presentation.
Except where otherwise indicated, this analysis speaks as of the date hereof.
Under no circumstances should the delivery of this document imply that the
analysis would be the same if made as of any other date.
THIS REPORT HAS BEEN ISSUED FOR THE BENEFIT OF THE BOARD OF DIRECTORS OF THE
COMPANY. IT IS NOT INTENDED TO BE USED, AND SHOULD NOT BE RELIED UPON, BY ANY
OTHER PERSON.
THIS REPORT IS CONFIDENTIAL AND SHOULD NOT, WITHOUT PRIOR WRITTEN CONSENT OF
PJSC, BE COPIED OR MADE AVAILABLE TO ANY PERSON OTHER THAN THE DIRECTORS OF THE
COMPANY.
PJSC SHALL NOT HAVE LIABILITY, WHETHER DIRECT OR INDIRECT, IN CONTRACT OR TORT
OR OTHERWISE, TO ANY PERSON IN CONNECTION WITH THIS PRESENTATION.
<PAGE> 3
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB PAGE
--- ----
<S> <C> <C>
I. Going Concern Analysis . . . . . . . . . . . . . . . 1
II. Analysis of LG Proposal. . . . . . . . . . . . . . . 18
III. Preliminary Liquidation Analysis . . . . . . . . . . 11
</TABLE>
<PAGE> 4
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
________________________________________________________________________________
(Dollars in Millions)
<TABLE>
<CAPTION> SUMMARY
GOING CONCERN VALUATION
-----------------------
<S> <C>
Enterprise Value(a) $127.0
Domestic VSB Technology Value(b) 186.0
------
Total Value $313.0
======
</TABLE>
________________________________________________________________________________
(a) Per Electro Business Plan, dated April 16, 1998. Business plan is adjusted
to exclude projected VSB royalties. Enterprise value based on 14.0x EBIT
multiple and a 12.0% discount rate equal to the weighted average cost of
capital (WACC) of the comparable company group.
(b) VSB valuation assumes a $2.50 PC royalty fee, 25.0% discount rate applied to
royalty fee income cash flows through 2011 and availability of Company NOLs
to shelter VSB and operating cash flow. Excludes any potential value for
international VSB royalties.
Page 1
<PAGE> 5
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
Going Concern Analysis
Electro Discounted Cash Flow Analysis
(Dollars in Millions)
- --------------------------------
Excludes VSB Royalty Revenues(a)
- --------------------------------
<TABLE>
<CAPTION>
Projected Fiscal Year Ended December 31,
----------------------------------------
1998 1999 2000 2001 2002
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Revenue $989.5 $908.3 $892.2 $939.5 $997.1
EBITDA (46.3) (17.6) 12.6 15.7 24.6
__% of Revenues (4.7%) (1.9%) 1.4% 1.7% 2.5%
EBIT (81.0) (28.9) 5.9 9.0 17.6
__% of Sales (8.2%) (3.2%) 0.7% 1.0% 1.8%
Taxes __ 0.0% 0.0 0.0 0.0 0.0 0.0
------------------------------------------
Tax-Adjusted EBIT (81.0) (28.9) 5.9 9.0 17.6
Depreciation & Amortization 34.7 11.3 6.7 6.7 7.0
Capital Expenditures (107.4) (5.0) (5.0) (5.0) (5.0)
Change in Net Working Capital (55.5) 57.4 46.0 (2.1) (7.8)
Proceeds from Asset Sales 62.7 159.6 0.0 0.0 0.0
Restructuring Costs (39.1) (51.5) (7.8) (5.6) (4.2)
-------------------------------------------
Free Cash Flow ($185.6) $142.9 $45.8 $3.0 $7.6
===========================================
Growth in Free Cash Flow - NM -68% -93% 153%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL VALUE/EBIT MULTIPLE 12.0x 13.0x 14.0x 15.0x
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount Rate 12.0% 14.0% 16.0% 12.0% 14.0% 16.0% 12.0% 14.0% 16.0% 12.0% 14.0% 16.0%
--------------------------------------------------------------------------------------------------
Present Value of Free Cash Flow ($13.0) ($16.2) ($19.2) ($13.0) ($16.2) ($19.2) ($13.0) ($16.2) ($19.2) ($13.0) ($16.2)($19.2)
Present Value of Terminal Value 119.8 109.7 100.6 129.8 118.8 108.9 139.8 128.0 117.3 149.8 137.1 125.7
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Enterprise Value $106.9 $93.5 $81.4 $116.9 $102.6 $89.8 $126.8 $111.8 $98.1 $136.8 $120.9 $106.5
------
Terminal Value as a % of
Enterprise Value 112.1% 117.3% 123.6% 111.1% 115.8% 121.4% 110.2% 114.5% 119.6% 109.5% 113.4% 118.0%
--------------------------------------------------------------------------------------------------
___________________________________________________________________________________________________________________________________
Source: Electro 1998-2000 Business Plan dated April 16, 1998.
(a) Business plan projected income statement includes certain R&D/engineering costs associated with VSB technologies, but is
adjusted to exclude projected VSB royalties.
</TABLE>
<PAGE> 6
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
Going Concern Analysis
Analysis of Selected Consumer Electronics Companies
- --------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET DATA Equity Value Enterprise Value as a
Price/Earnings Multiples as a Multiple of LTM:
Closing ---------------------------------- Multiple of ---------------------
Price on Equity CY 1998 CY 1999 Tangible Enterprise Net
Selected Companies 5/19/98 Value LTM EPS EPS(a) EPS(a) Book Value Value(b) Sales EBIT EBITDA
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRO $1.625 $109.7 NM NA NA NM $ 330.3 29.1% NM NM
Hitachi, Ltd.(c) 7.397 24,690.9 31.2 49.3 41.9 0.9 33,716.1 44.1% 12.9 4.5
Matsushita Electric Industrial Co.(d) 15.946 33,682.0 37.6 37.1 32.2 1.1 35,859.2 57.0% 13.0 6.1
Mitsubishi Electric Corp.(e) 2.529 5,430.7 79.0 NM NM NM 12,203.9 40.6% 15.5 4.6
Philips Electronics N.V. 100.353 36,932.7 20.4 17.1 13.7 4.7 40,940.8 104.5% 15.2 8.9
Pioneer Electronic Corp. 18.402 3,304.5 55.3 45.2 39.3 1.3 3,759.7 88.4% 24.4 9.7
Sony Corp. 85.044 34,133.6 18.7 19.9 18.3 3.0 41,464.3 75.8% 9.8 6.2
--------------------------------
MEAN(f) 68.4% 15.1 6.7
MEDIAN(f) 66.4% 14.1 6.1
--------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA Net Income
Net Sales EBITDA EBIT to Common
----------------- -------------- --------------- ----------------
LTM CAGR LTM CAGR LTM CAGR LTM CAGR
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRO $ 1,135.3 (4.0%) ($176.2) NM ($216.0) NM ($242.5) NM
Hitachi, Ltd.(c) 76,403.5 (0.5%) 7,435.1 (4.7%) 2,606.1 (5.7%) 817.7 (17.3%)
Matsushita Electric Industrial Co.(d) 62,868.0 (1.3%) 5,872.5 (9.1%) 2,766.2 6.9% 1,112.3 15.9%
Mitsubishi Electric Corp.(e) 30,041.9 (4.2%) 2,676.0 (7.9%) 785.1 (18.5%) 68.7 (59.7%)
Philips Electronics N.V. 39,188.6 (1.3%) 4,611.2 1.0% 2,693.6 (0.0%) 1,719.2 0.8%
Pioneer Electronic Corp. 4,254.9 (6.8%) 387.0 0.4% 154.2 12.1% 60.4 35.1%
Sony Corp. 54,719.8 11.9% 6,709.8 33.0% 4,229.8 91.9% 1,737.2 NM
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS Return on
Net Working Common Net Debt/
Capital/Sales EBITDA/Sales EBIT/Sales Net Income/Sales Equity Total Cap.
------------- --------------- --------------- ---------------- ---------- ----------
LTM LTM Average LTM Average LTM Average LTM LTM
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRO (8.5%) (15.5%) (8.5%) (19.0%) (11.4%) (21.4%) (13.0%) NM 188.5%
Hitachi, Ltd.(c) 17.0% 9.7% 10.5% 3.4% 3.8% 1.1% 1.4% 3.0% 5.9%
Matsushita Electric Industrial Co.(d) (49.8%) 9.3% 9.3% 4.4% 4.0% 1.8% 1.2% 3.7% (6.2%)
Mitsubishi Electric Corp.(e) 15.8% 8.9% 9.8% 2.6% 3.5% 0.2% 1.1% 1.1% 36.4%
Philips Electronics N.V. 7.7% 11.8% 10.8% 6.9% 5.9% 4.4% 3.4% 17.9% 19.8%
Pioneer Electronic Corp. 28.9% 9.1% 5.9% 3.6% 0.9% 1.4% 0.2% 2.4% 11.9%
Sony Corp. 11.9% 12.3% 9.3% 7.7% 4.2% 3.2% 0.1% 12.9% 25.0%
MEAN(f) 10.2% 9.3% 4.8% 3.7%
MEDIAN(f) 9.5% 9.6% 4.0% 3.9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: CAGRs (Compound Annual Growth Rates) and Averages are for the last three
completed fiscal years for each company. All operating data has been adjusted
to exclude unusual and extraordinary items.
(a) Source of projected EPS estimates: First Call - median estimate of Wall
Street analysts as of 05/19/98.
(b) Enterprise value represents equity value plus book values of total debt,
preferred stock and minority interest less cash.
(c) LTM data is as of September 30, 1997.
(d) LTM data is as of December 31, 1997.
(e) LTM data is as of March 31, 1997.
(f) Mean and median exclude ELECTRO.
Page 3
<PAGE> 7
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
VSB VALUATION ASSUMING USE OF NOLS
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
- -------------------
ASSUMES USE OF NOLS
- -------------------
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Royalty Income $0.0 $0.0 $0.0 $4.5 $23.6 $42.5 $67.1 $83.6 $102.2
Unsheltered Earnings 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0)
Taxes 38.% 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0)
---- ---- ---- ---- ----- ----- ----- ----- -----
Net VSB Royalty Income 0.0 0.0 0.0 4.5 23.6 42.5 67.1 83.6 102.2
Calculation of Remaining NOLs
- -----------------------------
Pre-LG NOLs(a) 481.0 485.5 509.1 551.6 618.7 697.0 724.0
Utilizable Beginning 27.0 54.0 81.0 108.0 130.5 133.9 118.4 78.3 27.0
Pre-LG NOLs Utilized 0.0 0.0 0.0 (4.5) (23.6) (42.5) (67.1) (78.3) (27.0)
---- ---- ---- ----- ----- ----- ----- ----- -----
Utilizable End 27.0 54.0 81.0 103.5 106.9 91.4 51.3 0.0 0.0
Post LG NOL (beginning) $354.6 $425.7 $389.0 $409.9 $420.6 $417.5 $412.2
Post LG NOL Utilized 0.0 0.0 0.0 0.0 0.0 (5.3) (75.2)
NOL Generated(b) 71.1 (36.7) 20.9 10.7 (3.2) 0.0 0.0
---- ----- ----- ----- ----- ----- -----
Post LG NOL (ending) $425.7 $389.0 $409.9 $420.6 $417.5 $412.2 $337.0
<CAPTION>
2005 2006 2007 2008 2009 2010 2011
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Royalty Income $122.4 $137.0 $150.6 $169.1 $191.7 $214.9 $242.4
Unsheltered Earnings (0.0) 0.0 0.0 134.2 164.7 187.9 242.4
Taxes (0.0) 0.0 0.0 51.0 62.6 71.4 92.1
----- ----- ----- ----- ----- ----- -----
Net VSB Royalty Income 122.4 137.0 150.6 118.1 129.1 143.5 150.3
Calculation of Remaining NOLs
- -----------------------------
Pre-LG NOLs(a) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Utilizable Beginning 27.0 27.0 27.0 27.0 27.0 27.0 0.0
Pre-LG NOLs Utilized (27.0) (27.0) (27.0) (27.0) (27.0) (27.0) 0.0
----- ----- ----- ----- ----- ----- -----
Utilizable End 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Post LG NOL (beginning) $337.0 $241.6 $131.5 $7.9 $0.0 $0.0 $0.0
Post LG NOL Utilized (95.4) (110.0) (123.6) (7.9) 0.0 0.0 0.0
NOL Generated(b) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ----- ----- ----- ----- -----
Post LG NOL (ending) $241.6 $131.5 $7.9 $0.0 $0.0 $0.0 $0.0
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------- ---------------------------------------------------
1998 Net Income ($348.1) Discount Rate:
Cancellation of Debt Income (c) 277.0 --------------
------- 20.0% 25.0% 30.0% 35.0% 40.0%
1998 NOL ($71.1) ------ ------ ------ ------ -----
$255.6 $186.3 $139.5 $107.0 $83.7
- ----------------------------------------------------------- ---------------------------------------------------
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
CALCULATION OF NET INCOME ADJUSTED FOR THE EXCLUSION OF VSB ROYALTY INCOME:
<CAPTION>
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Old EBIT ($81.0) ($26.2) $20.3 $33.0 $50.7
New EBIT (81.0) (28.9) 5.9 9.0 17.6
--------------------------------------------------------------------
EBIT Differential 0.0 (2.7) (14.4) (24.0) (33.1)
Incremental Debt 0.0 (2.7) (17.1) (41.1) (74.2)
--------------------------------------------------------------------
Incremental Interest Expense @ 9.3% 0.0 (0.1) (0.9) (2.7) (5.3)
Old Net Income ($348.1) $36.8 ($20.0) ($8.0) $8.5
New Net Income (348.1) 36.7 (20.9) (10.7) 3.2
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Note: Assumes no net tax attributable on account of cancellation of indenture
pursuant to a restructure.
(a) Source: Electro 1997 10-K. Utilizable at a maximum rate of $27MM per year
up until 2010. When unutilized the $27MM carried forward.
(b) Negative NOL generation in 1999 and 2002 represents NOL utilized in Company
operations per Electro Business plan dated April 16, 1998.
(c) Per LG proposal.
Page 4
<PAGE> 8
PETER J. SOLOMON COMPANY
PROJECTED ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
<TABLE>
<CAPTION>
SUMMARY VALUATION: VSB TECHNOLOGY BASE CASE
- -----------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS, EXCEPT AVERAGE ROYALTY FEES)
1999 2000 2001 2002 2003 2004 2005
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
Cable Box Box Type: QAM
Market Size 8.0 8.0 8.0 8.0 8.0 8.0 8.0
% Digital 20.0% 35.0% 50.0% 65.0% 80.0% 100.0% 100.0%
% Using VSB Remodiation 0.0% 4.0% 7.0% 10.0% 14.0% 14.0% 14.0%
Total VSB Remodiation 0.0 0.1 0.3 0.5 0.9 1.1 1.1
Average Royalty Fee $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50
------ ------ ------ ------ ------ ------ ------
Royalty Income $0.0 $0.2 $0.4 $0.8 $1.3 $1.7 $1.7
TVs
Market Size 25.0 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 1.0% 4.0% 7.0% 10.0% 14.0% 20.0% 24.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.3 1.0 1.8 2.5 3.5 5.0 6.0
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $1.1 $4.5 $7.9 $11.3 $15.8 $22.5 $27.0
PCs
Market Size 11.0 13.0 14.5 16.0 17.8 19.6 21.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 0.0% 15.0% 40.0% 60.0% 75.0% 75.0% 75.0%
Total VSB Demodulation 0.0 2.0 5.8 9.6 13.3 14.7 16.1
Average Royalty Fee $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50
------ ------ ------ ------ ------ ------ ------
Royalty Income $0.0 $4.9 $14.5 $24.0 $33.3 $36.7 $40.3
Add-In Cards
Market Size NA NA NA NA NA NA NA
% Digital NA NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA NA
Total VSB Demodulation 1.0 1.3 1.5 1.8 2.0 1.7 1.2
Average Royalty Fee $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $1.0 $1.3 $1.5 $1.8 $2.0 $1.7 $1.2
Video Recorders/DVD-R
Market Size 15.0 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 1.0% 5.0% 10.0% 15.0% 20.0% 30.0% 40.0%
% Using VSB Remod/Demod 50.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Remod/Demod 0.1 0.6 1.5 2.3 3.0 4.5 6.0
% Zenith (No Royalties) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $0.4 $2.9 $7.2 $10.9 $14.5 $21.7 $29.0
- -------------------------------------------------------------------------------------------------
Note: Consumer electronic component roll-out is substantially per Forrester Research, Inc.,
a Cambridge, Massachusetts based high technology research firm. See accompanying notes.
</TABLE>
PETER J. SOLOMON COMPANY
PROJECTED ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
<TABLE>
<CAPTION>
SUMMARY VALUATION: VSB TECHNOLOGY BASE CASE
- -----------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS, EXCEPT AVERAGE ROYALTY FEES)
2006 2007 2008 2009 2010 2011 Total
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
Cable Box Box Type: QAM
Market Size 8.0 8.0 8.0 8.0 8.0 8.0
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodiation 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Total VSB Remodiation 1.1 1.1 1.1 1.1 1.1 1.1
Average Royalty Fee $1.50 $1.50 $1.50 $1.50 $1.50 $1.50
------ ------ ------ ------ ------ ------
Royalty Income $1.7 $1.7 $1.7 $1.7 $1.7 $1.7 $16.2
TVs
Market Size 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 28.0% 32.0% 42.0% 52.0% 62.0% 75.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 7.0 8.0 10.5 13.0 15.5 18.8
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------
Royalty Income $31.5 $36.0 $47.3 $58.5 $69.8 $84.4 $417.4
PCs
Market Size 23.7 26.0 28.6 31.5 34.6 38.1
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Total VSB Demodulation 17.7 19.5 21.5 23.6 26.0 28.6
Average Royalty Fee $2.50 $2.50 $2.50 $2.50 $2.50 $2.50
------ ------ ------ ------ ------ ------
Royalty Income $44.4 $48.8 $53.7 $59.1 $65.0 $71.5 $496.0
Add-In Cards
Market Size NA NA NA NA NA NA
% Digital NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA
Total VSB Demodulation 0.7 0.2 0.0 0.0 0.0 0.0
Average Royalty Fee $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ------ ------ ------ ------
Royalty Income $0.7 $0.2 $0.0 $0.0 $0.0 $0.0 $11.3
Video Recorders/DVD-R
Market Size 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%
% Using VSB Remod/Demod 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Remod/Demod 7.5 9.0 10.5 12.0 13.5 15.0
% Zenith (No Royalties) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------
Royalty Income $36.2 $43.4 $50.7 $57.9 $65.1 $72.4 $412.2
- -------------------------------------------------------------------------------------------------
Note: Consumer electronic component roll-out is substantially per Forrester Research, Inc.,
a Cambridge, Massachusetts based high technology research firm. See accompanying notes.
</TABLE>
Page 5
<PAGE> 9
PETER J. SOLOMON COMPANY
PROJECTED ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
<TABLE>
<CAPTION>
SUMMARY VALUATION: VSB TECHNOLOGY BASE CASE
- -----------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS, EXCEPT AVERAGE ROYALTY FEES)
1999 2000 2001 2002 2003 2004 2005
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
DVD-P
Market Size 0.4 0.7 0.7 0.7 0.0 0.0 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 10.0% 20.0% 40.0% 60.0% 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.1 0.3 0.4 0.0 0.0 0.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $0.00 $0.00 $0.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $0.2 $0.7 $1.4 $2.1 $0.0 $0.0 $0.0
CONVERTERS
Market Size NA NA NA NA NA NA NA
% Digital NA NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA NA
Total VSB Demodulation 0.3 0.4 0.5 1.9 2.2 2.5 3.8
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $1.5 $2.0 $2.5 $9.5 $11.0 $12.5 $19.0
SATELLITE BOX
Market Size 1.5 1.5 1.5 1.5 1.5 1.3 1.1
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 4.7% 20.0% 40.0% 60.0% 86.7% 100.0% 100.0%
Total VSB Demodulation 0.1 1.5 1.5 1.5 1.3 1.3 1.1
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------ ------
Royalty Income $0.4 $7.5 $7.5 $7.5 $6.5 $6.5 $5.5
Assumed Sharing Rate: 1.0%
TOTAL PRE-TAX INCOME $4.5 $23.6 $42.5 $67.1 $83.6 $102.2 $122.4
- -------------------------------------------------------------------------------------------------
Note: Consumer electronic component roll-out is substantially per Forrester Research, Inc.,
a Cambridge, Massachusetts based high technology research firm. See accompanying notes.
</TABLE>
PETER J. SOLOMON COMPANY
PROJECTED ELECTRO
- --------------------------------------------------------------------------------
GOING CONCERN ANALYSIS
<TABLE>
<CAPTION>
SUMMARY VALUATION: VSB TECHNOLOGY BASE CASE
- -----------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS, EXCEPT AVERAGE ROYALTY FEES)
2006 2007 2008 2009 2010 2011 Total
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC
DVD-P
Market Size 0.0 0.0 0.0 0.0 0.0 0.0
% Digital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.0 0.0 0.0 0.0 0.0
Average Royalty Fee $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
------ ------ ------ ------ ------ ------
Royalty Income $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $4.4
CONVERTERS
Market Size NA NA NA NA NA NA
% Digital NA NA NA NA NA NA
% Using VSB Demodulation NA NA NA NA NA NA
Total VSB Demodulation 3.9 3.7 3.0 3.0 3.0 3.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------
Royalty Income $19.5 $18.5 $15.0 $15.0 $15.0 $15.0 $156.0
SATELLITE BOX
Market Size 0.9 0.7 0.5 0.3 0.1 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.9 0.7 0.5 0.3 0.1 0.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
------ ------ ------ ------ ------ ------
Royalty Income $4.5 $3.5 $2.5 $1.5 $0.5 $0.0 $53.9
Assumed Sharing Rate: 1.0%
TOTAL PRE-TAX INCOME $137.0 $150.6 $169.1 $191.7 $214.9 $242.4 $1,551.6
- -------------------------------------------------------------------------------------------------
Note: Consumer electronic component roll-out is substantially per Forrester Research, Inc.,
a Cambridge, Massachusetts based high technology research firm. See accompanying notes.
</TABLE>
<PAGE> 10
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
Risks and Opportunities of Business Plan
<TABLE>
<CAPTION>
Opportunities Risks
------------- -----
<S> <C>
- - Higher than projected market adoption and - Inability to meet business plan sales and
royalty rates for VSB technology. margin projections.
- - Improvement in Company operating margins - Inability to attract and retain necessary,
beyond business plan projections. qualified personnel.
- - Realization of asset sale proceeds in excess - Inability to smoothly implement new sourcing
of plan (NWS, manufacturing and assembly strategy and exit manufacturing facilities.
plants, real estate).
- - Availability of credit terms more advantageous - Inability to identify and reach acceptable
than projection. terms with sources for finished goods and/or
components in accord with business plan
projections (e.g., 25" and 27" product,
pricing assumptions).
</TABLE>
Page 7
<PAGE> 11
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
Risks and Opportunities of Business Plan
<TABLE>
<CAPTION>
Opportunities Risks
------------- -----
<S> <C>
- - Realization of new cash flows from existing - Inability to realize proceeds from the disposition
but uncommercialized technologies and of assets at least equal to business plan projections.
aggressive licensing of Company trademark.
- Inability to receive and maintain credit terms with
suppliers and lenders in accord with business plan
projections and maintain working capital at levels
equal to industry "best practices".
- VSB adoption rates and/or royalty prices below business
plan projections.
- Substantial shift in market demand for Company's
products.
- Diminution or interruption of tuner patent royalty
stream.
- Price erosion for TVs continues at historical average
(approximately 5-6%) instead of declining as projected
in the business plan.
</TABLE>
Page 8
<PAGE> 12
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB Valuation Approach and Assumptions
Introduction
- - Three primary applications drive the value of owning VSB technology:
televisions, consumer PCs and VCRs. Other applications exist, such as PC
add-in cards and satellite set-top boxes, but are peripheral to the primary
three because of their lower license fee potential.
- - The key issues in establishing a range of value for the VSB technology are:
- Assumptions regarding market sizes for various applications and market
acceptance/adoption rates;
- Appropriate royalty rate structures for each application; and
- Appropriate discount rates.
- - In assessing each of these key issues, PJSC reviewed publicly available data
and spoke with Zenith corporate and technical management as well as a range of
third party experts including, among others:
- Forrester Research, Inc.;
- McKinsey Consulting;
- Pittiglio Rabin Todd & McGrath; and
- Price Waterhouse (previously commissioned study).
Page 9
<PAGE> 13
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
I. VSB MARKET MODEL
o PJSC'S VSB market model assumptions were derived through:
- - Discussions with Company management regarding technical and regulatory
parameters of VSB and anticipated commercial applications.
- - Follow up discussions with Wall Street equity market and technical analysts
for an overview of market perceptions of VSB technology.
- - Detailed discussions among Forrester Research, Inc. and Company technical and
business managers to identify significant applications and estimate adoption
rates.
- - Discussions with Company counsel regarding patent and intellectual property
issues.
- - Follow up conference among Company and LG technology experts.
Page 10
<PAGE> 14
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
o The VSB model is based on the following assumptions concerning the roll-out of
individual applications:
TVs: Assumes a conservative roll out of digital television sets but assumes that
100% of digital television sets sold will include a VSB demodulator.
PCs: Assumes no royalty revenues from PC based VSB licensing fees in 1999. With
respect to 2000-2002, assumes as follows:
- - In 2000, 50.0% of all consumer PCs sold will be over $1,000. Of those,
approximately 40.0% will have television receiver capability. 75.0% of those
will have digital television capability.
- - In 2001, 50.0% of all consumer PCs sold will be over $800. Of those 80.0% will
have television receiver capability, all of which will be digital.
- - In 2002, 50% of all consumer PCs sold will be over $600. Of those 100% will
have digital television receiver capability. In addition some computers under
$600 will likewise have digital television capability.
- - All PCs with digital television capability will be VSB enabled.
- - Based upon assumptions, proposed by Forrester Research, Inc., that dominant
market players in the PC industry including Intel and Microsoft have plans to
incorporate VSB into their offerings.
VIDEO RECORDERS: Assumes video recorder market becomes 100% digital by 2011 and
that digital video recorders aggressively adopt VSB modulation.
Page 11
<PAGE> 15
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
CABLE BOXES: Assumes cable operators continue to prefer QAM modulation to VSB;
also assumes a certain percentage of cable boxes will utilize VSB remodulators
to deliver VSB signals to digital TVs (assumes DTVs do not include "cable
ready" QAM demodulation).
o PJSC's VSB model includes an assumed 1.0% royalty fee sharing arrangement with
LGE involving HDTV standard patent development based upon an existing
agreement.
o The VSB model projects royalty revenues through 2011 when the first of VSB
patents expires.
Page 12
<PAGE> 16
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
II. Royalty Rate Assumptions
- - The ultimate determination of appropriate royalty rates structures for the
use of VSB in each application is a business decision for Company
management. Management will need to set royalty rates based upon prevailing
market conditions and corporate decisions to implement volume or cost-based
discounts to encourage adoption of VSB.
- - The Company is currently in the process of determining royalty rate
structures for each assumed application. Before being finally set, VSB
royalty structures may require further management review and strategic
consideration.
- - To estimate appropriate royalty rates, PJSC utilized the following royalty
rate assumptions:
- Royalty rate structures are governed by general undertaking to FCC that
royalty rates will be "reasonable" and "non-discriminatory".
- Royalties accruing to the Company for non-PC applications are based on
management's estimates of royalty rates: $4-6 per demodulation (including
demodulation/remodulation) device (e.g., TVs, VCRs) and $1-2 per
remodulation device (e.g. cable and satellite boxes).
- Digital televisions and digital VCRs are assumed to be a higher margin,
more inelastic markets for VSR technology than PCs. Accordingly, PJSC
used a flat $5.00 per license royalty rate assumption.
Page 13
<PAGE> 17
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
- With respect to the implementation of VSB, Company management believes
that the market for consumer PCs has a considerably higher elasticity of
demand than TVs and VCRs. This characteristic occurs because VSB, or any
form of TV reception, is of secondary importance to a fully functional
PC. Moreover, in the PC context significant risk exists that PC
manufacturers may engineer around the need to utilize VSB. On the other
hand, with respect to TVs, because the FCC has adopted VSB as the digital
television standard for terrestrial broadcast, TV manufacturers are
unlikely to build TVs unable to receive terrestrial broadcast signals.
- To approximate the assumed market conditions for PCs, a flat royalty rate
of $2.50 per license is assumed.
Page 14
<PAGE> 18
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
VSB VALUATION APPROACH AND ASSUMPTIONS
III. Discount Rates
o Range of discount rates applied: 20% to 40%
- 20% represents an estimated minimum "hurdle rate" for hedge funds and
higher risk investors.
- 40% represents an estimated venture capital "hurdle rate".
- VSB technology is, in many ways, analogous to a biotechnology company
with regulatory approval and uncertain commercialization prospects and,
as yet, no cash flow.
o In valuing publicly traded biopharmaceutical and technology companies,
equity research analysts have used the following discount rates (each
company has sales less than $1 million and market capitalization greater
than $200 million.
<TABLE>
<CAPTION>
Company Date of Report Discount Rate
------- -------------- -------------
<S> <C> <C>
Coulter Pharmaceuticals 10/16/97 30%
PathoGenesis Corporation 7/9/97 25%
Pharmacyclics, Inc. 10/1/97 40%
Triangle Pharmaceuticals 11/26/96 30%
</TABLE>
- Technology consultants have advised that later stage biotechnology
companies and/or pharmaceutical concerns have "removed" substantial risk
from their projected cash flows by the time they are approaching final
FDA approval. The approval process requires significant financial
commitment. These companies
Page 15
<PAGE> 19
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
have pre-investigated product formulation, market testing and consumer
acceptance. In such circumstances, discount rates approximate 3x to 5x the
"risk free rate" (approximately 19.5%-32.5%).
- - In M&A transactions involving established bio-pharmaceutical and
bio-technology companies, financial advisors have used the following discount
rates when performing discounted cash flow analysis to determine valuation
parameters for fairness opinions.
<TABLE>
<CAPTION>
Company Transaction Date Discount Rates
- ------- ---------------- --------------
<S> <C> <C>
Applied Immune Sciences, Inc. 10/24/95 35% - 55%
Viagene, Inc. 8/15/95 15% - 30%
Immunex Corporation 5/4/93 18% - 21%
Genetics Institute, Inc. 9/19/91 25% - 40%
</TABLE>
Page 16
<PAGE> 20
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
VSB VALUATION APPROACH AND ASSUMPTIONS
- - In assessing the value of a new technology like VSB, technology consultants
typically review a range of factors relating to projected revenues of the new
technology. These factors, and the categorization of VSB within them are as
follows:
<TABLE>
<CAPTION>
Parameter Range VSB
- --------- ----- ---
<S> <C> <C>
Source of revenue (product, service, license royalties) Technology license royalty
Rate of technology adoption (high - low variability) Medium to high variability
Competitive technology acceptance (high - low) Low to medium
risk
Maturity of technology (fully developed - many risks still exist) Most risks have been solved
Patent or trade secret protection (high - low) High
Regulatory environment (fully regulated - unregulated) Mildly regulated
</TABLE>
Page 17
<PAGE> 21
PETER J. SOLOMAN COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
ANALYSIS OF LG PROPOSAL
Potential Strategic Alternatives
* Although the Board did not direct PJSC to undertake a formal sale process, at
the Boards direction, PJSC together with management did meet or speak with a
number of industry participants about their interest, if any, in acquiring,
some or all of the assets of the Company or engaging in some other form of
strategic transaction.
* These parties included, among others:
- Philips Electronics
- Thomson Consumer Electronics
- Sony
- Hitachi
- Toshiba
- Microsoft
- Samsung
- Matsushita/Panasonic
<PAGE> 22
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
ANALYSIS OF LG PROPOSAL
Potential Strategic Alternatives
- - Certain of the companies contacted have expressed a willingness to continue
a dialogue regarding more limited transactions including:
- Potential sourcing relationships
- Specified asset purchases
- Acquisition of specific operations or divisions
- Technology development joint ventures
- - No party indicated a desire to move forward to acquire all or substantially
all of the Company.
Page 19
<PAGE> 23
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- --------------------------------------------------------------------------------
ANALYSIS OF LG PROPOSAL
GOING CONCERN IMPLIED EQUITY VALUATION UNDER LG PROPOSAL
- --------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
SUMMARY
GOING CONCERN VALUATION
-----------------------
<S> <C>
Enterprise Value(a) $127.0
Domestic VSB Technology Value(b) 186.0
------
Total Value $313.0
======
REORGANIZED ELECTRO DEBT PER LG PROPOSAL
Secured Working Capital Facility $100.0
Restructured LG Notes(c) 152.7
Subordinated Debentures(c) 40.0
New LG Financing(d) 30.0
------
Total $322.7
Implied Equity of Reorganized Electro (9.7)
</TABLE>
- --------------------------------------------------------------------------------
(a) Per Electro Business Plan, dated April 16, 1998. Business plan is adjusted
to exclude projected VSB royalties. Enterprise value based on 14.0x EBIT
multiple and a 12.0% discount rate equal to the weighted average cost of
capital (WACC) of the comparable company group.
(b) VSB valuation assumes a $2.50 PC royalty fee, 25.0% discount rate applied
to royalty fee income cash flows through 2011 and availability of Company
NOLs to shelter VSB and operating cash flow. Excludes any potential value
for international VSB royalties.
(c) Assumes par value. Market may be lower.
(d) Assumed average outstanding balance for 1998-1999 under LG's $60.0 million
facility.
Page 20
<PAGE> 24
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
ANALYSIS OF LG PROPOSAL (AS REVISED)
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PROPOSED
ESTIMATED TREATMENT
CLAIM AMOUNT UNDER LG PROPOSAL
------------ -----------------
<S> <C> <C>
CITIBANK SECURED DEBT $ 88.0 $100.0 (A)
LG CLAIMS AND INTERESTS
SECURED
Secured Guarantee of Demand Notes $102.0
Secured Guarantee of Leverage Lease 112.3
Direct Loans 45.0 LG Claims and Interests:
------
Subtotal $259.3 Exchanged for (i) $152.7 in restructured
Notes, (ii) 100.0% of the equity of reorganized
UNSECURED Zenith, (iii) ownership of Reynosa plant ($56.6MM
Extended Payables $140.0 credit against claims) and (iv) general release
Servicing Fees 10.0 (approximately 51.1% recovery)
------
Subtotal $150.0
------
Total LG Claims $409.3
GENERAL UNSECURED CLAIMS
Trade Payables 75.0 Unimpaired
Accruals 150.0
6 1/4 Subordinated Convertible
Debentures 103.5 $40.0 million new 6 1/2% subordinated debentures
due 2010
Common Equity Cancelled
</TABLE>
- -------------------------------------------------------------------------------
(a) LG Proposal assumes $100.0 million working capital facility.
Page 21
<PAGE> 25
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
- -------------------------------------------------------------------------------
PRELIMINARY LIQUIDATION ANALYSIS
_______________________________________________________________________________
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION> ESTIMATED ESTIMATED
VALUE AT ASSET RECOVERY
3/28/98(a) FROM LIQUIDATION
---------- ----------------
<S> <C> <C>
ASSETS
MARKETABLE ASSETS
VSB Technology(tax-affected)(b) $45.2
Network Systems(c) 20.0
Trademark & Distribution(d) 42.0
Tuner Patent(e) 49.1
Other Intangibles(f) 0.7
Flat Tension Mask(f) 2.1
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
CURRENT ASSETS % RECOVERY
----------
<S> <C> <C> <C>
Cash $0.0 0.0
Accounts Receivable(g) 169.4 65.0% 110.1
Inventories(h)
Finished Goods 35.4 75.0% 26.6
Finished CRTs 38.8 50.0% 19.4
Work in Process 40.8 5.0% 2.0
Raw Materials 43.1 15.0% 6.5
FIXED ASSETS
Real Estate(i) 58.9
Furniture, Fixture and Equipment(j) 47.7
------
Gross Asset Recovery $430.3
======
</TABLE>
_______________________________________________________________________________
Note: Excludes "Other Assets" which represents the book gain on sale of certain
assets.
(a) All estimated values subject to substantial due diligence and review.
(b) Represents present value discounted to 1/1/98. Assumes 38.0% tax rate. Value
assumes a 35.0% discount rate, and royalty rates lower than Company base
case.
(c) Represents approximate book value.
(d) Assumes liquidation will result in a 50.0% decrease in market share to 5.0%
and a 2.0% market share contraction, a 25 million domestic television
market, a $300/television unit price, and a strategic buyer that has a
weighted average cost of capital of 12.0% and an incremental tax rate of
38.0%.
(e) Represents low-end of present value range discounted to 1/1/98. Assumes
$26.0 million in annual royalty income in 1998 and 1999 and assumes royalty
income decreases proportionate to the roll-out of digital television through
the life of the tuner patents (6/30/03) discounted at 20%. Assumes 38.0% tax
rate. Digital television roll-out is per Forrester Research, Inc. a
Cambridge based technology research firm.
(f) Per Company senior patent counsel. Other intangibles relates primarily to
touch-screen technology. Represents 50.0% of management's estimate of fair
market value.
(g) Includes $149.7MM of transferor certificates at 3/31/98.
(h) Inventories at book value: $158.1MM as of 3/28/98.
(i) Per Insignia/ESG at liquidation. Including a substantial portion of
equipment subject to leverage lease and not by the Company.
(j) Per Greenwich Industrial Services.
<PAGE> 26
PETER J. SOLOMON COMPANY
PROJECT ELECTRO
PRELIMINARY LIQUIDATION ANALYSIS
<TABLE>
- -------------------------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C>
GROSS ASSET RECOVERY $430.3
LESS: LIQUIDATION EXPENSES, & ADMINISTRATIVE AND PRIORITY TAX CLAIMS
Administrative Costs
Professional Fees (a) $33.0
Corporate Overhead (b) 23.8
Trustee Fees (c) 7.7
Brokerage Fees (d) 25.8
Wind Down Costs (e) 6.2
Warranty (f) 18.3
WARN Act (Melrose Only) 19.0
Environmental (f) 40.1
------
Subtotal 173.9
------
LIQUIDATION PROCEEDS AVAILABLE FOR DISTRIBUTION TO SECURED CREDITORS $256.4
SECURED DEBT Claim % Recovery
------ ----------
Citibank $97.2 $97.2 100.0%
Proceeds available for secured creditors after Citibank $159.2
LG Guarantee of Demand Note (Par) 102.0 62.6 61.4%
LG Guarantee of Leverage Lease 112.3 (g) 68.9 61.4%
LG Direct Loans 45.0 27.6 61.4%
------ ------ -----
Total Secured Debt $356.5 $256.4
====== ======
Liquidation Proceeds Available for Priority Claims and
Unsecured Creditors and Equity $0.0
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Assumes 24 month liquidation, $2,000,000 in fees each month in the first 6
months, $1,500,000 in fees the next 6 months and $1,000,000 in fees the
next 12 months.
(b) Represents 50.0% of 1998 projected Electro general and administrative costs.
(c) Assumed as 3.0% of net liquidation proceeds.
(d) Brokerage fees assumed at 6.0% of gross asset value.
(e) Real estate taxes plus on-site security and wind down teams at each
location during an average nine month disposition period.
(f) Per Electro management. Payment assumed to be necessary to achieve
liquidation value.
(g) Secured claim reflecting LG's guarantee of the leverage lease will equal
the value of the leverage lease equipment. Any deficiency claim will be
treated as unsecured.
Page 23
<PAGE> 1
EXHIBIT 99b
CONFIDENTIAL TREATMENT REQUESTED
(Redacted text indicated by "***")
PROJECT ELECTRO
PRESENTATION TO THE BOARD OF DIRECTORS
July 22, 1998
PETER J. SOLOMON COMPANY
<PAGE> 2
PROJECT ELECTRO
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C> <C>
I. Going Concern Valuation..................................... 1
II. Business Plan Comparison.................................... 6
III. One-Time Adjustments........................................ 9
IV. Methodological Comparison................................... 11
V. Electro Comparable Company Analysis......................... 13
VI. LG Plan Analysis............................................ 14
VII. Liquidation Analysis........................................ 16
VIII. Strategic Investor Contact List............................. 18
</TABLE>
<PAGE> 3
PROJECT ELECTRIC
I. GOING CONCERN ANALYSIS
Going Concern Implied Equity Valuation Under LG Proposal
- ------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Summary Going Concern Valuations Summary Going Concern Sensitivities
--------------------------------- --------------------------------------------------
5/21/98 Board Assumes '98 Q3 & Q4
Presentation Present Valuation Inventory Reduction
Valuation at Valuation at Per Sourcing Plan Assumes '99 Q1 & Q2
1/1/98 (a) 1/1/99 (b) Occurs in Q1 '99 Asset Sales Occur in Q3
Valuation at 1/1/99 (c) Valuation at 6/30/99 (d)
------------- ----------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
Enterprise Value (c) $127.0 $125.0 $125.0 $125.0
Domestic VSB
Technology Value (1) 186.0 $180.0 180.0 180.0
------ ------ ------ ------
Total Value $313.0 $305.0 $305.0 $305.0
====== ====== ====== ======
Reorganized Electro Debt
per I.G Proposal
Working Capital Facility $100.0 $84.5 (h) $100.0 (i) $100.0 (i)
Restructured LG Notes (g) 152.7 148.7 148.7 158.1
Subordinated Debentures (g) 40.0 40.0 40.0 40.0
New LG Financing 30.0 0.0 18.8 (i) 19.4 (i)
------ ------ ------ ------
Total $322.7 $273.2 $307.5 $317.5
Implied Equity of
Reorganized Electro $(9.7) $31.8 $(2.5) $(12.5)
</TABLE>
- -------------------------------------------------------------------------------
(a) Per Electro Business Plan, dated April 16, 1998. Reflected in Electro Board
Presentation dated May 21, 1998.
(b) Per Electro Business Plan, dated June 26, 1998.
(c) Assumes that $64.2MM reduction in inventories scheduled to occur in Q-3 and
Q-4 of 1998 actually occur in Q-1 of 1999. Capitalization reflects
additional borrowing due to reduced cash flow.
(d) Assumes that asset sales scheduled to occur in Q-1 and Q-2 of 1999 are
delayed until Q-3. Reduction in asset proceeds results in elimination of
debt service in Q-1 and Q-2 of $43.2MM and $21.6MM respectively. In
addition, debt is increased by PIK interest of $4.6MM in Q-1 and $4.8MM in
Q-2.
(e) Business plan adjusted to exclude projected VSB royalties. Enterprise value
at 1/1/98 is based on 14.0x EBIT multiple and a 12.0% discount rate equal to
the weighted average cost of capital (WACC) of the comparable company
group. Enterprise value at 1/1/99 is based on the mid-range of the
illustrative LTM sales multiples and values Tuner Patent cash flows
separately.
(f) VSB valuation assumes a $2.50 PC royalty fee, 25.0% discount rate applied to
royalty fee income cash flows through 2011 and availability of Company NOLs
to shelter VSB and operating cash flow. Excludes any potential value for
international VSB royalties.***
(g) Assumes par value. Market value may be lower.
(h) Revolver balance based on average revolver balance for Q-3 1998, Q-4 1998,
Q-1 1999, and Q-2 1999.
(i) Balance based on modified projected cash needs and assumed availability.
41
<PAGE> 4
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
ELECTRO DISCOUNTED CASH FLOW ANALYSIS (VALUE AT JANUARY 1, 1999)
(Dollars in Millions)
EBIT EXCLUDES VSB AND TUNER PATENT INCOME AND COSTS & EXPENSES(a)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue $916.0 $917.8 $961.9 $1,013.9 $1,039.9
- --% Growth (7.4)% 0.2 % 4.8 % 5.4 % 2.6 %
Gross Margin % 6.2 % 8.5 % 9.6 % 10.0 % 10.4 %
EBITDA (43.7) (20.5) (7.4) (2.1) 1.7
- --% of Revenues (4.8)% (2.2)% (0.8)% (0.2)% $ 0.0
EBIT (52.8) (23.3) (10.7) (5.8) (2.3) NORMALIZED
- --% of Sales (5.8)% (2.5)% (1.1)% (0.6)% (0.2)% TERMINAL
Taxes 0.0% 0.0 0.0 0.0 0.0 0.0 CASH FLOW
------ ------ ------- -------- -------- -----------
Tax-Adjusted EBIT (52.8) (23.3) (10.7) (5.8) (2.3) $ (2.3)
Depreciation and Amortization 9.1 2.8 3.3 3.7 4.0 4.0
Capital Expenditures (4.5) (4.5) (4.5) (4.5) (4.5) (4.5)
Change in Working Capital 1.6 36.0 (2.0) (3.5) (0.5) (0.5)
Proceeds from Asset Sales 93.2 0.0 0.0 0.0 0.0 0.0
Restructuring Costs (61.5) (9.1) (6.6) (4.2) (2.8) 0.0
------ ------ ------- -------- -------- ------
Free Cash Flow $(14.9) $ 1.9 $(20.5) $ (14.3) $ (6.1) $ (3.3)
====== ====== ======= ======== ======== ======
Growth in Free Cash Flow NM NM -1179 % NM NM
</TABLE>
ILLUSTRATIVE SALES MULTIPLE(b)
<TABLE>
<CAPTION>
12.5 % 15.0 % 17.5 %
-------------------------- ------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Rate 12.0 % 14.0 % 16.0 % 12.0 % 14.0 % 16.0 % 12.0 % 14.0 % 16.0 %
Present Value of Free Cash Flow $(38.9) $(37.1) $(35.4) $(38.9) $ (37.1) $ (35.4) $(38.9) $(37.1) $(35.4)
Present Value of Terminal Value 73.8 67.5 61.9 88.5 81.0 74.3 103.3 94.5 86.6
------ ------ ------ ------ -------- -------- ------ ------ -------
Total Terminal Value & Free
Cash Flow Value $ 34.8 $ 30.4 $ 26.5 $ 49.6 $ 43.9 $ 38.9 $ 64.3 $ 57.4 $ 51.3
------ ------ ------ ------ -------- -------- ------ ------ ------
Discount Rate 18.0 % 20.0 22.0 % 18.0 % 20.0 % 22.0 % 18.0 % 20.0 % 22.0 %
------ ------ ------ ------ -------- -------- ------ ------ ------
Present Value of Tuner Patent(c) $ 72.8 $ 69.9 $ 67.2 $ 72.8 $ 69.9 $ 67.2 $ 72.8 $ 69.9 $ 67.2
------ ------ ------ ------ -------- -------- ------ ------ ------
Total Enterprise Value $107.6 $100.3 $ 93.7 $122.4 $ 113.8 $ 106.1 $137.1 $127.3 $118.4
------ ------ ------ ------ -------- -------- ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
PROJECTED FISCAL YEAR ENDED DECEMBER 31, NET PRESENT VALUE OF
---------------------------------------------------------- TURNER PATENT @
1999 2000 2001 2002 2003 --------------------------
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tuner Patent Cash Flows(c) $26.0 $26.0 $26.0 $26.0 $13.0 18.0% 20.0% 22.0%
Tuner Patent Costs and Expenses(d) (0.2) (0.2) (0.2) (0.2) (0.2) $72.8 $69.9 $67.2
Assumed Reduction(e) 0.0 0.0 0.0 (3.0) (1.5)
----- ----- ----- ----- -----
Tuner Patent Cash Flows
(incl. reductions)(c) $25.8 $25.8 $25.8 $22.8 $11.3
</TABLE>
Source: Electro 1998-2003 Business Plan dated June 26, 1998.
(a) Business plan projected income statement excludes VSB and Tuner Patent
income and certain R & D/engineering costs associated with these technology
patents. Electro income statement includes approximately $2.0MM a year in
royalties related to the use of the Zenith trademark and name.
(b) Illustrative LTM sales multiple range is based on the lowest comparable
company to Electro discounted at 50.0%-66.6%.
(c) Assumes Tuner Patent expires June 30, 2003 and a successful defense of
patent in current lawsuit proceedings.
(d) Per Electro management.
(e) Assumed reduction per Electro management. ***
Page 2
<PAGE> 5
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
VSB VALUATION ASSUMING USE OF NOLs
(Dollars in millions)
Value At January 1, 1999
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Royalty Income 0.0 0.0 0.0 3.6 14.8 32.2 53.7 70.1 85.8 102.4 115.1 127.0
VSB Associated Costs (b) 0.0 0.0 0.0 (7.1) (5.0) (5.2) (5.4) (5.5) (5.6) (5.7) (5.8) (6.0)
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Royalty Income 0.0 0.0 0.0 (3.5) 9.8 27.0 48.3 64.6 80.2 96.7 109.2 121.0
Unsheltered Earnings 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Taxes 38.0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net VSB Royalty Income 0.0 0.0 0.0 (3.5) 9.8 27.0 48.3 64.6 80.2 96.7 109.2 121.0
CALCULATION OF REMAINING NOLs
Pre-LG NOLs (a) $481.0 $481.0 $481.0 $471.8 $442.2 $406.0 $325.8 $229.0 $184.0 $157.0
Utilizable Beginning 27.0 54.0 81.0 108.0 135.0 162.0 179.8 177.2 168.0 114.8 45.0 27.0
Pre-LG NOLs Utilized 0.0 0.0 0.0 0.0 0.0 (9.2) (29.5) (36.3) (80.2) (96.7) (45.0) (27.0)
---- ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Utilizable End 27.0 54.0 81.0 108.0 135.0 152.8 150.2 141.0 87.8 18.0 0.0 0.0
Post LG NOL (beginning) $354.6 $422.8 $445.8 $464.3 $464.3 $464.3 $464.3 $464.3 $464.3 $400.1
Post LG NOL Utilized 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (64.2) (94.0)
NOL Generated 68.2 23.0 18.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Post LG NOL (ending) $422.8 $445.8 $464.3 $464.3 $464.3 $464.3 $464.3 $464.3 $400.1 $306.1
<CAPTION>
2008 2009 2010 2011
------ ------ ----- -----
<S> <C> <C> <C> <C>
Aggregate Royalty Income 143.1 171.2 192.0 216.9
VSB Associated Costs (b) (6.1) (6.2) (6.3) (6.4)
------- ------- ------ -----
Net Royalty Income 137.1 165.0 185.7 210.4
Unsheltered Earnings 0.0 0.0 100.7 210.4
Taxes 38.0% 0.0 0.0 38.3 80.0
------- ------- ------ -----
Net VSB Royalty Income 137.1 165.0 147.5 130.5
CALCULATION OF REMAINING NOLs
Pre-LG NOLs (a) $ 130.0 $ 103.0 $ 76.0 $0.0
Utilizable Beginning 27.0 27.0 27.0 0.0
Pre-LG NOLs Utilized (27.0) (27.0) (27.0) 0.0
------- ------- ------ -----
Utilizable End 0.0 0.0 0.0 0.0
Post LG NOL (beginning) $ 306.1 $ 196.0 $ 58.0 $0.0
Post LG NOL Utilized (110.1) (138.0) (58.0) 0.0
NOL Generated 0.0 0.0 0.0 0.0
------- ------- ------ -----
Post LG NOL (ending) $ 196.0 $ 58.0 $ 0.0 $0.0
1998 Net Income $(300.0)
Cancellation of Debt Income (c) 231.8
-------
1998 NOL $ (68.2)
</TABLE>
CALCULATION OF NET INCOME ADJUSTED FOR THE EXCLUSION OF VSB ROYALTY INCOME:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Old EBIT $ (76.3) $(31.0) $ 11.8 $ 33.3 $ 46.5 $ 44.5
VSB Income 0.0 2.6 13.8 22.9 31.4 39.0
------- ------ ------ ------ ------ ------
Old EBIT (Excl. VSB) (76.3) (33.6) (2.0) 10.4 15.1 5.5
------- ------ ------ ------ ------ ------
EBIT Differential 0.0 (2.6) (13.8) (22.9) (31.4) (39.0)
Incremental Debt 0.0 2.6 16.4 39.3 70.7 109.7
------- ------ ------ ------ ------ ------
Incremental Interest Expense @ 9.3% 0.0 0.1 0.9 2.6 5.1 8.3
Old Net Income $(300.0) $(20.3) $(13.6) $ 7.7 $ 20.7 $ 20.5
New Net Income (Excl. VSB) (300.0) (23.0) (28.3) (17.8) (18.8) (28.3)
</TABLE>
<TABLE>
<CAPTION>
NET PRESENT VALUE OF
VSB TECHNOLOGY @
- -----------------------------
25.0% 30.0% 35.0% 40.0%
- ------ ------ ------ -----
<S> <C> <C> <C>
$180.3 $136.3 $105.4 $83.1
</TABLE>
(a) Source: Electro 1997 10-K. Utilizable at a maximum rate of $27MM per year up
until 2010. When unutilized the $27MM is cumulative.
(b) Per Electro management.
(c) Based on Arthur Andersen analysis.
Page 3
<PAGE> 6
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
Summary Valuation: VSB Technology Base Case
(Amounts in Millions, Except Average Royalty Fees)
<TABLE>
<CAPTION>
Domestic 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cable Box Taxes: No
Market Size 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0
% Digital 20.0% 35.0% 50.0% 65.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodulation 0.0% 4.0% 7.0% 10.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Total VSB Remodulation 0.0 0.1 0.3 0.5 0.9 1.1 1.1 1.1 1.1 1.1 1.1
Average Royalty Fee $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50
*** (a) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $0.0 $ 0.2 $ 0.4 $ 0.7 $ 1.2 $ 1.5 $ 1.5 $ 1.5 $ 1.5 $ 1.5 $ 1.5
TVs
Market Size 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
% Digital 1.0% 4.0% 7.0% 10.0% 14.0% 20.0% 24.0% 28.0% 32.0% 42.0% 52.0%
% Using VSB Demodulation 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.3 1.0 1.8 2.5 3.5 5.0 6.0 7.0 8.0 10.5 13.0
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
*** (a) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.9 $ 3.6 $ 6.4 $ 9.1 $12.8 $18.2 $21.9 $25.5 $29.2 $38.3 $52.7
PCs
Market Size 11.0 13.0 14.5 16.0 17.8 19.6 21.5 23.7 26.0 28.6 31.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Remodulation 0.0% 15.0% 40.0% 60.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Total VSB Remodulation 0.0 2.0 5.8 9.6 13.3 14.7 16.1 17.7 19.5 21.5 23.6
Average Royalty Fee $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50
*** (a) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.0 $ 4.3 $12.9 $21.4 $29.7 $32.7 $35.9 $39.5 $43.5 $47.8 $53.1
Add-In Cards
Market Size NA NA NA NA NA NA NA NA NA NA NA
% Digital NA NA NA NA NA NA NA NA NA NA NA
% Using VSB Remodulation NA NA NA NA NA NA NA NA NA NA NA
Total VSB Remodulation 1.0 1.3 1.5 1.8 2.0 1.7 1.2 0.7 0.2 0.0 0.0
Average Royalty Fee $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
*** (a) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Royalty Income $ 0.9 $ 1.1 $ 1.4 $ 1.6 $ 1.8 $ 1.5 $ 1.1 $ 0.6 $ 0.2 $ 0.0 $ 0.0
Domestic 2010 2011 Total
----- ----- ------
<S> <C> <C> <C>
Cable Box Taxes: No
Market Size 8.0 8.0
% Digital 100.0% 100.0%
% Using VSB Remodulation 14.0% 14.0%
Total VSB Remodulation 1.1 1.1
Average Royalty Fee $1.50 $1.50
*** (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $ 1.5 $ 1.5 $ 14.5
TVs
Market Size 25.0 25.0
% Digital 62.0% 75.0%
% Using VSB Demodulation 100.0% 100.0%
Total VSB Demodulation 15.5 18.8
% Zenith (No Royalties) 10.0% 10.0%
Average Royalty Fee $5.00 $5.00
*** (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $62.8 $75.9 $357.2
PCs
Market Size 34.6 38.1
% Digital 100.0% 100.0%
% Using VSB Remodulation 75.0% 75.0%
Total VSB Remodulation 26.0 28.6
Average Royalty Fee $2.50 $2.50
*** (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $58.5 $64.3 $443.7
Add-In Cards
Market Size NA NA
% Digital NA NA
% Using VSB Remodulation NA NA
Total VSB Remodulation 0.0 0.0
Average Royalty Fee $1.00 $1.00
*** (a) 0.0% 0.0%
Cross License Adjustment (b) 10.0% 10.0%
----- -----
Royalty Income $ 0.0 $0.0 $ 10.2
</TABLE>
Note: Consumer electronic component roll-out is substantially per Forrester
Research, Inc. a Cambridge, Massachussetts based high technology research
firm.
(a) Per Electro management.
(b) Cross license assumes that 25.0% of market pays only 60.0% of royalty fee.
Per Electro management.
Page 4
<PAGE> 7
PROJECT ELECTRO
I. GOING CONCERN ANALYSIS
Summary Valuation: VSB Technology Base Care
(Amounts in Millions, Except Average Royalty Fees)
<TABLE>
<CAPTION>
Domestic 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VIDEO RECORDERS/DVD-R
Market Size 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
% Digital 1.0% 5.0% 10.0% 15.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
% Using VSB Remod/Demod 50.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Remod/Demod 0.1 0.6 1.5 2.3 3.0 4.5 6.0 7.5 9.0 10.5
% Zenith (No Royalties) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
*** (a) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Royalty income $0.3 $2.5 $6.3 $9.5 $12.6 $19.0 $25.3 $31.6 $37.9 $44.2
DVD-P
Market Size 0.4 0.7 0.7 0.7 0.0 0.0 0.0 0.0 0.0 0.0
% Digital 100.0% 100.0% 100.0% 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 10.0% 20.0% 40.0% 60.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.1 0.3 0.4 0.0 0.0 0.0 0.0 0.0 0.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
*** (a) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- -------- -------- ------- -------- -------- -------- -------- ------- -------
Royalty income $0.2 $0.6 $1.2 $1.8 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
CONVERTERS
Market Size N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
% Digital N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
% Using VSB Demodulation N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Total VSB Demodulation 0.3 0.4 0.5 1.9 2.2 2.5 3.8 3.9 3.7 3.0
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
% Zenith (No Royalties) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
*** (a) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- ------- ------- ------- -------- -------- -------- ------- ------- -------
Royalty income $1.1 $1.5 $1.8 $6.9 $8.0 $9.1 $13.9 $14.2 $13.5 $10.9
SATELLITE BOX
Market Size 1.5 1.5 1.5 1.5 1.5 1.3 1.1 0.9 0.7 0.5
% Digital 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Using VSB Demodulation 4.7% 20.0% 40.0% 60.0% 86.7% 100.0% 100.0% 100.0% 100.0% 100.0%
Total VSB Demodulation 0.1 0.3 0.6 0.9 1.3 1.3 1.1 0.9 0.7 0.5
Average Royalty Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
*** (a) 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
-------- ------- ------- ------- -------- -------- -------- ------- ------- -------
Royalty income $0.3 $1.1 $2.2 $3.2 $4.7 $4.7 $4.0 $3.2 $2.5 $1.8
Assumed Sharing Rate: 1.0%
Total Pre-Tax Income $3.6 $14.8 $32.2 $53.7 $70.1 $85.8 $102.4 $115.1 $127.0 $143.1
</TABLE>
<TABLE>
<CAPTION>
Domestic 2009 2010 2011 Total
-------- ------- -------- --------
<S> <C> <C> <C> <C>
VIDEO RECORDERS/DVD-R
Market Size 15.0 15.0 15.0
% Digital 80.0% 90.0% 100.0%
% Using VSB Remod/Demod 100.0% 100.0% 100.0%
Total VSB Remod/Demod 12.0 13.5 15.0
% Zenith (No Royalties) 3.5% 3.5% 3.5%
Average Royalty Fee $5.00 $5.00 $5.00
*** (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- --------
Royalty income $52.1 $58.6 $65.1 $365.1
DVD-P
Market Size 0.0 0.0 0.0
% Digital 0.0% 0.0% 0.0%
% Using VSB Remod/Demod 0.0% 0.0% 0.0%
Total VSB Remod/Demod 0.0 0.0 0.0
Average Royalty Fee $0.00 $0.00 $0.00
*** (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- --------
Royalty income $0.0 $0.0 $0.0 $3.8
CONVERTERS
Market Size N/A N/A N/A
% Digital N/A N/A N/A
% Using VSB Demodulation N/A N/A N/A
Total VSB Demodulation 3.0 3.0 3.0
Average Royalty Fee $5.00 $5.00 $5.00
% Zenith (No Royalties) 10.0% 10.0% 10.0%
*** (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- -------
Royalty income $12.2 $12.2 $12.2 $117.4
SATELLITE BOX
Market Size 0.3 0.1 0.0
% Digital 100.0% 100.0% 100.0%
% Using VSB Demodulation 100.0% 100.0% 100.0%
Total VSB Demodulation 0.3 0.1 0.0
Average Royalty Fee $5.00 $5.00 $5.00
*** (a) 0.0% 0.0% 0.0%
Cross License Adjustments (b) 10.0% 10.0% 10.0%
-------- -------- -------
Royalty income $1.4 $0.5 $0.0 $29.4
Assumed Sharing Rate: 1.0%
Total Pre-Tax Income $171.2 $192.0 $216.9 $1,327.9
</TABLE>
Note: Consumer electronic component roll-out is substantially per Forrester
Research, Inc. a Cambridge, Massachusetts based high technology research firm.
(a) Per Electro management.
(b) Cross license assumes that 25.0% of market pays only 60.0% of royalty fee.
Per Electro management.
Page 5
<PAGE> 8
PROJECT ELECTRO
11. Business plan Comparison
(Dollar in Millions)
<TABLE>
<CAPTION>
FY Ended December 31,
Income Statement Items Business
-------------------------------------------------------
Plan Date 1998 1999 2000 2001 2002 2003 Comments
--------- ---- ---- ---- ---- ---- ---- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 6/26 $989.7 $916.0 $917.8 $961.9 $1,013.9 $1,039.9 The 6/26 Plan includes an
4/16 989.5 908.3 892.2 939.5 997.7 N/A additional year of projections
------ ------ ------ ------ --------
Difference (6/26 vs. 4/16) $ 0.2 $ 7.7 $ 25.6 $ 22.4 $ 16.2 N/A
Gross Margin 6/26 $ 60.6 $ 57.2 $ 77.6 $ 92.3 $ 101.6 $ 108.4 Gross margin drops as a % of
4/16 57.6 58.1 78.0 93.7 107.3 N/A sales from 1999-2002 in 6/26
------ ------ ------ ------ -------- Plan, ranging from .20% to .76%
Difference (6/26 vs. 4/16) $ 3.0 $ (0.9) $ (0.4) $ (1.4) $ (5.7) N/A
Selling 6/26 $ 72.5 $ 63.0 $ 65.3 $ 68.7 $ 72.6 $ 75.1
4/16 70.9 61.8 61.6 73.7 78.0 N/A
------ ------ ------ ------ --------
$ 1.6 $ 1.2 $ 3.7 $ (5.0) $ (5.4) N/A
G&A 6/26 $ 45.2 $ 34.4 $ 26.3 $ 24.8 $ 25.4 $ 25.9 Total 6/26 G&A is higher as a %
4/16 45.6 30.2 21.0 21.5 22.0 N/A of sale but excludes VSB &
------ ------ ------ ------ -------- Tuner Patent IP costs
Difference (6/26 vs. 4/16) $ (0.4) $ 4.2 $ 5.3 $ 3.3 $ 3.4 N/A
R&D 6/26 $ 38.4 $ 7.6 $ 4.3 $ 4.4 $ 4.4 $ 4.6 Most of the differential in
4/16 $ 40.5 13.3 7.9 8.2 8.4 N/A the 6/26 Plan is the exclusion
------ ------ ------ ------ -------- of VSB related R&D costs
$ (2.1) $ (5.7) $ (3.6) $ (3.8) $ (4.0) N/A
Operating Income 6/26 $(95.5) $(47.8) $(18.3) $ (5.6) $ (0.8) $ 2.8 Operating income difference
4/16 (99.5) (47.2) (12.5) (9.7) (1.1) -- due to changes in sales levels,
------- ------ ------ ------ -------- margin and the allocation of
Difference (6/26 vs. 4/16) $ 4.0 $ (0.6) $ (5.8) $ 4.1 $ 0.3 -- VSB costs and expenses
</TABLE>
Page 6
<PAGE> 9
PROJECT ELECTRO
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<CAPTION>
Income Statement Items (cont'd)
Business FY Ended December 31,
---------------------------------------------------------
Plan Date 1998 1999 2000 2001 2002 2003 Comments
--------- --------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Royalty Income (now valued
separately) 6/26 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 1.9 6/26 reduces Tuner
4/16 31.4 29.0 29.0 29.0 29.0 NA Patent income by
------ ------ ------ ------ ------ $1.00MM, values it
Difference (6/26 vs. 4/16) ($29.4) ($27.0) ($27.0) ($27.0) ($27.0) NA separately, only
licensing & trademark
income
Other Expense (Income)(a) 6/26 $ 9.5 $ 7.0 $ 7.0 $ 7.0 $ 7.0 $ 7.0 6/26 reduction in other
4/16 12.9 10.7 10.6 10.3 10.3 NA expenses due to
------ ------ ------ ------ ------ acceleration of
Difference (6/26 vs. 4/16) ($3.4) ($3.7) ($3.6) ($3.3) ($3.3) NA amortization related to
cancelled financing
fully expensed in 1998
EBIT 6/26 ($103.0) ($52.8) ($23.3) ($10.7) ($5.8) ($2.3) EBIT difference due in
4/16 (81.0) (28.9) 5.9 9.0 17.6 -- (i) the changes in
------ ------ ------ ------ ------ operating income
Difference (6/26 vs. 4/16) ($22.0) ($23.9) ($29.2) ($19.7) ($23.4) -- identified above, (ii)
the exclusion of the
Tuner Patent in the 6/26
Plan and (iii) lower
other expenses in the
6/26 Plan
</TABLE>
- ------------------
(a) Other Expense in 1998 @ 6/26 excludes non-cash restructuring charge of
$35.2MM.
<PAGE> 10
PROJECT ELECTRO
II. BUSINESS PLAN COMPARISON
(DOLLARS IN MILLIONS)
CASH FLOW ITEMS
<TABLE>
<CAPTION>
FY ENDED DECEMBER 31,
BUSINESS --------------------------------------------------------
PLAN DATE 1998 1999 2000 2001 2002 2003 COMMENTS
--------- -------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEPRECIATION & AMORTIZATION 6/26 $ 35.7 $ 9.1 $ 2.8 $ 3.3 $ 3.7 $ 4.0
4/16 34.7 11.3 6.7 6.7 7.0 --
Difference (6/26 vs. 4/16) $ 1.0 $ (2.2) $ (3.9) $ (3.4) $ (3.3) --
CAPITAL EXPENDITURES 6/26 $ (13.2) $ (4.5) $ (4.5) $ (4.5) $ (4.5) $(4.5) 1998 cap. ex. @ 4/16 includes
4/16 (107.4) (5.0) (5.0) (5.0) (5.0) -- cash outlays related to leveraged
Difference (6/26 vs. 4/16) $ 94.2 $ 0.5 $ 0.5 $ 0.5 $ 0.5 -- lease. 6/26 excludes VSB cap. ex.
CHANGE IN NET WORKING CAPITAL 6/26 $ 16.8 $ 1.6 $ 36.0 $ (2.0) $ (3.5) $(0.5) 1998 negative change in NWC @
4/16 (55.5) 57.4 46.0 (2.1) (7.8) -- 4/16 related to buildup of inven-
Difference (6/26 vs. 4/16) $ 72.3 $ (55.8) $(10.0) $ 0.1 $ 4.3 -- tories per Company sourcing plan
PROCEEDS FROM ASSET SALES 6/26 $ 31.9 $ 93.2 $ 0.0 $ 0.0 $ 0.0 $ 0.0 6/26 asset proceeds difference
4/16 62.7 159.6 0.0 0.0 0.0 -- includes ***
Difference (6/26 vs. 4/16 $ (30.8) $ (66.4) $ 0.0 $ 0.0 $ 0.0 -- & transfer of Reynosa to
LG. 4/16 assumed sale of Reynosa.
RESTRUCTURING COSTS 6/26 $ (29.0) $ (61.5) $ (9.1) $ (6.6) $ (4.2) $(2.8)
4/16 (39.1) (51.5) (7.8) (5.6) (4.2) -- Differential primarily due to
Difference (6/26 vs. 4/16) $ 10.1 $ (10.0) $ (1.3) $ (1.0) $ 0.0 -- timing of cash flows
FREE CASH FLOW (a) 6/26 $ (60.8) $ (14.9) $ 1.9 $(20.5) $(14.3) $(6.1) 6/26 FCF excludes (i) $26.0MM
4/16 (185.6) 142.9 45.8 3.0 7.6 -- in annual Tuner Patent income
Difference (6/26 vs. 4/16) $ 124.8 $(157.8) $(43.9) $(23.5) $(21.9) -- (resulting in lower EBIT) in
1998-2002, (ii) ***
(iii) leveraged lease cash
outlay in 1998
</TABLE>
- --------------
(a) Free cash flow defined as EBIT plus all cash flow items.
<PAGE> 11
PROJECT ELECTRO
III. ONE-TIME ADJUSTMENTS
VALUE ADJUSTMENT
- ----------------
***
VSB ADJUSTMENTS
VSB Technology cash flows have been reduced by (i) *** and (ii) a 10.0%
annual reduction in all cash flows related to management's anticipation of
certain royalty-free cross licenses (present value reduction = ***).
CALCULATION AND TREATMENT OF LG LEVERAGED LEASE CLAIM
The 4/16 Valuation assumes that 1998 capital expenditures include a $90.5MM
buy-back of the leveraged lease equipment and restructuring payments of $21.8MM
related to the buyout of the leveraged lease penalty. The 6/26 Valuation assumes
that the leveraged lease is terminated in December 1998 without direct cash
outlay by the Company coinciding with the financial restructuring.
In addition, LG claim has been reduced from $112.3MM to $97.3MM due to
timing and negotiated terms of the LG lease settlement. A portion of the claim
is treated as secured and the deficiency is treated as unsecured based on legal
assessment on terms of reimbursement agreement. Secured claim equal to
Greenwich Industrial revised valuation made subsequent to 4/16 Valuation.
INVENTORY BUILD-UP
The 4/16 Plan assumes that Electro does not reduce its levels of inventory
until Q-1 of 1999 to reflect the timing of its sourcing plan. During Q-1 of
1999, there is a $97.1MM source of cash reflecting the reduction of inventories
per the Company's sourcing plan. The 6/26 Plan, however, begins to significantly
reduce inventories in Q-3 and Q-4 of 1998 to reflect the new timing of the
sourcing plan resulting in a $67.1MM source of cash from reduced inventories in
fiscal 1998 versus a $6.8MM reduction in cash in the 4/16 Plan. In addition to
the issue of timing, there is an aggregate $38.0MM reduction in inventories
related to a reduced need to build inventories for console and projection
television.
Page 9
<PAGE> 12
PROJECT ELECTRO
III. ONE-TIME ADJUSTMENTS
REYNOSA VALUE
Reduction in value of Reynosa asset received by LG from $56.6MM to $45.7MM
(for LG's distribution in the restructuring plan) reflects LG's decision to take
only 3 of Reynosa's 6 facilities.
CAPITAL STRUCTURE
Reduced by $4.0MM to reflect a $15.0MM reduction in LG leveraged lease
claim which is offset by the $11.0MM reduction in Reynosa value.
The projected draw down of new LG Financing and the working capital
facility have declined due to (i) a $38.0MM reduction in inventories related to
console and projection television, the (ii) reversal of a $15.0MM treasury
adjustment relating to inventory turns, and (iii) a subsequent detailed
inventory forecast that further reduced inventories.
Page 10
<PAGE> 13
PROJECT ELECTRO
IV. METHODOLOGICAL COMPARISON
The methodology utilized in the discounted cash flow valuation based on the June
26, 1998 Business Plan ("6/26 Valuation") differs from the methodology utilized
in valuing the April 16, 1998 Business Plan (the "4/16 Valuation") in the
following ways:
- TIME PERIOD: For purposes of the S-4, the 6/26 Valuation values
Electro's Business Plan VSB royalties at 1/1/99 and assumes a terminal
cash flow in the fifth year at 12/31/03. The 4/16 Valuation values
Electro's Business Plan and VSB royalties at 1/1/98 and assumes a
terminal cash flow period at 12/31/02. This change resulted from the
assumption in the S-4 that Electro would emerge from bankruptcy at
1/1/99.
- TREATMENT OF VSB CASH FLOWS: VSB cash flows are valued separately in
both the 6/26 Valuation and the 4/16 Valuation. However, in the 6/26
Valuation VSB related costs are excluded from corporate SG&A and R&D
costs and are allocated directly to VSB cash flows. In addition, the
6/26 Valuation assumes a *** and (ii) management's anticipation of
certain royalty-free cross licenses.
- TREATMENT OF TUNER PATENT CASH FLOWS: The Tuner Patent is valued
separately from the Business Plan cash flows in the 6/26 Valuation.
The 4/16 Valuation assumes the Tuner Patent as part of the Business
Plan operating cash flows. In the 4/16 Valuation, the Tuner Patent is
capitalized as it is incorporated into the 2002 EBIT under the
assumption that Electro has historically had a cash flow from IP
licensing. PJSC has modified its view towards capitalizing the Tuner
Patent cash flows as this income stream is finite and expires on June
30, 2003, and management has made no assumption with respect to
ongoing cash flows from replacement IP licensing. It is PJSC's
judgement that Electro's current levels of R&D spending for the
development of new technologies do not justify utilizing the Tuner
Patent as a proxy for cash flows potentially received in the future
from new patents. ***.
Page 11
<PAGE> 14
PROJECT ELECTRO
IV. METHODOLOGICAL COMPARISON
- TERMINAL MULTIPLE: The 4/16 Valuation generates a terminal value for
the Electro business franchise by applying a multiple to the last year
(2002) projected EBIT. This multiple is based on the median EBIT
multiple of the comparable companies at May 19, 1998. The 6/26
Valuation no longer has a positive EBIT in 2002 or in 2003 after
removing the Tuner Patent cash flows. Free cash flow is also negative
in 2003. The 6/26 Valuation applies a range of sales multiples to
Electro's sales in 2003 to determine the terminal value of the
Company. Rather than using the median sales multiple of the comparable
companies, which all have positive cash flow and extensive
international sales, the 6/26 Valuation utilizes the lower end of the
comparable company sales multiples range, further adjusted by
discounts ranging from 50% to 66%, to reflect the difference between
the comparable companies and Electro. Using a discounted sales
multiple to value an unprofitable company reflects value represented
by Electro's presence and market share within the U.S. consumer
electronics industry (including its trademark, distribution network
and shelf space) and captures the potential value available if an
owner were to "cherry-pick" profitable sales from Electro's $1.0
billion of total sales.
- DISCOUNT RATE: The 6/26 Valuation and 4/16 Valuation utilize the same
discount rates in valuing the business plan of Electro and the royalty
income related to VSB technology. The Tuner Patent, which is valued
separately in the 6/26 Valuation, is valued utilizing 18.0%, 20.0%,
and 22.0% discount rates. These rates have been utilized to reflect
***.
Page 12
<PAGE> 15
PROJECT-ELECTRO
V. COMPARABLE COMPANY ANALYSIS
Analysis of Selected Consumer Electronics Companies
(Dollars in millions, except per share amounts)
MARKET DATA
<TABLE>
<CAPTION>
Price/Earnings Multiples Equity Value Enterprise Value as a
Closing ------------------------------------- as a Multiple Multiple of LTM
Price on Equity CY 1998 CY 1999 of Tangible Enterprise -------------------------
Selected Companies 7/15/98 Value LTM EPS EPS (a) EPS (a) Book Value Value (b) Net Sales EBIT EBITDA
- -------------------- -------- ------ ------- ------- ------- ------------- ---------- --------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hitachi, Ltd.(c) 6.481 21,633.1 27.3 43.2 36.7 0.8 30,658.3 40.1% 11.8 4.1
Matsushita Electric
Industrial Co.(d) 16.619 35,103.6 39.2 38.7 33.6 1.2 37,280.8 59.3% 13.5 6.3
Mitsubishi Electric
Corp.(e) 2.175 4,669.9 68.0 NM NM NM 11,443.1 38.1% 14.6 4.3
Philips
Electronics N.V. 93.625 34,432.1 19.0 15.9 12.8 4.4 38,440.2 98.1% 14.3 8.3
Pioneer
Electronic Corp. 20.250 3,636.3 60.9 49.7 43.2 1.5 4,091.6 96.2% 26.5 10.6
Sony Corp. 92.700 37,206.4 20.4 21.7 20.0 3.3 44,537.2 81.4% 10.5 6.6
Mean (f) 68.9% 15.2 6.7
Median (f) 70.3% 13.9 6.5
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
Net Income
Net Sales EBITDA EBIT to Common
------------------- ------------------- ---------------- ------------------
LTM CAGR LTM CAGR LTM CAGR LTM CAGR
--------- ------ ---------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ELECTRO $ 1,135.3 (4.0%) ($ 176.2) NM ($ 216.0) NM ($242.5) NM
Hitachi, Ltd. (c) 76,403.5 (0.5%) 7,435.1 (4.7%) 2,606.1 (5.7%) 817.7 (17.3%)
Matsushita Electric Industrial Co.(d) 62,868.0 (1.3%) 5,872.5 (9.1%) 2,766.2 6.9% 1,112.3 15.9%
Mitsubishi Electric Corp. (e) 30,041.9 (4.2%) 2,676.0 (7.9%) 785.1 (18.5%) 68.7 (59.7%)
Philips Electronics N.V. 39,188.6 (1.3%) 4,611.2 1.0% 2,693.6 (0.0%) 1,719.2 0.8%
Pioneer Electronic Corp. 4,254.9 (6.8%) 387.0 0.4% 154.2 12.1% 60.4 35.1%
Sony Corp. 54,719.8 11.9% 6,709.8 33.0% 4,229.8 91.9% 1,737.2 NM
</TABLE>
SELECTED RATIOS
<TABLE>
<CAPTION>
Net Working Return on Net Debt
Capital/Sales EBITDA/Sales EBIT/Sales Net Income/Sales Common Equity Total Cap.
------------- --------------- --------------- ---------------- ------------- ----------
LTM LTM Average LTM Average LTM Average LTM LTM
------------- ----- ------- ----- ------- ----- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hitachi, Ltd.(c) 17.0% 9.7% 10.5% 3.4% 3.8% 1.1% 1.4% 3.0% 5.9%
Matsushita Electric
Industrial Co.(d) (49.8%) 9.3% 9.3% 4.4% 4.0% 1.8% 1.2% 3.7% (6.2%)
Mitsubishi Electric
Corp.(e) 15.8% 8.9% 9.8% 2.6% 3.5% 0.2% 1.1% 1.1% 36.4%
Philips
Electronics N.V. 7.7% 11.8% 10.8% 6.9% 5.9% 4.4% 3.4% 17.9% 19.8%
Pioneer
Electronic Corp. 28.9% 9.1% 5.9% 3.6% 0.9% 1.4% 0.2% 2.4% 11.9%
Sony Corp. 11.9% 12.3% 9.3% 7.7% 4.2% 3.2% 0.1% 12.9% 25.0%
Mean (f) 10.2% 9.3% 4.8% 3.7%
Median (f) 9.5% 9.6% 4.0% 3.9%
</TABLE>
NOTE: CAGRs (Compounded Annual Growth Rates) and Averages are for the last three
completed fiscal years for each company. All operating data has been adjusted to
exercise unusual and extraordinary items.
(a) Source of projected EPS estimates: First Call - median estimate of Wall
Street analysis as of 07/15/98.
(b) Enterprise value represents equity value plus book values of total debt,
preferred stock and minority interest less cash.
(c) LTM data is as of September 30, 1997.
(d) LTM data is as of December 31, 1997.
(e) LTM data is as of March 31, 1997.
(f) Mean and median exclude ELECTRO.
Page 13
<PAGE> 16
PROJECT ELECTRO
VI. LG PLAN ANALYSIS
Analysis of LG PROPOSAL (As Revised)
(Dollars in Millions)
<TABLE>
<CAPTION>
Estimated Proposed
Claim Amount Treatment
at 12/31/98 Under LG Proposal $ Recovery
----------- ----------------- ----------
<S> <C> <C> <C>
CITIBANK SECURED DEBT (a) $ 84.5 $100.0 $84.5
LG CLAIMS AND INTERESTS
SECURED
Secured Guarantee of Demand Notes 102.0
Secured Guarantee of Leveraged Lease(b) 33.7
Direct Loans 45.0
------
Subtotal $180.7 Exchanged for (i) $148.7 in restructured Notes (c), (ii)
100.0% of the equity of reorganized Zenith, (iii)
UNSECURED ownership of Reynosa plant ($45.7MM credit against 226.2 (d)
IG Extended Payable 140.0 claims) and (iv) general release. In addition LG is
Leveraged Lease Deficiency Claim 63.6 providing a revolving credit facility of $60.0MM.
Servicing Fees 10.0
------
Subtotal 213.6
------
Total LG Claims $394.3
GENERAL UNSECURED CLAIMS
General Unsecured (Trade) 85.0 Unimpaired 85.0
General Unsecured (Accruals) 140.9 140.9
6 1/4 Subordinated Convertible Debentures 103.6 $40.0 million new 6 1/4% Subordinated Debentures 40.0 (e)
due 2010
Common Equity NA Cancelled
</TABLE>
- --------------------------------------------------------------------------------
(a) LG Proposal assumes $100.0 million working capital facility.
(b) Reflects Greenwich Industrial Services value for leveraged lease at
fair-market-value-in-place.
(c) $97.3MM in leveraged lease claims, $45.0MM in direct loans, and $52.0MM
in the guarantee of demand note claims are exchanged for $148.7MM in
restructured notes and the value of Reynosa ($45.7MM).
(d) Excludes value of release, if any. Assumes equity value at 1/1/99 of
$31.8MM based on Company generating cash from inventory reductions and
asset sales per Business Plan projections.
(e) Assumes face value. Trading value may be lower.
Page 14
<PAGE> 17
PROJECT ELECTRO
VI. LG PLAN ANALYSIS
ANALYSIS OF ORIGINAL LG PROPOSAL BASED ON 4/16 PLAN
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED PROPOSED
CLAIM AMOUNT TREATMENT
3/28/98 UNDER LG PROPOSAL $ RECOVERY
------------ ----------------- ----------
<S> <C> <C> <C>
Citibank Secured Debt (a) $ 88.0 $100.0 $ 88.0
LG CLAIMS AND INTERESTS
Secured
Secured Guarantee of Demand Notes 102.0
Secured Guarantee of Leveraged Lease (b) 112.3
Direct Loans 45.0
------
Subtotal $259.3 Exchanged for (i) $152.7
in restructured Notes (b),
(ii) 100.0% of the equity of 209.3 (c)
reorganized Zenith, (iii)
ownership of Reynosa plant
UNSECURED ($66.6MM credit against
LG Extended Payable 140.0 claims) and (iv) general release.
Leveraged Lease Deficiency Claim 0.0
Servicing Fees 10.0
------
Subtotal 150.0
------
Total LG Claims $409.3
GENERAL UNSECURED CLAIMS
General Unsecured (Trade) 75.0 Unimpaired 75.0
General Unsecured (Accruals) 150.0 150.0
6 1/4 Subordinated Convertible Debentures 103.5 $40.0 million new 6 1/4% subordinated 40.0 (d)
debentures due 2010
Common Equity NA Cancelled
</TABLE>
(a) LG Proposal assumes $100.0 million working capital facility.
(b) $112.3MM in leveraged lease claims, $45.0MM in direct loans, and $52.0MM in
the guarantee of demand note claims are exchanged for $152.7MM in
restructured notes and the value of Reynosa ($56.6MM).
(c) Excludes value of release, if any. Assumes no equity value at 1/1/98.
(d) Assumes face value. Trading value may be lower.
15
<PAGE> 18
PROJECT ELECTRO
VII. LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
VALUE AT ASSET RECOVERY
(Dollars in Millions) 1/1/99 (a) FROM LIQUIDATION
---------- ----------------
<S> <C> <C> <C>
ASSETS
Marketable Assets
VSB Technology (tax-affected) (b) $ 51.0
Trademark & Distribution (c) 42.0
Tuner Patent (d) 40.0
Other intangibles (e) 0.7
Flat Tension Mask (e) 2.1
ESTIMATED
% RECOVERY
----------
Current Assets
Cash $ 0.0 0.0
Accounts Receivable (f) 149.0 65.0% 96.9
Inventories (f)
Finished Goods 35.2 75.0% 26.4
Less Warranty (g) (23.3)
------
Net Finished Goods 3.1
Work in Process 10.8 5.0% 0.5
Raw Materials 43.1 20.0% 8.6
Fixed Assets 0.0
Real Estate (f)
Domestic 4.4
Mexican (h) 0.0
Furniture, Fixture and Equipment (f)
Domestic 13.4
Mexican (h) 25.5
------
Gross Asset Recovery $288.2
======
</TABLE>
Note: Excludes "Other Assets" which represents the book gain on sale of certain
assets.
(a) All estimated values subject to substantial due diligence and review.
(b) Represents present value discounted to 1/1/99. Assumes 38.0% tax rate. Value
assumes a 35.0% discount rate, and royalty assets lower than Company Base
Case. Reflects ***.
(c) Assumes liquidation will result in a 50.0% decrease in market share to 5.0%,
a 2.0% market share contraction, a 25 million domestic television market, a
$300/television unit price, and a strategic buyer that has a weighted
average cost of capital of 12.0% and an incremental tax rate of 38.0%.
(d) Tuner Patent cash flows are net of cost and expenses associated with them
***. Cash flows are tax affected at 38.0% and are discounted at 25.0%.
(e) Per Company senior patent counsel. Other intangibles relates primarily to
touch-screen technology. Represents 50.0% of management's estimate of fair
market value.
(f) Estimated value at 1/1/99 per Electro management.
(g) Per Electro management. Payment assumed to be necessary to achieve
liquidation value. Includes future warranty claims as well as estimated
administration expense.
(h) Mexican real estate and furniture, fixture and equipment have been reduced
by $44.2MM in Mexican claims per Electro management. Real estate has been
reduced first.
Page 16
<PAGE> 19
PROJECT ELECTRO
VII. LIQUIDATION ANALYSIS
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
GROSS ASSET RECOVERY $288.2
Less: Liquidation Expenses, & Administrative and Priority Tax Claims
Administrative Costs
Professional Fees (a) $24.0
Corporate Overhead (b) 24.8
Trustee Fees (c) 4.9
Brokerage Fees (d) 19.9
Wind Down Costs (e) 6.5
WARN Act (b) 21.0
Environmental (b) 24.5
------
Subtotal 125.6
------
Liquidation Proceeds Available for Distribution to Secured Creditors $162.7
</TABLE>
<TABLE>
<CAPTION>
SECURED DEBT CLAIM % RECOVERY
- ------------ ------ ----------
<S> <C> <C> <C>
Citibank $ 84.5 (f) $84.5 100.0%
Proceeds available for secured creditors after Citibank $78.2
LG Guarantee of Demand Notes 102.0 49.7 48.7%
LG Guarantee of Leveraged Lease 13.6 (g) 6.6 48.7%
LG Direct Loans 45.0 21.9 48.7%
------ ------
Total Secured Debt $245.1 $162.7
====== ======
Liquidation Proceeds Available for Priority Claims and Unsecured Creditors and Equity $0.0
</TABLE>
(a) Assumes 4 year liquidation. Assumes fees of $2.0MM each month the first
6 months, $1.5MM for each of the next 6 months, $1.2MM for the entire
second year, $1.2MM for the entire third year, and $.6MM for the fourth and
final year.
(b) Per Electro management.
(c) Assumed as 3.0% of net liquidation proceeds.
(d) Brokerage fees assume 6.0% of gross asset recovery and $44.2MM Mexican
claim addback adjustment.
(e) Real estate taxes plus on-site security and wind down teams at each
location during an average twelve month disposition period.
(f) Based on average outstanding balance in Q-3 and Q-4 of 1998 and Q-1 and
Q-2 of 1999.
(g) Secured claim reflecting LG's guarantee of the leveraged lease equals the
value of the leveraged lease equipment in a liquidation per Greenwich
Industrial. Any deficiency claim is treated as unsecured.
Page 17
<PAGE> 20
PROJECT ELECTRO
VIII. STRATEGIC INVESTORS CONTACT LIST
<TABLE>
<CAPTION>
Name(1) Contact Made By Comments
- ------- --------------- --------
<S> <C> <C>
- - Philips Jeff Gannon, Bill Leuhrs, Richard Interested only in certain potential assets
Lewis, Kevin Lynch, PJSC transactions and sourcing contracts.
- - Thomson Jeff Gannon, Bill Leuhrs, Richard Interested only in certain potential assets
Lewis, Kevin Lynch, PJSC transactions and sourcing contracts
- - Microsoft Jeff Gannon, Bill Leuhrs Interested only in potential technology
cooperation.
- - Mitsubishi LG Interested only in sourcing contract.
- - Hitachi Jeff Gannon, Bill Leuhrs Interested only in potential sourcing contract.
- - Sony Jeff Gannon, Bill Leuhrs No interest.
- - Oracle Jeff Gannon No interest.
- - Sun Microsystems Jeff Gannon, Bill Leuhrs, PJSC Interested only in potential technology.
</TABLE>
(1) In addition to the contacts with potential strategic investors set forth,
PJSC had contacts with the following potential financial investors:
Kohlberg Kravis Roberts & Co.; Accel Partners; Kelso & Company; Hellman &
Friedman; and Centre Partners. Additionally LG had discussions with
Clayton, Dublilier & Rice. None of the foregoing resulted in serious
expressions of interest.
<PAGE> 21
PROJECT ELECTRO
VIII. STRATEGIC INVESTORS CONTACT LIST - (cont'd)
<TABLE>
<CAPTION>
Name Contact Made By Comments
- ---- --------------- --------
<S> <C> <C>
- - Matsushita Bill Leuhrs Pending.
- - Intel LG Pending.
- - Sanyo LG Pending.
- - Texas Instruments Jeff Gannon, Bill Leuhrs, PJSC No interest.
</TABLE>
