<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 3
to
SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
ZENITH ELECTRONICS CORPORATION
(Name of Issuer)
ZENITH ELECTRONICS CORPORATION
LG ELECTRONICS INC.
(Name of Persons Filing Statement)
6 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
DUE 2011
(Title of Class of Securities)
989349AB1
(CUSIP Number of Class of Securities)
Edward J. McNulty Chan-Ho Lee
Zenith Electronics Corporation LG Electronics Inc.
1000 Milwaukee Avenue LG Twin Towers, 20, Yoido-dong
Glenview, Illinois 60025-2493 Youngdungpo-gu, Seoul, Korea, 150-721
Telephone: (847) 391-7000 Telephone: 011-82-2-3777-3049
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
Copies to:
Richard F. Vitkus Steven R. Gross Michael G. Timmers
Zenith Electronics Debevoise & Plimpton Kirkland & Ellis
Corporation 875 Third Avenue 200 East Randolph Drive
1000 Milwaukee Avenue New York, New York 10022 Chicago, Illinois 60601
Glenview, Illinois 60025- (212) 909-6586 (312) 861-2000
2493
(847) 391-7000
This statement is filed in connection with (check the appropriate box):
a.[X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [X] The filing of registration statement under the Securities Act of
1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
$34,500,000 $6,900
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*The transaction valuation has been calculated pursuant to Rule 0-11(b)(2)
and Rule 457(f)(2) as one-third of the principal amount of Zenith
Electronics Corporation's 6 1/4% Convertible Subordinated Debentures due
2011.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount previously paid: $10,178
Form or Registration No: Form S-4 Registration Statement
Filing Party: Zenith Electronics Corporation
Date Filed: August 10, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INTRODUCTION
This Rule 13E-3 Transaction Statement (this "Statement") relates to a
Disclosure Statement and Proxy Statement-Prospectus (the "Registration
Statement") for the solicitation of votes for the Prepackaged Plan of
Reorganization (the "Prepackaged Plan") of Zenith Electronics Corporation, a
Delaware corporation (the "Issuer"). The purpose of the Prepackaged Plan is to
reduce the Issuer's debt service obligations, facilitate future borrowing to
fund liquidity needs and permit the Issuer to implement a restructuring of its
operations. The Prepackaged Plan will reduce the Issuer's overall debt and
other obligations by approximately $300 million by exchanging (i) $200 million
of debt and other liabilities owed to LG Electronics Inc. (the "Affiliate") for
all of the newly issued common stock, par value $.01 per share, of the
reorganized Issuer (the "New Common Stock"), (ii) the 6 1/4% Convertible
Subordinated Debentures due 2011 (the "Old Subordinated Debentures") in an
aggregate principal amount of $103.5 million plus accrued interest thereon for
the 8.19% Debentures due 2009 (the "New Debentures") of the reorganized Issuer
in an aggregate principal amount of $50 million and (iii) approximately $32.4
million of indebtedness to the Affiliate for certain property, plant and
equipment owned by the Issuer's subsidiaries located in Reynosa, Tamaulipas,
Mexico, which have an appraised value equal to such amount. In addition, as a
consequence of the Prepackaged Plan, the common stock, par value $1.00 par
value, of the Issuer (the "Old Common Stock"), together with all outstanding
options, warrants or rights to acquire shares of common stock, will be canceled
and the holders of the Old Common Stock (including the Affiliate and its
affiliate) will receive no distributions and retain no property under the
Prepackaged Plan in respect of their holdings of the Old Common Stock. This
Statement further amends the Schedule 13E-3, dated August 10, 1998, as amended
November 20, 1998 and January 29, 1999 (as hereby further amended, the
"Schedule 13E-3").
This Statement amends and restates in its entirety all of the Items of the
Schedule 13E-3.
The cross reference sheet on the following pages, which is being supplied
pursuant to General Instruction F to Schedule 13E-3, shows the location in the
Registration Statement of the information required to be included in response
to the items of this Statement. The information set forth in the Registration
Statement, which is attached hereto as Exhibit (d)(1), is incorporated herein
by reference in its entirety, and responses to each item herein are qualified
in their entirety by such reference. The Registration Statement will be
completed and, if appropriate, amended prior to the time it is first sent or
given to securityholders. This Statement will be amended to reflect such
completion or amendment to the Registration Statement.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
All references are to portions of the Registration Statement which are
incorporated herein and made a part hereof by reference.
<TABLE>
<CAPTION>
Schedule 13E-3 Item Response/Caption in
Number and Caption Registration Statement
------------------- ----------------------
<S> <C>
1. Issuer and Class of Security
Subject to the Transaction.
(a) Front Page of Registration Statement;
"SUMMARY--The Company"; "SPECIAL FACTORS--
Going Private Transaction"
(b) Front page of Registration Statement;
"SPECIAL FACTORS--Going Private
Transaction"
(c) Front Page of Registration Statement;
"MARKET PRICES OF THE OLD SUBORDINATED
DEBENTURES"
(d) and (e) *
(f) "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--Long-Term Debt"
2. Identity and Background.
(a)-(g) "SUMMARY--The Company"; "MANAGEMENT"
3. Past Contacts, Transactions or
Negotiations.
(a) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "CERTAIN TRANSACTIONS"
(b) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "--LGE Agreements Related
to Common Stock"; "CERTAIN TRANSACTIONS"
4. Terms of the Transaction.
(a) "SUMMARY--The Prepackaged Plan"; "SPECIAL
FACTORS--The Restructuring Agreement"; "THE
PREPACKAGED PLAN--Classification and
Treatment of Claims and Equity Interests
under the Prepackaged Plan"; "ANNEX A--THE
PREPACKAGED PLAN"
(b) *
5. Plans or Proposals of the
Issuer or Affiliate.
(a) *
(b) "RISK FACTORS--Certain Risks Relating to
the Business Plan Projections"; "--Risks
Associated with Proposed Operational
Restructuring"
</TABLE>
- --------
*Not applicable or answer is negative.
i
<PAGE>
<TABLE>
<CAPTION>
Schedule 13E-3 Item Response/Caption in
Number and Caption Registration Statement
------------------- ----------------------
<S> <C>
(c) "MANAGEMENT"; "THE PREPACKAGED PLAN--Sum-
mary of Other Provisions of the Prepackaged
Plan--Amendments to Certificate of Incorpo-
ration and By-Laws"
(d) "SPECIAL FACTORS--Liquidity Pending Consum-
mation of the Restructuring"; "DESCRIPTION
OF DEBT AND CREDIT ARRANGEMENTS"
(e) "RISK FACTORS--Risks Associated with Pro-
posed Operational Restructuring"; "THE PRE-
PACKAGED PLAN--Summary of Other Provisions
of the Prepackaged Plan--Amendments to Cer-
tificate of Incorporation and By-Laws"
(f) and (g) *
6. Source and Amount of Funds or
Other Consideration.
(a), (c) and (d) *
(b) "ESTIMATED FEES AND EXPENSES"
7. Purpose(s), Alternatives,
Reasons and Effects.
(a) "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring"
(b) and (c) "SPECIAL FACTORS--Events Leading to the
Restructuring"; "--Alternatives to
Confirmation and Consummation of the
Prepackaged Plan"; "--Recommendation of the
Board"; "--LGE's Position Regarding the
Financial Restructuring"; "--Liquidation
and Going Concern Analyses"; "LIQUIDATION
ANALYSIS"
(d) "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring"; "CERTAIN U.S.
FEDERAL INCOME TAX CONSIDERATIONS"; "HIS-
TORICAL AND PRO FORMA CAPITALIZATION"; "PRO
FORMA CONSOLIDATED FINANCIAL INFORMATION"
8. Fairness of the Transaction.
(a) and (b) "SPECIAL FACTORS--Recommendation of the
Board"; "--LGE's Position Regarding the
Financial Restructuring"; "--Liquidation
and Going Concern Analyses"; "LIQUIDATION
ANALYSIS"
</TABLE>
- --------
*Not applicable or answer is negative.
ii
<PAGE>
<TABLE>
<CAPTION>
Schedule 13E-3 Item Response/Caption in
Number and Caption Registration Statement
- ------------------- ----------------------
<S> <C>
(c) "SPECIAL FACTORS--Recommendation of the
Board" "SUMMARY--Voting Procedures";
"THE PREPACKAGED PLAN--Confirmation
Standards"; "--Confirmation of the
Prepackaged Plan Without Acceptance by All
Classes of Impaired Claims"; "--Certain
Consequences of Non-Acceptance of the
Prepackaged Plan"
(d) "SPECIAL FACTORS--Events Leading to
the Restructuring";
"--Recommendation of the Board"
(e) "SPECIAL FACTORS--Recommendation of
the Board "
(f) *
9. Reports, Opinions, Appraisals and
Certain Negotiations.
(a), (b) and (c) "SPECIAL FACTORS--Events Leading to
the Restructuring";
"--Recommendation of the Board";
"--LGE's Position Regarding the
Financial Restructuring";
"--Liquidation and Going Concern
Analyses"; "LIQUIDATION ANALYSIS"
10. Interest in Securities of the
Issuer.
(a) and (b) *
11. Contracts, Arrangements or "SPECIAL FACTORS--LGE Agreements
Understandings with Respect to the Related to Common Stock"; "--The
Issuer's Securities. Restructuring Agreement"
12. Present Intention and
Recommendation of Certain Persons
with Regard to the Transaction.
(a) and (b) "SPECIAL FACTORS--Recommendation of
the Board"; "--LGE's Position
Regarding the Financial
Restructuring"
13. Other Provisions of the
Transaction.
(a) "SPECIAL FACTORS--Dissenters'
Rights"
(b) and (c) *
14. Financial Information.
(a) and (b) "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA"; "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION"
15. Persons and Assets Employed,
Retained or Utilized.
(a) *
(b) "SOLICITATION; VOTING PROCEDURES--
Solicitation Agent"
16. Additional Information.
*
</TABLE>
- --------
*Not applicable or answer is negative.
iii
<PAGE>
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The Issuer of the class of equity securities which is the subject of
this Statement is Zenith Electronics Corporation, the principal executive
office of which is located at 1000 Milwaukee Avenue, Glenview, Illinois 60025-
2493. The information set forth in the Front Page of the Registration
Statement, "SUMMARY--The Company" and "SPECIAL FACTORS--Going Private
Transaction" of the Registration Statement is incorporated herein by reference.
(b) The title of the equity securities subject to this Rule 13e-3
transaction is the 6 1/4% Convertible Subordinated Debentures due 2011 (the
"Old Subordinated Debentures"). As of March 31, 1999, the aggregate principal
amount of the outstanding Old Subordinated Debentures was $103.5 million. The
Issuer had approximately 259 holders of record of the Old Subordinated
Debentures as of March 31, 1999. The information set forth in the Front Page of
the Registration Statement and "SPECIAL FACTORS--Going Private Transaction" of
the Registration Statement is incorporated herein by reference.
(c) The information set forth in the Front Page of the Registration
Statement and "MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES" of the
Registration Statement is incorporated herein by reference.
(d) Not Applicable.
(e) None.
(f) This information set forth in "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--Long-Term Debt" of the Registration Statement is incorporated
herein by reference.
Item 2. Identity and Background.
(a)--(g) This Statement is being filed jointly by the Issuer and the
Affiliate. See Annex 1 to this Statement. The information set forth in
"SUMMARY--The Company" and "MANAGEMENT" of the Registration Statement is
incorporated herein by reference.
None of the persons with respect to whom information is provided in response
to this Item was, during the past five years, convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or was,
during the past five years, a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such
proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, or prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws.
Item 3. Past Contacts, Transactions or Negotiations.
(a) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring" and "CERTAIN TRANSACTIONS" of the Registration Statement is
incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring", "--LGE Agreements Related to Common Stock" and "CERTAIN
TRANSACTIONS" of the Registration Statement is incorporated herein by
reference.
Item 4. Terms of the Transaction.
(a) The information set forth in "SUMMARY--The Prepackaged Plan", "SPECIAL
FACTORS--The Restructuring Agreement", "THE PREPACKAGED PLAN--Classification
and Treatment of Claims and Equity Interests under the Prepackaged Plan" and
"ANNEX A--THE PREPACKAGED PLAN" of the Registration Statement is incorporated
herein by reference.
(b) None.
iv
<PAGE>
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a) Not applicable.
(b) The information set forth in "RISK FACTORS--Certain Risks Relating to
the Business Plan Projections" and "--Risks Associated with Proposed
Operational Restructuring" of the Registration Statement is incorporated herein
by reference.
(c) The information set forth in "MANAGEMENT" and "THE PREPACKAGED PLAN--
Summary of Other Provisions of the Prepackaged Plan--Amendments to Certificate
of Incorporation and By-Laws" of the Registration Statement is incorporated
herein by reference.
(d) The information set forth in "SPECIAL FACTORS--Liquidity Pending
Consummation of the Restructuring" and "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS" of the Registration Statement is incorporated herein by
reference.
(e) The information set forth in "RISK FACTORS--Risks Associated with
Proposed Operational Restructuring" and "THE PREPACKAGED PLAN--Summary of Other
Provisions of the Prepackaged Plan--Amendments to Certificate of Incorporation
and By-Laws" of the Registration Statement is incorporated herein by reference.
(f) and (g) Not applicable.
Item 6. Source and Amount of Funds or Other Consideration.
(a), (c) and (d) Not applicable.
(b) The information set forth in "ESTIMATED FEES AND EXPENSES" of the
Registration Statement is incorporated herein by reference.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring" of the Registration Statement is incorporated
herein by reference.
(b) and (c) The information set forth in "SPECIAL FACTORS--Events Leading to
the Restructuring", "--Alternatives to Confirmation and Consummation of the
Prepackaged Plan", "--Recommendation of the Board", "--LGE's Position Regarding
the Financial Restructuring", "--Liquidation and Going Concern Analyses" and
"LIQUIDATION ANALYSIS" of the Registration Statement is incorporated herein by
reference.
(d) The information set forth in "SPECIAL FACTORS--Purposes and Effects of
the Financial Restructuring", "CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS",
"HISTORICAL AND PRO FORMA CAPITALIZATION" and "PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION" of the Registration Statement is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a) and (b) The information set forth in "SPECIAL FACTORS--Recommendation of
the Board", "--LGE's Position Regarding the Financial Restructuring", "--
Liquidation and Going Concern Analyses" and "LIQUIDATION ANALYSIS" of the
Registration Statement is incorporated herein by reference.
(c) The information set forth in "SPECIAL FACTORS--Recommendation of the
Board"; "SUMMARY--Voting Procedures", "THE PREPACKAGED PLAN--Confirmation
Standards", "--Confirmation of the Prepackaged Plan Without Acceptance by All
Classes of Impaired Claims" and "--Certain Consequences of Non-Acceptance of
the Prepackaged Plan" of the Registration Statement is incorporated herein by
reference.
v
<PAGE>
(d) The information set forth in "SPECIAL FACTORS--Events Leading to the
Restructuring" and "--Recommendation of the Board" of the Registration
Statement is incorporated herein by reference.
(e) The information set forth in "SPECIAL FACTORS--Recommendation of the
Board" of the Registration Statement is incorporated herein by reference.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a), (b) and (c) The information set forth in "SPECIAL FACTORS--Events
Leading to the Restructuring", "--Recommendation of the Board", "--LGE's
Position Regarding the Financial Restructuring", "--Liquidation and Going
Concern Analyses" and "LIQUIDATION ANALYSIS" of the Registration Statement is
incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
(a) None.
(b) Not applicable.
Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's
Securities.
The information set forth in "SPECIAL FACTORS--LGE Agreements Related to
Common Stock" and "--The Restructuring Agreement" of the Registration Statement
is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
(a) and (b) The information set forth in "SPECIAL FACTORS--Recommendation of
the Board" and "--LGE's Position Regarding the Financial Restructuring" of the
Registration Statement is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in "SPECIAL FACTORS--Dissenters' Rights" of
the Registration Statement is incorporated herein by reference.
(b) and (c) Not applicable.
Item 14. Financial Information.
(a) and (b) The information set forth in "SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA" and "PRO FORMA CONSOLIDATED FINANCIAL INFORMATION" of the
Registration Statement is incorporated herein by reference.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) Not applicable.
(b) The information set forth in "SOLICITATION; VOTING PROCEDURES--
Solicitation Agent" of the Registration Statement is incorporated herein by
reference.
Item 16. Additional Information.
Not applicable.
vi
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this Statement is true, complete and correct as of
April 16, 1999.
Zenith Electronics Corporation
/s/ Jeffrey P. Gannon
By: _________________________________
Name: Jeffrey P. Gannon
Title: President and Chief
Executive Officer
LG Electronics Inc.
/s/ Nam K. Woo
By: _________________________________
Name: Nam K. Woo
Title: Executive Vice President
vii
<PAGE>
ANNEX 1
Item 2. Identity and Background.
This Statement is being jointly filed by LG Electronics Inc., a corporation
organized under the laws of the Republic of Korea, who may be deemed to be an
affiliate of Issuer (the "Affiliate").
The Affiliate is engaged in the consumer electronics business. The address
of the principal business and principal office of the Affiliate is LG Twin
Towers, 20, Yoido-dong, Youngdungpo-gu, Seoul, Korea 150-721. Set forth below
with respect to each executive officer and director of the Affiliate is such
individual's name, present principal occupation, material positions held during
the last five years (and the name of any corporation or other organization in
which such position was carried on) and business address. All of the persons
listed below are citizens of Korea.
<TABLE>
<CAPTION>
Present Principal
Name Occupation Material Positions Held During the Past Five Years Business Address
---- ----------------- -------------------------------------------------- ----------------
<C> <C> <C> <S> <C>
Cha Vice Chairman & 1/99-Present Vice Chairman and Chief Executive Officer, LG Electronics Inc.,
Hong CEO, LG LG Electronics, Inc. 20, Yoido-dong,
(John) Electronics Inc. 1/95-Present President & CEO, LG Electronics Inc. Youngdungpo-gu,
Koo 11/95-Present Director, Zenith Electronics Corporation Seoul 150-721, Korea
2/91-Present Director, LG Electronics Inc.
1/94-12/94 Executive VP & CEO, LG Electronics Inc.
3/91-12/93 Executive VP, LG Electronics Inc.
Bon Moo Chairman, LG 3/98-Present Chairman, LG Electronics Inc. LG Electronics Inc.,
Koo Electronics Inc. Chairman, LG Chemical Ltd. 20, Yoido-dong,
2/91-2/98 Director, LG Electronics Inc. Youngdungpo-gu,
1/95-12/97 Chairman, LG Group Seoul 150-721, Korea
1/89-12/94 Vice Chairman, LG Group
Byung President & 1/99-Present President & CFO, LG LG Electronics Inc.,
Chul CFO, LG Electronics Inc. 20, Yoido-dong,
Jung Electronics Inc. 2/97-Present Director, LG Electronics Inc. Youngdungpo-gu,
7/96-11/97 Executive VP, LG Electronics Inc. Seoul 150-721, Korea
2/94-6/96 Executive VP, LG International Corp.
1/93-1/94 Senior Managing Director, LG Semicon
Co., Ltd.
Chang Chairman, LG 2/95-Present Director, LG Electronic Inc. LG Cable &
Soo Cable & 3/95-Present Chairman, LG Cable & Machinery Ltd. Machinery Ltd.,
Huh Machinery Ltd. 1/93-2/95 Executive Vice President, LG Industrial 20, Yoido-dong,
Systems Co. Youngdungpo-gu,
Seoul 150-721, Korea
Yong Research 3/98-Present Director, LG Electronics Inc. Korea Institute of
Chin Advisor, Korea 7/97-Present Research Advisor, Korea Institute of Public Finance Public Finance,
Kim Institute of 12/96-3/97 Minister, Ministry of Science & Technology 402 Ildong
Public Finance 8/96-11/96 Officer, Office of The Prime Minister Building, 60,
1/95-8/96 Superintendent, Bank Supervisory Office Yangjae-dong,
5/94-12/94 Vice Minister, Ministry of Finance Seocho-gu, Seoul
12/93-4/94 Commissioner, Korea Customs Service 137-130, Korea
10/90-11/93 Assistant Minister, Ministry of Finance
Kee Rek Vice Chairman 12/97-Present Vice Chairman & CEO, LG Management LG Management
Sohn & CEO, LG Development Institute Development
Management 3/98-Present Director, LG Electronics Inc. Institute, 165,
Development 1/94-11/97 President, LG Precision Co. Haewol-ri,
Institute 1/93-12/93 Executive VP, LG International Corp. Majang-Myun,
Echun-city,
Gyunggi-do 467-810,
Korea
Yu Sig President, LG 3/99-Present Director, LG Electronics Inc. LG Semicon Co., Ltd.
Kang Semicon Co., Ltd. 1/99-Present President, LG Semicon Co., Ltd. 20, Yoidodong,
3/96-12/98 Senior Executive VP, LG Semicon Co., Ltd. Youngdungpo-gu
3/95-2/96 Executive VP, LG Semicon Co., Ltd. Seoul150-721, Korea
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
Present Principal Material Positions Held During the Past Five
Name Occupation Years Business Address
---- ----------------- -------------------------------------------- ----------------
<C> <C> <C> <S> <C>
Byung Nak Professor, 3/98-Present Director, LG Electronics Inc. Seoul National
Song School of 1/93-Present Professor, School of Economics, Seoul University,
Economics, National University School of
Seoul National 1/93-Present Chairman, Institute of Energy Economics Economics, 56-1,
University Sinlim-dong,
Kwanak-gu,
Seoul 151-010,
Korea
Seung Pyeong President, 1/99-Present President of LG Electronics Inc., LG Electronics
Koo LG Electronics responsible for Display Division Kumi Plant,
Inc. 7/96-1998 Executive VP, LG Electronics Inc. 184, Gongdan-dong
10/97-Present Director, Zenith Electronics Corporation Kumi-city,
10/92-Present President of Display Division, LG Gyungbuk-do
Electronics Inc. 730-030, Korea
2/96-3/98 Director, LG Electronics Inc.
3/95-6/96 Senior Managing Director, LG Electronics Inc.
3/91-2/95 Managing Director, LG Electronics Inc.
Ssang Su Senior Executive VP, 3/98-Present Senior Executive VP, LG Electronics Inc. LG Electronics
Kim LG Electronics 2/95-3/98 Director, LG Electronics Inc. Changwon Plant,
Inc. 3/96-2/98 Senior Managing Director, LG Electronics Inc. 76, Sungsan-dong,
1/93-2/96 Managing Director, LG Electronics Inc. Changwon-city,
Gyungnam-do
641-713, Korea
Woo Hyun Senior Executive VP 1/98-Present Senior Executive VP & CTO, LG Electronics
Paik & CTO, LG LG Electronics Inc. Inc., 20, Yoido-dong,
Electronics Inc. 9/96-5/97 Executive VP, Tiernan Communication Inc. Youngdungpo-gu,
3/96-8/96 Executive VP, General Instrument Seoul 150-721, Korea
4/95-2/96 Senior VP, Qualcomm Inc.
6/78-3/95 Senior VP, General Instrument
Yong Ak President, LG 3/95-Present President, LG Electronics China, LG LG Electronics
Ro Electronics Electronics Inc. China,
China 1/93-2/95 Director, LG Electronics Inc. 16F China Travel
1/93-2/95 Executive VP, LG Electronics Inc. Service Tower,
No. 2, Bei
San Huan Road,
Beijing 100028,
China
Kun Hi President, LG 3/98-Present President, LG Production Engineering LG Electronics
Yu Production Research Center, LG Electronics Inc. Pyungtaek
Engineering 1/93-2/98 Executive VP, LG Production Technology Campus, 19-1,
Research Center, LG Electronics Inc. Cheongho-ri,
Center Jinwhi-myun,
Pyungtaek-city,
Gyunggi-do 451-713,
Korea
Jong Eun Kim Senior Executive 1/99-Present Senior Executive VP, LG Electronics Inc. LG Electronics Inc.
VP, LG Electronics responsible for Multimedia Division Pyungtalk Plant, 19-1,
Inc. 1/98-11/98 Executive VP & CTO, LG Electronics Inc. Cheongho-Ri,
1/96-12/97 Executive VP, LG Electronics Inc. Jinwuy-Myun,
3/95-12/95 Senior VP, LG Electronics Inc. Pyungtalk-City,
3/93-2/95 Senior VP, LG Group Kyunggi-Do,
451-713, Korea
Chang Soo President, LG 1/97-Present President, LG Corporate Institute of LG Corporate
Kim Corporate Technology, LG Electronics Inc. Institute of
Institute of 2/93-2/95 Director, LG Electronics Inc. Technology, 16,
Technology 1/93-12/96 Executive VP, LG Electronics Research Woomyun-dong,
Center, LG Electronics, Inc. Seocho-gu, Seoul
137-724, Korea
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
Present Material Positions Held During the Past Five
Name Principal Occupation Years Business Address
---- -------------------- -------------------------------------------- ----------------
<C> <C> <C> <S> <C>
Chong Suk Lee Senior Executive VP, 1/99-Present Senior Executive VP, LG Electronics Inc.,
LG Electronics Inc. LG Electronics Inc. 20, Yoido-dong,
4/98-12/98 Executive VP, LG Youngdungpo-gu
1/96-3/98 Electronics Inc. Seoul 150-721,
Executive VP, LG Korea
1/92-12/95 Construction
Co., Ltd.
Senior VP, LG
Construction
Co., Ltd.
</TABLE>
x
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
(a) Not applicable.
(b)(1) Valuation Report, dated May 21, 1998, prepared by Peter J. Solomon Company, Ltd.
(incorporated by reference to Exhibit 99a to the Issuer's Registration Statement
on Form S-4).
(b)(2) Valuation Report, dated July 22, 1998, prepared by Peter J. Solomon Company, Ltd.
(incorporated by reference to Exhibit 99b to the Issuer's Registration Statement
on Form S-4).
(b)(3) Complete appraisal of Real Property, Partes Television de Reynosa, S.A. de C.V.,
dated May 28, 1998, prepared by Cushman & Wakefield of Arizona, Inc. (incorporated
by reference to Exhibit 99c to the Issuers Amendment No. 1 to the Registration
Statement on Form S-4).
(b)(4) Property Summary and Value Estimates, Mexico Owned Facilities, dated February,
1998, prepared by Bermudez-Binswanger (incorporated by reference to Exhibit 99d to
the Issuer's Amendment No. 1 to the Registration Statement on Form S-4).
(b)(5) Appraisal, Zenith Electronics Corporation, Reynosa Mexico, dated April 1, 1998,
prepared by Greenwich Industrial Services, LLC (incorporated by reference to
Exhibit 99e to the Issuer's Amendment No. 1 to the Registration Statement on Form
S-4).
(b)(6) Valuation Report, dated November 17, 1998, prepared by Peter J. Solomon Company,
Ltd. (incorporated by reference to Exhibit 99f to the Issuer's Amendment No. 1 to
the Registration Statement on Form S-4).
(b)(7) International VSB Market Forecast prepared by Gartner Consulting, including
addendums thereto (incorporated by reference to Exhibit 99i to the Issuer's
Amendment No. 1 to the Registration Statement on Form S-4).
(b)(8) Summary of Domestic VSB Market Forecast Information provided by Forrester
Research, Inc. (incorporated by reference to Exhibit 99k to the Issuer's Amendment
No. 3 to the Registration Statement on Form S-4).
(b)(9) Complete Appraisal of Real Property, Zenco de Chihuahua, S.A. de C.V., dated
January 13, 1998, prepared by Cushman & Wakefield of Arizona, Inc. (incorporated
by reference to Exhibit 99l to the Issuer's Amendment No. 3 to the Registration
Statement on Form S-4).
(b)(10) Complete Appraisal of Real Property, Zenco de Chihuahua, S.A. de C.V., dated May
29, 1998, prepared by Cushman & Wakefield of Arizona, Inc. (incorporated by
reference to Exhibit 99m to the Issuer's Amendment No. 3 to the Registration
Statement on Form S-4).
(b)(11) Complete Appraisal of Real Property, Zenith Electronics Corporation, Rauland
Picture Tube Division, Plant #25, dated May 21, 1998, prepared by Cushman &
Wakefield of Illinois, Inc. (incorporated by reference to Exhibit 99n to the
Issuer's Amendment No. 3 to the Registration Statement on Form S-4).
(b)(12) Complete Appraisal of Real Property, Cableproductos de Chihuahua, S.A. de C.V.,
dated May 29, 1998, prepared by Cushman & Wakefield of Arizona, Inc. (incorporated
by reference to Exhibit 99o to the Issuer's Amendment No. 3 to the Registration
Statement on Form S-4).
(b)(13) Complete Appraisal of Real Property, Zenith Corporate Headquarters Facility, dated
October 1, 1998, prepared by Cushman & Wakefield of Illinois, Inc. (incorporated
by reference to Exhibit 99p to the Issuer's Amendment No. 3 to the Registration
Statement on Form S-4).
(b)(14) Complete Appraisal of Real Property, Zenith Electronics Corporation, Rauland
Picture Tube Division, Plant #45, dated May 21, 1998, prepared by Cushman &
Wakefield of Illinois, Inc. (incorporated by reference to Exhibit 99q to the
Issuer's Amendment No. 3 to the Registration Statement on Form S-4).
</TABLE>
xi
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
(b)(15) Valuation Report, dated April 13, 1999, prepared by Peter J. Solomon Company, Ltd.
(incorporated by reference to Exhibit 99r to the Issuer's Amendment No. 3 to the
Registration Statement on Form S-4).
(b)(16) Complete Appraisal of Real Property, Electro Partes de Matamoros, S.A. de C.V.,
dated January 25, 1999, prepared by Cushman & Wakefield of Arizona, Inc.
(incorporated by reference to Exhibit 99s to the Issuer's Amendment No. 3 to the
Registration Statement on Form S-4).
(c)(1) Restructuring Agreement, dated as of August 6, 1998, by and between Zenith
Electronics Corporation and LG Electronics Inc. (incorporated by reference to
Exhibit 10ah to the Issuer's Registration Statement on Form S-4).
(c)(2) Agreement, dated as of March 25, 1997, between LG Semicon Co., Ltd. and LG
Electronics Inc.
(c)(3) Amendment No. 1 and Waiver to the Restructuring Agreement, dated November 16,
1998, between Zenith Electronics Corporation and LG Electronics, Inc.
(incorporated by reference to Exhibit 10am to the Issuer's Amendment No. 1 to the
Registration Statement on Form S-4.
(d) Registration Statement of Zenith Electronics Corporation on Form S-4.
(e) and Not applicable.
(f)
</TABLE>
xii
<PAGE>
As filed with the Securities and Exchange Commission on April 19, 1999.
Registration No. 333-61057
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 3 to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
ZENITH ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3651 36-1996520
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Number)
organization) ---------------
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:
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
---------------
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 G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to Offering Price Offering Registration
Registered be Registered Per Unit(1) Price(1) Fee
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.19% Debentures due
2009.................... $50,000,000 -- $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 and April
15, 1999. The Old Subordinated Debentures will be exchanged for Zenith
Electronics Corporation's 8.19% Debentures due 2009. The registration fee
was paid on August 10, 1998.
---------------
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 or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 APRIL 19, 1999
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, hereby solicits from each holder of Impaired Claims as
of the close of business on , 1999 (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 having an
aggregate principal amount outstanding of $103.5 million (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
$50 million of new 8.19% Debentures due 2009 (the "New 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 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. While the Company believes this treatment
is permissible under the Bankruptcy Code, certain case law exists that may
permit a contrary conclusion. In addition, under the Prepackaged Plan, all
Equity Interests, including the Company's common stock, will be cancelled and
the holders thereof will receive no distributions and retain no property on
account of such interests. 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 would receive no distribution and
retain no property under any circumstances. See "RISK FACTORS."
(continued on next page)
For a discussion of certain factors that should be considered in connection
with a vote on the Prepackaged Plan, see "Risk Factors" beginning on page 30.
For an index to the capitalized terms used in this Proxy Statement-Prospectus,
see "Index to Defined Terms" beginning on page 205.
-----------
THE VOTING DEADLINE TO ACCEPT OR REJECT THE PREPACKAGED PLAN IS 5:00 PM., NEW
YORK CITY TIME, ON , 1999, UNLESS EXTENDED.
The Solicitation Agent is:
Georgeson & Company Inc.
The date of this Disclosure Statement is , 1999.
<PAGE>
(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, LESSORS
AND EMPLOYEES FOR ALL AMOUNTS DUE PRIOR TO AND DURING THE BANKRUPTCY CASE.
Members of a committee of holders of Old Subordinated Debentures (the
"Debenture Committee") have entered into an agreement with the Company
pursuant to which they have agreed to vote for and support the Prepackaged
Plan. The members of the Debenture Committee have informed the Company
that they collectively hold or control over 50% of the outstanding
principal amount of the Old Subordinated Debentures. The members of the
Debenture Committee are Loomis Sayles & Company, L.P., Mariner Investment
Group and Caspian Capital Partners L.L.P. The Debenture Committee has
retained Crossroads Capital Partners LLC as its financial advisor and Hebb
& Gitlin as its legal advisor. See "SPECIAL FACTORS--Debenture Committee."
LG Electronics Inc., a corporation organized under the laws of the
Republic of Korea, ("LGE") has entered into an agreement with the Company
(as amended, the "Restructuring Agreement") pursuant to which it has
agreed to vote for the Prepackaged Plan. LGE holds all of the LGE Claims.
See "SPECIAL FACTORS--The Restructuring Agreement."
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 $105.1 million assuming an Effective Date of July 31, 1999, 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, (ii) the
LGE Technical Services Claims and (iii) 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"). The appraisals relating to the
value of the Reynosa Assets should be read in their entirety and state an
opinion of value as of the date of the report and are subject to assumptions
and limiting conditions stated in each report. If for any reason the Reynosa
Assets are not transferred to LGE, LGE and Zenith expect to enter into a
management or lease agreement on mutually satisfactory terms pursuant to which
LGE will operate the Reynosa facility on behalf of, or lease the Reynosa
facility from, the Company and the principal amount of the LGE New
Restructured Senior Note would be increased by approximately $32.4 million
(the amount of Claims that would have been exchanged for the Reynosa Assets).
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 $140 million; (ii) the LGE Reimbursement Claims, not to exceed $50
million; (iii) the LGE Guarantee Fee Claims; and (iv) the LGE Demand Loan
Claims in an amount (if any) sufficient when aggregated with the amounts
described in clauses (i) through (iii) to equal $200 million (collectively,
the "LGE Tranche B Claims"). LGE Tranche A Claims and LGE Tranche B Claims are
collectively referred to herein as the "LGE Claims."
Finally, pursuant to the Restructuring Agreement, interest accruing on the
LGE Leveraged Lease Claims and the LGE Reimbursement Claims is required to be
paid at or prior to the Consummation of the Prepackaged Plan. As of December
31, 1998, approximately $5.0 million of interest had accrued on the LGE
Leveraged Lease Claims and approximately $3.3 million of interest had accrued
on the LGE Reimbursement Claims. Such accrued
ii
<PAGE>
interest on the LGE Leveraged Lease Claims and LGE Reimbursement Claims, as
well as any other Claims held by LGE not included in the LGE Claims (such as
rental obligations, miscellaneous vendor payables, certain licensing fees and
other similar obligations incurred in the ordinary course), will be classified
and treated as General Unsecured Claims under the Prepackaged Plan.
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 38,315,000 shares of Old Common Stock (which
represents approximately 56.2% 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 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") HAS UNANIMOUSLY RECOMMENDED TO THE BOARD OF DIRECTORS OF THE
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. THE SPECIAL
COMMITTEE IS COMPOSED OF FOUR DIRECTORS OF
iii
<PAGE>
THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF LGE OR CURRENT OFFICERS OF THE
COMPANY. ONE MEMBER OF THE SPECIAL COMMITTEE IS A FORMER OFFICER OF THE
COMPANY, AND ONE MEMBER OF THE SPECIAL COMMITTEE WAS ORIGINALLY DESIGNATED BY
LGE AS A DIRECTOR IN 1995. LGE HAS VOTED TO RE-ELECT EACH OF THE MEMBERS OF THE
SPECIAL COMMITTEE TO THE BOARD SINCE 1995.
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 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 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 , 1999.
iv
<PAGE>
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.
v
<PAGE>
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 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.
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION..................................................... v
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................ vi
SUMMARY................................................................... 1
The Company............................................................. 1
LGE Claims.............................................................. 2
The Prepackaged Plan.................................................... 4
Special Factors......................................................... 10
The Prepackaged Proceeding; Classification and Impairment of Creditors.. 15
Historical and Pro Forma Capitalization................................. 19
Business Plan Projections............................................... 20
Comparison of the Old Subordinated Debentures to the New Debentures..... 24
Voting Procedures....................................................... 25
U.S. Federal Income Tax Matters......................................... 28
Risk Factors............................................................ 29
RISK FACTORS.............................................................. 30
Recent Operating Results, Independent Auditor's Report and High
Leverage............................................................... 30
Certain Risks Relating to the Business Plan Projections................. 30
Risks Associated with Proposed Operational Restructuring................ 34
Legal Proceedings....................................................... 41
Conditions in the Restructuring Agreement and Lock-Up Agreement......... 42
Financing Agreement Restrictions........................................ 42
Events of Default; Risk of Acceleration or Termination.................. 43
Control by LGE.......................................................... 43
Certain Bankruptcy Considerations....................................... 44
Readiness for the Year 2000............................................. 47
Dependence on Patents and Proprietary Technology........................ 48
SPECIAL FACTORS........................................................... 50
Events Leading to the Restructuring..................................... 50
Debenture Committee..................................................... 61
Purposes and Effects of the Financial Restructuring..................... 62
LGE Agreements Related to Common Stock.................................. 63
Alternatives to Confirmation and Consummation of the Prepackaged Plan... 63
Going Private Transaction............................................... 65
Recommendation of the Board............................................. 65
LGE's Position Regarding the Financial Restructuring.................... 68
Liquidation and Going Concern Analyses.................................. 70
The Restructuring Agreement............................................. 77
Amendments to Certificate of Incorporation and By-Laws.................. 82
Interests of Certain Persons in the Financial Restructuring; Conflicts
of Interest............................................................ 82
Liquidity Pending Consummation of the Restructuring..................... 86
Dissenters' Rights...................................................... 86
THE PREPACKAGED PLAN...................................................... 87
General................................................................. 87
Classification of Claims and Equity Interests under the Prepackaged
Plan................................................................... 88
Summary of Treatment Under the Prepackaged Plan......................... 90
Summary of Other Provisions of the Prepackaged Plan..................... 93
Conditions to Confirmation/Consummation................................. 100
Effect of Consummation of the Prepackaged Plan.......................... 100
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Modification of the Prepackaged Plan.................................... 101
Intended Actions During the Prepackaged Chapter 11 Case................. 101
Confirmation Standards.................................................. 103
Confirmation of the Prepackaged Plan Without Acceptance by All Classes
of Impaired Claims..................................................... 104
Certain Consequences of Non-Acceptance of the Prepackaged Plan.......... 105
OPERATIONAL RESTRUCTURING................................................. 106
MARKET PRICES OF THE COMMON STOCK......................................... 109
MARKET PRICES OF THE OLD SUBORDINATED DEBENTURES.......................... 110
HISTORICAL AND PRO FORMA CAPITALIZATION................................... 111
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA........................... 112
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................. 113
BUSINESS PLAN PROJECTIONS................................................. 119
Assumptions Underlying the Business Plan Projections.................... 128
History of the Business Plan Projections................................ 132
ACCOUNTING TREATMENT...................................................... 135
LIQUIDATION ANALYSIS...................................................... 135
DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS............................... 141
Short-Term Debt......................................................... 141
Long-Term Debt.......................................................... 142
The DIP Facility and the Citicorp Exit Facility......................... 143
DESCRIPTION OF NEW DEBENTURES............................................. 146
SUMMARY OF LGE NEW RESTRUCTURED SENIOR NOTE............................... 149
SUMMARY OF LGE NEW CREDIT FACILITY........................................ 150
SOLICITATION; VOTING PROCEDURES........................................... 152
General................................................................. 152
Voting Record Date...................................................... 152
Expiration Date; Extensions; Amendments................................. 152
Voting Procedures and Other Requirements................................ 153
Agreements Upon Furnishing Ballots...................................... 157
Method of Delivery of Ballots........................................... 157
Withdrawal of Ballots; Revocation....................................... 157
Solicitation Agent...................................................... 157
Notice Agent............................................................ 158
Waivers of Defects, Irregularities, Etc................................. 158
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS............................................................ 159
Results of Operations................................................... 159
Cash Flows.............................................................. 164
Financial Condition..................................................... 166
Readiness for the Year 2000............................................. 168
BUSINESS.................................................................. 170
General................................................................. 170
Raw Materials........................................................... 170
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Patents................................................................ 170
Seasonal Variations in Business........................................ 171
Major Customers........................................................ 171
Competitive Conditions................................................. 171
Research and Development............................................... 171
Environmental Matters.................................................. 171
Employees.............................................................. 171
Financial Information about Foreign and Domestic Operations and Export
Sales................................................................. 172
Properties of the Company.............................................. 172
Subsidiaries........................................................... 173
Legal Proceedings...................................................... 173
MANAGEMENT............................................................... 177
Current Directors of the Company....................................... 177
Board and Committee Meetings and Directors' Compensation............... 179
Current Executive Officers of the Company.............................. 181
Executive Compensation and Other Information........................... 184
Options/SAR Grants in 1997............................................. 185
Aggregated Option/SAR Exercises in 1997 and Year-End Option/SAR
Values................................................................ 185
SECURITY OWNERSHIP....................................................... 186
Security Ownership of Certain Beneficial Owners........................ 186
DESCRIPTION OF CAPITAL STOCK............................................. 187
Old Common Stock and Old Preferred Stock............................... 187
New Common Stock....................................................... 187
Delaware Anti-Takeover Law............................................. 187
CERTAIN TRANSACTIONS..................................................... 188
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS TO RESALES OF NEW
SECURITIES.............................................................. 193
Transfers of New Debentures............................................ 193
Certain Transactions by Stockbrokers................................... 194
Issuance of New Common Stock........................................... 194
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS........................... 194
Consequences to Holders of the Old Subordinated Debentures............. 194
Consequences to Holders of Other Claims................................ 198
Consequences to Holders of Equity Interests in the Company............. 198
Consequences to LGE.................................................... 199
Consequences to the Company............................................ 199
ESTIMATED FEES AND EXPENSES.............................................. 202
Advisors............................................................... 202
LEGAL MATTERS............................................................ 203
EXPERTS.................................................................. 203
INDEX OF CERTAIN DEFINED TERMS........................................... 204
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
ANNEX A--THE PREPACKAGED PLAN............................................ A-1
ANNEX B--REPORTS OF PETER J. SOLOMON COMPANY LIMITED..................... B-1
</TABLE>
ix
<PAGE>
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 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's cash
flows for 1998 were, and absent restructuring, its cash flows for future years
are projected to 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 and disposing of
substantially all of its manufacturing operations, outsourcing substantially
all components and products beginning with the 1999 product lines, selling
certain other assets such as warehouses and equipment and focusing on the
development of its distribution channels, technologies, patent rights, parts
and service operations and accessory business. From 1998 to March 31, 1999 the
Company sold assets to unrelated third parties for cash and purchase credits
totaling $47.0 million pursuant to the Operational Restructuring. Based on
appraisals received by the Company and the results of its sale efforts to date,
the Company estimates that it will receive approximately $60 to $65 million
more in sale proceeds from sales of assets to third parties pursuant to the
Operational Restructuring. In addition, as part of the Prepackaged Plan, the
Company will transfer the Reynosa Assets, which have an appraised value of
$32.4 million, to LGE. The Company intends to retain its patent and technology
assets, brand name, distribution channels, accounts receivable and inventories,
which PJSC estimates to have a value of over $300 million in its going concern
analysis. The Company does not believe that stockholder approval would be
required for the Operational Restructuring because the Company does not expect
to sell all or substantially all of its assets pursuant to the Operational
Restructuring. See "SPECIAL FACTORS--Liquidation and Going Concern Analyses"
and "OPERATIONAL RESTRUCTURING."
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," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"BUSINESS."
1
<PAGE>
LGE Claims
The following chart summarizes the LGE Claims projected to be held by LGE as
of July 31, 1999.
<TABLE>
<CAPTION>
Projected as Classification
of under
Type of Support July 31, 1999 LGE Claims
- --------------- ------------- ------------------------------------
<S> <C> <C>
LGE Demand Loan Claims:
Direct secured loan to $45.0 million LGE Tranche B Claims to the extent
Zenith (the "LGE Demand (if any) that the sum of (i) the
Loan Claims") first $50 million of LGE
Reimbursement Claims, (ii) the first
$140 million of the LGE Extended
Payables Claims and (iii) the LGE
Guarantee Fee Claims is less than
$200 million. The balance will be
classified as LGE Tranche A Claims.
LGE Reimbursement Claims:
Guarantees of Zenith's $72.0 million The first $50 million will be LGE
obligations under unsecured Tranche B Claims with all excess
demand note financing over $50 million classified as LGE
transactions with Bank of Tranche A Claims.
America, First National
Bank of Chicago--NBD,
Societe Generale, Seoul
Branch and Credit Agricole
Indosuez, Seoul Branch (the
"Unsecured Bank Loans"). As
of March 31, 1999, LGE had
made payments under demands
against guarantees on $72
million of the Unsecured
Bank Loans and $30 million
of Unsecured Bank Loans
remain outstanding. Under
the Reimbursement
Agreement, the Company is
obligated to LGE for these
payments (the "LGE
Reimbursement Claims").
Interest accrues on the LGE
Reimbursement Claims at a
rate per annum equal to
Bank of America National
Trust and Savings
Association's announced
reference rate plus two
percent. Such interest is
classified as a General
Unsecured Claim.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Projected as Classification
of under
Type of Support July 31, 1999 LGE Claims
- --------------- -------------- ------------------------------------
<S> <C> <C>
LGE Leveraged Lease Claims:
Reimbursement obligations $ 76.4 million LGE Tranche A Claims
owed to LGE as a result of
LGE's payment under its
guarantees of Zenith's
obligations under or
related to leveraged
leases (collectively, the
"LGE Leveraged Lease
Claims"), 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"). The
amount of the Claims is
equal to the original
amount paid by LGE to
settle the Company's
obligations under the
leases ($90.1 million)
less the amount received
by LGE from the sale of
certain Leveraged Lease
(Mexico) equipment in
February 1999 ($0.7
million) less the amount
projected to be received
by LGE from the sale of
other Leveraged Lease
assets prior to July 31,
1999 ($13 million).
Interest accrues on these
claims at a rate per annum
equal to LIBOR plus six
and one-half percent. Such
interest is classified as
a General Unsecured Claim.
LGE Extended Payables
Claims:
Vendor credit line for $140.0 million The first $140 million will be LGE
Zenith's purchase of Tranche B Claims, with the excess,
products from LGE (the if any, over $140 million classified
"LGE Extended Payables as General Unsecured Claims
Claims"). As of March 31,
1999, the outstanding
balance on the vendor
credit line was
approximately $130.1
million.
LGE Technical Services
Claims:
Fees owed for certain $ 10.5 million LGE Tranche A Claims
technical and other
services (the "LGE
Technical Services
Claims").
LGE Guarantee Fee Claims:
Fees for the guarantees of $ 1.6 million LGE Tranche B Claims
the Unsecured Bank Loans
(the "LGE Guarantee Fee
Claims").
</TABLE>
3
<PAGE>
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
PROCEEDING; CLASSIFICATION AND IMPAIRMENT OF CREDITORS" and "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.
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
Administrative Claims
(The Company is not These Claims consist of the Claims for costs and
currently able to expenses of administration under section 503(b),
estimate the number of 507(b) or 1114(e)(2) of the Bankruptcy Code,
holders or amount of including: (a) the actual and necessary costs and
claims in this Class) expenses incurred after the Petition Date 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.
(S)(S) 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
(The Company is not governmental unit of the kind specified in section
currently able to 507(a)(8) of the Bankruptcy Code ("Priority Tax
estimate the number of Claims"). On the Effective Date, each holder of a
holders or amount of Priority Tax Claim due and payable on or prior to
claims in this Class) 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.
4
<PAGE>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
Class 1--Other Priority This Class of Claims consists of all Claims
Claims accorded priority in right of payment under section
(Unimpaired, not entitled 507(a) of the Bankruptcy Code, other than Priority
to vote) Tax Claims or Administrative Claims ("Other
(The Company is not Priority Claims"). Unless the holder of such Claim
currently able to and the Company agree to a different treatment,
estimate the number of each holder of an allowed Other Priority Claim
holders or amount of shall receive one of the following alternative
claims in this Class) 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.
Class 2--Citibank Secured This Class of Claims (the "Citibank Secured
Claims Claims") consists of all Claims arising from or
(Unimpaired, not entitled relating to the Company's $125 million senior
to vote) secured credit facility (the "Amended Citibank
Credit Facility"). On the Effective Date, unless
(This Class has 9 holders the holders of such Claims and the Company agree to
and $73.2 million of a different treatment, the holders of such Claims
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 This Class of Claims consists of all secured Claims
Claims against the Company, other than secured Claims
(Unimpaired, not entitled classified in a different Class (the "Other Secured
to vote) Claims"). The legal, equitable and contractual
(The Company is not rights of the holders of Other Secured Claims are
currently able to unaltered by the Prepackaged Plan. Unless the
estimate the number of holder of such Claim and the Company agree to a
holders or amount of different treatment, each holder of an allowed
claims in this Class) 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 This Class of Claims consists of all Claims arising
(Impaired, entitled to from or relating to the Unsecured Bank Loan (the
vote) "Bank Lender Claims"). On the Effective Date, the
(This Class has 1 holder holder of the Bank Lender Claims shall receive a
and $30 million of new unsecured term note that shall mature one year
Claims) from the Effective Date in full satisfaction of its
Claims (the "New Bank Lender Note"). LGE has
informed Zenith that it received a demand for
payment in full from the holder of the Bank Lender
Claims on April 16, 1999. LGE and Zenith intend to
engage in discussions with the lender regarding its
demand.
5
<PAGE>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
Class 5--General This Class of Claims consists of all unsecured
Unsecured Claims Claims against the Company that are not Bank Lender
(Unimpaired, not entitled Claims, Old Subordinated Debenture Claims or LGE
to vote) Tranche A Claims or LGE Tranche B Claims (the
"General Unsecured Claims"). This Class includes,
(The Company estimates but is not limited to, the interest payable to LGE
this Class has on the LGE Reimbursement Claims and the LGE
approximately 900 trade Leveraged Lease Claims. Unless the holder of such
creditors, 60 carrier Claim and the Company agree to a different
claimants, 70,000 service treatment, each holder of an allowed General
contract creditors, 200 Unsecured Claim shall receive one of the following
holders of unknown claims alternative treatments, at the election of the
and an undetermined Company: (a) to the extent then due and owing on
number of warranty and the Effective Date, such Claim will be paid in full
other claimants, in cash by New Zenith; (b) to the extent not due
aggregating approximately and owing on the Effective Date, such Claim (X)
$161 million of Claims) 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.
Class 6--Old Subordinated
Debenture Claims This Class of Claims consists of all Claims arising
(Impaired, entitled to from or relating to the Old Subordinated Debentures
vote) (the "Old Subordinated Debenture Claims"). Members
of the Debenture Committee, who have informed the
(This Class has Company that they hold or control over 50% of the
approximately 259 holders outstanding principal of the Old Subordinated
of record and $108.9 Debentures, have agreed to vote for and support the
million of Claims Prepackaged Plan. If the Class of the Old
including principal and Subordinated Debenture Claims accepts the
interest) Prepackaged Plan, each holder will receive a pro
rata distribution of the New Debentures. If the
Class of these Claims does 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. If approved, the "cram down"
would not result in any other change to the terms
of the Prepackaged Plan. However, New Zenith's
indebtedness would be reduced by $50 million as a
result.
Class 7--LGE Claims The LGE Tranche A Claims consist of the following
(Impaired, entitled to Claims held by LGE (i) the LGE Leveraged Lease
vote) Claims, (ii) the LGE Technical Services Claims and
LGE Tranche A Claims: (iii) that portion of the LGE Reimbursement Claims
and the LGE Demand Loan Claims not classified as
(This Class has 1 LGE Tranche B Claims. On the Effective Date, LGE
holder and will receive the LGE New Restructured Senior Note
approximately $145.5 and the Reynosa Assets in full satisfaction of the
million of Claims) LGE Tranche A Claims. If for any reason the Reynosa
Assets are not transferred to LGE, LGE and Zenith
expect to enter into a management or lease
agreement on mutually satisfactory terms pursuant
to which LGE will operate the Reynosa facility on
6
<PAGE>
Class/Type of
Claim/Estimated
Amount
as of July 31,
1999 Description and Treatment of Claims
- --------------- -----------------------------------
behalf of, or lease the Reynosa facility from, the
Company and the principal amount of the LGE New
Restructured Senior Note would be increased by
approximately $32.4 million (the amount of Claims
that would have been exchanged for the Reynosa
Assets): Following the Restructuring, it is
expected that LGE will own and operate the
Reynosa Assets, and the Company currently
anticipates purchasing approximately $431 million
in finished products and components produced at the
Reynosa facility for its 1999 model year, a portion
of which will occur following consummation of the
Restructuring.
LGE Tranche B Claims: The LGE Tranche B Claims consist of $200 million of
(This Class has 1 the following Claims held by LGE: (i) the LGE
holder and $200 million Extended Payables Claims, not to exceed $140
of Claims) million; (ii) the LGE Reimbursement Claims, not to
exceed $50 million; (iii) the LGE Guarantee Fee
Claims; and (iv) the LGE Demand Loan Claims in an
amount (if any) sufficient when aggregated with the
amounts described in clauses (i) through (iii) to
equal $200 million. On the Effective Date, LGE will
receive the New Common Stock in full satisfaction
of the LGE Tranche B Claims.
Class 8--Equity Interests This Class consists of holders of Equity Interests.
(Impaired, deemed to Holders of Equity Interests in the Company shall
reject, not entitled to receive no distribution and retain no property
vote) under the Prepackaged Plan. All Old Common Stock
will be cancelled.
(The Company estimates
this Class has 11,500
holders of record of
67,525,447 shares of Old
Common Stock)
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."
The following table provides a comparison of what holders of Claims against
and Equity Interests in the Company would receive on account of their Claims
and Equity Interests under the Prepackaged Plan versus what the Company
believes such parties would likely receive if the Company liquidated its assets
in bankruptcy. 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 and liquidation analysis performed by PJSC. See
"THE LIQUIDATION ANALYSIS."
<TABLE>
<CAPTION>
Treatment if Company
Treatment Under Prepackaged Liquidated in Hypothetical
Claim or Interest Plan Chapter 7 Bankruptcy
- ----------------- --------------------------- --------------------------
<S> <C> <C>
Citibank Claims Under the Prepackaged Plan, In a liquidation, the
the holders of these Claims holders of these Claims
would be paid in full in would be paid in full in
cash or be otherwise treated cash.
in a manner so as to be
rendered unimpaired.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
LGE Claims Under the Prepackaged Plan, In a liquidation, LGE would
LGE would receive the LGE receive $50.1 million on
New Restructured Senior account of its secured
Note, the Reynosa Assets and claims, representing a
all of the New Common Stock. recovery of 32.7% of its
estimated $153 million of
secured Claims. LGE would
receive no distribution and
retain no property on
account of its unsecured
claims.
Other Secured Claims Under the Prepackaged Plan, In a liquidation, the
the holders of these Claims holders of these Claims
would be treated in a manner would retain the collateral
so as to be rendered securing their claims but
unimpaired. would receive no
distribution and retain no
other property on account of
their Claims.
Old Subordinated Debentures Claims Under the Prepackaged Plan, In a liquidation, holders of
holders of Old Subordinated Old Subordinated Debentures
Debentures would receive a would receive no
pro rata distribution of $50 distribution and retain no
million of the New property on account of their
Debentures. Claims.
Bank Lender Claims Under the Prepackaged Plan, In a liquidation, the holder
the holder of these Claims of these Claims would
would receive the New Bank receive no property on
Lender Note. account of its Claims but
would seek payment of its
Claims from LGE under the
Reimbursement Agreement. LGE
would then have a secured
claim against the Company,
which would be included as
part of LGE's $153 million
of secured claims in a
liquidation.
Other Priority Claims Under the Prepackaged Plan, In a liquidation, the
the holders of Other holders of Other Priority
Priority Claims would be Claims would receive no
paid in full in cash or be distribution and retain no
otherwise treated in a property on account of their
manner so as to be rendered Claims.
unimpaired.
General Unsecured Claims Under the Prepackaged Plan, In a liquidation, the
the holders of General holders of General Unsecured
Unsecured Claims would be Claims would receive no
paid in full in cash or be distribution and retain no
otherwise treated in a property on account of their
manner so as to be rendered Claims.
unimpaired.
Equity Interests Under the Prepackaged Plan, In a liquidation, the
the holders of Equity holders of Equity Interest
Interests would receive no would receive no
distribution and retain no distribution and retain no
property on account of their property on account of their
Equity Interests. Equity Interests.
</TABLE>
8
<PAGE>
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 continued service of certain designated individuals in connection with 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"), (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"), and (iii) the Debenture Committee and all
its attorneys, financial advisors, accountants, investment bankers, agents and
representatives (collectively, "Debenture 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, including preference, fraudulent transfer, avoidance and
turnover actions under sections 544, 547, 548, 549 and 550 of the Bankruptcy
Code. 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, other than a holder of Old Subordinated
Debentures that has marked its ballot so as not to consent to the releases in
favor of the D&O Releasees, Investor Releasees and the Debenture Releasees 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, the Investor Releasees and the Debenture 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. Under the Prepackaged Plan, holders of Equity Interests do not grant
releases to the D&O Releasees, the Investor Releasees or the Debenture
Committee.
The Prepackaged Plan also provides that the Company, the D&O Releasees, the
Investor Releasees, the Debenture Releasees and all statutory official
committees shall be exculpated from any liability to any person or entity (as
defined in the Bankruptcy Code), including, but not limited to, all holders of
Claims and Equity Interests, 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. All of the D&O
Releasees and Investor Releasees, including the LGE-related D&O Releasees,
would receive the benefits of the exculpation provisions of the Prepackaged
Plan.
In the course of the Special Committee's work and review of the proposed
release of LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a hypothetical
restructuring occurring without the Investor Releases and without LGE's
participation. In that regard, the Special Committee and its counsel reviewed
and investigated significant transactions between LGE and the Company. Based on
that investigation, the Special Committee concluded that any value that might
be attributed to these releases was less than the overall value created by the
Restructuring, and that absent LGE's agreement to participate in a
restructuring (which was conditioned on, among other things, obtaining the
releases)
9
<PAGE>
there was no value available for distribution to holders of either the Old
Common Stock or the Old Subordinated Debentures.
The Company is not generally aware of, and accordingly the Special Committee
did not investigate, any specific avoidance actions or other potential causes
of action against non-LGE-related D&O Releasees.
The Company does not believe that any avoidance action or other potential
causes of action exist or will exist with respect to the transactions
contemplated by the Operational Restructuring because the Company has received
and expects to receive reasonably equivalent value and/or fair consideration in
connection with such transactions. Moreover, since substantially all of the
transactions contemplated by the Operational Restructuring are with
unaffiliated third parties, any avoidance actions or other potential causes of
action arising from such transactions will not be affected by the releases
provided under the Prepackaged Plan.
The Company believes that these provisions of the Prepackaged Plan are
permissible under the Bankruptcy Code but acknowledges that arguments exist
that certain case law would permit a contrary conclusion. Parties with standing
may object to such provisions of the Prepackaged Plan in the Bankruptcy Court.
It is a condition to Consummation of the Prepackaged Plan that no more than
5% of the holders of Old Subordinated Debentures shall have marked Ballots so
as not to consent to the releases contained in the Prepackaged Plan in favor of
the D&O Releasees, the Investor Releasees and the Debenture Releasees.
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 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 benefit the Company and reduce its overall debt and other obligations by
approximately
10
<PAGE>
$285 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 Debentures in an aggregate principal amount of $50 million; and (iii)
approximately $32.4 million of indebtedness to LGE for the Reynosa Assets,
which have an appraised value equal to such amount. Such appraisals should be
read in their entirety and state an opinion of value as of the date of the
report and are subject to assumptions and limiting conditions stated in each
report. In addition, as a result of the Consummation of the Prepackaged Plan,
the Company's annual interest obligations are expected to be reduced by in
excess of $30 million on an annualized post-restructuring basis.
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 pursuant to which interest
will be payable at a rate of LIBOR plus 6.5% per annum during the two years
following consummation of the Prepackaged Plan by the issuance of additional
LGE New Restructured Notes unless the Company's ratio of operating income
including royalties before interest expense, income taxes, depreciation,
amortization and restructuring expenses ("EBITDA") to cash interest expense for
the immediately preceding four fiscal quarters exceeds 1.5. After two years,
the interest will be payable in cash at a rate of LIBOR + 6.5%. See "SUMMARY OF
LGE NEW RESTRUCTURED NOTE--Payment of Principal and Interest; Maturity." The
Company's existing debt accrues interest at the following per annum rates: Bank
Lender Claims: LIBOR + 0.9375%; Amended Citibank Credit Facility: LIBOR +
3.25%; LGE Leveraged Lease Claims: LIBOR + 6.5%; LGE Reimbursement Claims:
10.5%; LGE Demand Loan Claims: LIBOR + 6.5%; and Old Subordinated Debentures:
6.25%. The Company has entered into a commitment letter (the "Commitment") with
Citicorp North America, Inc. ("Citicorp") pursuant to which Citicorp has agreed
to provide a three-year $150 million credit facility following consummation of
the Prepackaged Plan (the "Citicorp Exit Facility"), and $150 million debtor-
in-possession credit facility during the pendency of the Prepackaged Plan (the
"DIP Facility"). The Commitment is subject to a number of conditions. See
"DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS." 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"). LGE's commitment to extend the LGE New Credit
Support will remain outstanding until the third anniversary of the 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 Citicorp Exit
Facility 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."
Upon consummation of the Prepackaged Plan, New Zenith will be a wholly owned
subsidiary of LGE. Material existing transactions between LGE and Zenith have
been approved by at least a majority of the disinterested members of Zenith's
Board. LGE has advised Zenith that no general policy has been established for
intercompany transactions after New Zenith becomes a wholly owned subsidiary of
LGE. Following the Restructuring, Zenith expects to continue purchasing some
finished products from LGE, including VCRs. Additionally, Zenith expects to
purchase mid-size televisions produced by LGE in its operation of the Reynosa
Assets. Because the Company intends to outsource substantially all of its
product lines following the Restructuring, the Company expects that it will
continue to purchase some finished products, components and other technical
services from LGE.
11
<PAGE>
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 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. One of the conditions to
consummation of the Prepackaged Plan is the availability to the Company of a
credit facility in an amount not less than $100 million on terms and conditions
set forth in the Restructuring Agreement. This is also a condition to LGE's
obligations in connection with the Prepackaged Plan. If the Company is unable
to obtain such a credit facility, it is possible that LGE could waive such
condition to its obligations. In such an event, however, the Company would
probably not have sufficient financing for its operations and would be unable
to consummate the Prepackaged Plan. 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 or
retain 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."
Pursuant to the Restructuring Agreement, in the event that the Company
pursues an alternative reorganization, restructuring, liquidation or similar
transaction during the period ending 12 months after termination of the
Restructuring Agreement, the Company may be required to reimburse LGE for
certain fees and expenses incurred in connection with the proposed
Restructuring and LGE may be entitled to a transaction fee of $8 million. SEE
"SPECIAL FACTORS--The Restructuring Agreement--Transaction Expenses and
Transaction Fee upon Termination under Certain Circumstances."
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. See "SPECIAL
FACTORS--Liquidation and Going Concern Analyses" for a description of the
review undertaken and assumptions made by PJSC in developing its analyses.
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
12
<PAGE>
respect to its general 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.
Six of the eleven members of the Board (Ki-Song Cho, Cha Hong (John) Koo,
Seung Pyeong Koo, Hun Jo Lee, Yong Nam and Nam Woo) are officers of and/or
affiliated with LGE and/or its affiliates. LGE and its affiliates are currently
the Company's largest shareholder and creditor, and a supplier to and a
customer of the Company. LGE subsidiaries serve as the Company's distributors
in Canada and Mexico, and the Company has leased space from LGE subsidiaries in
Hunstville, Alabama, Ontario, California and San Jose, California. In addition,
the Company and LGE are operating under several technology agreements and
licenses, LGE has donated certain employee services to the Company and a U.S.
affiliate of LGE has guaranteed the Company's obligations under the employment
and indemnity agreement with the Company's President and Chief Executive
Officer.
The Prepackaged Plan provides for certain releases in favor of the Investor
Releasees (including the members of the Board affiliated with LGE). The
Prepackaged Plan also provides for certain releases in favor of the D&O
Releasees (including members of the Board who are not affiliated with LGE) and
the preservation of indemnification rights held by directors and officers of
the Company. See "Releases, Indemnifications and Limitations of Liability."
Further, described below under the heading "--Retention and Incentive
Programs," a number of the Company's executives and senior managers participate
in retention and incentive programs that are based on achieving certain
performance goals in connection with the Restructuring, including Richard F.
Vitkus, the Company's Senior Vice President and General Counsel, and Edward J.
McNulty, the Company's Senior Vice President and Chief Financial Officer. Under
these retention and incentive programs, the Company may be obligated to pay Mr.
Vitkus up to $1.2 million and Mr. McNulty up to $1.1 million. Additionally,
Jeffrey P. Gannon, the Company's Chief Executive Officer, has incentives and
bonuses as established under his employment contract. Some of the payments he
may be entitled to receive under his employment contract are based upon whether
the Company reaches certain performance goals in connection with the
Restructuring. The Company's former president and chief executive officer, Mr.
Peter Willmott resigned from that position on January 19, 1998 and has no
interests in the Restructuring other than as a securityholder and director. He
received a negotiated separation payment of $500,000 in January 1998 in lieu of
the termination benefits provided under his employment agreement.
The Company's Senior Vice President--Restructuring, Mr. Robert Dangremond is
also a Principal of Jay Alix & Associates ("JA&A"), which has been engaged by
the Company to assist it in the Restructuring. JA&A receives a fixed monthly
fee (plus expenses) for such services, and upon successful completion of the
Financial Restructuring, JA&A will receive a success fee of $1.0 million. Other
than as a principal of JA&A, Mr. Dangremond does not have any interest in the
Restructuring. See "SPECIAL FACTORS--Events Leading to the Restructuring" and
"--Interests of Certain Persons in the Financial Restructuring; Conflicts of
Interest," "MANAGEMENT," "CERTAIN TRANSACTIONS" and "ESTIMATED FEES AND
EXPENSES."
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 potential conflicts of
interest involving LGE and its affiliates. The Special Committee did not
resolve or address any other conflicts of
13
<PAGE>
interest, including any conflicts created by the releases in favor of the
members of the Board who are not affiliated with LGE, or indemnification
provisions contained in the Prepackaged Plan. 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 to supplement cash flow from operations. The Amended
Citibank Credit Facility expires on the earlier of the Company's filing for
bankruptcy and April 30, 1999. The Company has obtained the Commitment from
Citicorp for the DIP Facility. See "RISK FACTORS--Recent Operating Results,
Independent Auditor's Report and High Leverage" and "--Events of Default; Risk
of Acceleration or Termination" and "SPECIAL FACTORS--Liquidity Pending
Consummation of Restructuring" and "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--The DIP Facility and the Citicorp Exit Facility."
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.
Retention and Incentive Programs
In connection with the Restructuring, in early 1998 the Company developed a
retention program for 14 key executives and senior managers, not including the
Chief Executive Officer. Under this executive retention program, the Company
may be obligated to pay participants up to an aggregate of $1.2 million in
retention bonuses. Mr. Vitkus is the only Named Executive Officer who may
receive a retention bonus under the executive retention program. Such bonus is
scheduled to be paid in two installments totalling $137,508. The first
installment was made in January 1999 and the second installment is scheduled to
be paid on July 1, 1999. Additionally, in July 1998, the Company established
short-term and long-term incentive programs for two tiers of 15 key executives
and senior managers, not including the Chief Executive Officer. Those incentive
programs are based on achieving certain performance goals in connection with
the Restructuring. In March 1999, the Company made payments under its short-
term incentive program of $180,135 and $98,211 to Mr. Vitkus and Mr. McNulty,
respectively, and payments totaling $1,066,758 to the other tier 1 and tier 2
executives and senior managers. The Company may be obligated to make payments
to the two tiers of 14 key executives and senior managers aggregating up to
$6.5 million under the long-term incentive program, including up to $0.8
million payable under the long-term incentive programs to each of Mr. Vitkus
and Mr. McNulty. respectively. The following chart summarizes the retention
bonuses and incentives the Company has paid and may be obligated to pay.
<TABLE>
<CAPTION>
Actual Maximum
Short-Term Long-Term
Retention Incentive Incentive
Executive Group Bonus Payment Payment Total
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier One Executives and Senior
Managers......................... $ 755,332 $1,014,544 $5,317,048 $7,086,924
Tier Two Executives and Senior
Managers......................... 445,772 330,560 1,179,816 1,956,148
---------- ---------- ---------- ----------
Total........................... $1,201,104 $1,345,104 $6,496,864 $9,043,072
========== ========== ========== ==========
</TABLE>
14
<PAGE>
The executives currently in tier one are: Richard F. Vitkus, Edward J.
McNulty, William G. Luehrs, Richard Lewis, Kevin Lynch, Kathryn Wolfe, William
J. Sims and John I. Taylor. The executives currently in tier two are: Hector
Escobedo, Gerald Reid, Wendy Weil, Gregg Gronowski, Tom Sorensen and Michael
Thomas. Nick Mehta, the Company's chief technology officer, retired from the
Company effective January 31, 1999. Mr. Mehta's retention and short-term
incentive payments were reduced as a result of his retirement. Additionally,
Mr. Mehta will not participate in the long-term incentive program. Mr. Lewis
was moved from tier two to tier one effective February 16, 1999 when he was
promoted to Senior Vice President--Technology. The Company expects to seek
approval of its board of directors for an additional short-term incentive
program based on achievement of performance goals for the 1999 fiscal year.
Mr. Gannon's incentive programs and bonuses are established under his
employment contract. Some payments under that contract are tied to certain
performance goals in connection with the Restructuring, including (a) an annual
target bonus, $400,000 of which is guaranteed and which may be increased to
$600,000 for achieving certain specific target performance objectives, and (b)
long-term incentive plan cash payments equal to $6 million if target
performance is achieved or up to $12 million if maximum stated performance
values are achieved. Mr. Gannon's short-term incentive payment for 1998 was
$456,000, including a guaranteed payment of $400,000.
The Company has also established retention and stay bonus programs covering
approximately 175 other key managers and employees. Certain employees in areas
of ongoing operation will also be provided with limited short-term incentive
programs. Total short-term incentive payments for 1998 were approximately $9.5
million. See "MANAGEMENT--Executive Retention Programs" and "--Current
Executive Officers of the Company." The Company intends to seek court authority
to honor its obligations under the retention programs after the filing of the
Prepackaged Chapter 11 Case. See "THE PREPACKAGED PLAN--Intended Actions During
the Prepackaged Chapter 11 Case--Provisions for Employees; Retention Programs;
Employment Contracts."
The Prepackaged Proceeding; Classification and Impairment 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.
In accordance with Section 1102 of the Bankruptcy Code, as soon as
practicable after the filing of the petition for relief in this case, the U.S.
trustee may appoint a committee of creditors holding unsecured claims and may
appoint additional committees of creditors or of Equity Interest holders as the
U.S. trustee deems appropriate. Any such committee may, among other things:
consult with the trustee or Company concerning the
15
<PAGE>
administration of the case; investigate the acts, conduct, assets, liabilities,
and financial condition of the Company, the operation of the Company's
business, and any other matter relevant to the case or to the formulation of a
plan; and perform such other services as are in the interest of those
represented.
Under Section 1109(b) of the Bankruptcy Code a party in interest, including
the Company, the trustee, a creditor's committee, an Equity Interest holders'
committee, a creditor, an Equity Interest holder, or any indenture trustee, may
appear and be heard on any issue in this case.
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 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. The LGE Demand Loan Claims, the LGE
Reimbursement Claim and the LGE Guarantee Fee Claims, as secured claims, are
senior in priority to the Old Subordinated Debentures to the extent provided in
Section 502 of the Bankruptcy Code. In addition, the LGE Extended Payables
Claims, the LGE Demand Loan Claims and the LGE Reimbursement Claims are senior
in right of payment to the Old Subordinated Debentures pursuant to the
subordination provision of the Old Subordinated Debenture Indenture. The LGE
Technical Services Claims and the LGE Leveraged Lease Claims are pari passu
with the Old Subordinated Debentures. In the course of its negotiations with
the Debenture Committee, the Company was advised by legal counsel to the
Debenture Committee that the Debenture Committee might assert that some or all
of the LGE Claims are capable of being equitably subordinated to the Old
Subordinated Debenture Claims and/or recharacterized as Equity Interests of the
Company. Although the members of the Debenture Committee have agreed to vote
for and support the Prepackaged Plan, other holders of Old Subordinated Notes
could seek to equitably subordinate or recharacterize the LGE Claims, in which
case the Company would be unable to comply with its obligations under the
Restructuring Agreement. Unless waived by LGE, any such failure would release
LGE from its commitments under the Restructuring Agreement, including its
commitment to provide the LGE New Credit Support. The Company does not believe
that the Restructuring can be achieved in such event and that the Company may
consequently be forced to liquidate. 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."
Impairment of Creditors
Only Classes that are impaired under the Prepackaged Plan are entitled to
vote to accept or reject the Prepackaged Plan, unless the Class is to receive
no distribution under the Prepackaged Plan and is, consequently,
16
<PAGE>
deemed to have rejected the Prepackaged Plan. Under section 1124 of the
Bankruptcy Code, a class of claims or interests is impaired unless, with
respect to each claim or interest of such class, the plan:
(i) leaves unaltered the legal, equitable and contractual rights to which
the claim or interest entitles the holder thereof; or
(ii) with certain exception, cures any default which occurred before or
after the commencement of the chapter 11 case, reinstates the original
maturity of the claim or interest and compensates the holder for any
damages resulting from any reasonable reliance by the holder on a
contractual provision or applicable law that permits acceleration of the
debt.
The Prepackaged Plan has four Impaired Classes: (1) Class 4 which consists of
the Bank Lender Claims; (2) Class 6 which consists of the Old Subordinated
Debenture Claims; (3) Class 7 which consists of the LGE Claims; and (4) Class 8
which consists of Equity Interests.
The Prepackaged Plan provides that the holder of Bank Lender Claims shall
receive the New Bank Lender Note in full satisfaction of its Claims. The New
Bank Lender Note shall have the same principal but will not be payable upon
demand to Zenith.
The Prepackaged Plan provides that the holders of the Old Subordinated
Debenture Claims shall receive a pro rata distribution of the New Debentures.
See "DESCRIPTION OF NEW DEBENTURES--Comparison of the Old Subordinated
Debentures and the New Debentures."
The Prepackaged Plan provides that LGE shall receive 100% of the New Common
Stock in exchange for the LGE Tranche B Claims and the LGE New Restructured
Senior Note and the Reynosa Assets in exchange for the LGE Tranche A Claims,
unless the Reynosa Asset transfer does not occur, in which case the principal
amount of the New Restructured Senior Note shall be increased by $32.4 million
(the value of the Reynosa Assets).
The Prepackaged Plan provides that holders of Equity Interests shall receive
no distribution and retain no property on account of their interests. On April
14, 1999 the last trading price for the Old Common Stock was $0.375 per share.
Notice to Creditors and Holders of Equity Interests
The Company intends to deliver a notice, as soon after the commencement of
the Prepackaged chapter 11 case as the Company is authorized by the Bankruptcy
Court, advising parties in interest of the commencement of the case, the date
set for the hearing on confirmation of the Prepackaged Plan, and such other
matters as the Bankruptcy Court may direct. Such notice will instruct parties
in interest on the procedure for objecting to confirmation of the Prepackaged
Plan. Due to large number of creditors and holders of Equity Interests and the
volume of documents involved in this case, the Company will not send all
documents and pleadings to all parties in interest. Should a party in interest
who was not designated by the Bankruptcy Court wish to receive copies of
documents related to this case, it may seek to do so by filing an appropriate
motion with the Bankruptcy Court.
In accordance with section 1125 of the Bankruptcy Code and Bankruptcy Rule
3018(b), the Bankruptcy Court must determine whether all impaired creditors and
holders of Equity Interests were provided with sufficient information and time
in order to consider the Prepackaged Plan. If insufficient information or
inadequate time was provided, the ballots received from those creditors and
holders of Equity Interests regarding the Prepackaged Plan may be voided, in
whole or in part, by the Bankruptcy Court.
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.
17
<PAGE>
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 an amount not less than $150 million and on
such terms and conditions as set forth in the Restructuring Agreement;
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof; and
5. no more than 5% of the holders of Old Subordinated Debentures shall
have marked Ballots so as not to consent to the releases contained in the
Prepackaged Plan in favor of the D&O Releasees, the Investor Releasees and
the Debenture Releasees.
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. In the event the Company waives
such a condition, the Company does not intend to resolicit approval of the
Prepackaged Plan. Pursuant to the Restructuring Agreement, however, LGE's
consent is required for any such waiver. See "SPECIAL FACTORS--The
Restructuring Agreement" and "THE PREPACKAGED PLAN--Conditions to
Confirmation/Consummation--Waiver of Conditions."
18
<PAGE>
Historical and Pro Forma Capitalization
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) December 31, 1998 on an historical basis
and on a pro forma basis giving effect to the Financial Restructuring as if it
had occurred on December 31, 1998 and (ii) July 31, 1999 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 July 31,
1999. During 1999, the Company expects to incur certain charges associated with
its Operational Restructuring that are not included herein. 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>
As of
December 31, Projected As of
1998 July 31, 1999
---------------- ---------------------------
Without With
Pro Financial Financial
Actual Forma Restructuring Restructuring
------- ------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash............................. $ -- $ 15.0 $ -- $ --
======= ======= ======= =======
LGE Extended Payables Claims..... $ 135.6 $ -- $ 140.0 $ --
======= ======= ======= =======
Debt:
Bank Lender Claims(1).......... $ 30.0 $ 30.0 $ 30.0 $ 30.0
Amended Citibank Credit
Facility...................... 17.8 -- 73.2 --
Post-Restructuring bank credit
facility...................... -- 17.8 -- 73.2
LGE Leveraged Lease Claims..... 90.1 -- 76.4 --
LGE Reimbursement Claims....... 72.0 -- 72.0 --
LGE Demand Loan Claims......... 30.0 -- 45.0 --
Old Subordinated Debentures (at
face value)................... 103.5 -- 103.5 --
New Debentures (at face
value)........................ -- 50.0 -- 50.0
LGE New Restructured Senior
Note.......................... -- 113.5 -- 105.1
------- ------- ------- -------
Total debt................... $ 343.4 $ 211.3 $ 400.1 $ 258.3
======= ======= ======= =======
Stockholders' equity:
Old Common Stock, $1.00 par
value, 150,000,000 shares
authorized, 67,630,628 shares
issued and outstanding(2)..... $ 67.6 $ -- $ 67.6 $ --
New Common Stock, $0.01 par
value, 1,000 shares
authorized, 1,000 shares
issued and outstanding(3)..... -- -- -- --
Additional paid-in capital,
old........................... 506.8 572.7 506.8 572.7
Additional paid-in capital,
new........................... -- 200.0 -- 200.0
Retained earnings (deficit).... (937.2) (880.3) (994.5) (936.9)
Treasury stock, 105,181 Old
Common Shares, at cost........ (1.7) -- (1.7) --
------- ------- ------- -------
Total stockholders' equity... $(364.5) $(107.6) $(421.8) $(164.2)
======= ======= ======= =======
</TABLE>
- --------
(1) Represents the Company's credit facility with Credit Agricole Indosuez.
(2) Excludes 3,349,000 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of December 31, 1998, of which 1,746,000
shares are issuable to LGE and 1,603,000 shares are issuable to employees.
There will be no such options outstanding on a pro forma basis.
(3) New Common Stock does not show a value due to rounding in millions.
19
<PAGE>
Business Plan Projections
In connection with the planning and development of the Prepackaged Plan,
certain financial projections were prepared by the Company in April 1999 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 a chapter 11
proceeding in May 1999 and emerges from the chapter 11 proceeding in July 1999
(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.
20
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------------------------------
Projected Projected Projected
Actual Unadjusted Reorganization Adjusted Projected Projected Projected Projected
1998 1999 Adjustments 1999 2000 2001 2002 2003
------- ---------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 984.8 $ 969.5 $ -- $969.5 $889.3 $935.1 $987.6 $1,018.3
Cost of products sold... 905.5 862.3 -- 862.3 806.4 832.2 880.7 903.0
------- ------- ----- ------ ------ ------ ------ --------
Gross Margin............ 79.3 107.2 -- 107.2 82.9 102.9 106.9 115.3
Gross Margin............ 8.1% 11.1% -- 11.1% 9.3% 11.0% 10.8% 11.3%
Selling, general and
administrative......... 126.6 129.2(a) -- 129.2 103.9 103.4 102.9 102.4
Engineering and
research............... 39.1 32.6 -- 32.6 12.0 11.4 10.8 10.3
Restructuring
expense (b)............ 165.7 13.0 -- 13.0 -- -- -- --
Other operating expense
(income), net (c)...... (43.0) (38.8) -- (38.8) (34.8) (43.6) (53.5) (52.2)
------- ------- ----- ------ ------ ------ ------ --------
Operating income
(loss)................. (209.1) (28.8) -- (28.8) 1.8 31.7 46.7 54.8
Gain (loss) on asset
sales.................. 16.6 11.0 -- 11.0 -- -- -- --
Finance guarantee fee
charge (d)............. (36.6) -- (1.8) (1.8) -- -- -- --
Interest expense, net... (43.4) (43.8) -- (43.8) (29.3) (31.2) (31.7) (30.0)
------- ------- ----- ------ ------ ------ ------ --------
Income (loss) before
reorganization items... (272.5) (61.6) (1.8) (63.4) (27.5) 0.5 15.0 24.8
Reorganization
items (e).............. -- -- 10.4 10.4 -- -- -- --
Taxes on income/(income
tax benefit)........... 3.0 -- -- -- -- -- -- --
------- ------- ----- ------ ------ ------ ------ --------
Net earnings (loss)
before extraordinary
items.................. (275.5) (61.6) (12.2) (73.8) (27.5) 0.5 15.0 24.8
Extraordinary gain on
debt retirement (f) ... -- -- 59.0 59.0 -- -- -- --
------- ------- ----- ------ ------ ------ ------ --------
Net earnings (loss)..... $(275.5) $ (61.6) $46.8 $(14.8) $(27.5) $ 0.5 $ 15.0 $ 24.8
======= ======= ===== ====== ====== ====== ====== ========
Memo:
Operating income
(loss)................ $(209.1) $ (28.9) $ -- $(28.9) $ 1.8 $ 31.7 $ 46.7 $ 54.8
Restructuring
expense (b)........... 165.7 13.0 -- 13.0 -- -- -- --
Depreciation and
Amortization.......... 31.2 7.0 -- 7.0 4.7 4.8 4.8 4.8
------- ------- ----- ------ ------ ------ ------ --------
EBITDA (g).............. $ (12.2) $ (8.9) $ -- $ (8.9) $ 6.5 $ 36.5 $ 51.5 $ 59.6
======= ======= ===== ====== ====== ====== ====== ========
</TABLE>
21
<PAGE>
- --------
(a) Selling, general and administrative expenses in 1999 include retention plan
payments of $2.0 million for corporate employees.
(b) Restructuring expenses are detailed as follows:
<TABLE>
<CAPTION>
1998 1999
------ -----
<S> <C> <C>
Loss on termination of Leveraged Lease (i)................ $ 68.8 $ --
Accelerated amortization of deferred gain (i)............. (9.1) --
Impairment of property, plant and equipment (ii).......... 47.2 --
Severance and other employee costs (iii).................. 24.8 7.4
Plant closure and business exit costs (iii)............... 18.8 1.0
Professional fees (iv).................................... 11.5 4.6
Inventory writedowns...................................... 3.2 --
Other..................................................... 0.5 --
------ -----
Total restructuring charges............................. $165.7 $13.0
====== =====
</TABLE>
--------
(i) The loss on the termination of the Leveraged Leases 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
Leases, 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. Simultaneous with the recognition
of the loss, a lease-related gain of $9.1 million is recognized.
This amount is the acceleration of the balance of a deferred gain
on the 1997 sale of fixed assets into the Leveraged Leases.
Historically, the gain was being amortized to income over the life
of the lease.
(ii) The estimated impairment of $47.2 million on property, plant, and
equipment that occurred at the end of 1998 related to the
execution of the Operational Restructuring. It is measured as the
difference between the book value of assets and the appraised fair
value in an orderly liquidation including environmental
obligations.
(iii) Various costs incurred to implement the Operational Restructuring
including staff reductions, facility closures, and product line
eliminations.
(iv) Professional fees for advisors and consultants to assist in
formulating and implementing the Prepackaged Plan.
These costs are classified as Restructuring Costs because they are not
incurred during the Reorganization Period as defined above.
(c) Other operating expense (income) includes royalty income from domestic VSB,
tuner patent/other sources and miscellaneous items in amounts per year as
follows:
<TABLE>
<CAPTION>
Royalty
Income Other
----------- Income/
VSB Other (Expense)
----- ----- ---------
<S> <C> <C> <C>
1998................................................ $ -- $38.5 $ 4.5
1999................................................ 2.2 31.1 5.5
2000................................................ 6.1 30.2 (1.5)
2001................................................ 14.3 30.8 (1.5)
2002................................................ 26.6 28.4 (1.5)
2003................................................ 35.5 18.2 (1.5)
</TABLE>
Royalty amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustment for costs or reductions relating
to development, marketing and legal costs, 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 and banking and financing fees related to the
Company's efforts to obtain financing commitments in 1998. These are
primarily non-cash amortization expenses.
(e) Reorganization items of $10.4 million are detailed as:
<TABLE>
<S> <C>
Reorganization Costs (i):
Severance coincident with Prepackaged Plan........................ $ 6.4
Professional fees coincident with Prepackaged Plan................ 1.6
Professional fees during reorganization period.................... 2.4
-----
Total reorganization expenses...................................... $10.4
=====
</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 upon the actual implementation of the Business
Plan Projections and the timing of the bankruptcy proceedings.
22
<PAGE>
(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
Accrued interest on Old Subordinated Debentures (to July 31,
1999)....................................................... 5.4
less: New Debentures (at face value)......................... (50.0)
------
Gain........................................................ $ 59.0
======
</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 indicator of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring a company's ability to service its debt.
23
<PAGE>
Comparison of the Old Subordinated Debentures to the New Debentures
The following is a brief comparison of certain provisions of the Old
Subordinated Debentures with the New Debentures. For a more detailed
description of the provisions of the New Debentures, see "DESCRIPTION OF NEW
DEBENTURES."
<TABLE>
<CAPTION>
Old Subordinated Debentures New Debentures
---------------------------- ----------------------------
<S> <C> <C>
Aggregate Principal
Amount Outstanding...... $103.5 million $50 million
Maturity Date........... April 1, 2011 November 1, 2009
Interest................ 6 1/4% per annum, payable in 8.19% per annum, payable in
cash on April 1 and October cash on May 1 and November 1
1 of each year of each year
Redemption.............. The Old Subordinated The New Debentures may be
Debentures may be redeemed redeemed at the option of
at the option of the the Company, in whole or in
Company, in whole or in part, at par.
part, at a premium which
declined to par on April 1,
1996.
Conversion.............. The Old Subordinated The New Debentures are not
Debentures are convertible convertible.
into shares of 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 The New Debentures will rank
Debentures are subordinated pari passu with all senior
to the prior payment when debt of the Company
due of all Senior (including the LGE New
Indebtedness (as defined in Restructured Senior Note)
the Old Subordinated and will rank senior to any
Debenture Indenture, subordinated debt of the
including the Citibank Company. The New Debentures
Secured Claims, the Other will not be secured.
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.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Old Subordinated Debentures New Debentures
---------------------------- ----------------------------
<S> <C> <C>
Events of Default................. Events of Default with Same
respect to 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 Same
occurs, 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.
Covenants......................... The Old Subordinated Same
Debenture Indenture does not
contain restrictive
covenants. The only
covenants of the Company are
those regarding (i) payment,
(ii) provision of periodic
reporting, (iii)
substitution of successors,
and (iv) administrative
matters, such as maintenance
of a register of debenture
holders, offices for notice
and payment, filling
vacancies in the trustee's
office and the provision of
a paying agent.
</TABLE>
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.
25
<PAGE>
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 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." A holder of Old Subordinated
Debentures may, in addition to voting on the Prepackaged Plan, mark its Ballot
not to consent to the releases granted in favor of the D&O Releasees, the
Investor Releasees and the Debenture Releasees by checking the box set forth on
the Ballot.
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.
Pursuant to the terms and conditions of the Restructuring Agreement, LGE has
agreed to vote all of its Claims in favor of the Prepackaged Plan. In addition,
the members of the Debenture Committee have entered into an agreement with the
Company pursuant to which they have agreed to vote for and support the
Prepackaged Plan. The members of the Debenture Committee have informed the
Company that they collectively hold or control over 50% of the outstanding
principal amount of the Old Subordinated Debentures. The members of the
Debenture Committee are Loomis Sayles & Company, L.P., Mariner Investment Group
and Caspian Capital Partners L.L.P. The Debenture Committee has retained
Crossroads Capital Partners LLC as its financial advisor and Hebb & Gitlin as
its legal advisor. See "SPECIAL FACTORS--Debenture Committee." The Company does
not have any agreement with the holder of Bank Lender Claims with respect to
the Prepackaged Plan, nor has such holder indicated to the Company whether it
will vote for or against the Prepackaged Plan.
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. LGE is an "insider" within the
meaning of Section 101(31) of the Bankruptcy Code, so the Class containing its
claims cannot be an impaired accepting class for purposes of the "cram down"
provisions of the Bankruptcy Code. The members of the Debenture Committee are
not "insiders." 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
26
<PAGE>
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.
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).
27
<PAGE>
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 ("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.
Issues or disputes relating to the classification of holders of Claims or
Equity Interests 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 "RISK FACTORS--Certain Bankruptcy Considerations."
Solicitation Agent
Georgeson & Company Inc. will act as the solicitation and voting agent (the
"Solicitation Agent") in connection with the Solicitation. Its telephone number
is (800) 223-2064. 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."
Notice Agent
The Company intends to seek approval of the Bankruptcy Court to hire Poorman
Douglas Corporation as the notice agent in connection with the Prepackaged
Chapter 11 Case (the "Notice Agent"). The Notice Agent will process and deliver
notices as required during the Prepackaged Chapter 11 Case. It may also assist
the Company with other tasks.
U.S. Federal Income Tax Matters
Upon consummation of the transactions contemplated by the Prepackaged Plan,
the Company estimates realizing approximately $59.0 million of cancellation of
debt income attributable to the exchange of New 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 $942.8 million NOL carryover as of December 31, 1998,
which will 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,
28
<PAGE>
but because the determination of ownership changes is highly fact specific, the
Company's tax counsel is not providing an opinion as to whether the Prepackaged
Plan will cause an ownership change. Subject to certain exceptions, 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"). Subject
to certain exceptions, the Section 382 Limitation is 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 April 1999 is
4.78%).
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 (as defined herein)
own at least 50% of the corporation's stock after the reorganization. Because
the determination of whether a Claim constitutes Qualifying Debt is highly
fact-specific, the Company's tax counsel is not providing an opinion as to
whether the exchanges contemplated by the Prepackaged Plan will qualify for the
Section 382(l)(5) exception. Under Section 382(l)(5), if the exchanges
contemplated by the Prepackaged Plan qualify for the Section 382(1)(5)
exception, 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 determination of whether there is an ownership change is highly fact-
specific, and it is possible that the exchanges contemplated by the Prepackaged
Plan will not cause 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 depending on the magnitude of such change. 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."
29
<PAGE>
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 $275.5
million, $299.4 million and $178.0 million for the years ended December 31,
1998, 1997 and 1996, respectively. The Company's cash flows in 1996, 1997 and
1998 were, and, absent restructuring, its 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 years ended
December 31, 1997 and 1998 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
As of December 31, 1998 the Company had $601.9 million in total current
liabilities and a deficit in stockholders' equity of $364.5 million. As of
December 31, 1998, the Company's current liabilities included a $136.1 million
vendor credit line payable to LGE, $30 million in demand loans guaranteed by
LGE, $90.1 million of LGE Leveraged Lease Claims resulting from LGE payment of
$90.1 million to settle the Company's obligations under the Leveraged Leases
and $72 million of LGE Reimbursement Claims resulting from LGE payments of $72
million under guarantees of other demand loans. Although the Financial
Restructuring will reduce the Company's debt obligations by approximately $285
million upon the Confirmation of the Prepackaged Plan, the Company projects it
will still have $259.8 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 Amended Citibank Credit Facility currently expires on the earlier of a
bankruptcy filing by the Company and April 30, 1999. In December 1998, the
Company negotiated an extension of the Amended Citibank Credit Facility to the
earlier of a bankruptcy filing by the Company and April 30, 1999. The Company
is in discussions with its lenders regarding a further extension of the
Amended Citibank Credit Facility, but there can be no assurance that the
extension will be granted. See "--Events of Default; Risk of Acceleration or
Termination." The Company believes that, giving effect to the Citicorp Exit
Facility, 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 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.
30
<PAGE>
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 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. The continuing economic crisis in
Asia, where many major consumer electronics companies are headquartered and
where a significant percentage of consumer electronics products are
manufactured, may have a material impact on the Company's ability to realize
the Business Plan Projections. The Company could face increased competition
and price pressure for its products if Asian manufacturers shift sales to the
U.S. domestic markets as a result of decreased consumer demand in other
markets. Many of the Company's competitors are larger, more vertically
integrated, currently manufacture in and sell to a number of international
markets and may have greater access to capital during prolonged economic
difficulties. 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 1999, as the Business Plan
Projections assumes that all or a portion of those business lines will be sold
in late 1999. To date, efforts to sell the NWS business have been
unsuccessful. However, the Company is continuing to seek a buyer for all or a
portion of the NWS business. See "--Ability to Maximize Value for Network
Systems Division." The Business Plan Projections assume that the Chihuahua
manufacturing facility for NWS is sold mid-year to a contract manufacturer who
will source product back to the Company for the remainder of 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 by the end of the
first quarter of 1999, and that all manufacturing facilities (other than the
Reynosa Assets, which will be transferred to LGE pursuant to the Prepackaged
Plan) will be transferred or sold to third parties by the end of 1999. The
Company has taken charges in 1998 related to the termination of the Leveraged
Leases in the amount of $68.8 million, representing the loss difference
between the $90.1 million payment made by LGE and the $21.3 million appraised
fair market value of the equipment.
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,
31
<PAGE>
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.
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.
Assumptions Concerning Credit Facilities
The Company executed the Amended Citibank Credit Facility as of June 29,
1998, and it was further amended in December 1998 to extend the term of the
facility until the earlier of a bankruptcy filing by the Company and April 30,
1999. The Company is in discussions with its lenders regarding a further
extension of the Amended Citibank Credit Facility, but there can be no
assurance that such extension will be granted. See "--Events of Default; Risk
of Acceleration or Termination." In addition, pursuant to the Restructuring
Agreement, LGE has agreed to provide the LGE New Credit Support and has
provided a letter of intent covering such facility. LGE's obligation to provide
such financing is subject to the conditions set forth in the Restructuring
Agreement.
The Business Plan Projections incorporate the terms of the DIP Facility and
the Citicorp Exit Facility contained in the Commitment and assume per annum
interest rates of 10.0% on borrowings under both facilities. Failure of the
Company to obtain credit facilities meeting the availability levels or on less
favorable terms than those included in the Business Plan Projections may
adversely affect 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.
Initial digital broadcasts began in the U.S. in selected markets in November
1998. All digital signals originating at or directly from broadcasters'
terrestrial transmission antennas are mandated to use the ATSC digital signal
standard. The ATSC mandate will not, however, apply to non-terrestrial digital
signals such as cable or satellite system signals under current regulations.
Cable or satellite system operators may elect to use or carry some form of ATSC
digital signal, but will not be required to do so. 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.
The Business Plan Projections assume certain timing and absorption of digital
products by consumer markets, and that the current federally mandated timing of
HDTV and digital broadcasts would be met. While
32
<PAGE>
initial digital broadcasts began in November 1998, the amount of programming
is expected to be limited for some time. In addition, television
manufacturers, including the Company, are experiencing delays in getting
digital products to market at mass-market price points. The Business Plan
Projections contemplate that domestic VSB royalties, excluding development
costs, received by the Company in cash will account for a significant portion
of the Company's cash flow by 2003. 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 Company's assumptions regarding the absorption of
digital products by consumer markets are based in part on information provided
by industry observers. These markets are moving rapidly and the industry
observers may periodically update their views and predictions accordingly.
There can be no assurance that any such revisions will not materially affect
the Business Plan Projections.
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 Company expects to finalize its VSB licensing strategy and
begin to negotiate licenses in the second quarter of 1999. The Company's
initial strategy was to negotiate licensing terms following its Financial
Restructuring. As a result of the passage of time, however, the Company
decided to begin its licensing program prior to completion of the Financial
Restructuring. The Company is not currently collecting royalties on its VSB
technology, but expects that these licenses, when granted, will be retroactive
to the first production or sale of the licensed products.
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, the Republic of Korea and
Argentina 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 include non-domestic
(i.e., non-United States) revenues from licensing activity and royalties
relating to VSB technologies because the Company believes such revenues to be
highly speculative and unreliable for business planning purposes. Potential
non-domestic VSB revenues are subject to certain risks and variables that are
far more extensive and material than the risks and variables presented by the
Company's domestic VSB revenue projections. These risks and variables include:
international economic conditions, both market-by-market and global; standards
adoption processes and the interaction between de facto and government decreed
standards (for countries that have yet to adopt a standard); influence of
infrastructural elements; lack of historical information for the potential
market; market drivers and consumer adoption; political and economic
influences as among potential market countries; source of transmission
content; lack of patent protection in some countries; technical
considerations; broadcaster plans; and consumer electronics equipment
manufacturer plans. See "BUSINESS PLAN PROJECTIONS--Assumptions Concerning
VSB."
Additionally, the ATSC digital television standard is one of several
technologies currently competing for dominance in digital broadcasting
internationally. In addition to the alternative broadcast standard adopted in
Western Europe and Australia, cable television and satellite providers each
employ a different competing standard that allows for digital broadcasts over
those systems. Japan has also developed an alternative digital broadcasting
standard. In all cases, the companies associated with competing digital
broadcast standards are currently involved in efforts to seek adoption of
those competing standards in other countries that have not yet established
national standards. In many cases, those companies have greater resources
available to promote the competing standards than those resources available to
the Company for similar efforts. There can be no assurance that the ATSC
standard, and therefore VSB technology, will achieve a significant market
share globally, or that, in the face of technological innovation, will remain
the standard in markets where it is currently adopted.
33
<PAGE>
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 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
The Company ceased production at its Melrose Park manufacturing facility in
March 1999 and is currently in the process of decommissioning the equipment
and shutting down the facility. The Company's Glenview headquarters building
was sold to BRI/Glenview I Inc. in October 1998 and the Company is leasing
space in the building from the buyer until it relocates its headquarters. As
part of the Operational Restructuring, the Company is seeking to sell or shut
down manufacturing facilities in Chihuahua and Cd. Juarez and sell excess
facilities in Reynosa, Mexico. 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
liabilities to be approximately $23.4 million. Additionally, the Company
expects that it will incur additional expenses related to expatriate U.S.
workers assigned to Mexican facilities, including relocation costs.
From 1998 to March 31, 1999 the Company sold assets to unrelated third
parties for cash and purchase credits totaling $47 million pursuant to the
Operational Restructuring. Based on appraisals received by the Company and the
results of its sale efforts to date, the Company estimates that it will
receive approximately $60 million to $65 million more in sale proceeds from
sales of assets to third parties pursuant to the Operational Restructuring. In
addition, as part of the Prepackaged Plan, the Company will transfer the
Reynosa Assets, which have an appraised value of $32.4 million.
The Company may not be able to accomplish the sale of each of its remaining
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 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.
In November 1998, the Company entered into agreements with Philips
Electronics North America Corporation ("Philips") for the sale of certain
equipment located at the Company's Melrose Park facility, including some of
the equipment previously leased by the Company under the Leveraged Lease
(Melrose Park), and the purchase of color picture tubes. The purchase price
for the equipment is payable in credits against picture tube purchases by the
Company over a three-year period. The amount of purchase credits ranges from
$17.2 million to $23.9 million, depending upon the amount of picture tube
purchases. The amount of picture tubes to be purchased from Philips depends on
the Company's requirements for picture tubes, which depends on customer demand
and sales volumes. The Company has no right to use the credits after the
expiration or termination of
34
<PAGE>
the manufacturing agreement, and may not receive any credits in exchange for
the equipment if it breaches or terminates the manufacturing agreement. A
substantial portion of the equipment sold to Philips was owned by the owner
trust under the Leveraged Lease (Melrose Park), which is controlled by LGE as a
result of LGE's payments under its guarantee of the Company's obligations under
the Leveraged Leases. The Company purchased such equipment from the owner trust
immediately prior to the sale to Philips in exchange for approximately $11.5
million of the credits to be received by the Company from Philips. Pursuant to
its agreement with the owner trust, the Company may purchase the credits for
cash from the owner trust. The Company expects to purchase such credits from
the owner trust as necessary to acquire picture tubes from Philips.
On October 7, 1998, the Company sold its Glenview, Illinois headquarters
building to BRE/Glenview I Inc. for $23.3 million. The terms of the sale
included a lease agreement under which the Company is permitted to be a tenant
in the building through December 1999. The Company expects that it will reduce
the amount of space it occupies in the building through the end of the lease,
as provided in the lease. The base rent payable by the Company is $5 per
rentable square foot, and the Company is required to pay its pro-rata share of
the operating expenses and real estate taxes associated with the building. The
proceeds of the sale of the building were used, as required under the Amended
Citibank Credit Facility, to repay certain debt under that facility, which
permanently reduced that portion of the facility secured by the Company's real
estate assets. The Company is reviewing alternative locations for its
headquarters, but has not yet entered into any agreement for replacement office
space.
In February 1999, the Company sold its electron gun operations located in
Matamoros, Mexico to a third party. The sale also included certain projection
television tube manufacturing equipment under the Leveraged Lease (Mexico). The
sale of the remaining 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. A "maquiladora" is a Mexican
corporation, generally 100% foreign owned, that operates under a special
Mexican regulatory program which provides certain tax and customs duties
privileges to manufacturers who import raw materials and equipment to assemble
products in Mexico, with such products to be exported and sold outside of
Mexico. 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 that may influence the Company's ability to
sell its Mexican operations within the schedule and budget set forth in the
Operational Restructuring.
The Company will depend on third-party suppliers to provide the Company with
substantially all of its consumer electronics product line for 1999 and beyond.
Failure to enter into necessary outsourcing contracts 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 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; however, the parties are engaged in negotiations while the
structure of the Reynosa Assets transfer under the Financial Restructuring is
being finalized. The Company believes that it would be beneficial to its
outsourcing efforts to have the Reynosa Assets (while owned by LGE) provide
certain products due to the general unavailability of certain screen-sized
televisions and uniquely designed commercial products models through other
manufacturers. The Company currently anticipates purchasing approximately $431
million in finished products and components from the Reynosa facility for its
1999 model year. Because no contract concerning transfer of the Reynosa Assets
or outsourcing from the Reynosa Assets following the transfer to LGE
35
<PAGE>
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.
The Company currently manufactures certain components and sub-assemblies at
the Reynosa facility that may be required by suppliers to the Company
following its exit from manufacturing. The Company and LGE have not yet
reached agreement on whether LGE will continue the manufacture of those
components and sub-assemblies following the transfer of the Reynosa Assets. If
those components and sub-assemblies are not manufactured at Reynosa following
the transfer, the Company may need to seek alternative sources, pre-build
parts and inventories of finished goods, or delay some of its intended product
lines until suitable component and sub-assembly manufacturers can be located
and contracts secured for the Company's products. If the Company is unable to
reach agreement with LGE concerning outsourcing and component supply, 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. While the Company outsourced some
small screen televisions, all of its VCRs, and many television components and
accessories prior to the beginning of the 1999 model year, 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; (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; (iv) the Company may not be able to meet
financial requirements, including payment and security terms, imposed by
outsourcing manufacturers and component suppliers; and (v) 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 or
continued performance of the Operational Restructuring.
Between October and December 1998, Zenith signed definitive supply
agreements with vendors relating to significant portions of its 1999 model
year requirements. These contracts cover console televisions, small and medium
screen direct-view sets, TV/VCR combination sets and large screen projection
television sets. The Company has agreed to purchase direct view television
sets from Action Electronics Co., Ltd, Daewoo Electronics Company, Ltd. and
from the Company's facilities in Reynosa, Mexico which are to be transferred
to LGE under the terms of the Prepackaged Plan. The Company has contracted
with Five Rivers Electronics Innovations, LLC for the manufacture and assembly
of console television sets, which will incorporate picture tubes produced
under agreement with Philips and Thomson Consumer Electronics and chassis
assembled in the Reynosa facility. Front and rear projection televisions and
components will be purchased from several manufacturers, including Hitachi
Home Electronics (America), Inc. and from the Company's Reynosa facility. No
minimum purchase volume is established under any of the contracts. Each
agreement provides for price adjustments for changes in Zenith's product
specifications. Additionally, some of the agreements have specific financial
requirements concerning payment terms and conditions that are subject to
credit availability under the Company's DIP or post-restructuring credit
facilities during the 1999 model year.
36
<PAGE>
The Company has also entered into supply agreements with Philips and Thomson
Consumer Electronics relating to color picture tube requirements for the 1999
model year. Each of the supply agreements requires that the seller supply a
specific percentage of the Company's requirements for medium screen color
picture tubes. The agreement with Philips includes provisions relating to
Philips' purchase of some of the equipment located at the Company's Melrose
Park facility, including some of the equipment previously leased by the Company
under the Leveraged Lease (Melrose Park).
While the Company has identified parties that it believes have the capacity
and interest to provide all or substantially all of the products in its 1999
model year line, the Company has not entered into definitive agreements
concerning its 1999 model year requirements for HDTV products, front-projection
televisions, VCRs, TV/VCR combination sets or for some accessories or
components which the Company expects to purchase from LGE or an affiliate of
LGE or other vendors, in each case also under purchase order arrangements.
The ability of the Company to achieve its Operational Restructuring requires
that all outsourcing contract negotiations for each model year be finalized
within sufficient lead time to allow product sources to order components and
schedule production and delivery to meet the Company's forecasts. Such lead
time schedules vary from supplier to supplier. Failure of the Company to
finalize all product specifications, allowing suppliers' scheduling of
component parts, manufacturing or delivery could result in delays in delivery
of products, which could, in turn, 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 Debentures. Failure of the Company to obtain
credit facilities with sufficient capacity to meet the requirements of those
contracts could result in delays of product delivery and materially impact the
Company's ability to implement the Restructuring.
Pursuant to the Prepackaged Plan, the Company may transfer to LGE the Reynosa
Assets in return for the forgiveness of debt. The Company is currently
negotiating terms with LGE under which the Company will procure certain
products from Reynosa following that transfer but no contract relating to that
outsourcing relationship has been completed at this time. In some cases such
contract may be at prices or under terms less favorable to the Company than
those included in assumptions used in formulation of the Operational
Restructuring. The Company expects, however, that initial pricing terms for
outsourcing from Reynosa to fall within the assumptions underlying the Business
Plan Projections. The Company currently anticipates purchasing approximately
$431 million in finished products and components from the Reynosa facility for
its 1999 model year, a portion of which is expected to be purchased following
the transfer of the Reynosa Assets to LGE in connection with the Restructuring.
See "BUSINESS PLAN PROJECTIONS--Cost of Goods Assumptions."
Due to continuing industry production under-capacity for new technology
products, particularly in high end, high feature television sets, the Company
may not be able to offer expanded product lines incorporating such new
technologies at attractive prices. Such products include HDTV sets and plasma
screen monitors. Many of these products typically have higher margins than
older technology, 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 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.
There can be no assurance that the Company will be successful in procuring
all outsourced products at the prices and covering the product lines
contemplated by the Operational Restructuring. With the exception of the
picture tube agreement described above, the Company has not yet entered into
any agreements with suppliers for model years after 1999. Failure of the
Company to provide its planned product line at the designated price points
37
<PAGE>
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 Debentures.
Continued delays in the implementation of all aspects 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 more than $25 million for
each of the years 1998-2002 and $14 million in 2003. In June 1998, Funai
Electric Co., Ltd., 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 also sought 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 injunctive
relief. 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 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. Most, if not all, steps in the Operational Restructuring require
actions by parties (such as lenders, suppliers, customers and purchasers of
assets to be sold) or the occurrence of events (such as asset sales and
agreement on outsourcing arrangements) that are outside of the control 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.
On November 16, 1998, the Company and LGE entered into Amendment No. 1 and
Waiver to the Restructuring Agreement to extend the delivery date of the
Implementation Program (as defined) from August 31, 1998 to November 30, 1998
and to defer until November 30, 1998 the Company's obligation to pay interest
to LGE on certain amounts owed by the Company to LGE. In April 1999, the
Company and LGE reached an agreement in principle concerning certain
amendments to the Restructuring Agreement which would, among other things,
extend the date by which the Prepackaged Plan must be consummated to September
15, 1999 and modify various provisions of the Restructuring Agreement to
reflect the terms of the Citibank Exit Facility and Lock-Up Agreement. The
Company and LGE are continuing to discuss other possible amendments.
38
<PAGE>
There can be no assurance that an agreement can be reached with respect to
these issues. If an agreement is not reached with respect to these issues, the
Company will be in default of the Restructuring Agreement, the conditions to
LGE's participation in the Restructuring will not be met, and the Company will
not likely be able to complete the Restructuring.
LGE may terminate the Restructuring Agreement if the Prepackaged Plan is not
consummated prior to the deadline in the Restructuring Agreement. There can be
no assurance that the Company will be able to comply with the deadlines and
other conditions in the Restructuring Agreement.
Ability to Maximize Value for Network Systems Division
NWS has designed, manufactured and distributed set top boxes for the cable
and satellite television industries for the past 15 years. In 1998, NWS sales
accounted for $106.1 million, or about 11% of the Company's total sales of
$984.8 million. In 1997, NWS sales accounted for $56.9 million, or about 5% of
the Company's total sales of $1.1 billion. The increase in NWS sales from 1997
to 1998 primarily resulted from shipments of digital set top boxes, which were
first introduced in the second half of 1997. In 1996, NWS sales accounted for
$ 82.4 million, or about 6.4% of the Company's total sales of $1.3 billion.
The majority of NWS' current business is derived from two strategic
contractual relationships with Americast and with affiliates of News
Corporation for the production of digital set top boxes. Americast was
initially 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 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. 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. 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 Americast
agreement has been amended to adjust volume, pricing and products covered. The
value of NWS may also be affected by further contract negotiations involving
changes in prices or volumes.
In connection with the Operational Restructuring, the Company has been
attempting to find an investor in, or a buyer for, NWS since early 1998.
Although the Company received preliminary bids or indications of interest
relating to the purchase of NWS in late 1998, such bids have been withdrawn,
and the prospective buyers have notified the Company that they are no longer
interested in purchasing NWS. The Company is continuing to seek a buyer for
all or a portion of the NWS business. The Company's Business Plan Projections
contemplate the sale of NWS in late 1999. 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.
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 Debentures.
39
<PAGE>
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 Business Plan Projections assume certain
timing and absorption of digital products by consumer markets, and that the
current federally mandated timing of HDTV and digital broadcasts would be met.
While initial digital television broadcasts began in November 1998, the amount
of programming is expected to be limited for some time. In addition, television
manufacturers, including the Company, are experiencing delays in getting
digital products to market at mass-market price points. The Company has delayed
the consumer release of its rear-projection HDTV due to manufacturing issues
and cost considerations.
The television and consumer electronics industries have seen substantial
price erosion since the late 1980s. Since 1994, consumer prices have declined,
on average, from 2% to 5% per year. 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 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 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 within the time frames contemplated by the Business Plan
Projections.
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 has very limited resources with which to either develop the technology
or to extend the applications of the technology as the standard in other
markets internationally. The Company is not currently collecting royalties on
its VSB technology. It expects to finalize its VSB licensing strategy and begin
to negotiate licenses in the second quarter of 1999. The Company expects that
these licenses, when granted, will be retroactive to the first production or
sale of the licensed products.
The Operational Restructuring requires that the Company exploit its
technologies, including VSB. Because of the Company's limited resources, such
activities are likely to be undertaken through joint ventures or technical
alliances with third parties. 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. LGE does
40
<PAGE>
have manufacturing, technology and marketing capabilities which may be
beneficial to the Company in its efforts to advance the ATSC broadcast standard
in certain key markets and the Company has had discussions with LGE concerning
its interest and the resources available to assist in expanding the application
of the ATSC broadcast standard in other markets, particularly in Asia and South
America. No definitive agreement has been reached concerning joint efforts
between the Company and LGE in those areas. The achievement of the results
contemplated by the Operational Restructuring does not require that LGE will be
one of the parties with whom the Company seeks joint venture or technological
partnerships.
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 its 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 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 several years, and continues to
experience, high turnover in the ranks of its executives, professionals, sales
and marketing personnel and technical and engineering staff. In particular,
several key digital technology and software engineers have 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 implemented a
retention program in 1998 which included base salary adjustments, short-term
and long-term incentive bonuses and retention and stay bonuses for key senior
management 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 Debentures.
Legal Proceedings
In June 1998, Funai Electric Co., Ltd., 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 also sought 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 and has also denied plaintiff's
motion for a preliminary injunction. 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 defendants removed the suit to the U.S. District Court in Newark, New
Jersey. In December 1998, the suit was amended to name the Company, a former
director and chief executive officer of the Company, LGE, LG Semicon and LG
Group as additional defendants. The suit alleges breach of fiduciary duties,
fraud and violations of securities laws by the defendants arising out of
certain alleged misstatements that "artificially
41
<PAGE>
inflated" the price of the Old Common Stock. The plaintiff seeks to be
certified as a class representative and to have the suit designated as a class
action. In addition to money damages, the suit also seeks to enjoin the
defendants from commencing the Prepackaged Chapter 11 Case and proceeding with
the cancellation of the Old Common Stock held by minority shareholders. The
Company does not anticipate that the Vengrove litigation will have an adverse
effect on the Company's ability to effectuate the Restructuring. However, if
the court in which the Vengrove litigation is pending were to grant some or
all of the relief sought by the plaintiff, such a ruling could result in a
delay of the commencement of the Prepackaged Chapter 11 Case or of the
consummation of Restructuring. The defendants have asked the court to dismiss
the suit.
The exculpation provisions of the Prepackaged Plan, if approved by the
Bankruptcy Court, would bar causes of action against the defendants for any
act taken or omitted in connection with or related to the formulation,
preparation, dissemination, implementation, administration, confirmation or
consummation 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 of such defendants, as determined by a
court of competent jurisdiction.
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."
Conditions in the Restructuring Agreement and Lock-Up Agreement
Pursuant to the Restructuring Agreement and the Lock-Up Agreement, LGE and
the members of the Debenture Committee have agreed to vote their Claims in
favor of the Prepackaged Plan. The obligations of LGE and the members of the
Debenture Committee are subject to a number of conditions and requirements, as
provided in the Restructuring Agreement and the Lock-Up Agreement. There can
be no assurances, however, that the Company will be able to comply with such
conditions and requirements. See "SPECIAL FACTORS--The Restructuring
Agreement" and "--The Debenture Committee" for more information regarding the
terms of the Restructuring Agreement and the Lock-Up Agreement.
Financing Agreement Restrictions
The Company has entered into the Commitment with Citicorp for the DIP
Facility and the Citicorp Exit Facility. The Commitment provides that both
facilities will contain a number of restrictions on the Company's operations,
including, among others, restrictions on the following:
. the incurrence of debt and . making of payments on subordinated
making of guarantees; debt or intercompany debt;
. the making of investments; . sales of assets;
. mergers, acquisitions and
. transactions with affiliates consolidations; and
and stockholders;
. issuance of capital stock.
. incurrence of liens;
These restrictions may limit the Company's financial and operating
flexibility. See "DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS."
In addition, both facilities will require the Company to achieve and
maintain certain financial ratios and tests. There can be no assurance that
the Company will be able to achieve and maintain compliance with these ratios
and tests or the other requirements to be contained in the facilities. Failure
to comply with the requirements of a facility would result in a default and
could lead to acceleration of the Company's obligations under the facility,
and cross-acceleration of other debt of the Company, which could result in a
subsequent bankruptcy proceeding for the Company. The Company cannot predict
what the results of any subsequent bankruptcy proceeding would be.
42
<PAGE>
Events of Default; Risk of Acceleration or Termination
The Company is a party to a number of 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.
In addition, substantially all of the Company's outstanding 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. The Company did not make the required
April 1, 1999 sinking fund and interest payments on the Old Subordinated
Debentures. Failure to make such payments, subject to grace periods (if any)
under the Old Subordinated Debenture Indenture, constitutes a default under the
Old Subordinated Debenture Indenture. The Company received waivers relating to
cross defaults under the Amended Citibank Credit Facility and the LGE Demand
Loan Facility. The Amended Citibank Credit Facility expires on the earlier of a
bankruptcy filing by the Company and April 30, 1999. The Company believes that
a further extension of the Amended Citibank Credit Facility will be necessary,
but there can be no assurance that the Company will be able to obtain such
extension. 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) or to become due without a replacement
facility, 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 or chapter 11 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 56.2% 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 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. For
example, if the Prepackaged Plan is consummated and the Reynosa Assets are
transferred to LGE, LGE will sell televisions produced at the Reynosa facility
to the Company for resale by the Company in the United States. The Company
would expect to purchase approximately $431 million of product in 1999 from LGE
under such arrangement. If the Reynosa Asset transfer does not occur, the
Company expects to enter into a management or lease agreement with LGE pursuant
to which LGE would operate such facility. The Company and LGE are in
discussions concerning the joint development of HDTV products, which may
eventually be manufactured by LGE for the Company for resale by the Company in
the United States. See "SPECIAL FACTORS--Events Leading to the Restructuring"
and "CERTAIN TRANSACTIONS."
43
<PAGE>
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 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
44
<PAGE>
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 Company believes that under the Federal Rules of
Bankruptcy Procedure the Company would be required to resolicit votes for or
against the Prepackaged Plan only when a modification adversely affects the
treatment of the claim of any creditor or equity securityholder. See "THE
PREPACKAGED PLAN--Modification of the Prepackaged Plan."
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 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.
45
<PAGE>
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 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 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, the Investor Releasees and the
Debenture 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. Under the Prepackaged Plan,
holders of Equity Interests and holders of Old Subordinated Debentures that
have marked a Ballot so as not to consent to the releases do not grant
releases to the D&O Releasees, the Investor Releasees or the Debenture
Releasees. While the Company believes that these provisions in the Prepackaged
Plan are permissible under the Bankruptcy Code, arguments exist that certain
case law would permit a contrary conclusion which, if accepted by the
Bankruptcy Court, may result in the Prepackaged Plan not being confirmed.
The Confirmation and Consummation of the Prepackaged Plan are also subject
to certain other 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 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 Debenture in the
event of a subsequent bankruptcy. A holder of New Debentures will have a
smaller claim with respect to New 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
46
<PAGE>
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 is employing a combination of internal resources and outside
consultants to coordinate and implement its Year 2000 readiness initiatives.
The Company has established a Company-wide Year 2000 task force, led by the
company's technology group, with representation from its major business
segments, to evaluate and address Year 2000 issues. The Year 2000 task force's
responsibilities include, without limitation, (i) conducting an evaluation of
the Company's computer-based systems, facilities and products (and those of
dealers, vendors and other third parties with which the Company does business)
to determine their Year 2000 readiness, (ii) coordinating the replacement
and/or upgrade of non-compliant systems as necessary, (iii) promoting the
Company-wide awareness of Year 2000 issues through education and training, and
(iv) developing, and overseeing the implementation of all of the Company's
other Year 2000 readiness initiatives.
The Company has completed its evaluation of its computer-based systems,
facilities and products to determine whether they are "Year 2000 ready." The
Company believes that its material non-information technology systems will be
Year 2000 ready prior to January 1, 2000. The Company believes that most of its
currently manufactured products are Year 2000 ready. The Company has sent Year
2000 readiness questionnaires to its existing key vendors and suppliers to
assess the Year 2000 readiness of their systems and products. The responses to
these questionnaires have indicated that the Company's vendors or suppliers are
addressing their Year 2000 issues and expect to be Year 2000 ready by the Year
2000. 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,
and based on the Company's current implementation plan, the Company does not
believe that its Year 2000 related issues will have a material adverse effect
on the Company's business. Although no contingency plan has been deemed to be
necessary at this time, the Company is in the process of evaluating the need
for various contingency plans as a precautionary measure.
Included within the Company's Year 2000 readiness initiatives are plans to
ensure that the Company's financial, sales and distribution application
software ("FS&D Applications") are Year 2000 ready. The FS&D Applications
include the primary software employed in the Company's general ledger, accounts
payable and disbursement, accounts receivable and collection, purchasing,
billing, inventory management and sales activities. The Company believes its
current FS&D Applications are not Year 2000 compliant and, accordingly, has
undertaken an initiative to replace these systems with new Year 2000 compliant
applications from a third party software vendor. The Company has commenced the
implementation of these new FS&D Applications and currently expects to be
completed by the third quarter of 1999. The estimated total cost of
implementing the new FS&D Applications is $6.8 million, of which $3.3 million
will be incurred in fiscal 1999. The Company has not specifically identified
the date upon which its existing FS&D Applications will begin to fail, but
believes their replacement by the third quarter of 1999 is necessary in order
to avoid significant risk of business interruption in activities to which the
FS&D Applications relate. The timely implementation of the new FS&D
Applications involves certain risks. The most significant of these risks
includes retention of certain key employees, the ability to obtain external
technical programming resources, and the ability to fund the program given the
uncertainties surrounding the company's current financial condition and plan of
reorganization. If implementation is delayed beyond the third quarter of 1999,
the existing FS&D Applications may begin to fail and cause significant business
interruption. There can be no assurances that delays in the implementation will
not occur. Delays in implementation could adversely impact the Company's
ability to bill sales and collect cash from customers, pay vendors, manage
inventories and prepare financial results.
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 other
principal exposure to Year 2000 risks are related to the ability of its vendors
to provide the Company with Year 2000 ready components and products and to
assure that such vendors otherwise are Year 2000 ready so
47
<PAGE>
that they are able to provide the Company with components and products in a
timely manner. The Company is aware, however, that Year 2000 issues may exist
with respect to vendors with which the Company has or will have a material
relationship.
Prior to 1998, the Company spent in the aggregate approximately $1.8 million
on software and hardware upgrades and replacements and approximately $0.2
million was spent on other costs (i.e., labor, consulting fees and other
expenses) in connection with Year 2000 readiness. The company spent a total of
$2.5 million in 1998 (approximately $0.8 million for software and hardware
upgrades and approximately $1.7 million for other costs) for this project. The
Company has estimated it will spend $4.6 million in 1999 (approximately $1.0
million for software and hardware upgrades and approximately $3.6 million for
outside consulting assistance and other costs) 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
48
<PAGE>
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.
49
<PAGE>
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 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.
50
<PAGE>
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 with two owner trusts in which General Foods Credit Corporation
was the sole participant. In connection with the transactions, 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. The owner trusts financed a portion of the
purchase price of the equipment through loans from a number of lenders (Cova
Financial Services Life Insurance Company, Peninsular Life Insurance Company,
Executive Risk Indemnity, Inc., Occidental Life Insurance Company of North
Carolina, two J.P. Morgan Investment Management, Inc. entities, two pension
funds managed by banks, and six John Hancock Mutual Life Insurance Company
investment entities). A portion of the equipment covered by the Leveraged
Leases was originally purchased by the Company from LGE, for which the Company
paid LGE approximately $35 million.
The term of the Leveraged Leases was 12 1/2 years and annual payments under
the Leveraged Leases averaged approximately $10 million in the aggregate. The
Company's payment obligations, along with certain other obligations under the
Leveraged Leases, were fully guaranteed by LGE. Under the terms of the
Leveraged Lease documents, the Company had certain obligations to maintain and
operate the equipment for the term of the leases. In the event of an early
termination of the Leveraged Leases, including as a result of an event of
default, the Company was required to pay an amount which included the
stipulated loss value associated with the purchase price of the equipment
(less depreciation) and additional amounts covering certain lost tax and
investment opportunities for both the lessor and its lenders.
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, 1998, 1997 and 1996,
$135.6 million, $144.3 million and $106.8 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% per annum of the fair value of the
amounts of such LGE commitments, payable in stock options to purchase
3,965,000 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.
51
<PAGE>
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% per annum on amounts outstanding under 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 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. The Company continued to be unable to
obtain the additional financing, and in June 1998, the Citibank Credit Facility
was amended and restated, and the requirement for the additional financing was
eliminated. See "DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS--Short Term Debt."
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 which was in May 1998, 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 in May 1999. The Company is in negotiations with LGE
to extend the facility. 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.
52
<PAGE>
In June 1998, LGE paid $50 million of the Unsecured Bank Loans pursuant to
its guarantees of those obligations. In September 1998, LGE paid an additional
$22 million of the Unsecured Bank Loans pursuant to such guarantees. Pursuant
to the Reimbursement Agreement, the Company is obligated to LGE for these
payments plus interest.
As part of the Operational Restructuring, the Company determined that as a
result of its decision to exit manufacturing it would be idling a substantial
portion of the equipment subject to the Leveraged Lease (Melrose Park), and
that this would constitute an event of default under both of the Leveraged
Leases. Following negotiations with the lessor and its lenders, on July 22,
1998, LGE made a negotiated settlement payment of $90.1 million under the
guarantees of the Leveraged Leases. The Company estimated that its obligations
under the Leveraged Leases under a default in connection with the idling of the
equipment pursuant to the Operational Restructuring would have been in excess
of $97 million based on the termination calculations provided for in the
Leveraged Leases. If the Company had not pursued the Operational Restructuring
so as to trigger a default under the Leveraged Leases, and the Leveraged Leases
otherwise continued in force through their term, the total amount of the
Company's payments under the Leveraged Leases from August 1998 through the end
of the term would have been $120.2 million.
As a result of LGE's settlement payment with respect to the Leveraged Leases,
LGE controls the owner trusts that own the equipment, and the Company has an
obligation to LGE in the amount of the settlement payment ($90.1 million). As
the equipment is sold, the Company's reimbursement obligation on account of
such settlement payment will be reduced by the amount of the sale proceeds.
The appraised value of the equipment covered by the Leveraged Leases is $21.3
million, which is significantly less than its original value, and as a result
the Company recognized a loss on termination of the Leveraged Leases of $68.8
million.
In December 1998, the term of the Amended Citibank Credit Facility was
extended to the earlier of a bankruptcy filing by the Company and April 30,
1999. The Company and LGE amended the LGE Demand Loan Facility to provide that
no demand for repayment may be made under the facility, absent an event of
default, prior to April 30, 1999.
Other Transactions with LGE
In addition to the financing transactions described above, the Company has
engaged in a number of transactions with LGE, including purchases of products
and equipment, sales of products, technical agreements and service agreements.
The Company believes that the transactions between the Company and LGE have
been conducted on terms no less favorable to the Company than could have been
obtained with unrelated third parties. See "CERTAIN TRANSACTIONS" for
additional information about these transactions, including the amounts of such
transactions.
Product purchases: In the ordinary course of business, the Company purchases
VCRs, television-VCR combinations and components from LGE and LG Semicon. The
amount of such purchases was $50.7 million, $93.3 million and $128.8 million in
1998, 1997 and 1996, respectively. Sales of products purchased from LGE and LG
Semicon contributed $59.8 million, $112.3 million and $141.4 million to sales
in 1998, 1997 and 1996. The purchase prices were the result of negotiations
between the parties, and were consistent with third party bids.
In 1998, the Company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the Company's two
largest customers and pays the Company a license fee for the use of the
Company's brand names on such products and the inclusion of the Company's
patented tuner technology in such products. During 1998, the Company accrued
approximately $1.5 million in royalties for the use of the Company's brand
names pursuant to this direct shipment program. A similar arrangement was
entered into in April 1997 in Canada where LGE's Canadian affiliate sells
Zenith branded VCRs under a license from the Company. Pursuant to that
arrangement, the Company received payment from LGE of approximately $0.3
53
<PAGE>
million during 1998 and less than $60,000 in 1997. The licensee fee payable by
LGE under these arrangements is comparable to royalty rates charged by the
Company to unrelated third parties. Following the Restructuring, it is
expected that LGE will own and operate the Reynosa Assets, and the Company
currently anticipates purchasing finished products and components produced at
the Reynosa facility for its 1999 model year.
Equipment purchases: During 1996 and 1997, the Company purchased from LGE
production machinery and equipment for the manufacture of computer display
tubes and the automation of existing production lines in the Company's Melrose
Park picture tube plant. Equipment purchases were approximately $0.3 million,
$18 million and $24 million in 1998, 1997 and 1996, respectively.
Product and other sales: The Company sells televisions, picture tubes, yokes
and other manufactured subassemblies to LGE at prices that are comparable to
prices charged by the Company to its major customers. Such sales totalled
approximately $53.6 million, $55.1 million and $29.4 million in 1998, 1997 and
1996, respectively.
In December 1996, the Company closed its wholly-owned Canadian distributor
and sold the remaining inventory to LGE at its book value of $3.8 million,
after taking into consideration the cost to the Company (including customs and
duties), the point in time within the model year, the costs associated with
other methods of disposal of such inventory, and the requirement that the new
Canadian distributor would require certain inventories in order to meet
customer expectations for product support. 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 products in Mexico. The Company's sales to the LGE Canadian and
Mexican subsidiaries were $27.3 million and $19.6 million, respectively, in
1998 and $25.5 million and $16.8 million during 1997. The Company did not have
any such sales during 1996. In 1997, an affiliate of LGE entered into an
agreement with the Company concerning a license for the use of the Company's
"Z-Tac" set-top box technology pursuant to which the Company received a
$250,000 up-front license fee as well as approximately $850,000 from the sale
of set-top box kits.
LGE's U.S. affiliate, LG Alabama, Inc. ("LGAI") and the Company's Reynosa
maquiladora have entered into a maquila agreement (the "LGAI Maquila
Agreement") pursuant to which the Reynosa facility will assemble small and
medium screen size television sets for LGAI, using components, equipment and
other assets provided by LGAI. The LGAI Maquila Agreement was approved by
Mexican authorities in December 1998. The material terms of the assembly
relationship between LGAI and the Reynosa maquiladora are currently being
negotiated between the parties. The parties expect to finalize the terms of
this assembly relationship in the first quarter of 1999. In connection with
the LGAI Maquila Agreement, the Company's subsidiaries with assets located in
the Reynosa maquiladora will also negotiate and enter into agreements with
LGAI concerning labor, equipment and other assets to be used in the assembly
operations.
Technical agreements: The Company and LGE are currently operating under
several technology agreements and licenses related to HDTV, flat tension mask
products, and the Company's patents on television tuners. The license fee
payable by LGE is comparable to royalty rates charged by the Company to
unrelated parties. Under a technical cooperation agreement entered into by the
Company and LGE in 1990, the Company agreed to pay LGE 33% of the royalties
received by the Company from the use in Korea of certain HDTV technologies and
1% of the royalties received from such technologies from all other countries.
The Company had not received any such royalties as of December 31, 1998. Under
a separate agreement, the Company has licensed its tuner patents to LGE. LGE's
payments to the Company under tuner licenses were approximately $0.4 million,
$0.6 million and $1.0 million in 1998, 1997 and 1996, respectively. In
September 1997, LGE agreed to provide the Company with $4.5 million in funding
for the Company's HDTV receiver project. LGE is to be repaid the $4.5 million
advance, without interest, from the royalties generated from future VSB
licensing.
In May 1997, the Company and LGE entered into a patent collaboration
agreement which provides that (a) LGE will assist the Company in identifying
infringements of the Company's patents and technologies, in return
54
<PAGE>
for 10% of all royalties collected as a result of such efforts, and defending
against third party intellectual property claims, and (b) LGE has the option to
acquire patent rights the Company intends to abandon for nominal amounts and to
acquire any other patent rights for mutually agreed upon prices plus the
payment by LGE to the Company of 10% of all future royalty income, if any,
received from such other patent rights. LGE's option to acquire Zenith's U.S.
and foreign patent rights under the patent collaboration agreement extends to
any of the patents owned or applied for by the Company during the term of the
agreement (which is automatically renewable for two year periods unless
terminated by either party following its initial two year term), provided the
Company has made an affirmative decision not to protect or maintain those
patents. As of December 31, 1998, the Company had assigned to LGE or its
affiliates for a total of approximately $6,000 one U.S. patent, one foreign
patent and one foreign patent application relating to television and
telecommunication technology. The Company has made a decision not to protect or
maintain those patents already assigned to LGE under the agreement. Under a
separate agreement, the Company has assigned to LGE's telecommunications
affiliate a patent relating to cordless telephone technology for $75,000. The
Company retained a royalty-free, non-exclusive license and 50% of all royalties
collected by the LGE affiliate related to such patent. An affiliate of LGE has
also licensed certain technological information from Zenith relating to the
manufacture of VSB modulation equipment under a 1998 agreement. That agreement
allows the LGE affiliate to use technical information and design schematics as
the basis for further development of commercial products. Under the agreement,
Zenith is to receive $300,000 in 1998 in up-front payments and additional
royalty payments per units sold by the LGE affiliate based on Zenith's designs.
The agreement does not include a VSB patent license.
Service Assistance: In 1996 and 1997, employees of LGE provided certain
technical support services to the Company for which LGE was not compensated by
the Company. LGE donated $2.2 million of such services (based on its actual
payroll, travel and living expenses) in 1997. In addition, employees of LGE
have provided certain technical support services to the Company that were
covered under service agreements. The Company's obligations to LGE for such
services totaled $1.5 million, $4.8 million and $0.3 million in 1998, 1997 and
1996, respectively. The amounts due to LGE for the services provided were the
amounts that LGE advised the Company were its cost to provide the services. 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.
In late December 1997, the Company entered into an agreement with LG Software
India Ltd. pursuant to which LG Software India Ltd. provides certain software
development, design and support services to the Company. Projects under the
agreement include the Company's Year 2000 Readiness support. Payments to LG
Software India Ltd. were approximately $1.1 million and $0.1 million in 1998
and 1997, respectively.
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. Lease payments to LGE
were approximately $0.6 million, $0.3 million and $2,000 in 1998, 1997 and
1996, respectively. The Company and LGE are in discussions concerning the joint
development of HDTV products, which may eventually be manufactured by LGE for
the Company for resale by the Company in the United States.
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 advised the Company that 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 advised the
Company that it 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, the Company began to evaluate options for additional
financing or capital in light of its continuing cash requirements and
continuing losses from operations. Beginning in November 1997, LGE advised
55
<PAGE>
the Company that it 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. LGE initially interviewed PJSC to act as LGE's financial advisor
in connection with the Restructuring. At the request of the Company's
independent directors, PJSC was retained to act as the Company's investment
banker and financial advisor in evaluating the Company's strategic and
financial alternatives. LGE has advised the Company that it and its affiliates
(other than the Company) have not had, and do not presently contemplate having,
any material relationship with PJSC. None of the fees or expenses of PJSC will
be borne by LGE. 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 to replace Mr.
Willmott, who had announced in September 1997 his intention to resign.
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 JA&A as
restructuring advisors. JA&A 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 JA&A, 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 JA&A employees serve in
financial positions at the Company. The Company has engaged JA&A pursuant to an
engagement letter dated as of December 1997, as amended, under which JA&A
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." LGE advised the Company that it and its affiliates (other
than the Company) have not had, and do not presently contemplate having, any
material relationship with JA&A. None of the fees or expenses of JA&A will be
borne by LGE.
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 (which subsequently evolved into the
Operational Restructuring) 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 outsourcing 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. The proposed strategy also
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.
56
<PAGE>
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, in
furtherance of the development of the Operational Restructuring, 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 over 15 parties (including strategic
investors in the consumer electronics industry and financial investors)
concerning a potential 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; (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
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. None of the members of the Special Committee is an
officer or director of LGE or an officer of the Company, although Mr. Connolly
was one of the directors designated by LGE in 1995 pursuant to the LGE Stock
Purchase Agreement and Mr. Willmott served as the Company's Chief Executive
Officer from January 1997 to January 1998. 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
57
<PAGE>
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 advised the Company
that it 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."
On April 16, 1998, LGE presented its initial proposal, which contemplated that
pursuant to a prepackaged plan of restructuring: (i) the Citibank Credit
Facility and the Citibank Receivables Facility would be restructured or
refinanced; (ii) the Company's general unsecured claims would be unimpaired;
(iii) the holders of Old Subordinated Debentures would receive an aggregate of
$26 million of new 10% subordinated debentures due 2011 (which debentures would
not be convertible); (iv) LGE would receive all of the common stock of New
Zenith, the Reynosa Assets and an aggregate of $152.7 million of new senior
notes due 2008 in exchange for its extended payables, guarantee of the
Company's demand loans and leveraged leases, direct loans, and servicing fees;
and (v) Zenith's existing Common Stock would be canceled. The conditions to
LGE's obligations in the initial proposal were substantially identical to those
provided to the Company on March 12, although the requirement regarding
available non-LGE financing was reduced to $100 million, and the provision
regarding releases was modified to require releases from the Company, its
creditors and interest holders. Discussions among the Company, the Special
Committee and representatives of LGE concerning possible restructuring
alternatives continued throughout April and May of 1998.
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 also discussed and reviewed with its special counsel the
reasonableness and effects of any such releases. In that regard, the Special
Committee's deliberations focused on whether the value, if any, attributable to
the requested release of LGE would cause LGE to obtain a disproportionate
recovery relative to other creditors and whether other creditors would receive
more with LGE participating in the Company's proposed financial restructuring
and receiving releases than if no such releases were provided and the proposed
restructuring did not proceed. 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 made a
subsequent proposal which provided for the same treatment of the Citibank
Credit Facility and the Citibank Receivables Facility, the Company's general
unsecured claims, LGE and holders of the Old Common Stock, but contemplated
that the holders of Old Subordinated Debentures would receive an aggregate of
$40 million of new 6 1/4% subordinated debentures due 2010 (which debentures
would not be convertible). The conditions to LGE's obligations in the
subsequent proposal were similar to those included in the initial proposal, but
the conditions contained in the subsequent proposal also included: (i) the
continued service of Mr. Gannon's direct reports or appointment of replacements
satisfactory to the Board; (ii) implementation on or before June 30, 1998 of a
comprehensive compensation plan for Zenith salaried employees, including
retention bonuses, incentive compensation and employment agreements
satisfactory to LGE; (iii) a July 31, 1998 deadline for formulation of detailed
programs to outsource production, sell nonessential assets and maximize VSB
technology and a requirement of execution of necessary contracts satisfactory
to LGE of such programs; (iv) commitments of the sale or liquidation of
nonessential assets at prices consistent with the Company's business plan; (v)
caps on the deviation of results from the Company's business plan with respect
to the projected cumulative funding requirement to December 15, 1998, actual
cumulative funding requirement for any three-month period, projected
58
<PAGE>
cumulative EBITDA to December 31, 1998 and actual EBITDA; (vi) review on or
before June 30, 1998 by the Company's independent public auditors of the
assets listed on the Company's June 30, 1998 balance sheet satisfactory to
LGE; (vii) absence of material contingent liabilities other than specified
liabilities; (viii) a cap on actual and projected cash restructuring expenses;
and (ix) execution of definitive documentation satisfactory to LGE on or
before the earlier of the filing of the Registration Statement or June 30,
1998, filing of the Registration Statement on or before June 30, 1998 and
confirmation of the Prepackaged Plan on or before December 15, 1998. In
addition, LGE withdrew its request for a release from interest holders.
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) that under its
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." This
recommendation included a recommended acceptance of the releases requested by
LGE, which had been presented as a prerequisite to LGE's proceeding with its
restructuring proposal. In that regard the Special Committee's deliberations
focused not on ascribing a fixed value to the requested releases, but on
whether other creditors would receive more with LGE participating in the
Company's proposed financial restructuring and receiving releases than if no
such releases were provided and the proposed restructuring did not proceed. In
this context, the Special Committee concluded that a benefit to the Company of
LGE's agreement to participate in the Restructuring could be measured by the
difference between the going concern valuation of the Company (obtainable if
LGE participated in the Restructuring) and the liquidation valuation of the
Company. In that regard, the Special Committee concluded that the Company's
creditors, including in particular its holders of unsecured Old Subordinated
Debentures, would receive far more with LGE participating in the Company's
proposed financial restructuring and receiving releases than if no such
release were provided and the proposed restructuring did not proceed, in which
event there would likely be no value at all available for distribution to the
holders of unsecured Old Subordinated Debentures.
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-
59
<PAGE>
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. See "--Liquidation and Going Concern Analyses."
PJSC also discussed with the Board the terms of the Company's business plan
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. The Company and LGE entered into the
Restructuring Agreement on August 7, 1998 and entered into Amendment No. 1 and
Waiver to the Restructuring Agreement on November 16, 1998. See "--The
Restructuring Agreement."
On November 16, 1998, PJSC presented to the Special Committee a liquidation
analysis and a going concern analysis based on the Company's November 1998
business plan projections.
On January 20, 1999, the Special Committee unanimously reconfirmed its
recommendation and approval of the Restructuring Agreement.
In March 1999, the Company's independent auditors advised the Company that
the Company's 1998 financial statements would again contain an explanatory
paragraph that describes the significant uncertainty about the Company's
ability to continue as a going concern.
On March 31, 1999, the Company entered into the Lock-Up Agreement with the
Debenture Committee and the Commitment with Citicorp. The terms of the Lock-Up
Agreement are described below under "--Debenture Committee" and the terms of
the Commitment are described below under "DESCRIPTION OF DEBT AND CREDIT
ARRANGEMENTS--The DIP Facility and the Citicorp Exit Facility." The Company
updated its Business Plan Projections to give effect to the terms of the Lock-
Up Agreement and the Commitment, and certain other items. See "BUSINESS PLAN
PROJECTIONS--History of the Business Plan Projections."
On April 13, 1999, PJSC presented to the Special Committee an updated
liquidation and going concern analysis based on the Company's April 1999
Business Plan Projections and which took into account the terms of the Lock-Up
Agreement with the Debenture Committee. See "--Liquidation and Going Concern
Analyses" for a description of the review undertaken and assumptions made by
PJSC in developing its analyses. The Special Committee unanimously reconfirmed
its recommendation and approval of the Restructuring, as modified by the terms
of the Lock-Up Agreement.
LGE has informed Zenith that it received a demand for payment in full from
the holder of the Bank Lender Claims on April 16, 1999. LGE and Zenith intend
to engage in discussions with the lender regarding its demand.
60
<PAGE>
Debenture Committee
In June 1998, the Company was contacted by three significant holders of Old
Subordinated Debentures, Loomis Sayles & Company, Mariner Investment Group and
Caspian Capital Partners, L.L.P. to discuss the proposed Prepackaged Chapter 11
Case and Prepackaged Plan. The members of the Debenture Committee represented
to the Company that they collectively held or controlled over 50% of
outstanding principal amount of the Old Subordinated Debentures. The Debenture
Committee retained Crossroads Capital Partners, LLC ("Crossroads") as its
financial advisor and Hebb & Gitlin as its legal advisor.
The Company entered into a letter agreement, dated June 30, 1998, with
Crossroads pursuant to which, among other things, the Company agreed to pay to
Crossroads certain fees in consideration of Crossroad's agreement to render
financial advisory services on behalf of the Debenture Committee in connection
with the Prepackaged Chapter 11 Case and the Prepackaged Plan. As compensation
for its services, the Company agreed to pay to Crossroads $80,000 per month for
the ninety day period from and after June 8, 1998. At the later to occur of (i)
ninety days, (ii) the entry of an agreement in principle between the Company
and the Debenture Committee with respect to the restructuring of the Old
Subordinated Debentures, and (iii) a cessation of negotiations between the
Company and the Debenture Committee, the fee payable to Crossroads will be
reduced to $25,000 per month, plus an additional amount, if any, at Crossroad's
hourly billing rates if Crossroads incurs greater than sixty hours service on
behalf of the Debenture Committee in such month. The letter agreement is
terminable by the Company upon five business days notice at any time after the
initial ninety day period. Through March 31, 1999, the Company has paid
approximately $537,000 to Crossroads in respect of such arrangements.
The Company entered into a letter agreement, dated June 30, 1998, with the
law firm of Hebb & Gitlin pursuant to which the Company agreed to pay the
reasonable legal fees and expenses of such law firm in connection with such law
firm's representation of the Debenture Committee. As compensation for its
services, the Company agreed to provide Hebb & Gitlin with an initial fee
reserve of $100,000 to be applied against fees and expenses to be incurred in
connection with such law firm's representation of the Debenture Committee. The
letter agreement is terminable at will by either the Company or Hebb & Gitlin
on five business days prior written notice provided to the other party. Through
March 31, 1999, the Company has paid approximately $486,000 to Hebb & Gitlin in
respect of such arrangements.
On March 31, 1999, the Company, LGE and the Debenture Committee entered into
a Forbearance, Lock-Up and Voting Agreement (the "Lock-Up Agreement") with
respect to the terms of the Company's proposed prepackaged plan of
reorganization. Pursuant to the Lock-Up Agreement:
. the parties agreed that under the Prepackaged Plan, if approved, holders
of Old Subordinated Debentures will receive a pro rata distribution of
$50 million of New Debentures;
. the members of the Debenture Committee agreed to vote their claims in
favor of the Prepackaged Plan and to support confirmation of the
Prepackaged Plan;
. the members of the Debenture Committee agreed to forbear from enforcement
of any defaults that might occur with respect to the Old Subordinated
Debentures until the Prepackaged Plan is confirmed;
. the members of the Debenture Committee agreed not to transfer their Old
Subordinated Notes unless the transferee agrees to be bound by the terms
of the Lock-Up Agreement; and
. the members of the Debenture Committee agreed to grant the releases and
exculpations described herein and not to object to the entry of an order
by the Bankruptcy Court approving the releases.
The obligations of the members of the Debenture Committee under the Lock-Up
Agreement terminate if: (a) the Prepackaged Plan has not been filed with the
Bankruptcy Court on or before September 15, 1999, (b) the Prepackaged Plan has
not been confirmed by the Bankruptcy Court on or before December 31, 1999, (c)
the Company or LGE withdraws the Prepackaged Plan from consideration by the
Bankruptcy Court and does not promptly re-file, (d) the Company or LGE files or
supports a prepackaged plan that contains terms that are not, in all material
respects, the same as those in the Prepackaged Plan, (e) the Prepackaged Plan
is modified in any
61
<PAGE>
material respect without the consent of the Debenture Committee or (f) LGE does
not support the Prepackaged Plan. It is a condition to Consummation that no
more than 5% of holders of Old Subordinated Debentures elect not to grant the
releases set forth in the Prepackaged Plan, although this condition may be
waived by LGE.
Under the Lock-Up Agreement, the Company agreed to indemnify the members of
the Debenture Committee and certain related persons from losses arising from
their execution of the Lock-Up Agreement and performance of their obligations
thereunder, other than losses arising from or related to the gross negligence,
fraud or willful misconduct of the members of the Debenture Committee.
Equity Interest Holders
In September 1998, the Company was contacted by the law firm of Katten Muchin
& Zavis, purporting to represent certain institutional and individual holders
of Equity Interests. In October 1998, the Katten Muchin & Zavis law firm, on
behalf of its clients, requested that the Company agree to fund certain
expenses of such Equity Interest holders in connection with the proposed
restructuring, including the fees and expenses of their advisors. In addition,
the Katten Muchin & Zavis law firm, on behalf of its clients, requested access
to certain books and records of the Company.
In November 1998, the Company agreed to cooperate by responding to any
appropriate informational request that might be made by such Equity Interest
holders, subject to the execution of appropriate confidentiality agreements.
However, the Company concluded that it would be inconsistent with the Company's
obligations to creditors for the Company to make any payment to Equity Interest
holders or their advisors when the Company was unable to provide full payment
to all creditors. In January 1999, the Katten Muchin & Zavis law firm and
certain of its clients entered into confidentiality agreements with the
Company. In February 1999, the Company and its financial advisors reviewed with
such parties the Company's November 1998 business plan projections and the
financial analysis performed by PJSC. The Company has not engaged in any
negotiations with such persons.
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 benefit the Company and reduce its overall debt and other obligations by
approximately $285 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 Debentures in an aggregate principal amount of $50
million; and (iii) approximately $32.4 million of indebtedness to LGE for the
Reynosa Assets, which have an appraised value equal to such amount. Such
appraisals should be read in their entirety and state an opinion of value as of
the date of the report and are subject to assumptions and limiting conditions
stated in each report. In addition, as a result of the Consummation of the
Prepackaged Plan, the Company's post-restructuring annualized interest
obligations are expected to be reduced in excess of $30 million.
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 pursuant to which interest will be payable during
the two years following consummation of the Prepackaged Plan by the issuance of
additional LGE New Restructured Notes unless the Company's ratio of EBITDA to
cash interest expense for the immediately preceding four fiscal quarters
exceeds 1.5. See "SUMMARY OF LGE NEW RESTRUCTURED NOTE--Payment of Principal
and Interest; Maturity." The Company has entered into the Commitment with
Citicorp pursuant to which Citicorp has agreed to provide a three-year $150
million credit facility following consummation of the Prepackaged Plan and $150
million debtor-in-possession credit facility during the pendency of the
Prepackaged Plan. The Commitment is subject to a number of conditions. See
"DESCRIPTION OF DEBT AND CREDIT ARRANGEMENTS." In addition, pursuant to the
Restructuring Agreement, LGE has agreed to provide additional credit support of
up to
62
<PAGE>
$60 million pursuant to the LGE New Credit Support. The combination of the PIK
feature of the LGE New Restructured Senior Note, the LGE New Credit Support and
the Citicorp Exit Facility is expected to enhance the liquidity of the Company
following the Consummation of the Prepackaged Plan.
Although the Financial Restructuring will have a detrimental effect on LGE
and the holders of Old Subordinated Debentures in that they will receive less
than face value with respect to their claims (with holders of Old Subordinated
Debentures receiving an aggregate of $50 million in principal amount of New
Debentures in exchange for $103.5 million in principal amount of Old
Subordinated Debentures, and LGE receiving the Reynosa Assets and securities
having an aggregate principal amount of $105.1 million plus the New Common
Stock in exchange for $345.5 million of claims), the Company believes that LGE
and the holders of Old Subordinated Debentures would receive even less in any
reasonably likely alternative transaction. In addition, the Company believes
that its ability to utilize its NOLs, and, therefore, its value, may be less in
an alternative transaction. The amount of LGE's claims is based on the
Company's obligations to LGE, and is not affected by the amount of the
Company's NOLs.
The Financial Restructuring has a detrimental effect on holders of Old Common
Stock (including LGE and LG Semicon), who receive no distribution and retain no
property pursuant to the Prepackaged Plan. In addition, following the Effective
Date LGE will own all of the Common Stock of New Zenith and will, therefore,
have 100% (increased from approximately 56%) of the interests in New Zenith's
net book value, which was negative $364.5 million at year end 1998 and is
projected to be negative $179.3 million at year end 1999, and net earnings
(losses), which were $(275.5) million for 1998 and are projected to be $(14.8)
million for 1999. Following the Restructuring, Zenith expects to continue
purchasing some finished products from LGE, including VCRs. Additionally,
Zenith expects to purchase medium and large screen direct view televisions
produced by LGE in its operation of the Reynosa Assets. Because the Company
intends to outsource substantially all of its product lines following the
Restructuring, the Company expects that it will continue to purchase some
finished products, components and technical services from LGE.
The Company will not pay the fees and expenses of LGE or its professionals in
connection with the Restructuring, except as provided in the Restructuring
Agreement. See "SPECIAL FACTORS--The Restructuring Agreement."
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. One of the conditions
to consummation of the Prepackaged Plan is the availability to the Company of a
credit facility in an amount not less than $100 million on terms and conditions
set forth in the Restructuring Agreement. This is also a condition to LGE's
obligations in connection with the Prepackaged Plan. If the Company is unable
to obtain such a credit facility, it is possible that LGE could waive the
condition to its obligations. In such an event, however, the Company would
probably not have sufficient financing for its operations, and would be unable
to consummate the Prepackaged Plan. If the Prepackaged Plan is not confirmed,
the Company will decide which alternative to pursue by weighing each of the
available options and choosing the alternative or alternatives that are in the
best interests of the Company, its creditors and other parties in interest.
63
<PAGE>
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" and a comparison of the effects of the Prepackaged Plan
and a hypothetical chapter 7 liquidation is set forth under "SUMMARY--The
Prepackaged Plan." In a liquidation, the assets of the Company would be sold in
exchange for 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. First, the going concern value is predicated upon the Company continuing
in operation. In contrast, liquidation value assumes that the Company would be
unable to continue functioning as a going concern and its assets would be sold
separately. Second, due to certain provisions of the Tax Code, it is unlikely
that the Company could take advantage of the Company's accumulated NOLs
following a liquidation or a sale of the Company to an unaffiliated third
party. See "CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS--Consequences to the
Company--Section 382 Limitation." 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
64
<PAGE>
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 March 31, 1999, there were issued and outstanding 67,525,447 shares of
Old Common Stock and approximately 11,500 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 the 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 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 Debentures will not be convertible. However, the New 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. LGE
has advised Zenith that it intends for New Zenith to file periodic reports with
the Commission for such time as the New Debentures remain outstanding.
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. For the reasons described below, the Special Committee
determined that the proposed financial restructuring is fair to unaffiliated
securityholders. Based on the Special Committee's recommendation, the Board
also determined that the proposed financial restructuring is fair to
unaffiliated securityholders.
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, as a result, the financial restructuring has not been
structured so that approval of at least a majority of unaffiliated
securityholders is required. See "THE PREPACKAGED PLAN--Confirmation
Standards." The Company does not believe that stockholder approval would be
required for the Operational Restructuring, because the Company does not expect
to sell all or substantially all of its assets pursuant to the Operational
Restructuring. The following discussion of the Financial Restructuring as it
affects the holders of Old Common Stock is provided notwithstanding that they
are not entitled to vote on the Prepackaged Plan.
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 prepared by PJSC 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. See "--Liquidation
and Going Concern Analyses" for a description of the review undertaken,
assumptions made and information relied upon by PJSC in developing its
analyses. 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, and was advised and concluded that in the absence of LGE's
participation no restructuring would be possible. In this regard, the
Special Committee noted that
65
<PAGE>
the Company might be of greater potential value to LGE than to third
parties for a number of reasons, including the Company's ability to utilize
its NOLs if still controlled by LGE.
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
(other than LGE) 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 which is a part of both the going concern valuation
and the liquidation valuation prepared by PJSC. See "LIQUIDATION ANALYSIS."
The Special Committee also noted that under the terms of the proposed
financial restructuring as negotiated with LGE, the distributions to be
received by LGE with respect to its Claims, including consideration of the
value, if any, of the releases, are reasonable in comparison to the
distributions offered to holders of the Old Subordinated Debentures. In
this regard, the Special Committee noted that it had been advised that a
significant portion of the LGE unsecured Claims are contractually senior to
the claims of the holders of the Old Subordinated Debentures. The Special
Committee further noted that, under PJSC analyses, the percentage face
value to be received by LGE with respect to its unsecured Claims is less
than the percentage face value to be received by the holders of the Old
Subordinated Debentures with respect to their claims (assuming the holders
of the Old Subordinated Debentures approve the restructuring and thereby
receive a distribution). The Special Committee further noted that absent
LGE's agreement to participate in the proposed restructuring, and its
willingness to accept impairment of its secured and unsecured Claims
otherwise entitled to priority, there would likely be no value at all
available for distribution to holders of the Old Subordinated Debentures.
In addition, 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) The Lack of Available Alternatives. In the course of its negotiations
with LGE, the Special Committee investigated and considered the
availability of alternatives to the terms of the proposed financial
restructuring as negotiated with LGE. Specifically, the Special Committee
investigated whether the Company could obtain interim financing from LGE
absent the proposed restructuring, obtain a significant investment by a
strategic investor, a cash-out merger, or arrange for an "exchange" or
"rights" offering pursuant to the Securities Act or the sale of all or a
portion of the Company or its assets.
The Special Committee concluded that each of these alternatives was
unobtainable, unworkable or inappropriate. Specifically, the Special
Committee determined that LGE was unwilling to provide continued interim
financing absent the proposed financial restructuring and further concluded
that even if such short-term interim financing were available, it would not
resolve the Company's need to restructure its obligations on a long-term
basis in order to reduce its debt service obligations. The Special
Committee also concluded that no third-party interested in providing the
required capital (such as strategic investors or buyers for the Company as
a whole) exists, and noted that none had come forward or expressed interest
despite the efforts of management and PJSC to identify such a third party.
In reaching this conclusion, the Special Committee took into account the
beliefs of management and PJSC, each of which expressed the view that no
such third party likely exists. Finally, the Special Committee concluded
that no "exchange" or "rights" offering was viable, both because of the
Company's financial circumstances and because a sale of the Company's
assets to one or more third parties would, even if possible, not be likely
to produce as much value as would result under the LGE proposed financial
restructuring and also would not result in an adequate, long-term
reordering of the Company's debt obligations.
66
<PAGE>
(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 by the Special Committee 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. The Bankruptcy Code requires, subject to certain
exceptions, that the Prepackaged Plan be accepted by all Impaired Classes
of Claims, with acceptance defined to be acceptance by holders of at least
66 2/3% in dollar amount and more than one-half of the number of Allowed
Claims in a class, but counts only those claims that have been voted on the
plan. 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."
In making its recommendation to the Board, the Special Committee did not
consider whether the consideration offered to unaffiliated security holders
constitutes fair value in relation to: (a) current and historical market prices
of the Old Subordinated Debentures and the Common Stock, (b) the net book value
of the Company, or (c) amounts paid by the Company in connection with its
redemption of a portion of the Old Subordinated Debentures. The Special
Committee did not believe that those factors were relevant or appropriate in
light of the Company's financial condition at the time and the lack of
alternative transactions or refinancing. Because the Company did not receive
any firm offers made within the prior eighteen months to the Company by
unaffiliated persons related to a merger, consolidation, acquisition of
substantially all of the assets of the Company or an acquisition of a
controlling interest in the Company, the Special Committee did not consider any
such offers.
The majority of non-employee directors did not retain an unaffiliated
representative to act on behalf of unaffiliated security holders for the
purposes of negotiating the Prepackaged Plan and/or preparing a report
concerning the fairness of the Prepackaged Plan. The terms of the Prepackaged
Plan were negotiated on behalf of the Company, its creditors and its
unaffiliated securityholders by the Special Committee.
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
67
<PAGE>
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, which are attached hereto as Annex C, 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. The Board did not, however,
receive any fairness opinion with respect to the Restructuring.
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 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. (S)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
Retention and Advice of Lazard, Freres & Co. LLC
LGE has advised the Company that it engaged Lazard to provide advice
concerning LGE's negotiating strategy and positions but not to prepare an
independent valuation of the Company. LGE informed the Company that to the
extent the formulation of such negotiating strategy and positions required
valuation information concerning the Company, LGE and Lazard utilized the
financial analyses prepared by the Company's management and PJSC, which are
included elsewhere in this Disclosure Statement. LGE has advised the Company
that Lazard was not engaged to and did not render an opinion, valuation,
appraisal or report with respect to the terms of the proposed Restructuring.
Lazard was retained based on its prior experience in restructurings of other
public companies in similar types of transactions. LGE advised the Company that
Lazard has not provided investment banking services to LGE or its affiliates
(including the Company) in the last two years.
LGE has informed the Company that Lazard made presentations to certain
members of LGE's senior management on two occasions.
LGE has advised the Company that on March 25, 1998, prior to LGE's initial
proposal to the Company on April 16, 1998, certain members of LGE's senior
management and LGE's advisors met to discuss the terms under which LGE might
participate in a long-term restructuring of the Company. At that meeting,
Lazard made a presentation to LGE in an effort to provide LGE with background
that it deemed relevant for this discussion and to assist LGE in identifying
restructuring options. The Lazard presentation began by reviewing the issues
posed by the Company's existing capital structure (including with respect to
its leverage and reliance on short-term debt) and objectives LGE might seek to
achieve in connection with a restructuring. The presentation then focused on
the elements of the Company's capital structure that would require revision in
connection with any long-term restructuring: the Company's Old Subordinated
Debentures and Common Stock and the Company's obligations to LGE. With respect
to the Old Subordinated Debentures, Lazard noted the principal financial terms
68
<PAGE>
of the Debentures and suggested ways in which these terms might be modified in
connection with a restructuring. Lazard also hypothesized certain outcomes of
negotiation with the holders of the Old Subordinated Debentures, ranging from
the issuance of new debentures with a value modestly in excess of the trading
value of the Old Subordinated Debentures subsequent to the announcement of the
Zenith restructuring to the possibility that the Debentures would be
substantially unimpaired. With respect to the Company's Common Stock, based on
the amount of the Company's outstanding indebtedness and a very preliminary
version of the Business Plan Projections, Lazard stated that it believed that
the Company's equity had no value but mentioned alternatives (including cash
payments, the issuance of out-of-the-money warrants and the issuance of
contingent payment rights) pursuant to which some compensation might be offered
to the holders of the Common Stock in respect of their "holdup" value should
LGE want to expedite a restructuring. Finally, based on a very preliminary
version of the Business Plan Projections, Lazard gave its views regarding the
Company's possible debt capacity in an initial effort to assist LGE in
determining the portion of its existing claims that might need to be
capitalized in connection with a long-term restructuring.
LGE has also advised the Company that on December 13, 1998, Lazard again met
with certain members of LGE's senior management and LGE's other advisors. At
this meeting, Lazard made a presentation to LGE concerning recent discussions
with the Debenture Committee. Again, Lazard reviewed the principal terms of the
Old Subordinated Debentures and suggested ways in which they might be modified
in connection with the Prepackaged Plan. To illustrate the potential impact of
different modifications, Lazard provided LGE with a table setting forth the
present value of various restructured securities (assuming discount rates
ranging between 12% and 15%). In addition, Lazard discussed with LGE a concept
that had been a focus of recent conversations with the advisors to the
Debenture Committee: a quasi-equity security the payments on which would be
contingent on the Company's future cash flow. Lazard described possible terms
of such a security.
LGE's Position
LGE has advised the Company that, based on the liquidation and going concern
analyses presented to the Board by PJSC and the expected cost of a prolonged
liquidation or traditional bankruptcy proceeding as compared to the cost of the
Restructuring, LGE is willing to proceed with the Restructuring pursuant to the
Restructuring Agreement. LGE has advised the Company that it 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 has advised the Company that it did not undertake any formal evaluation
of its own as to the fairness of the Prepackaged Plan to unaffiliated
securityholders of the Company and did not participate in the Special
Committee's deliberations concerning the fairness of the proposed Prepackaged
Plan. LGE has advised the Company that it did consider (i) the liquidation and
going concern analyses prepared for the Company by PJSC which LGE found to be
reasonable and persuasive, (ii) the negative book value of the Company, the
Company's operating performance since 1985 and the Company's Business Plan
Projections, (iii) the absence of any offers from unaffiliated third parties
during the preceding eighteen months for any merger or consolidation with the
Company or the sale or transfer of all or a substantial portion of the Company
or its assets or the sale of securities of the Company, (iv) the fact that the
proposed Prepackaged Plan is the product of arms-length negotiations between
LGE and its legal and financial advisors, on the one hand, and the Special
Committee, the Company and their respective legal and financial advisors, on
the other hand, (v) the determination of the Special Committee as to fairness
and the recommendation of the Special Committee with respect to the proposed
Prepackaged Plan, (vi) the procedural and substantive protections of the
Bankruptcy Code described under "Recommendation of the Board--Procedural
Considerations" and (vii) the absence of any other viable alternative as
described under "Recommendation of the Board--The Lack of Available
Alternatives." LGE has advised the Company that it believes that these factors,
when considered together, provide a reasonable basis to believe, as LGE does,
that the proposed Prepackaged Plan is fair to the unaffiliated securityholders
of the Company. LGE has advised the Company that it did not attach specific
relative weights to the factors considered in reaching its view as to fairness.
69
<PAGE>
Liquidation and Going Concern Analyses
At a meeting in April 1999, the Special Committee considered the liquidation
and going concern analyses developed by PJSC based on the Company's April 1999
Business Plan Projections. 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 general unsecured Claims than are
holders of the Old Subordinated Debentures (as a percentage of such Claims).
See "--Recommendation of the Board." The Business Plan Projections and the
going concern and liquidation analyses are different sets of projections, and
were prepared using different methodologies. The assumptions underlying these
projections differ only in that the Business Plan Projections do not include
non-domestic VSB revenues, although projections for such amounts are included
in the liquidation and going concern analyses.
PJSC was instructed by the Company to prepare a going concern analysis of the
Company, a hypothetical Chapter 7 liquidation analysis of the Company, and to
compare the results of its final analyses with its immediately prior going
concern and liquidation analyses prepared in November 1998. In preparing the
liquidation and going concern analyses, PJSC: (i) reviewed information supplied
by the Company's management, including the Business Plan Projections, dated
April 1, 1999; (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 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. With respect to the
projected adoption rates for VSB-technology in consumer electronics products,
PJSC relied on information obtained through discussions with Forrester
Research, Inc. ("Forrester") (for domestic markets) and a report prepared by
Gartner Consulting/Dataquest ("Gartner/Dataquest") (for international markets).
Such firms also reviewed PJSC's analyses in developing its cash flow models for
VSB-based consumer electronics products. In addition, PJSC relied on the
evaluations of the Reynosa Assets prepared by Cushman & Wakefield of Arizona,
Inc., and Greenwich Industrial Services, LLC (collectively, the "Appraisers")
and Bermudez-Binswanger. See note (j) of the Notes to the Business Plan
Projections. 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. PJSC did not receive any other instructions or limitations
with respect to the analyses.
Certain Information Regarding Forrester and Gartner/Dataquest
Forrester and Gartner/Dataquest are independent research firms that provide
clients with information and advice regarding technology issues. They are
recognized for their expertise in evaluating emerging technologies. Following a
series of interviews with research firms, the Company selected Forrester and
Gartner/Dataquest, based on their familiarity with the developing market for
VSB-based consumer electronics products, their availability to provide
information to the Company on a timely basis, and the prices for their
services. Gartner/Dataquest provided projections of unit shipments of consumer
electronic products including televisions, VCRs, set top boxes, DVD players and
personal computers for countries other than the United States. The
70
<PAGE>
projections were on a year by year basis from 1998 to 2003 and included
separate figures for (i) countries that had adopted VSB standards and (ii)
countries Gartner/Dataquest deemed likely to adopt VSB standards, based on
existing infrastructure, cultural and economic factors. Gartner/Dataquest's
report included a total unit shipment forecast, a forecast of the digital
percentage of the total unit shipment, and a VSB unit shipment forecast. The
information provided by Gartner/Dataquest was used by PJSC in preparing its
reports.
Forrester made several oral presentations to the Company and PJSC regarding
its research findings with respect to the potential adoption (in domestic
markets only) of VSB technology for use in various consumer electronic
products, including televisions, personal computers and satellite boxes. The
presentations provided projections of market size, the percent of the market
using digital technology and the percent of the market using digital
technology that would use VSB technology. Forrester's projections were on a
year-by-year basis from 1999 through 2011. The projections summarized by
Forrester at these presentations were used by PJSC in preparing its reports.
Forrester and Gartner/Dataquest collected information regarding consumer
electronics production forecasts from industry participants, regulators and
consumers, and demographics for the relevant markets. Forrester and
Gartner/Dataquest were not given specific instructions or restrictions by the
Company or PJSC on their analyses. As compensation for their services,
Forrester and Gartner/Dataquest received approximately $50,000 and $82,000,
respectively, through March 31, 1999.
Certain Information Regarding the Appraisals
As part of its preparation of the Restructuring, the Company retained
certain nationally reorganized professionals who inspected the Company's
plants, land and equipment and provided appraisals concerning the value of
these assets under circumstances approximating those contemplated in the
Operational Restructuring.
The Company and a potential lender engaged the Valuation and Advisory
service of Cushman & Wakefield of Illinois, Inc. and Cushman & Wakefield of
Arizona, Inc. to prepare appraisals concerning the Company's real estate
assets in the United States and Mexico. The Cushman & Wakefield Companies are
part of a network of Cushman & Wakefield affiliates which are nationally
recognized real estate advisors and providers of appraisal services and have
recognized expertise in evaluating the current market for office,
manufacturing and warehouse space. The appraisals prepared for the Company
were performed in accordance with the Uniform Standards of Professional
Appraisal Practices of the Appraisal Foundation and in accordance with
instructions from the Company's potential lenders. In preparing its
appraisals, the appraisers considered regional and neighborhood analysis for
each property location, the current market for similar types of property, real
estate taxes and assessments and zoning. The appraisers provided appraised
values of each property or facility including both fair market value and
"quick sale estimates." The appraised value of the Company's real estate in
Reynosa (including facilities that will not be transferred to LGE as part of
the Reynosa Assets) ranged from approximately $35.0 million for fair market
value to approximately $31.9 million for liquidation value. Such appraisals
should be read in their entirety and state an opinion of value as of the date
of the report and are subject to assumptions and limiting conditions stated in
each report. As compensation for its services, the Cushman & Wakefield
Companies received approximately $80,000 for their initial appraisals of the
Company's real estate assets in the United States and Mexico, and
approximately $15,000 relating to additional work performed subsequent to the
delivery of their initial appraisals through March 31, 1999.
The Company engaged Greenwich Industrial Services, LLC ("Greenwich") a
subsidiary of Greenwich Financial Group, to provide appraisals of the
Company's machinery and equipment. Greenwich is a nationally recognized
appraiser, a member of the American Society of Appraisers, and has experience
in the area of evaluating assets in plant closings, liquidations, and
insurance appraisals. Greenwich conducted on site inspections of the Company's
facilities in Mexico, examined the Company's capital assets records and
conducted offsite review, research and analysis of the assets, including
review of comparable sales of similar pieces of equipment. In arriving at its
conclusions as to the value of the Company's machinery and equipment,
Greenwich considered workflow of the products produced, capability
constraints, safety issues, quality controls, maintenance
71
<PAGE>
of the equipment, industry trends, location of the facilities, current
technology and overall working conditions and environment. Greenwich provided
a range of appraised values for the assets, with an aggregate fair market
value in place of approximately $28.8 million, an aggregate fair market value
of approximately $23.2 million and an aggregate forced liquidation value of
approximately $18.9 million. As compensation for its appraisal services,
Greenwich received fees totaling approximately $102,800 through March 31,
1999. Through March 31, 1999, Greenwich has also received approximately
$50,500 in auction fees associated with the sale of Company assets pursuant to
an agreement entered into by the Company and Greenwich in February 1999, under
which Greenwich agreed to conduct auctions and assist the Company in
liquidating certain assets located at the Company's manufacturing facilities.
Under the agreement, Greenwich is entitled to fees based on a percentage of
the amount recovered by the Company from the auctions, plus expenses.
The Company selected Bermudez-Binswanger, the Mexican affiliate of
Chesterton Blumenauer Binswanger, as its real estate advisor and broker in
Mexico for the disposition of its Mexican properties after soliciting
recommendations from other U.S. companies with Mexican real estate interests
and after interviewing a number of real estate brokers and advisors who
specialize in or have experience with maquila manufacturing operations.
Bermudez-Binswanger is an internationally recognized real estate firm with
technical knowledge and market experience in the Mexican real estate market in
general and the maquila real estate areas in particular. Through the
association with Chesterton Blumenauer Binswanger, the Mexican brokerage firm
has access to offices and potential buyers in 50 countries. Bermudez-
Binswanger had previously been retained by the Company in a prior year for the
successful sale of a Mexican manufacturing property. Bermudez-Binswanger
prepared a strategic value analysis of the Company's plants in Matamoros,
Reynosa, Chihuahua and Cd. Juarez Mexico that included a brief description of
each property and marketing strategy. The aggregate estimated value of the
properties was approximately $73.9 million. Bermudez-Binswanger was not
specifically compensated for its summary and value estimate concerning the
Company's Mexican real estate, but may be entitled to a commission on the sale
of the Company's Mexican properties in accordance with the terms of its
brokerage agreement with the Company.
There is no material relationship between any of Forrester,
Gartner/Dataquest or the Appraisers and Zenith, and LGE has advised Zenith
that there is no such relationship between LGE and any of such firms.
Bermudez-Binswanger has, however, been engaged by the Company to act as
brokers for the sale of the property covered by their value estimates and will
be compensated for those activities on terms the Company believes to be
customary. In addition, Zenith is a client of Forrester and purchases research
reports from Forrester from time to time.
Liquidation Analysis
The liquidation analysis presented to the Special Committee is substantially
identical to the liquidation analysis set forth herein under the heading
"LIQUIDATION ANALYSIS."
Going Concern Analysis
The going concern analysis presented by PJSC to the Special Committee
measured the enterprise value of the Company and the value of the Company's
VSB technology separately, and then aggregated the two values to reach a going
concern value. The enterprise value and the VSB value were calculated
separately in order to appropriately account for the different risks
associated with the Company's VSB technology as compared to the Company's
other businesses. The enterprise value was calculated by aggregating (i) the
present value of the Company's cash flow generated from the Company's consumer
electronics business through 2003, and (ii) the present value of such business
in 2003 based on a multiple of projected sales in that year (the "Terminal
Value"). The sum of these two amounts was added to the present value of the
tuner patent cash flow to reach the enterprise value. With respect to the
Company's cash flow from its consumer electronics business, the going concern
analysis applies a range of discount rates from 12% to 16%. The 12% rate is
equal to the weighted average cost of capital of the Company Peer Group. A
premium was applied to the weighted average cost of capital to reflect the
international presence, profitable sales and more diversified product base of
the Company
72
<PAGE>
Peer Group. With respect to the Terminal Value, the going concern analysis
applies a range of discount rates from 12% to 16% to a multiple of 21% of
sales. The sales multiple was derived from the lowest end of the Company Peer
Group's latest twelve months sales multiples, which was 43.2% of sales,
discounted by 50% (the "Sales Multiples Approach"). 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. These rates reflect the
potential risks associated with the Funai litigation regarding the tuner
patent that suggest uncertainty in the stability of these cash flows. With
respect to domestic VSB, the going concern analysis applies a 25% discount
rate methodology to net projected VSB royalty income. The 25% discount rate
represents an estimate of the discount rates applied by equity analysts and
investors to analogous companies that have products in development that have
been approved by appropriate regulators but that are not producing commercial
cash flows. With respect to non-domestic VSB, the going concern analysis
includes potential revenues from licensing activity and royalties in countries
in which the Company has obtained patents for its VSB technology and that (i)
have adopted the ATSC digital television standard, or (ii) are deemed likely
to adopt such standard for some level of national use by Gartner/Dataquest,
the Company's technology professionals. Non-domestic VSB revenue estimates
were derived from projected adoption and utilization rates in such countries.
With respect to non-domestic VSB, the going concern analysis applies a 40% and
a 55% discount rate methodology to net projected VSB revenue for countries
that have adopted the ATSC digital television standard or are deemed likely to
adopt such standard, respectively. The 40% and 55% discount rates reflect not
only the same underlying assumptions as the discount rate applied for domestic
VSB revenue, but are further adjusted to account for the significantly
increased uncertainty and speculative nature of such revenues. See "BUSINESS
PLAN PROJECTIONS--Assumptions Concerning VSB." The going concern analysis does
not include revenues for countries that are deemed unlikely to adopt the ATSC
digital television standard or that have already adopted an alternative
standard.
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 $1.50/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
the discount rates reasonably reflect the timing issues and risks in the
projected royalty fee cash flows through 2011, (v) with respect to enterprise
value, that the Company's operational performance and timing of the
disposition of material assets related to the integrated manufacturing base of
Zenith prior to its operational restructuring and substantive reductions in
inventory held for the manufacturing process, will be consistent with the
assumptions set forth in the Business Plan Projections, and (vi) 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 value of the Company's VSB technology are separately valued, and then
aggregated to determine going concern value.
Under the going concern analysis presented by PJSC, the Company's enterprise
value (which includes net indebtedness) was estimated at $155.0 million,
derived from (i) a present value of free cash flow (using a discount rate that
ranged from 12% to 16%) that ranged from $(21.0) million to $(21.1) million,
(ii) a present value of the Terminal Value (using a multiple of 21% of sales
and a discount rate that ranged from 12% to 16%) that ranged from $129.6
million to $111.0 million and (iii) a present value of the tuner patent cash
flow (using a discount rate that ranged from 18.0% to 22.0%) that ranged from
$63.5 million to $59.1 million. The present value of VSB technology was
estimated at $153.8 million, representing $108.5 million as the net present
value of domestic VSB technology revenue (using a discount rate of 25%), $31.6
million as the net present value of international (adopted) VSB technology
revenue (using a discount rate of 40%) and $13.7 million as the net present
value of international (likely to adopt) VSB technology (using a discount rate
of 55%). The total going concern value was thus estimated as $308.8 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
73
<PAGE>
(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.
Such analyses are subject to significant uncertainty and are based upon certain
assumptions which may or may not prove to be correct. 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 event that any or all of
the underlying assumptions are shown to be in error, except as required by
applicable law.
Other Board Review
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 in connection with the Company's then existing business plan projections
dated June 26, 1998. The Company updated its business plan projections in
November 1998 and asked PJSC to update its liquidation and going concern
analyses to reflect the November 1998 business plan projections. PJSC presented
the updated analyses to the Special Committee in November 1998. The Company
further updated its business plan projections in April 1999 and asked PJSC to
update its liquidation and going concern analyses to reflect the April 1999
business plan projections. PJSC presented the updated analyses to the Special
Committee in April 1999. For information about the different assumptions used
in the Company's business plan projections, see "BUSINESS PLAN PROJECTIONS--
History of the Business Plan Projections." A copy of PJSC's April 1999 report
to the Special Committee is attached hereto as Annex B.
The principal differences between the April 1999 analyses and the November
analyses are as follows:
. the illustrative sales multiple used in the April 1999 analyses is
higher as a result of increases in the valuations of the comparable
companies since November 1998;
. the April 1999 analyses reflect an assumed Consummation date of July 31,
1999, whereas the November analyses reflected an assumed Consummation
date of January 1, 1999, a timing difference that:
. accounted for a significant portion of the increase in VSB
technology value because large net revenues in later years of the
Business Plan Projections are discounted for a shorter period;
. resulted in the use of only five months of 1999 in the calculation
of discounted cash flows following the assumed Consummation date in
the April 1999 analyses, as compared to a full twelve months in the
November analyses;
. resulted in an increase in enterprise value because the Terminal
Value in the April 1999 analyses were discounted for four and five-
twelfths years, while the Terminal Value in the November projections
were discounted for a full five years;
. resulted in changes in the assumptions regarding the sale of real
estate, fixtures, furniture and equipment available for sale at
Consummation, as compared with those assumed to have been sold prior
to such date, as shown below:
<TABLE>
<CAPTION>
Assumed to be Available for Sale at Consummation
-----------------------------------------------------------------------
November 1998 Analyses April 1999 Analyses
-------------------------- -------------------------
<S> <C>
. Real estate in: . Real estate in:
Melrose Park, Illinois Melrose Park, Illinois
Franklin Park, Illinois Reynosa, Mexico
McAllan, Texas
Juarez, Mexico
Matamoros, Mexico
Reynosa, Mexico
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Assumed to be Available for Sale at Consummation
--------------------------------------------------------------------------------
November 1998 Analyses April 1999 Analyses
--------------------------------------- ---------------------------------------
<S> <C>
. Furniture, fixtures and equipment at: . Furniture, fixtures and equipment at:
Franklin Park, Illinois Matamoros, Mexico
Glenview, Illinois Reynosa, Mexico
Melrose Park, Illinois
Chicago, Illinois
Juarez, Mexico
Matamoros, Mexico
Reynosa, Mexico
</TABLE>
. the April 1999 analyses reflect the terms of the Lock-Up Agreement
with the Debenture Committee, pursuant to which the Company and LGE
agreed to provide for a distribution to holders of Old Subordinated
Debentures of $50 million of New Debentures; and
. the April 1999 analyses reflect reductions in the amount of the LGE
New Restructured Note equal to the proceeds projected to be received
from the sale of Leveraged Lease equipment prior to the valuation
date.
The principal differences between the July analyses and the November
analyses are as follows:
. the November going concern and liquidation analyses include $36.6
million of discounted (reflecting a 40% discount rate for international
(adopted) VSB technology and a 55% discount rate for international
(likely to adopt) VSB technology) international VSB royalty and
licensing revenue, which values were not capable of reasonable
estimation at the time the July analyses were prepared;
. the July analyses were generated using the business plan projections
dated June 26, 1998, while the November analyses incorporated the
business plan projections dated November 12, 1998;
. the November analyses give effect to the Company's sale of its
headquarters and certain equipment at its Melrose Park in 1998, which
reflect a $10.8 million increase compared to the July analyses.
. the November analyses include updated assumptions concerning certain
domestic VSB revenue projections for personal computers, principally
relating to:
. a decrease of $387.8 million in anticipated aggregate royalty
revenue from the inclusion of VSB technology in personal computer
products based on the demonstrated market trend towards lower-cost
units, which are unlikely to have VSB capability; and
.an increase in the assumed VSB royalty rate for personal computers
($5.00 per unit in the November analyses, as compared to $2.50 per
unit in the July analyses);
.with respect to the going concern analyses, the November analysis utilized
updated tax assumptions to reflect:
.the projection of the Company's accountants that the Company will be
subject to a domestic alternative minimum tax of $186.2 million,
which was not included in the July analysis; and
.the Company's assumed aggregate tax liability of $418.1 million with
respect to international VSB revenues (which includes both non-
domestic alternative minimum tax and withholding taxes), which was
not included in the July analysis;
.with respect to the liquidation analyses:
.the November analysis allocates projected warranty expenses of $33.7
million against both finished goods and trademark and distribution
values, while the July analysis allocated such expenses of $23.3
million solely to finished goods value; and
75
<PAGE>
.the November analysis applies a three year discount rate of 10% to
projected net liquidated proceeds to more accurately reflect the
present value of anticipated distributions of net liquidation
proceeds at the conclusion of the assumed 2 to 4 year hypothetical
liquidation period of the Company, while the July analysis did not
provide for such discount.
Prior to the July 22, 1998 meeting of the Board, including at the May 21,
1998 meetings of the Board, the Board and the Special Committee reviewed
certain preliminary liquidation and going concern analyses also prepared by
PJSC which were based on the Company's then-existing business plan projections
dated April 16, 1998. In June 1998, the Company updated its business plan
projections to give effect to the Financial Restructuring and to reflect more
realistic financial estimates. The Company asked PJSC to update its liquidation
and going concern analyses to reflect the updated business plan projections,
which included increased projected sales, reduced interest expenses, decreased
estimates of realizations for asset sales, and increased freight and product
costs.
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:
.the preliminary analyses estimated values as of January 1, 1998, while the
July analyses estimated values as of January 1, 1999, the assumed
confirmation date of the Prepackaged Plan;
.the preliminary analyses were generated using financial projections from a
preliminary draft of the business plan projections, while the July
analyses incorporated projections from the business plan projections
dated June 26, 1998;
.with respect to VSB, the July analyses utilized reduced royalty revenue
projections to reflect projected royalty-free cross-licenses, which were
included in the July analyses to reflect the Company's market
experience;
.the July valuation analysis included a $78.6 million reduction in the
projected value of LGE's secured claim against the Company arising from
the leveraged lease guaranty resulting from bifurcation of the claim to
reflect that the leased property had a value of less than the claim;
.with respect to the liquidation analyses:
.the preliminary analysis utilized a 15% estimated recovery rate for
raw materials inventory, while the July analysis utilized a 20%
estimated recovery rate, resulting in a $2.1 million increase in
projected available liquidation proceeds;
.the July analysis assumed that projected liquidation recoveries of
$25.5 million from certain Mexican assets of the Company would be
net of projected liquidation and severance costs associated with
such assets (estimated at $44.2 million), whereas the preliminary
analysis did not estimate such obligations.
. with respect to the going concern analyses:
. 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 July analysis was derived from a Sales
Multiples Approach; and
. in the July analysis, the Company's tuner patent technology was
separately valued, in part to better reflect the anticipated
cessation of the patents and to better account for an appropriate
estimate of risk related to the tuner patent cash flows;
. certain categories of assets included in the preliminary analysis are
omitted in the July analysis because such assets are projected to have
already been liquidated as of the effective date of the analysis.
In the preliminary analyses, the enterprise value of the Company was
estimated at $127.0 million, derived from (i) a present value of free cash flow
(using a discount rate that ranged from 12% to 16%) that ranged from
76
<PAGE>
$(13.0) million to $(19.2) million and (ii) a present value of all of the
Company's future EBIT after 2002 (using an EBIT multiple of 14x and a discount
rate that ranged from 12% to 16%) that ranged from $139.8 million to $117.3
million. The VSB technology value was estimated at $186.0 million,
representing the net present value of domestic VSB technology revenue (using a
discount rate of 25%). The total value was thus estimated at $313.0 million.
In the July analyses, the Company's enterprise value (which includes net
indebtedness) was estimated at $125.0 million, derived from (i) a present
value of free cash flow (using a discount rate that ranged from 12% to 16%)
that ranged from $(38.9) million to $(35.4) million, (ii) a present value of
the Terminal Value (using a multiple of 17.5% of sales and a discount rate
that ranged from 12% to 16%) that ranged from $64.3 million to $51.3 million
and (iii) a present value of the tuner patent cash flow (using a discount rate
that ranged from 18.0% to 22.0%) that ranged from $72.8 million to $67.2
million. The domestic VSB technology value was estimated at $180.0 million
(using a discount rate of 25%). The total going concern value was thus
estimated as $305.0 million.
In the November analyses, the Company's enterprise value (which includes net
indebtedness) was estimated at $125.0 million, derived from (i) a present
value of free cash flow (using a discount rate that ranged from 12% to 16%)
that ranged from $(33.9) million to $(33.1) million, (ii) a present value of
the Terminal Value (using a multiple of 17.5% of sales and a discount rate
that ranged from 12% to 16%) that ranged from $101.1 million to $84.8 million
and (iii) a present value of the tuner patent cash flow (using a discount rate
that ranged from 18.0% to 22.0%) that ranged from $70.5 million to $65.0
million. The present value of VSB technology was estimated at $130.6 million,
representing $94.0 million as the net present value of domestic VSB technology
revenue (using a discount rate of 25%), $26.1 million as the net present value
of international (adopted) VSB technology revenue (using a discount rate of
40%) and $10.5 million as the net present value of international (likely to
adopt) VSB technology (using a discount rate of 55%). The total going concern
value was thus estimated as $255.6 million.
With respect to the liquidation analyses, the estimated gross asset recovery
from liquidation under the preliminary analyses, the July analysis, the
November analysis and the April 1999 analysis is $430.3 million, $288.2
million, $269.3 million and $249.9 million, respectively and the estimated
gross asset recovery, net of liquidation expenses and administrative and
priority claims, was $173.9 million, $162.7 million and $116.7 million, and
$123.2 million, respectively.
The reduction in the gross asset recovery from liquidation under the
preliminary analysis to the July analysis is derived primarily from (i) the
implementation of the Operational Restructuring (pursuant to which the Company
decided to exit manufacturing), which reduced the work-in-process and
inventories by approximately $104.2 million and (ii) a reduction in the value
of the Mexican real estate and furniture fixture and equipment of $44.2
million as a result of statutory severance and labor costs not reflected in
the preliminary analysis. The reduction in the gross asset recovery from the
July analysis to the April 1999 analysis is derived primarily from (i) a
reduction in accounts receivable by $13.1 million and (ii) a reduction in the
amount of furniture, fixtures and equipment available for liquidation by $27.4
million.
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.
On November 16, 1998, the Company and LGE entered into Amendment No. 1 and
Waiver to the Restructuring Agreement to extend the delivery date of the
Implementation Program (as defined) from August 31, 1998 to November 30, 1998
and to defer until November 30, 1998 the Company's obligation to pay interest
to LGE on certain amounts owed by the Company to LGE. In April 1999, the
Company and LGE reached an agreement in principle concerning amendments to the
Restructuring Agreement which would, among other things, extend the date by
which the Prepackaged Plan must be consummated to September 15, 1999 and
modify
77
<PAGE>
various provisions of the Restructuring Agreement to reflect the terms of the
Citibank Exit Facility and Lock-Up Agreement. The Company and LGE are
continuing to discuss other possible amendments.
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 November 30, 1998 an implementation program (the
"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
78
<PAGE>
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 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 Mr. 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
79
<PAGE>
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
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.
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
80
<PAGE>
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 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
81
<PAGE>
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. If the
Board withdraws its recommendation because it has received an Alternative
Proposal which the Board in good faith determines is superior to the Financial
Restructuring, the Board could terminate the Restructuring Agreement, in which
case the termination and expense reimbursement provisions of the Restructuring
Agreement shall govern. Any withdrawal or modification for any reason other
than receipt of a superior proposal would not trigger the Company's right to
terminate the Restructuring Agreement and would 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. Following confirmation of the Prepackaged
Plan, there is no legal requirement for New Zenith's certificate of
incorporation to contain provisions prohibiting the issuance of nonvoting
equity securities. 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.
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 directors who are not officers or directors of LGE or current
officers of the Company and which the Board had established specifically to
mitigate some of the conflicts of interest described below. The Special
Committee did not resolve or address any other conflicts of interest,
including any conflicts created by the releases or indemnification provisions
contained in the Prepackaged Plan as they related to members of the Special
Committee. See "--Events Leading to the Restructuring."
LGE Directors
The current Board consists of eleven directors. LGE and LG Semicon
beneficially own approximately 56.2% 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. 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.
82
<PAGE>
Releases, Indemnifications and Limitations of Liability
The Prepackaged Plan provides for certain waivers, exculpation, releases and
injunctions 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 throughout the reorganization process to facilitate the
expeditious reorganization of the Company and the implementation of the
Restructuring. The Prepackaged Plan provides an injunction barring the
commencement or continuation of any Claims released pursuant to its terms. In
connection with the Lock-Up Agreement, the Debenture Releasees are also
entitled to certain waivers, exculpations, releases and injunctions. The
Ballot and Master Ballot contain a summary of the release, waiver, exculpation
and injunctive provisions contained in the Prepackaged Plan.
Specifically, the Prepackaged Plan provides that the Company and its
Subsidiaries will release, upon the Effective Date, the D&O Releasees, the
Investor Releasees and the Debenture 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, including preference, fraudulent transfer, avoidance and
turnover actions under sections 544, 547, 548, 549 and 550 of the Bankruptcy
Code.
Section 547 generally allows a debtor to avoid a transfer made to a creditor
within the 90 days (one year if the recipient is an insider) preceding the
debtor's filing for bankruptcy if, among other things, that transfer was made
on account of an antecedent debt while the debtor was insolvent. Section 548
allows a trustee to nullify a transfer of the debtor's property if that
transfer was made with the intention of improperly placing assets beyond the
reach of creditors or was without the debtor receiving reasonably equivalent
value or fair consideration. Section 544 enables a trustee to avoid transfers
and liens on the debtor's property that could have been avoided by a creditor
under the applicable state law. These state laws are generally similar to
section 548, but often carry a longer statute of limitations. Section 549
allows the trustee to avoid unauthorized postpetition transfers of property of
the estate.
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,
other than a holder of Old Subordinated Debentures that has marked a Ballot so
as not to consent to the releases in favor of the D&O Releasees, Investor
Releasees and Debenture Releasees, 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, the Investor
Releasees or the Debenture 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, the Investor Releasees and the Debenture 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.
The Company believes that the release and exculpation provisions of the
Prepackaged Plan are permissible under the Bankruptcy Code but acknowledges
that arguments exist that certain case law would permit a contrary conclusion.
Parties with standing may object to such provision in the Bankruptcy Court
proceeding.
The Company does not believe that any avoidance action or other potential
causes of action exist or will exist with respect to the transactions
contemplated by the Operational Restructuring because the Company has
83
<PAGE>
received and expects to receive reasonably equivalent value and/or fair
consideration in connection with such transactions. Moreover, since
substantially all of the transactions contemplated by the Operational
Restructuring are with unaffiliated third-parties, any avoidance actions or
other potential causes of action arising from such transactions will not be
affected by the releases provided under the Prepackaged Plan.
The Company is aware that certain security holders have asserted or may
assert that claims exist against one or more of the Investor Releasees and/or
the LGE-related D&O Releasees relating to the relationship of the Investor
Releasees and/or the LGE-related D&O Releasees to the Company and the
development of the proposed Restructuring. Such claims include or might include
alleged breach of fiduciary duties, violation of securities laws, or other
conduct allegedly inconsistent with applicable law. To the extent any such
claims exist, and to the extent that such claims are held by the Company or by
holders 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, such claims will be released by the terms of the Prepackaged
Plan. Moreover, all of the D&O Releasees and Investor Releasees, including the
LGE-related D&O Releasees, would receive the benefits of the exculpation
provisions of the Prepackaged Plan, which might impair certain causes of action
not affected by the releases in the Prepackaged Plan.
To the extent claims against the D&O Releasees and Investor Releasees exist,
the Company believes that the release of the D&O Releasees and the Investor
Releasees is appropriate and warranted under the facts, circumstances and
equities of the Company's current financial condition and the terms of the
proposed Restructuring. Each of the D&O Releasees and the Investor Releasees
has made and will make a substantial contribution to the success of the
Restructuring, in the case of the Investor Releasees, through their commitments
set forth in the Restructuring Agreement, and in the case of the D&O Releasees,
through their service to the Company to facilitate the expeditious
reorganization of the Company and the implementation of the Restructuring.
Because the willingness of LGE to participate in the Restructuring is
conditioned on a grant of the release to the D&O Releasees and the Investor
Releasees, the release is a necessary and essential component of the
Prepackaged Plan. Moreover, there exist contractual and common law rights of
indemnity by the D&O Releasees and Investor Releasees against the Company.
Indeed, in the event a cause of action were brought against the D&O Releasees
or Investor Releasees as to which the D&O Releasees or Investor Releasees were
entitled to indemnity from the Company, such indemnification claims would
constitute General Unsecured Claims and the Company would be required to pay
such claims in full under the terms of the Prepackaged Plan.
Review by Special Committee
In the course of the Special Committee's work and review of the proposed
releases for LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a bankruptcy
proceeding occurring without the Investor Releases and without LGE's
participation than they would under the proposed Restructuring. In that regard,
the Special Committee considered and reviewed transactions contemplated by the
proposed Restructuring Agreement. In connection with evaluating the proposed
releases, the Special Committee and its counsel also considered and reviewed
past significant financial assistance transactions involving LGE, including
credit support arrangements in April and October 1997, the vendor credit
extended to the Company by LGE, the Reimbursement Agreement and the LGE Demand
Loan Facility. See "CERTAIN TRANSACTIONS--Financial Assistance." The Special
Committee and its counsel also considered and reviewed certain material non-
financing transactions between the Company and LGE, including technical support
services provided by LGE and affiliates to the Company and manufacturing and
production equipment purchases related to upgrading portions of the Company's
color picture tube operations in Melrose Park and setting up a new automated
manufacturing line for computer display terminals. The Special Committee and
its counsel also considered the existence of (i) certain ongoing product
transactions, such as ordinary course purchases of VCRs, television-VCR
combinations and components by the Company from LGE and its affiliates, and
(ii) certain technology agreements and licenses with LGE or its affiliates
entered into since LGE had obtained majority ownership.
84
<PAGE>
In performing its evaluations, the Special Committee considered prior
determinations and recommendations made by the Audit Committee, comprised of
independent directors of the Board, which had previously reviewed and approved
certain transactions between the Company and LGE. The Special Committee also
considered knowledge regarding certain transactions that they already had
accumulated in their capacities as members of the Board.
The Special Committee's deliberations focused not on ascribing a fixed value
to the requested releases but rather on determining whether it was likely that
other creditors would receive more with LGE participating in the Company's
proposed financial restructuring and receiving releases than if no such
releases were provided and the proposed restructuring did not proceed. In this
context, the Special Committee concluded that a benefit to the Company of LGE's
agreement to participate in the Restructuring could be measured by the
difference between the going concern valuation of the Company (obtainable if
LGE participated in the Restructuring) and the liquidation valuation of the
Company.
Based on its investigation, the Special Committee concluded that any value
that might reasonably be attributed to the releases was clearly likely to be
less than the overall value created by the Restructuring, and that absent LGE's
agreement to participate in a restructuring (which was conditioned on, among
other things, obtaining the releases) there would likely be no value available
for distribution to unsecured creditors or holders of Equity Interests. The
Special Committee concluded that the Company's creditors, including in
particular holders of its unsecured Old Subordinated Debentures, would receive
far more with LGE participating in the Company's proposed financial
restructuring and receiving releases than if no such releases were provided and
the proposed restructuring did not proceed, in which event there would likely
be no value at all available for distribution to the holders of unsecured Old
Subordinated Debentures.
The Company is not generally aware of any transactions with the non-LGE-
related D&O Releasees other than in the ordinary course of business and
accordingly the Special Committee did not investigate any avoidance or other
potential causes of action against non-LGE related D&O Releasees. However, to
the extent any such claims exist, such claims will be released by the terms of
the Prepackaged Plan.
Effect of Conflicts of Interest on the Board's Recommendation
The releases and indemnification provisions provided by the Prepackaged Plan
may 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.
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 of LGE or certain LGE-affiliated directors.
See "--Events Leading to the Restructuring."
Management's Interest in the Transaction
In connection with the Restructuring, the Company developed a retention
program for 14 key executives and senior managers, not including the Chief
Executive Officer. Under this executive retention program, the Company may be
obligated to pay participants up to an aggregate of $1.2 million in retention
bonuses. Additionally, in July 1998, the Company established short-term and
long-term incentive programs for two tiers of 15 key executives and senior
managers, not including the Chief Executive Officer. Those incentive programs
are based on achieving certain performance goals in connection with the
Restructuring. See "MANAGEMENT--Executive Retention Programs." In addition, the
Company's Senior Vice President--Restructuring is also a Principal of JA&A,
which has been engaged by the Company to assist it in the Restructuring. JA&A
receives a
85
<PAGE>
fixed monthly fee (plus expenses) for such services, and upon successful
completion of the Financial Restructuring, will receive a success fee of $1.0
million. See "ESTIMATED FEES AND EXPENSES--Advisors."
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. The Amended
Citibank Credit Facility currently expires on the earlier of a bankruptcy
filing by the Company and April 30, 1999. The Company has obtained the
Commitment from Citicorp for the DIP Facility. See "RISK FACTORS--Recent
Operating Results, Independent Auditor's Report and High Leverage" and "--
Events of Default; Risk of Acceleration or Termination" and "DESCRIPTION OF
DEBT AND CREDIT ARRANGEMENTS--The DIP Facility and the Citicorp Exit
Facility."
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.
86
<PAGE>
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 therefore 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 Bankruptcy Code generally provides for the appointment of a committee of
unsecured creditors in a Chapter 11 case. The appointment is made by either
the bankruptcy judge (in non-U.S. Trustee districts) or the U.S. Trustee.
Ordinarily, the committee will consist of the seven largest unsecured
creditors that are willing to serve, however, the Bankruptcy Code does not
place a limitation as to the size of any particular committee. Under certain
circumstances, additional committees may be appointed as well, or no
committees may be appointed. If appointed, a Chapter 11 creditors' committee
possesses authority to promote and to protect the interests of its creditor
constituency. In this regard, Section 1103(c) of the Bankruptcy Code provides,
among other things, that a duly-appointed committee may: consult with the
trustee or debtor in possession concerning the administration of the case;
investigate the acts, conduct, assets, liabilities, and financial condition of
the debtor, the operation of the debtor's business and the desirability of the
continuance of such business, and any other matter relevant to the case or to
the formulation of a plan; and perform such other services as are in the
interest of those represented. To carry out these functions, a creditors'
committee appointed pursuant to Section 1102 of the Bankruptcy Code may employ
professionals, may raise and may appear and be heard on any issue in the case,
and may transact such business as may be necessary and proper with the trustee
or debtor in possession.
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
87
<PAGE>
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 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
88
<PAGE>
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.
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; (c) 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; (d) 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 (e) a Claim that is allowed
pursuant to the terms of the Prepackaged Plan.
89
<PAGE>
The classification of Claims and Equity Interests pursuant to the Prepackaged
Plan is as follows:
<TABLE>
<CAPTION>
Class Status Voting Rights
----- ------ -------------
<S> <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 Impaired --entitled to vote
Claims
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 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.(S)(S) 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.
90
<PAGE>
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.
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
91
<PAGE>
(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 Lender
arising from or relating to the Unsecured Bank Loans.
Treatment: The holder of Bank Lender Claims shall receive the New Bank Lender
Note in full satisfaction of its Claims.
Voting: Bank Lender Claims are impaired and the holder of Bank Lender Claims
is 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. This Class includes, but is not limited to,
interest owed to LGE on the LGE Leveraged Lease Claims and the LGE
Reimbursement Claims.
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
92
<PAGE>
Claim, a pro rata distribution of the New 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. The Company
believes that this treatment is permissible under the Bankruptcy Code. The
Company recognizes that arguments exist that certain case law would permit a
contrary conclusion.
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, (ii) the LGE Technical Services Claims and (iii) 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 Guarantee Fee
Claims; and (iv) the LGE Demand Loan Claims in an amount (if any) sufficient
when aggregated with the amounts described in clauses (i) through (iii) to
equal $200 million.
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.
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
The Prepackaged Plan provides for certain waivers, exculpation, releases and
injunctions 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. In connection with the
Lock-Up Agreement, the Debenture Releasees are also entitled to 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,
(ii) the Investor Releasees, and (iii) the Debenture Releasees from any
93
<PAGE>
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, including avoidance actions under
sections 544, 547, 548, 549 and 550 of the Bankruptcy Code. 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, other than a holder of Old Subordinated Debentures that has
marked a Ballot so as not to consent to the releases in favor of the D&O
Releasees, Investor Releasees and the Debenture Releasees, 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, the Investor Releasees and the Debenture 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, the Investor Releasees and the Debenture
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.
In the course of the Special Committee's work and review of the proposed
release of LGE, the Special Committee sought to determine whether impaired
classes would be likely to receive a greater recovery in a hypothetical
restructuring occurring without the Investor Releases and without LGE's
participation. In that regard, the Special Committee and its counsel reviewed
and investigated significant transactions between LGE and the Company. Based
on that investigation, the Special Committee concluded that any value that
might be attributed to these releases was less than the overall value created
by the Restructuring, and that absent LGE's agreement to participate in a
restructuring (which was conditioned on, among other things, obtaining the
releases) there was no value available for distribution to holders of either
the Old Common Stock or the Old Subordinated Debentures.
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." The Company believes that these provisions of the
Prepackaged Plan are permissible under the Bankruptcy Code but acknowledges
that arguments exist that certain case law would permit a contrary conclusion.
Parties with standing may object to such provision in the Bankruptcy Court
proceeding.
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 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.
94
<PAGE>
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.
The Company is not aware of any material actual or contingent indemnification
obligations of the Company, except as might arise as a result of certain
shareholder litigation discussed herein. See "RISK FACTORS--Legal Proceedings."
In the event any such claims were asserted against the Company, such claims
would likely constitute general unsecured claims of the Company, which would be
paid in full under the terms of the Prepackaged Plan. Accordingly, the
Company's proposed treatment of such indemnification obligations provides the
holders of such claims with the same economic treatment that such persons would
otherwise be entitled to receive under the Prepackaged Plan.
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 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 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.
95
<PAGE>
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 Note, the New 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.
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.
96
<PAGE>
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.
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 Note, the New 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.
97
<PAGE>
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"). In an effort to ensure that all holders of valid claims receive
their allocated distributions, the Company will file with the Bankruptcy Court,
a listing of unclaimed distribution holders. This list will be maintained for
as long as the bankruptcy case stays open. This process will provide unclaimed
distribution information in a public forum and increase the possibility of
notice of an unclaimed distribution to previously "lost" claimholders.
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 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
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.
98
<PAGE>
Minimum Distribution
The New Debentures will be issued in denominations of $1,000 and integral
multiples thereof. No New 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 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 Debentures each such holder would have been entitled to receive
or deemed to hold had the Company issued New Debentures in integral multiples
smaller than $1,000, such distribution being in lieu of any other distribution
thereon. The Company believes that the sale of New Debentures is exempted from
registration under the federal securities laws pursuant to section 1145 of the
Bankruptcy Code.
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 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
99
<PAGE>
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
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;
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof, and;
5. no more than 5% of the holders of Old Subordinated Debentures shall
have marked a Ballot so as not to consent to the releases contained in the
Prepackaged Plan in favor of the D&O Releasees, the Investor Releasees and
the Debenture Releasees.
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. Pursuant to the Restructuring
Agreement, however, LGE's consent is required for any such waiver. See
"SPECIAL FACTORS--The Restructuring Agreement."
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 Note or the New
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
100
<PAGE>
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 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.
In accordance with Bankruptcy Rule 3019, the Company will resolicit
acceptances of the Prepackaged Plan only if a modification to the plan
adversely changes the treatment of the claim of any creditor or the interest of
any equity security holder who has not accepted in writing the modification.
Bankruptcy Rule 3019 provides: "If the court finds after hearing on notice to
the trustee, any committee appointed under the Code and any other entity
designated by the court that the proposed modification does not adversely
change the treatment of the claim of any creditor or the interest of any equity
security holder who has not accepted in writing the modification, it shall be
deemed accepted by all creditors and equity security holders who have
previously accepted the plan." As such, the Company believes that unless the
Bankruptcy Court finds otherwise, a modification to the Prepackaged Plan that
does not adversely change the treatment of claims does not require
resolicitation.
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.
101
<PAGE>
Provisions for Employees; Retention Programs; Employment Contracts
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 (i) to honor its executive retention
program and employee retention program and (ii) to assume employee contracts
with Messrs. Gannon and Vitkus and other executives and key managers. 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.
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 JA&A as its restructuring
advisor, PJSC as its financial advisor and investment banker, Arthur Andersen
LLP as its auditor, Kirkland & Ellis as its attorneys and Gavin Anderson
Company as its public relations advisors.
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.
102
<PAGE>
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 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, such as federal securities laws and
regulations. For example, under Section 5(c) of the Securities Act, no offer to
buy or sell a security may be made except pursuant to an effective registration
statement. If there is no such applicable non-bankruptcy law, "adequate
information" as defined
103
<PAGE>
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
Section 1129 of the Bankruptcy Code lists 13 individual requirements that
must be satisfied by the Company before the Prepackaged Plan can be confirmed.
Among these requirements is that each Class has either accepted the Prepackaged
Plan or is not impaired under the Prepackaged Plan. For purposes of the
Company's Prepackaged Plan, this means that the following Classes would be
required to accept the Prepackaged Plan: (i) Class 4--the Bank Lender Claims;
(ii) Class 6--the Old Subordinated Debenture Claims; (iii) Class 7--the LGE
Claims; and (iv) Class 8--the Equity Interests. The other Classes in the
Prepackaged Plan are unimpaired, so they are deemed to have already accepted
the Prepackaged Plan.
The Bankruptcy Code provides an exception to the requirement that every class
must accept a plan of reorganization. This exception is commonly known as the
"cram down" provision. This provision may allow the Company to confirm the
Prepackaged Plan even if less than all four of the impaired Classes accept the
Prepackaged Plan. If the Company can demonstrate to the Bankruptcy Court that
it satisfies the requirements of the "cram down" provision, each impaired Class
that voted to reject the Prepackaged Plan would be bound to the treatment
afforded to that Class under the Prepackaged Plan.
To obtain Confirmation of the Prepackaged Plan using the "cram down"
provision, the Company must demonstrate to the Bankruptcy Court that, as to
each Class that has rejected the Prepackaged Plan, the treatment afforded to
such Class under the Prepackaged Plan "does not discriminate unfairly" and is
"fair and equitable."
In general, a plan does not discriminate unfairly if it provides a treatment
to the class that is substantially equivalent to the treatment that is provided
to other classes that have equal rank. In determining whether a plan
discriminates unfairly, courts will take into account a number of factors,
including the effect of applicable subordination agreements between parties.
Accordingly, two classes of unsecured creditors could be treated differently
without unfairly discriminating against either class.
In general, the Bankruptcy Code applies a different test to holders of
secured claims, unsecured claims and equity interests to determine whether the
treatment proposed in a plan of reorganization is "fair and equitable." In
general, a plan of reorganization is "fair and equitable" to a holder of:
. secured claims if the plan provides that the holder (i) will retain the
lien or liens securing its claim and (ii) will receive cash payments,
normally evidenced by a note, that total at least the amount of its
claim, with such payments having a present value at least equal to the
value of the collateral securing the claim;
. unsecured claims if the plan provides that the holder (i) will retain
property equal to the amount of its claim or (ii) no holder of a claim
or interest that is junior to the creditor receives any value under the
plan of reorganization; and
. equity interest if the plan provides that the holder (i) will retain
property equal to the greatest of the allowed amount of any liquidation
preference to which such holder is entitled, any redemption price to
which such holder is entitled or the value of such interest or (ii) no
holder of an interest that is junior to the holder will receive any
value under the plan of reorganization.
The Company will seek Confirmation of the Prepackaged Plan under section
1129(b) of the Bankruptcy Code because Class 8--the Equity Interests is deemed
to have rejected the Prepackaged Plan. Under the Bankruptcy Code, to the extent
holders in a Class receive no distribution, the Class is deemed to reject the
Prepackaged Plan. In the event that any other 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
104
<PAGE>
the right (i) to request that the Bankruptcy Court confirm the Prepackaged Plan
in accordance with the "cram down" provision under the Bankruptcy Code and/or
(ii) to modify 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 instead
of the current offer the Company has made to the Class in the Prepackaged Plan.
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." At the hearing on Confirmation the Company would likely introduce PJSC's
liquidation and going concern analyses as evidence in support of the Company's
request for Confirmation. Based on the circumstances at such time, including,
in particular, the existence of any objections to Confirmation, the Company may
introduce additional evidence at the hearing on Confirmation.
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.
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.
105
<PAGE>
THE OPERATIONAL RESTRUCTURING
Under the Operational Restructuring, the Company intends to transform itself
from an integrated manufacturer and distributor of consumer electronics
products into a sales, distribution and technology company. The Operational
Restructuring requires that the Company close and dispose of all, or
substantially all, of its manufacturing facilities and outsource all, or
substantially all, product lines beginning with the 1999 model year.
Closing Manufacturing Operations and Disposition of Assets
The Company ceased production at its Melrose Park manufacturing facility in
March 1999 and is currently in the process of decommissioning the facility. The
Company has entered into two agreements with Philips for the sale of certain
manufacturing equipment located at the Company's Melrose Park facility,
including some of the equipment previously leased by the Company under the
Leveraged Lease (Melrose Park), and the purchase of color picture tubes from
Philips. Under the agreements, Philips will provide sales credits against
picture tube purchases by the Company over a three-year period in exchange for
certain picture tube manufacturing equipment located in the Company's Melrose
Park facility. The expected credits range from $17.2 million to $23.9 million,
depending upon the amount of picture tubes purchased. The amount of picture
tubes to be purchased from Philips depends on the Company's requirements for
picture tubes, which depends on customer demand and sales volumes. The Company
has no right to use the credits after the expiration or termination of the
manufacturing agreement, and may not receive any credits in exchange for the
equipment if it breaches or terminates the manufacturing agreement.
A substantial portion of the equipment purchased by Philips was owned by the
owner trust under the Leveraged Lease (Melrose Park), which is controlled by
LGE as a result of LGE's payments under its guarantee of the Company's
obligations under the Leveraged Leases. The Company purchased such equipment
from the owner trust immediately prior to the sale to Philips in exchange for
approximately $11.5 million of the credits to be received by the Company from
Philips. The Company may purchase the credits for cash from the owner trust.
The Company expects to purchase such credits from the owner trust as necessary
to acquire picture tubes from Philips.
The Company's Glenview, Illinois headquarters building was sold to
BRI/Glenview I Inc. in October 1998 for $23.3 million. The terms of the sale
included a lease agreement under which the Company may continue to be a tenant
in the building through December 1999. The Company expects that it will reduce
the amount of space it occupies in the building through the end of the lease,
as provided in the lease. The Company is reviewing alternative locations for
its headquarters, but has not yet entered into any agreement for replacement
office space. In February 1999, the Company sold its electron gun operations
located in Matamoros, Mexico as an ongoing business to a third party for $4.4
million, less escrowed amounts. The sale also included certain projection
television tube manufacturing equipment under the Leveraged Lease (Mexico) on
account of which the amount of LGE Leveraged Lease Claims was reduced by the
sale proceeds of $0.7 million.
The Company is currently marketing other portions of its operations,
properties, equipment and inventories for sale as going concerns or as
individual asset sales.
106
<PAGE>
Outsourcing Contracts
Between October and December 1998, the Company entered into definitive
supply agreements with vendors relating to significant portions of its 1999
model year requirements. These contracts cover console television sets, small
and medium screen direct-view sets and large screen projection television sets
as follows:
<TABLE>
<CAPTION>
Product Suppliers
-------------------------------------------- ----------------------------------
<C> <C> <S>
small and medium direct-view television sets . Action Electronics Co., Ltd.
. Daewoo Electronics Company,
Ltd.
. the Reynosa facility (to be
operated by LGE following the
Restructuring)
console television sets . Five Rivers Electronics
Innovations, LLC (to include
tubes produced by Philips and
chassis assembled in the
Reynosa facility)
large screen projection television sets . Hitachi Home Electronics
(America), Inc.
. the Reynosa facility
. others
</TABLE>
No minimum purchase volume is established under any of the contracts. The
Company has entered into supply agreements with Thomson and Philips for color
picture tube requirements for the 1999 model year. Each of the color picture
tube supply agreements requires that the seller supply a specific percentage
of the Company's requirements for medium screen color picture tubes. No
definitive agreements concerning the Company's 1999 model year requirements
for HDTV products, front-projection televisions, VCRs, TV/VCR combination sets
or for some accessories and components have been completed. The Company
expects to purchase these products from LGE or an affiliate of LGE or other
vendors, in each case under purchase order arrangements.
The console television manufacturing agreement requires that the assembler
manufacture and deliver Zenith-designed console televisions for delivery
against firm purchase orders. The color picture tube manufacturing agreements
require that the companies supply the majority of Zenith's picture tube
requirements for the next three model years for 25 inch and 27 inch television
set sizes, with additional requirements to provide 32 inch picture tubes in
2000 and 2001. The projection television agreement provides for the
manufacture of high-end, high-featured large screen projection televisions.
The following is a summary of the status of the Operational Restructuring
with respect to each of the Company's Manufacturing facilities:
Melrose Park, Illinois. The Company's Melrose Park facility previously
manufactured small and medium sized screen color picture tubes and CDTs.
The Company had previously announced its plans to close its color picture
tube manufacturing operations in Melrose Park by the end of 1998 and ceased
operations in March 1999. The limited workforce on hand is decommissioning
the equipment and the facility. The Company has sold a portion of the
equipment housed at Melrose Park to Philips and began shipping that
equipment during February 1999. The Company continues to market the
remaining equipment. If the Company is unable to dispose of all remaining
equipment, the Company expects that the remaining equipment will be
scrapped. If the Company is unable to sell the plant and real estate, the
Company expects that it will be obligated to undertake "moth balling"
activities related to the site, including environmental remediation, and
provide some level of ongoing maintenance and security for the facility.
Inventory at Melrose Park currently consists primarily of tubes requiring
rework, some of which may not be recoverable and which will be scrapped.
Chihuahua, Chihuahua, Mexico. The Company's NWS division products are
produced at its Chihuahua facility, including digital set-top boxes for
Americast, Sky Latin America, Sky New Zealand, NetSat and NDS. The Company
is in the process of discontinuing its analog set-top box lines. In all
cases, the Company's contracts for these products are non-exclusive and the
customer may secure products from multiple sources. The Company is
continuing to attempt to sell the NWS business, including the Chihuahua
manufacturing operations, as an ongoing business.
107
<PAGE>
Matamoros, Tamaulipas, Mexico. The Company sold its electron gun
operations located in Matamoros, Mexico to a third party in February 1999
for approximately $4.4 million, less escrowed amounts. The sale also
included certain projection television tube manufacturing equipment under
the Leveraged Lease (Mexico), for which the sale proceeds of $0.7 million
were paid to the owner trust of the Leveraged Lease (Mexico), which is
controlled by LGE as a result of its settlement of the Company's
obligations under the Leveraged Leases. The amount owed by the Company to
LGE on account of its settlement of the Leveraged Leases is reduced by the
$0.7 million proceeds from the sale of the equipment. The Company expects
that the remaining equipment at this facility will be liquidated or
scrapped.
Reynosa, Tamaulipas, Mexico. The Company's Reynosa facility currently
manufactures direct view television sets and chassis for console
televisions. The Company expects to transfer substantially all of the
Reynosa facility to LGE pursuant to the Prepackaged Plan. The Company
continues to market several properties at its Reynosa facilities that are
not scheduled to be transferred to LGE.
Cd. Juarez, Chihuahua, Mexico. The Company assembled console televisions
and projections televisions at its Cd. Juarez facility, and previously
manufactured projection television picture tubes at this facility. The
Company ceased operations at the plant in February 1999 and has begun to
decommission portions of the plant. The Company is providing some of the
equipment used to produce console televisions to the Company's outsource
supplier of such products to facilitate manufacture of those products to
the Company's specifications. In March 1999, a portion of the equipment
located in Juarez was sold at auction, resulting in $1.1 million of
proceeds. Of that amount, $0.8 million is allocated to the Sale of
Leveraged Lease (Mexico) assets and will be paid over to the owner trustee
under the Leveraged Lease (Mexico). The Company is seeking to sell the
remainder of the operations and equipment as an on-going business. If
unsuccessful, the Company will seek to sell the equipment and the real
estate as separate assets. If the Company is not successful in selling all
assets, unsold equipment will be liquidated or scrapped, and the facility
will be "moth balled."
108
<PAGE>
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>
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)..................... .71875 .25000
Third Quarter.......................................... .75000 .26563
Fourth Quarter......................................... .63000 .25000
1999
First Quarter.......................................... .45313 .25000
Second Quarter (through April 14, 1999)................ .40625 .37500
</TABLE>
109
<PAGE>
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 the Old Subordinated Debentures
on the NYSE Composite Tape.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
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. Although
the Company believes that there has been trading in the Old Subordinated
Debentures from time to time, the Company has not been able to obtain regular
market prices for the Old Subordinated Debentures since May 21, 1998.
110
<PAGE>
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at (i) December 31, 1998 on an historical basis
and on a pro forma basis giving effect to the Financial Restructuring as if it
had occurred on December 31, 1998 and (ii) July 31, 1999 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 July 31,
1999. During 1999, the Company expects to incur certain charges associated with
its Operational Restructuring that are not included herein. 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 July 31,
As of December 31, 1998 1999
-------------------------- ---------------------------
Without With
Financial Financial
Actual Pro Forma Restructuring Restructuring
----------- ------------- ------------- -------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Cash.................... $ -- $ 15.0 $ -- $ --
=========== =========== ======= =======
LGE Extended Payables
Claims................. $ 135.6 $ -- $ 140.0 $ --
=========== =========== ======= =======
Debt:
Bank Lender
Claims(1)............ $ 30.0 $ 30.0 $ 30.0 $ 30.0
Amended Citibank
Credit Facility...... 17.8 -- 73.2 --
Post-Restructuring
bank credit
facility............. -- 17.8 -- 73.2
LGE Leveraged Lease
Claims............... 90.1 -- 76.4 --
LGE Reimbursement
Claims............... 72.0 -- 72.0 --
LGE Demand Loan
Claims............... 30.0 -- 45.0 --
Old Subordinated
Debentures (at face
value)............... 103.5 -- 103.5 --
New Debentures (at
face value).......... -- 50.0 -- 50.0
LGE New Restructured
Senior Note.......... -- 113.5 -- 105.1
----------- ----------- ------- -------
Total debt.......... $ 343.4 $ 211.3 $ 400.1 $ 258.3
=========== =========== ======= =======
Stockholders' equity:
Old Common Stock,
$1.00 par value,
150,000,000 shares
authorized,
67,630,628 shares
issued and
outstanding(2)....... $ 67.6 $ -- $ 67.6 $ --
New Common Stock,
$0.01 par value,
1,000 shares
authorized, 1,000
shares issued and
outstanding(3)....... -- -- -- --
Additional paid-in
capital, old......... 506.8 572.7 506.8 572.7
Additional paid-in
capital, new......... -- 200.0 -- 200.0
Retained earnings
(deficit)............ (937.2) (880.3) (994.5) (936.9)
Treasury stock,
105,181 Old Common
Shares, at cost...... (1.7) -- (1.7) --
----------- ----------- ------- -------
Total stockholders'
equity............. $ (364.5) $ (107.6) $(421.8) $(164.2)
=========== =========== ======= =======
</TABLE>
- --------
(1) Represents the Company's credit facility with Credit Agricole Indosuez.
(2) Excludes 3,349,000 shares of Old Common Stock issuable upon exercise of
outstanding stock options as of December 31, 1998, of which 1,746,000
shares are issuable to LGE and 1,603,000 shares are issuable to employees.
There will be no such options outstanding on a pro forma basis.
(3) New Common Stock does not show a value due to rounding in millions.
111
<PAGE>
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, 1998. 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 following
financial information should be read in conjunction with "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION," "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>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(Dollars in millions, except per share
data)
<S> <C> <C> <C> <C> <C>
Results of operations:
Net sales.................. $ 984.8 $1,173.1 $1,287.9 $1,273.9 $1,469.0
Pre-tax income (loss)...... (272.5) (300.2) (177.8) (98.5) (14.8)
Net income (loss).......... (275.5) (299.4) (178.0) (90.8) (14.5)
Financial Position:
Total assets............... $ 350.0 $ 527.7 $ 765.3 $ 700.7 $ 662.4
Long term debt............. 97.8 132.8 152.7 168.8 182.0
Stockholders' equity
(deficit)................. (364.5) (89.0) 162.0 317.5 237.1
Per share of basic and
diluted common stock:
Net income (loss).......... $ (4.08) $ (4.49) $ (2.73) $ (1.85) $ (0.35)
Book value (deficit)....... (5.40) (1.33) 2.44 5.00 5.19
Other Financial Data:
Ratio of losses to fixed
charges (2)............... -- -- -- -- --
</TABLE>
- --------
(1) The Company's deficiency of earnings to cover fixed charges for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 was $272.5 million,
$300.2 million, $177.8 million, $98.5 million and $14.8 million,
respectively.
112
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of December
31, 1998 set forth below has been prepared as if the Financial Restructuring
had been completed as of January 1, 1998. Pro forma adjustments solely reflect
the pro forma effects of the Financial Restructuring. During 1999, the Company
expects to incur certain charges associated with its Operational Restructuring
that are not included herein. The Business Plan Projections included in this
Disclosure Statement include the projected financial statement impact of the
Company's Financial and Operational 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 "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.
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 benefit the Company and reduce its overall debt and other
obligations by approximately $285 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 Debentures in an aggregate principal
amount of $50 million; and (iii) approximately $32.4 million of indebtedness
to LGE for the Reynosa Assets, which have an appraised value equal to such
amount. Such appraisals should be read in their entirety and state an opinion
of value as of the date of the report and are subject to assumptions and
limiting conditions stated in each report.
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.
113
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Historical Pro Forma Adjustments Pro Forma
---------- --------------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................... $ -- $ 15.0 (a) $ 15.0
Receivables, net......... 135.5 -- 135.5
Inventories.............. 84.2 -- 84.2
Other.................... 10.8 (1.1)(b) 9.7
------- ------- -------
Total current assets... 230.5 13.9 244.4
Property, plant and
equipment, net.......... 50.2 (19.1)(c)(d) 31.1
Receivable from related
party................... 21.3 (21.3)(d)(g) --
Property held for
disposal................ 43.0 -- 43.0
Other.................... 5.0 (1.0)(b) 4.0
------- ------- -------
Total assets........... $ 350.0 $ (27.5) $ 322.5
======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......... $ 47.8 $ -- $ 47.8
Short-term debt with
related party........... 192.1 (192.1)(a)(e)(f)(g) --
Current portion of long-
term debt............... 5.8 (5.8)(h) --
Accounts payable......... 48.1 -- 48.1
Accounts payable to
related party........... 136.1 (135.6)(i) 0.5
Income taxes payable..... 4.2 -- 4.2
Other accrued expenses... 167.8 (5.4)(h) 162.4
------- ------- -------
Total current
liabilities........... 601.9 (338.9) 263.0
Long-term debt............. 97.8 (47.8)(h) 50.0
Long-term debt with related
party..................... -- 113.5 (c)(e)(f)(g)(j) 113.5
Other long term
liabilities............... 14.8 (11.2)(j) 3.6
Stockholders' equity:
Preferred stock.......... -- -- --
Old Common Stock......... 67.6 (67.6)(k) --
New Common Stock......... -- -- (e)(f)(i)(j) --
Old additional paid-in
capital................. 506.8 65.9 (k) 572.7
New additional paid-in
capital................. -- 200.0 (e)(f)(i)(j) 200.0
Retained earnings
(deficit)............... (937.2) 56.9 (b)(h) (880.3)
Old treasury stock....... (1.7) 1.7(k) --
------- ------- -------
Total stockholders'
equity.................. (364.5) 256.9 (107.6)
------- ------- -------
Total liabilities and
stockholders' equity.. $ 350.0 $ (27.5) $ 322.5
======= ======= =======
</TABLE>
114
<PAGE>
Notes to the Pro Forma Balance Sheet
(a) The Company receives $15.0 million of additional direct secured loans from
LGE. The cash is required to fund operating losses through the remainder of
1999.
<TABLE>
<C> <S> <C> <C>
Dr. Cash........................................................ $15.0
Cr. Short-term debt with related party........................ $15.0
</TABLE>
(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 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.
<TABLE>
<CAPTION>
Non-
Current current Total
Portion Portion Writeoff
------- ------- --------
<S> <C> <C> <C>
Old Subordinated Debentures deferred charges....... $ 0.1 $0.7 $0.8
LGE Extended Payables Claims deferred charges...... 1.0 0.3 1.3
----- ---- ----
$ 1.1 $1.0 $2.1
===== ==== ====
</TABLE>
<TABLE>
<C> <S> <C> <C>
Dr. Restructuring expense....................................... $ 2.1
Cr. Other current assets...................................... $ 1.1
Cr. Other non-current assets.................................. 1.0
</TABLE>
(c) The Reynosa Assets, having an appraised fair value of $32.4 million will be
transferred to LGE. Such appraisals should be read in their entirety and
state an opinion of value as of the date of the report and are subject to
assumptions and limiting conditions stated in each report. This will reduce
the amount of the LGE Claims that are converted into the LGE New
Restructured Senior Note.
<TABLE>
<C> <S> <C> <C>
Dr. Long-term debt with related party............................ 32.4
Cr. Property, plant and equipment.............................. $32.4
</TABLE>
(d) When LGE made payments of $90.1 million under the Leveraged Leases pursuant
to certain guarantees, LGE became the sole beneficiary of the owner trusts,
which continued to own the equipment under the Leveraged Leases. Pursuant
to the Restructuring Agreement, any equipment under the Leveraged Leases
that is not sold by the Consummation of the Prepackaged Plan (other than
certain equipment located in Reynosa) will be transferred to the Company.
It is estimated that such equipment will have an appraised fair value of
$13.3 million.
<TABLE>
<C> <S> <C> <C>
Dr. Property, plant and equipment............................... $13.3
Cr. Receivable from related party............................. $13.3
</TABLE>
(e) The LGE Demand Loan Claims, which will total $45.0 million, will be settled
partially through the issuance of New Common Stock ($12.9 million) and
partially by the LGE New Restructured Senior Note ($32.1 million). The
Financial Restructuring will result in the issuance of a total of 1,000
shares of New Common Stock, par value of $0.01 per share, which amount is
not shown on the Pro Forma balance sheet because amounts are presented
rounded to the nearest million.
<TABLE>
<C> <S> <C> <C>
Dr. Short-term debt with related party.......................... $45.0
Cr. New Common Stock.......................................... $ --
Cr. New additional paid-in capital............................ 12.9
Cr. Long-term debt with related party......................... 32.1
</TABLE>
(f) The LGE Reimbursement Claims ($72.0 million) will be settled partially
through the issuance of New Common Stock ($50.0 million) and partially by
the LGE New Restructured Senior Note ($22.0 million).
<TABLE>
<C> <S> <C> <C>
Dr. Short-term debt with related party........................... $72.0
Cr. New common stock........................................... $--
Cr. New additional paid-in capital............................. 50.0
Cr. Long-term debt with related party.......................... 22.0
</TABLE>
115
<PAGE>
(g) The Leveraged Lease Claims ($90.1 million) will be settled partially by the
LGE New Restructured Senior Note ($82.1 million) and partially by LGE
retaining title to certain equipment related to the Leveraged Leases that
has an appraised fair value of approximately $8.0 million.
<TABLE>
<C> <S> <C> <C>
Dr. Short-term debt with related party........................ $ 90.1
Cr. Long-term debt with related party....................... $ 82.1
Cr. Receivable from related party........................... 8.0
(h) The Old Subordinated Debentures will be retired and as a result, current
portion of long-term debt ($5.8 million) and long-term debt ($97.8 million)
will be reduced. The New Debentures ($50.0 million) will be recorded at
face value. The retirement of the Old Subordinated Debentures will give
rise to an extraordinary gain of $59.0 million.
Dr. Current portion of long-term debt......................... $ 5.8
Dr. Long-term debt............................................ 97.8
Dr. Accrued interest on Old Subordinated Debentures........... 5.4
Cr. Long-term debt.......................................... $ 50.0
Cr. Extraordinary gain...................................... 59.0
(i) The LGE Extended Payable Claims ($135.6 million) will be settled through
the issuance of New Common Stock.
Dr. Accounts payable to related party......................... $135.6
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 135.6
(j) The LGE Technical Services Claims ($9.7 million) and the LGE Guarantee Fee
Claims ($1.5 million) will be settled partially through the issuance of New
Common Stock ($1.5 million) and partially by the LGE New Restructured
Senior Note ($9.7 million).
Dr. Other long-term liabilities............................... $ 11.2
Cr. New Common Stock........................................ $ --
Cr. New additional paid-in capital.......................... 1.5
Cr. Long-term debt with related party....................... 9.7
(k) As part of the Financial Restructuring, the Old Common Stock ($67.6
million) and the old treasury stock ($1.7 million) will be cancelled and
the net amount ($65.9 million) is transferred to old additional paid-in
capital.
Dr. Old Common Stock.......................................... $ 67.6
Cr. Old additional paid-in capital.......................... $ 65.9
Cr. Old treasury stock...................................... 1.7
</TABLE>
116
<PAGE>
ZENITH ELECTRONICS CORPORATION
PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31 , 1998
----------------------------------
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- -------
<S> <C> <C> <C>
Net sales................................. $ 984.8 $ -- $ 984.8
------- ----- -------
Cost, expenses and other:
Cost of products sold................... 905.5 (5.9)(a) 899.6
Selling, general and administrative..... 126.6 -- 126.6
Engineering and research................ 39.1 -- 39.1
Other operating income, net............. (43.0) -- (43.0)
Restructuring charges................... 202.3 (b) -- 202.3
------- ----- -------
Operating loss............................ (245.7) (5.9) (239.8)
Gain on asset sales, net.................. 16.6 -- 16.6
Interest expense.......................... (14.6) 4.1 (c) (10.5)
Interest expense-related party............ (29.7) 16.1 (c) (13.6)
Interest income........................... 0.9 -- 0.9
------- ----- -------
Loss before income taxes.................. (272.5) 26.1 (246.4)
Income tax (credit)....................... 3.0 -- 3.0
------- ----- -------
Net loss.................................. $(275.5) $26.1 $(249.4)
======= ===== =======
Net loss per basic and diluted common
share.................................... $ (4.08) $0.39 $ (3.69)
======= ===== =======
</TABLE>
- --------
(a) Decrease in cost of products sold reflects the elimination of lease
expense related to the cancelled Leveraged Leases.
(b) Represents costs incurred as a direct result of the Company's efforts to
achieve an operational restructuring including costs related to (i) a
$68.8 million loss on the termination of the Company's Leveraged Leases,
(ii) $36.6 million of deferred charges (bank, attorney and guarantee fees)
that were written off, (iii) accelerated amortization of the remaining
deferred gain ($9.1 million) related to the 1997 sale of the assets into
the Leveraged Leases, (iv) $47.2 million for the impairment of property,
plant and equipment primarily related to the Company's commitment in 1998
to dispose of its manufacturing facilities, (v) $24.8 million for
severance and other employee costs resulting from the implementation of
the Operational Restructuring, (vi) $18.8 million for plant closure and
business exit costs, (vii) $11.5 million of professional fees (associated
with work performed by outside consultants to support the development of
the Operational and Financial Restructuring and the Prepackaged Plan) and
financing charges (relative to amending the Citicorp credit agreement),
(viii) $3.2 million of inventory writedowns and (ix) $0.5 million of other
costs. Excluding these nonrecurring items, pro forma net loss for the year
ended December 31, 1998 would have been $73.2 million.
117
<PAGE>
(c) Net reduction of interest expense as a result of the Financial
Restructuring has been estimated as follows:
<TABLE>
<CAPTION>
Year Ended
12/31/98
----------
<S> <C>
Interest expense on the new debt:
LGE New Restructured Senior Note, at LIBOR (adjusted
quarterly) + 6.5%, (estimated herein as 12%) (principal --
$113.5 million).............................................. $ 13.6
New Debentures (principal --$50.0 million at face value)...... 4.1
Reversal of actual interest expense:
Old Subordinated Debentures................................... (6.5)
A portion ($30.0 million) of the Unsecured Bank Loans......... (1.7)
LGE Extended Payables......................................... (15.1)
Amortization of LGE Guarantee Fee Claims related to various
financing activities......................................... (5.1)
LGE Leveraged Lease payable................................... (4.0)
LGE Reimbursement Claims...................................... (3.3)
LGE Demand Loan Claims........................................ (2.2)
------
Net reduction in interest....................................... $(20.2)
======
</TABLE>
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>
<S> <C>
$(0.8) Old Subordinated Debentures deferred charges written off. See footnote (b).
(1.3) LGE Extended Payables Claims deferred charges written off. See footnote (b).
59.0 Extraordinary gain on retirement of the Old Subordinated Debentures. See footnote (h).
------
$56.9
======
</TABLE>
118
<PAGE>
BUSINESS PLAN PROJECTIONS
In connection with the planning and development of the Prepackaged Plan, the
Business Plan Projections were prepared by the Company in April 1999 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 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 nor compiled the Business Plan Projections,
and consequently do not express an opinion or any other form of assurance with
respect thereto.
From time to time the Company has evaluated its operations, performance and
productivity, including the implementation of the Operational Restructuring,
to assess and compare the Company's actual experience to the Company's
projections. Moreover, the Company monitors markets, consumer sentiment,
technological developments, political and legislative affairs and other
economic and non-economic criteria, both domestically and internationally, to
help the Company evaluate current and anticipated changes in the demand for
the Company's products and the impact, if any, on the Restructuring. As a
consequence of these undertakings by the Company, as well as other factors,
including those beyond the control of the Company, the Company, from time to
time, has made revisions to its Business Plan Projections. The Company
disclaims any obligation to further update or otherwise revise the Business
Plan Projections to reflect circumstances existing after the date thereof or
to reflect the occurrence of unanticipated events.
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
119
<PAGE>
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.
120
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------------------------------
Projected Projected Projected
Actual Unadjusted Reorganization Adjusted Projected Projected Projected Projected
1998 1999 Adjustments 1999 2000 2001 2002 2003
------- ---------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 984.8 $ 969.5 $ -- $969.5 $889.3 $935.1 $987.6 $1,018.3
Cost of products sold... 905.5 862.3 -- 862.3 806.4 832.2 880.7 903.0
------- ------- ----- ------ ------ ------ ------ --------
Gross Margin............ 79.3 107.2 -- 107.2 82.9 102.9 106.9 115.3
Gross Margin %.......... 8.1% 11.1% 11.1% 9.3% 11.0% 10.8% 11.3%
Selling, general and
administrative......... 126.6 129.2(a) -- 129.2 103.9 103.4 102.9 102.4
Engineering and
research............... 39.1 32.6 -- 32.6 12.0 11.4 10.8 10.3
Restructuring
expense (b)............ 165.7 13.0 -- 13.0 -- -- -- --
Other operating expense
(income), net (c)...... (43.0) (38.8) -- (38.8) (34.8) (43.6) (53.5) (52.2)
------- ------- ----- ------ ------ ------ ------ --------
Operating income
(loss)................. (209.1) (28.8) -- (28.8) 1.8 31.7 46.7 54.8
Gain (loss) on asset
sales.................. 16.6 11.0 -- 11.0 -- -- -- --
Finance guarantee fee
charge (d)............. (36.6) -- (1.8) (1.8) -- -- -- --
Interest expense, net... (43.4) (43.8) -- (43.8) (29.3) (31.2) (31.7) (30.0)
------- ------- ----- ------ ------ ------ ------ --------
Income (loss) before
reorganization items... (272.5) (61.6) (1.8) (63.4) (27.5) 0.5 15.0 24.8
Reorganization
items (e).............. -- -- 10.4 10.4 -- -- -- --
Taxes on income/(income
tax benefit)........... 3.0 -- -- -- -- -- -- --
------- ------- ----- ------ ------ ------ ------ --------
Net earnings (loss)
before extraordinary
items.................. (275.5) (61.6) (12.2) (73.8) (27.5) 0.5 15.0 24.8
Extraordinary gain on
debt retirement (f) ... -- -- 59.0 59.0 -- -- -- --
------- ------- ----- ------ ------ ------ ------ --------
Net earnings (loss)..... $(275.5) $ (61.6) $46.8 $(14.8) $(27.5) $ 0.5 $ 15.0 $ 24.8
======= ======= ===== ====== ====== ====== ====== ========
Memo:
Operating income
(loss)................ $(209.1) $ (28.9) $ -- $(28.9) $ 1.8 $ 31.7 $ 46.7 $ 54.8
Restructuring
expense (b)........... 165.7 13.0 -- 13.0 -- -- -- --
Depreciation and
amortization.......... 31.2 7.0 -- 7.0 4.7 4.8 4.8 4.8
------- ------- ----- ------ ------ ------ ------ --------
EBITDA (g).............. $ (12.2) $ (8.9) $ -- $ (8.9) $ 6.5 $ 36.5 $ 51.5 $ 59.6
======= ======= ===== ====== ====== ====== ====== ========
</TABLE>
121
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED BALANCE SHEETS
(Unaudited)
(Dollars In Millions)
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------------
Projected Projected Projected
Actual Unadjusted Reorganization Adjusted Projected Projected Projected Projected
1998 1999 Adjustments 1999 2000 2001 2002 2003
------- ---------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accounts receivable..... 135.5 134.8 -- 134.8 134.5 137.5 137.4 141.4
Inventory............... 84.2 62.4 -- 62.4 59.7 61.6 65.2 66.9
Other current assets.... 10.8 10.6 (1.8)(h) 8.8 8.8 8.8 8.8 8.8
------- ------- ------- ------- ------- ------- ------- -------
Total current assets.... 230.5 207.8 (1.8) 206.0 203.0 207.9 211.4 217.1
Plant, property and
equipment, net......... 110.1 65.8 (32.4)(i) 33.4 33.7 33.9 34.1 34.3
Plant, property and
equipment,
environmental reserve.. (16.9)(j) -- -- -- -- -- -- --
Other assets............ 5.0 6.2 -- 6.2 6.1 6.1 6.1 6.1
Other receivable (k).... 21.3 12.3 (8.0) 4.3 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total assets............ $ 350.0 $ 292.1 $ (42.2) $ 249.9 $ 242.8 $ 247.9 $ 251.6 $ 257.5
======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES AND DEFICIT:
Short-term debt......... $ 245.7 $ 309.6 $(195.2) $ 114.4 $ 122.7 $ 125.1 $ 109.0 $ 88.1
Accounts payable........ 48.1 58.8 -- 58.8 76.9 80.1 84.9 86.9
Accrued liabilities..... 140.7 94.4 (5.4)(l) 89.0 82.4 70.9 70.9 70.9
Restructuring........... 31.3 0.7 6.4 (m) 7.1 -- -- -- --
Long-term debt.......... 97.8 101.6 57.3 158.9 167.6 178.0 178.0 178.0
Other liabilities....... 14.8 13.1 (12.1)(n) 1.0 -- -- -- --
LGE Extended Payables
Claims................. 136.1 140.0 (140.0) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities....... 714.5 718.2 (289.0) 429.2 449.6 454.1 442.8 423.9
Stockholders' Equity.... (364.5) (426.1) 246.8 (o) (179.3) (206.8) (206.2) (191.2) (166.4)
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity... $ 350.0 $ 292.1 $ (42.2) $ 249.9 $ 242.8 $ 247.9 $ 251.6 $ 257.5
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
122
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
Projected Projected Projected
Unadjusted Reorganization Adjusted Projected Projected Projected Projected
1999 Adjustments 1999 2000 2001 2002 2003
---------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $ (8.9) $ -- $ (8.9) $ 6.5 $ 36.5 $ 51.5 $ 59.6
Working capital changes:
Accounts receivable.... 0.7 -- 0.7 0.3 (3.0) 0.1 (4.0)
Inventory.............. 21.8 -- 21.8 2.7 (1.9) (3.6) (1.7)
Accounts payable....... 10.7 -- 10.7 18.1 3.2 4.8 2.0
Accrued liabilities.... (46.3) -- (46.3) (6.6) (11.5) -- --
Others, net............ (2.7) (12.1)(n) (14.8) (0.9) -- -- --
------ ------- ------- ------ ------ ------ ------
Cash flow from
operations before
restructuring charges.. (24.7) (12.1) (36.8) 20.1 23.3 52.8 55.9
Restructuring payments.. (60.5) (4.0) (64.5) (7.1) -- -- --
Other receivable, asset
interests.............. 13.2 8.0 (i) 21.2 4.3 -- -- --
Capital expenditures.... (16.0) (8.0)(i) (24.0) (5.0) (5.0) (5.0) (5.0)
Proceeds from asset
sales, net............. 60.2 40.4 (i) 100.6 -- -- -- --
------ ------- ------- ------ ------ ------ ------
Free cash flow from
operations............. (27.8) 24.3 (3.5) 12.3 18.3 47.8 50.9
Long-term debt
(service)/borrowing.... 3.8 110.9 114.7 8.7 10.4 -- --
LGE Extended Payables
Claims, net............ 3.9 (140.0) (136.1) -- -- -- --
Interest................ (43.8) -- (43.8) (29.3) (31.2) (31.7) (30.0)
Debt To Equity
Conversion............. -- 200.0 (o) 200.0 -- -- -- --
------ ------- ------- ------ ------ ------ ------
Short-term debt
service/(borrowing).... $(63.9) $ 195.2 $ 131.3 $ (8.3) $ (2.5) $ 16.1 $ 20.9
====== ======= ======= ====== ====== ====== ======
</TABLE>
123
<PAGE>
ZENITH ELECTRONICS CORPORATION
PROJECTED DEBT STRUCTURE
(Unaudited)
(Dollars in Millions)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------
Projected Projected Projected
Actual Unadjusted Reorganization Adjusted Projected Projected Projected Projected
1998 1999 Adjustments 1999 2000 2001 2002 2003
------ ---------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Secured Tranche A
(working capital) (p).. $ 17.8 $ 65.1 $ 4.0 $ 69.1 $ 92.7 $ 95.1 $ 79.0 $ 58.1
Bank Lender Claims...... 30.0 30.0 -- 30.0 30.0 30.0 30.0 30.0
LGE Reimbursement
Claims................. 72.0 72.0 (72.0) -- -- -- -- --
LGE Leveraged Lease
Claims................. 90.1 76.4 (76.4) -- -- -- -- --
LGE Demand Loan Claims.. 30.0 45.0 (45.0) -- -- -- -- --
LGE New Credit Support.. -- 15.3(q) -- 15.3 -- -- -- --
------ ------ ------- ------ ------ ------ ------ ------
239.9 303.8 (189.4) 114.4 122.7 125.1 109.0 88.1
Current portion of long-
term debt:
Old Subordinated
Debentures............. 5.8 5.8 (5.8) -- -- -- -- --
------ ------ ------- ------ ------ ------ ------ ------
Total Short-term debt... $245.7 $309.6 $(195.2) $114.4 $122.7 $125.1 $109.0 $ 88.1
====== ====== ======= ====== ====== ====== ====== ======
Long-term debt:
Old Subordinated
Debentures............. 97.8 97.8 (97.8) -- -- -- -- --
New Debentures.......... -- -- 50.0 50.0 50.0 50.0 50.0 50.0
LGE New Restructured
Senior Note............ -- 3.8(r) 105.1(s) 108.9 117.6 128.0 128.0 128.0
------ ------ ------- ------ ------ ------ ------ ------
Total Long-term debt.... 97.8 101.6 57.3 158.9 167.6 178.0 178.0 178.0
====== ====== ======= ====== ====== ====== ====== ======
Total debt.............. $343.5 $411.2 $(137.9) $273.3 $290.3 $303.1 $287.0 $266.1
====== ====== ======= ====== ====== ====== ====== ======
LGE Extended Payables
Claims................. $135.6 $140.0 $(140.0) $ -- $ -- $ -- $ -- $ --
</TABLE>
124
<PAGE>
ZENITH ELECTRONICS CORPORATION
NOTES TO THE PROJECTED FINANCIAL STATEMENTS
(Dollars in Millions)
For presentation purposes, it is assumed that the Company files a chapter 11
proceeding in May 1999 and emerges from the chapter 11 proceeding in July
1999, 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) Selling, general and administrative expenses in 1999 include retention
plan payments of $2.0 million for corporate employees.
(b) Restructuring expenses are detailed as follows:
<TABLE>
<CAPTION>
1998 1999
------ -----
<S> <C> <C>
Loss of termination of Leveraged Lease(i).................. $ 68.8 $ --
Accelerated amortization of deferred gain(i)............... (9.1) --
Impairment of property, plant and equipment(ii)............ 47.2 --
Severance and other employee costs(iii).................... 24.8 7.4
Plant closure and business exit costs(iii)................. 18.8 1.0
Professional fees(iv)...................................... 11.5 4.6
Inventory writedowns....................................... 3.2 --
Other...................................................... 0.5 --
------ -----
Total restructuring charges.............................. $165.7 $13.0
====== =====
</TABLE>
(i) 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
Leases, 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. Simultaneous with the recognition
of the loss, a lease-related gain of $9.1 million is recognized.
This amount is the acceleration of the balance of a deferred gain
on the 1997 sale of fixed assets into the Leveraged Leases.
Historically, the gain was being amortized to income over the life
of the lease.
(ii) The estimated impairment of $47.2 million, on property, plant, and
equipment that occurred at the end of 1998 related to the
execution of the Operational Restructuring. It is measured as the
difference between the book value of assets and the estimated (by
appraisal) fair value in an orderly liquidation including
environmental obligations.
(iii) Various costs incurred to implement the Operational Restructuring
including staff reductions, facility closures, and product line
eliminations.
(iv) Professional fees for advisors and consultants to assist in
formulating and implementing the Prepackaged Plan.
These costs are classified as Restructuring Costs because they are not
incurred during the Reorganization Period as defined above.
(c) Other operating expense (income) includes royalty income from domestic
VSB, tuner patent/other sources and miscellaneous items in amounts per
year as follows:
<TABLE>
<CAPTION>
Royalty
Income Other
----------- Income/
VSB Other (Expense)
----- ----- ---------
<S> <C> <C> <C>
1998................................................ $ -- $38.5 $ 4.5
1999................................................ 2.2 31.1 5.5
2000................................................ 6.1 30.2 (1.5)
2001................................................ 14.3 30.8 (1.5)
2002................................................ 26.6 28.4 (1.5)
2003................................................ 35.5 18.2 (1.5)
</TABLE>
Royalty amounts represent estimated gross revenues. Accordingly, the
foregoing does not include any adjustment for costs or reductions relating
to development, marketing and legal costs, 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,
125
<PAGE>
during the Reorganization Period and banking and financing fees related to
the Company's continuing efforts to secure financing commitments in 1998.
These are primarily non-cash amortization expenses.
(e) Reorganization items of $10.4 million are detailed as:
<TABLE>
<S> <C>
Reorganization Costs (i):
Severance coincident with Prepackaged Plan......................... $ 6.4
Professional fees coincident with Prepackaged Plan................. 1.6
Professional fees during Reorganization Period..................... 2.4
-----
Total Reorganization expenses....................................... $10.4
=====
</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 upon the actual implementation of the Business
Plan Projections and the timing of the bankruptcy proceedings.
(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
Accrued interest on Old Subordinated Debentures (to July 31,
1999)........................................................... 5.4
less: New Debentures (at face value)............................. (50.0)
-----
Gain........................................................... $59.0
=====
</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 indicator of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring a company's ability to service its debt.
(h) Other Current Assets decrease represents the write-off of the Short-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.
(i) Property, Plant, and Equipment decreases are due to transferring a portion
of the Company's Reynosa Assets to LGE (as beneficiaries of the owner
trust) at an independently appraised value, receiving the Leveraged Lease
assets from LGE and a charge for an impairment of the assets. The
property, plant and equipment being transferred to LGE as the Reynosa
Assets consist of the three main buildings housing manufacturing
operations in the Company's Reynosa facility, the real property associated
with those buildings, and a significant portion of the manufacturing and
assembly equipment currently housed within those buildings. The real
estate and buildings have an appraised value of $17.9 million and the
equipment has an appraised value of $14.5 million. Such appraisals should
be read in their entirety and state an opinion of value as of the date of
report and are subject to assumptions and limiting conditions stated in
each report. 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
Lease........................................................... 8.0
Reynosa Leveraged Lease assets retained by LG.................... (8.0)
------
Total........................................................... $(32.4)
======
</TABLE>
(j) 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 is reclassified to the
Restructuring Accrual (see footnote (b)(ii) for further information).
(k) 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. Through the first
126
<PAGE>
seven months of 1999 the asset is reduced as the assets underlying the
receivable are sold by the Company or LGE. All proceeds from the sales of
the Leveraged Lease assets are paid to LGE in return for retirement of debt
related to the LGE Leveraged Lease Claims. At the consummation of the
Prepackaged Plan, LGE will retain the Reynosa Leveraged Lease assets and
the Company's obligations to LGE related to the LGE Leveraged Lease Claims
will be reduced.
(l) Interest accrued but not paid on Old Subordinated Debentures, as a result
the unpaid interest results in forgiveness of debt gain (see note (f)).
(m) The Restructuring liability represents the accrued cash portion of
estimated Reorganization expenses referred to above in Note (e)(i), less
payments that were made in conjunction with executing the Prepackaged
Plan.
<TABLE>
<S> <C>
Estimated cash reorganization charges........................... $10.4
Estimated cash payments made coincident with the Prepackaged
Plan........................................................... (4.0)
-----
Total.......................................................... $ 6.4
=====
</TABLE>
(n) Other Liabilities changes reflect the following:
<TABLE>
<S> <C>
LGE Technical Services Claims.................................... $(10.5)
LGE Guarantee Fee Claims......................................... (1.6)
------
Total........................................................... $(12.1)
======
</TABLE>
(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 Demand Loan Claims.......................................... 8.4
LGE Guarantee Fee Claims........................................ 1.6
LGE Reimbursement Claims........................................ 50.0
------
Total debt converted............................................. $200.0
Income statements effects (of Reorganization Adjustments)
Accelerated write-off of unamortized deferred charges (see
footnote (d)).................................................. $ (1.8)
Reorganization items (see footnote (e))......................... (10.4)
Extraordinary gain on debt retirement (see footnote (f))........ 59.0
------
Total of income statement effects................................ $ 46.8
------
Total......................................................... $246.8
======
</TABLE>
(p) Assumes that the Company is able to refinance its current Amended Citibank
Credit Facility with new facilities substantially as set forth in the DIP
Facility and the Citicorp Exit Facility. The projections of borrowing
availability are based on the terms described in the Commitment.
(q) Prior to the execution of the Prepackaged Plan, the LGE New Credit Support
is not available to the Company. The $15.3 represents borrowing the
Company will make after emerging from Chapter 11.
(r) Represents the paid-in-kind interest which will accrue but not be paid on
the LGE New Restructured Senior Note after the Company emerges from
Chapter 11 for August through December 1999.
(s) The LGE New Restructured Senior Note of $105.1 million represents the
Company's obligations under the following LGE Claims:
<TABLE>
<S> <C>
LGE Leveraged Lease Claims...................................... $ 76.4
Less: Leveraged Lease equipment retained by LGE (at appraised
value)......................................................... (8.0)
Less: Reynosa Assets transferred by the Company to LGE (at
appraised value--see note (i))................................. (32.4)
LGE Demand Loan Claims.......................................... 36.6
LGE Technical Services Claims................................... 10.5
LGE Reimbursement Claims........................................ 22.0
------
$105.1
======
</TABLE>
127
<PAGE>
Assumptions Underlying the Business Plan Projections
The Business Plan Projections assume that the Company would operate as an
integrated manufacturer and distributor of consumer electronics products until
(a) the changeover to the new 1999 model year (approximately April 1st) for
certain products and (b) the completion of the Prepackaged Plan for products
manufactured at Reynosa. Beginning with the new model year, the Company will
source certain products (small screen televisions, projection TVs, VCRs, DVDs,
and accessories) from third party manufacturers. Additionally, at the
Confirmation of the Pre-Packaged Plan the Company will transfer the Reynosa
Assets to LGE in return for retirement of debt. In 2000 and for all years
beyond, the Company intends to operate as a sales, distribution and technology
company and outsource all or substantially all of its product lines. The
Business Plan Projections assume that the Company will obtain the balance of
most 1999 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
1999, as the plan assumes that all or a portion of those business lines will
be sold at 1999 year end. The Company has not yet been able to locate a buyer
for NWS but is continuing to seek a buyer for all or a portion of the NWS
business. The Business Plan Projections assume that the Chihuahua
manufacturing facility for NWS is sold mid-year to a contract manufacturer who
will source product back to the company for the remainder of 1999. The
projections further assume the sale of the remainder of the NWS business for
book value at the end of 1999. 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. 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 during the first
quarter of 1999, with the exception of Reynosa which will be transferred to
LGE at Confirmation of the Prepackaged Plan, and that all manufacturing
facilities will be transferred or sold to third parties by the end 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.
Financing Assumptions
The Business Plan incorporates the terms of the DIP Facility and the
Citicorp Exit Facility contained in the Commitment and assume per annum
interest rates of 10.0% on borrowings under both facilities. The Company
assumes that each of these financings will provide sufficient letter of credit
capacity to meet expected needs for an outsourced product line. 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 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.
128
<PAGE>
The Business Plan Projections assume accounts receivable days outstanding
will be reduced from approximately 50 to 40 from 1998 through 2003 (adjusted
for seasonality); inventory turns will increase from approximately 5 to 12 per
year from 1998 through 2003; and the accounts payable days outstanding will be
approximately 33.5 for the period of the Business Plan Projections (adjusted
for seasonality). 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 after the
transfer of the Reynosa Assets to LGE for the 1999 model year and beyond.
Property, Plant and Equipment Assumptions
Because the Company will exit manufacturing and dispose of many capital
assets, capital expenditures and depreciation are assumed to decrease after
1998. Capital expenditures are assumed to be approximately $16.0 million in
1999 and decrease to $5 million per year from 2000 through 2003 while
depreciation decreases from $31.2 million in 1998 to approximately $4.8
million in 2003. The Company assumes that it will require significantly less
capital expenditures than in prior years due to its planned exit from
manufacturing. The reduced capital expenditure budget is expected to be enough
to support a distribution and technology 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, on average,
from 2% to 5% per year. 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 1999 incorporate the product plan and
expected sales and margins for the current model year and include actual
contracted prices in certain cases. The Business Plan Projections for 2000
reflect the detailed product plans that have been developed by the Company for
that year. The projections take into consideration certain product lines and
product features of the 1998 and 1999 model years and currently available
products and features not included in the Company's 1998 or 1999 product lines
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 for 1998 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
129
<PAGE>
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............................ 8.1% 11.1% 9.3% 11.0% 10.8% 11.3%
</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 the detailed 1999 operating budget
prepared by the Company. This budget is based on operational plans and
programs for advertising, product management, digital business initiatives,
engineering and technology initiatives and general overhead support. 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 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 federal taxation for the projection period. As a result no federal
income tax liability is presented. In addition, no state or foreign income tax
liability is presented. The Company may or may not have enough state and
foreign tax NOLs available to shelter state and foreign income taxes.
Assumptions Concerning VSB
The assumptions relating to domestic (i.e., United States) 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 Forrester, technology professionals retained by the
Company. The Business Plan Projections reflect domestic 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.
Aggregate potential non-domestic (i.e., non-United States) revenues from
licensing activity and royalties relating to VSB technologies are not included
in the Business Plan Projections. These revenues were excluded because the
Company and Gartner/Dataquest, technology professionals retained by the
Company, believe such revenues to be highly speculative. The unreliability of
potential non-domestic VSB revenues is due to the substantial difficulty in
assessing and quantifying the risks and variables identified by
Gartner/Dataquest in analyzing potential non-domestic VSB revenues, which
risks and variables are far more extensive and material than the risks and
variables presented by the Company's domestic VSB revenue projections. These
risks and variables include:
. international economic conditions, both market-by-market and global;
. standards adoption processes and the interaction between de facto and
government decreed standards (for countries that have yet to adopt a
standard);
. influence of infrastructural elements;
. lack of historical information for the potential market;
. market drivers and consumer adoption;
. political and economic influences as among potential market countries;
130
<PAGE>
. sources of transmission content;
. lack of patent protection in some countries;
. technical considerations;
. broadcaster plans; and
. consumer electronics equipment manufacturer plans.
Accordingly, the Company believes that non-domestic market assumptions and
revenue projections with respect to VSB technology are unreliable for business
planning purposes.
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.
For additional information regarding the qualifications, selection of, and
procedures used by Forrester and Gartner/Dataquest, see "SPECIAL FACTORS--
Liquidation and Going Concern Analyses."
The Company's assumptions regarding the absorption of digital products by
consumer markets are based in part on information provided by Forrester and
Gartner/Dataquest. The relevant markets are moving rapidly and Forrester and
Gartner/Dataquest may periodically update their views and predictions
accordingly. Since the Business Plan Projections were prepared, Forrester has
revised its views regarding the timing of HDTV rollout and the likelihood that
the cable television industry will adopt VSB technology. These revisions would
result in slightly lower estimates for VSB cash flows, although the Company
does not believe that the differences are material in the context of the
Prepackaged Plan. There can be no assurance, however, that Forrester or
Gartner/Dataquest will not revise its predictions in a way that could
materially affect the Business Plan Projections.
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 appraisals concerning the value of
these assets under circumstances approximating those contemplated in the
Operational Restructuring.
The Company and a potential lender engaged the Valuation and Advisory Service
of Cushman & Wakefield of Illinois, Inc. and Cushman & Wakefield of Arizona,
Inc. to prepare appraisals concerning the Company's real estate assets in the
United States and Mexico. These Cushman & Wakefield Companies are part of a
network of Cushman & Wakefield affiliates which are nationally recognized real
estate advisors and providers of appraisal services and have recognized
expertise in evaluating the current market for office, manufacturing and
warehouse space. The appraisals prepared for the Company were performed in
accordance with the Uniform Standards of Professional Appraisal Practices of
the Appraisal Foundation and in accordance with instructions from the Company's
potential lenders. In preparing its appraisals, the appraisers considered
regional and neighborhood analysis for each property location, the current
market for similar types of property, real estate taxes and assessments and
zoning. The appraisers provided appraised values of each property or facility
including both fair market value and "quick sale estimates." Such appraisals
should be read in their entirety and state an opinion of value as of the date
of the report and are subject to assumptions and limiting conditions stated in
each report. As compensation for its services, the Cushman & Wakefield
Companies received approximately $80,000 for their initial appraisals of the
Company's real estate assets, and approximately $15,000 relating to additional
work performed subsequent to the delivery of their initial appraisals through
March 31, 1999.
The Company engaged Greenwich to provide appraisals of the Company's
machinery and equipment. Greenwich is a nationally recognized appraiser, a
member of the American Society of Appraisers, and has experience in the area of
evaluating assets in plant closings, liquidations, and insurance appraisals.
Greenwich conducted on site inspections of the Company's facilities in the
United States and Mexico, examined the
131
<PAGE>
Company's capital assets records and conducted offsite review, research and
analysis of the assets, including review of comparable sales of similar pieces
of equipment. In arriving at its conclusions as to the value of the Company's
machinery and equipment, Greenwich Industrial Services considered workflow of
the products produced, capability constraints, safety issues, quality
controls, maintenance of the equipment, industry trends, location of the
facilities, current technology and overall working conditions and environment.
Greenwich Industrial Services provided a range of appraised values: fair
market value in-place, fair market value, and forced liquidation value. As
compensation for its services, Greenwich Industrial Services received fees
totaling approximately $102,800 through March 31, 1999. Through March 31,
1999, Greenwich has also received approximately $50,500 in auction fees
associated with the sale of Company assets pursuant to an agreement entered
into by the Company and Greenwich in February 1999, under which Greenwich
agreed to conduct auctions and assist the Company in liquidating certain
assets located at the Company's manufacturing facilities. Under the agreement,
Greenwich is entitled to fees based on a percentage of the amount recovered by
the Company from the auctions, plus expenses.
The Company selected Bermudez-Binswanger, the Mexican affiliate of
Chesterton Blumenauer Binswanger as its real estate advisor and broker in
Mexico for the disposition of its Mexican properties after soliciting
recommendations from other U.S. companies with Mexican real estate interests
and after interviewing a number of real estate brokers and advisors who
specialize or have experience with maquila manufacturing operations. Bermudez-
Binswanger is an internationally recognized real estate firm with technical
knowledge and market experience in the Mexican real estate market in general
and the maquila real estate areas in particular. Through the association with
Chesterton Blumenauer Binswanger, the Mexican brokerage firm has access to
offices and potential buyers in 50 countries. Bermudez-Binswanger had
previously been retained by the Company in a prior year for the successful
sale of a Mexican manufacturing property. Bermudez-Binswanger was not
specifically compensated for its summary and value estimate concerning the
Company's Mexican real estate, but may be entitled to a commission on the sale
of the Company's Mexican properties in accordance with the terms of its
brokerage agreement with the Company.
Based on the appraisals described above, the Business Plan Projections
include proceeds, net of selling costs, from the sale of assets equal to $60.2
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.
History of the Business Plan Projections
The April 1998 Projections
In April 1998, as part of its planning for the Operational Restructuring,
the Company prepared a set of projections (the "April 1998 Projections") to
present a hypothetical picture of what Zenith might look like
132
<PAGE>
operating under an outsourcing business model. Because the Company had not then
decided on the scope of any financial restructuring, the April 1998 Projections
did not reflect any financial restructuring.
The April 1998 Projections included forecasts of income, expenses, and cash
requirements of the Company's consumer electronics core business for 1998 to
2002. Projections of 1998 performance were derived from the Company's 1998
budget, which was still being developed at that time, and projections for 1999-
2002 were based on industry and management forecasts.
The April 1998 Projections assumed that NWS would be sold by the end of 1998,
and therefore did not include forecasts of income, expenses, or cash
requirements for NWS after 1998. The April 1998 Projections also assumed that
the Company's Glenview headquarters and certain Reynosa assets would be sold at
the end of 1998, and that the Company would outsource all or substantially all
products and exit manufacturing during the first quarter of 1999. The April
1998 Projections included assumed proceeds from the planned asset sales based
on appraisals performed by Greenwich Industrial Services, Insignia ESG, and
Bermudez-Binswanger.
Revenue estimates for the April 1998 Projections were derived from the
Company's 1998 product plan and estimated product plans for 1999 and 2000,
including certain product lines and product features that were not available in
1998 but that the Company expected to add. For the years 2001 and 2002, the
Company 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 April 1998 Projections assumed
that the Company's market share would be generally consistent with its
historical market share, with some increases in market share in higher-end
products, and that prices for its products would decline slightly less than
market averages as the Company focused on higher end product and markets.
Projected royalty and other income was based on royalties historically earned
by the Company and projections of VSB royalties for domestic sales only, which
were projected with the assistance of PJSC and Forrester, and included VSB
royalties for VCRs, DVDs, converter boxes, satellite boxes, cable boxes and
televisions.
Because the Company was contemplating changing to an outsourcing model, the
Company was required to develop assumptions for the costs of sourced product
for 1999 through 2002. The Company's assumptions regarding costs for products
were derived from its historical cost structure and its experience in the
industry. The April 1998 Projections also assumed that the Company would be
able to achieve certain cost reductions in sourced products consistent with
historical cost improvements in the industry.
The overhead structure included in the April 1998 Projections was based on
the Company's estimates of requirements of head count, facilities, capital
expenditures and tooling for a sales, distribution and technology company.
The April 1998 Projections included assumptions regarding the Company's
levels of inventory, accounts receivable, and accounts payable that differed
from the Company's historical levels as a manufacturing company, but which the
Company believed were consistent with levels for sales and distribution
companies and were therefore appropriate as a result of the Operational
Restructuring. Specifically, the April 1998 Projections assumed that:
. accounts receivable days outstanding were reduced from approximately 50
to 40 days for 1998 through 2002;
. inventory turns were increased from approximately 5 to 12 per year for
1998 through 2002; and
. accounts payable days outstanding were reduced to 35 days in 1998 and 30
days for 1999 through 2002.
The June 1998 Projections
In June 1998, the Company prepared revised projections (the "June 1998
Projections") to give effect to the terms of the proposed financial
restructuring that had been negotiated with LGE and to give effect to
133
<PAGE>
additional information the Company had obtained regarding a number of
assumptions that had been made in the April 1998 Projections. The June 1998
Projections also reflected a reduction in estimated sale proceeds for the
Company's NWS business based on the Company's inability to sell or find an
investor for the NWS business during that time.
The June 1998 Projections also included actual results for the first quarter
of 1998. The assumptions underlying the June 1998 Projections were revised to
reflect better estimates and more accurate information developed as the
Company obtained more information about the Operational Restructuring, and
they differed from those used in the April 1998 Projections in that they
reflect:
. increased sales of, and higher margins in, the Company's accessories
business,
. refined estimates of obsolete inventory,
. increased freight charges for international sales,
. refined estimates of product costs,
. reduced merchandising costs,
. reduced advertising budgets
. higher operating expenses for headquarters relocation costs,
. retention plan costs, and
. higher VSB royalties due to estimated increased usage of VSB technology
in the personal computer market.
The November 1998 Projections
In November 1998, the Company prepared a further set of projections (the
"November 1998 Projections") to incorporate a number of developments in the
implementation of the Operational Restructuring and availability of additional
information. The November 1998 Projections included actual financial results
for the first three quarters of 1998, and revised projections for results in
1999 based on the Company's 1999 budget, which had not yet been prepared in
June. The November 1998 Projections also reflected a reduced estimate of VSB
royalties as a result of reductions in Forrester's estimates regarding the use
of VSB technology in personal computers. Further reductions in the Company's
estimate of NWS sale proceeds were also included due to the results of
feedback in the Company's continuing efforts to sell the NWS business. The
November 1998 Projections were also revised to reflect the proposed terms of
the sale of certain equipment at the Company's Melrose Park facility to
Philips.
The November 1998 Projections also reflected revised cost estimates based on
the sourcing contracts that Company had entered into at that time, as well as
the effects of the direct shipment arrangement for VCRs that was implemented
in the second quarter of 1998. The direct shipment arrangement decreased the
Company's sales and cost of sales, but increased royalty income.
Other revisions in the assumptions underlying the November 1998 Projections
included increased overhead costs to support development of digital products,
product and inventory management departments, and correction of errors in the
amortization of guarantee related fees.
The April 1999 Projections
In April 1999, the Company prepared a further set of projections (the "April
1999 Projections") to incorporate:
. the terms of the agreement entered into on March 31, 1999 by the Company,
LGE and the Debenture Committee regarding the treatment of the Old
Subordinated Debentures under the Prepackaged Plan,
. the terms of the DIP and post-restructuring financing described in the
Commitment entered into on March 31, 1999,
. the Company's actual 1998 results, and
. the Company's 1999 operating budget.
134
<PAGE>
The April 1999 Projections also reflect a change in the projected date and
manner of the sale of the NWS business. The November 1998 Projections assumed
that the NWS business would be sold to a single buyer at the end of 1998. The
April 1999 Projections assume that the NWS business will be sold in steps, to
be completed by the end of 1999.
In addition, the April 1999 Projections reflect a change in the projected
Consummation date of the Prepackaged Plan from December 1998 to July 1999. The
delay in confirmation requires the Company to operate the Reynosa
manufacturing operations until July 1999, and results in the Company incurring
additional professional fees related to the development and implementation of
the Prepackaged Plan. The delay in completion of the restructuring also causes
the Company to incur greater interest expenses as a result of the delay in the
conversion of approximately $200 million of LGE debt into equity, the delay in
the transfer of the Reynosa Assets to LGE for retirement of debt and the
exchange of $50 million of New Debentures for $103.5 million of Old
Subordinated Debentures.
The April 1999 Projections include changes driven by the Company's 1999
operating budget, including the inclusion of actual pricing terms in certain
cases and finalization of sourcing costs from third parties and the Reynosa
facility for internally manufactured product. Other changes in the April 1999
Projections related to the 1999 operating budget include refined headcount and
overhead estimates, and refined estimates of the additional expenditures
expected to be needed to support the Company's transition into a sales,
distribution and technology company.
The April 1999 Projections also give effect to the terms of the Company's
agreements with Philips for the Company's sale of certain Melrose Park assets
and purchase of picture tubes. Because the assets sold to Philips included
assets owned by the Company and those owned by the lessor under the Leveraged
Lease (Melrose Park), the Company will receive only a portion of the sale
proceeds. The sale proceeds are payable in purchase credits for picture tubes
to be purchased during the term of the three-year sourcing agreement between
the Company and Philips.
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 the trustee's 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
135
<PAGE>
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 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 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. See "SPECIAL FACTORS--
Liquidation and Going Concern Analyses" for a description of the review
undertaken and assumptions made by PJSC in developing its analyses.
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.
136
<PAGE>
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.
137
<PAGE>
STATEMENT OF ASSETS AND LIQUIDATION PROCEEDS:
July 31, 1999
(Dollars in millions)
<TABLE>
<CAPTION>
Estimated
Recovery
Estimated as a Estimated
Book Value as of Percentage Liquidation
Note July 31, 1999 of Book Value
Reference (Unaudited) Value (Unaudited)
------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash..................... $ 0 0% $ 0
Accounts Receivable...... (p) 128.9 65 83.8
Inventories.............. (e)
Finished Goods......... 64.5 75 48.3
Less Warranty........ (0.8)
Net Finished Goods..... 47.5
Work in Process........ 10.5 5 0.5
Raw Materials.......... 24.7 20 4.9
Fixed Assets............. (f)(g) n/a 13.1
Brand and Technology
Assets.................. (a)(b)(c)(d) n/a 100.1
------
Total Assets............. 249.9
Less Costs Associated
with Liquidation:
Professional Fees...... (h) (24.0)
Corporate Overhead..... (e) (24.8)
Trustee Fees........... (i) (4.9)
Brokerage Fees......... (j) (8.2)
Wind Down Costs........ (k) (6.8)
WARN Act............... (l) (10.4)
Environmental.......... (o) (6.8)
------
Total Costs Associated
with Liquidation........ (85.9)
Aggregate net proceeds... 164.0
Net Estimated Liquidation
Proceeds Available for
Distribution............ (q) 123.2
</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.................................... $123.2
Citibank Secured Claims (r)...................... $ 73.1 73.1 100.0%
LGE Secured Claims(m)............................ 153.0 50.1 32.7
Other Priority Claims............................ -- $0.0 0.0
General Unsecured Claims......................... -- $0.0 0.0
LGE Unsecured Claims(n).......................... 228.6 $0.0 0.0
Old Subordinated Debenture Claims................ 103.5 $0.0 0.0
Equity Interests................................. n/a $0.0 0.0
</TABLE>
138
<PAGE>
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.
(a) VSB Technology (tax-affected): VSB value discounted to July 31, 1999,
assumes a sale to a third party and utilizes VSB royalty revenue, net of
associated costs and expenses, with the following adjustments: 38.0% tax
rate applied to net cash flows, 35.0% discount rate on domestic net cash
flows, a 50% discount rate on non-domestic net cash flows for countries
that have adopted the ATSC digital television standard, no non-domestic
revenues for countries that have not adopted the ATSC digital television
standard, 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). The discount rates reflect a premium over the discount rates
used in the going concern analysis based on the assumption that a forced
sale would negatively affect royalty rates and buyer pricing strategy.
Reflects reduction in income related to anticipated cross licenses based
on the use of bulk cross licenses in the consumer electronics industry
which results in a significant portion of the market paying significantly
less than standard royalty fees. With respect to the projected adoption
rates for VSB technology in consumer electronics products, PJSC relied on
information obtained through discussions with Forrester (for domestic
markets) and a report prepared by Gartner/Dataquest (for international
markets). Such firms also reviewed PJSC's analyses in developing its cash
flow models for VSB-based consumer electronics products. The firms were
selected based on their familiarity with the developing market for VSB-
based consumer electronics products.
(b) Trademark and Distribution Network: Value of trademark and distribution
network discounted to July 31, 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 an assumed EBIT
margin of 2.5%. Analysis assumes that a strategic buyer would have a
weighted average cost of capital of 12% and would therefore 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. Trademark
and Distribution is net of assumed present and future warranty claims and
administrative expenses estimated to be approximately $33.3 million,
discounted over 8 quarters at 12.0%.
(c) Tuner Patent: Tuner patent cash flows discounted to July 31, 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. The 25% discount rate reflects a premium over the discount rate
used in the going concern analysis based on the assumption that the tuner
patent and related licenses would be subject to more frequent challenges
if sold in a forced liquidation. Valuation assumes a 38.0% tax rate.
(d) Flat Tension 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 July 31, 1999.
. Net Finished Goods are net of assumed present and future warranty claims
and administrative expenses estimated to be approximately $0.4 million.
. Analysis assumes no finished CRT's in inventory at July 31, 1999.
(f) Real Estate:
. Domestic real estate at liquidation values provided by Insignia/ESG.
. Mexican gross real estate value at liquidation values provided by
Bermudez-Binswanger in a summary and value estimate of the Company's
Mexican real estate that was prepared prior to
139
<PAGE>
Binswanger/Bermudez's engagement by Zenith as real estate broker
concerning the Mexican properties. Such summary and estimate is not an
appraisal, nor was it prepared in accordance with MAI standards.
. Mexican real estate and Mexican furniture, fixtures and equipment are
presented net of $38.8 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 $28.7 million
has been reduced to $18.9 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 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.
(i) Trustee Fees: Assumed at 3.0% of net liquidation proceeds.
(j) Brokerage Fees: Assumes 6.0% of gross asset recovery, plus $38.8 million
Mexican claim addback adjustment, but excludes Accounts Receivable and
Inventory.
(k) Wind Down Costs: Comprised of real estate taxes plus on site security and
wind down teams at each location during an assumed 12 month disposition
period.
(l) WARN Act: Estimated by the Company based on headcount and assumed
compensation levels.
(m) The LGE Secured Claims are as follows:
<TABLE>
<CAPTION>
Claim Amount
----- --------------
<S> <C>
LGE Reimbursement Claims.................................. $ 72.0 million
LGE Demand Loan Claims.................................... $ 45.0 million
LGE Payment of Bank Lender Claims......................... $ 30.0 million
Secured portion of LGE Leveraged Lease Claims
(representing the estimated liquidation value of the
equipment under the Leveraged Leases) per Greenwich
Industrial Services...................................... $ 13.6 million
</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 Leases Claims......... $ 76.5 million
LGE Guarantee Fee Claims.................................. $ 1.6 million
LGE Technical Services Claims............................. $ 10.5 million
</TABLE>
(o) Environmental: Estimated by the Company.
(p) Accounts Receivable: The balance of Accounts Receivable at December 31,
1998 projected by the Company is adjusted to exclude receivables on account
of the sale of certain equipment.
(q) A three year 10% discount rate is applied to the aggregate net liquidation
proceeds to reflect the projected 2 to 4 year hypothetical liquidation
period of the Company.
(r) The Citibank Secured Claim amount is comprised of the debt balance
projected by the Company at July 31, 1999.
140
<PAGE>
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 and April 30,
1999. 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.
141
<PAGE>
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. In December 1998, in conjunction with the extension of the Amended
Citibank Credit Facility to April 30, 1999, the Company and LGE amended the
LGE Demand Loan Facility to provide that no demand for repayment may be made
under the facility, absent an event of default, prior to April 30, 1999.
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
March 31, 1999, 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,
Societe Generale and Bank of America totaling $72 million have been paid by
LGE pursuant to its guarantee as of September 26, 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% per annum of the outstanding 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
---------------------
1998 1997 1996
------- ------ ------
(Dollars in millions)
<S> <C> <C> <C>
Maximum month-end borrowings........................ $299.9 $72.0 $72.6
Average daily borrowings............................ 182.5 26.4 18.3
Weighted average interest rate...................... 8.5% 9.1% 8.8%
</TABLE>
Long-Term Debt
The components of long-term debt were:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(Dollars in millions)
<S> <C> <C> <C>
6 1/4% Convertible Subordinated Debentures due
2011........................................... $103.5 $ 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........................................... $103.5 148.1 170.5
Less current portion............................ 5.7 15.3 17.8
------- ------- -------
Total long-term debt............................ $ 97.8 $132.8 $ 152.7
======= ======= =======
</TABLE>
142
<PAGE>
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. The Company did not make the April 1, 1999 sinking fund and
interest payments on the Old Subordinated Debentures. The Company's failure to
make such payments on April 1, subject to grace periods (if any) provided in
the Old Subordinated Debenture Indenture, constituted a default under the Old
Subordinated Debenture Indenture. The Company has obtained waivers under the
Amended Citicorp Credit Facility and the LGE Demand Note Facility for cross-
defaults under those facilities relating to the non-payment. Pursuant to the
Lock-Up Agreement, the members of the Debenture Committee agreed to forbear
from enforcement of any defaults that might occur with respect to the Old
Subordinated Debentures until the Prepackaged Plan is confirmed.
The LGE Demand Loan Claims, the LGE Reimbursement Claim and the LGE Guarantee
Fee Claims, as secured claims, are senior in priority to the Old Subordinated
Debentures to the extent provided in Section 502 of the Bankruptcy Code. In
addition, the LGE Extended Payables Claims, the LGE Demand Loan Claims and the
LGE Reimbursement Claims are senior in right of payment to the Old Subordinated
Debentures pursuant to the subordination provision of the Old Subordinated
Debenture Indenture. The LGE Technical Services Claims and the LGE Leveraged
Lease Claims are pari passu with the Old Subordinated Debentures. The Company
has been advised by legal counsel to the Debenture Committee that the Debenture
Committee may dispute the seniority of the LGE Extended Payables. In addition,
the Company has been advised by legal counsel to the Debenture Committee that
the Debenture Committee may assert that some or all of the LGE Claims are
capable of being equitably subordinated to the Old Subordinated Debenture
Claims and/or recharacterized as Equity Interests of the Company.
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.
The DIP Facility and the Citicorp Exit Facility
General. On March 31, 1999, the Company and Citicorp entered into a
Commitment Letter pursuant to which Citicorp has agreed to provide a three-year
$150 million credit facility following Consummation of the Prepackaged Plan and
$150 million debtor-in-possession credit facility during the pendency of the
Prepackaged Plan.
143
<PAGE>
Conditions and Termination of Commitment. The Commitment is subject to a
number of conditions, including preparation of acceptable documentation for
each of the facilities, absence of material adverse changes, accuracy of
representations, payment of fees and LGE's commitment to provide $60 million of
exit financing to the Company.
In addition, the Commitment requires a closing of the DIP Facility on or
before August 31, 1999 and a closing of the Citicorp Exit Facility on or before
October 31, 1999. If the Company has not closed the facilities on or before the
specified dates, the Commitment terminates.
The DIP Facility. The Commitment provides for a DIP Facility having up to
$150 million of revolving loans, subject to borrowing base limitations.
Borrowings may be used to repay amounts owing under the Amended Citicorp Credit
Facility and for working capital purposes in the ordinary course of the
Company's business. The DIP Facility may not be used to finance acquisitions or
capital expenditures other than necessary capital expenditures within a budget
to be agreed upon.
Interest. At the Company's option, the per annum interest rates applicable to
the loans under the DIP Facility will be as follows: (a) the Base Rate (as
defined in the DIP Facility), plus 1.75% or (b) the relevant Eurodollar Rate
(as defined in the DIP Facility), plus 2.75%. Following an Event of Default (as
defined in the DIP Facility), the applicable interest rate will be increased by
2% per annum.
Security. Subject to certain exceptions, the DIP Facility will be secured in
accordance with Section 364(c) of the Bankruptcy Code by "super-priority" liens
on and security interests in all property and interests of the Company.
Repayment. The DIP Facility must be repaid on or before the earlier of the
six-month anniversary of the closing of the DIP facility, confirmation of a
plan of reorganization acceptable to Citicorp, acceleration following an event
of default, or the date of the closing of the sale of all or substantially all
of the Company's assets. In addition, the Company will be required to use the
proceeds of post-petition issuances of debt or equity to repay borrowings under
the DIP Facility.
Fees. The Company has agreed to pay certain fees in connection with the DIP
Facility, including letter of credit fees, closing fees, commitment fees and
collateral management fees. The closing fee is 1.75% of the total DIP Facility
commitment. Commitment fees are payable at a rate per annum of 0.5% on the
undrawn amounts of the DIP Facility. In addition, from March 31, 1999 to the
closing of the DIP Facility, the Company will pay a commitment fee of 0.5% per
annum on the amount of $25 million, which represents the difference between the
DIP Facility commitment and the commitment under the Amended Citicorp Credit
Facility. The collateral management fee is $125,000 per year, payable in
advance.
Covenants. The DIP Facility will contain a number of negative covenants
which, among other things, restrict the ability of the Company to sell assets,
make investments, enter into mergers or acquisitions, incur liens, incur debt,
make payments on subordinated debt, declare dividends or redeem or repurchase
capital stock and enter into transactions with affiliates. The DIP Facility
will also require the Company to satisfy certain customary affirmative
covenants, including those regarding maintenance of bank accounts, financial
reporting, inspection of records and properties, maintenance and insurance of
assets, maintenance of supplier agreements, payment of taxes, notices of
certain events and business plan. The DIP Facility will require the Company to
maintain compliance with financial covenants to be agreed upon.
Events of Default. The DIP Facility will contain a number of events of
default, including conversion of the Company's chapter 11 case to a case under
chapter 7 of the Bankruptcy Code, dismissal of the Company's chapter 11 case,
filing of a proposed plan of reorganization or entry of a final order that does
not provide for payment in full of the Company's obligations under the DIP
Facility, appointment of a trustee or an examiner with enlarged powers under
Section 1104 or 1106(b) of the Bankruptcy Code, the occurrence of certain other
144
<PAGE>
events in the course of the chapter 11 case, payment defaults, breach of
representations and warranties, covenant defaults, occurrence of a change in
control, or a material adverse change.
The Citicorp Exit Facility. The Commitment provides for the Citicorp Exit
Facility having up to $150 million of revolving loans and letters of credit,
subject to borrowing base limitations. Borrowings may be used to repay amounts
owing under the DIP Facility, to fund the Company's plan of reorganization and
for working capital purposes in the ordinary course of the Company's business.
The Citicorp Exit Facility may not be used to finance acquisitions or capital
expenditures other than necessary capital expenditures within a budget to be
agreed upon.
Interest. At the Company's option, the per annum interest rates applicable to
the loans under the Citicorp Exit Facility will be as follows: (a) the Base
Rate (as defined in the Citicorp Exit Facility) plus 2.0% or (b) the relevant
Eurodollar Rate (as defined in the Citicorp Exit Facility), plus 3.0%, subject
to a grid based on performance levels to be determined. Following an Event of
Default (as defined in the Citicorp Exit Facility), the applicable interest
rate will be increased by 2% per annum.
Security. Subject to certain exceptions, the Citicorp Exit Facility will be
secured by first priority liens on and security interests in all property and
interests of the Company (other than the Company's VSB patents and licenses, on
which it will have a second lien, and other than certain fixed assets to be
determined).
Repayment. The Citicorp Exit Facility must be repaid on or before the earlier
of the three-year anniversary of the closing of the facility or acceleration
following an event of default. In addition, the Company will be required to use
the proceeds of certain asset sales or the issuance of debt or equity to repay
borrowings under the Citicorp Exit Facility.
Fees. The Company has agreed to pay certain fees in connection with the
Citicorp Exit Facility, including letter of credit fees, commitment fees and
collateral management fees. Commitment fees are payable at a rate per annum of
0.5% on the undrawn amounts of the Citicorp Exit Facility. The collateral
management fee is $125,000 per year, payable in advance.
Covenants. The Citicorp Exit Facility will contain a number of negative
covenants which, among other things, restrict the ability of the Company to
sell assets, make investments, enter into mergers or acquisitions, incur liens,
incur debt, make payments on subordinated debt, declare dividends or redeem or
repurchase capital stock and enter into transactions with affiliates. The
Citicorp Exit Facility will also require the Company to satisfy certain
customary affirmative covenants, including those regarding maintenance of bank
accounts, financial reporting, inspection of records and properties,
maintenance and insurance of assets, maintenance of supplier agreements,
payment of taxes, notices of certain events and business plan. The Citicorp
Exit Facility will require the Company to maintain compliance with financial
covenants to be agreed upon.
Events of Default. The Citicorp Exit Facility will contain a number of events
of default, including payment defaults, breach of representations and
warranties, covenant defaults, occurrence of a change in control, certain
bankruptcy or insolvency events or a material adverse change.
145
<PAGE>
DESCRIPTION OF NEW DEBENTURES
In satisfaction of all amounts owed with respect to the Old Subordinated
Debentures, the Company intends to issue New 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 and are qualified in their entirety
by reference to the New Indenture, a copy of which is filed as an exhibit to
the Registration Statement.
The New Debentures are to be issued under the New Indenture and will
represent unsecured general obligations of the Company. The New Debentures will
bear interest from , 1999, at the rate shown by their title,
payable on May 1 and November 1 in each year, commencing , 1999, to
holders of record at the close of business on the immediately preceding April
15 and October 15. Interest will be paid by check mailed to such holders. The
New Debentures mature on November 1, 2009. The New Debentures are not
convertible.
Principal of and premium, if any, on the New Debentures are payable, and the
New 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 Debentures will be issued in denominations of $1,000 and
integral multiples of $1,000. The New Debentures are not subject to a sinking
fund.
Redemption of New Debentures
The New Debentures may be redeemed at the option of the Company at par, 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 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 Debentures or portions thereof to be redeemed.
Ranking of New Debentures
The indebtedness evidenced by the New Debentures will rank pari passu with
all senior debt of the Company (including the LGE New Restructured Senior Note)
and will rank senior to all subordinated debt of the Company. The New
Debentures will not be secured.
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 Debentures; default for 30
days in payment of any interest on the New 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
Debentures then outstanding may declare the principal of all the New 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 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 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 Debentures.
146
<PAGE>
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
Debenture holders, unless such New 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 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.
The New Indenture does not contain restrictive covenants. The only covenants
of the Company are those regarding (i) payment of principal, premium and
interest, (ii) provision of periodic reporting to the Trustee, (iii)
substitution of successors, and (iv) administrative matters, such as
maintenance of a register of debenture holders, offices for notice and payment,
filling vacancies in the trustee's office and the provision of a paying agent.
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 Debentures at the time outstanding, to modify the New Indenture or any
supplemental indenture or the rights of the holders of the New Debentures,
except that no such modification shall (i) extend the fixed maturity of any New
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 Debentures are payable, without the consent of the
holder of each New Debenture so affected, or (ii) reduce the aforesaid
percentage of New 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
Debentures.
Concerning the Trustee
is the Trustee under the New Indenture (the "Trustee").
Comparison of the Old Subordinated Debentures and the New Debentures
<TABLE>
<CAPTION>
Old Subordinated Debentures New Debentures
--------------------------- --------------
<S> <C> <C>
Aggregate Principal $103.5 million $50 million
Amount
Outstanding
Maturity Date........... April 1, 2011 November 1, 2009
Interest................ 6 1/4% per annum, payable in 8.19% per annum, payable in
cash on April 1 and October 1 cash on May 1 and November 1
of each year of each year
Redemption.............. The Old Subordinated Debentures The New Debentures may be
may be redeemed at the option redeemed at the option of the
of the Company, in whole or in Company, in whole or in part,
part, at a premium which at par.
declined to par on April 1,
1996.
Conversion.............. The Old Subordinated Debentures The New Debentures are not
are convertible into shares of convertible.
the Company's common stock at
any time prior to maturity at a
conversion price of $31.25 per
share (subject to adjustment).
</TABLE>
147
<PAGE>
<TABLE>
<CAPTION>
Old Subordinated Debentures New Debentures
--------------------------- --------------
<S> <C> <C>
Ranking; Security....... The Old Subordinated Debentures The New Debentures will rank
are subordinated to the prior pari passu with all debt of
payment when due of all Senior the Company (including the LGE
Indebtedness (as defined in the New Restructured Senior Note)
Old Subordinated Debenture and will rank senior to any
Indenture, including the subordinated debt of the
Citibank Secured Claims, the Company. The New Debentures
Other Secured Claims, the Bank will not be secured.
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 Same
to 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, Same
the 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>
148
<PAGE>
<TABLE>
<CAPTION>
Old Subordinated Debentures New Debentures
------------------------------- ------------------------------
<S> <C> <C>
Covenants....................... The Old Subordinated Debenture Same
Indenture does not contain
restrictive covenants. The only
covenants of the Company are
those regarding (i) payment,
(ii) provision of periodic
reporting, (iii) substitution
of successors, and (iv)
administrative matters, such as
maintenance of a register of
debenture holders, offices for
notice and payment, filling
vacancies in the trustee's
office and the provision of a
paying agent.
</TABLE>
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 approximately $32.4 million if the Reynosa Assets are transferred to LGE
and will mature on November 1, 2009. 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 November 1, 1999, to holders of record at the close of business on
the immediately preceding January 15, April 15, July 15 and October 15. During
the two years following the consummation of the Prepackaged Plan, 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. After two years, the interest
will be payable in cash at a rate of LIBOR + 6.5%.
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the LGE New
Restructured Senior Note will be secured by a first lien on all assets leased
to the Company and its Subsidiaries pursuant to the Leveraged Leases and
transferred to the Company pursuant to the Restructuring Agreement and all
proceeds thereof. The LGE New Restructured Senior Note 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
Restructured Senior Note, upon any sale of assets of the Company securing the
LGE New Restructured Senior Note and to the extent permitted under the
Company's senior bank credit agreement 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.
149
<PAGE>
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; 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.
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 new
financing provided by a third-party lender. LGE's commitment to extend the LGE
New Credit Support will remain outstanding until the third anniversary of the
Consummation of the Prepackaged Plan. Any LGE New Credit Support (including any
guarantee) 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. If the New Credit Support is
provided through an LGE guarantee, the Company's reimbursement obligation in
respect of such LGE guarantee will be entitled to the same collateral and
subsidiary guarantees described below. 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
, 1999. Interest will be paid in cash.
150
<PAGE>
Collateral and Guarantees
Except as otherwise agreed to by LGE and the Company, the Company's
obligations under the LGE New Credit Facility (including reimbursement
obligations in respect of any guarantee) will be secured by a first lien on the
Company's VSB patents and licenses and by a second lien (junior only to the
lien granted pursuant to the Citicorp Exit Facility) on the stock of the
Company's Subsidiaries and on equipment, real estate and intellectual property
(excluding the tuner and VSB patents and licenses) of the Company and its
Subsidiaries. The LGE New Credit Facility (including reimbursement obligations
in respect of any guarantee) 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
the VSB patents and licenses 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 (including
any guarantee) 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.
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; 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.
151
<PAGE>
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. In a conventional chapter 11
case, the debtor is required to file with the bankruptcy court a schedule of
the debtor's creditors indicating the amount and nature of the creditors'
claims and whether the debtor believes any of such claims are contingent,
unliquidated or disputed. The debtor's designation of a claim as contingent,
unliquidated or disputed results in the disallowance of that claim unless the
creditor files a proof of claim with the Bankruptcy Court.
The Company intends to ask the Bankruptcy Court for permission not to file a
schedule of creditors. The Company believes that this request is warranted
because the filing of schedules in this case would be burdensome both in terms
of cost and time requirements and because the Company intends to pay General
Unsecured Claims in full. The consequence of not filing a schedule of creditors
is that creditors are not required to file a proof of claim to substantiate
their claims against the debtor, although they may do so at their discretion.
In the event that the Company decided to object to any claim or seek
designation of any vote, the Company would be required to file a motion seeking
such relief with the Bankruptcy Court and would be required to serve a copy of
that motion on the affected creditor, who as a party in interest would have the
right to respond to the Company's motion.
In addition, under the Bankruptcy Code and Bankruptcy Rules, the Bankruptcy
Court has jurisdiction to determine the validity, timeliness and amount of any
ballot and any creditor, as a party in interest, has an opportunity to appear
and be heard regarding its voting rights with respect to its claim.
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
152
<PAGE>
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.
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, with 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.
153
<PAGE>
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 are a holder of Old Subordinated Debentures, you may, in
addition to voting on the Prepackaged Plan, elect not to consent to the
releases granted in the Prepackaged Plan in favor of the D&O Releasees, the
Investor Releasees and the Debenture Releasees by checking the box set
forth on the Ballot.
(b) 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.
(c) 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
154
<PAGE>
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.
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
155
<PAGE>
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.
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.
156
<PAGE>
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 the original executed Ballot is 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. Delivery of a Ballot by facsimile, e-mail or any other electronic
means will not be accepted. 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
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 has engaged Georgeson & Company Inc. 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 Solicitation Agent at (800) 223-2064.
157
<PAGE>
Notice Agent
The Company intends to seek approval of the Bankruptcy Court to hire Poorman
Douglas Corporation as the Notice Agent. The Notice Agent will process and
deliver notices as required during the Prepackaged Chapter 11 Case. It may also
assist the Company with other tasks.
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.
While the Company will exercise sole discretion as to the validity, form,
eligibility, acceptance and revocation or withdrawal of Ballots and Master
Ballots, the Bankruptcy Court will be the final arbitrator with respect to all
issues relating to the Ballots and Master Ballots. Any holder of a Ballot or
Master Ballot who believes that the Company has incorrectly determined the
validity, form, eligibility or any other aspect of a Ballot or Master Ballot it
filed may seek a ruling from the Bankruptcy Court with respect to such
determination. While there is no specific provision of the Bankruptcy Code that
governs under what circumstances the Bankruptcy Court would reach a different
interpretation than the Company with respect to a Ballot or Master Ballot, the
Bankruptcy Court presumably would consider the merits of each party's position
and likely determine whether cause exists to reach a different determination
than reached by the Company.
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.
158
<PAGE>
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 fiscal years 1998, 1997 and 1996, set forth
below, have largely been excerpted from the Company's 1998 Annual Report 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
The statements of consolidated operations summarize operating results for
the last three years. This section highlights the main factors affecting the
changes in operating results during the three-year period.
Revenues
Sales in 1998 were $985 million, down 16% from 1997 sales of $1,173 million.
Sales in 1997 decreased 9% as compared to 1996 sales of $1,288 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 (which
includes the design and manufacture of digital and analog set-top boxes along
with data modems sold primarily to cable and satellite television operators).
In Consumer Electronics, the color television market remains extremely
competitive. Price competition continued during 1998 and 1997, forcing the
Company to reduce color television prices in each year to attempt to maintain
sales volumes and market share. This price competition may continue to
adversely affect the Company's performance.
Consumer Electronics sales declined $237 million (or 21%) in 1998 from 1997,
driven largely by planned sales reductions in lower-margin color television
products and a change in distribution strategy whereby certain VCRs are sold
directly from the manufacturer (LGE) rather than through the Company's direct
sales organization. The Company receives a royalty ($1.5 million in 1998) for
these sales. The Company estimates that industry-wide color television unit
sales to dealers (including projection television) increased by 8% in 1998 to
26.4 million units (following a decrease of 4% in 1997 to 24.5 million units).
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 to 1996, but the Company gained market
share in key large screen categories. The company estimates that industry-wide
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).
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 were
lower than expected.
159
<PAGE>
Sales of NWS products increased $49 million (or 86%) in 1998 compared with
1997 due to shipments of digital set-top boxes, which were first introduced in
the second half of 1997. NWS 1997 sales were down significantly compared with
1996 due to slowing industry-wide demand for analog set-top boxes as cable
operators prepared to launch digital networks. 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.
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 Company's 1998 gross margin was $79.3 million compared to ($7.4) million
in 1997 and $30.9 million in 1996. This was primarily the result of (i)
significant 1997 excess and obsolete inventory charges (approximately $44
million), (ii) decreased 1998 raw material costs, (iii) 1998 planned reductions
in lower-margin color television products, (iv) lower depreciation expense in
1998 (due to the asset impairment charges the company recorded in December
1997), (v) lower overall spending during 1998 for manufacturing overhead items
and (vi) large 1997 losses in color picture tube operations which resulted from
high operating costs and performance difficulties associated with new product
start-up and new automated production processes. These product and process
problems created a large amount of rework inventory that necessitated the
significant charges for excess and obsolete inventory. The 1998 gross margin
was negatively impacted by approximately $15 million as the Company became
aware of potential problems with certain projection television sets
manufactured by the Company and recorded charges to cover a customer
notification and retrofit program.
The 1996 gross margin was also negatively impacted by write-offs of excess
and obsolete inventory and charges for hourly employees' severance.
Selling, general and administrative expenses were $126.6 million (12.9% of
revenues) in 1998, $178.3 million (15.2% of revenues) in 1997 and $167.8
million (13.0% of revenues) in 1996. The 1997 results included bad debt charges
(approximately $25 million) of which $21 million was related to a dispute the
Company had with the Brazilian customer discussed above. Expenses for 1998 also
benefited from lower merchandising and advertising costs and the Company's
continuing efforts to downsize staffing.
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 $39.1 million in
1998, $42.9 million in 1997 and $46.7 million in 1996. These expenses as a
percentage of revenues were approximately 4% in each year during the three
years ended December 31, 1998.
Other Operating Expense (Income)
Other operating expense (income) was ($43.0) million in 1998, $42.4 million
in 1997 and ($26.3) million in 1996. Included in these amounts is royalty
income related to manufacturers of television sets and VCRs who have taken
licenses under some of the Company's U.S. tuner system patents. Royalty income
from tuner system patents was $35 million in 1998, $26 million in 1997 and $27
million in 1996.
In 1998, Other operating expense (income) also included $1.5 million of
royalty income related to the previously discussed change in VCR distribution
strategy.
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)
160
<PAGE>
No. 121--Impairment of Long-Lived Assets, 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 because 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. In 1998, impairment of long-lived assets
was related to the Company's operational restructuring plan and as a result
such charges were included in restructuring expense as discussed below.
Also, in accordance with FAS 121, certain long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell.
During the third quarter of 1997, the Company recorded a charge of $10 million
related to the impairment of certain long-lived assets to be disposed of. The
charge related primarily to (i) assets that were sold or scrapped as a result
of the Company's decision to phase out of its printed circuit board operation,
(ii) assets that were sold or scrapped as a result of the Company's decision
not to develop the proposed large-screen picture tube plant in Woodridge,
Illinois and (iii) a building in Canada that was sold in December 1997.
Restructuring Charges
During 1998, the Company provided for impairment of assets and restructuring
costs related to its operational restructuring plan, whereby the Company
intends to transform itself from an integrated manufacturer and distributor of
consumer electronics products into a sales, distribution and technology
company. The Company's current business plan requires that it close and dispose
of all, or substantially all, of its manufacturing facilities and outsource
all, or substantially all, product lines.
The $202.3 million of restructuring charges recorded by the Company in 1998
are composed of (i) the non-cash loss on the termination of the Leveraged
Leases ($68.8 million), (ii) bank and financing fees and the non-cash loss
related to the write-off of certain deferred finance charges ($36.6 million
excluding the accelerated amortization of the remaining $9.1 million deferred
gain discussed below), (iii) the non-cash impairment of property, plant and
equipment ($47.2 million), (iv) severance and costs for staff reductions ($24.8
million), (v) plant closure and business exit costs ($18.8 million), (vi)
professional fees ($11.5 million), (vii) non-cash inventory writedowns ($3.2
million) and (viii) other costs associated with the restructuring effort ($0.5
million). Of the $202.3 million of restructuring charges, asset writeoffs
amounted to $144.6 million, cash payments in 1998 were $26.4 million and
restructuring reserves at December 31, 1998, were $31.3 million.
As mentioned above, the Company incurred a $68.8 million loss in the third
quarter on the termination of the Leveraged Leases. The Company's payment
obligations under the lease were fully guaranteed by LGE, which made a
negotiated settlement payment of $90.1 million in the third quarter of 1998 to
the lessor. The appraised value of the equipment is now significantly less than
the original investment value, thus resulting in the loss of $68.8 million.
This loss was calculated as the difference between the $90.1 million liability
to LGE for settlement of the obligations and the $21.3 million appraised value
of the equipment.
Of the $36.6 million write-off of deferred financing fees, $28.3 million of
the fees related to the Leveraged Leases. (These amounts do not include the
accelerated amortization of the remaining $9.1 million deferred gain related to
the 1997 sale of assets into the leveraged lease.) Also, $3.9 million was
related to the receivable securitization and $1.6 million was related to the
Amended Citicorp Credit Facility. Additionally, the Company incurred $2.8
million in banking and financing fees and expenses related to its continuing
efforts to secure financing commitments.
The impairment of property, plant, and equipment of $47.2 million relates
primarily to the Company's commitment in 1998 to dispose of its manufacturing
facilities. During the fourth quarter, the Company identified and entered into
agreements with various suppliers to outsource its product lines, thus enabling
the Company to
161
<PAGE>
commit to disposing of certain assets. As of December 31, 1998, the Company
had announced the closure of the Melrose Park, Illinois, Juarez, Mexico, and
Matamoros, Mexico manufacturing facilities and reclassified those assets as
being held for disposal. The Company began winding down production at each of
these facilities in the fourth quarter; and subsequent to December 31, 1998,
both the Juarez and the tuner and remote operations located in the Matamoros
facilities were shut down. Melrose Park production has ceased as well. In
February 1999, the Company sold the electron gun operations located in
Matamoros to a third party for $4.4 million less escrowed amounts. Although
the Company continues to operate its Chihuahua, Mexico facility, it is
actively seeking a buyer for the entire NWS business, which this facility
supports. Thus, the Chihuahua property, plant, and equipment is also
considered held for disposal. The carrying value of property, plant, and
equipment related to all of the assets held for disposal is $43.0 million. The
only manufacturing facilities to be used by the Company to produce its 1999
product line will be the Company's Chihuahua and Reynosa, Mexico facilities.
This latter facility will be transferred to LGE upon consummation of the
Prepackaged Plan in exchange for the cancellation of certain of the Company
obligations to LGE. The Reynosa facility will be transferred to LGE at its
fair value, which approximates the Company's current carrying value.
Impairment losses were calculated based on the excess of the carrying amount
of assets over the assets' fair values. The fair values used in determining
impairment losses were based upon management's estimates of expected sales
proceeds and third-party appraisals and valuations, including management and
third party estimates of potential environmental liabilities. The fair value
estimates considered whether the assets are expected to be sold as going-
concern operations or under orderly liquidation. Previously, the fair value
estimates for these assets reflected the Company's continued use of the
assets. The change in fair value estimates due to the Company's commitment to
dispose of certain assets and resulted in the additional impairment charge
incurred during the fourth quarter of 1998.
The Company plans to dispose of all of these assets during 1999, by either
selling portions of operations, properties, equipment, and inventories as
going concerns, by selling individual assets located at the facilities, or by
permanently idling assets to the extent that they remain unsold.
The impairment charges discussed above are based upon management and third-
party estimates of the recoverability of long-lived assets and the fair value
of related assets. It is reasonably possible that the Company's estimates of
the recoverability of long-lived assets and the fair value may change as new
information becomes available and circumstances change.
It is anticipated that the implementation of the Company's Operational
Restructuring plan will result in the termination, at a cost of $22.9 million,
of approximately 4,200 employees by December 31, 1999, primarily at the
Company's manufacturing facilities. During 1998, the Company terminated
approximately 2,500 of these employees. These terminations resulted in
expenditures of $7.5 million in 1998, with the $15.4 million remaining to be
paid in 1999. Additionally, during 1998, the Company incurred expenditures of
$1.9 million to retain key management employees throughout the operational
restructuring process.
Included in the total $18.8 million of plant closure and business exit costs
are $5.8 million of plant costs at the Melrose Park, Illinois facility
incurred to maintain the property subsequent to the cessation of manufacturing
activities. In addition, plant closure and business exit charges reflect $2.1
million of legal costs, $2.1 million of duty payments related to plant
equipment in Mexico that the company is selling or disposing of and a
$1.5 million charge for the early termination of various leases. An additional
charge of $2.9 million was incurred for payments given to Melrose Park
employees to stabilize employment and maintain production after the
announcement of the plant closure. Plant closure and business exit costs also
included a $2.9 million charge related to management salaries and labor costs
associated with the closure of the facilities and $1.5 million of other
exit/plant closure costs. The Company has incurred cash outlays of $3.8
million in 1998 of plant closure and business exit costs, and the Company
expects to incur additional cash outlays of $15.0 million in 1999 and 2000.
The $11.5 million charge for professional fees reflects work performed by
outside professionals to support the development of the Company's Operational
Restructuring and Financial Restructuring.
162
<PAGE>
Reorganization and additional restructuring charges of approximately $27
million are expected to be incurred in 1999 as the Company continues to
implement its operational and financial restructuring plans. The Company will
continue to incur costs for professional fees in order to support the
implementation of the Prepackaged Plan. These fees are estimated to be
approximately $8 million. The Company also expects to incur additional
severance costs of approximately $14 million. These severance charges could be
incurred upon the transfer of the Reynosa manufacturing facility to LGE, which
will occur concurrently with the consummation of the Prepackaged Plan, upon the
sale of the NWS business, and upon the further reorganization of corporate
personnel to support the Company's transformation from an integrated
manufacturer to a sales, distribution and technology company. Additional
deferred financing costs of approximately $2 million are expected to be written
off as a result of the consummation of the Prepackaged Plan. Additional plant
closure/exit costs and staff retention costs are anticipated to total
approximately $3 million in 1999.
The benefits from the above actions made pursuant to the Operational
Restructuring did not have a material effect on the Company's 1998 financial
results. The successful implementation of the Operational Restructuring will
result in the Company becoming less complex. As a result of these actions, the
Company expects that there will be cost reductions during 1999 stemming from
exiting manufacturing: depreciation, corporate payroll, plant operations and
working capital costs. These cost savings will be partially offset by purchase
costs as the Company will rely on third-party vendors to manufacture
substantially all of its products. The amount of 1999 savings are dependent on
the timing of the implementation of the Operational Restructuring, the
Financial Restructuring and the Company's ability to achieve its financial
performance objectives going-forward.
The Company did not incur any restructuring costs during 1997.
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 that were made during 1997.
Gain (Loss) on Asset Sales
In 1998, the Company recorded a $16 million gain related to the sale of its
headquarters building in Glenview, Illinois. In 1997 and 1996, the gain (loss)
on asset sales was not material.
Interest Expense
Interest expense was $44 million in 1998, $26 million in 1997 and $15 million
in 1996. The change in 1998 from 1997 resulted from higher funding requirements
(at generally higher interest rates) for Company operations and the Company's
need to accrue interest to LGE on the $90.1 million the company owes LGE for
LGE's payment under the guarantee of the Company's obligation under the sale-
leaseback agreement.
The increased amount in 1997, 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 U. S. federal and
state income taxes during the last three years have not been material. Foreign
income tax expense in 1998 was $3.0 million.
Net Income
As a result of the factors described above, the Company's net losses,
excluding restructuring and asset impairment charges were $73 million in 1998,
$235 million in 1997 and $169 million in 1996. Including restructuring and
asset impairment charges, net losses were $276 million in 1998, $299 million in
1997 and $178 million in 1996. Corresponding per share losses were $4.08 in
1998, $4.49 in 1997 and $2.73 in 1996.
163
<PAGE>
Cash Flows
The statements of consolidated cash flows reflect the changes in cash for the
last three years by classifying transactions into three major categories--
Operating, Investing and Financing activities.
Operating Activities
A principal use of the Company's liquidity is the cash used by operating
activities which consists of the Company's net loss as adjusted for non-cash
operating items and the changes in current assets and liabilities such as
receivables, inventories and payables.
During 1998, $152 million of cash was used by operating activities
principally to fund $100 million of net losses from operations, as adjusted for
non-cash restructuring and asset impairment charges and depreciation. In
addition, $47 million of cash was used to fund the change in current accounts,
which was principally composed of a $114 million increase in receivables (net
of a $42 million allowance for doubtful accounts), and a $27 million decrease
in accounts payable and accrued expenses, which were offset by an $80 million
decrease in inventories. The increase in receivables and the allowance for
doubtful accounts was mainly due to the receivable securitization agreement
with Citibank being terminated during the third quarter of 1998. As a result,
receivables are no longer sold and transferor certificates (which represented
the Company's retained interest in the pool of receivables that were sold) do
not exist. The decrease in inventories and accounts payable and accrued
expenses resulted primarily from the Company decreasing manufacturing
activities as part of its Restructuring. Cash used by operating activities also
included $17 million attributable to gain on asset sales, net, primarily as a
result of the gain realized on the sale of the Company's headquarters.
In 1997, operating activities provided $86 million of cash, including $111
million of cash provided because of the reclassification of cash used in
connection with the establishment of a receivables securitization program from
operating activities to investing activities. Were the effects of this
reclassification excluded, operating activities would have resulted in a net
use of $25 million of cash.
Net losses from operations as adjusted for depreciation and charges for asset
impairment were $198 million. This use of cash was offset by $260 million in
cash provided from changes in current accounts, $11 million in other asset and
liability changes, and $12 million from losses on asset sales and other non-
cash items.
The $260 million change in current accounts included a $187 million decrease
in receivables and $90 million decrease in inventories. The decrease in
receivables was mainly due to the receivable securitization agreement with
Citicorp being put in place during 1997, which accounts for transactions under
this agreement as a sale of receivables. The cash used in the securitization
facility is reported in Investing Activities as an increase in transferor
certificates.
The net effect of the decrease in receivables and the increase in transferor
certificates was a decrease of $76 million which was primarily related to the
lower sales levels, particularly in the fourth quarter of 1997, the $21 million
bad debt charge related to a dispute the company had with a Brazilian customer,
and the sale of receivables to outside investors under the receivable
securitization agreement. The decrease in inventories was related to reduced
amounts of purchases in anticipation of the lower fourth quarter sales. In
addition, the Company reduced cash used by operating activities by issuing
common stock to the retirement savings plans to fulfill the 1996 obligation to
salaried employees. This issuance increased stockholders' equity by $5 million.
In 1996, $24 million of cash was used by operating activities principally to
fund $143 million of net losses from operations as adjusted for depreciation.
The change in current accounts provided $116 million of cash and was
principally composed of a $180 million increase in accounts payable and accrued
expenses offset by a $53 million increase in inventories and an $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
164
<PAGE>
which permit the Company to elect interest-bearing extended-payment terms ($107
million at December 31, 1996, and $9 million at December 31, 1995) and (ii) all
other accounts payable ($110 million at December 31, 1996, and $63 million at
December 31, 1995). The increase in the LGE extended payables is due to a
lengthening of the terms, while the increase in the other accounts payable is
due mainly to the increased levels of inventory. In addition, the Company
reduced cash used by operating activities by issuing 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.
Investing Activities
Historically the principal recurring investing activity has been the addition
of property, plant and equipment. These expenditures are primarily for
equipment and tooling related to product improvements, more efficient
production methods and replacement for normal wear. In 1997, another major
investing activity became the initial investment in transferor certificates and
the distribution of investor certificates that were both generated under the
receivable securitization with Citibank, which agreement was terminated in
1998.
During 1998, $119 million of cash was provided by investing activities. This
was primarily attributable to the $111 million decrease in transferor
certificates due to the termination of the Citibank receivables facility.
Additionally, $30 million of cash was received from the sale of receivables
prior to the termination of the receivable securitization agreement with
Citibank and $23 million was received from the sale of the Company's
headquarters building, offset by $8 million used for capital additions and $41
million used to pay off the investor certificates upon the termination of the
receivable securitization agreement with Citibank. The capital additions during
1998 of $8 million were significantly lower than the 1997 amount of $83
million, which was the result of spending related to projects primarily in the
color picture tube area, which included new automated production processes and
the addition of new production lines for computer display tubes.
In 1997, investing activities used $90 million of cash, which consisted of
$188 million of proceeds from asset sales offset by the initial $111 million
securitization of receivables with Citibank, capital additions of $83 million
and the distribution of $84 million of investor certificates. The proceeds from
asset sales were primarily composed of $95 million of cash received from the
sale of receivables (sold via the receivable securitization with Citibank) 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
discussed above.
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 than
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.
Financing Activities
During 1998, $33 million of cash was provided by financing activities. This
was composed of $78 million of borrowings under the Company's various short-
term facilities, offset by cash used to pay the $6 million current portion of
the Old Subordinated Debentures due 2011, $38 million used to pay off the term
loan negotiated in 1997 and $0.5 million used to redeem the Company's 8.5%
senior subordinated convertible debentures due January 2001.
In 1997, financing activities provided $4 million of cash, which included $45
million provided as a result of borrowings under the Company's new term loan,
$25 million of increased borrowings under the Company's short-term debt
agreements and $1 million provided from sales of the Company's common stock to
employees of the Company via the exercise of previously issued stock options.
This was offset by $31 million of cash used to pay off the old term loan, $24
million of cash used to redeem the 8.5% 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 Old
Subordinated Debentures.
165
<PAGE>
In 1996, financing activities provided $55 million of cash, which included
$47 million provided as a result of borrowings under the Company's credit
agreement and $15 million provided from sales of the Company's common stock to
employees of the Company via the exercise of previously issued stock options.
This was offset by $7 million of cash used to pay maturities of the old term
loan.
Financial Condition
As of December 31, 1998, the Company had $479 million of interest-bearing
obligations which consisted of: (i) $136 million of extended-term payables with
LGE, (ii) $103 million of Old Subordinated Debentures (the current portion of
which was $6 million), (iii) $30 million currently payable under the remaining
Unsecured Bank Loans, (iv) $18 million currently payable under the Amended
Citibank Credit Facility, (v) $72 million owed to LGE as a result of LGE's
payments under demands against guarantees on the Unsecured Bank Loans,
(vi) $90 million owed to LGE as a result of LGE's payment under the guarantees
of the Leveraged Leases and (vii) $30 million outstanding under a secured
credit facility with LGE.
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 Chicago NBD ($30 million),
Societe Generale ($20 million) and Credit Agricole ($30 million). The credit
lines were guaranteed by LGE for which LGE is entitled to receive a fee in an
amount up to 2% of the outstanding amount of the loans payable in either Old
Common Stock or cash. The Company granted liens in favor of LGE on the capital
stock of the Company's domestic subsidiaries, on the Company's intellectual
property (other than tuning patents, tuning patent royalties and related
license agreements) and certain other Company assets to secure the guarantees
of LGE for borrowings under these credit lines. As of December 31, 1998, only
the Credit Agricole loan remains outstanding in the amount of $30 million.
During the second and third quarter of 1998, LGE made payments under demands
against guarantees on $72 million of the facilities and the Company is
obligated to LGE for these payments plus interest. During the third quarter of
1998, the Citibank Credit Facility (initially composed of a $45 million
amortizing term loan and a $65 million revolving credit line) was amended and
restated. The Amended Citibank Credit Facility provides for up to $125 million
of revolving loans, subject to borrowing base restrictions. In December 1998,
the Amended Citibank Credit Facility was amended to extend the term until the
earlier of (a) the Company's court filing for the Prepackaged Plan and (b)
April 30, 1999. Pursuant to the Restructuring Agreement, LGE has agreed to
provide additional credit support of up to $60 million. LGE's obligation to
provide such financing is subject to the conditions set forth in the
Restructuring Agreement including consummation of the Prepackaged Plan.
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
(as amended) is one year from the date of the first borrowing, subject to LGE's
right to demand repayment at anytime, after April 30, 1999. Repayment is due in
full at the end of the term. The first such borrowing occurred in May 1998, and
as of December 31, 1998, $30 million was outstanding under the facility. The
facility is secured by a second lien on certain of the Company's assets,
including its VSB technology, and is subject to certain terms and conditions.
In April 1997, a three-year trade receivables securitization was provided
through a Citicorp commercial paper conduit. The availability of funds under
this receivable securitization was 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. LGE provided
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. This arrangement was terminated in the third quarter of 1998.
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, plant and in its Reynosa
and Juarez, Mexico, facilities. The term of the leases was 12 1/2 years and
annual payments under the leases averaged approximately $10 million. The
Company's payment obligations, along with certain other items under the lease
agreement, were fully guaranteed by LGE. The leases of the manufacturing
equipment were accounted for as operating leases.
166
<PAGE>
In July 1998, LGE made payment under the guarantees of the Leveraged Leases
in the amount of $90 million under a negotiated settlement with the lessor. As
a result, the Company's December 31, 1998 financial statements reflect a $90
million current liability to LGE included in Short-term debt with related
party, a $21 million receivable from LGE, and a loss on termination of the
lease of $69 million. The amount of the liability to LGE will be reduced by the
proceeds from any sale of the equipment. The receivable from LGE represents the
appraised fair value of the manufacturing equipment. In addition, the financial
statements reflect a non-cash restructuring gain of $9 million which represents
the accelerated amortization of the deferred gain on the 1997 sale of the
assets into the lease.
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 were 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
granted options to LGE to purchase 3,965,000 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. However,
the portions of the deferred charge pertaining to the sale-leaseback
transaction and the receivable securitization were written off as part of the
third quarter 1998 restructuring charge.
The Company continues to face liquidity problems caused by its significant
debt burden and its continuing net losses. The Company has incurred net losses
of $275.5 million, $299.4 million and $178.0 million in 1998, 1997 and 1996,
respectively. The Company's cash flows in 1998, 1997 and 1996 were, and, absent
restructuring, its cash flows in 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 reports on the Company's consolidated financial statements for the fiscal
years ended December 31, 1998 and 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.
During the first quarter of fiscal 1998, the Company's 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 all or substantially all of its
manufacturing operations, outsourcing all or 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.
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 Financial Restructuring would
reduce the Company's overall debt and other obligations by approximately $285
million by exchanging (i) $200 million of debt and other liabilities owed to
LGE for 100% of New Common Stock; (ii) the Old Subordinated Debentures for New
Subordinated Debentures in an aggregate principal amount of $50 million; and
(iii) approximately $32.4 million of indebtedness to LGE for certain assets
located at the Company's manufacturing plant in Reynosa, Mexico, which have an
appraised value equal to such amount. As a consequence of the Financial
Restructuring, the Company's Old Common Stock will be canceled and the holders
of the Old Common Stock (including LGE) will receive no distribution and retain
no property in respect of their holdings of Old Common Stock under the
financial restructuring.
As amended in December 1998, the Company's current credit facility expires on
the earlier of a bankruptcy filing by the Company and April 30, 1999. The
Company is in discussions with its lenders regarding a further extension of the
Amended Citibank Credit Facility, but there can be no assurance that such
extension will be granted.
167
<PAGE>
The Company, LGE and the Debenture Committee have agreed to the terms of the
proposed restructuring of the Old Subordinated Debentures. The parties have
agreed, among other things, that under the Prepackaged Plan, if approved,
holders of the Old Subordinated Debentures will receive a pro rata
distribution of $50 million of New Debentures. The Debenture Committee has
agreed to support confirmation of the Prepackaged Plan, and has agreed to
forbear from enforcement of any defaults that might occur with respect to the
Old Subordinated Debentures until the Prepackaged Plan is confirmed. The
agreement also contains other customary provisions.
On March 29, 1999, the Company was advised by LGE that LGE had received
Korean regulatory approval to permit LGE to consummate the transactions set
forth in the Restructuring Agreement, including authorization for LGE to
provide the LGE New Credit Support on the terms and conditions of the
Restructuring Agreement.
The Company has determined not to make the April 1, 1999 sinking fund and
interest payments on the Old Subordinated Debentures. The Company's failure to
make such payments on April 1, subject to grace periods (if any) provided in
the indenture, constitutes a default under the indenture relating to the Old
Subordinated Debentures.
The lenders under the Amended Citibank Credit Facility waived the cross
default under such credit facility related to the Company's failure to make
the payments on the Old Subordinated Debentures. In addition, LGE waived the
cross default under the Note Agreement between LGE and the company and certain
related security agreements related to the Company's failure to make the
payments on the Old Subordinated Debentures.
Readiness for the Year 2000
The Company is employing a combination of internal resources and outside
consultants to coordinate and implement its Year 2000 readiness initiatives.
The Company has established a Company-wide Year 2000 task force, led by the
company's technology group, with representation from its major business
segments, to evaluate and address Year 2000 issues. The Year 2000 task force's
responsibilities include, without limitation, (i) conducting an evaluation of
the Company's computer-based systems, facilities and products (and those of
dealers, vendors and other third parties with which the Company does business)
to determine their Year 2000 readiness, (ii) coordinating the replacement
and/or upgrade of non-compliant systems as necessary, (iii) promoting the
Company-wide awareness of Year 2000 issues through education and training, and
(iv) developing, and overseeing the implementation of all of the Company's
other Year 2000 readiness initiatives.
The Company has completed its evaluation of its computer-based systems,
facilities and products to determine whether they are "Year 2000 ready." The
Company believes that its material non-information technology systems will be
Year 2000 ready prior to January 1, 2000. The Company believes that most of
its currently manufactured products are Year 2000 ready. The Company has sent
Year 2000 readiness questionnaires to its existing key vendors and suppliers
to assess the Year 2000 readiness of their systems and products. The responses
to these questionnaires have indicated that the Company's vendors or suppliers
are addressing their Year 2000 issues and expect to be Year 2000 ready by the
Year 2000. 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, and based on the Company's current implementation plan, the Company
does not believe that its Year 2000 related issues will have a material
adverse effect on the Company's business. Although no contingency plan has
been deemed to be necessary at this time, the Company is in the process of
evaluating the need for various contingency plans as a precautionary measure.
Included within the Company's Year 2000 readiness initiatives are plans to
ensure the Company's FS&D Applications are Year 2000 ready. The FS&D
Applications include the primary software employed in the Company's general
ledger, accounts payable and disbursement, accounts receivable and collection,
purchasing, billing, inventory management and sales activities. The Company
believes its current FS&D Applications are not Year 2000 compliant and,
accordingly, has undertaken an initiative to replace these systems with new
Year 2000 compliant applications from a third party software vendor. The
Company has commenced the implementation of these new FS&D Applications and
currently expects to be completed by the third quarter of 1999. The estimated
total cost of implementing the new FS&D Applications is $6.8 million, of which
$3.3 million will be incurred in fiscal 1999. The Company has not specifically
identified the date upon which its existing FS&D applications will begin to
fail, but believes their replacement by the third quarter of 1999 is
168
<PAGE>
necessary in order to avoid significant risk of business interruption in
activities to which the FS&D Applications relate. The timely implementation of
the new FS&D Applications involves certain risks. The most significant of these
risks includes retention of certain key employees, the ability to obtain
external technical programming resources, and the ability to fund the program
given the uncertainties surrounding the company's current financial condition
and plan of reorganization. If implementation is delayed beyond the third
quarter of 1999, the existing FS&D Applications may begin to fail and cause
significant business interruption. There can be no assurances that delays in
the implementation will not occur. Delays in implementation could adversely
impact the Company's ability to bill sales and collect cash from customers, pay
vendors, manage inventories and prepare financial results.
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 other
principal exposure to Year 2000 risks are related to the ability of its vendors
to provide the Company with Year 2000 ready components and products and to
assure that such vendors otherwise are Year 2000 ready so that they are able to
provide the Company with components and products in a timely manner. The
Company is aware, however, that Year 2000 issues may exist with respect to
vendors with which they have or will have a material relationship.
Prior to 1998, the Company spent in the aggregate approximately $1.8 million
on software and hardware upgrades and replacements and approximately $0.2
million was spent on other costs (i.e., labor, consulting fees and other
expenses) in connection with Year 2000 readiness. The company spent a total of
$2.5 million in 1998 (approximately $0.8 million for software and hardware
upgrades and approximately $1.7 million for other costs) for this project. The
Company has estimated it will spend $4.6 million in 1999 (approximately $1.0
million for software and hardware upgrades and approximately $3.6 million for
outside consulting and other costs) 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.
169
<PAGE>
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, 1998. 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
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
December 31, 1998, LGE and LG Semicon owned 38,315,000 shares, including vested
but unexercised options, of Old Common Stock of the Company, which represents
56.2% 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. The direct importance of the items to the business will lessen as
the Company implements the Operational Restructuring.
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, although the Company does not currently have licensing
agreements in place for this technology. 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. tuner system patents. Based on 1998 U.S.
industry unit sales levels and technology, more than $25 million royalty income
is expected for each of the years 1998-2002 and $14 million in 2003, when the
last of these patents expire. 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.
170
<PAGE>
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 $131.2
million (13%) in 1998, $138.6 million (12%) in 1997, and $187.2 million (15%)
in 1996. Sales to a second customer, Sears, Roebuck and Company, accounted for
$102.7 million (10%) in 1998, $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 believes it competes well with respect to each of these
factors.
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 1998, 1997 and 1996 expenditures for Company-sponsored research and
engineering relating to new products and services and to improvements of
existing products and services were $39.1 million, $42.9 million and $46.7
million.
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
As of March 31, 1999, the Company employed approximately 5,295 people, of
whom approximately 2,905 were hourly workers covered by collective bargaining
agreements.
As of March 31, 1999, approximately 735 of the Company's employees were
located in the Chicago, Illinois, area, of whom approximately 100 were
represented by unions. Approximately 4,245 of the Company's employees are
located in Mexico, of whom approximately 2,795 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.
171
<PAGE>
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
------------------------
1998 1997 1996
------ -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Net Sales:
Domestic companies............................... $965.1 $1,144.9 $1,221.4
Foreign companies................................ 19.7 28.2 66.5
------ -------- --------
Total net sales.................................. $984.8 $1,173.1 $1,287.9
====== ======== ========
Long-lived assets:
Domestic companies............................... $ 21.5 $ 99.9 $ 156.4
Foreign companies................................ 98.0 114.6 133.8
------ -------- --------
Total long-lived assets.......................... $119.5 $ 214.5 $ 290.2
====== ======== ========
</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.
During 1998, the Company's product lines were dependent on the operations of
the Company's manufacturing and assembly facilities located in Mexico.
Properties of the Company
As of March 31, 1999, the Company utilized a total of approximately 5.1
million square feet for manufacturing, warehousing, engineering and research,
administration and distribution, as described below.
<TABLE>
<CAPTION>
Location Nature of Operation Square Feet
-------- ------------------- -------------
(In millions)
<C> <S> <C>
Domestic:
Chicago, Illinois Five administration, 1.9
(including suburban locations) production and
warehousing facilities
(approximately
1.0 million square feet is
leased by
the Company)
Fort Worth, El Paso and Dallas, Seven locations-- 1.0
Texas; Huntsville, Alabama; warehouses/offices
Ontario; San Jose, California (all of which are leased by
and Greenville, Tennessee the Company)
Foreign:
Mexico Three locations with ten 2.2
manufacturing
and warehouse buildings
Taiwan One purchasing office --
---
Total 5.1
===
</TABLE>
172
<PAGE>
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.
Subsidiaries
The companies listed below are the subsidiaries of the Company as of March
31, 1999.
<TABLE>
<CAPTION>
Organized
Name of Company Under 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
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
Summarized below are the significant legal matters to which the Company is a
party. There is a range of possible outcomes for these matters. With the
exception of the Funai and Vengrove matters discussed below, the Company does
not believe any of the following matters are reasonably likely to have a
material adverse effect on the Company. The Company's belief is based on the
amounts involved and the types of litigation.
Litigation
In June 1998, Funai Electric Co., Ltd., 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 also sought 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 and has also denied plaintiff's
motion for a preliminary injunction. 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 defendants removed the suit to the U.S. District Court in Newark, New
Jersey. In December 1998, the suit was amended to name the Company, a former
director and chief executive officer of the Company, LGE, LG Semicon and LG
Group as additional defendants. The suit alleges breach of fiduciary duties,
fraud and violations of securities laws by the defendants arising out of
certain alleged misstatements that "artificially
173
<PAGE>
inflated" the price of the Old Common Stock. The plaintiff seeks to be
certified as a class representative and to have the suit designated as a class
action. In addition to money damages, the suit also seeks to enjoin the
defendants from commencing the Prepackaged Chapter 11 case and proceeding with
the cancellation of the Old Common Stock held by minority shareholders. The
defendants have asked the court to dismiss the suit. The exculpation
provisions of the Prepackaged Plan, if approved by the Bankruptcy Court, would
bar causes of action against the defendants for any act taken or omitted in
connection with or related to the formulation, preparation, dissemination,
implementation, administration, confirmation or consummation 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 of such defendants, as determined by a court of competent
jurisdiction.
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 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.
Environmental Litigation
WVP Income III, LP has brought a legal action in the federal court for the
Northern District of California under RCRA, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA") and
several state causes of action, asserting that the Company caused
contamination on property owned by the plaintiff in Menlo Park, California. A
wholly-owned subsidiary of the Company, Zenith Radio Research Corporation,
purchased the Menlo Park facility newly constructed in 1959. The subsidiary
ceased operations at the facility in 1972 and the property was sold in 1974.
Following the Company's sale of the property, the primary occupant was Raychem
Corporation, from approximately 1976 until 1993. Plaintiff's lawsuit has named
the Company and Raychem as defendants. No work plan has yet been adopted and
no estimates on the cost to clean up the property have yet been provided to
the Company. The Company has notified its insurance carriers of the claim.
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, 136th Judicial District
Court, Jefferson City, Texas, was filed on November 30, 1997. The case is in
the early stages of discovery.
Environmental Matters
The Company and/or one of its subsidiaries are currently named as
Potentially Responsible Parties ("PRPs") under CERCLA, as an alleged generator
of hazardous waste disposed of at eight contaminated sites in the United
States. These sites are the Rocky Flats Industrial Park Superfund Site in
Jefferson
174
<PAGE>
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 has resolved its alleged liability for hazardous wastes disposed of
at Moyer Landfill and payment has been made 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 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 and 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 boiler
used at a former manufacturing plant and is required to conduct long-term
groundwater monitoring and post-closure care at this 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, which was paid in two installments ending in
1998.
175
<PAGE>
In 1997, the Company settled a lawsuit in which it was named as a third-party
defendant at a hazardous waste site located in New Jersey. The total settlement
of $140,000 is payable over 5 years. The first payment of $27,000 was made in
January 1998. The last payment of $32,000 is due in January 2002.
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 and one in Illinois 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.
In October 1998 the Company became aware of potential problems with certain
projection television sets manufactured by the Company. The appropriate
regulatory agencies have been notified and the Company is implementing a
customer notification and retrofit program. The Company believes it has
adequate reserves to cover the cost of such program.
176
<PAGE>
MANAGEMENT
The following table sets forth the name, age at March 31, 1999 and business
experience of each of the current directors of the Company. The composition of
the Board following Consummation of the Prepackaged Plan has not yet been
determined. The Company's By-Laws currently provide that the Board shall
consist of the number of directors as determined from time to time by
resolution of the Board. The Board has set the number of directors at eleven.
The terms of office of all directors 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 "Current 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." 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...... 59 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............. 49 1995 Executive Vice President, Overseas Operations
of Display Division of LG Electronics Inc.
since January 1999, Managing Director,
Overseas Sales of Display Division of LG
Electronics, Inc. and Senior Vice President
from December 1997 to December 1998. 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...... 67 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........ 65 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..... 52 1995 Vice-Chairman of the Board of Zenith
Electronics Corporation since November 1,
1996; Vice Chairman and Chief Executive
Officer of LG Electronics Inc. since January
1999; 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.
</TABLE>
177
<PAGE>
<TABLE>
<CAPTION>
Director
Name Age Since Background Information
- ---- --- -------- ----------------------
<S> <C> <C> <C>
Seung Pyeong Koo... 56 1997 President of LG Electronics Inc. responsible
for Display Division since January 1999;
Executive Vice President of LG Electronics
Inc. from 1996 to 1998; 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.
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
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.. 59 1990 Managing Director of Hammond, Kennedy, Whitney
& Company, Inc. (private equity investments)
since 1998. Former Chairman and Chief
Executive Officer (from 1993 to 1997) and
current Director of Rand McNally & Company
(printing, publishing and map making) since
1972; Director of Hubbell Incorporated since
1980, Mercury Finance Company since 1989,
Borg-Warner Securities Corporation since 1996
and Morgan Stanley Funds since 1995.
Yong Nam........... 51 1995 President, Chief Executive Officer and
Chairman of the Board of LG Telecom., Ltd.
since October 1998; Executive Vice President
of LG Electronics Inc. and President of Multi-
media Division, LG Electronics Inc. from
December 1997 to October 1998; 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.
</TABLE>
178
<PAGE>
<TABLE>
<CAPTION>
Director
Name Age Since Background Information
- ---- --- -------- ----------------------
<S> <C> <C> <C>
Nam Woo............ 49 1995 Executive Vice President of LG Electronics,
Inc. since August 1998; 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
1996; President of European Operations of LG
Electronics Inc. from 1990 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 has from
time to time in the past provided legal services to LGE. Messrs. Cho, C.H. Koo,
S.P. Koo, Woo and Nam are employees of LGE or its affiliates, and Mr. Lee is a
retired employee of LGE. Pursuant to the Stock Purchase Agreement under which
LGE and LG Semicon acquired a majority stake in the Company in 1995, LGE and LG
Semicon were provided with the right to designate six directors to the Board
immediately following the stock purchase. At that time, LGE and LG Semicon
designated Mr. Lee, Mr. C. H. Koo, Mr. Nam, Mr. Woo, Mr. Cho and Mr. Connolly
as directors. Since 1995, candidates for the Board have been nominated by the
sitting Board. With the exception of Mr. S. P. Koo and Mr. Woo, the current
Board was nominated for election by the Board at its January 31, 1997 meeting.
Mr. S. P. Koo and Mr. Woo were nominated and elected to the Board at its
October 27, 1997 meeting. As the holder or beneficial owner of the majority of
the Company's outstanding shares of Old Common Stock, LGE has the ability to
elect all of the Company's directors. Together with LG Semicon, LGE
collectively beneficially owns approximately 56.2% 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 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 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
179
<PAGE>
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 1998, of the four meetings held by the Audit Committee, one was a special
meeting in which the Audit Committee acted as a finance committee to consider
various financing alternatives for the Company.
The 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, 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. In 1998, no such awards were granted. 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 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 control 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.
180
<PAGE>
Current Executive Officers of the Company
The following table sets forth the name, age at March 31, 1999 and business
experience of each of the current executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Office Held
---- --- ---------------------------------------------------
<C> <C> <S>
Jeffrey P. Gannon..... 48 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.. 56 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
Multigraphics, Inc. (f/k/a AM International, Inc.)
and Viskase Companies, Inc.
</TABLE>
Mr. Dangremond is a Principal of JA&A, which has been engaged by the Company
to assist it in the Restructuring. JA&A receives a fixed monthly fee (plus
expenses) for such services, and upon successful completion of the Financial
Restructuring, will receive a success fee of $1.0 million. See "ESTIMATED FEES
AND EXPENSES--Advisors."
Executive Retention and Incentive Programs
In connection with the Restructuring, in early 1998 the Company developed a
retention program for 14 key executives and senior managers, not including Mr.
Gannon. Under this executive retention program, the Company may be obligated to
pay participants up to an aggregate of $1.2 million in retention bonuses. Such
program was developed based on benchmarked, publicly available studies of
similar programs. Mr. Vitkus is the only Named Executive Officer who may
receive a retention bonus under the executive retention program. Such bonus is
payable in two installments totalling $137,508. The first installment was paid
in January 1999 and the second installment is payable on July 1, 1999. The
short- and long-term incentive bonuses have been divided into two tiers, with
eight key executives currently in tier one and six key executives and senior
managers currently in tier two. Mr. Gannon's incentive programs and bonuses are
established under his employment contract. See "--Employment Agreements." The
aggregate amount of retention bonuses payable to the fourteen key executives
totals $1.2 million and is payable in two equal installments, the first having
been paid on or about December 31, 1998 and the second scheduled to be paid on
July 1, 1999.
Payments under the short-term incentive program ranged from 34% to 83% of
base salary for tier 1 executives and were 34% of base salary for tier 2
executives.
181
<PAGE>
Payments under tier 1 and tier 2 short-term incentive programs were
approximately $1.0 million and $0.3 million, respectively, including payments
of $180,135 and $98,211 to Mr. Vitkus and Mr. McNulty, respectively. The
payments were made by March 31, 1999.
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. Tier 1 and tier 2
long-term incentive programs have a maximum payout value of approximately $5.3
million and $1.2 million. All long-term incentive bonus payments are payable on
March 31, 2001. Tier 1 and tier 2 short-term and long-term incentive programs
cover 15 key executives and senior managers, not including the Chief Executive
Officer. Those incentive programs are based on achieving certain performance
goals in connection with the Restructuring. The Company could be required to
make payments to 14 key executives and senior managers aggregating up to $6.5
million under the long-term incentive program, including up to $0.8 million
payable to each of Mr. Vitkus and Mr. McNulty. The following chart summarizes
the retention bonuses and incentives the Company has paid and may be obligated
to pay.
<TABLE>
<CAPTION>
Actual Maximum
Short-Term Long-Term
Retention Incentive Incentive
Executive Group Bonus Payment Payment Total
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier One Executives and Senior
Managers......................... $ 755,332 $1,014,544 $5,317,048 $7,086,924
Tier Two Executives and Senior
Managers......................... 445,772 330,560 1,179,816 1,956,148
---------- ---------- ---------- ----------
Total............................. $1,201,104 $1,345,104 $6,496,864 $9,043,072
========== ========== ========== ==========
</TABLE>
The executives currently in tier one are: Richard F. Vitkus, Edward J.
McNulty, William G. Luehrs, Richard Lewis, Kevin Lynch, Kathryn Wolfe, William
J. Sims and John I. Taylor. The executives currently in tier two are: Hector
Escobedo, Gerald Reid, Wendy Weil, Gregg Gronowski, Tom Sorensen and Michael
Thomas. Nick Mehta, the Company's chief technology officer, retired from the
Company effective January 31, 1999. Mr. Mehta's retention and short-term
incentive payments were reduced as a result of his retirement. Additionally,
Mr. Mehta will not participate in the long-term incentive program. Mr. Lewis
was moved from tier two to tier one effective February 16, 1999 when he was
promoted to Senior Vice President--Technology. The Company expects to seek
approval of its board of directors for an additional short-term incentive
program based on achievement of performance goals for the 1999 fiscal year.
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 Operational Restructuring and are payable at the end of the relevant stay
period. Retention bonuses are payable in two equal installments, with the first
half paid on or about December 31, 1998 and the second half scheduled to be
paid on 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 $3.6 million to the Company. Total short-term incentive payments
for 1998 to all eligible Company employees were approximately $9.5 million. 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 at 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.
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, 2001. 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
182
<PAGE>
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. Mr. Gannon's short-
term incentive payment for 1998 was $456,000, including a guaranteed payment of
$400,000.
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 bonuses 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
guaranteed Mr. Gannon's base salary and guaranteed bonuses in the event the
letter of credit is unavailable.
In connection with the Restructuring, the Company has entered into amended
employment agreements (the "Employment Agreements") with a number of key
executives, including Richard F. Vitkus (the "Key Executives"). The Employment
Agreements generally provide for an employment period which ends on December
31, 2000. Each Employment Agreement provides for payment of a retention bonus
payable in two installments, each in the amount of 25% of the Key Executives'
salary, the first paid on or about January 1, 1999 and the second scheduled to
be paid 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
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 (d) outplacement services not to exceed 15% of the Key
Executive's base compensation. Mr. Vitkus' Employment Agreement further
provides that, upon at least 90 days notice, he may voluntarily terminate his
contract effective December 31, 1999 and still be entitled to receive (i) his
severance payment, (ii) his actual annual incentive compensation for 1999 and
(iii) the benefits described in (c) and (d) above.
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 in 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
183
<PAGE>
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.
The Company intends to seek court authority to honor its obligations under
the retention programs and to assume the employment contracts of Messrs. Gannon
and Vitkus and other executives and managers after the filing of the
Prepackaged Chapter 11 Case. See "THE PREPACKAGED PLAN--Intended Actions During
the Prepackaged Chapter 11 Case--Provisions for Employees; Retention Programs;
Employment Contracts."
Other employees of the Company may be parties to employment agreements that
will not be affected by the Restructuring or the Prepackaged Plan.
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 the Company's Chief Executive Officer, the other three executive officers of
the Company and the former Chief Executive Officer of the Company, Peter S.
Willmott, who left the Company in January, 1998. Those listed in the table are
hereinafter referred to as the "Named Executive Officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Awards($)(2) Options/SARs(#) Compensation
- --------------------------- ---- --------- -------- ------------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Gannon(3).... 1998 527,727 880,273 0 2,780,000 300,000(2) 83,946
President and Chief 1997 0 0 0 0 0 0
Executive Officer 1996 0 0 0 0 0 0
Edward J. McNulty(4).... 1998 150,024 148,211 0 0 0 0
Senior Vice President
and 1997 0 0 0 0 0 0
Chief Financial Officer 1996 0 0 0 0 0 0
Richard F. Vitkus(5).... 1998 275,018 271,889 0 0 0 9,600(6)
Senior Vice President, 1997 229,999 23,000 0 0 25,000 9,600(6)
General Counsel and 1996 218,333 14,000 0 420,000 30,000 9,000(6)
Secretary
Robert Dangremond(7).... 1998 0 0 0 0 0 0
Senior Vice President 1997 0 0 0 0 0 0
and Restructuring 1996 0 0 0 0 0 0
Officer
Peter S. Willmott....... 1998 36,931 0 0 0 30,000 509,585(8)
Former President and 1997 775,000 0 0 1,612,500 100,000 4,800(6)
Chief Executive Officer 1996 539,192 0 0 0 2,000 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.
184
<PAGE>
(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, 1998, Mr. Gannon held an aggregate of 500,000 shares of
restricted stock valued at $125,000 and Mr. Vitkus held an aggregate of
30,000 shares of restricted stock valued at $7,500. Mr. Willmott's share
units were forfeited as part of his negotiated separation payment. In
connection with an amendment to Mr. Gannon's employment agreement, the
restricted stock and options originally granted to Mr. Gannon were
eliminated in August 1998 (See "--Employment Agreements").
(3) Mr. Gannon joined the Company in January 1998. The amount shown under "All
Other Compensation" reflects a one-time relocation expense allowance of
$50,000 and $33,946 of imputed income for Company paid life insurance
premiums. The amount shown under "Bonus" reflects bonus payments pursuant
to the terms of Mr. Gannon's employment agreement. See "--Current
Executive Officers of the Company--Employment Agreements."
(4) Mr. McNulty joined the Company in June 1998. The amount shown under
"Bonus" reflects a $50,000 hiring bonus and $98,211 earned under the
company's short-term incentive plan.
(5) Of the amount shown under "Bonus" for 1998, $68,754 reflects amounts
earned by Mr. Vitkus under the company's executive retention program,
$180,135 reflects amounts earned under the company's short-term incentive
plan and $23,000 reflects other bonus payments. See "--Current Executive
Officers of the Company--Executive Retention and Incentive Programs."
(6) The amount reflects the annual contribution to the Company's defined
contribution plan for Messrs. Vitkus and Willmott. Since Mr. Willmott was
not fully vested at the time of his termination of employment, the Company
contribution was forfeited.
(7) Mr. Dangremond is a principal in the firm of JA&A which was hired as a
consultant to the Company for the Restructuring. Mr. Dangremond's
compensation is paid to him by JA&A. Fees paid to JA&A are discussed under
"Estimated Fees And Expenses--Advisors."
(8) The amount reflects a negotiated separation payment of $500,000 in lieu of
termination benefits provided for under an employment agreement and $9,585
of imputed income for Company paid life insurance premiums.
Ramesh G. Amin served as an Executive Vice President of the Company from
1996 to October 1997. In connection with Mr. Amin's termination of employment
with the Company, he received severance payments of $600,000 during 1998. No
additional payments are required in 1999.
Option/SAR Grants in 1998
Mr. Gannon is the only Named Executive Officer who was granted stock options
in 1998. Mr. Gannon's employment agreement was amended as part of plans
relating to the Restructuring. The stock option grants provided under Mr.
Gannon's original employment agreement were eliminated with the amendment. No
stock appreciation rights (SARs) were granted to the Named Executive Officers
in 1998.
Aggregated Option/SAR Exercises in 1998 and Year-End Option/SAR Values
Shown below is information concerning the unexercised options to purchase
Company common stock held by the Named Executive Officers at December 31,
1998. No Named Executive Officers exercised stock options or SARs in 1998 and
no Named Executive Officer currently holds any SARs.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Year-End(#) Year-End($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Jeffrey P. Gannon........... 0/0 0/0
Edward J. McNulty........... 0/0 0/0
Richard F. Vitkus(1)........ 26,333/36,667 0/0
Robert Dangremond........... 0/0 0/0
Peter S. Willmott........... 0/0 0/0
</TABLE>
- --------
(1) The exercise price of options held by Mr. Vitkus exceeds $0.25 (the
closing price of the Company's Old Common Stock on December 31, 1998).
185
<PAGE>
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 March 31, 1999 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
Owned Prior to Beneficially Owned
Restructuring(1) After Restructuring
------------------------ ----------------------
Name Number Percent(2) Number Percent
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LG Electronics Inc........... 12,219,800(3) 17.6% 1,000 100%
LG Semicon Company Ltd....... 26,095,200 38.6% 0 0
Richard F. Vitkus............ 56,333(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
Ki-Song Cho.................. 0 0 0 0
Robert Dangremond............ 0 0 0 0
Jeffrey P. Gannon............ 0 0 0 0
Cha Hong (John) Koo.......... 0 0 0 0
Seung Pyeong Koo............. 0 0 0 0
Hun Jo Lee................... 0 0 0 0
Edward J. McNulty............ 0 0 0 0
Yong Nam..................... 0 0 0 0
Nam Woo...................... 0 0 0 0
Directors and All Executive
Officers as group (15
persons).................... 103,333 * 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 619,574 shares of Old Common Stock as of December 31, 1998.
(2) Percentage includes outstanding exercisable stock options.
(3) As of March 31, 1999, LGE beneficially owned 12,219,800 shares directly as
to which it had sole voting and dispositive power. Such amount includes
1,746,000 shares obtainable through the exercise of stock options. In April
1997, pursuant to the Financial Support Agreement, LGE was granted options
to purchase 3,965,000 shares of Old Common Stock. Upon early termination of
the Leveraged Leases, the vesting of 160,000 of the stock options issued
pursuant to the Financial Support Agreement between LGE and the Company was
accelerated. The remaining 2,219,000 options issued pursuant to the
Financial Support Agreement were forfeited. 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 and 26,333 shares issuable upon
exercise of vested stock options.
186
<PAGE>
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 September 26, 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.
187
<PAGE>
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 March 31, 1999, LGE beneficially owned or held an irrevocable proxy to vote
38,315,000 shares of common stock of the Company which represents 56.2% 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
Company and LGE engaged in the following material transactions in 1998, 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 $50.7, million, $93.3 million and $128.8 million of these
items in 1998, 1997 and 1996, respectively. Sales of products purchased from
LGE and LG Semicon contributed $59.8 million, $112.3 million and $141.4
million to sales in 1998, 1997 and 1996, respectively. The purchase prices
were the result of negotiations between the parties, and were consistent with
third party bids.
In 1998, the Company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the Company's two
largest customers and pays the Company a license fee for the use of the
Company's brand names on such products and the inclusion of the Company's
patented tuner technology in such products. The license fee payable by LGE is
comparable to licensing rates charged by the Company to unrelated parties. The
Company believes that the direct shipment program is beneficial to the Company
because it reduces the Company's inventory costs and maintains sales to
customers that might not have continued to purchase products directly from the
Company due to the Company's current financial difficulties. During 1998, the
Company accrued approximately $1.5 million in royalties for the use of the
Company's brand names pursuant to this direct shipment program. A similar
arrangement was entered into in April 1997 in Canada where LGE's Canadian
affiliate sells Zenith branded VCRs under a license from the Company. Pursuant
to that arrangement, the Company received payment from LGE of approximately
$0.3 million during 1998 and less than $60,000 in 1997.
Following the Restructuring, it is expected that LGE will own and operate
the Reynosa Assets, and the Company currently anticipates purchasing
approximately $431 million in finished products and components produced at the
Reynosa facility for its 1999 model year, a portion of which will occur
following the transfer of the Reynosa Assets to LGE under the Restructuring.
Equipment purchases: As contemplated when LGE became a majority stockholder
in 1995, the Company purchased production machinery and equipment from LGE.
These equipment purchases totaled approximately $0.3 million, $18 million and
$24 million in 1998, 1997 and 1996, respectively. The machinery and equipment
related primarily to new production lines for the manufacture of computer
display tubes and the automation of existing production lines in the Company's
Melrose Park picture tube plant. A portion of the purchased machinery and
equipment was manufactured by LGE, with the balance procured by LGE on the
Company's behalf from third party vendors. LGE acted as the coordinating
purchasing agent for the Company because the equipment and machinery was part
of an integrated production system based on a similar facility designed,
operated and owned by LGE in Kumi, South Korea. The purchase prices for the
equipment were the result of negotiations between the parties. A significant
portion of the equipment purchased from LGE, together with other
188
<PAGE>
equipment, was sold by Zenith to an owner trust and leased back to Zenith
pursuant to the Leveraged Leases. As described below under "--Financial
Assistance," LGE guaranteed the Company's obligations under the Leveraged
Leases, and has made a negotiated settlement payment of $90.1 million under
such guarantees. As a result of the settlement payment, LGE indirectly owns the
equipment.
Product and other sales: The Company sells televisions, 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 1998,
1997 and 1996 by the Company to LGE and to subsidiaries of LGE were $53.6
million, $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 its book value of $3.8 million. 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 products in Mexico. The Company sold the inventory of its
Canadian distributor to LGE after consideration of the business alternatives
for continuing operations or a commercial presence in Canada. The determination
of the book value selling price of such inventory took into consideration the
cost to the Company (including customs and duties), the point in time within
the model year, the costs associated with other methods of disposal of such
inventory, and the requirement that the new Canadian distributor would require
certain inventories in order to meet customer expectations for product support.
There was no comparable sale of Mexican inventory as Zenith goods were sold in
Mexico from the United States. In 1998, the Company's sales to the LGE Canadian
and Mexican subsidiaries were $27.3 million and $19.6 million, respectively.
During 1997, the Company's sales to the LGE Canadian and Mexican subsidiaries
were $25.5 million and $16.8 million, respectively. The Company did not have
any sales to these LGE subsidiaries during 1996. In 1997, an affiliate of LGE
entered into an agreement with the Company concerning a license for the use of
the Company's "Z-Tac" set-top box technology. Under that agreement, the Company
has received $250,000 in an up-front license fee and approximately $850,000
from the sale of set-top box kits at its standard pricing schedule for such
kits.
LGE's U.S. affiliate, LGAI and the Company's Reynosa maquiladora have entered
into the LGAI Maquila Agreement pursuant to which the Reynosa facility will
assemble small and medium screen size television sets for LGAI, using
components, equipment and other assets provided by LGAI. The LGAI Maquila
Agreement was approved by Mexican authorities in December 1998. The material
terms of the assembly relationship between LGAI and the Reynosa maquiladora are
currently being negotiated between the parties. The parties expect to finalize
the terms of this assembly relationship in the first quarter of 1999. In
connection with the LGAI Maquila Agreement, the Company's subsidiaries with
assets located in the Reynosa maquiladora will also negotiate and enter into
agreements with LGAI concerning labor, equipment and other assets to be used in
the assembly operations.
Technical agreements: The Company and LGE are currently operating under
several technology agreements and licenses related to HDTV, flat tension mask
products, and the Company's patents on television tuners. The license fee
payable by LGE is comparable to royalty rates charged by the Company to
unrelated parties. Under a technical cooperation agreement entered into by the
Company and LGE in 1990, the Company agreed to pay LGE 33% of the royalties
received by the Company from the use in Korea of certain HDTV technologies and
1% of the royalties received from such technologies from all other countries.
As of December 31, 1998, the Company had not received any such royalties,
however, and accordingly no payments have been made to LGE pursuant to such
agreement. The Company originally licensed flat tension mask technology to LGE
on a non-exclusive basis in 1991. The license provided for an initial five-year
term with automatic one-year renewals unless otherwise terminated. Under the
agreement, the Company is to receive a $2.5 million payment on the first sale
of flat tension mask products by LGE, and a running royalty on all products
sold by LGE incorporating the technology at royalty rates ranging from 2.5% to
1.5%, based on units sold. In December 1996, the license was amended to
eliminate LGE payments until December of 2001 in exchange for LGE's assistance
in the development and manufacture of the Company's planned computer display
tubes and a paid up cross-license to
189
<PAGE>
the Company from LGE on LGE's related technology. Although the Company has
approached other television manufacturers regarding potential licenses for the
flat tension mask technology, none has expressed an interest in such a license.
Other technologies exist for producing flat screens.
Under a separate agreement, the Company has licensed its tuner patents to
LGE. LGE's payments to the Company under tuner licenses were approximately $0.4
million, $0.1 million and $1.0 million in 1998, 1997 and 1996, respectively. In
September 1997, LGE agreed to provide the Company with $4.5 million in funding
for the Company's HDTV receiver project. LGE is to be repaid the $4.5 million
advance, without interest, from the royalties generated from future VSB
licensing. Pursuant to the HDTV receiver project agreement, intellectual
property developed jointly during the project will be jointly owned, and
intellectual property developed solely by one party during the project will be
owned exclusively by such party, provided that the other party will be granted
a non-exclusive, non-transferable, royalty-free license to use such
intellectual property.
In May 1997, the Company and LGE entered into a patent collaboration
agreement which provides that (a) LGE will assist the Company in identifying
infringements of the Company's patents and technologies, in return for 10% of
all royalties collected as a result of such efforts, and defending against
third party intellectual property claims, and (b) LGE has the option to acquire
patent rights the Company intends to abandon for nominal amounts and to acquire
any other patent rights for mutually agreed upon prices plus the payment by LGE
to the Company of 10% of all future royalty income, if any, received from such
other patent rights. LGE's option to acquire Zenith's U.S. and foreign patent
rights under the patent collaboration agreement extends to any of the patents
owned or applied for by the Company during the term of the agreement (which is
automatically renewable for two year periods unless terminated by either party
following its initial two year term), provided the Company has made an
affirmative decision not to protect or maintain those patents. As of December
31, 1998, the Company had assigned to LGE or its affiliates for a total of
approximately $6,000 one U.S. patent, one foreign patent and one foreign patent
application relating to television and telecommunication technology. The
Company has made a decision not to protect or maintain those patents already
assigned to LGE under the agreement. The Company retains a non-exclusive,
royalty-free license to the use of any patents so assigned. The agreement also
provides that LGE may file patent applications in respect of the Company's
technologies in any foreign jurisdiction in which the Company does not intend
to protect its potential patent rights, provided that LGE pays the Company 10%
of all royalties received by LGE in respect of such rights. As of December 31,
1998, the Company believes that LGE had exercised its right to file foreign
applications in respect of 35 of the Company's U.S. patented technologies. No
royalty income from such foreign rights assignments had been realized by Zenith
as of December 31, 1998. Additionally, under a separate agreement the Company
assigned to LGE's telecommunications affiliate a patent relating to cordless
telephone technologies for $75,000. The Company retained a royalty-free, non-
exclusive license and 50% of all royalties collected by the LGE affiliate
related to such patent.
An affiliate of LGE has also licensed certain technological information from
Zenith relating to the manufacture of VSB modulation equipment under a 1998
agreement. That agreement allows the LGE affiliate to use technical information
and design schematics as the basis for further development of commercial
products. Under the agreement, Zenith received $300,000 in 1998 in up-front
payments and additional royalty payments per unit sold by the LGE affiliate
based on Zenith's designs. The agreement does not include a license on the VSB
patents.
The Company currently produces modulators on a small scale to facilitate the
roll out of digital TV in the U.S. but the Company does not have any definite
long term plans to remain in that business. Even if the Company decides to
remain in the modulator manufacturing business on a long-term basis, the
Company's outsourcing strategy would require it to buy the modulators from a
third party. The LGE affiliate could be such a third party. While the
technology license agreement provides the LGE affiliate with a world-wide
license, the LGE affiliate has informed the Company that it currently expects
to market such products only in Korea. The Company has no plans to market
modulators in Korea. For these reasons, the LGE affiliate should not have an
impact on the Company's competitive standing in this product line.
190
<PAGE>
Service Assistance: In 1997 and 1996, employees of LGE provided certain
technical support services to the Company for which LGE was not compensated by
the Company. LGE donated $2.2 million (its actual costs of payroll, travel and
living expenses) of such services in 1997. The services were not material in
1996. In addition, employees of LGE have provided certain technical support
services to the Company that were covered under service agreements. The
Company's obligations to LGE for such services totaled $1.5 million, $4.8
million and $0.3 million in 1998, 1997 and 1996, respectively. The amounts due
to LGE for the services provided were the amounts that LGE advised the Company
were its costs to provide the services. 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.
In late December 1997, the Company entered into an agreement with LG Software
India Ltd. pursuant to which LG Software India Ltd. provides certain software
development, design and support services to the Company. Projects under the
agreement include the Company's Year 2000 Readiness support. Payments to LG
Software India Ltd. were $1.1 million and $0.1 million in 1998 and 1997,
respectively. No such payments were made during 1996.
Financial Assistance: In 1997, the Company consummated $87 million in sale-
leaseback transactions in which it 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. As
described above under "--Equipment Purchases," a portion of such equipment was
originally purchased by Zenith from LGE. The term of the Leveraged Leases was
12 1/2 years and annual payments under the Leveraged Leases averaged
approximately $10 million in the aggregate. The Company's payment obligations,
along with certain other obligations under the Leveraged Leases, were fully
guaranteed by LGE. 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 and interest accruing thereon to LGE. As of December 31,
1998, $5.0 million of interest had accrued on this obligation. In March 1998,
the Company entered into the LGE Demand Loan Facility, which provides for
borrowings of up to $45 million. The interest rate is LIBOR plus 6.5% per
annum. 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. In December 1998, in conjunction with the extension of the Amended
Citibank Credit Facility to the earlier of a bankruptcy filing by the Company
and April 30, 1999, the Company and LGE amended the LGE Demand Loan Facility to
provide that no demand for repayment may be made under the facility, absent an
event of default, prior to April 30, 1999. Repayment is due in full at the end
of the term. The Company has borrowed $30 million under such facility through
December 31, 1998 and has accrued $2.2 million of interest through December 31,
1998. 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% per annum 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 (plus
interest at the Reference Rate announced by Bank of America plus 2% per annum)
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 equipment, real property and certain intellectual property of the Company
and its Subsidiaries. As of December 31, 1998, LGE had made payments pursuant
to demands on its guarantees in connection with $72 million of the Unsecured
Bank Loans. As of December 31, 1998, $3.3 million of interest had accrued on
amounts owed LGE under the Reimbursement Agreement. LGE has to date deferred,
on a month to month basis, payment of such interest.
191
<PAGE>
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 to related party.
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 was included in other accrued
expenses. During 1998, this balance was fully paid by the Company.
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 $135.6 million,
$144.3 million and $106.8 million as of December 31, 1998, 1997 and 1996,
respectively. The Company is charged interest in respect of each vendor credit
advance at varying rates equal to LIBOR plus an applicable margin, which has
increased over the period during which such vendor credit remains outstanding.
As a result, the interest rate per annum payable in respect of individual
credit advances varies over time. The average interest rates per annum charged
in 1998, 1997, and 1996 were 13.4%, 7.9% and 6.4% respectively. During 1998
and 1997, the Company has accrued approximately $15.1 million and $9.6 million
of interest, respectively, under this credit arrangement.
As of December 31, 1998, 1997 and 1996, accounts payable included $136.1
million, $145.9 million and $124.5 million, respectively, to LGE and its
affiliates. The amount of receivables from LGE and its affiliates was $8.5
million as of December 31, 1998 and 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 3,965,000 of Old Common Stock 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 on a
straight-line basis 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.
Options for 2,219,000 shares of Old Common Stock held by LGE were cancelled in
1998, and the balance of LGE's stock options will be cancelled under the
Prepackaged Plan.
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. Zenith's
rental payments at market rates in respect of the Huntsville, Ontario and San
Jose properties totaled approximately $290,000, $240,000 and $72,000,
respectively, in 1998 and approximately $138,000, $135,000 and $59,000,
respectively, in 1997. During part of 1996, the Company made lease payments
for use of the Ontario facility totaling $2,000.
The Company and LGE are in discussions concerning the joint development of
HDTV products, which may eventually be manufactured by LGE for the Company for
resale by the Company in the United States. The Company is currently in
negotiations with LGE for a joint development agreement that would provide for
the development of the next generation of HDTV products, incorporating design
changes to improve on an earlier jointly developed design by improving
features and manufacturability and lowering prices. Under the Zenith proposed
agreement, either LGE or a third party would manufacture the resulting product
for the Company, depending on pricing, performance and quality. The
negotiations to date have assumed that the Company would have the sole
distribution rights in North America for any jointly developed design, and
that each party would have non-exclusive distribution rights in other regions.
No patent licenses are currently included in the discussions, except that
intellectual property mutually developed under the program would be cross-
licensed by
192
<PAGE>
the parties consistent with the product distribution outlined above. No
definitive document has been finalized and negotiations are still in the
preliminary stages.
The Company believes that the transactions between the Company and LGE have
been conducted on terms no less favorable to the Company than could have been
obtained with unrelated third parties. Upon consummation of the Prepackaged
Plan, New Zenith will be a wholly owned subsidiary of LGE. LGE has advised
Zenith that no general policy has been established for intercompany
transactions after New Zenith becomes a wholly owned subsidiary of LGE.
Following the Restructuring, Zenith expects to continue purchasing some
finished products from LGE, including VCRs. Additionally, Zenith expects to
purchase mid-size televisions produced by LGE in its operation of the Reynosa
Assets. Because the Company intends to outsource substantially all of its
product lines following the Restructuring, the Company expects that it will
continue to purchase some finished products, components and other technical
services from LGE.
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.
Transfers of New Debentures
The New 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 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 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
DEBENTURES TO BE DISTRIBUTED PURSUANT TO THE PREPACKAGED PLAN. THE COMPANY
RECOMMENDS THAT POTENTIAL RECIPIENTS OF THE NEW DEBENTURES CONSULT THEIR OWN
COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH NEW DEBENTURES.
193
<PAGE>
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.
Issuance of New Common Stock
The New Common Stock to be issued to LGE is exempt from registration under
federal and state securities law pursuant to section 1145 of the Bankruptcy
Code as they are (i) being issued under a plan of reorganization, (ii) LGE
holds a Claim against the Company, and (iii) the stock is being issued entirely
in exchange for LGE's claim.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
Kirkland & Ellis, special counsel to the Company, has advised the Company
that the following discussion expresses its opinion (the "Tax Opinion") as to
all 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, subject to the qualifications set forth herein under the heading "--
Limitations to the Tax Opinion." The Tax Opinion 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 Tax Opinion 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 this Tax Opinion does not discuss any aspects of state, local
or foreign tax laws.
NO RULING WILL BE SOUGHT FROM THE INTERNAL REVENUE SERVICE ("IRS") WITH
RESPECT TO ANY OF THE TAX ASPECTS OF THE PREPACKAGED PLAN. UNLIKE A RULING FROM
THE IRS, AN OPINION OF COUNSEL HAS NO BINDING EFFECT ON THE IRS. THE
AUTHORITIES ON WHICH THIS SUMMARY AND THE TAX OPINION ARE BASED ARE SUBJECT TO
VARIOUS INTERPRETATIONS, AND THERE CAN BE NO ASSURANCE THAT THE IRS WILL NOT
CHALLENGE THE CONCLUSIONS SET FORTH IN THIS TAX OPINION, OR THAT A COURT WOULD
SUSTAIN SUCH CONCLUSIONS IF CHALLENGED BY THE IRS. 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
A holder of an Old Subordinated Debenture will realize gain or loss on the
exchange of an Old Subordinated Debenture for a New Debenture in an amount
equal to the difference between (i) the amount realized (i.e., the "issue
price" of the New 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 Debenture depends on whether the exchange constitutes a
tax-free recapitalization. This, in turn, depends upon whether the Old and New
Debentures
194
<PAGE>
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 Debentures mature in 2009, both debentures have terms of ten
years or more, which is evidence that they will be treated as securities for
federal income tax purposes. See "Limitations to the Tax Opinion--
Characterization of the Debentures as Securities and Qualification as a
Recapitalization" for the U.S. federal income tax consequences of the
characterization of the debentures as either securities or as other than
securities.
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 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 (i.e., the amount of such accrued
interest recognized as income by such holder) and the amount of the payment.
Stated Interest and Original Issue Discount
A New 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). The stated
redemption price at maturity of a New 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
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.
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 Debenture's "adjusted
issue price" at the beginning of such accrual 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 Debenture allocable to
the accrual period. The "adjusted issue price" of a New 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.
See "Limitations to the Tax Opinion--Stated Interest and Original Issue
Discount" for a discussion of the U.S. federal income taxation of stated
interest and OID, if any, with respect to the New Debentures.
195
<PAGE>
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
Debenture pursuant to the Prepackaged Plan does not qualify as a
recapitalization, a holder 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 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 Debenture.
If the holder of a New 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.
This discussion of amortizable bond premium will not apply to a holder of a
New Debenture if such holder does not make an election under Section 171 of
the Tax Code. Thus, such holder will not be allowed to amortize bond premium
(if any) and will thus not be allowed to offset its interest income on the New
Debenture. Such holder will also not be required to reduce its basis in the
debt instrument as described in the preceding paragraph.
Issue Price
The "issue price" of a New 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 Debenture
depends, in part, on whether the New Debentures or the Old Subordinated
Debentures are publicly traded. The New 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 Debentures (the "60-
Day Period"), a substantial amount of the New Debentures or the Old
Subordinated Debentures are traded on an established market, as defined in
Treasury Regulations. Subject to certain exceptions, the New 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 Debentures
or the Old Subordinated Debentures are traded on an established market, the
issue price of a New Debenture will be the fair market value of the New
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 Debenture that is neither publicly traded nor
issued for an Old Subordinated Debenture so traded will be its stated
principal amount if the New Debenture provides for "adequate stated interest,"
and otherwise will be its "imputed principal amount." A New 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 Debenture is
computed by discounting all cash payments, including interest, required to be
made under the New Debenture at the AFR. Because the AFR that will apply in
determining the issue price of a New Debenture is presently unknown, the
196
<PAGE>
Company cannot predict with certainty whether a New Debenture will have
adequate stated interest. It is possible that the interest rate will be less
than the AFR as of the issue date, and in such an event, the issue price of a
New Debenture will be its "imputed principal amount."
Because, as described above, the determination of the issue price of the New
Debentures is dependent on factual circumstances as they exist in the future
on the issue date of the New Debentures, the Company's tax counsel is not
providing an opinion with respect to the issue price of the New Debentures.
See "Limitations to the Tax Opinion--Issue Price."
Backup Withholding
A holder of a New 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 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 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. Whether such a restructuring or modification constitutes a
tax-free recapitalization will depend on whether the Claims are "securities"
for federal income tax purposes. Because the determination of whether a Claim
is a "security" is highly fact specific, the Company's tax counsel is not
providing an opinion on this issue and hence whether such a restructuring or
modification constitutes a tax-free recapitalization. See "Limitations to the
Tax Opinion--Characterization of the Debentures as Securities and
Qualification as a Recapitalization" for a discussion of the characterization
of the Claims as securities and the U.S. federal income tax ramifications
thereof.
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
197
<PAGE>
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. A
"worthless stock deduction" is a deduction allowed to a holder of a
corporation's stock for the taxable year in which such stock becomes
worthless. 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:
Subject to certain exceptions, 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 estimates that under the Prepackaged Plan it will realize
approximately $59 million of COD income attributable to the exchange of New
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 $942.8 million NOL carryover as of
December 31, 1998, which will be decreased by the amount of COD income
realized as a result of the Restructuring.
Section 382 Limitation
Subject to certain exceptions discussed below 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 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 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 April 1999 is 4.78%).
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
198
<PAGE>
change is 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% 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 is generally
treated as being owned by one 5% shareholder.
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 an 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.
See "Limitations to the Tax Opinion--Section 382 Limitation" for a
discussion of the U.S. federal income tax consequences to the Company of an
ownership change and the ramifications of not qualifying for the Section
382(1)(5) exception.
Applicable High Yield Discount Obligations
OID, if any, on the New Debentures will not be deductible until paid by the
Company if the New 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 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").
See "Limitations to the Tax Opinion--Applicable High Yield Discount
Obligations" for a discussion of the U.S. federal income tax consequences to
the Company if the New Debentures are treated as AHYDOs.
199
<PAGE>
Limitations to the Tax Opinion
Certain of the U.S. federal income tax consequences are highly fact specific
and/or dependent on facts as they will exist in the future. Consequently the
Company's tax counsel is not providing an opinion as to such issues. Described
below are the specific matters not covered by the Tax Opinion and the possible
tax consequences of alternative characterizations.
Characterization of the Debentures as Securities and Qualification as a
Recapitalization
The determination of whether the Old Subordinated Debentures or the New
Debentures are securities for federal income tax purposes is based on an
analysis of all the facts and circumstances, and the authorities do not
provide definitive guidelines for making such analysis. Because the
determination is so highly fact specific, the Company's tax counsel is not
providing an opinion on this issue. Consequently, as described below, the
Company's tax counsel is also not providing an opinion as to whether the
exchange of Old Subordinated Debentures for New Debentures will constitute a
recapitalization for U.S. federal income tax purposes.
If they are treated as securities, the exchange of the Old Subordinated
Debentures for New 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 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 Debenture received in the exchange
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 Debenture received in the exchange 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 Subordinated Debentures and New 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 Debenture, in such case, will be equal to
the issue price of the New 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 Debenture will begin on the day following the day of the exchange.
Stated Interest and Original Issue Discount
As described in "--Issue Price" below, the Company's tax counsel is not
providing an opinion as to the issue price of the New Debentures.
Consequently, the Company's tax counsel also is not providing an opinion as to
whether the stated redemption price at maturity of a New Debenture will exceed
its issue price by more than a de minimis amount at the time of its issuance
and hence whether the New Debentures will be issued with OID. Whether or not
the New Debentures are issued with OID will have different U.S. federal income
tax consequences to a holder of the New Debentures as described below.
If the New Debentures are not issued with OID, the stated interest on a New
Debenture will be taxable to a holder as ordinary income when received or
accrued in accordance with such holder's method of accounting. If the New
Debentures are issued with OID, a holder will be required to include OID in
income as interest over the term of the New Debentures under a constant-yield-
to-maturity basis, based on the original yield-to-maturity of the New
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 Debenture is issued with OID, a holder of the
New Debenture may be required to take OID into income prior to the receipt of
cash payments with respect to the New Debenture.
200
<PAGE>
If a New Debenture is issued with OID, and if a holder's tax basis on the
issue date in a New Debenture exceeds its issue price, the debt instrument
will be treated as having been acquired with "acquisition premium," and the
holder will be allowed to reduce its OID accruals with respect to such New
Debenture by the proportion of the aggregate amount of OID remaining to be
accrued that is represented by the amount of such excess.
Issue Price
As described below, the determination of the issue price of the New
Debentures is dependent in large part upon facts as they exist in the future,
in particular whether (i) the New Debentures or the Old Subordinated
Debentures will be treated as publicly traded or (ii) the New Debentures will
have adequate stated interest. Because such information is not currently known
or knowable, the Company's tax counsel is not providing an opinion with
respect to the issue price of the New Debentures.
If the IRS were to contend successfully that either (i) the New Debentures
or the Old Subordinated Debentures are traded on an established securities
market during the 60-Day Period or (ii) the New Debentures do not bear
adequate stated interest, then the issue price of a New Debenture could be
materially less than the issue price that would result if neither were
publicly traded and the New Debentures bore adequate stated interest. In that
event, a New Debenture could have OID or additional OID, as the case may be,
that would be includible in a holder's income.
Section 382 Limitation
The determination of whether there is an ownership change and the
application of Section 382(l)(5) are both highly fact specific and dependent
on circumstances which are difficult to accurately assess. Although the
Company believes that an ownership change will occur, it is possible that the
exchanges contemplated by the Prepackaged Plan will not cause an ownership
change. Consequently, the Company's tax counsel is not providing an opinion as
to whether the Prepackaged Plan will cause an ownership change or whether the
Section 382(l)(5) exception will apply. If the Prepackaged Plan does not cause
an ownership change, then, subject to any pre-existing Section 382 Limitation,
Section 382 of the Tax Code will not apply to limit the Company's use of its
NOL carryover. In such case, a change after the Effective Date that affects
the percentage stock ownership of a 5% shareholder may trigger an ownership
change depending on the magnitude of such change. If the Company is not in
bankruptcy at such time, however, neither the Section 382(l)(5) nor the
Section 382(l)(6) exception described below will be available, and the
Company's use of its NOL carryover will be subject to the general Section 382
Limitation.
If instead the Prepackaged Plan causes an ownership change, then to the
extent not reduced by the amount of realized COD income discussed above in
"Consequences to the Company--Realization of Cancellation of Indebtedness
Income," the use of the remaining NOL carryover will be subject to the Section
382 Limitation unless the exception in Section 382(l)(5) applies.
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 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(l)(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
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
201
<PAGE>
changes). In such case, since it is impossible to predict 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.
Applicable High Yield Discount Obligation
As discussed in "--Issue Price" and "--Stated Interest and Original Issue
Discount" above, because the determination of whether the Old Subordinated
Debentures or the New Debentures will be treated as traded on an established
securities market within the 60-Day Period, and hence whether the New
Debentures will bear OID, is dependent upon facts as they will exist in the
future, the Company's tax counsel is not providing an opinion as to the issue
price of the New Debentures or whether they will bear OID. Consequently, the
Company's tax counsel also is not providing an opinion as to whether the New
Debentures will be treated as AHYDOs. If the New Debentures are treated as
AHYDOs, the Company would not be permitted to deduct any OID in respect of the
New 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.
202
<PAGE>
ESTIMATED FEES AND EXPENSES
The estimated fees and expenses expected to be incurred by the Company and
that LGE has advised the Company that it expects to incur 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......................... $ 6,500,000
Bank transaction fees and expenses........................... 5,000,000
Fees of other advisors....................................... 7,000,000
Legal fees and expenses...................................... 6,000,000
Accounting fees and expenses................................. 1,200,000
Printing and mailing fees.................................... 1,000,000
Fees relating to new securities.............................. 250,000
Miscellaneous................................................ 50,000
-----------
Total.................................................... $27,000,000
===========
Estimated Costs and Fees of LGE
Investment banking fees and expenses......................... $ 2,300,000
Fees of other advisors....................................... 700,000
Legal fees and expenses...................................... 6,000,000
Accounting fees and expenses................................. 100,000
-----------
Total.................................................... $ 9,100,000
===========
</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).
The Company currently estimates that the total fees payable to PJSC will be
$5.7 million. The portion of the fees associated with the restructuring or
replacement of the Old Subordinated Debentures ($1.0 million) is contingent on
the effectiveness of the restructuring of the Old Subordinated Debentures.
Through September 26, 1998, the Company had paid PJSC $2.4 million in fees and
expenses, including $0.75 million in fees related to obtaining the Amended
Citibank Credit Facility. The Company will request approval of the post-
petition fees through the filing of appropriate applications with the
Bankruptcy court.
JA&A 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, JA&A receives
a fixed monthly fee plus expenses, and upon successful completion of the
Financial Restructuring, will receive a success fee ($1.0 million). The
Company currently estimates that the total fees payable to JA&A in connection
with the Restructuring will be $4.0 million of which $1.0 million is
designated as a success fee, contingent on successful completion of the
Financial Restructuring, which includes consummation of the Prepackaged Plan.
Through September 26, 1998, the Company had paid $2.3 million in fees and
expenses to JA&A. The Company will request approval of these fees through the
filing of appropriate applications with the Bankruptcy Court.
203
<PAGE>
Following commencement of the Prepackaged Chapter 11 Case, the Company
intends to seek authority to employ JA&A as its restructuring advisor, PJSC as
its financial advisor and investment banker, Arthur Andersen LLP as its
auditor and Kirkland & Ellis as its attorneys.
LEGAL MATTERS
Certain legal matters in connection with the New 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.
204
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
60-Day Period............................................................... 196
Administrative Claims....................................................... 4
AFR......................................................................... 196
AHYDOs...................................................................... 199
Allowed..................................................................... 89
Alternative Proposal........................................................ 78
Amended Certificate of Incorporation........................................ 78
Amended Citibank Credit Facility............................................ 5
Appraisers.................................................................. 70
ATSC........................................................................ 32
Audit Committee............................................................. 51
Ballots..................................................................... 25
Bank Lender Claims.......................................................... 5
Bankruptcy Code............................................................. i
Bankruptcy Court............................................................ 10
Bankruptcy Rules............................................................ 27
Board....................................................................... iii
Business Plan Projections................................................... 20
CDT......................................................................... 50
CERCLA...................................................................... 174
Change in Control Period.................................................... 183
Citibank.................................................................... 14
Citibank Credit Facility.................................................... 51
Citibank Receivables Facility............................................... 51
Citibank Secured Claims..................................................... 5
Citicorp.................................................................... 11
Citicorp Exit Facility...................................................... 11
Claims...................................................................... i
Class....................................................................... 9
COD......................................................................... 190
Commission.................................................................. v
Commitment.................................................................. 11
Company..................................................................... i
Company Peer Group.......................................................... 70
Confirmation................................................................ i
Confirmation Date........................................................... 88
Consumer Electronics........................................................ 159
Consummation................................................................ iii
Contingent Compensation Plan................................................ 180
Crossroads.................................................................. 61
D&O Releasees............................................................... 9
Delaware Anti-Takeover Law.................................................. 178
Debenture Committee......................................................... ii
Debenture Releasees......................................................... 9
DGCL........................................................................ 187
DIP Facility................................................................ 11
Directors' Retirement Plan.................................................. 180
Disclosure Statement........................................................ i
Disqualified OID............................................................ 199
Distribution Record Date.................................................... 98
EBIT........................................................................ 76
EBITDA...................................................................... 11
Effective Date.............................................................. i
Employment Agreements....................................................... 183
Equity Interests............................................................ iii
ERISA....................................................................... 141
Exchange Act................................................................ v
Expiration Date............................................................. 27
Final Order................................................................. 18
Financial Restructuring..................................................... i
</TABLE>
<TABLE>
<S> <C>
Forrester................................................................... 70
FS&D Applications........................................................... 47
Gartner/Dataquest........................................................... 70
GECC Credit Facility........................................................ 141
General Unsecured Claims.................................................... 6
Greenwich................................................................... 71
Impaired Claims............................................................. 4
Implementation Program...................................................... 78
Indenture Event of Default.................................................. 146
Investor Releasees.......................................................... 9
IRS......................................................................... 194
Issue Price................................................................. 194
JA&A........................................................................ 13
Key Executives.............................................................. 183
Lazard...................................................................... 57
Leveraged Lease (Melrose Park).............................................. 3
Leveraged Lease (Mexico).................................................... 3
Leveraged Leases............................................................ 3
LG Semicon.................................................................. iii
LGAI........................................................................ 54
LGAI Maquila Agreement...................................................... 54
LGE......................................................................... ii
LGE Claims.................................................................. ii
LGE Demand Loan Claims...................................................... 2
LGE Demand Loan Facility.................................................... 52
LGE Extended Payables Claims................................................ 3
LGE Guarantee Fee Claims.................................................... 3
LGE Leveraged Lease Claims.................................................. 3
LGE New Credit Facility..................................................... 150
LGE New Credit Facility Event of Default.................................... 151
LGE New Credit Support...................................................... 11
LGE New Restructured Senior Note............................................ ii
LGE Reimbursement Claims.................................................... 2
LGE Restructured Notes Default.............................................. 150
LGE Stock Purchase Agreement................................................ 50
LGE Technical Services Claims............................................... 3
LGE Tranche A Claims........................................................ ii
LGE Tranche B Claims........................................................ ii
Lock-Up Agreement........................................................... 61
Maquiladora................................................................. 35
Master Ballots.............................................................. 25
NAFTA....................................................................... 35
Named Executive Officers.................................................... 184
New Bank Lender Note........................................................ 5
New Common Stock............................................................ ii
New Indenture............................................................... 146
New Investor................................................................ 81
New Debentures.............................................................. i
New Zenith.................................................................. ii
NOLs........................................................................ 12
Nominee..................................................................... 28
Notice Agent................................................................ 28
NWS......................................................................... 31
NYSE........................................................................ v
OID......................................................................... 195
Old Common Stock............................................................ iii
Old Preferred Stock......................................................... 187
Old Subordinated Debenture Claims........................................... 6
Old Subordinated Debenture Indenture........................................ i
Old Subordinated Debentures................................................. i
</TABLE>
205
<PAGE>
<TABLE>
<S> <C>
Operational Restructuring................................................... i
Other Priority Claims....................................................... 5
Other Secured Claims........................................................ 5
Petition Date............................................................... 101
Phillips.................................................................... 34
PIK......................................................................... 11
PJSC........................................................................ 12
Prepackaged Chapter 11 Case................................................. 9
Prepackaged Plan............................................................ i
Priority Tax Claims......................................................... 4
Professionals............................................................... 15
PRPs........................................................................ 174
Qualifying Debt............................................................. 199
Registration Statement...................................................... v
Reimbursement Agreement..................................................... 52
Reorganization Period....................................................... 20
Restructuring............................................................... i
Restructuring Agreement..................................................... ii
Reynosa Assets.............................................................. ii
Sales Multiples Approach.................................................... 73
Section 382 Limitation...................................................... 29
</TABLE>
<TABLE>
<S> <C>
Securities Act............................................................. v
Solicitation............................................................... iii
Solicitation Agent......................................................... 28
Solicitation Materials..................................................... 27
Special Committee.......................................................... iii
Subsidiaries............................................................... 1
Tax Code................................................................... 28
Tax Opinion................................................................ 194
Terminal Value............................................................. 72
TIN........................................................................ 197
Transaction Expenses....................................................... 81
Transaction Fee............................................................ 81
Treasury Regulations....................................................... 194
Trustee.................................................................... 147
Unimpaired Claims.......................................................... 97
Unsecured Bank Loans....................................................... 2
US EPA..................................................................... 175
Voting Record Date......................................................... i
VSB........................................................................ 32
Zenith..................................................................... i
</TABLE>
206
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Statements of Consolidated Operations and Retained Earnings (Deficit) for
the Years Ended December 31, 1998, 1997 and 1996......................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................. F-3
Statements of Consolidated Cash Flows for the Years Ended December 31,
1998, 1997 and 1996...................................................... F-4
Notes to Consolidated Financial Statements................................ F-5
Report of Independent Public Accountants.................................. F-24
</TABLE>
F-1
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)
In millions, except per share amounts
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $ 984.8 $1,173.1 $1,287.9
Costs, Expenses and Other
Cost of products sold.......................... 905.5 1,180.5 1,257.0
Selling, general and administrative (Note
Four)......................................... 126.6 178.3 167.8
Engineering and research....................... 39.1 42.9 46.7
Other operating expense (income), net (Notes
One, Three and Ten)........................... (43.0) 42.4 (26.3)
Restructuring charges (Note Seven)............. 202.3 -- 9.3
------- -------- --------
Operating loss................................... (245.7) (271.0) (166.6)
Gain (loss) on asset sales, net.................. 16.6 (4.6) 0.3
Interest expense................................. (14.6) (11.9) (12.5)
Interest expense--related party (Note Six)....... (29.7) (13.6) (2.6)
Interest income.................................. 0.9 0.9 3.6
------- -------- --------
Loss before income taxes......................... (272.5) (300.2) (177.8)
Income taxes (credit) (Note Eight)............... 3.0 (0.8) 0.2
------- -------- --------
Net loss......................................... $(275.5) $ (299.4) $ (178.0)
======= ======== ========
Net loss per share of basic and diluted common
stock (Note Twenty)............................. $ (4.08) $ (4.49) $ (2.73)
======= ======== ========
Retained Earnings (Deficit)
Balance at beginning of year................... $(661.7) $ (362.3) $ (184.3)
Net loss....................................... (275.5) (299.4) (178.0)
------- -------- --------
Retained earnings (deficit) at end of year..... $(937.2) $ (661.7) $ (362.3)
======= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-2
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
In millions, except share and per share data
<TABLE>
<CAPTION>
December 31
----------------
1998 1997
------- -------
<S> <C> <C>
Assets
Current Assets
Cash....................................................... $ -- $ --
Receivables, net of allowance for doubtful accounts of
$42.0 and $-- ,
respectively............................................. 127.0 21.7
Receivable from related party (Note Six)................... 8.5 6.4
Inventories (Note Eleven).................................. 84.2 159.1
Transferor certificates (Note Twelve)...................... -- 99.7
Other...................................................... 10.8 26.3
------- -------
Total current assets..................................... 230.5 313.2
Property, plant and equipment, net (Note Thirteen)........... 50.2 171.1
Receivable from related party (Note Fourteen)................ 21.3 --
Property held for disposal (Notes One and Seven)............. 43.0 5.7
Other noncurrent assets...................................... 5.0 37.7
------- -------
Total assets........................................... $ 350.0 $ 527.7
======= =======
Liabilities and Stockholders' Equity
Current Liabilities
Short-term debt (Note Fifteen)............................. $ 47.8 $ 72.0
Short-term debt with related party (Note Six).............. 192.1 --
Current portion of long-term debt (Note Sixteen)........... 5.8 15.3
Accounts payable........................................... 48.1 91.3
Accounts payable with related party (Note Six)............. 136.1 145.9
Compensation and retirement benefits (Note Nineteen)....... 35.7 41.2
Product warranties......................................... 17.8 18.3
Co-op advertising and merchandising programs............... 23.7 30.6
Restructuring costs (Note Seven)........................... 31.3 --
Income taxes payable....................................... 4.2 0.7
Other accrued expenses..................................... 59.3 51.6
------- -------
Total current liabilities................................ 601.9 466.9
Long-term liabilities (Note Nineteen)........................ 3.6 8.8
Long-term liabilities with related party (Note Six).......... 11.2 8.2
Long-term debt (Note Sixteen)................................ 97.8 132.8
Stockholders' Equity
Preferred stock, $1 par value; 8,000,000 shares authorized;
none outstanding.......................................... -- --
Common stock, $1 par value; 150,000,000 shares authorized;
67,630,628 and 67,130,628 shares issued................... 67.6 67.1
Additional paid-in capital................................. 506.8 507.3
Retained earnings (deficit)................................ (937.2) (661.7)
Cost of 105,181 common shares in treasury.................. (1.7) (1.7)
------- -------
Total stockholders' equity (Note Seventeen).............. (364.5) (89.0)
------- -------
Total liabilities and stockholders' equity............. $ 350.0 $ 527.7
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
ZENITH ELECTRONICS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
In millions
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
Year Ended December 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss..................................... $ (275.5) $ (299.4) $ (178.0)
Adjustments to reconcile net loss to net cash
provided (used) by operations:
Depreciation................................ 31.2 38.0 35.0
Non-cash restructuring charges/charge for
asset impairment........................... 144.6 63.7 --
Employee retirement plan contribution made
in stock................................... -- 4.9 5.3
(Gain) loss on asset sales, net............. (16.6) 4.6 (0.3)
Charge for donated services................. -- 2.2 --
Other....................................... 1.5 0.5 1.6
Changes in assets and liabilities:
Current accounts.......................... (47.4) 260.1 116.4
Other assets.............................. 3.3 3.6 (3.9)
Other liabilities......................... 6.9 7.6 --
--------- --------- ---------
Net cash provided (used) by operating
activities.................................. (152.0) 85.8 (23.9)
--------- --------- ---------
Cash Flows from Investing Activities
Capital additions........................... (8.1) (69.5) (105.0)
Capital additions purchased from related
party...................................... (0.3) (13.0) (24.0)
Proceeds from asset sales................... 57.4 187.7 4.3
Transferor certificates decrease
(increase)................................. 110.7 (110.7) --
Distribution of investor certificates....... (41.0) (84.0) --
--------- --------- ---------
Net cash provided (used) by investing
activities.................................. 118.7 (89.5) (124.7)
--------- --------- ---------
Cash Flows from Financing Activities
Short-term borrowings, net.................. 77.8 25.0 47.0
Proceeds from issuance of long-term debt.... -- 45.0 --
Proceeds from issuance of common stock,
net........................................ -- 1.1 15.7
Principal payments on long-term debt........ (44.5) (67.4) (7.3)
--------- --------- ---------
Net cash provided by financing activities.... 33.3 3.7 55.4
--------- --------- ---------
Cash
Decrease in cash............................ -- -- (93.2)
Cash at beginning of year................... -- -- 93.2
--------- --------- ---------
Cash at end of year......................... $ -- $ -- $ --
========= ========= =========
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net............................ $ (113.8) $ 186.6 $ (7.5)
Income taxes, net........................... 3.5 (0.6) 0.1
Inventories................................. 79.7 90.2 (53.1)
Other assets................................ 10.5 (9.7) (3.3)
Accounts payable and accrued expenses....... (27.3) (6.4) 180.2
--------- --------- ---------
Net change in current accounts............... $ (47.4) $ 260.1 $ 116.4
========= ========= =========
Supplemental disclosure of cash flow
information-
Cash paid (refunded) during the year for:
Interest.................................. $ 38.1 $ 24.8 $ 14.1
Income taxes.............................. (0.8) (9.3) 0.9
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-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note One--Significant Accounting Policies: Nature of operations: 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 segments: Consumer Electronics, which includes 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 and purchased VCRs, all of which are sold
principally to retail dealers in the United States and to retail dealers and
wholesale distributors in foreign countries; and Network Systems 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.
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.
Reclassifications: Certain reclassifications have been made to prior year
data to conform to the current year presentation and had no effect on net
income reported for any period.
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 using the straight-line method over their useful lives, which
range from 8 to 12 years. Accelerated methods are used for depreciation of
certain 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 not depreciated. This property includes
certain facilities and land no longer used in the company's operations. See
Notes Seven and Thirteen for additional information on property held for
disposal.
Rental expenses under operating leases were $19.9 million, $20.7 million,
and $12.8 million in 1998, 1997 and 1996, respectively. The 1997 increase in
rental expense was due to the sale-leaseback transaction that was entered into
in April 1997, and terminated in July 1998. See Note Fourteen for additional
information on the sale-leaseback transaction.
Future minimum lease payments required under operating leases were $8.8
million in 1999, $3.2 million in 2000, $2.2 million in 2001, $1.8 million in
2002 and $2.3 million in 2003 and beyond.
The company capitalizes interest on major capital projects. The company
capitalized no interest in 1998, $4.1 million of interest in 1997 and $2.3
million of interest in 1996.
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.
F-5
<PAGE>
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 1998,
1997 and 1996.
Stock options: The company values all stock-based compensation based on the
estimated fair value at the grant date and spreads 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
Eighteen.
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
carrying value is recoverable. If the future undiscounted cash flows to be
derived over the life of the asset do not exceed the asset's net book value,
the company recognizes an impairment loss for the amount by which the net book
value of the asset exceeds its estimated fair market value. See Notes Three
and Seven for additional information.
Comprehensive Income: The company adopted Statement of Financial Accounting
Standards ("FAS") No. 130--Reporting Comprehensive Income--effective in 1998.
This statement requires that certain items recorded directly in stockholders'
equity be classified as comprehensive income. Comprehensive income and its
components may be presented in a separate statement, or may be included in the
statement of stockholders' equity or the statement of income. The company has
no items which will be classified as comprehensive income; thus the adoption
of the FAS had no impact on the presentation of the company's financial
statements.
Note Two--Financial Results and Liquidity: The company continues to face
liquidity problems caused by its significant debt burden and its continuing
net losses. The company incurred net losses of $275.5 million, $299.4 million
and $178.0 million in 1998, 1997 and 1996, respectively. The company's cash
flows in 1998, 1997 and 1996 were, and absent restructuring, its projected
cash flows in future years are insufficient to meet its operating expenses,
including its current interest and principal repayment obligations. The
company's independent public accountants included in their reports on the
company's consolidated financial statements for the fiscal years ended
December 31, 1998 and 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.
During the first quarter of fiscal 1998, the company's management developed
and began implementing an 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 all or substantially all of its
manufacturing operations, outsourcing all or 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.
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 financial restructuring would
reduce the company's overall debt and other obligations by approximately $285
million by exchanging (i) $200 million of debt and other liabilities owed to
LGE for 100 percent of new common stock; (ii) the company's current
subordinated debentures due 2011 in an aggregate principal amount of $103.6
million plus accrued interest thereon for new subordinated debentures in an
aggregate principal amount of $50 million; and (iii) approximately $32.4
million of indebtedness to LGE for certain assets located at the company's
manufacturing plant in Reynosa, Mexico, which have an appraised value equal to
such amount. As a consequence of the financial restructuring, the company's
current common stock will be canceled and the holders of that common stock
(including LGE) will receive no distribution and retain no property in respect
of their holdings of old common stock under the financial restructuring.
F-6
<PAGE>
On August 10, 1998, the company filed a Registration Statement on Form S-4
which contains information relating to the company's proposed financial and
operational restructuring plans along with information regarding a prepackaged
plan of reorganization. The Securities and Exchange Commission review and
response processes to make the filing of the Form S-4 Registration Statement
effective are underway.
As amended in December 1998, the company's current credit facility expires
on the earlier of a bankruptcy filing by the company and April 30, 1999.
Further extension or a replacement of the credit facility may be necessary,
but there can be no assurance that the company will be able to do so or of the
terms on which it would be able to do so. The company has entered into a
commitment letter regarding financing during the prepackaged Chapter 11 case
and following consummation of the prepackaged plan. See Note Twenty Two. The
company believes that, giving effect to the financing contemplated in the
commitment letter, 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 underlying its
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.
Note Three--Impairment of Long-lived Assets: In 1998, impairment of long-
lived assets was related to the company's operational restructuring plan and
as a result such charges were included in Restructuring expense. See Note
Seven for further discussion.
During the fourth quarter of 1997, an impairment was recognized for the
Consumer Electronics business because 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 charge is
included in Other operating expense (income).
The impairment related primarily to the company's assets associated with its
color picture tube (CPT) and computer display tube (CDT) plant at Melrose
Park, Illinois, and certain assembly plant operations in Reynosa, Mexico. An
accumulation of many adverse circumstances during 1997 called into question
the recovery of the carrying values of Melrose Park including: the company's
decision to exit from 19/200 tube production; unrecoverable new capital costs
significantly in excess of plans ($118 million v. $81 million) for partial
plant automation and new CDT production capability; the inability to produce
the new CDTs economically; sudden adverse market developments in 150-CDT
demand and 15/170 CDT pricing; and persistent historic and projected operating
cash flow losses along with the need for continuing maintenance capital
investment.
Further, at the Reynosa, Mexico, assembly plant, certain facts indicated
potential impairment: its exit from small television assembly; the relocation
of certain parts/service operations to Huntsville, Alabama; and the planned
vacating of certain buildings on site. These factors during 1997, coupled with
historic and projected operating cash flow losses and the need for continuing
maintenance capital indicated that an impairment existed in the company's
Consumer Electronics manufacturing assets.
During the third quarter of 1997, the company recorded a charge of $10.0
million related to the impairment of certain long-lived assets to be disposed
of. The charge related primarily to (i) assets that were sold or scrapped as a
result of the company's decision to phase out of its printed circuit board
operation, (ii) assets that were sold or scrapped as a result of the company's
decision not to develop the proposed large-screen picture tube plant in
Woodridge, Illinois and (iii) a building in Canada that was sold in December
1997. The amount of the charge is included in Other operating expense
(income).
The impairment charges discussed above are based upon management and third
party 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 may change as
new information becomes available and circumstances change.
F-7
<PAGE>
Note Four--Charge for Bad Debts: During the third quarter of 1998, the
company's trade receivable securitization agreement was terminated. As a
result, receivables are no longer sold and transferor certificates (which
represented the company's retained interest in the pool of receivables that
were sold) do not exist. In connection with the cancellation of the agreement,
the receivables and an allowance for doubtful accounts were recorded in the
company's financial statements. As of December 31, 1998, the allowance for
doubtful accounts was $42.0 million of which $9.5 million was charged to
Selling, general and administrative expense in 1998, and $32.5 million was
reclassified from transferor certificates due to the cancellation of the
receivable securitization agreement. The 1998 charge of $9.5 million included
an additional charge of $3.3 million related to the Brazilian customer
discussed below.
In November 1995, the company entered into a contract with a customer in
Brazil to purchase televisions and television kits and to assemble and
distribute Zenith brand televisions 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 litigation against this customer in the United
States. In late 1997, this matter was settled. The agreement provided that the
company would make certain parts and components available to this customer,
and would 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 reflected
the company's estimated loss as of December 31, 1997. This bad debt charge
increased 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 affected by a change in
accounting principle and was 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 had 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 were manufactured by the company and had been costed using
LIFO. It was expected that the LIFO picture tube inventory pool would 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 believed that
the FIFO method was preferable as it would 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
was 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,
retroactively restating the financial statements.
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, 1998, LGE owned 36,569,000 shares, excluding
vested but unexercised options, of common stock of the company which
represents 54.2 percent of the outstanding common stock. Because LGE owns a
majority of the issued and outstanding common stock, it effectively controls
the outcome of any matter requiring action by a majority of the company's
stockholders, including the election of a majority of the company's directors
and any future change in control of the company.
On August 7, 1998, the company entered into a restructuring agreement with
LGE which sets forth the terms and conditions pursuant to which LGE has agreed
to participate in and assist the company with its proposed financial and
operational restructuring plans. The restructuring agreement provides that LGE
may lend or provide
F-8
<PAGE>
indirect credit support up to $60 million, subject to certain conditions,
including consummation of the prepackaged plan, to enable the company to
implement the operational restructuring. Pursuant to the restructuring
agreement, LGE has agreed to vote in favor of the prepackaged plan, subject to
compliance with applicable laws. Further, the company has agreed, among other
things, to provide LGE access to all properties and records of the company,
promptly notify LGE of any alternative proposal such as a prospective business
combination, pay monthly accrued interest due LGE under the reimbursement and
financial support agreements, and obtain consent from LGE for significant
transactions such as the material acquisition of assets, subjection of assets
to liens, cancellation of indebtedness, establishment of material contracts,
the hire of new executive officers, or establishment of new lines of business.
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 1998, 1997 and 1996.
Product purchases: In the ordinary course of business, the company purchases
VCRs, television-VCR combinations and components from LGE and its affiliates.
The company purchased $50.7 million, $93.3 million and $128.8 million of these
items in 1998, 1997 and 1996, respectively. Sales of products purchased from
LGE and its affiliates contributed $59.8 million, $112.3 million and $141.4
million to sales in 1998, 1997 and 1996, respectively. The purchase prices
were the result of negotiations between the parties and were consistent with
third party bids.
In 1998, the company and LGE entered into a direct shipment arrangement
pursuant to which LGE sells and ships VCRs directly to the company's two
largest customers and pays the company a license fee for the use of the
company's brand names on such products and the inclusion of the company's
patented tuner technology in such products. The license fee payable by LGE is
comparable to licensing rates charged by the company to unrelated parties.
During 1998, the company accrued approximately $1.5 million in royalties for
the use of the company's brand names pursuant to this direct shipment program.
A similar arrangement was entered into in April 1997, in Canada where LGE's
Canadian affiliate sells Zenith branded VCRs under a license from the company.
Pursuant to that arrangement, the company received payment from LGE of
approximately $0.3 million in 1998 and less than $60,000 in 1997.
Equipment purchases: The company purchased approximately $0.3 million, $13.0
million and $24.0 million of production machinery and equipment from LGE
during 1998, 1997 and 1996, respectively. 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 and its affiliates at prices that
equate to amounts charged by the company to its major customers. Sales in
1998, 1997 and 1996, by the company to LGE and its affiliates were $53.6
million, $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 products in Mexico. During 1998, the company's sales to the LGE
Canadian and Mexican subsidiaries were $27.3 million and $19.6 million,
respectively. During 1997, the company's sales to the LGE Canadian and Mexican
subsidiaries were $25.5 million and $16.8 million, respectively. These amounts
are included in the sales figures discussed above. The company did not have
any sales to these LGE subsidiaries in 1996.
Included in the financial statements is $8.5 million of related party
receivables from LGE and its affiliates as of December 31, 1998. The balance
represents $2.7 million of receivables related to license and warranty fees
from direct shipment of VCRs. The remaining balance of $5.8 million relates
primarily to sales, in the ordinary course of business, of televisions,
picture tubes, yokes and other manufactured subassemblies during 1998.
F-9
<PAGE>
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
television tuners. LGE's payment in 1998, 1997 and 1996, to the company under
these agreements and licenses was $0.4 million, $0.6 million and $1.0 million,
respectively.
An affiliate of LGE has licensed certain technological information from
Zenith relating to the manufacture of VSB modulation equipment under a 1998
agreement. That agreement allows the LGE affiliate to use technical
information and design schematics as the basis for further development of
commercial products. Under the agreement, Zenith received $300,000 in 1998 in
up-front payments and additional royalty payments per unit sold by the LGE
affiliate based on Zenith's design. This agreement does not include a license
on the VSB patent.
In September 1997, the company and LGE entered into a 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 the $4.5 million. This
obligation is included in Long-term liabilities to related party.
Service Assistance: In 1998, employees of LGE provided certain services to
the company that were covered under various agreements. The cost of these
services was $1.5 million. 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.
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
(the actual costs of payroll, travel and living expenses) 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 1997, employees of LGE provided certain services to the company that were
covered under service agreements. The company's payments ($1.1 million) and
payable ($3.7 million) to LGE for such services totaled $4.8 million. The
payable was included in Long-term liabilities to related party. Costs for 1996
were $0.3 million.
In late December 1997, the company entered into an agreement with an LGE
affiliate pursuant to which certain software development, design and support
services are provided. Projects under the agreement include the company's Year
2000 Readiness support. Payments to the affiliate were $1.1 million and $0.1
million in 1998 and 1997, respectively.
Interest Expense: A summary of the interest expense and associated rates for
related party transactions is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Interest Interest Interest
Expense Expense Expense
-------- -------- -------- ---
In millions
<S> <C> <C> <C> <C>
Secured credit facility....................... $ 2.2 $ -- $ --
Extended accounts payables with LGE........... 15.1 9.6 2.6
Amortization of stock options................. 5.1 4.0 --
Leveraged lease claims........................ 4.0 -- --
Reimbursement claims.......................... 3.3 -- --
----- ----- ----
Total related party interest expense.......... $29.7 $13.6 $2.6
===== ===== ====
<CAPTION>
1998 1997 1996
Interest Interest Interest
Rate Rate Rate
-------- -------- --------
<S> <C> <C> <C> <C>
Secured credit facility....................... 12.2% n/a n/a
Extended accounts payable with LGE............ 13.4% 7.9% 6.4%
Leveraged lease claims........................ 12.3% n/a n/a
Reimbursement claims.......................... 10.5% n/a n/a
</TABLE>
F-10
<PAGE>
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
(as amended) is one year from the date of the first borrowing, subject to
LGE's right to demand repayment at anytime, after April 30, 1999. Repayment is
due in full at the end of the term. The first such borrowing occurred in May
1998, and as of December 31, 1998, $30.0 million was outstanding under the
facility. The facility is secured by a second lien on certain of the company's
assets, including its VSB technology, and is subject to certain terms and
conditions.
Accounts payable with related party included $136.1 million and $145.9
million to LGE and its affiliates as of December 31, 1998 and December 31,
1997, respectively. In April 1997, the company and LGE entered into an
arrangement whereby LGE provided a vendor credit line to the company to
finance the company's purchases of certain goods from LGE in the ordinary
course of business. Prior to April 1997, the company's accounts payables
arising in the ordinary course of business to LGE were extended for certain
periods of time, but no formal arrangement was in place. The amount of
extended payables was $135.6 million and $144.3 million as of December 31,
1998 and 1997, respectively. The company is charged interest for the extended
period at rates reflecting then-current market conditions in Korea.
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 3,965,000 common shares of the company at an exercise price of $0.01
per share. These options were exercisable over a 12-1/2 year period with
793,000 options vesting in each of the first three years, 175,000 options
vesting in years 4 through 12 and 11,000 options vesting in the last half
year. (In 1998, the balance of 2,219,000 of LGE's stock options was canceled.)
The accounting for these stock options was based upon their fair value with
that fair value being amortized straight-line to interest expense over the
term of the associated commitments. The quoted market price of the stock at
the time of issuance was $10.00 per share. The market price was used as the
fair value of the options as the company believed this provided the best
representation of the options' fair value. The related deferred financing
charge, net of amortization, was recorded as follows as of December 31,1997:
$30.1 million in Noncurrent other assets and $5.1 million in Current other
assets. The portions of the deferred financing charges applicable to the sale-
leaseback transaction and the receivables securitization were written off in
the third quarter of 1998 as part of the restructuring charge discussed in
Note Seven.
See Note Fourteen and Note Fifteen for discussion of the leveraged lease
claims and the Reimbursement claims between the company and LGE.
Other Items: 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, $0.6 million of the
liability to LGE, which was repaid in 1998, remained and was included in
accrued expenses.
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. Lease
payments, at market rates, for these facilities were approximately $0.6
million in 1998 and $0.3 million in 1997.
Note Seven--Restructuring and Other Charges: During 1998, the company
provided for impairment of assets and restructuring costs related to its
operational restructuring plan, whereby the company intends to transform
itself from an integrated manufacturer and distributor of consumer electronics
products into a sales, distribution and technology company. The company's
current business plan requires that it close and dispose of all, or
substantially all, of its manufacturing facilities and outsource all, or
substantially all, product lines.
F-11
<PAGE>
A summary of the restructuring charges recorded in 1998 is as follows:
<TABLE>
<CAPTION>
Restructuring Asset Restructuring
Charges at Write- Cash Reserve at
Inception off Payment Dec. 31,1998
------------- ------- ------- -------------
In millions
<S> <C> <C> <C> <C>
Loss on termination of leveraged
lease.......................... $ 68.8 $ (68.8) $ -- $ --
Deferred financing charge/bank
fee write-off.................. 36.6 (34.5) (2.1) --
Accelerated amortization of de-
ferred gain.................... (9.1) 9.1 -- --
Impairment of property, plant
and equipment.................. 47.2 (47.2) -- --
Severance and other employee
costs.......................... 24.8 -- (9.4) 15.4
Plant closure and business exit
costs.......................... 18.8 -- (3.8) 15.0
Professional fees............... 11.5 -- (10.9) 0.6
Inventory writedowns............ 3.2 (3.2) -- --
Other........................... 0.5 -- (0.2) 0.3
------ ------- ------ -----
Total restructuring
charges.................... $202.3 $(144.6) $(26.4) $31.3
====== ======= ====== =====
</TABLE>
As described in Note Fourteen, the company incurred a $68.8 million loss in
the third quarter on the termination of the leveraged lease on equipment at
Melrose Park, Illinois and at Reynosa and Juarez, Mexico. The company's
payment obligations under the lease were fully guaranteed by LGE, which made a
negotiated settlement payment of $90.1 million in the third quarter of 1998 to
the lessor. The appraised value of the equipment is significantly less than
the original investment value, thus resulting in the loss of $68.8 million.
This loss was calculated as the difference between the $90.1 million liability
to LGE for settlement of the lease obligation and the $21.3 million appraised
fair value of the equipment.
Of the $36.6 million expense for banking and deferred financing fees, $28.3
million of the fees related to the leveraged lease. (The former amount does
not include the accelerated amortization of the remaining $9.1 million
deferred gain related to the 1997 sale of assets into the leveraged lease.)
Also, $3.9 million was related to the receivable securitization as discussed
in Note Twelve and $1.6 million was related to the credit facility with
Citicorp that was amended in the third quarter of 1998 as discussed in Note
Fifteen. Additionally, the company incurred $2.8 million in banking and
financing fees and expenses related to its continuing efforts to secure
financing commitments.
The impairment of property, plant, and equipment of $47.2 million relates
primarily to the company's commitment in 1998 to dispose of its manufacturing
facilities. During the fourth quarter, the company identified and entered into
agreements with various suppliers to outsource its product lines, thus
enabling the company to commit to disposing of certain assets. As of December
31, 1998, the company had announced the closure of the Melrose Park, Illinois,
Juarez, Mexico, and Matamoros, Mexico manufacturing facilities, and that those
assets were being held for disposal. The company began winding down production
at each of these facilities in the fourth quarter, and subsequent to December
31, 1998, both the Juarez and the Matamoros facilities were shut down. Melrose
Park production has ceased as well. Although the company continues to operate
its Chihuahua, Mexico facility, it is seeking a buyer for the entire Network
Systems business, which this facility supports. Thus, the Chihuahua property,
plant, and equipment is also considered held for disposal. See Note Nine for
the results of operations for the Networks Systems business. The carrying
value of property, plant, and equipment related to all of the assets held for
disposal is $43.0 million. The only manufacturing facilities to be used by the
company to produce its 1999 product line will be the company's Chihuahua and
Reynosa, Mexico facilities. This latter facility will be transferred to LGE
upon consummation of the prepackaged plan of reorganization in exchange for
the cancellation of certain of the company's obligations to LGE. The Reynosa
facility will be transferred to LGE at its fair value, which approximates the
company's current carrying value.
Impairment losses were calculated based on the excess of the carrying amount
of assets over the assets' fair values. The fair values used in determining
impairment losses were based upon management's estimates of
F-12
<PAGE>
expected sales proceeds and third-party appraisals and valuations, including
management and third party estimates of potential environmental liabilities.
The fair value estimates considered whether the assets are expected to be sold
as going-concern operations or under orderly liquidation. Previously, the fair
value estimates for these assets reflected the company's continued use of the
assets. The change in fair value estimates was due to the company's commitment
to dispose of certain assets and resulted in the additional impairment charge
incurred during the fourth quarter of 1998.
The company plans to dispose of all of these assets during 1999, by either
selling portions of operations, properties, equipment, and inventories as
going concerns, by selling individual assets located at the facilities, or by
permanently idling assets to the extent that they remain unsold.
The impairment charges discussed above are based upon management and third
party estimates of the recoverability of long-lived assets and the fair value
of related assets. It is reasonably possible that the estimates of the
recoverability of long-lived assets and the fair value may change as new
information becomes available and circumstances change.
It is anticipated that the implementation of the company's operational
restructuring plan will result in the termination, at a cost of $22.9 million,
of approximately 4,200 employees by December 31, 1999, primarily at the
company's manufacturing facilities. During 1998, the Company terminated
approximately 2,500 of these employees. These terminations resulted in
expenditures of $7.5 million in 1998, with $15.4 million remaining to be paid
in 1999. Additionally, during 1998, the company incurred expenditures of $1.9
million to retain key management employees throughout the operational
restructuring process.
Included in the total $18.8 million of plant closure and business exit costs
are $5.8 million of plant costs at the Melrose Park, Illinois facility
incurred to maintain the property subsequent to the cessation of manufacturing
activities. In addition, plant closure and business exit charges reflect $2.1
million of legal costs, $2.1 million of duty payments related to plant
equipment in Mexico that the company is selling or disposing of and a $1.5
million charge for the early termination of various leases. An additional
charge of $2.9 million was incurred for payments given to Melrose Park
employees to stabilize employment and maintain production after the
announcement of the plant closure. Plant closure and business exit costs also
included a $2.9 million charge related to management salaries and labor costs
associated with the closure of the facilities and $1.5 million of other
exit/plant closure costs. The company has incurred cash outlays of $3.8
million in 1998 of plant closure and business exit costs, and the company
expects to incur additional cash outlays of $16.0 million in 1999 and 2000, of
which $15.0 million was accrued as of December 31, 1998.
The $11.5 million charge for professional fees reflects work performed by
outside professionals to support the development of the company's operational
and financial restructuring plans.
The company did not incur any restructuring costs during 1997.
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. A summary of the restructuring reserve activity
related to the restructuring is as follows:
<TABLE>
<CAPTION>
Restructuring Restructuring
Reserve at Asset Reserve at
December 31, Write- Cash Reserve December 31,
1996 off Payments Release 1997
------------- ------ -------- ------- -------------
In millions
<S> <C> <C> <C> <C> <C> <C>
Severance costs......... $5.2 $ -- $(5.2) $ -- $--
Canadian distributorship
shutdown............... 4.1 (0.3) (2.7) (1.1) --
---- ----- ----- ----- ----
Total restructuring
charges................ $9.3 $(0.3) $(7.9) $(1.1) $--
==== ===== ===== ===== ====
</TABLE>
F-13
<PAGE>
Note Eight--Income Taxes: The components of income taxes (credit) were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1998 1997 1996
------- -------- -------
In millions
<S> <C> <C> <C>
Currently payable (refundable):
Federal............................................ $ -- $ 0.1 $ --
State, local and foreign........................... 3.0 (0.9) 0.2
------- -------- -------
Total income taxes (credit).......................... $ 3.0 $ (0.8) $ 0.2
======= ======== =======
</TABLE>
The statutory federal income tax rate and the effective tax rate are
compared below:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate............... (35.0)% (35.0)% (35.0)%
Foreign tax effects............................. 1.1 2.2 1.0
Tax benefits not recognized subject to future
realization.................................... 35.0 32.8 34.0
------- ------- -------
Effective tax rate.............................. 1.1 % (--)% (--)%
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997
----------- -----------
In millions
<S> <C> <C>
Loss carryforwards.................................... $ 398.8 $ 353.5
Inventory valuation................................... 15.6 22.6
Transferor certificate valuation reserve.............. -- 14.6
PP&E/restructuring valuation reserve.................. 48.4 22.9
Product warranty...................................... 8.7 9.4
Co-op advertising..................................... -- 3.7
Merchandising......................................... 7.1 2.6
Bad debt reserves..................................... 18.5 --
Disallowed interest................................... 19.8 --
Other................................................. 42.9 35.6
----------- -----------
Deferred tax assets................................. 559.8 464.9
----------- -----------
Depreciation.......................................... 9.5 3.4
Other--State, Local and Foreign....................... 4.2 (1.3)
----------- -----------
Deferred tax liabilities............................ 13.7 2.1
----------- -----------
Valuation allowance................................... (546.1) (462.8)
----------- -----------
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, 1998, the company had $942.8 million of total net
operating loss carryforwards (NOLs) available for federal income tax purposes
(which expire from 2004 through 2018) 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)
F-14
<PAGE>
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--Segment and Geographic Data: The company adopted FAS 131--
Disclosures about Segments of an Enterprise and Related Information-- as of
December 31, 1998. This statement established new disclosure requirements
related to operating and geographic segments.
Financial information, summarized by segment, is as follows:
<TABLE>
<CAPTION>
Consumer Network Corporate
Electronics Systems and Other Consolidated
----------- ------- --------- ------------
In millions
<S> <C> <C> <C> <C> <C>
1998
Net sales..................... $ 878.7 $106.1 $ -- $ 984.8
Restructuring charges......... 170.2 7.9 24.2 202.3
Depreciation.................. 27.3 3.6 0.3 31.2
Profit (loss) before income
taxes........................ (200.0) (5.2) (67.3) (272.5)
Capital additions............. 4.7 2.7 1.0 8.4
1997
Net sales..................... $1,115.8 $ 56.9 $ 0.4 $1,173.1
Asset impairments............. 63.7 -- -- 63.7
Depreciation.................. 36.4 4.0 (2.4) 38.0
Profit (loss) before income
taxes........................ (215.4) (14.9) (69.9) (300.2)
Capital additions............. 70.2 10.2 2.1 82.5
</TABLE>
Financial information, summarized by segment, is not presented for 1996 nor
is total assets for any year, as it is impracticable to do so as the necessary
information is not available and the cost to develop it would be excessive. It
should be noted that in the 1998 and 1997 information presented, certain costs
such as interest and administrative costs are not allocated to the Consumer
Electronics or Network Systems segments. These unallocated costs are reported
above in the Corporate and Other column.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1998 1997 1996
------ -------- --------
In millions
<S> <C> <C> <C>
Net sales (1):
Domestic companies............................... $965.1 $1,144.9 $1,221.4
Foreign companies................................ 19.7 28.2 66.5
------ -------- --------
Total net sales.................................. $984.8 $1,173.1 $1,287.9
====== ======== ========
Long-lived assets:
Domestic companies............................... $ 21.5 $ 99.9 $ 156.4
Foreign companies................................ 98.0 114.6 133.8
------ -------- --------
Total long-lived assets.......................... $119.5 $ 214.5 $ 290.2
====== ======== ========
</TABLE>
- --------
(1) Net sales are attributed to countries based on location of customer.
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.
F-15
<PAGE>
Sales to a single customer, Circuit City Stores, Inc., amounted to $131.2
million (13 percent) in 1998, $138.6 million (12 percent) in 1997, and $187.2
million (15 percent) in 1996. Sales to a second customer, Sears, Roebuck and
Company, accounted for $102.7 million (10 percent) in 1998, $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
televisions and VCRs agreed during 1992 to take licenses under some of the
company's U.S. tuner system patents (the licenses expire in 2003). Also in
1998, due to a change in distribution strategy, certain VCR's are sold
directly by the manufacturer (LGE) rather than through the company's direct
sales organization; the company receives a royalty for these sales.
Other Operating expense (income) consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
In millions
<S> <C> <C> <C>
Royalty income--tuner system patents............. $ (35.1) $ (26.0) $ (26.6)
Royalty income--VCR direct ship.................. (1.5) -- --
Royalty income--other............................ (1.9) (2.4) (2.3)
Bank fees........................................ 3.7 6.2 1.7
Asset impairment charge.......................... -- 63.7 --
Other............................................ (8.2) 0.9 0.9
------- ------- -------
Total other operating expense (income)........... $ (43.0) $ 42.4 $ (26.3)
======= ======= =======
</TABLE>
Note Eleven--Inventories: Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31
------------
1998 1997
----- ------
In millions
<S> <C> <C>
Raw materials and work-in-process.............................. $47.1 $ 96.9
Finished goods................................................. 37.1 68.6
----- ------
Total inventories.............................................. $84.2 $165.5
===== ======
</TABLE>
Note Twelve--Transferor certificates: The Financial Accounting Standards
Board issued FAS No. 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 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 represented the company's retained interest in the
pool of receivables that were sold by the company to a special-purpose trust,
but that could not or had not been sold to outside investors in the commercial
paper market via a multi-seller conduit pursuant to the trade receivables
securitization agreement. The transferor certificates were classified as
current held-to-maturity securities and matured 30 to 60 days from the date of
acquisition. Outside investors held investor certificates which evidenced
their ownership of a portion of the assets contained in the special multi-
purpose trust. Transferor certificates were valued at historical cost which
reasonably approximated their fair value. This cost approximated 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 No. 125.
During the third quarter of 1998, the company's trade receivables
securitization was terminated. As a result, the company's December 31, 1998
financial statements reflect the following: (i) receivables, net of allowance
for doubtful accounts, are no longer sold and transferor certificates do not
exist; and (ii) a non-cash restructuring charge of $3.9 million was made to
write-off deferred charges (bank, attorney and guarantee fees) related to the
receivable securitization.
F-16
<PAGE>
Note Thirteen--Property, Plant and Equipment: Property, plant and equipment
consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------
1998 1997
------- -------
In millions
<S> <C> <C>
Land....................................................... $ 2.1 $ 8.4
Buildings.................................................. 122.5 147.9
Machinery and equipment.................................... 645.9 640.9
------- -------
770.5 797.2
Less accumulated depreciation.............................. (573.6) (562.0)
Less valuation reserve..................................... (103.7) (58.4)
------- -------
Total property, plant and equipment, net................... $ 93.2 $ 176.8
======= =======
</TABLE>
In 1998, the company recorded a $16 million gain related to the sale of its
headquarters building in Glenview, Illinois.
At December 31, 1998 and 1997, the company reclassed $43.0 million and $5.7
million, respectively, of property held for disposal out of Property, plant
and equipment into noncurrent assets. The reclassed amounts are net of
applicable valuation reserves. See Note Seven for further discussion of the
property held for disposal.
Note Fourteen--Sale-Leaseback Transaction: In April 1997, the company
entered into an $86.6 million sale-leaseback transaction whereby the company
sold and leased back new and existing manufacturing equipment in its Melrose
Park, Illinois, 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 was being amortized over the 12 1/2-year lease term.
The detail of the transaction by location is as follows (in millions):
<TABLE>
<CAPTION>
Melrose
Park Reynosa Juarez
------- ------- ------
<S> <C> <C> <C>
Cash proceeds......................................... $66.0 $12.0 $8.6
Carrying value........................................ 60.0 8.7 7.7
Deferred gain......................................... 6.0 3.3 0.9
</TABLE>
The related lease was being accounted for as an operating lease. The rental
expense under this lease in 1998 and 1997 was $5.9 million (for seven months)
and $8.1 million (for nine months), respectively.
As discussed in Note Six, the company issued options to LGE with a fair
value of $39.0 million in return for LGE providing support for certain
financing activities of the company. Included in this support from LGE was a
guarantee of the company's payment obligation on the sale-leaseback
transaction. Approximately $30.0 million of the option value is related to the
lease obligation and this value was being amortized over the life of the
lease.
As discussed above, the company's payment obligations, along with certain
other items under the lease agreement were fully guaranteed by LGE. The sale-
leaseback agreement contained financial penalties which would be triggered if
the company were to terminate the lease early. The amounts the company would
be required to pay were based upon stipulated loss values, and tax-benefit and
investment opportunity losses.
During 1998, as a part of the operational restructuring, the company
determined it would be idling a substantial portion of the equipment subject
to the leaseback, thereupon causing an event of default under the lease.
Following negotiations with the lessor and its lenders, in July 1998, LGE made
a negotiated settlement payment of $90.1 million under its guarantee of the
company's obligation. The company has estimated that its obligation without
the negotiated settlement exceeded $97 million. As a result of its guarantee
payment, full ownership interests in the lessor were transferred to LGE, and
LGE currently holds indirect title to the leased equipment.
The company is obligated under documents related to the lease for the
repayment of this settlement amount to LGE. As a result, the company's
December 31, 1998 financial statements reflect a $90.1 million Short-term
F-17
<PAGE>
debt with LGE, a $21.3 million Receivable from LGE , and a loss on termination
of the lease of $68.8 million. The company is no longer making cash payments
against the lease, but is accruing an interest expense obligation to LGE for
this $90.1 million liability. The $21.3 million receivable from LGE represents
the appraised fair value of the manufacturing equipment receivable from LGE.
The appraised value of the equipment is significantly less than the original
investment value, as reflected by the restructuring loss recognized in the
third quarter of 1998. The reasons for the loss of value are related both to
the products produced and to global economic changes. Lower demand and market
prices decreased the potential investment return and the potential price for
the equipment as an integrated system. Additionally, due to a decrease, versus
the dollar, in the value of the local currencies where such equipment is
produced, the current dollar price of new equipment is now substantially less
than that at the time of the company's purchase. In addition, the financial
statements reflect a non-cash restructuring charge of $28.3 million to write
off deferred charges (bank, attorney and guarantee fees) related to the lease,
offset by a non-cash restructuring gain of $9.1 million which represents the
accelerated amortization of the deferred gain on the 1997 sale of the assets
into the lease.
Note Fifteen--Short-term Debt and Credit Arrangements: Between November 1997
and February 1998, the company entered into a series of new financing
transactions designed to enhance the company's liquidity and financial
flexibility. The company obtained a total of $110 million in unsecured and
uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), First Chicago NBD ($30 million), Societe Generale ($20
million) and Credit Agricole ($30 million). 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 is entitled to receive
a fee in an amount up to 2 percent of the outstanding amount of the loans. As
of December 31, 1998, only the Credit Agricole loan remains outstanding in the
amount of $30.0 million. During the second and third quarter of 1998, LGE made
payments under demands against guarantees on $72.0 million of the facilities
and the company is obligated to LGE for these payments plus interest. The
company's obligations to LGE are secured by a second lien on certain assets of
the company.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. As of December 31, 1998,
$30.0 was outstanding under this facility. See Note Six for further
discussion.
During the third quarter of 1998, the company's existing Citicorp credit
facility (initially composed of a $45.0 million amortizing term loan and a
$65.0 million revolving credit line) was amended and restated. The amended
Citibank credit facility provides for up to $125 million of revolving loans,
subject to borrowing base restrictions. The revolving loans must be repaid on
or before the earlier of (a) the company's court filing for a pre-packaged
plan of reorganization or (b) April 30, 1999 (as amended). In addition, the
company is required to make repayments: (i) to the extent of the excess of
borrowings over the borrowing base and (ii) with the proceeds of most sales of
capital stock or assets. The obligations of the company under the amended
Citibank credit facility are secured by certain of the company's assets. The
amended Citibank credit facility requires the company, among other things, to
meet certain financial tests regarding the amount of tuner patent royalties
and the average outstanding payable to LGE for products purchased in the
ordinary course of business. The facility also contains covenants which, among
other things, restrict the ability of the company and its subsidiaries to
incur indebtedness, issue guarantees, incur liens, declare dividends or pay
management or consulting fees to affiliates, make loans and investments,
engage in transactions with affiliates, liquidate, sell assets or engage in
mergers. Interest on borrowings is based on market rates. As of December 31,
1998, the outstanding balance on the facility was $17.8 million.
Borrowings and interest rates on short-term debt were:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
In millions
<S> <C> <C> <C>
Maximum month-end borrowings..................... $ 299.9 $ 72.0 $ 72.6
Average daily borrowings......................... 182.5 26.4 18.3
Weighted average interest rate................... 8.5% 9.1% 8.8%
</TABLE>
F-18
<PAGE>
Note Sixteen--Long-term Debt: The components of long-term debt were as
follows:
<TABLE>
<CAPTION>
December 31
-------------
1998 1997
------ ------
In millions
<S> <C> <C>
6 1/4 percent convertible subordinated debentures due 2011... $103.6 $109.3
8.5 percent senior subordinated convertible debentures due
2001........................................................ -- 0.5
Term Loan.................................................... -- 38.3
------ ------
103.6 148.1
Less current portion......................................... 5.8 15.3
------ ------
Total long-term debt....................................... $ 97.8 $132.8
====== ======
</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. The debentures have been classified in the accompanying balance
sheet as long-term based upon the company's intention that under the terms of
the prepackaged plan, the $103.6 million of 6 1/4 percent convertible
subordinated debentures outstanding at December 31, 1998, will be replaced by
$50 million of 8.19 percent subordinated debentures due 2009. See Note Two.
The Company has determined not to make the April 1, 1999 sinking fund and
interest payments on the subordinated debentures. See Note Twenty Two.
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.
The fair value of long-term debt is $17.6 million as of December 31, 1998,
as compared to the carrying amount of $97.8 million. The fair value of the 6
1/4 percent convertible subordinated debentures is based on the quoted market
price from the Over-The-Counter Market. As of December 31, 1998, the company's
Credit Agreement 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, 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)
Restricted stock issued.......................... .5 (.5) --
----- ------ -----
Balance, December 31, 1998....................... $67.6 $506.8 $(1.7)
===== ====== =====
</TABLE>
F-19
<PAGE>
During 1997, the company entered into certain transactions with LGE that
affected additional paid in capital. These transactions dealt with the
granting of stock options and donated services. See Note Six for further
discussion of these items.
Under the terms of the prepackaged plan, if approved, all of the shares of
common stock, including shares held by LGE, will be canceled and the holders
thereof will receive no distribution and retain no property on account of such
equity interests.
The company has authorized 8 million shares of preferred stock of which none
are issued or outstanding as of December 31, 1998. The Board of Directors of
the company is authorized to issue the preferred stock from time to time in
one or more series and to determine all relevant terms of each such series,
including but not limited to the following: (i) whether and upon what terms,
the shares of such series would be redeemable; (ii) whether a sinking fund
would be provided for the redemption of the shares of such series and, if so,
the terms thereof; and (iii) the preference, if any, to which shares of such
series would be entitled in the event of voluntary or involuntary liquidation
of the company.
Note 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, restricted stock awards and stock appreciation rights
to key management personnel. The purchase price of shares under option is the
market price of the shares on the date of grant. Options expire ten 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 loss and
loss per share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
In millions, except per
share amount
<S> <C> <C> <C>
Net loss:
As reported.................................... $(275.5) $(299.4) $(178.0)
Pro forma...................................... (277.7) (301.1) (179.1)
Loss per basic and diluted share:
As reported.................................... $ (4.08) $ (4.49) $ (2.73)
Pro forma...................................... (4.11) (4.52) (2.75)
</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, 1998, 1997 and 1996, and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
Employees
---------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
January 1................ 1,506 $10.66 968 $ 9.91 2,588 $ 8.25
Options granted........... 404 5.83 952 11.10 456 12.54
Options exercised......... -- -- (154) 7.80 (1,889) 8.33
Options canceled.......... (307) 10.29 (260) 11.20 (187) 9.30
----- ----- ------
Options outstanding at De-
cember 31................ 1,603 $ 9.44 1,506 $10.66 968 $ 9.91
===== ===== ======
Options exercisable at De-
cember 31................ 715 $10.17 486 $ 9.05 427 $ 8.27
Shares available for grant
at December 31........... 1,243 1,340 1,329
</TABLE>
F-20
<PAGE>
Non-employee stock options (3,965,000 shares at $0.01 per share) were
granted to LGE during 1997. At December 31, 1997 and 1998, 3,965,000 and
1,746,000 options remained outstanding, respectively; 793,000 and 1,746,000
options were exercisable at December 31, 1997 and 1998, respectively. The
remainder of LGE's stock options were canceled upon the termination of the
leveraged lease. See Note Six and Note Fourteen for further discussion.
Of the employee options outstanding at December 31, 1998, 865,650 had
exercise prices between $5.56 and $11.00, with a weighted average exercise
price of $7.27 and a weighted average remaining contractual life of 7.46
years. The remaining 737,750 had exercise prices between $11.13 and $14.75,
with a weighted average exercise price of $11.98 and a weighted average
remaining contractual life of 8.07 years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model, using the following assumptions:
weighted average risk-free interest rates of 5.01 percent, 5.76 percent and
6.25 percent for grants in 1998, 1997, and 1996, respectively; zero expected
dividend yields, and expected volatility of 388.95 percent for 1998, 43.69
percent for 1997 and 62.35 percent for 1996. A 3.5 year estimated life was
used for all employee grants. The weighted average fair value of employee
options granted during 1998, 1997 and 1996 was $5.93, $11.16 and $13.93,
respectively. The employee options will be canceled under the prepackaged
plan, if approved.
Restricted stock awards: The company had 734,500 and 234,500 restricted
stock awards issued and outstanding as of December 31, 1998 and 1997,
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. Total compensation expense in 1998, 1997 and 1996,
related to these awards, was not material. The restricted stock awards will
also be canceled under the prepackaged plan, if approved.
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'
contributions 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 $6.9 million, $7.8 million and $8.6 million in 1998, 1997
and 1996, respectively. The company's 1997 contribution to the retirement
plans was made during 1998. The company's 1996 and 1995 contributions to the
retirement plans were partially funded through the issuance of approximately
466,500 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.
Note Twenty--Loss Per Share: In accordance with FAS No. 128--Earnings Per
Share,--the company computed basic loss per share by dividing net loss by the
weighted average number of shares of common stock outstanding during the year.
Diluted loss per share, assuming conversion of the 6 1/4 percent convertible
subordinated debentures, the 8.5 percent Senior Subordinated Convertible
Debentures due 2001 (redeemed in January 1998) and the 8.5 percent Senior
Subordinated Convertible Debentures due 2000 (redeemed in December 1997) and
outstanding stock options, are not presented because the effect of the assumed
conversion is antidilutive.
<TABLE>
<CAPTION>
For the Year Ended
-------------------------
1998 1997 1996
------- ------- -------
In millions, except per
share amounts
<S> <C> <C> <C>
Net loss......................................... $(275.5) $(299.4) $(178.0)
Weighted average common shares outstanding....... 67.5 66.6 65.2
Basic and diluted loss per share................. $ (4.08) $ (4.49) $ (2.73)
</TABLE>
Note Twenty One--Contingencies: Summarized below are significant legal
matters to which the company is a party. There is a range of possible outcomes
for all legal matters in which the company is involved.
F-21
<PAGE>
With the exception of the matters discussed below, the company does not
believe any of the other legal matters are reasonably likely to have a
material adverse effect on the company. The company's belief is based on the
amounts involved and the types of litigation.
In June 1998, Funai Electric Co., Ltd., 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 also sought 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 and
has also denied plaintiff's motion for a preliminary injunction. 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. In December 1998, the suit was amended to name the company, a former
director and chief executive officer of the company, LGE, LG Semicon and LG
Group as additional defendants. The suit alleges breach of fiduciary duties
and violation of securities laws by the defendants arising out of certain
alleged misstatements that "artificially inflated" the price of the common
stock. The plaintiff seeks to be certified as a class representative and the
suit designated as a class action. In addition to money damages, the suit also
seeks to enjoin the defendants from commencing the prepackaged Chapter 11 case
and proceeding with the cancellation of the common stock held by minority
shareholders.
Note Twenty Two--Subsequent Events: The company ceased production in its
Melrose Park manufacturing facility in March 1999, and is currently in the
process of decommissioning this facility. The company has entered into two
agreements with Philips Electronics North American Corporation ("Philips").
One is for the sale of certain manufacturing equipment located at the
company's Melrose Park facility, and the second is for the purchase by the
company of color picture tubes. Philips will provide credits against the
picture tubes purchase over a three-year period in exchange for (i) the
manufacturing equipment and (ii) the company's entering into the contract to
purchase the picture tubes. The expected credits ranged from $17.2 to $23.9
million depending upon the picture tube volume required by the company and/or
its contract manufacturers. The volume of purchase is dependent upon customer
demand and sales volumes. The company shall have no right to use the credits
after the expiration or termination of the purchase agreement.
A substantial portion of the equipment purchased by Philips was owned, under
a leveraged lease, by an owner trust controlled by LGE as a result of LGE's
payment under its guarantees of the company's obligations under the lease. The
company purchased the equipment from the trust immediately prior to the sale
to Philips in exchange for a substantial portion of the credits.
The company sold the electron gun operations at its Matamoros, Tamaulipas,
Mexico facility as an ongoing business to a third party in February 1999, for
$4.4 million, less escrowed amounts. The company expects that the balance of
the equipment at this location will be liquidated or scrapped.
On March 31, 1999, the company entered into a Commitment Letter (the
"Commitment") with Citicorp North America, Inc. pursuant to which Citicorp
North America, Inc. agreed to provide up to $150 million of debtor-in-
possession financing during the pendency of the company's bankruptcy
proceeding and agreed to provide a new three-year $150 million credit facility
following completion of the company's bankruptcy proceeding, subject in each
case to borrowing base restrictions. The new facilities will be secured by
certain of the company's assets, including inventory, receivables, fixed
assets and intellectual property, and will be subject to other terms and
conditions. The Commitment is subject to the completion of definitive
documentation and other conditions and provides for interest on borrowings
based on specified margins above LIBOR or the prime rate.
The new credit facilities will be in addition to the $60 million post-
restructuring credit support to be provided by LGE to the company pursuant to
the terms of the restructuring agreement between the parties.
F-22
<PAGE>
The company has determined not to make the April 1, 1999 sinking fund and
interest payments on its subordinated debentures due 2011. The company's
failure to make such payments on April 1, subject to grace periods (if any)
provided in the indenture, constitutes a default under the indenture relating
to the subordinated debentures.
The lenders under the Citicorp credit facility waived the cross default
under the credit facility related to the company's failure to make the
payments on the subordinated debentures. In addition, LGE waived the cross
default under the Note Agreement between LGE and the company and certain
related security documents related to the company's failure to make the
payments on the subordinated debentures.
On March 29, 1999, the company was advised by LGE that LGE had received
Korean regulatory approval to permit LGE to consummate the transactions set
forth in the restructuring agreement between the company and LGE, including
authorization for LGE to provide the company with $60 million of post-
restructuring credit support, on the terms and conditions of the restructuring
agreement.
On March 31, 1999, the company, LGE and an ad hoc committee of holders of
the company's 6 1/4% Convertible Subordinated Debentures due 2011 reached an
agreement with respect to the terms of the company's proposed prepackaged plan
of reorganization. The ad hoc committee is comprised of Loomis Sayles &
Company, Mariner Investment Group and Caspian Capital Partners, L.L.P. (the
"Debenture Committee"). The members of the Debenture Committee have
represented to the company that they collectively hold or control over 50% of
the outstanding principal amount of the subordinated debentures.
The company, LGE and the Debenture Committee have agreed to the terms of the
proposed restructuring of the subordinated debentures. The parties have
agreed, among other things, that under the prepackaged plan, if approved,
holders of the subordinated debentures will receive a pro rata distribution of
$50 million of new 8.19 percent subordinated debentures of the company due
2009. The Debenture Committee has agreed to support confirmation of the
company's prepackaged plan, and has agreed to forbear from enforcement of any
defaults that might occur with respect to the subordinated debentures until
the prepackaged plan is confirmed. The agreement also contains other customary
provisions.
F-23
<PAGE>
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, 1998 and 1997, and the related statements of consolidated
operations and retained earnings (deficit) and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, 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 its ability to continue as a going concern.
Management's plans in regard 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 4, 1999
(except with respect to the
matters discussed in Note
Twenty Two, as to which the
date is March 31, 1999)
F-24
<PAGE>
INDEX TO FINANCIAL
STATEMENT SCHEDULES
<TABLE>
<S> <C>
Report of Independent Public Accountants on Financial Statement Schedule... S-2
Schedule II--Valuation and Qualifying Accounts............................. S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders of Zenith Electronics Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Zenith Electronics
Corporation's annual report to stockholders included in this Amendment No. 3
to Registration Statement on form S-4, and have issued our report thereon
dated March 4, 1999 (except with respect to the matters discussed in Note
Twenty Two, as to which the date is March 31, 1999). Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
financial statement schedule is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
-------------------------------------
Arthur Andersen LLP
Chicago, Illinois March 4, 1999
S-2
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(Amounts in millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ----------------------- ---------- ----------
Additions
-----------------------
Balance at Charged Balance at
Reserves and allowances beginning to costs Charged to end of
deducted from asset accounts of period & expenses other accts. Deductions period
- ---------------------------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year Ended December
31, 1998........... $ -- $ 9.5 $33.9(1) $ 1.4(3) $ 42.0
====== ====== ===== ====== ======
Year Ended December
31, 1997........... $ 6.2 $ -- $ -- $ 6.2(2) $ --
====== ====== ===== ====== ======
Year Ended December
31, 1996........... $ 3.6 $ 5.2 $ -- $ 2.6(3) $ 6.2
====== ====== ===== ====== ======
Valuation allowance
for deferred tax as-
sets:
Year Ended December
31, 1998........... $462.8 $ 83.3 $ -- $ -- $546.1
====== ====== ===== ====== ======
Year Ended December
31, 1997........... $310.5 $152.3 $ -- $ -- $462.8
====== ====== ===== ====== ======
Year Ended December
31, 1996........... $188.3 $122.2 $ -- $ -- $310.5
====== ====== ===== ====== ======
Reserve for restruc-
turing costs:
Year Ended December
31, 1998........... $ -- $202.3 $ -- $171.0(4) $ 31.3
====== ====== ===== ====== ======
Year Ended December
31, 1997........... $ 9.3 $ -- $ -- $ 9.3(5) $ --
====== ====== ===== ====== ======
Year Ended December
31, 1996........... $ -- $ 9.3 $ -- $ -- $ 9.3
====== ====== ===== ====== ======
</TABLE>
- --------
(1) Amount required upon cancellation of receivable securitization agreement.
(2) Amount sold under accounts receivable securitization agreement.
(3) Uncollectable accounts written off, net of recoveries.
(4) Includes $144.6 million asset write-off and $26.4 million cash payment.
(5) Includes $7.9 million cash payment, $0.3 million asset write-off and $1.1
million reserve release.
S-3
<PAGE>
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:
Chapter 11
ZENITH ELECTRONICS CORPORATION,
Debtor. Case No. 99- ( )
- ----------------------------------
- -------------------------------------------------------------------------------
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
- -------------------------------------------------------------------------------
James H.M. Sprayregen
Matthew N. Kleiman
Anup Sathy
KIRKLAND & ELLIS
200 E. Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
Counsel to
ZENITH ELECTRONICS CORPORATION,
debtor and debtor-in-possession
Dated: [ ]
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <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............................... 9
A. Administrative Claims............................................ 9
B. Priority Tax Claims.............................................. 9
ARTICLE III.
CLASSIFICATION AND TREATMENT OF CLASSIFIED CLAIMS AND EQUITY
INTERESTS........................................................... 9
A. Summary.......................................................... 9
B. Classification and Treatment..................................... 12
C. Special Provision Governing Unimpaired Claims.................... 14
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
Continued Corporate Existence and Vesting of Assets in the
A. Reorganized Debtor............................................... 15
Cancellation of Notes, Instruments, Debentures, Common Stock and
B. Stock Options.................................................... 16
C. Issuance of New Securities; Execution of Related Documents....... 16
Corporate Governance, Directors and Officers, and Corporate
D. 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
Claims Based on Rejection of Executory Contracts or Unexpired
B. Leases........................................................... 17
Cure of Defaults for Executory Contracts and Unexpired Leases
C. 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
Distributions by the Reorganized Debtor; Distributions with
B. Respect to Debt Securities....................................... 18
Delivery and Distributions and Undeliverable or Unclaimed
C. Distributions.................................................... 18
D. Distribution Record Date......................................... 18
E. Timing and Calculation of Amounts to be Distributed.............. 20
F. Minimum Distribution............................................. 20
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
G. Setoffs............................................................ 20
H. Surrender of Canceled Instruments or Securities.................... 20
I. Lost, Stolen, Mutilated or Destroyed Debt Securities............... 20
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...................... 22
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............................. 23
A. Subordination...................................................... 23
B. Limited Releases by the Debtor..................................... 23
C. Limited Releases by Holder of Claims............................... 23
D. Preservation of Rights of Action................................... 23
E. Exculpation........................................................ 24
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............................................. 26
G. Reservation of Rights.............................................. 26
H. Section 1146 Exemption............................................. 26
I. Further Assurances................................................. 26
J. Service of Documents............................................... 26
K. Filing of Additional Documents..................................... 26
</TABLE>
A-3
<PAGE>
- -------------------------------------------------------------------------------
PREPACKAGED PLAN OF REORGANIZATION
OF ZENITH ELECTRONICS CORPORATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
- -------------------------------------------------------------------------------
Pursuant to title 11 of the United States Code, 11 U.S.C. (S)(S) 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 shall 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, shall mean 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
A-4
<PAGE>
charges assessed against the Estate under chapter 123 of title 28 United
States Code, 28 U.S.C. (S)(S) 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; (c) 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 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; (d) a Claim relating to a rejected executory contract or 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
(e) 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 Lender arising from
or relating to the Bank Loan.
9. "Bank Lender" means Credit Agricole Indosuez, Seoul Branch.
10. "Bank Loan" means the financial accommodations provided by the Bank
Lender to the Corporation, including, but not necessary limited to,
pursuant to 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. (S) 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.
A-5
<PAGE>
15. "Beneficial Holder" means the Person or Entity holding the beneficial
interest in a Claim or Equity Interest.
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
A-6
<PAGE>
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. These claims include, but are not limited, to any
accrued but unpaid interest on the LGE Leveraged Lease Claims and the LGE
Reimbursement Claims.
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 time, including, but
not limited to, that certain Participation Agreement dated as of March 26,
1997 by
A-7
<PAGE>
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 Guarantee" means the guarantee from LGE to the Bank Lender
issued in connection with the Bank Loan.
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 Guarantee.
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; but excluding any accrued but unpaid interest related thereto.
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.
A-8
<PAGE>
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 Guarantee, other than the LGE Guaranty Fee Claims; but excluding
any accrued but unpaid interest related thereto.
63. "LGE New Restructured Senior Note" means that certain new note in a
principal amount equal to the aggregate amount of the LGE Tranche A Claims
minus the amount of the LGE Leveraged Lease Claims exchanged for the
Reynosa Assets, bearing interest at LIBOR plus 6.5%, and maturing on
November 1, 2009 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.
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, (b) the
LGE Technical Services Fee Claims, and (c) 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 Guaranty Fee Claims,
and (d) the LGE Demand Loan Claims in an amount sufficient when aggregated
with the Claims described in items (a) through (c) to equal $200,000,000.
67. "Master Ballots" mean the master ballots accompanying the Disclosure
Statement upon which Holders of Impaired Claims shall indicate the
acceptance or rejection of the Plan in accordance with the Voting
Instructions.
68. "New Bank Lender Note" means that certain term note issued by the
Reorganized Debtor to be distributed to the Holder 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 Debentures" means those certain $50,000,000 of new 8.19%
Debentures due November 1, 2009 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.
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.
A-9
<PAGE>
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. "Prepetition Committee" means that certain ad hoc committee of
Holders of Old Subordinated Debentures composed of Loomis, Sayles &
Company, L.P., Mariner Investment Group, and Caspian Capital Partners,
L.L.P., and all attorneys, financial advisors, accountants, investment
bankers, agents and representatives of such committee in such capacity.
82. "Priority Tax Claim" means a Claim of a governmental unit of the kind
specified in section 507(a)(8) of the Bankruptcy Code.
83. "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.
84. "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.
85. "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.
86. "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.
87. "Restructuring Agreement" means that certain Restructuring Agreement
dated as of August 7, 1998 by and between the Debtor and LGE (as amended on
November 16, 1998 and as thereafter amended and supplemented from time to
time), a copy of which is set forth as an exhibit to the Disclosure
Statement.
88. "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.
89. "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.
90. "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.
91. "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 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.
A-10
<PAGE>
92. "Securities Act" means the Securities Act of 1933, 15 U.S.C. sections
77a-77aa, as now in effect or hereafter amended.
93. "Unimpaired Claim" means an unimpaired Claim within the meaning of
section 1124 of the Bankruptcy Code.
94. "Unimpaired Class" means an unimpaired Class within the meaning of
section 1124 of the Bankruptcy Code.
95. "Unsecured Claim" means any Claim against the Debtor that is not a
Secured Claim, Administrative Claim, Priority Tax Claim or Other Priority
Claim.
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.
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
A-11
<PAGE>
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>
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.
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.
A-12
<PAGE>
(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 the Holder of Bank
Lender Claims.
(b) Treatment: On the Effective Date, unless the Holder of such Claims
and the Debtor agree to a different treatment, the Holder of the Bank
Lender Claims shall receive the New Bank Lender Note in full satisfaction
of its Claims.
(c) Voting: Class 4 is impaired and the Holder of Allowed Class 4 Claims
is 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;
(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.
A-13
<PAGE>
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 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 8 is not entitled to vote to
accept or reject the Plan.
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.
A-14
<PAGE>
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
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
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.
A-15
<PAGE>
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 Note, the New 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 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
A-16
<PAGE>
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.
A-17
<PAGE>
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 Note, the New 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.
A-18
<PAGE>
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
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
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. The Company will file with
the Bankruptcy Court, from time to time, a listing of the Holders of unclaimed
distributions. This list will be maintained until the entry of an order and/or
final decree concluding the Prepackaged Chapter 11 Case. 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 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
A-19
<PAGE>
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.
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 Debentures will be issued in denominations of $1,000 and integral
multiples thereof. No New 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 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 Debentures each such Holder would have been entitled to receive
or deemed to hold had the Company issued New 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 Note, New 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
A-20
<PAGE>
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 Reorganized Debtor or its respective
property. In such cases, any New 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.
A-21
<PAGE>
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.
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 an amount not less than $150 million and on such
terms and conditions as set forth in the Restructuring Agreement;
4. all conditions precedent to the "Closing," as defined in the
Restructuring Agreement, shall have been satisfied or waived pursuant to
the terms thereof; and
5. no more than 5% of the Holders of Claims in Class 6 shall have marked
Item 5 of the Ballot so as not to consent to Article X.C. of the Plan.
C. Waiver of Conditions
Other than the condition precedent to Consummation set forth in Article
IX.B.3, IX.B.4 and IX. B.5, 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.
A-22
<PAGE>
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.
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, the Investor Releasees, the D&O Releasees and the
Prepetition Committee 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,
other than the Holder of a Claim in Class 6 who signs and returns a timely
Ballot and marks Item 5 of the Ballot, shall be deemed to have unconditionally
released the Investor Releasees, the D&O Releasees and the Prepetition
Committee 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
A-23
<PAGE>
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 Prepetition Committee and the Committee(s) and their
respective 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 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;
A-24
<PAGE>
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.
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 Note or the New 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.
A-25
<PAGE>
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.
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:
A-26
<PAGE>
PROJECT ELECTRO
Presentation to the Special Committee
April 13, 1999
Peter J. Solomon Company
B-1
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Tab
---
<C> <S> <C>
I. Going Concern Valuation.............................................. 4
II. Business Plan Comparison............................................. 9
III. One-Time Adjustments................................................. 13
IV. S-4 Plan Analysis.................................................... 16
V. Liquidation Analysis................................................. 18
</TABLE>
B-2
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TAB 1
B-3
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. Going Concern Analysis
Going Concern Implied Equity Valuation Under S-4 Proposal (4-1-99 Business
Plan)
- -------------------------------------------------------------------------------
(Dollars in Millions)
Summary Going Concern Valuations
<TABLE>
<CAPTION>
11-16-98 4-13-99
Presentation Presentation
Valuation at Valuation at
1/1/99 (a) 7/31/99 (b)
------------ ------------
<S> <C> <C>
Enterprise Value (c)................................. $125.0 $155.0
VSB Technology Value................................. 130.6(d) 153.8(e)
====== ======
Total Value........................................ $255.6 $308.8
Reorganized Electro Debt per LG Proposal
Working Capital Facility............................. $ 68.2(f) $ 77.2(g)
Indo Suez............................................ 30.0 30.0
Restructured LG Notes (h)............................ 118.8 105.1
Subordinated Debentures (h).......................... 40.0 50.0
LGE New Credit Support............................... 0.0 9.2(i)
------ ------
Total.............................................. $257.0 $271.5
Implied Equity of Reorganized Electro................ ($ 1.4) $ 37.3
</TABLE>
- -------------------------------------------------------------------------------
(a) Per Electro Business Plan, dated November 12, 1998. Reflected in Electro
Board Presentation dated November 16, 1998.
(b) Per Electro Business Plan, dated April 1, 1999.
(c) Business plan adjusted to exclude projected VSB royalties. Enterprise
value at 7/31/99 is based on a discounted cash flow analysis utilizing a
terminal value derived by applying a multiple to LTM sales and values
Tuner Patent cash flows separately. Sales multiple based on the low-end of
an illustrative comparable company sales multiple range (see Electro
Discounted Cash Flow Analysis).
(d) VSB valuation at 1/1/99 assumes a $5.00 PC royalty fee, 25.0% discount
rate applied to Domestic royalty fee cash flows, a 40.0% discount rate
applied to International (Adopted) royalty fee cash flows and a 55.0%
discount rate applied to International (Likely to Adopt) royalty fee cash
flows through 2011 and availability of Company NOLs to shelter VSB and
operating cash flow. Includes present value of Sony settlement per Electro
management.
(e) VSB valuation at 7/31/99 assumes five-twelfths of 1999 royalty fee cash
flows and associated costs (run rate), 25.0% discount rate applied to
Domestic royalty fee cash flows, a 40.0% discount rate applied to
International (Adopted) royalty fee cash flows and a 55.0% discount rate
applied to International (Likely to Adopt) royalty fee cash flows through
2011 and availability of Company NOLs to shelter VSB and operating cash
flow. Includes present value of Sony settlement per Electro management.
(f) Revolver balance based on average revolver balance for Q-1 1999 ($34.2MM),
Q-2 1999 ($63.6MM), Q-3 1999 ($84.2MM) and Q-4 1999 ($90.8MM).
(g) Revolver balance based on average monthly revolver balance for July 31,
1999 to December 31, 1999 ($84.9MM), and the average quarterly balance for
Q-1 2000 ($51.9MM) and Q-2 2000 ($94.9MM).
(h) Does not reflect accruals of unpaid interest, if any. Assumes par value.
Market value may be lower.
(i) Revolver balance based on average monthly revolver for July 31, 1999 to
December 31, 1999 ($3.1MM), and the average quarterly balance for Q-1 2000
($0.0MM) and Q-2 2000 ($24.4MM).
B-4
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
I. Going Concern Analysis
Electro Discounted Cash Flow Analysis (Value at July 31, 1999)
- -------------------------------------------------------------------------------
(Dollars in Millions)
Excludes VSB and Tuner Patent Income and Costs & Expenses (a)
<TABLE>
<CAPTION>
Projected Fiscal Year Ended December
31,
-------------------------------------------
1999(b) 2000 2001 2002 2003
------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Revenue........................ $502.8 $889.3 $935.1 $987.6 $1,018.3
--% Growth........................ -- 76.9% 5.2% 5.6% 3.1%
Gross Margin %..................... 10.9% 9.3% 11.0% 10.8% 11.3%
EBITDA............................. 3.9 (16.8) 4.9 10.6 20.9
--% of Revenues................... 0.8% (1.9%) 0.5% 1.1% 2.1%
EBIT............................... 1.1 (21.6) 0.1 5.8 16.0
--% of Sales...................... 0.2% (2.4%) (0.0%) 0.6% 1.6%
AMT................................ 0.0 0.0 0.0 0.1 0.3
------ ------ ------ ------ --------
Tax-Adjusted EBIT.................. 1.1 (21.6) 0.1 5.7 15.7
Depreciation and Amortization...... 2.8 4.7 4.8 4.8 4.8
Capital Expenditures (a)........... (5.0) (4.5) (4.5) (4.5) (4.5)
Change in Working Capital.......... 2.8 13.6 (13.2) 1.3 (3.7)
Proceeds from Asset Sales.......... 4.2 0.0 0.0 0.0 0.0
Restructuring Payments............. (17.5) (7.1) 0.0 0.0 0.0
------ ------ ------ ------ --------
Free Cash Flow..................... ($11.6) ($14.8) ($12.8) $ 7.3 $ 12.4
====== ====== ====== ====== ========
Growth in Free Cash Flow........ NM NM NM NM 70%
</TABLE>
<TABLE>
<CAPTION>
Illustrative Sales
Multiple (c) 14.0% 17.5% 21.0%
<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 (d).......... ($21.0) ($21.0) ($21.1) ($21.0) ($21.0) ($21.1) ($21.0) ($21.0) ($21.1)
Present Value of
Terminal Value (d)..... 86.4 79.9 74.0 108.0 99.9 92.5 129.6 119.9 111.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Terminal Value &
Free Cash Flow Value... $ 65.4 $ 58.9 $ 53.0 $ 87.0 $ 78.9 $ 71.5 $108.6 $ 98.8 $ 90.0
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 (e)............. $ 63.5 $ 61.2 $ 59.1 $ 63.5 $ 61.2 $ 59.1 $ 63.5 $ 61.2 $ 59.1
Total Enterprise Value.. $128.9 $120.1 $112.1 $150.5 $140.1 $130.6 $172.1 $160.1 $149.1
</TABLE>
<TABLE>
<CAPTION>
Projected Fiscal Year Ended
December 31, Net Present Value
----------------------------------- of Tuner Patent @
1999 (h) 2000 2001 2002 2003 (d)
-------- ----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tuner Patent Cash Flows
(a) $10.4 $25.0 $25.0 $22.0 $11.0 18.0% 20.0% 22.0%
----- ----- -----
Tuner Patent Costs and
Expenses (f) (0.1) (0.2) (0.2) (0.2) (0.2) $63.5 $61.2 $59.1
Assumed Reduction (g) 0.0 0.0 0.0 (3.0) (1.5)
----- ----- ----- ----- -----
Tuner Patent Cash Flows
(incl. reductions) (e) $10.3 $24.8 $24.8 $21.8 $10.8
</TABLE>
- -------------------------------------------------------------------------------
Source: Electro 1998-2003 Business Plan dated April 1, 1999.
(a) Cash flow analysis excludes VSB and Tuner Patent income and certain
R&D/engineering costs associated with these technology patents. VSB
related costs include Licensing, Advanced Product Development,
Transmission Technology, Broadcast Technology, Technology Adoption,
Digital Business Development, Legal and R&D and Engineering. A percentage
of projected VSB costs is assumed to be capital expenditures associated
with maintenance/continuing development of the technology Electro EBIT
includes approximately $2.0MM a year in royalties related to the use of
the Zenith trademark and name deemed to be recurring, $1.5MM in
international royalty income for Mexican and Canadian LG products and
income from ELO Touch and other Accessories. Valuation assumes no D&A
associated with VSB or Tuner Patent.
(b) 1999 figures represent only the last five months of 1999.
(c) Illustrative LTM sales multiple range is based on the lowest comparable
company discounted at 50.0%-66.6%.
(d) Present value at 7/31/99.
(e) Assumes Tuner Patent expires June 30, 2003 and a successful defense of
patent in current litigation.
(f) Per Electro management.
(g) Assumed reduction Per Electro Management. Reflects settlement with Sony.
(h) Represents five-twelfths of 1999 Tuner Patent cash flows and associated
costs and expenses (run rate).
- -------------------------------------------------------------------------------
B-5
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. Going Concern Analysis
VSB Valuation at 7/31/99
- -------------------------------------------------------------------------------
(Dollars in millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999(a) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
---- ---- ---- ------- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Domestic
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate 0.0 0.0 0.0 0.9 6.1 14.3 26.6 35.5 43.8 57.8 78.6 102.9 119.2 147.5 176.8 181.6
Royalty Income..
VSB Associated (2.7) (2.7)
Costs(b)........ 0.0 0.0 0.0 (3.3) (8.0) (8.0) (8.0) (8.0) (5.6) (3.9) (2.7) (2.7) (2.7) (2.7)
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 100.2
Income.......... 0.0 0.0 0.0 (2.4) (1.9) 6.3 18.6 27.5 38.2 53.9 75.9 116.5 144.8 174.1 178.9
Unsheltered 0.0
Earnings........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 89.5 117.8 147.1 178.9
AMT Due(c)...... 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.5 0.8 1.1 1.5 2.0 26.8 44.8 55.9 68.0
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net VSB Royalty 98.2
Income.......... 0.0 0.0 0.0 (2.4) (1.9) 6.1 18.2 26.9 37.5 52.8 74.4 89.6 100.0 118.2 110.9
International Adopted
Aggregate 0.0 0.0 0.0 0.2 2.3 7.3 17.0 31.9 35.9 40.6 46.2 52.4 59.7 83.0 92.5 100.5
Royalty Income..
VSB Associated 0.0 0.0 0.0 (0.3) (2.1) (2.1) (2.1) (2.1) (1.5) (1.0) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7)
Costs(b)........
Witholding(d)... 0.0 0.0 0.0 0.0 (0.0) (0.6) (1.6) (3.3) (3.8) (4.4) (5.0) (5.7) (6.5) (9.0) (10.1) (11.0)
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 0.0 0.0 0.0 (0.1) 0.2 4.6 13.3 26.5 30.7 35.2 40.4 46.0 52.5 73.2 81.6 88.8
Income..........
Unsheltered 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 52.5 73.2 81.6 88.8
Earnings........
AMT Due(c)...... 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.5 0.6 0.7 0.8 0.9 15.7 27.8 31.0 33.7
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net VSB Royalty 0.0 0.0 0.0 (0.1) 0.2 4.5 13.0 26.0 30.0 34.5 39.6 45.1 36.7 45.4 50.6 55.0
Income..........
International Likely to Adopt
Aggregate 0.0 0.0 0.0 0.0 0.0 2.9 7.7 33.1 40.0 48.6 59.2 72.4 88.8 120.0 148.2 183.7
Royalty Income..
VSB Associated 0.0 0.0 0.0 (0.5) (3.2) (3.2) (3.2) (3.2) (2.2) (1.6) (1.1) (1.1) (1.1) (1.1) (1.1) (1.1)
Costs(b)........
Witholding(d)... 0.0 0.0 0.0 0.0 0.0 0.0 (0.5) (3.3) (4.2) (5.2) (6.4) (7.8) (9.6) (13.1) (16.2) (20.1)
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net Royalty 0.0 0.0 0.0 (0.5) (3.2) (0.3) 4.0 26.6 33.6 41.8 51.7 63.4 78.0 105.8 130.9 162.5
Income..........
Unsheltered 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1 78.0 105.8 130.9 162.5
Earnings........
AMT Due(c)...... 0.0 0.0 0.0 0.0 0.0 (0.0) 0.1 0.5 0.7 0.8 1.0 14.0 23.4 40.2 49.7 61.7
--- --- --- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ------
Net VSB Royalty 0.0 0.0 0.0 (0.5) (3.2) (0.3) 3.9 26.1 33.0 41.0 50.7 49.4 54.6 65.6 81.2 100.7
Income..........
</TABLE>
- -------------------------------------------------------------------------------
(a) 1999 VSB royalty fee cash flows and associated expenses represent five-
twelfths of aggregate 1999 royalty fee cash flows and associated expenses
(run rate).
(b) Per Electro Management. Costs include Licensing, Advanced Product
Development, Transmission Technology, Broadcast Technology, Technology
Adoption, Digital Business Development, Legal and R&D and Engineering and
Capital Expenditures. VSB costs are assumed to decrease by 30% in 2004,
2005 and 2006 and remain constant thereafter. In 1999 approximately 80.0%
of the costs of VSB are allocated to Domestic VSB and 20.0% of the costs
of VSB are allocated to International VSB. In years beyond 1999, 60.0% of
the costs of VSB are allocated to Domestic VSB and 40.0% are allocated to
International VSB. In all years, 40.0% of the International VSB costs are
allocated to International Adopted countries and 60.0% are allocated to
International Likely to Adopt countries.
(c) Per guidance from Arthur Andersen, the Valuation assumes the Company pays
an AMT in the years after 2000. In the years in which the Company has
available NOLs, it pays an effective AMT of 2.0%. In the years in which
there is no available NOL, the Valuation assumes the Company pays an AMT
adjusted, effective tax rate of 25.0% in 2007, 30.0% in 2008 and 38.0%
thereafter. The Valuation assumes no foreign tax credits, but treats
assumed foreign witholding as a deduction.
(d) The foreign witholding tax rate is equal to the weighted average of the
countries' treaty defined witholding rates (approximately 11%). For those
countries where there is no treaty defined rate, the country's internal
witholding rate was used. Assumed witholding rates per Arthur Andersen.
B-6
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
I. Going Concern Analysis
----------
VSB Valuation at 7/31/99
- -------------------------------------------------------------------------------
(Dollars in millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
---- ---- ------- ------ ------ ------ ------ ------ ------- ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Calculation of
Remaining
NOLs(a)
- ----------------
Pre-LG NOLs
(Year-End)(b)... $481.0 $481.0 $481.0 $476.0 $444.3 $368.0 $ 265.5 $211.0 $ 184.0 $ 157.0 $130.0 $103.0
Utilizable
Beginning....... 27.0 54.0 81.0 108.0 135.0 162.0 184.0 179.3 130.0 54.5 27.0 27.0 27.0 27.0
Pre-LG NOLs
Utilized........ 0.0 0.0 0.0 0.0 0.0 (5.0) (31.8) (76.2) (102.5) (54.5) (27.0) (27.0) (27.0) (27.0)
---- ---- ------ ------ ------ ------ ------ ------ ------- ------ ------- ------- ------ ------
Utilizable End.. 27.0 54.0 81.0 108.0 135.0 157.0 152.3 103.0 27.5 0.0 0.0 0.0 0.0 0.0
Post LG NOL
(beginning)..... $319.2 $461.8 $313.9 $344.0 $344.0 $344.0 $ 344.0 $344.0 $ 267.5 $ 126.5 $ 0.0 $ 0.0
Post LG NOL
Utilized........ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (76.5) (141.0) (126.5) 0.0 0.0
NOL
Generated(c).... 142.6 (147.9) 30.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------- ------ ------- ------- ------ ------
Post LG NOL
(ending)........ $461.8 $313.9 $344.0 $344.0 $344.0 $344.0 $ 344.0 $267.5 $ 126.5 $ 0.0 $ 0.0 $ 0.0
<CAPTION>
2010 2011
------ ----
<S> <C> <C>
Calculation of
Remaining
NOLs(a)
- -----------------
Pre-LG NOLs
(Year-End)(b)... $76.0 $0.0
Utilizable
Beginning....... 27.0 0.0
Pre-LG NOLs
Utilized........ (27.0) 0.0
------ ----
Utilizable End.. 0.0 0.0
Post LG NOL
(beginning)..... $ 0.0 $0.0
Post LG NOL
Utilized........ 0.0 0.0
NOL
Generated(c).... 0.0 0.0
------ ----
Post LG NOL
(ending)........ $ 0.0 $0.0
1999 Net Income(d)........ ( 14.8)
Cancellation of Debt
Income(e)................. 162.7
------
1999 NOL.................. (147.9)
1999 Net Income(d)........
Cancellation of Debt
Income(e).................
1999 NOL..................
<CAPTION>
Net Income Adjusted for 2000(a) 2001 2002 2003
VSB ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business Plan EBIT........ $ 1.8 $ 31.7 $ 46.7 $ 54.8
Domestic VSB Income (net
of costs)................. (1.9) 6.3 18.6 27.5
------ ------ ------ ------
Business Plan EBIT (Excl.
VSB)...................... 3.7 25.4 28.1 27.3
EBIT Differential......... 1.9 (6.3) (18.6) (27.5)
------ ------ ------ ------
Incremental Debt.......... (4.4) 1.9 20.5 48.0
Incremental Interest
Expense (Income) @ 9.5%... (0.3) (0.2) 0.6 2.2
Business Plan Net
Income.................... ($27.4) $ 0.5 $ 15.0 $ 25.3
------ ------ ------ ------
New Net Income (Excl.
VSB)...................... (25.1) (5.6) (4.1) (4.4)
===============================
<CAPTION>
Calculation of NOL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Net Income (Excl.
VSB)...................... (25.1) (5.6) (4.1) (4.4)
Net VSB royalty(g)........ (5.0) 10.6 35.9 80.6
------ ------ ------ ------
Total Net Income.......... (30.1) 5.0 31.8 76.2
NOL
(Generated)/Utilized...... (30.1) 5.0 3.18 76.2
<CAPTION>
Net Income Adjusted for
VSB
<S> <C> <C>
Business Plan EBIT........
Domestic VSB Income (net
of costs).................
Business Plan EBIT (Excl.
VSB)......................
EBIT Differential.........
Incremental Debt..........
Incremental Interest
Expense (Income) @ 9.5%...
Business Plan Net
Income....................
New Net Income (Excl.
VSB)......................
<CAPTION>
Calculation of NOL
<S> <C> <C>
New Net Income (Excl.
VSB)......................
Net VSB royalty(g)........
Total Net Income..........
NOL
(Generated)/Utilized......
</TABLE>
<TABLE>
<CAPTION> Total
Present
Value Net Present Value of
of Domestic VSB Technology @
------------------------------
VSB
Technology
$153.8(f)
25.0% 30.0% 35.0% 40.0%
------ ----- ----- -----
<S> <C> <C> <C>
$108.5 $80.2 $60.4 $46.4
<CAPTION>
Net Present Value of
Int'l (Adopted) VSB
Technology @
------------------------------
35.0% 40.0% 45.0% 50.0%
------ ----- ----- -----
<S> <C> <C> <C>
$39.7 $31.6 $25.5 $20.9
<CAPTION>
Net Present Value of
Int'l (Likely to Adopt) VSB
Technology @
------------------------------
45% 50% 55% 60%
------ ----- ----- -----
<S> <C> <C> <C>
$22.5 $17.5 $13.7 $10.8
</TABLE>
- -------------------------------------------------------------------------------
(a) Assumes that after 2003 NOLs are used exclusively to shelter VSB income.
(b) Source: Electro 1997 10-K. Utilizable at a maximum rate of $27MM per year
up until 2010.
(c) NOL generated in 1998 per Arthur Andersen.
(d) 1999 Net Income reflects full year 1999. Per Electro Business Plan dated
April 1, 1999.
(e) Based on Arthur Andersen analysis and an assumed implied equity value of
reorganized Electro.
(f) Assumes a 25.0% discount rate for Domestic VSB royalty fee income cash
flow, a 40.0% discount rate for International (Adopted) VSB royalty fee
income cash flows and a 55.0% discount rate for International (Likely to
Adopt) VSB royalty fee income cash flows. Includes only five-twelfths of
1999 royalty fee income (run rate). Present value at 7/31/99.
(g) Represents aggregate Net VSB royalty after costs and before AMT for both
Domestic and International VSB revenue streams.
B-7
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TAB II
B-8
<PAGE>
Peter J. Solomon Company____________________________________________4/13/99
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<CAPTION>
Projected
Business -------------------------------------------
Plan Date 1999 2000 2001 2002 2003
--------- ------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Items
Sales................... 4/1 $ 969.5 $889.3 $935.1 $ 987.6 $1,018.3
11/12 876.1 889.3 935.1 987.6 1,018.3
------- ------ ------ -------- --------
Difference (4/1 vs.
11/12)............... $ 93.4 $ 0.0 $ 0.0 $ 0.0 $ 0.0
======= ====== ====== ======== ========
Gross Margin............ 4/1 $ 107.2 $ 82.9 $102.9 $ 106.9 $ 115.3
11/12 74.0 81.7 97.4 106.9 115.3
------- ------ ------ -------- --------
Difference (4/1 vs.
11/12)............... $ 33.2 $ 1.2 $ 5.5 $ 0.0 $ 0.0
======= ====== ====== ======== ========
Selling, General &
Administrative......... 4/1 $ 124.8 $ 99.5 $ 99.0 $ 98.5 $ 98.0
11/12 105.9 96.0 95.5 95.0 94.5
------- ------ ------ -------- --------
Difference (4/1 vs.
11/12)............... $ 18.9 $ 3.5 $ 3.5 $ 3.5 $ 3.5
======= ====== ====== ======== ========
Engineering and R&D..... 4/1 $ 32.6 $ 8.7 $ 8.1 $ 7.5 $ 7.0
11/12 11.2 8.7 8.1 7.5 7.0
------- ------ ------ -------- --------
Difference (4/1 vs.
11/12)............... $ 21.4 $ 0.0 $ 0.0 $ 0.0 $ 0.0
======= ====== ====== ======== ========
Operating Income........ 4/1 ($ 50.3) ($25.3) ($ 4.2) $ 0.9 $ 10.3
11/12 (43.1) (23.0) (6.2) 4.4 13.8
------- ------ ------ -------- --------
Difference (4/1 vs.
11/12)............... ($ 7.2) ($ 2.3) $ 2.0 ($ 3.5) (3.5)
======= ====== ====== ======== ========
</TABLE>
B-9
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<CAPTION>
Projected
Business -------------------------------------
Plan Date 1999 2000 2001 2002 2003
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Items
(cont'd)
Royalty Income........... 4/1 $ 6.2 $ 5.2 $5.8 $ 6.4 $ 7.2
11/12 4.7 5.2 5.8 6.4 7.2
------ ------ ---- ----- -----
Difference (4/1 vs.
11/12)................ $ 1.5 $ 0.0 $0.0 $ 0.0 $ 0.0
====== ====== ==== ===== =====
Other Expense (Income) .. 4/1 ($ 5.4) ($ 1.5) $1.5 $ 1.5 $ 1.5
11/12 (2.3) 1.5 1.5 1.5 1.5
------ ------ ---- ----- -----
Difference (4/1 vs.
11/12)................ ($ 3.1) $ 0.0 $0.0 $ 0.0 $ 0.0
====== ====== ==== ===== =====
EBIT..................... 4/1 ($38.8) ($21.6) $0.1 $ 5.8 $16.0
11/12 (36.2) (19.3) (1.9) (9.3) 19.4
------ ------ ---- ----- -----
Difference (4/1 vs.
11/12)................ ($ 2.6) ($ 2.3) $2.0 ($3.5) (3.4)
====== ====== ==== ===== =====
</TABLE>
B-10
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
II. Business Plan Comparison
(Dollars in Millions)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Cash Flow Items
<CAPTION>
FY Ended December 31,
Projected
Business --------------------------------------
Plan Date 1999 2000 2001 2002 2003
--------- ------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Depreciation & Amortization.. 4/1 $ 7.0 $ 4.7 $ 4.8 $ 4.8 $ 4.8
11/12 6.1 3.2 3.6 3.9 4.2
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... $ 0.9 $ 1.5 $ 1.2 $ 0.9 $ 0.6
======= ====== ====== ====== =====
Capital Expenditures......... 4/1 ($ 23.5) ($ 4.5) ($ 4.5) ($ 4.5) ($4.5)
11/12 (4.9) (4.5) (4.5) (4.5) (4.5)
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... ($ 18.6) $ 0.0 $ 0.0 $ 0.0 $ 0.0
======= ====== ====== ====== =====
Change in Net Working
Capital..................... 4/1 ($ 27.9) $ 13.6 ($13.2) $ 1.3 ($3.7)
11/12 10.7 17.0 (13.1) (3.3) (5.7)
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... ($ 38.6) ($ 3.4) ($ 0.1) $ 4.6 $ 2.0
======= ====== ====== ====== =====
Proceeds From Asset Sales.... 4/1 $ 100.6 $ 0.0 $ 0.0 $ 0.0 $ 0.0
11/12 47.9 0.0 0.0 0.0 0.0
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... $ 52.7 $ 0.0 $ 0.0 $ 0.0 $ 0.0
======= ====== ====== ====== =====
Restructuring Costs.......... 4/1 ($ 64.5) ($ 7.1) $ 0.0 $ 0.0 $ 0.0
11/12 (55.5) (2.4) 0.0 0.0 0.0
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... ($ 9.0) ($ 4.7) $ 0.0 $ 0.0 $ 0.0
======= ====== ====== ====== =====
Taxes........................ 4/1 $ 0.0 $ 0.0 $ 0.0 $ 0.1 $ 0.3
11/12 0.0 0.0 0.0 0.2 0.4
------- ------ ------ ------ -----
Selling, General &
Administrative............ $ 0.0 $ 0.0 $ 0.0 ($ 0.1) ($0.1)
======= ====== ====== ====== =====
Free Cash Flow (a)........... 4/1 ($ 47.1) ($14.8) ($12.8) $ 7.3 $12.4
11/12 (31.9) (6.0) (15.9) 5.2 13.0
------- ------ ------ ------ -----
Difference (4/1 vs.
11/12).................... ($ 15.2) ($ 8.9) $ 3.1 $ 2.1 ($0.6)
======= ====== ====== ====== =====
</TABLE>
- --------
(a) Free cash flow defined as EBIT plus all cash flow items.
B-11
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TAB III
<TABLE>
<C> <S>
</TABLE>
B-12
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
III. One-Time Adjustments
<TABLE>
<CAPTION>
Going Concern Value Adjustment
------------------------------
<C> <S>
Illustrative Sales Multiple The increase in the illustrative sales multiple
reflects the increase in the valuation of the
comparable companies from October 29, 1998 to
April 4, 1999.
Valuation Date April 13, 1999 Valuations as of July 31, 1999.
November 16, 1998 Valuation as of January 1, 1999.
This timing differential accounts for a
significant portion of the increase in VSB
Technology Value due to ascending projected VSB
revenues.
Discount Period Business plan projection period remains through
year end 2003. Accordingly, April 13, 1999
Valuation terminal value and intervening years'
free cash flow discounted for four and five-
twelfths years. The November 16, 1998 Valuation
discounted for five years.
Subordinated Debentures April 13, 1999 Valuation reflects recently
executed agreement with Ad Hoc Committee of
Subordinated Debenture Holders providing for a
distribution of new securities with a face amount
of $50.0MM
1999 Projections April 13, 1999 Valuation based on Electro
Management business plan dated April 1, 1999
utilizes last five months of 1999. November 16,
1998 Valuation based on Electro Management
business plan dated November 12, 1998 utilized
full year 1999 figures.
Asset Sales April 13, 1999 Valuation assumes that only Melrose
Park Building and Matamoros equipment will be
available for sale at July 31, 1999.
</TABLE>
B-13
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
III. One-Time Adjustments
<TABLE>
<CAPTION>
Liquidation Analysis Value Adjustment
-------------------------------------
<C> <S>
Sale of Domestic Real Estate April 13, 1999 Valuation includes only Melrose
Park building in Domestic Real Estate. McAllen
and Franklin Park will be sold prior to July 31,
1999. November 16, 1998 Valuation included all
three properties in liquidation analysis.
Sale of Domestic F,F&E April 13, 1999 Valuation assumes Domestic
Furniture, Fixture and Equipment will be sold
prior to July 31, 1999. The November 16, 1998
Valuation assumed that F,F&E at Franklin Park,
Glenview, Microcircuits and Melrose Park would be
available for sale at the liquidation date of
January 1, 1999.
Sale of Mexican Real Estate April 13, 1999 Valuation assumes only Reynosa
will be available for liquidation. The November
16, 1998 Valuation assumed that Juarez,
Matamoros, and Reynosa would be available for
sale.
Sale of Mexican F,F&E April 13, 1999 Valuation assumes that only
Matamoros and Reynosa Furniture, Fixture, and
Equipment will be available for liquidation at
7/31/99.
Restructured LG Notes The Restructured LG Note amount is presented net
of the proceeds projected to be realized prior to
the Valuation date from the sale of the Leveraged
Lease Equipment.
</TABLE>
B-14
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TAB IV
<TABLE>
<C> <S>
</TABLE>
B-15
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
IV. S-4 Proposal Analysis
Analysis of S-4 Proposal (Based on 4-1-99 Business Plan)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Claim
Amount
7/31/99 Proposed Treatment Under S-4 Proposal $ Recovery % Recovery
--------- ------------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
Citibank Secured Debt
(a).................... $ 77.2 $150.0 $77.2 100.0%
LG Claims and Interests
Secured
--------
Secured Guarantee of
Demand Notes.......... 72.0
Secured Guarantee of
Leveraged Lease (b)... 19.0
Direct Loans........... 45.0
------
--------
Subtotal............. $136.0 Exchanged for (i) $105.1MM in restructured Secured 100.0%
Senior Unsecured Notes (c), (ii) 100.0% of the equity of $182.8 (d)
LG Extended Payable.... 140.0 reorganized Zenith, (iii) ownership of Senior Unsecured 33.4%
General Unsecured Reynosa plant ($32.4MM credit against claims),
Leveraged Lease (iv) $8.0 in leverage lease equipment retained by
Deficiency Claim...... 57.4 LG and (v) general release. General Unsecured 0.0%
--------
Service Fees........... 10.5
Guarantee Fees......... 1.6
------
Subtotal............. 69.5
------
Total LG Claims........ $345.5
--------
General Unsecured
Claims
--------
General Unsecured
(Trade)............... 61.9 Unimpaired....................................... $61.9 100.0%
General Unsecured
(Accruals)............ 121.5 $121.5 100.0%
--------
Indo Suez.............. 30.0 Modified Terms................................... $30.0 100.0%
6 1/4 Subordinated
Convertible $50.0 million new 8.19% subordinated
Debentures (f)........ 108.9 debentures due 2009............................. $50.0(e) 45.9%
Common Equity.......... NA Cancelled........................................
</TABLE>
- -------------------------------------------------------------------------------
(a) S-4 Proposal assumes $150.0 million working capital facility.
(b) Represents that portion of LGE's Leveraged Lease Claim secured by the
Philips Proceeds and Leveraged Lease Equipment. Per Electro Management.
(c) Assumes treatment of Indo Suez obligations consistent with other
guaranteed demand obligations. Trading value may be lower.
(d) Excludes value of release, if any. Assumes an equity value of $37.3
million at 7/31/99.
(e) Assumes face value. Trading value may be lower.
(f) Principal amount plus assumed accrued interest at 7/31/99.
B-16
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- --------------------------------------------------------------------------------
TAB V
B-17
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
V. Liquidation Analysis
- -------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<CAPTION>
Estimated Estimated
Value at Asset Recovery
7/31/99 (a) From Liquidation
----------- ----------------
<S> <C> <C> <C>
ASSETS
Marketable Assets
VSB Technology (tax-
affected) (b).............. $ 42.6
Trademark & Distribution
(c)........................ 19.7
Tuner Patent (d)............ 35.0
Other Intangibles (e)....... 0.7
Flat Tension Mask (e)....... Estimated 2.1
% Recovery
Current Assets ----------
Cash........................ $ 0.0 100.0% 0.0
Accounts Receivable (f)..... 128.9 65.0% 83.8
Inventories (g).............
Finished Goods............ 64.5 75.0% 48.3
Less: Warranty (i).......... (0.8)
------
Net Finished Goods........ 47.5
Work in Process........... 10.6 5.0% 0.5
Raw Materials............. 24.7 20.0% 4.9
Fixed Assets
Real Estate (h).............
Domestic.................. 1.6
Mexican (j)............... 0.0
Furniture, Fixture and
Equipment (h)..............
Domestic.................. 3.4
Mexican (j)............... 8.1
------
Gross Asset Recovery.... $249.9
======
</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 7/31/99. Assumes 38.0% tax rate.
Value assumes a 35.0% discount rate for Domestic VSB, a 50% discount rate
for International (Adopted) VSB and zero value for International (Likely
to Adopt VSB) and royalty rates lower than the Company base case. Reflects
decrease in income related to Sony and cross licenses.
(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 discount rate equal to the
historical weighted average cost of capital of the comparable companies of
12.0% and an incremental tax rate of 38.0% also includes a reduction of
$24.7 million in warranty expenses discounted over 8 quarters at 12.0%.
(d) Tuner Patent cash flows are net of cost and expenses associated with them
and assume settlement with Sony. Cash flows are tax affected at 38.0% and
are discounted at 25.0%. Represents present value at 7/31/99. 1999 cash
flows and associated expenses represent a 5 month run rate.
(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) Excludes receivables on account of sale of equipment to Philips.
(g) Estimated value at 7/31/99 net of reserves per Electro management.
(h) Estimated value at 7/31/99 per Greenwich Industrial Services.
(i) Per Electro management. Payment assumed to be necessary to achieve
liquidation value. Includes future warranty claims associated with net
finished goods in inventory.
(j) Mexican real estate and furniture, fixture and equipment have been reduced
by $23.4MM in Mexican Priority claims associated with Reynosa, per Electro
management. Claims include Employee Claims ($11.2MM), Transfer Price Tax
($8.3MM), Profit Sharing Tax ($2.2MM), Employee Taxes ($0.7MM), Income
Taxes ($0.8MM), and Proceeding Expenses ($0.1MM). Real estate has been
reduced first.
B-18
<PAGE>
Peter J. Solomon Company
PROJECT ELECTRO
- -------------------------------------------------------------------------------
V. Liquidation Analysis
- -------------------------------------------------------------------------------
(Dollars in Millions)
<TABLE>
<S> <C> <C> <C>
Gross Asset Recovery.............................. $249.9
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).............................. 8.2
Wind Down Costs (e)............................. 6.8
WARN Act (b).................................... 10.4
Environmental (b)............................... 6.8
------
Subtotal...................................... 85.9
------
Aggregate Net Proceeds............................ $164.0
Liquidation Proceeds Available for Distrbution
(f).............................................. $123.2
<CAPTION>
Claim % Recovery
------ ----------
<S> <C> <C> <C>
Secured Debt
Citibank........................................ $ 73.1(g) $ 73.1 100.0%
Proceeds available for secured creditors after
Citibank......................................... $ 50.1
LG Guarantee of Demand Notes.................... 102.0 33.4 32.7%
LG Guarantee of Leveraged Lease................. 6.0(h) 2.0 32.7%
LG Direct Loans................................. 45.0 14.7 32.7%
------ ------
Total Secured Debt................................ $226.1 $123.2
====== ======
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 excluding Accounts
Receivables and Inventory. Includes $23.4MM on account of Mexican Real
Estate and Furniture, Fixture and Equipment sold to offset Mexican
priority claims.
(e) Real estate taxes plus on-site security and wind down teams at each
location during an average twelve month disposition period. Also includes
preparation of Melrose Park site for sale.
(f) Assumes distribution of net proceeds of asset sales will occur over the
course of 2 to 4 years. Accordingly, a 10.0% discount rate was applied for
three years.
(g) Revolver balance based on the 7/31/99 balance.
(h) Secured claim reflecting LGE's guarantee of the Leveraged Lease equals the
value of the Leveraged Lease Equipment in a liquidation per Greenwich
Industrial and assumes no payment of the remaining portion of LGE's
Philip's claim.
B-19
<PAGE>
ZENITH ELECTRONICS CORPORATION
IMPORTANT
Any Holder of Old Subordinated Debentures, Bank Lender Claims or LGE Claims
who wishes to vote with respect to the Prepackaged Plan should complete and
sign the applicable Ballot or Master Ballot in accordance with the
instructions set forth in this Disclosure Statement and return such Ballot or
Master Ballot in accordance with the instructions set forth thereon. See
"SOLICITATION; VOTING PROCEDURES."
The Solicitation Agent:
GEORGESON & COMPANY INC.
By Hand Delivery or Overnight Courier: By Mail:
Georgeson & Company Inc. Georgeson & Company Inc.
Wall Street Plaza Wall Street Plaza
New York, NY 10005 New York, NY 10005
Facsimile Transmission:
(212) 440-9009
Confirm by Telephone:
(800) 223-2064
ADDITIONAL COPIES
Requests for additional copies of this Disclosure Statement should be
directed to the Solicitation Agent. You may also contact your broker, dealer,
commercial bank or trust company for assistance concerning the Solicitation.
<PAGE>
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 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 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 indemnify any such indemnitee in connection with a
proceeding (or part
II-1
<PAGE>
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 DGCL 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>
(2a) Form of Prepackaged Plan of Reorganization of Zenith Electronics
Corporation Under Chapter 11 of the Bankruptcy Code
(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)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
(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 Debentures
++(4f) Form of LGE Secured Notes
++(4g) Form of LGE New Restructured Senior Note
++5(a) Opinion of Kirkland & Ellis
++8(a) Opinion of Kirkland & Ellis as to Tax Matters
*(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)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*(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)
(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)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
(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) Amended and Restated Employment Agreement, dated October 2,
1998, between Zenith Electronics Corporation and Richard F.
Vitkus
+*(10aj) Amendment dated August 7, 1998 to Employment Agreement between
Zenith Electronics Corporation and Jeffrey P. Gannon
(10ak) Reimbursement Agreement dated November 3, 1997, between LG
Electronics Inc. and Zenith Electronics Corporation
+(10al) First Amendment to Reimbursement Agreement, dated January 27,
1998, between LG Electronics Inc. and Zenith Electronics
Corporation
+(10am) Amendment No. 1 and Waiver to the Restructuring Agreement, dated
November 16, 1998, between Zenith Electronics Corporation and LG
Electronics, Inc.
+(10an) Guaranty Payment Agreement (Mexico), dated July 17, 1998 by and
between LG Electronics, Inc., First Security Bank, National
Association, not in its individual capacity but solely as
indenture trustee, the listed lenders, General Foods Credit
Corporation, and Fleet National Bank
+(10ao) Guaranty Payment Agreement (Melrose Park), dated as of July 17,
1998 by and between LG Electronics Inc., First Security Bank,
National Association, not in its individual capacity but solely
as indenture trustee, the listed lenders, General Foods Credit
Corporation, and Fleet National Bank
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
(10ap) Forbearance, Lock-Up and Voting Agreement, dated as of March 31,
1999, by and among Zenith Electronics Corporation, LG
Electronics Inc., Loomis, Sayles & Company, L.P., Mariner
Investment Group, and Caspian Capital Partners, L.L.P.
(10aq) Commitment Letter, dated as of March 31, 1999, by and between
Zenith Electronics Corporation and Citicorp North America, Inc.
(10ar) Asset Sale and Purchase Agreement--Melrose Park, dated March 26,
1999, by and between The Zenith Electronics Equipment Owner
Trust 1997--I and Zenith Electronics Corporation
(12) Computation of Ratios
(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) Consents of Kirkland & Ellis (included in Exhibits 5a and 8a)
+(24a) Power of Attorney appointing Nam Woo as attorney-in-fact for
certain directors.
+(24b) Power of Attorney appointing Richard Vitkus and Wayne Koprowski
as attorneys-in-fact for certain directors.
(27a) Financial Data Schedule for the twelve months ended December 31,
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)
+(99c) Complete Appraisal of Real Property, Partes Television de
Reynosa, S.A. de C.V., dated May 28, 1998, prepared by Cushman &
Wakefield of Arizona, Inc.
+(99d) Property Summary and Value Estimates, Mexico Owned Facilities,
dated February, 1998, prepared by Bermudez-Binswanger
+(99e) Appraisal, Zenith Electronics Corporation, Reynosa Mexico, dated
April 1, 1998, prepared by Greenwich Industrial Services, LLC.
+(99f) Valuation Report, dated November 16, 1998, prepared by Peter J.
Solomon Company, Ltd. (Confidential Treatment Requested)
(99g) Consent of Cushman & Wakefield regarding Reynosa appraisal
(99h) Consent of Cushman & Wakefield regarding Chihuahua, Glenview,
Melrose Park and Franklin Park appraisals
+(99i) International VSB Market Forecast prepared by Gartner
Consulting, including addendums thereto.
(99j) Form of letter to Securityholders
(99k) Summary of Domestic VSB Market Forecast Information provided by
Forrester Research, Inc.
(99l) Complete Appraisal of Real Property, Zenco de Chihuahua, S.A. de
C.V., dated January 13, 1999, prepared by Cushman & Wakefield of
Arizona, Inc.
(99m) Complete Appraisal of Real Property, Zenco de Chihuahua, S.A. de
C.V., dated May 29, 1998, prepared by Cushman & Wakefield of
Arizona, Inc.
(99n) Complete Appraisal of Real Property, Zenith Electronics
Corporation, Rauland Picture Tube Division, Plant #25, dated May
21, 1998, prepared by Cushman & Wakefield of Illinois, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
(99o) Complete Appraisal of Real Property, Cableproductos de
Chihuahua, S.A. de C.V., dated May 29, 1998, prepared by Cushman
& Wakefield of Arizona, Inc.
(99p) Complete Appraisal of Real Property, Zenith Corporate
Headquarters Facility, dated October 1, 1998, prepared by
Cushman & Wakefield of Illinois, Inc.
(99q) Complete Appraisal of Real Property, Zenith Electronics
Corporation, Rauland Picture Tube Division, Plant #45, dated May
21, 1998, prepared by Cushman & Wakefield of Illinois, Inc.
(99r) Valuation Report, dated April 13, 1999, prepared by Peter J.
Solomon Company, Ltd.
(99s) Complete Appraisal of Real Property, Electro Partes de
Matamoros, S.A. de C.V., dated January 25, 1999, prepared by
Cushman & Wakefield of Arizona, Inc.
(99t) [intentionally omitted]
(99u) Consent of Bermudez Binswanger regarding Property Summary and
Value Estimates
(99v) Consent of Greenwich Industrial Services, LLC regarding
appraisal
(99w) Consent of Forrester Research, Inc.
(99x) Consent of Gartner Group, Inc.
(99y) Form of Ballot for Class 4
(99z) Form of Ballot for Class 6
(99aa) Form of Ballot for Class 7
(99ab) Form of Master Ballot
</TABLE>
- --------
* Represents a management contract, compensation plan or arrangement.
+Previously filed.
++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 (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;
II-7
<PAGE>
(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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company duly
caused this Amendment No. 3 to the 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 16th day of April, 1999.
Zenith Electronics Corporation
/s/ Jeffrey P. Gannon
By: _________________________________
Jeffrey P. Gannon
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 16th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/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
Lawrence D. Panozzo (Principal Accounting Officer)
* Chairman of the Board
___________________________________________
Hun Jo Lee
** Director
___________________________________________
T. Kimball Brooker
* Director
___________________________________________
Ki-Song Cho
** Director
___________________________________________
Eugene B. Connolly
/s/ Robert A. Helman Director
___________________________________________
Robert A. Helman
* Director
___________________________________________
Cha Hong (John) Koo
* Director
___________________________________________
Seung Pyeong Koo
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
** Director
___________________________________________
Andrew McNally IV
* Director
___________________________________________
Yong Nam
** Director
___________________________________________
Peter S. Willmott
/s/ Nam Woo Director
___________________________________________
Nam Woo
</TABLE>
/s/ Nam Woo
*By__________________________________
Attorney-in-fact
/s/ Richard F. Vitkus
**By_________________________________
Attorney-in-fact
II-10
