<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File No. 1-4115
ZENITH ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1996520
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1000 Milwaukee Avenue, Glenview, 60025-2493
Illinois (Zip Code)
(Address of principal executive
offices)
(847) 391-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of April 30, 1999, there were 67,525,447 shares of Common Stock, par
value $1 per share, outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Millions, Except Per Share Amounts
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 3, March 28,
1999 1998
-------- ---------
<S> <C> <C>
Net sales................................................... $150.6 $220.7
------ ------
Costs, expenses and other:
Cost of products sold..................................... 134.7 213.5
Selling, general and administrative....................... 25.9 30.7
Engineering and research.................................. 8.0 10.8
Other operating expense (income), net (Note 4)............ (7.7) (7.2)
Restructuring charges (Note 3)............................ 3.3 2.6
------ ------
Operating loss.............................................. (13.6) (29.7)
Loss on asset sales, net.................................... (0.3) (0.2)
Interest expense............................................ (2.2) (3.8)
Interest expense--related party............................. (9.2) (4.4)
Interest income............................................. 0.2 0.3
------ ------
Loss before income taxes.................................... (25.1) (37.8)
Income taxes................................................ -- --
------ ------
Net loss.................................................... $(25.1) $(37.8)
====== ======
Net loss per share of basic and diluted common stock (Note
5)......................................................... $(0.37) $(0.55)
====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
April December 31, March 28,
ASSETS 3, 1999 1998 1998
- ------ ------- ------------ ---------
<S> <C> <C> <C>
Current assets:
Cash......................................... $ 5.2 $ -- $ 23.2
Receivables, net of allowance for doubtful
accounts of $18.9, $42.0 and $--,
respectively................................ 77.5 127.0 9.6
Receivable from related party................ 7.9 8.5 6.4
Inventories (Note 7)......................... 73.9 84.2 127.1
Transferor certificates (Note 6)............. -- -- 103.4
Other........................................ 26.7 10.8 23.4
------- ------- -------
Total current assets....................... 191.2 230.5 293.1
Property, plant and equipment, net............. 48.1 50.2 164.4
Property held for disposal..................... 27.0 43.0 5.7
Receivable from related party.................. 13.8 21.3 --
Other noncurrent assets........................ 10.4 5.0 36.5
------- ------- -------
Total assets............................... $ 290.5 $ 350.0 $ 499.7
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term debt (Note 8)..................... $ 30.0 $ 47.8 $ 102.0
Short-term debt with related party (Note 8).. 191.3 192.1 --
Current portion of long-term debt (Note 8)... 11.5 5.8 14.8
Accounts payable............................. 51.9 48.1 86.6
Accounts payable with related party (Note 9). 130.8 136.1 134.0
Income taxes payable......................... 4.2 4.2 0.7
Accrued expenses............................. 153.0 167.8 144.6
------- ------- -------
Total current liabilities.................. 572.7 601.9 482.7
Long-term liabilities.......................... 4.5 3.6 8.6
Long-term liabilities with related party....... 10.9 11.2 8.2
Long-term debt (Note 8)........................ 92.0 97.8 127.0
Stockholders' equity:
Preferred stock.............................. -- -- --
Common stock................................. 67.6 67.6 67.1
Additional paid-in capital................... 506.8 506.8 507.3
Retained earnings (deficit).................. (962.3) (937.2) (699.5)
Treasury stock............................... (1.7) (1.7) (1.7)
------- ------- -------
Total stockholders' equity................. (389.6) (364.5) (126.8)
------- ------- -------
Total liabilities and stockholders' equity. $ 290.5 $ 350.0 $ 499.7
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ZENITH ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Millions
<TABLE>
<CAPTION>
Increase (Decrease) in Cash
Three Months Ended
------------------------------
April 3, 1999 March 28, 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (25.1) $ (37.8)
Adjustments to reconcile net loss to net cash
provided (used) by operations:
Depreciation................................ 4.6 9.9
Other....................................... (0.4) --
Loss on asset sales, net.................... 0.3 0.2
Changes in assets and liabilities:
Current accounts.......................... 39.4 32.8
Other assets.............................. (1.0) 1.2
Other liabilities......................... 0.6 (0.2)
------------- -------------
Net cash provided by operating activities..... 18.4 6.1
------------- -------------
Cash flows from investing activities:
Capital additions........................... (0.4) (2.7)
Proceeds from asset sales................... 5.8 10.0
Transferor certificates increase............ -- (13.9)
------------- -------------
Net cash provided (used) by investing
activities................................... 5.4 (6.6)
------------- -------------
Cash flows from financing activities
Short-term borrowings, net.................. (18.6) 30.0
Principal payments on long-term debt........ -- (6.3)
------------- -------------
Net cash provided (used) by financing
activities................................... (18.6) 23.7
------------- -------------
Increase in cash.............................. 5.2 23.2
Cash at beginning of period................... -- --
------------- -------------
Cash at end of period......................... $ 5.2 $ 23.2
============= =============
Increase (decrease) in cash attributable to
changes in current accounts:
Receivables, net............................ $ 51.1 $ 5.7
Inventories................................. 10.3 38.4
Other assets................................ (3.1) 2.9
Accounts payable and accrued expenses....... (18.9) (14.2)
------------- -------------
Net change in current accounts................ $ 39.4 $ 32.8
============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.................................... $ 4.5 $ 6.7
Income taxes................................ -- --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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ZENITH ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note One--Basis of presentation
The accompanying unaudited condensed consolidated financial statements
("financial statements") have been prepared in accordance with generally
accepted accounting principles and pursuant to the rules and regulations of
the Securities and Exchange Commission. The accuracy of the amounts in the
financial statements is in some respects dependent upon facts that will exist,
and procedures that will be performed by the company, later in the year. In
the opinion of management, all adjustments necessary for a fair presentation
of the financial statements have been included and are of a normal, recurring
nature. For further information, refer to the consolidated financial
statements and notes thereto included in the company's Form 10-K for the year
ended December 31, 1998.
Certain reclassifications have been made to prior year selling, general and
administrative expenses and restructuring charges to conform to the current
year presentation and had no effect on net income reported.
Note Two--Subsequent events
On April 16, 1999, LG Electronics Inc. ("LGE") informed the company that it
had received a demand for repayment under LGE's guarantee of the company's
$30.0 million demand loan note payable to Credit Agricole. LGE further
informed the company that on April 20, 1999, it had made payment in full
against its guarantee under such demand. Such payment by LGE gives rise to a
claim by LGE against the company under the Reimbursement Agreement dated as of
November 3, 1997 between LGE and the company.
Effective as of April 19, 1999, the company entered into a Second Amendment
and Waiver to the Amended and Restated Credit Agreement dated as of June 29,
1998, among the company, the lenders, Citibank, N. A. as issuing bank and
Citicorp North America, Inc. as agent. The terms of such amendment extend the
maturity date of the facility to the earlier of the bankruptcy filing by the
company or August 31, 1999. Also, effective as of April 19, 1999, the company
and LGE amended the LGE Demand Loan Facility to provide that no demand for
repayment could be made under the facility, absent a default, prior to August
31, 1999.
On April 29, 1999, the company was informed by LGE that on April 28, 1999,
LGE had acquired 26,095,200 shares of common stock of the company along with
the associated common stock purchase rights from its affiliate, LG Semicon
Co., Ltd. The company was informed that the aggregate purchase price for such
shares was 10 Korean Won (approximately US$0.01). As a result of this
transfer, LGE owns approximately 54.2 percent of the outstanding common stock
of the company, excluding vested but unexercised options.
In April 1999, the company sold substantially all of the assets located at
its Cd. Juarez, Mexico facility to subsidiaries of Kimball International, Inc.
for approximately $23.8 million less escrowed amounts.
Note Three--Restructuring charges
During the first quarter of 1999, the company recorded $3.3 million of
restructuring charges related to costs associated with work performed by
outside consulting and law firms to support the development of the operational
and financial restructuring plans and the prepackaged plan of reorganization.
A restructuring charge of $2.6 million was recorded in the first quarter of
1998 for fees paid to outside professionals for work to support the
development of the company's operational and financial restructuring plans.
5
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A summary of the restructuring reserve recorded in 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Restructuring 1999 1999 Restructuring
Reserve at Restructuring Cash Reserve at
Dec. 31, 1998 Charges Payments April 3, 1999
------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Severance and other employee
costs...................... $15.4 $-- $ (6.8) $ 8.6
Plant closure and business
exit costs................. 15.0 -- (2.4) 12.6
Professional fees........... 0.6 3.3 (3.6) 0.3
Other....................... 0.3 -- (0.1) 0.2
----- ---- ------ -----
Total restructuring
reserve................ $31.3 $3.3 $(12.9) $21.7
===== ==== ====== =====
</TABLE>
Note Four--Other operating expense (income)
Other operating expense (income) consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 3, March 28,
1999 1998
-------- ---------
In millions
<S> <C> <C>
Royalty income--tuner system patents................... $(6.2) $(6.3)
Royalty income--VCR direct ship........................ (0.6) (0.2)
Royalty income--other.................................. (1.3) (0.3)
Bank fees.............................................. 0.3 0.4
Other.................................................. 0.1 (0.8)
----- -----
Total other operating income, net.................. $(7.7) $(7.2)
===== =====
</TABLE>
Note Five--Loss per share
In accordance with Statement of Financial Accounting Standards 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 periods. Diluted loss per share, assuming conversion of the 6 1/4
percent convertible subordinated debentures due 2011 and outstanding stock
options, is not presented because the effect of the assumed conversion is
antidilutive. The weighted average number of shares was 67.5 million and 67.0
million for the three months ended April 3, 1999 and the three months ended
March 28, 1998, respectively.
Note Six--Receivables
During the third quarter of 1998, the company's trade receivables
securitization was terminated. As a result, the company's financial statements
for the first quarter of 1999 reflect that receivables, net of allowance for
doubtful accounts, 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. 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 in the third quarter of 1998.
Note Seven--Inventories
Inventories consisted of the following (in millions):
<TABLE>
<CAPTION>
April 3, December 31, March 28,
1999 1998 1998
-------- ------------ ---------
<S> <C> <C> <C>
Raw materials and work-in-process......... $32.6 $47.1 $ 94.0
Finished goods............................ 41.3 37.1 33.1
----- ----- ------
Total inventories..................... $73.9 $84.2 $127.1
===== ===== ======
</TABLE>
Note Eight--Short-term debt and credit arrangements; Long-term debt
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
6
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of $110.0 million in unsecured and uncommitted credit facilities through four
lines of credit with Bank of America ($30.0 million), First Chicago NBD ($30.0
million), Societe Generale ($20.0 million) and Credit Agricole ($30.0
million). The credit lines were 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 April 3, 1999, only the Credit Agricole loan remained 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. See Note Two for subsequent event.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45.0 million. As of April 3, 1999,
$30.0 million was outstanding under the facility. See Note Nine for further
discussion and Note Two for subsequent event.
In April 1997, the company entered into a sale-leaseback transaction
whereby the company sold and leased back manufacturing equipment in its
Melrose Park, Illinois, plant and in its Reynosa and Juarez, Mexico,
facilities. The company's payment obligations, along with certain other items
under the lease agreement, were fully guaranteed by LGE. In July 1998, LGE
made payment under the guarantees of the leases in the amount of $90.1 million
under a negotiated settlement with the lessor. As equipment previously
included in the sale-leaseback transaction is sold, the proceeds of such sales
will reduce the company's debt to LGE for this payment. As a result of initial
asset sales and payments to LGE, the company's first quarter financial
statements reflect a reduced $89.3 million current liability to LGE (included
in "Short-term debt with related party" on the balance sheet).
The company's Citibank credit facility provides for up to $125.0 million of
revolving loans, subject to borrowing base restrictions. The revolving loans
must be repaid on or before the earlier of (a) the company filing for a
prepackaged plan of reorganization or (b) 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 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 April 3, 1999,
no borrowings were outstanding under this credit facility. See Note Two for
subsequent event.
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 $150.0 million of debtor-in-
possession financing during the pendency of the company's bankruptcy
proceeding and agreed to provide a new three-year $150.0 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.
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.
7
<PAGE>
The company did not make the April 1, 1999 sinking fund ($5.8 million) and
interest ($3.2 million) 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 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. However, the obligations of the members of
the Debenture Committee terminate if, among other circumstances, the
prepackaged plan has not been filed with the Bankruptcy Court on or before
September 15, 1999, or the prepackaged plan has not been confirmed by the
Bankruptcy Court on or before December 31, 1999. The agreement also contains
other customary provisions.
Note Nine--Related party
In November 1995, a change in control of the company occurred, in which LGE
and an affiliate 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 April 3, 1999, LGE and its affiliate 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. See Note Two for subsequent
event.
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.
LGE is a leading international brand-name manufacturer of five main groups
of products: televisions; audio and video equipment; home appliances;
computers and office automation equipment; and other products, including video
displays, telecommunication products and components, and magnetic media. The
following represent the most significant transactions between the company and
LGE during the three-month periods ended April 3, 1999 and March 28, 1998.
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 $2.9 million and $7.8 million of these items
during the three-month periods ended April 3, 1999 and March 28, 1998,
respectively. Sales of products purchased from LGE and its affiliates
contributed $7.4 million and $20.1 million to sales during the
8
<PAGE>
three-month periods ended April 3, 1999 and March 28, 1998, 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 the three-month periods ended April 3, 1999 and March 28, 1998, the
company accrued approximately $0.6 million and $0.2 million, respectively, 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 accrued
approximately $0.2 million in the three months ended April 3, 1999. No amount
was accrued in the three months ended March 28, 1998.
Product and other sales: The company sells televisions, picture tubes,
yokes and other manufactured subassemblies to LGE and its affiliates at prices
consistent with amounts charged by the company to its major customers. Sales
by the company to LGE and its affiliates were $5.2 million and $11.0 million
during the three months ended April 3, 1999 and March 28, 1999, 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 the three months ended April 3, 1999 and
March 28, 1998, the company's sales to the LGE Canadian and Mexican
subsidiaries were $5.2 million and $9.6 million, respectively. These amounts
are included in the sales by the company to LGE and its affiliates discussed
above.
Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45.0 million. The
interest rate is LIBOR plus 6.5 percent per annum. 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 April 3, 1999, $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. See Note Two for subsequent event.
Accounts payable with related party included $130.8 million and $134.0
million to LGE and its affiliates as of April 3, 1999 and March 28, 1998,
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 payable 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
$130.1 million and $133.7 million as of April 3, 1999 and March 28, 1998,
respectively. The company is charged interest on the extended period at rates
reflecting then-current market conditions in Korea.
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.
Note Ten--Segment and geographic data
The company adopted Statement of Financial Accounting Standards No. 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.
9
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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>
Three Months Ended April 3,
1999
Net sales................... $119.1 $31.5 $ -- $150.6
Income (loss) before income
taxes...................... (8.9) 3.1 (19.3) (25.1)
Three months Ended March 28,
1998
Net sales................... $202.7 $18.0 $ -- $220.7
Loss before income taxes.... (20.0) (3.3) (14.5) (37.8)
</TABLE>
It should be noted that in the 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The company's first quarter net loss, excluding restructuring charges, was
$21.8 million in 1999 compared to $35.2 million in 1998. Including a $3.3
million restructuring charge, the company reported a 1999 first quarter net
loss of $25.1 million or $0.37 per basic and diluted common share. In the 1998
first quarter, including a $2.6 million restructuring charge, the company
reported a net loss of $37.8 million or $0.55 per basic and diluted common
share.
The first quarter of 1999 and 1998 restructuring charges related to costs
associated with work performed by outside consulting and law firms to support
the development of the operational and financial restructuring plans and the
prepackaged plan of reorganization.
The company's core business--the development, manufacture and distribution
of a broad range of products for the delivery of video entertainment--is
composed of two major product areas--Consumer Electronics (which includes
color picture tube operations) and Network Systems (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).
Total first quarter sales were $150.6 million in 1999, down 32 percent from
$220.7 million in 1998. Consumer electronics sales declined $83.6 million (or
41 percent) in the 1999 quarter compared with the same period in 1998, driven
largely by planned sales reductions in lower-margin color television products
and a change in distribution strategy whereby certain VCRs were sold directly
from the manufacturer (LGE) rather than through the company's direct sales
organization. The company receives a royalty ($0.6 million in 1999) for these
sales. The 1999 sales decrease also resulted from a shortage of certain
products including projection televisions a large 1997 year-end finished goods
inventory which necessitated aggressive promotions in the first quarter of
1998 and LGE's Canadian affiliate purchasing $4.5 million less in 1999.
Sales of Network Systems products increased $13.5 million (or 75 percent)
in the first quarter of 1999 compared with a year ago. The increase reflects
continued strong demand for digital set-top boxes from both domestic customers
and emerging international markets which began in late 1998.
The company's 1999 first quarter gross margin was $15.9 million compared to
$7.2 million in the prior year. This was primarily the result of: (i) lower
depreciation expense and other fixed manufacturing costs eliminated in the
1999 first quarter (due to restructuring activities which were primarily in
the fourth quarter of 1998), (ii) a favorable change in product mix to more
Network Systems products, (iii) favorable spending and material costs at the
Reynosa plant, and (iv) a planned reduction in the sale of lower margin
business.
10
<PAGE>
Selling, general and administrative expenses were $25.9 million in the
first quarter of 1999, compared with $30.7 million in the previous year.
Expenses for 1999 benefited from lower advertising costs and the company's
continuing efforts to downsize staffing.
Other operating expense (income) was $(7.7) million for the first quarter
of 1999 and $(7.2) million for the same period in 1998. Other operating income
in the first quarter of 1999 includes $6.2 million of accrued royalty income
from manufacturers of television sets and VCRs who have taken licenses under
some of the company's U.S.tuner system patents. This income was $6.3 million
in the first quarter of 1998.
Interest expense was $11.4 million in the first quarter of 1999, compared
with $8.2 million in the comparable period of the previous year. The change
resulted from higher funding requirements in 1999 (at generally higher
interest rates) for company operations and the company's need to accrue
interest on the amount the company owes LGE for LGE's guarantee of the
company's obligation under the sale-leaseback agreement.
Liquidity and Capital Resources
During the three months ended April 3, 1999, $18.4 million of cash was
provided by operating activities principally as a result of $39.4 million of
cash provided by the change in current accounts, which was principally
composed of a $51.1 million decrease in receivables and a $10.3 million
decrease in inventories, partially offset by an $18.9 million reduction in
accounts payable and accrued expenses. The decrease in receivables was the
result of lower revenue in the first quarter of 1999 and the company's
continued effort to reduce its aged receivables. The decrease in inventories
and accounts payable and accrued expenses resulted primarily from the company
decreasing manufacturing activities as part of its operational restructuring
plan and its continuing effort to improve its rate of finished goods turnover.
Cash was used to fund $20.5 million of net losses from operations as adjusted
for depreciation.
During the three months ended April 3, 1999, $5.4 million of cash was
provided by investing activities. This was composed of $5.8 million of cash
received from the sale of certain property, partially offset by $0.4 million
of cash used for capital additions.
During the three months ended April 3, 1999, $18.6 million of cash was used
by financing activities. This was composed of a $17.8 million repayment of
revolving credit borrowings under the amended Citibank credit facility and
$0.8 million repaid to LGE from proceeds from the sale of equipment previously
included in the sale-leaseback transaction.
As of April 3, 1999, the company had $454.9 million of interest-bearing
obligations which consisted of: (i) $130.1 million of extended-term payables
with LGE, (ii) $103.5 million of 6 1/4 percent convertible subordinated
debentures due 2011 (the current portion of which was $11.5 million), (iii)
$30.0 million currently payable under the remaining unsecured and uncommitted
credit facility, (iv) $30.0 million outstanding under a secured credit
facility with LGE, (v) $89.3 million owed to LGE as a result of LGE's payment
under the guarantees of the leveraged leases and (vi) $72.0 million owed to
LGE as a result of LGE's payments under demands against guarantees on the
unsecured and uncommitted credit facilities. As of April 3, 1999, no balance
was outstanding under the amended Citibank credit facility.
Between November 1997 and February 1998, the company obtained a total of
$110.0 million in unsecured and uncommitted credit facilities through four
lines of credit with Bank of America ($30.0 million), First Chicago NBD ($30.0
million), Societe Generale ($20.0 million) and Credit Agricole ($30.0
million). The credit lines were 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 payable in either company 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
April 3, 1999, only the Credit
11
<PAGE>
Agricole loan remained 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. See Note Two for subsequent event.
In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45.0 million. The term of the facility
(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 April 3, 1999, $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. See Note Two for subsequent event.
In April 1997, the company entered into a 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 company's payment obligations, along with certain
other items under the lease agreement, were fully guaranteed by LGE. In July
1998, LGE made payment under the guarantees of the lease in the amount of
$90.1 million under a negotiated settlement with the lessor.
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 $125.0 million of revolving loans,
subject to borrowing base restrictions. The revolving loans must be repaid on
or before the earlier of (a) the company filing for a prepackaged plan of
reorganization or (b) April 30, 1999 (as amended). See Note Eight for
additional discussion of the amended credit facility.
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 $150.0 million of debtor-in-
possession financing during the pendency of the company's bankruptcy
proceeding and agreed to provide a new three-year $150.0 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 $60.0 million post-
restructuring credit support to be provided by LGE to the company pursuant to
the terms of the restructuring agreement between the parties.
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 $60.0 million of post-
restructuring credit support (as discussed above), on the terms and conditions
of the restructuring agreement.
The company did not make the April 1, 1999 sinking fund ($5.8 million) and
interest ($3.2 million) 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, constituted 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 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
12
<PAGE>
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
$50.0 million of new 8.19 percent 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. However, the obligations of the members of the
Debenture Committee terminate if, among other circumstances, the prepackaged
plan has not been filed with the Bankruptcy Court on or before September 15,
1999, or the prepackaged plan has not been confirmed by the Bankruptcy Court
on or before December 31, 1999. The agreement also contains other customary
provisions.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q, such as those
regarding the company's strategies, plans, objectives and expectations are
forward-looking statements that involve known and unknown risks, uncertainties
and other factors which may cause the actual results of the company or of its
efforts to successfully implement the operational restructuring and achieve
the business plan projections and financial results of the company to be
materially different from any future results expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both in the United States and other
countries in which the company sells its products and from which the company
obtains supplies; the effect of competition in the markets served by the
company; LGE's ability to obtain required approvals of the Republic of Korea
for additional financing, if any, that LGE may desire to extend to the
company; the availability and terms of financing from LGE or other financing
sources to fund the company's operating losses, restructuring charges and the
other costs and expenses of its new business plan; and the willingness of
existing creditors to continue to forbear from enforcing available rights and
remedies and to grant additional waivers of potential defaults and to confirm
the prepackaged plan. Given these uncertainties, stockholders and debtholders
are cautioned not to place undue reliance on any forward-looking statements
contained herein. The company disclaims any obligation to update such factors
or forward-looking statements or to publicly announce the result of any
revisions to any of the forward-looking statements contained or referred to
herein or to reflect future events or developments.
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
13
<PAGE>
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 January
1, 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 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 involve 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 company's proposed 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 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 it 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 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
None
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the three months ended April 3, 1999, no reportable events or
material developments occurred regarding the legal proceedings of the company.
Item 2. Changes in Securities
(b) The company's credit facility prohibits dividend payments on the
company's common stock and preferred stock, if issued, and prohibits the
redemption or repurchase of capital stock.
Item 3. Defaults Upon Senior Securities
The company did not make the April 1, 1999 sinking fund ($5.8 million) and
interest ($3.2 million) 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 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. However, the obligations of the members of
the Debenture Committee terminate if, among other circumstances, the
prepackaged plan has not been filed with the Bankruptcy Court on or before
September 15, 1999, or the prepackaged plan has not been confirmed by the
Bankruptcy Court on or before December 31, 1999. The agreement also contains
other customary provisions.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On April 19, 1999, the company filed an amendment to 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 pre-packaged plan of reorganization.
Item 6. Exhibits and Reports on Form 8-K
(27) Financial Data Schedule for the three months ended April 3, 1999
(b) Reports on Form 8-K:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Zenith Electronics Corporation
(Registrant)
Date: May 18, 1999
/s/ Edward J. McNulty
By: _________________________________
Edward J. McNulty
Chief Financial Officer
(Principal Financial Officer)
/s/ Lawrence D. Panozzo
By: _________________________________
Lawrence D. Panozzo
Director of Corporate Accounting
and Planning
(Principal Accounting Officer)
16
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
PERIOD ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 104
<ALLOWANCES> 19
<INVENTORY> 74
<CURRENT-ASSETS> 191
<PP&E> 729
<DEPRECIATION> 654
<TOTAL-ASSETS> 291
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<TOTAL-LIABILITY-AND-EQUITY> 291
<SALES> 151
<TOTAL-REVENUES> 151
<CGS> 135
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<OTHER-EXPENSES> 37
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (25)
<INCOME-TAX> 0
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